UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
POST-EFFECTIVE
AMENDMENT
NO. 2
TO
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA
MARINE FOOD GROUP LIMITED
(Exact
Name of Registrant as Specified in its Charter)
NEVADA
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2092
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87-0640467
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(State
or Jurisdiction of Incorporation
or
Organization)
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(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer Identification No.)
|
Da
Bao Industrial Zone, Shishi City
Fujian,
China
362700
86-595-8898-7588
(Address
and Telephone Number of Principal Executive Offices)
Steve
Schuster, Esq.
McLaughlin
& Stern LLP
260
Madison Avenue
New
York, New York 10016
telephone
(212) 448-1100
facsimile
(800) 203 1556
(Name,
Addresses and Telephone Numbers for Agents for Service)
Approximate
date of commencement of proposed sale to the public:
From
time to time after the effective date of this Registration
Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box:
x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earliest effective
registration statement for the same offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated Filer
¨
|
Accelerated
Filer
¨
|
|
|
Non-Accelerated
Filer
¨
|
Smaller
reporting company
x
|
|
|
(Do
not check if a smaller reporting company)
|
|
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
EXPLANATORY
NOTE
This
Post-Effective Amendment No. 2 to Form S-1 (this “Post-Effective Amendment”) is
being filed pursuant to Section 10(a)(3) of the Securities Act to update our
registration statement on Form S-1 (Registration No. 333-148073) (the
“Registration Statement”), which was previously declared effective by the
Securities and Exchange Commission on May 8, 2008, to (i) include the
consolidated financial statements and the notes thereto included in our Annual
Report on Form 10-K, for the fiscal year ended December 31, 2009,(ii) include
the consolidated financial statements and the notes thereto included in our
Quarterly Report on Form 10-Q, for the three months period ended March 31, 2010,
(iii) update certain other information in the Registration Statement and (iv)
decrease the number of shares of common stock included in the Registration
Statement from 13,291,942 to 12,013,568. No additional securities are being
registered under this Post-Effective Amendment. Based on information received by
the Company, no shares were sold by the selling stockholders pursuant to the
Registration Statement since March 22, 2010, the date on which we filed our
Annual Report on Form 10-K. All applicable registration fees were paid at the
time of the original filing of the Registration Statement.
Subject
to Completion, dated June 15, 2010
PROSPECTUS
CHINA
MARINE FOOD GROUP LIMITED
12,013,568
Shares of Common Stock
This
Prospectus relates to 12,013,568 shares of common stock of China Marine Food
Group Limited, a Nevada corporation, that may be sold from time to time by the
selling stockholders named in this Prospectus, consisting of 11,122,138 shares
of common stock and 891,430 shares of common stock issuable upon exercise of
three-year warrants owned by the selling stockholders named in this
Prospectus.
We
will not receive any proceeds from the sales of any shares of common stock by
the selling stockholders. We will, however, receive proceeds of up to $4.1782
per share from the exercise of warrants held by selling stockholders if and when
such warrants are exercised for cash consideration, which would result in
proceeds to us of $3,724,573 in the event that all such warrants are exercised
for cash consideration. We will not receive any proceeds from the exercise of
the warrants pursuant to the warrants’ cashless exercise provisions. Our common
stock is quoted on the NYSE AMEX under the symbol “CMFO.” The closing bid price
for our common stock on, June 11, 2010 was $5.47 per share, as reported on the
NYSE AMEX.
The
selling stockholders and any participating broker-dealers may be deemed to be
“underwriters” within the meaning of the Securities Act of 1933, as amended (the
“Securities Act”) and any commissions or discounts given to any such
broker-dealer may be regarded as underwriting commissions or discounts under the
Securities Act. The selling stockholders have informed us that they do not have
any agreement or understanding, directly or indirectly, with any person to
distribute their common stock.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on Page 10 to read about factors you should consider before buying shares of our
common stock.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this Prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The date
of this Prospectus
is ,
2010.
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
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5
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THE
COMPANY
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5
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THE
OFFERING
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9
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SUMMARY
OF CONSOLIDATED FINANCIAL INFORMATION
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9
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RISK
FACTORS
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11
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RISKS
RELATED TO OUR BUSINESS
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11
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RISKS
RELATED TO DOING BUSINESS IN CHINA
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20
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RISKS
RELATED TO THE MARKET OF OUR STOCK
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23
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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25
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USE
OF PROCEEDS
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25
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DETERMINATION
OF OFFERING PRICE
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25
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DILUTION
OF THE PRICE YOU PAY FOR YOUR SHARES
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25
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SELLING
STOCKHOLDERS
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25
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PLAN
OF DISTRIBUTION
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34
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DESCRIPTION
OF SECURITIES
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36
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STOCK
TRANSFER AGENT
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37
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SHARES
ELIGIBLE FOR FUTURE SALE
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37
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INTEREST
OF NAMED EXPERTS AND COUNSEL
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38
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DESCRIPTION
OF BUSINESS
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39
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DESCRIPTION
OF PROPERTY
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72
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LEGAL
PROCEEDINGS
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75
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MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
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75
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SELECTED
CONSOLIDATED FINANCIAL DATA
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76
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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77
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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107
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QUALITATIVE
AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
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108
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DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
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108
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EXECUTIVE
COMPENSATION
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112
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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117
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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117
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WHERE
YOU CAN FIND MORE INFORMATION
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120
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FINANCIAL
STATEMENTS
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121
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PROSPECTUS
SUMMARY
The
following summary is qualified in its entirety by, and must be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, all references to the “Company” or “China Marine” refer to
China Marine Food Group Limited, a Nevada corporation.
Except as
otherwise indicated by the context, references in this Prospectus
to:
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·
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“China Marine,” “Company,” “we,”
“us” or “our” are references to the combined business of China Marine and
its direct and indirect
subsidiaries.
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·
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“China Marine,” “Company,” “we,”
“us” or “our” does not include the selling
stockholders.
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·
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“Ocean Technology” means Ocean
Technology (China) Company Limited (formerly Nice Enterprise Trading H.K.
Co., Limited).and/or its operating subsidiaries, as the case may
be.
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·
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“Rixiang” means Shishi Rixiang
Marine Foods Co., Ltd.
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“Mingxiang” means Shishi Huabao
Mingxiang Foods Co., Ltd.
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“Jixiang” means Shishi Huabao
Jixiang Water Products Co.,
Ltd.
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·
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“Xianghe”
means Shishi Xianghe Food Science and Technology Co.,
Ltd.
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·
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“Xianglin”
means Shishi Xianglin Trading Co.,
Ltd.
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·
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“U.S. Dollar,” “$” and “US$”
means the legal currency of the United States of
America.
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“RMB” means Renminbi, the legal
currency of China.
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·
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“China” or the “PRC” are
references to the People’s Republic of
China.
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THE
COMPANY
Overview
of Our Business
We are
a holding company whose primary business operations are conducted through our
direct, wholly owned subsidiary, Ocean Technology and its direct wholly owned
subsidiary, Rixiang, which is incorporated in the PRC. Rixiang, in turn, is the
sole shareholder of our indirect subsidiaries. Mingxiang and Jixiang, both PRC
operating companies, Mingxiang and Jixiang are property holding companies. These
two companies operate solely to manage our land use rights and properties,
including our production plant, cold storage facility, office tower and staff
dormitory. Xianghe is a manufacturer of algae-based soft drinks and it is
organized under the laws of the PRC. All subsidiaries are wholly-owned except
for Xianghe, in which we own an 80% interest.
Our
Background History
We were
incorporated in the State of Nevada on October 1, 1999 under the name New
Paradigm Productions, Inc. to engage in the production and marketing of
meditation music and related supplies.
Starting
January 1, 2000, we commenced a private placement of our common stock in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act and Regulation D promulgated thereunder. We offered 100,000
shares of our common stock at $0.35 per share to certain accredited investors.
The offering closed in March 2000 and we raised gross proceeds in the amount of
$35,000. As a result of the offering our issued and outstanding common stock
increased from 900,000 shares to 1,000,000 shares.
On July
5, 2000, we filed a registration statement on Form SB-2 with the Securities and
Exchange Commission or the SEC under the Securities Act, to register shares of
our common stock (Registration Statement No. 333-40790). The registration
statement was declared effective on October 26, 2000. We sold 77,000 shares of
our common stock pursuant to the registration statement, raising a total of
$77,000 in gross proceeds. As a result of the offering, our issued and
outstanding common stock increased to 1,077,000 shares.
During
2007, Jody St. Clair, our president and sole director, indicated a need to
resign due to other commitments and the fact that the Company lacked the ability
to raise money to continue its search for a business acquisition. Former
management approached Halter Financial Investments (“HFI”) regarding HFI’s
interest in acquiring a control position in the Company as part of a plan to
enhance shareholder value. Former management believed that HFI would be able to
introduce the Company to privately held businesses seeking to access the US
capital markets through the reverse merger process, which could in turn result
in the Company having more profitable business operations that would
consequently lead to an increase in the value of the Company's outstanding
securities. Therefore, in September 2007, by the approval of the Company's board
of directors and shareholders, we entered into a Stock Purchase Agreement
(“SPA”) through which we sold 1,005,200 shares of post-reverse stock-split
common stock sell to HFI for $400,000. The business purpose of the SPA was to
put someone in control of the Company, who would continue to seek a business
acquisition. As a result of the SPA, HFI became the owner of 87.5% of the
1,148,826 shares of our then outstanding common stock.
HFI is a
Texas limited partnership of which Halter Financial Investments GP, LLC, a Texas
limited liability company, is the sole general partner. The members of Halter
Financial Investments GP, LLC include: (i) TPH Capital, L.P., a Texas limited
partnership of which TPH Capital GP, LLC is the general partner and Timothy P.
Halter is the sole member of TPH Capital GP, LLC; (ii) Bellfield Capital, L.P.,
a Texas limited partnership of which Bellfield Capital Management, LLC is the
sole general partner and Dave Brigante is the sole member of Bellfield Capital
Management, LLC; (iii) Colhurst Capital LP, a Texas limited partnership of which
Colhurst Capital GP, LLC is the general partner and George L. Diamond is the
sole member of Colhurst Capital GP, LLC; and (iv) Rivergreen Capital LLC of
which Marat Rosenberg is the sole member. As a result, each of the foregoing
individuals may be deemed to be a beneficial owner of the shares held of record
by Halter Financial Investments GP, LLC. Similarly, the limited partners of HFI
are: (i) TPH Capital, L.P., a Texas limited partnership of which TPH Capital GP,
LLC is the general partner and Timothy P. Halter is the sole member of TPH
Capital GP, LLC; (ii) Bellfield Capital, L.P., a Texas limited partnership of
which Bellfield Capital Management, LLC is the sole general partner and Dave
Brigante is the sole member of Bellfield Capital Management, LLC; (iii) Colhurst
Capital LP, a Texas limited partnership of which Colhurst Capital GP, LLC is the
general partner and George L. Diamond is the sole member of Colhurts Capital GP,
LLC; and (iv) Rivergreen Capital LLC of which Marat Rosenberg is the sole
member. As a result, each of the foregoing persons may be deemed to be a
beneficial owner of the shares held of record by HFI. The beneficial owners of a
majority of our stock prior to the SPA were: (i) Devonshire Partners, LLC,
owning 25,734 common stock shares, or 17.92% of our total outstanding stock; and
(ii) Lynn Dixon, owning 62,000 common stock shares, or 43.17% of our total
outstanding stock. We are unaware who controls Devonshire Partners,
LLC.
After the
consummation of the transaction, the Company was left with $392,028 after the
payment of related expenses. The shareholders determined that in connection with
the sale of voting control to HFI this money would be paid as a non-liquidating
dividend to the shareholders of the Company, as they existed prior to the sale
of control to HFI. Thus, we declared and paid a special cash dividend of $0.364
per post stock-split share to our shareholders of record as of September 12,
2007, for the business purpose of giving the Company's shareholders a return on
their investment. HFI did not participate in this special cash dividend.
Stockholders holding a total of 1,077,000 shares received a special cash
dividend in the total amount of $392,028 which amount was funded with proceeds
from the stock sale. Effective on September 25, 2007, we effectuated a 7.5 to 1
reverse stock split and increased our authorized shares of common stock to
100,000,000. In connection with the reverse stock split, we were assigned a new
stock symbol “CMFO.”
Upon the
closing of the HFI transaction, Jody St. Clair resigned as our sole director and
executive officer and in anticipation of her resignation, she appointed Richard
Crimmins as our sole director, President, Secretary-Treasurer, Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer.
We are
not aware of a nexus between this transaction and the reverse acquisition with
Ocean Technology which took place in November 2007, nor are we aware of any
preexisting affiliations between the Company, HFI or Ocean Technology. We were
advised that HFI routinely takes control positions in public companies and that
its acquisition of New Paradigm was part of its standard business practice. HFI
has advised us that it did not acquire its interest in our Company specifically
for the purpose of engaging in the reverse acquisition and financing transaction
with Ocean Technology.
We
discontinued our principal operations as of December 2002 and were, until our
reverse acquisition with Ocean Technology on November 17, 2007 described below,
investigating potential acquisitions or opportunities.
Our
Reverse Acquisition of Ocean Technology and Related Financing
On
November 17, 2007, we completed a reverse acquisition transaction with Ocean
Technology through a share exchange with Ocean Technology’s former stockholders.
The natural persons who were the beneficial owners of Ocean Technology prior to
the reverse acquisition are: (i) Pengfei Liu, owning 7,493 common stock shares,
or 74.93% of the total issued and outstanding stock; (ii)Ai Nyuet Ang, owning
221 common stock shares, or 2.21% of the total issued and outstanding stock;
(iii) Hung Yu Wong, owning 287 common stock shares, or 2.87% of the total issued
and outstanding stock; (iv) Zhicheng Li, owning 294 common stock shares or 2.94%
of the total issued and outstanding stock; (v) Shangxiong Qiu, owning 441 common
stock shares, or 4.41% of the total issued and outstanding stock; (vi) Liya Qiu,
owning 441 common stock shares, or 4.41% of the total issued and outstanding
stock; (vii) Hampton Investment Group Ltd., which is controlled by Mr. William
Yan Sui Hui, and which owns 602 common stock shares, or 6.02% of the total
issued and outstanding stock; and (viii) Metrolink Holdings Limited, which is
controlled by Mr. Kui Shing Andy Lai (50%) and Ms Lai Yung Wai (50%), and which
owns 221 common stock shares, or 2.21% of the total issued and outstanding
stock. Prior to the reverse acquisition, there were 10,000 shares of issued and
outstanding common stock.
Pursuant
to the share exchange agreement, the shareholders of Ocean Technology exchanged
100% of their outstanding capital stock in Ocean Technology for approximately
15,624,034 shares of our common stock, or approximately 93.15% shares of our
outstanding common stock after the share exchange. In connection with the share
exchange, a majority of our shareholders of record as of November 16, 2007
approved a resolution by our board of directors to change our name from New
Paradigm Productions, Inc. to China Marine Food Group Limited. The name change
became effective on January 9, 2008 upon the filing of a Certificate of
Amendment to our Amended Articles of Incorporation with the State of Nevada on
the twentieth day following the mailing of a Definitive Information Statement to
our shareholders.
Concurrently
with the closing of the reverse acquisition on November 17, 2007, we completed a
private placement of our securities to certain accredited investors who
subscribed for units consisting one share of common stock and a warrant to
purchase one-fifth of one share of our common stock. The investors subscribed
for aggregate of 6,199,441 shares of our common stock and warrants to purchase
an aggregate of 1,239,888 shares of our common stock at $3.214 per unit. The
units were offered and sold pursuant to exemptions from registration under the
Securities Act, including without limitation, Regulation D and Regulation S
promulgated under the Securities Act. Each warrant issued to the investors has a
term of three years and is exercisable at any time for a price equal to $4.1782
in cash or on a cashless exercise basis. An investor who exercises the warrant
on a cashless basis shall tender the warrant for cancellation and in return
receive a certificate for the number of warrant shares equal to the quotient
obtained by dividing [(A-B) (X)] by (A), where:
(A) = the
VWAP on the Trading Day immediately preceding the date of such
election;
(B) = the
Exercise Price of this Warrant, as adjusted; and
(X) = the
number of Warrant Shares in respect of which a cashless exercise is elected
pursuant to this Section 2(c).
VWAP is
an acronym for Volume-Weighted Average Price, which is the ratio of the value
traded to total volume traded over a one trading day.
Thus, if
the Investor elects to exercise one hundred (100) warrant shares while VWAP is
equal to $5.00, a price greater than the exercise price, then one hundred (100)
warrant shares will be cancelled and the Investor will receive a certificate
equal to sixteen (16) warrant shares, since: [(5.00 - 4.1782)(100)]/5.00 =
16.436
However,
if the Investor elects to exercise one hundred (100) warrants shares while VWAP
is equal to $3.00, a price less than the exercise price, then the equation will
not work since the quotient will be a negative number, as illustrated here:
[(3.00 - 4.1782)(100)]/3.00 = -39.273
Therefore,
it is in the Investor’s best interest if the warrants are exercised on a
cashless basis while VWAP is equal to or greater than the exercise
price.
A list of
the above-mentioned accredited investors may be found in the section entitled,
“Selling Stockholders” beginning on page 25. With the exception of Halter
Financial Investments, L.P., Ai Nyuet Ang, Hung Yu Wong, Zhicheng Li, Shangxiong
Qiu, Liya Qiu, Hampton Investment Group Limited and Metrolink Holdings Limited,
all of the listed selling shareholders received the stock which they are
registering in this Form S-1 in the private placement.
In
connection with the private placement, our principal stockholder, Pengfei Liu,
entered into a make good agreement pursuant to which Mr. Liu agreed, subject to
certain conditions discussed below, to place into an escrow account, 6,199,441
shares of common stock of the Company he beneficially owns. If we had not
generated net income of $10.549 million for the fiscal year ending December 31,
2008 and net income of $14.268 million for the fiscal year ending December 31,
2009, up to the full amount of the shares held in escrow would have been
transferred to the private placement investors. Since we met the minimum net
income thresholds for 2008 and 2009, such shares were returned to Mr.
Liu.,
Additionally,
upon the close of the reverse acquisition, Mr. Liu became our Chief Executive
Officer and Interim Secretary effective on the close of the reverse acquisition.
Prior to the effective date of the reverse acquisition, Mr. Liu served at Ocean
Technology as its Chief Executive Officer.
For
accounting purposes, the share exchange transaction was treated as a reverse
acquisition with Ocean Technology as the acquirer and China Marine Food Group
Limited as the acquired party. When we refer in this Prospectus to business and
financial information for periods prior to the consummation of the reverse
acquisition, we are referring to the business and financial information of Ocean
Technology on a consolidated basis unless the context suggests
otherwise.
Background
History of Ocean Technology and its Subsidiaries
Through
our wholly-owned subsidiaries, Rixiang, Jixiang and Mingxiang, we engage in the
business of processing, distribution and sale of processed seafood products, as
well as the sale of marine catch.
Our
dried seafood products are predominantly sold under our registered trademark,
the “Mingxiang (
明祥
)” brand. Our
dried processed seafood products are mainly sold through 19 distributors in
seven provinces in the PRC such as Fujian, Guangdong, Jiangsu, Shandong,
Sichuan, Liaoning and Zhejiang and in turn sub-distributed to about 2,500 retail
points (including major supermarkets and retailers such as Wal-Mart and
Carrefour) throughout these provinces. Our frozen processed seafood products are
sold to both domestic and overseas customers. Our marine catch is sold to
customers in Fujian and Shandong Provinces, some of whom directly export the
marine catch to Japan, South Korea and Taiwan. Our objective is to establish
ourselves as a leading producer of processed seafood products in the PRC and
overseas markets.
On
January 1, 2010, Mingxiang purchased Xianghe, a manufacturer of the branded
Hi-Power algae-based soft drinks. Xianghe has developed a network of
distributors in Fujian, Zhejiang, Guangdong and Hunan which sell Hi-Power to
retail food stores, restaurants food supply dealers and the hospitality
industry. Mingxiang purchased shares representing eighty percent (80%) of the
registered capital stock of Xianghe. See “Description of
Business”.
Our
business premises are located close to Xiangzhi (Shishi) Port, the largest
fishing port in Fujian Province and one of the state-level fishing port centers.
We have also been designated as a state base for the quality control testing of
marine products in Fujian Province.
Our
principal place of business in the PRC is located at Dabao Industrial Zone,
Xiangzhi Town, Shishi City, Fujian Province, the PRC. Our telephone number is
(86) 595-8898-7588 and fax number is (86) 595-8898-2319. Our internet address is
http://www.china-marine.cn. Information contained in our internet website does
not constitute part of this Prospectus.
THE
OFFERING
Common
Stock Offered by Selling Stockholders
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12,013,568
shares. This number represents 42.2% of our current outstanding
stock.
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Common
Stock to be Outstanding After the Offering
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28,493,650
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Proceeds
to us
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We
will not receive any of the proceeds from the resale of shares by the
selling stockholders, but we may receive up to $3,724,573 from the
exercise of warrants for cash but no proceeds from the exercise of the
warrants pursuant to the warrants’ cashless exercise provisions. Since the
initial registration statement was declared effective on May 8, 2008,
selling stockholders have exercised 1,111,261 and 167,113 warrants
pursuant to the cashless and cash exercise provision of the warrants
respectively and received 619,910 shares of common
stock.
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NYSE
AMEX Symbol
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CMFO
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The
above information regarding common stock to be outstanding after the offering is
based on 28,493,650 shares of common stock outstanding as of, June 11,
2010.
SUMMARY
OF CONSOLIDATED FINANCIAL INFORMATION
The following tables summarize our
consolidated financial data for the periods presented. You should read the
following financial information together with the information under
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and the related notes to
these consolidated financial statements appearing elsewhere in this Prospectus.
The selected consolidated statements of operations data for the three months
financial period ended March 31, 2010 and 2009, and the consolidated balance
sheet data as of March 31, 2010 are derived from our unaudited consolidated
financial statements, which are included elsewhere herein
.
The unaudited consolidated financial
statements have been prepared on the same basis as our audited financial
statements and include, in the opinion of management, all adjustments that
management considers necessary for a fair presentation of the financial
information set forth in those statements.
The
selected consolidated statements of operations data for the financial years
ended December 31, 2009, 2008, 2006 and 2005; and the selected consolidated
balance sheet data as of December 31, 2009, 2008, 2006 and 2005 are derived from
our consolidated financial statements, which are included elsewhere herein, and
have been audited by ZYCPA Company Limited (“ZYCPA”) (formerly Zhong Yi (Hong
Kong) C.P.A. Company Limited), an independent registered public accounting firm,
as indicated in their report. The selected consolidated statements of operations
data for the financial years ended December 31, 2007; and the selected
consolidated balance sheet data as of December 31, 2007 are derived from our
consolidated financial statements, which are included elsewhere in this
Prospectus, and have been audited by Cordovano and Honeck, LLP (“C & H”), an
independent registered public accounting firm, as indicated in their report.
Historical results are not necessarily indicative of the results to be expected
in future periods.
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Year
Ended December 31,
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Three
Months Ended
March
31,
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2005
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2006
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2007
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2008
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2009
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2009
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2010
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(in thousands)
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(unaudited)
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
14,939
|
|
|
$
|
27,442
|
|
|
$
|
36,425
|
|
|
$
|
48,799
|
|
|
$
|
69,586
|
|
|
$
|
1
6
,
548
|
|
|
$
|
19,650
|
|
Cost
of sales
|
|
|
(11,198
|
)
|
|
|
(19,730
|
)
|
|
|
(25,649
|
)
|
|
|
(33,607
|
)
|
|
|
(50,456
|
)
|
|
|
(12,442
|
)
|
|
|
(13,042
|
)
|
Gross
profit
|
|
|
3,741
|
|
|
|
7,712
|
|
|
|
10,776
|
|
|
|
15,192
|
|
|
|
19,130
|
|
|
|
4,106
|
|
|
|
6,608
|
|
Depreciation
and amortization
|
|
|
(26
|
)
|
|
|
(32
|
)
|
|
|
(37
|
)
|
|
|
(58
|
)
|
|
|
(80
|
)
|
|
|
(19
|
)
|
|
|
(623
|
)
|
Selling
and distribution expenses
|
|
|
(57
|
)
|
|
|
(94
|
)
|
|
|
(149
|
)
|
|
|
(608
|
)
|
|
|
(609
|
)
|
|
|
(114
|
)
|
|
|
(385
|
)
|
General
and administrative expenses
|
|
|
(208
|
)
|
|
|
(388
|
)
|
|
|
(598
|
)
|
|
|
(2,068
|
)
|
|
|
(2,276
|
)
|
|
|
(466
|
)
|
|
|
(620
|
)
|
Other
income
|
|
|
128
|
|
|
|
110
|
|
|
|
223
|
|
|
|
647
|
|
|
|
681
|
|
|
|
254
|
|
|
|
42
|
|
Interest
expense
|
|
|
(215
|
)
|
|
|
(272
|
)
|
|
|
(333
|
)
|
|
|
(319
|
)
|
|
|
(231
|
)
|
|
|
(63
|
)
|
|
|
(40
|
)
|
Income
before income tax
|
|
|
3,363
|
|
|
|
7,036
|
|
|
|
9,882
|
|
|
|
12,786
|
|
|
|
16,615
|
|
|
|
3,698
|
|
|
|
4,982
|
|
Income
tax expense
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
(1,221
|
)
|
|
|
(1,663
|
)
|
|
|
(2,051
|
)
|
|
|
(449
|
)
|
|
|
(1,056
|
)
|
Net
income attributable to non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Net
income attributable to the Shareholders of the Company
|
|
$
|
3,349
|
|
|
$
|
7,036
|
|
|
$
|
8,661
|
|
|
$
|
11,123
|
|
|
$
|
14,564
|
|
|
$
|
3,
249
|
|
|
$
|
3,926
|
|
Earnings per Share —basic (US$)
(1)
|
|
$
|
0.214
|
|
|
$
|
0.450
|
|
|
$
|
0.377
|
|
|
$
|
0.483
|
|
|
$
|
0.632
|
|
|
$
|
0.141
|
|
|
$
|
0.163
|
|
Earnings per Share — diluted (US$)
(2)
|
|
$
|
0.214
|
|
|
$
|
0.450
|
|
|
$
|
0.344
|
|
|
$
|
0.483
|
|
|
$
|
0.
597
|
|
|
$
|
0.141
|
|
|
$
|
0.157
|
|
Note:
(1)
|
Assume
there are 22,972,301 shares for the financial year ended December 31,
2005, 2006 and 2007, 23,010,842 shares for the financial year ended
December 31, 2008, 23,062,839 shares for the financial year ended December
31, 2009, 23,026,301 for the three months financial period ended March 31,
2009, and 24,125,064 shares for the three months financial period ended
March 31, 2010 of basic common stock outstanding after this offering was
applied retrospectively.
|
(2)
|
Assume there are 25,142,105
shares for the financial year ended December 31, 2005, 2006 and 2007,
23,010,842 shares for the financial year ended December 31, 2008,
24,391,942 shares for the financial year ended December 31, 2009,
23,026,301 for the three months financial period ended March 31, 2009, and
25,016,494 shares for the three months financial period ended March 31,
2010 of diluted common stock outstanding after this offering was applied
retrospectively.
|
|
|
As
at December 31,
|
|
|
As
at
March
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
(unaudited)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,622
|
|
|
$
|
9,182
|
|
|
$
|
24,477
|
|
|
$
|
31,640
|
|
|
$
|
7,143
|
|
|
$
|
47,376
|
|
Total
current assets
|
|
|
6,833
|
|
|
|
11,643
|
|
|
|
30,013
|
|
|
|
43,466
|
|
|
|
56,406
|
|
|
|
60,655
|
|
Total
assets
|
|
|
10,906
|
|
|
|
15,430
|
|
|
|
34,130
|
|
|
|
51,646
|
|
|
|
67,895
|
|
|
|
97,470
|
|
Short-term
borrowings
|
|
|
3,230
|
|
|
|
3,793
|
|
|
|
772
|
|
|
|
4,289
|
|
|
|
4,139
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
7,837
|
|
|
|
5,115
|
|
|
|
2,602
|
|
|
|
6,626
|
|
|
|
8,047
|
|
|
|
4,205
|
|
Total
stockholders’ equity
|
|
|
3,069
|
|
|
|
10,315
|
|
|
|
31,528
|
|
|
|
45,020
|
|
|
|
59,848
|
|
|
|
93,265
|
|
RISK
FACTORS
Prospective
investors should carefully review the following risk factors together with the
other information in this Prospectus in evaluating our business prior to
purchasing our common stock offered by this Prospectus. The shares of our common
stock being offered for resale by the selling stockholders are highly
speculative in nature, involve a high degree of risk and should be purchased
only by persons who can afford to lose the entire amount invested in the common
stock. Before purchasing any of the shares of common stock, you should carefully
consider the following factors relating to our business and prospects. If any of
the following risks actually occurs, our business, financial condition or
operating results will suffer, the trading price of our common stock could
decline, and you may lose all or part of your investment. You should also refer
to the other information about us contained in this Prospectus, including our
financial statements and related notes.
RISKS
RELATED TO OUR BUSINESS
We
are dependent on the supply of fresh seafood in our production of processed
seafood products and disruptions in the supply of fresh seafood could adversely
affect our business operations.
We use
fresh seafood as the primary ingredient in our processed seafood products. Our
processed seafood products accounted for approximately 47.2%, 60.3%, 76.5%,
90.9% and 74.8% of our sales in the fiscal years ended December 31, 2005, 2006,
2007, 2008 and 2009 respectively; and approximately 84% of our sales for the
three months period ended March 31, 2010. Our production of processed seafood
products is largely dependent on the continuous supply of fresh seafood, which
in turn could be affected by a large number of factors, including environmental
factors, the availability of seafood stock, weather conditions, the policies and
regulations of the governments of the relevant territories where such fishing is
carried out, the ability of the fishing companies and fishermen that supply us
to continue their operations and pressure from environmental or animal rights
groups.
Specifically,
fishing activities in waters around the PRC are restricted in certain months to
ensure sustainable aquatic resources. In particular, the PRC Ministry of
Agriculture imposes restrictions against fishing in the South China Sea in the
months of June and July. There is no assurance that the PRC government may not
impose more stringent fishing regulations, including but not limited to longer
or more frequent periods that restrict fishing. Such restrictions against
fishing or unfavorable weather conditions have a direct impact on the
availability of the raw materials required for the production of our processed
seafood products, and could lead to a shortage and/or an increase in the prices
of our raw materials. Any shortage in the supply of or increase in the prices of
the raw materials for our processed seafood products will adversely affect our
business, profitability and financial condition.
Our
profitability will be affected by fluctuations in the prices of our major raw
materials.
Our
financial performance may be affected by changes in production costs brought
about by fluctuations in the prices of our raw materials. Our major raw
materials are fresh seafood which accounted for approximately 64.6%, 64.9%,
74.3%, 77.9% and 74.4% of our total cost of sales of processed seafood products
in the fiscal years ended December, 2005, 2006, 2007, 2008 and 2009
respectively; and approximately 73.2% of our total cost of sales of processed
seafood products for the three months period ended March 31, 2010. The prices of
our major raw materials may fluctuate due to changes in supply and demand
conditions. Any shortage in supply or upsurge in demand of our major raw
materials may lead to an increase in prices, which may adversely affect our
profitability due to increased production costs and lower profit
margins.
We
are dependent on several major customers. In the event any one of these major
customers ceases to purchase or reduce their purchases from us, and we are
unable to secure new contracts, our sales will be adversely
affected.
Our
top five major customers accounted for approximately 64.1%, 56.9%, 45.8%, 44.9%
and 43.2% of our sales in the fiscal years ended December 31, 2005, 2006, 2007,
2008 and 2009 respectively; and approximately 37.2% of our sales for the three
months period ended March 31, 2010. In the event these customers do not continue
to purchase from us or reduce their purchases from us or develop their own
ability to manufacture the products that we sell to them, and we are unable to
secure new contracts or new customers that can replace the loss of these
customers within a short time frame, our business and profitability may be
adversely affected. Please see the section “Major Customers” of this Prospectus
for more details.
We
are dependent on several major suppliers for our raw materials. In the event we
are no longer able to secure raw materials from these suppliers and are unable
to find alternative sources of supply at similar or more competitive rates, our
operations and profitability will be adversely affected.
For
the production of our processed seafood and algae-based beverage products, we
rely on our major suppliers for a significant portion of the supply of raw
materials. Purchases from our top five suppliers of raw materials accounted for
65.1%, 62.5%, 89.9%, 90.8% and 90.3% of our total purchases of raw materials in
the fiscal years ended December 31, 2005, 2006, 2007, 2008 and 2009
respectively; and approximately 97.4% of our total purchases of raw materials
for the three months period ended March 31, 2010. In the event that we are
unable to secure our raw materials from these suppliers and we are unable to
find alternative sources of supply at similar or more competitive rates, our
business and operations will be adversely affected. Please see the section
“Major Suppliers” of this Prospectus for more details.
Our
profitability and continued growth is dependent on our ability to yield
commercially viable products, to enhance our product range and expand our
customer base.
The
seafood processing industry is highly competitive. The growth potential of the
seafood processing industry is dependant on population growth and consumer
preferences. therefore believe that our profitability and continued growth is
dependant on our ability to expand our customer base in existing and new markets
by introducing new products that are fast growing and profitable in the
populations that we serve, as well as our ability to develop commercially viable
products through our product development efforts. If we do not succeed in these
efforts, the growth of our sales may slow down and adversely affect our
profitability.
Since
we do not have long-term contracts with our suppliers and customers there is no
guarantee that our suppliers will continue to supply us with raw materials, or
that our customers will continue to purchase our products.
We do not
have long-term contracts with our suppliers and our customers. Accordingly,
there can be no assurance that we will continue to be able to obtain sufficient
quantities of raw materials in a timely manner from our existing suppliers on
acceptable terms, or that our existing customers will continue to purchase our
products on terms that are acceptable to us or at all. In the event that we are
unable to source for new suppliers or new customers on terms that are acceptable
to us, our business and operations will be adversely affected.
We may be exposed to potential risks
relating to our internal controls over financial reporting and our ability to
have those controls attested to by our independent
auditors
.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the SEC
adopted rules requiring public companies to include a report of management on
the company’s internal controls over financial reporting in their annual
reports, including Form 10-K. We have established disclosure controls and
procedures effective for the purposes set forth in the definition thereof in
Exchange Act Rule 13a-15(e) as of December 31, 2009. Commencing by the
fiscal year ended December 31, 2010, the independent registered public
accounting firm auditing a company’s financial statements must also attest to
and report on management’s assessment of the effectiveness of the company’s
internal controls over financial reporting as well as the operating
effectiveness of the company’s internal controls. However, there can be no
assurance that we will receive a positive attestation from our independent
auditors. In the event we are unable to receive a positive attestation from our
independent auditors with respect to our internal controls, investors and others
may lose confidence in the reliability of our financial statements. Also
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree or compliance with the policies or procedures may
deteriorate.
There
is no assurance that we will be able to execute our future plans successfully,
or that our future plans will result in commercial success.
We
intend to,
inter alia
and expand our operations and production capacity in the PRC by constructing new
cold storage facilities. While the new production facilities, which increased
our capacity by 100%, were completed in 2009, there can be no assurance that the
construction of, the new cold storage facilities will be completed by the end of
2010 as expected. Our expansion plans involve a number of risks, including
inter alia
the costs of
investment in fixed assets, costs of working capital tied up in inventories, as
well as other working capital requirements. Our expansion will also depend on
our ability to secure new customers and/or sufficient orders. Failure to secure
new customers or sufficient orders or to meet our customers’ orders would
materially and adversely affect our business and financial
performance.
There is
no assurance that our future plans will result in commercial success. If we are
unable to execute our expansion plans successfully, our business and financial
performance would be materially and adversely affected.
Changes
in consumer preferences or discretionary consumer spending could adversely
impact our results.
Our
continued growth and success depends in part on the popularity of our products.
Sales of our processed seafood products and marine catch as a percentage of our
total sales for the period under review were as follows:
|
|
Year ended December 31,
|
|
|
Period ended March 31,
|
|
Products
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
Marine
catch
|
|
|
52.8
|
|
|
|
39.7
|
|
|
|
23.5
|
|
|
|
9.1
|
|
|
|
25.2
|
|
|
|
32.3
|
|
|
|
2.0
|
|
Processed
seafood products
|
|
|
47.2
|
|
|
|
60.3
|
|
|
|
76.5
|
|
|
|
90.9
|
|
|
|
74.8
|
|
|
|
67.7
|
|
|
|
84.0
|
|
Marine
catch
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14.0
|
|
Shifts in
consumer preferences or eating habits away from processed seafood products will
materially affect our business. In addition, our continued success depends, in
general, on the economic conditions, disposable income and consumer confidence
in the countries in which we sell our products, all of which can affect
discretionary consumer spending in such countries. Adverse changes in these
factors would reduce the flow of customers and limit our pricing which will
reduce our profitability.
Our
business activities are subject to certain laws and regulations and our
operations may be affected if we should fail to have in force the requisite
licenses and permits.
We are
required to obtain various licenses and permits in order to conduct our business
of production and export of processed seafood products. These include the
Hygiene Registration Certificate, which is a requirement in order to carry on
the production of food products in the PRC, as well as the HACCP certificate and
EU export registration, which is a requirement in order to export our processed
seafood products to certain countries. Our business is also subject to
applicable laws and regulations.
Any
failure to comply with the conditions stipulated in our licenses and permits may
lead to their revocation or non-renewal. Any failure to observe the applicable
laws and regulations may lead to the termination or suspension of some or all of
our business activities or penalties being imposed on us. The occurrence of any
of these events may adversely affect our business, financial condition and
results of operations.
Our
processed seafood products may be illegally tampered with such that they are
rendered unfit for consumption and have to be recalled and
destroyed.
Our
processed seafood products are packed in plastic materials that can be illegally
tampered with. Illegal tampering of our processed seafood products could result
in such products being rendered unfit for consumption or cause them to fail to
meet customer specifications, health and/or safe handling requirements. This may
lead to a loss of customer confidence in our products; affect our reputation,
cause product recalls and/or product destruction. In addition, we may incur
substantial litigation costs and may be ordered to compensate consumers in the
event of any illness or death caused by the consumption of an illegally tampered
seafood product.
In the
event that our processed seafood products are recalled or destroyed as a result
of illegal tampering or a claim is made against us arising from the consumption
of our products, our reputation, business goodwill and sales will be adversely
affected.
Product
or raw material deterioration will lead to loss of sales, higher costs, negative
publicity, and payment of compensation to our customers and/or product liability
claims.
Our raw
materials and frozen processed seafood products, being perishable in nature, may
deteriorate due to various reasons such as malfunctioning cold storage
facilities, delivery delays or poor handling. This may lead to a delay in
production or delivery of our products, a loss in revenue, costs incurred in the
purchase of replacement raw materials and payment of compensation to our
customers. Any deterioration in our raw materials or processed seafood products
could have a material adverse effect on our business, operations and
reputation.
Currently,
we do not have any product liability insurance in respect of our products. We
believe that premiums for product liability insurances are high compared to the
risk of claims. In the event that the consumption of our processed seafood
products causes harm, illness or death to a consumer of our products, whether as
a result of product deterioration, spoiling, sabotage, willful action, omission
or negligence, we may be liable to complaints, lawsuits and claims from
consumers of our products which in turn could generate negative publicity and
materially and adversely affect our business, financial condition and our
operations.
Outbreak
of disease or widespread contamination in any of the raw materials that we use
in our production or any food scares may lead to a loss in consumer confidence
and reduce the demand for our processed seafood products.
One of
our competitive strengths is our established brand name and track record. We
have received several awards and certificates for our high quality products,
including the “Green Food” award. Any outbreak of disease or widespread
contamination in any of the raw materials that we use in the production of our
products or food scares in the markets in which our processed seafood products
are manufactured or sold may have an adverse impact on our business as it may
lead to a loss in consumer confidence and reduce the demand of our processed
seafood products. It may also affect our sources of supply and we may have to
look for alternative sources of supply which may be more costly, or which may
not be available. If this develops into actual events, our operations and
profitability will be adversely affected.
Any
failure to meet health and hygiene standards may result in the suspension of
licenses, accreditations or the loss of our ability to import and export our
products.
We are
subject to annual checks carried out by the General Administration of Quality
Supervision, Inspection and Quarantine of the PRC (CIQ). The CIQ’s annual check
encompasses the inspection of food preparation, production and processing
operations, as well as health checks on our employees. Failure to meet the
required standards may result in our being required to take remedial measures to
meet the health and hygiene standards, or in extreme cases, the cancellation or
suspension of the license(s) and accreditation(s) required for us to carry on
our operations. In the event that this should occur, our operations and
financial condition will be materially and adversely affected and could lead to
a loss in customer confidence in our products.
In
addition, the CIQ makes random inspections on the processed seafood products
that we export. Failure to meet the required standards of hygiene may affect our
ability to export our processed seafood products and meet our customers’ orders
on time. It may also lead to a restriction on our ability to export our
processed seafood products which will materially and adversely affect our
business, financial condition and operations.
We bear the risk of loss in shipment
of our products and have no insurance to cover such
loss
.
Under
the shipping terms of our standard customer contracts, we bear the risk of loss
in shipment of our products and do not insure this risk. Since management
considers the risk of loss to be minimal, with export sales representing less
than 5% of our total sales for the year ended December 31, 2009 and three months
period ended March 31, 2010, respectively. Moreover, we believe that the
shipping companies that we use carry adequate insurance or are sufficiently
solvent to cover any loss in shipment. Nevertheless, there can be no assurance
that we will be adequately reimbursed upon the loss of a significant shipment of
our products.
We
are dependent on our Executive Directors and Executive Officers. Any loss in
their services without suitable replacement may adversely affect our
operations.
Our
success to date has been largely due to the contribution of Pengfei Liu, our
Executive Chairman and CEO. Mr. Liu is the founder of our Company, and has
spearheaded our expansion and growth. He is responsible for our operations,
marketing, public relations, strategic planning and development of new products
and markets. Our continued success is dependent, to a large extent, on our
ability to retain his services.
The
continued success of our business is also dependent on our key management and
operational personnel. We rely on their experience in the processed seafood and
marine catch industry, product development, sales and marketing and on their
relationships with our customers and suppliers.
The loss
of the services of any of our executive directors or executive officers without
suitable replacement or the inability to attract and retain qualified personnel
will adversely affect our operations and hence, our revenue and
profits.
We
are dependent on our customers’ ability to maintain and expand their sales and
distribution channels. Should these distributors be unsuccessful in maintaining
and expanding their distribution channels, our results of operations will be
adversely affected.
Demand
for our products from end-consumers and our prospects depend on the retail
growth and penetration rate of our products to end-consumers. Sales of our
products are conducted mainly through distributors, over whom we have limited
control. As of March 31, 2010, our distribution network is comprised of 24
distributors located in seven provinces. These distributors sub-distribute our
dried processed seafood products to over 2,500 retail points, including major
supermarkets. We are thus dependent on the sales and distribution channels of
our distributors for broadening the geographic reach of our products. Should
these distributors be unable to maintain and expand their distribution channels,
our results of operations and financial position will be adversely
affected.
Failure
to compete effectively in a competitive environment may affect our
profitability.
We
operate in the highly competitive processed seafood industry. We believe that
our major competitors include international and domestic seafood processors.
Some of these competitors may have significantly greater financial, technical
and marketing resources, stronger brand name recognition and larger existing
customer base than we do.
We also
believe that these competitors may have the ability to respond more quickly to
new or emerging technologies or may adapt more quickly to changes in
customer requirements or may devote greater resources to the development,
promotion and sales of their products than us.
There is
no assurance that we will be able to continue competing successfully against
present and future competitors. We believe that important factors to achieving
success in our industry include maintaining customer loyalty by cultivating
long-term customer relationships, achieving consistent product renewal and
maintaining the quality of our products. If we are unable to attain these, we
may lose our customers to our competitors and this will adversely affect our
market share. Increased competition may also force us to lower our prices, thus
reducing our profit margins and affecting our financial performance and
condition. Such competition may have a material adverse effect on our business,
financial position and results of operations. Please refer to the section
captioned “Description of Business - Competition” for further details as to our
present competitors.
Any
outbreak of earthquake, tsunami, adverse weather or oceanic conditions or other
calamities may result in disruption in our operations and could adversely affect
our sales.
We are
based in Fujian Province which is situated in southeast China on the coast of
the East China Sea. Fujian is a vital navigation hub between the East China Sea
and South China Sea, and is also rich in agricultural and marine resources. Our
main raw materials for our marine catch business come from the Taiwan Straight,
which is also the place where we conduct our marine catch
operations.
In 2004,
an undersea earthquake occurred off the west coast of Sumatra Indonesia. This
earthquake triggered a series of devastating tsunamis along the costs of most
landmasses boarding the Indian Ocean. More than 225,000 people in 11 countries
were killed, and coastal communities were inundated with waves up to 100
feet.
In May
2008, there was an 8.0 magnitude scale earthquake occurred at Sichuan Province
of China. It was also known the Wenchuan earthquake, which by any name killed at
least 69,000 people, and over 374,000 injured, with 18,000 listed as missing.
The earthquake left about 4.8 million people homeless, thought the number could
be as high as 11 million. It was the deadliest earthquake to hit China since the
1976 Tangshan earthquake.
Due to
the location of our business, we may be at risk of experiencing another tsunami,
earthquake or other adverse weather or oceanic conditions. This may result in
the breakdown of our facilities, such as our cold storage facilities, which will
in turn lead to deterioration of our products with the potential for spoilage.
This could adversely affect our ability to fulfill our sales orders and
adversely affect our profitability.
Adverse
weather conditions affecting the fishing grounds where the fishing vessels
chartered by us operate such as storms, cyclones and typhoons or cataclysmic
events such as tsunamis may also decrease the volume of our fish catches or may
even hamper our fishing operations. Our operations may also be adversely
affected by major climatic disruptions such as El Nino which in the past has
caused significant decreases in seafood catches worldwide.
We
may be affected by global climate change or by legal, regulatory or market
responses to such changes.
The
growing political and scientific sentiment is that increased concentrations of
carbon dioxide and other greenhouse gases in the atmosphere are influencing
global weather patterns. Changing weather patterns, along with the increased
frequency or duration of extreme weather conditions, could impact the
availability or increase the cost of key raw materials that we use to produce
our products.
Concern
over climate change, including global warming, has led to legislative and
regulatory initiatives directed at limiting greenhouse gas (GHG) emissions. For
example, proposals that would impose mandatory requirements on GHG emissions may
be considered by policy makers in the territories that we operate. Laws enacted
that directly or indirectly affect our production, distribution, packaging, cost
of raw materials, fuel, ingredients, and water could all impact our business and
financial results.
We
are in the business of processing, distributing and selling processed seafood
products and marine catch. Thus, a dramatic reduction in fish resources may
adversely affect our business.
We are in
the business of processing, distributing, and selling processed seafood
products, as well as selling marine catch. As such, 100% of our raw materials
are obtained through fishing. Due to over-fishing, the stocks of certain species
of fish may be dwindling and to counteract such over-fishing, governments may
take action that may be detrimental to our ability to conduct our operations. If
the solution proffered or imposed by the governments controlling the fishing
grounds either restrict our ability to procure seafood supply or if such action
limits the types, quantities and species of fish that we are able to
procure or catch, our operations and prospects may be adversely
affected.
Our
purchase of the beverage business involves the risks of entering into a new
business and depending on prior management of the business.
On
January 1, 2010, we purchased Xianghe, a beverage company, and entered into a
new business segment where we will need to rely on current management for the
business acquired. Xianghe is a Fujian based manufacturer of the
branded Hi-Power algae-based soft drinks. We kept the management of
Xianghe to continue to manage Xianghe. We will be dependent on the current
management of Xianghe for the continued development of the beverage
business. We do not have prior experience in the beverage business and the
success of Xianghe would be subject to all of the uncertainties regarding the
development of a new business. Although we intend to integrate the product
into Mingxiang’s distribution network, there can be no assurance regarding the
successful distribution and market acceptance of the beverage
products.
We
may not be able to respond successfully to changes in the highly competitive
beverage marketplace domestically and internationally.
We
operate in the highly competitive beverage industry and face strong competition
from other general and specialty beverage companies. Our response to continued
and increased competitor and customer consolidations and marketplace competition
may result in lower than expected net pricing of our products. Our ability to
gain or maintain share of sales or gross margins may be limited by the actions
of our competitors, who may have advantages in setting their prices because of
lower costs. Competitive pressures in the markets in which we operate may cause
channel and product mix to shift away from more profitable channels and
packages.
The
principal areas of competition are pricing, packaging, development of new
products and flavors and marketing campaigns. Our products will compete with a
wide range of drinks produced by a relatively large number of manufacturers, any
of which have substantially greater financial, marketing and distribution
resources than we do.
Important
factors affecting our ability to compete successfully include taste and flavor
of products, trade and consumer promotions, rapid and effective development of
new, unique cutting edge products, attractive and different packaging, branded
product advertising and pricing. We will also compete for distributors who will
concentrate on marketing our products over those of our competitors, provide
stable and reliable distribution and secure adequate shelf space in retail
outlets. Competitive pressures in the healthy beverage market could cause our
products to be unable to gain market share, or we could experience price
erosion, which could have a material adverse effect on our business and
results.
We
compete with major international beverage companies that operate in multiple
geographic areas, as well as numerous firms that are primarily local in
operation. Our ability to gain or maintain share of sales or gross margins in
the Chinese markets and ability to grow the business in global market may be
limited as a result of actions by competitors.
We
compete not only for customer acceptance but for maximum marketing efforts by
multi-brand licensed bottlers, brokers and distributors, many of which have a
principal affiliation with competing companies and brands. Certain large
companies such as The Coca-Cola Company and Pepsico Inc. market and/or
distribute products in that market segment.
Our
beverage business are heavily regulated by China State Food and Drug
Administration (“SFDA”) and other government agencies for the
production and packaging of beverage products, and failure to comply these
regulation may adversely affected our beverage business.
The
production, distribution and sale in China of our beverage products are the
production, distribution and sale in the Chinese market of our products are
subject to the PRC State Food, Drug, and Cosmetic Act, state consumer protection
laws, the Occupational Safety and Health Act, various environmental statutes;
and various other state and local statutes and regulations applicable to the
production, transportation, sale, safety, packaging, advertising, labeling and
ingredients of such products. Although we expect that we will comply with all
relevant regulations and rules in our production and distribution of beverage
products, there is risk that those regulations may be violated and capital
expenditures, net income or competitive position as a result of the violation
may be adversely affected.
Water
scarcity and poor quality could negatively impact our beverage production costs
and capacity.
Water
is the main ingredient in substantially all of our beverage products. It is also
a limited resource in many parts of the world, facing unprecedented challenges
from overexploitation, increasing pollution and poor management. As demand for
water continues to increase in China and as the quality of available water
deteriorates, our system may incur increasing production costs or face capacity
constraints which could adversely affect our profitability or net operating
revenues in the long run.
Changes
in the nonalcoholic beverages business environment could impact our financial
results.
The
nonalcoholic beverages business environment is rapidly evolving as a result of,
among other things, changes in consumer preferences, changes in consumer
lifestyles, increased consumer information and competitive product and pricing
pressures. If we are unable to successfully adapt to this rapidly changing
environment, our net income, share of sales and volume growth could be
negatively affected.
Adverse
weather conditions could reduce the demand for our beverage
products.
The
sales of our beverage products are influenced to some extent by weather
conditions in the markets in which we operate. Unusually cold weather during the
summer months may have a temporary effect on the demand for our beverage
products and contribute to lower sales, which could have an adverse effect on
our results of operations for those periods.
We
are exposed to the credit risk of our customers which may cause us to make
larger allowances for doubtful trade receivables or incur bad debt
write-offs.
Our
customers may default on their payments to us. Although we review the credit
risk of our customers regularly, such risks will nevertheless arise from events
or circumstances that are difficult to anticipate or control, such as an
economic downturn.
Our
trade receivables turnover days were approximately 57, 33, 27, 34 and 64 days in
2005, 2006, 2007, 2008 and 2009 respectively; and approximately 66 days as of
March 31, 2010. Our allowances for doubtful trade receivables as at December 31,
2005, 2006, 2007, 2008 and 2009 were approximately $22,000, $6,000, $21,000,
$24,000 and $95,000, respectively; and as of March 31, 2010 was
approximately $49,000, and at about 0.5% of our gross trade
receivables.
As a
result of this credit risk exposure of our customers defaulting on their
payments to us, we may have to make larger allowances for doubtful trade
receivables or incur bad debt write-offs, both of which may have an adverse
impact on our profitability.
We
may be subject to foreign exchange risk and may incur losses arising from
exchange differences upon settlement.
We sell
our dried processed seafood products, frozen processed seafood products and
marine catch mainly to local customers. Direct exports as a percentage of our
sales ranged between 0.5% to 4.9% during the period under review. Our
sales are denominated in RMB and US$, while our purchases are denominated in
RMB.
For
the fiscal year of 2009, 2008, 2007, 2006 and 2005, the percentages of our sales
denominated in RMB and US$ were as follows:
|
|
Year ended December 31,
|
|
|
Period
ended
March
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
RMB
|
|
|
95.8
|
|
|
|
99.1
|
|
|
|
99.5
|
|
|
|
95.1
|
|
|
|
97.4
|
|
|
|
97.5
|
|
|
|
98.5
|
|
USD
|
|
|
4.2
|
|
|
|
0.9
|
|
|
|
0.5
|
|
|
|
4.9
|
|
|
|
2.6
|
|
|
|
2.5
|
|
|
|
1.5
|
|
We may
incur losses arising from exchange differences upon settlement. To the extent
that our sales, purchases and expenses are not naturally matched in the same
currency and there are timing differences between collections and payments, we
will be exposed to any adverse fluctuations in the exchange rates between the
various foreign currencies and the RMB. Any restrictions over the conversion or
timing of conversion of foreign currencies may also expose us to adverse
fluctuations in exchange rates. As a result, our earnings may be materially and
adversely affected.
On
July 21, 2005, the Renminbi was unpegged against the US$ and pegged against a
basket of currencies on a “managed float currency regime”. As at December 31,
2009 and March 31, 2010, the closing exchange rate was approximately US$1.00 to
RMB 6.8372 and US$1.00 to RMB 6.8361. There is no assurance that the PRC’s
foreign exchange policy will not be further altered. In the event that the PRC’s
policy is altered, significant fluctuations in the exchange rates of RMB against
the US$ will arise. As a result we will be subject to significant foreign
exchange exposure and in the event that we incur foreign exchange losses, our
financial performance will be adversely affected.
We
currently do not have a formal hedging policy with respect to our foreign
exchange exposure as our foreign exchange gains and losses over the past three
fiscal years ended December 31, 2009, 2008 and 2007, respectively have been
relatively low. We will continue to monitor our foreign exchange exposure in the
future and will consider hedging any material foreign exchange exposure should
the need arise.
Please
refer to the section “Description of Business - Foreign Exchange Exposure” for
further details.
Our
products and brand name may be replicated or counterfeited which will in turn
have an adverse effect on our Company and we may be affected by intellectual
property rights disputes.
We
have registered certain trademarks in the PRC, details of which are set out in
the section “Intellectual Property” for the fiscal year ended December 31, 2009
filed on March 22, 2009. Despite the protection of our trademark under the
intellectual property laws of the PRC, such laws may not be adequate or
effectively enforced against third parties who may violate our proprietary
rights by illegally using our trademarks or our brand name. Our products and
brand names may be replicated or counterfeited, which in turn may adversely
affect our reputation and brand image.
Policing
unauthorized use of our trademarks or brand is difficult and costly,
particularly in countries where the laws may not fully protect our proprietary
rights. There can be no assurance that our means of protecting our proprietary
rights will be adequate. Any unauthorized use of our trademarks and brand may
damage our brand, recognition and reputation. This may lead to our customers
losing confidence in our brand and products, which, in turn, may lead to a loss
in our business and hence sales.
Our
business may be adversely affected by conditions in the financial markets and
economic conditions generally.
The
United States has been in a recession since December, 2007. Business activity
across a wide range of industries and regions is greatly reduced, and many
businesses and local governments are experiencing serious difficulty in
remaining profitable due to the lack of consumer spending and the lack of
liquidity in the credit markets. Unemployment has increased significantly. Since
mid-2007, and particularly during the second half of 2008, the financial
services industry and the securities markets generally were materially and
adversely affected by significant declines in the values of nearly all asset
classes and by a serious lack of liquidity.
As a
result of this economic downturn, many lending institutions, including us, have
experienced declines in the performance of their loans, including commercial
loans, commercial real estate loans and consumer loans. Moreover, competition
among depository institutions for deposits and quality loans has increased
significantly. In addition, the values of real estate collateral supporting many
commercial loans and home mortgages have declined and may continue to decline.
Bank and bank holding company stock prices have been negatively affected, and
the ability of banks and bank holding companies to raise capital or borrow in
the debt markets has become more difficult compared to recent years. There is
also the potential for new federal or state laws and regulations regarding
lending and funding practices and liquidity standards, and bank regulatory
agencies are expected to be very aggressive in responding to concerns and trends
identified in examinations, including the expected issuance of many formal or
informal enforcement actions or orders. The impact of new legislation in
response to those developments, may negatively impact our operations by
restricting our business operations, including our ability to originate or sell
loans, and adversely impact our financial performance or our stock
price.
In
addition, further negative market developments may affect consumer confidence
levels and may cause adverse changes in payment patterns, causing increases in
delinquencies and default rates, which may impact our charge-offs and provision
for credit losses. A worsening of these conditions would likely exacerbate the
adverse effects of these difficult market conditions on us and others in the
financial services industry.
Overall,
during the past year, the general business environment has had an adverse effect
on our business, and there can be no assurance that the environment will improve
in the near term. Until conditions improve, we expect our business, financial
condition and results of operations to be adversely affected.
Worldwide
economic conditions may remain depressed for the foreseeable future. These
conditions make it difficult for us to accurately forecast and plan future
business activities, and could cause us to slow or reduce spending on our
research and development activities. Furthermore, during challenging economic
times, we may face issues gaining timely access to financings or capital
infusion, which could result in an impairment of our ability to continue our
business activities. We cannot predict the timing, strength or duration of any
economic slowdown or subsequent economic recovery, worldwide, in the United
States, or in our industry. These and other economic factors could have a
material adverse effect on our financial condition and operating
results.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Our
operations in the PRC are subject to the laws and regulations of the PRC and any
changes in the laws or policies of the PRC may have a material impact on our
operations and financial performance.
As our
processed seafood products and marine catch businesses are carried out in the
PRC, we are subject to and have to operate within the framework of the PRC legal
system. Any changes in the laws or policies of the PRC or the implementation
thereof, for example in areas such as foreign exchange controls, tariffs, trade
barriers, taxes, export license requirements and environmental protection, may
have a material impact on our operations and financial performance.
The
corporate affairs of our companies in the PRC are governed by their articles of
association and the corporate and foreign investment laws and regulations of the
PRC. The principles of the PRC laws relating to matters such as the fiduciary
duties of directors and other corporate governance matters and foreign
investment laws in the PRC are relatively new. Hence, the enforcement of
investors or shareholders' rights under the articles of association of a PRC
company and the interpretation of the relevant laws relating to corporate
governance matters remain largely untested in the PRC.
Introduction
of new laws or changes to existing laws by the PRC government may adversely
affect our business if stricter regulations are imposed on the overseas business
practices of PRC companies
Our
operations are carried out through our wholly-owned subsidiaries which are
located in the PRC. As such, the laws of the PRC govern our businesses and
operations. The PRC legal system is a codified system of written laws,
regulations, circulars, administrative directives and internal guidelines. The
PRC government is still in the process of developing its legal system to
encourage foreign investment and to align itself with global practices and
standards. As the PRC economy is undergoing development at a faster rate than
the changes to its legal system, some degree of uncertainty exists in connection
with whether and how existing laws and regulations apply to certain events and
circumstances. Some of the laws and regulations and the interpretation,
implementation and enforcement of such laws and regulations are also at an
experimental stage and are subject to policy changes. Hence, precedents on the
interpretation, implementation and enforcement of certain PRC laws are limited
and court decisions in the PRC do not have binding effect on lower courts.
Accordingly, the outcome of dispute resolutions and litigation may not be as
consistent or predictable as in other more developed jurisdictions and it may be
difficult to obtain swift and equitable enforcement of the laws in the PRC, or
to obtain enforcement of a judgment by a court or another
jurisdiction.
In
particular, on August 8, 2006, six PRC regulatory bodies, including the Ministry
of Commerce (MOFCOM) and the China Securities Regulatory Commission (“CSRC”),
jointly promulgated the new “Regulations on Foreign Investors Merging with or
Acquiring Domestic Enterprises”, which took effect on September 8, 2006 (“2006
M&A Rules”). The 2006 M&A Rules regulate,
inter alia
, the acquisition
of PRC domestic companies by foreign investors.
On
September 21, 2006, the CSRC promulgated the “Guidelines on Domestic Enterprises
Indirectly Issuing or Listing and Trading their Stocks on Overseas Stock
Exchanges” (the “CSRC Guidelines”).
Under the
2006 M&A Rules and the CSRC Guidelines, the listing of overseas special
purpose vehicles (“SPV”) which are controlled by PRC entities or individuals are
subject to the prior approval of the CSRC.
The 2006
M&A Rules and the CSRC Guidelines do not provide any express requirement for
an SPV to retroactively obtain CSRC approval where the restructuring steps had
been completed prior to September 8, 2006.
Yuan Tai
Law Offices, our Legal Adviser on PRC Law, is of the opinion that (i) we have
obtained all the necessary governmental approvals from PRC authorities for the
restructuring of our subsidiaries prior to September 8, 2006, (ii) we do not
need to obtain CSRC approval and (iii) it is not necessary for us to comply
retroactively with the requirement of obtaining the prior approval of the CSRC
for our public listing in the U.S..
There is
no assurance that these PRC authorities will not issue further directives,
regulations, clarifications or implementation rules requiring us to obtain
further approvals in relation to our public listing in the
U.S..
PRC
foreign exchange control may limit our ability to utilize our cash effectively
and affect our ability to receive dividends and other payments from our PRC
subsidiaries.
Our PRC
subsidiaries, which are foreign investment entities (“FIEs”), are subject to the
PRC rules and regulations on currency conversion. In the PRC, the State
Administration of Foreign Exchange (“SAFE”) regulates the conversion of the RMB
into foreign currencies. Currently, foreign investment enterprises (including
wholly foreign-owned enterprises) are required to apply to the SAFE for “Foreign
Exchange Registration Certificates for FIEs”. With such registration
certification (which have to be renewed annually), FIEs are allowed to open
foreign currency accounts including the “current account” and “capital account”.
Currently, transactions within the scope of the "current account" (for example,
remittance of foreign currencies for payment of dividends) can be effected
without requiring the approval of the SAFE. However, conversion of currency in
the “capital account” (for example, for capital items such as direct
investments, loans and securities) still requires the approval of the SAFE. Our
PRC operating subsidiary Rixiang has obtained the "Foreign Exchange Registration
Certificates for FIEs", which is subject to annual review.
There
is no assurance that the PRC regulatory authorities will not impose restrictions
on the convertibility of the RMB for FIEs. In 2005, 2006, 2007, 2008 and 2009,
approximately 95.8%, 99.1%, 99.5%, 95.1% and 97.4 of our sales, respectively was
denominated in RMB; and approximately 98.5% for the three months ended March 31,
2010 of our sales, respectively was denominated in RMB As such, any
future restrictions on currency exchanges may limit our ability to utilize funds
generated in the PRC to fund any potential business activities outside the PRC
or to distribute dividends to our shareholders.
Our
subsidiaries, operations and significant assets are located outside the U.S.
Shareholders may not be accorded the same rights and protection that would be
accorded under the Securities Act. In addition, it could be difficult to enforce
a U.S. judgment against our Directors and officers.
Our
subsidiaries, operations and assets are mostly located in the PRC. Our
subsidiaries are therefore subject to the relevant laws in the PRC. U.S. law may
provide shareholders with certain rights and protection which may not have
corresponding or similar provisions under the laws of the PRC. As such,
investors in our common stock may or may not be accorded the same level of
shareholder rights and protection that would be accorded under the Securities
Act. In addition, all our current executive directors are non-residents of the
U.S. and the assets of these persons are mainly located outside the U.S. As
such, there may be difficulty for our shareholders to affect service of process
in the U.S., or to enforce a judgment obtained in the U.S. against any of these
persons.
We
are subject to the PRC's environmental laws and regulations and in the event
stricter rules are imposed to protect the environment, we may have to incur
higher costs to comply with such rules.
Our
production facilities in the PRC will be subject to environmental laws and
regulations imposed by the PRC authorities,
inter alia
, in respect of
air protection, waste management and water protection. In the event stricter
rules are imposed on air protection, waste management and water protection by
the PRC authorities, we may have to incur higher costs to comply with such
rules. Accordingly, our financial performance may be adversely affected. In
addition, we require license for the discharge of pollutants for our operations,
which is subject to annual review and renewal. In the event that we fail to
renew our license with the relevant authority, our operations and financial
performance will be adversely affected.
The
outbreak of avian influenza and/or other communicable diseases, if uncontrolled,
could affect our financial performance and prospects.
The avian
influenza virus is a virus found chiefly in birds, but infections with these
viruses can occur in humans. In January of 2004, the first case of the avian
influenza was reported in Guangxi, Hunan and Hubei provinces. Later reports also
came from Anhui, Liaoning, Shanghai and Guangdong provinces. Since 2003,
there have been 37 recorded cases of the avian influenza in the
PRC.
Because
our operations are carried out through our wholly-owned subsidiaries located in
the PRC, the outbreak of avian influenza and/or other communicable diseases, if
uncontrolled, can have an adverse effect on business sentiments and environment.
In addition, if any of our employees, our customers or our suppliers, is
affected by the outbreak of communicable diseases, it can adversely affect,
among others, our operations, our customers
'
orders and our supply of raw
materials. Accordingly, our sales and profitability will be materially and
adversely affected.
Changes in
China’s political or economic situation could harm us and our operating
results
.
Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the government could change these
economic reforms or any of the legal systems at any time. This could either
benefit or damage our operations and profitability. Some of the things that
could have this effect are:
|
¨
|
Level of government involvement
in the economy;
|
|
¨
|
Control of foreign
exchange;
|
|
¨
|
Methods of allocating
resources;
|
|
¨
|
Balance of payments
position;
|
|
¨
|
International trade restrictions;
and
|
|
¨
|
International
conflict.
|
The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many ways. As
a result of these differences, we may not develop in the same way or at the same
rate as might be expected if the Chinese economy were similar to those of the
OECD member countries.
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities. Government action in the future may require us
to divest ourselves of any interest we hold in Chinese properties.
China
only recently has permitted provincial and local economic autonomy and private
economic activities. The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to continue to operate in
China may be affected by changes in its laws and regulations, including those
relating to taxation, import and export tariffs, environmental regulations, land
use rights, property and other matters. We believe that our operations in China
are in material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of the jurisdictions in
which we operate may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or
interpretations.
Accordingly,
government actions in the future including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Future
inflation in China may inhibit our ability to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and highly
fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2%. These factors have led
to the adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. High inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for
our products.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
The
majority of our revenues will be settled in Renminbi and U.S. dollars, and any
future restrictions on currency exchanged may limit our ability to use revenue
generated in Renminbi to fund any future business activities outside China or to
make dividend or other payments in the U.S. dollars. Although the Chinese
government introduced regulations in 1996 to allow greater convertibility of the
Renminbi for current account transactions, significant restrictions still
remain, including primarily the restriction that foreign-invested enterprises
may only buy, sell or remit foreign currencies after providing valid commercial
documents, at those banks in China authorized to conduct foreign exchange
business. In addition, conversion of Renminbi for capital account items,
including direct investment and loans, is subject to governmental approval in
China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the
convertibility of the Renminbi.
The
value of our securities will be affected by the foreign exchange rate between
U.S. dollars and Renminbi.
The value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and Renminbi, and between those currencies and other currencies in which
our sales may be denominated. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operational needs and should the Renminbi
appreciate against the U.S. dollar at that time, our financial position, the
business of the company, and the price of our common stock may be harmed.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of declaring dividends on our common stock or for other business
purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar
equivalent of our earnings from our subsidiaries in China would be
reduced.
RISKS
RELATED TO THE MARKET FOR OUR STOCK
Pengfei
Liu has significant influence over the outcome of matters submitted to
Shareholders for approval.
Mr.
Liu currently owns approximately 41.4% of our outstanding common stock. As a
result, he will be able to exercise significant influence over all matters
requiring shareholder approval, including the appointment of our directors and
the approval of significant corporate transactions.
His ownership and
control may also have the effect of delaying or preventing a future change in
control, impeding merger, consolidation, takeover or other business combination
or discourage a potential acquirer from making a tender offer.
Our
share price may be volatile, which can result in substantial losses for
investors who purchase our common stock.
The
market price of our common stock may be highly volatile and can fluctuate
significantly and rapidly in response to,
inter alia
, the following
factors, some of which are beyond our control:
|
·
|
Variations in our operating
results;
|
|
·
|
Success or failure of our
management team in implementing business and growth
strategies;
|
|
·
|
Gain or loss of an important
business relationship or adverse financial performance by a significant
customer or group of
customers;
|
|
·
|
Changes
in securities analysts’ recommendations, perceptions or estimates of our
financial performance;
|
|
·
|
Changes in conditions affecting
the seafood packaging and processing industry, the general economic
conditions or stock market sentiments or other events or factors in the
PRC;
|
|
·
|
Changes or developments in laws,
regulations or taxes in the seafood processing and packaging industry in
the PRC;
|
|
·
|
The temporary or permanent loss
of our seafood processing and packaging facilities due to casualty,
weather or any extended or extraordinary maintenance or inspection that
may be required.
|
|
·
|
Changes in market valuations and
share prices of companies with similar businesses that may be listed in
the U.S. or anywhere else in the
world;
|
|
·
|
Additions or departures of key
personnel;
|
|
·
|
Fluctuations in stock market
prices and volume; or
|
|
·
|
Involvement in
litigation.
|
Additional
funds raised through issue of new shares for our future growth will dilute
Shareholders’ equity interests.
Although
we have identified our expansion plans as avenues to pursue growth in our
business, we may also find other opportunities to grow, including acquisitions
which cannot be predicted at this juncture. Under such circumstances, we may
seek to sell additional equity or debt securities or obtain a credit facility.
If new shares placed to new and/or existing shareholders are issued in the
future, they may be priced at a discount to the then prevailing market price of
our shares trading on the NYSE/AMEX or any other stock exchanges, in which case,
existing shareholders' equity interest will be diluted. If we fail to utilize
the new equity to generate a commensurate increase in earnings, our earnings per
share will be diluted and this could lead to a decline in our share price. Any
additional debt financing may, apart from increasing interest expense and
gearing, contain restrictive covenants with respect to dividends, future fund
raising exercises and other financial and operational matters.
The
number of shares being registered for sale is significant in relation to our
trading volume.
All of
the shares registered for sale on behalf of the selling stockholders are
“restricted securities” as that term is defined in Rule 144 under the Securities
Act. We have filed this registration statement to register these restricted
shares for sale into the public market by the selling stockholders. These
restricted securities, if sold in the market all at once or at about the same
time, could depress the market price during the period the registration
statement remains effective and also could affect our ability to raise equity
capital. Any outstanding shares not sold by the selling stockholders pursuant to
this Prospectus will remain as “restricted shares” in the hands of the holders,
except for those held by non-affiliates for a period of two years, calculated
pursuant to Rule 144.
Negative
publicity may adversely affect our share price.
One of
our competitive strengths is our established brand name and track record. We
have been involved in the production of processes seafood products since
commencing our operations in 1994. Our “Mingxiang” brand has been conferred the
“Famous Brand” award, and our products have received several other awards such
as the “Green Food” award. Please see “Description of Business - Competition”.
We have also established a track record in the processed seafood industry which
instills confidence in our products and attracts new customers from South Korea,
Japan, Taiwan, Russia and Ukraine, as well as potential customers from the
European Union. Negative publicity involving us, any of our directors or
executive officers may adversely affect our stock market price whether or not
such negative publicity is justified.
Certain
provisions of our Amended Articles of Incorporation may make it more difficult
for a third party to effect a change in control.
Our
Amended Articles of Incorporation authorizes our board of directors to issue up
to 1,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
our board of directors without further action by the stockholders. These terms
may include voting rights including the right to vote as a series on particular
matters, preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. The issuance of any preferred
stock could diminish the rights of holders of our common stock, and therefore
could reduce the value of such common stock. In addition, specific rights
granted to future holders of preferred stock could be used to restrict our
ability to merge with, or sell assets to, a third party. The ability of our
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent the stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
registration statement contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as “anticipate”, “believe”, “could”, “estimate”,
“expect”, “intend”, “may”, “plan”, “potential”, “should”, “will” and “would” or
similar words. You should read statements that contain these words carefully
because they discuss our future expectations, contain projections of our future
results of operations or of our financial position or state other
forward-looking information. We believe that it is important to communicate our
future expectations to our investors. However, there may be events in the future
that we are not able to predict accurately or control. The factors listed above
in the section captioned “Risk Factors,” as well as any cautionary language in
this Prospectus, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. Before you invest in our common stock, you
should be aware that the occurrence of the events described in these risk
factors and elsewhere in this Prospectus could have a material adverse effect on
our business, results of operations and financial position.
USE OF
PROCEEDS
This
Prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholders. We will not receive any proceeds
from the sale of shares of common stock in this offering. However, we will
receive the sale price of any common stock we sell to the selling stockholder
upon exercise of the warrants, should the warrants be exercised for cash
consideration. We expect to use the proceeds received from the exercise of the
warrants, if any, for general working capital purposes.
DETERMINATION OF OFFERING
PRICE
The
selling stockholders will determine at what price they may sell the offered
shares, and such sales may be made at prevailing market prices or at privately
negotiated prices.
DILUTION OF THE PRICE YOU
PAY FOR YOUR SHARES
Dilution
represents the difference between the offering price and the net tangible book
value per share immediately after completion of this offering. Net tangible book
value is the amount that results from subtracting total liabilities and
intangible assets from total assets.
Our
net tangible book value as of March 31, 2010 and December 31, 2009 was $2.39 and
$2.56 per share of common stock, respectively. Since this offering is being made
solely by the selling stockholders and none of the proceeds will be paid to us,
our net tangible book value will be unaffected by this
offering.
SELLING
STOCKHOLDERS
This
Prospectus relates to the resale by the selling stockholders named below from
time to time of up to a total of 12,013,568 shares of our common stock that were
issued to selling stockholders pursuant to transactions exempt from registration
under the Securities Act.
The
following table sets forth certain information regarding the selling
stockholders and the shares offered by them in the Prospectus. Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a selling stockholder and the
percentage of ownership of that selling stockholder, shares of common stock
underlying warrants held by that selling stockholder that are convertible or
exercisable, as the case may be, within 60 days of November 17, 2007, are
included. Those shares, however, are not deemed outstanding for the purpose of
computing the percentage ownership of any other selling stockholder. Each
selling stockholder’s percentage of ownership in the following table is based
upon 28,493,650 shares of common stock outstanding as of June 11,
2010.
Except as
specifically set forth in the footnotes to the table, none of the selling
stockholders has held a position as an officer or director of our Company, nor
has any selling stockholder had any material relationship of any kind with us or
any of our affiliates. All information with respect to share ownership has been
furnished by the selling stockholders. The shares being offered are being
registered to permit public secondary trading of the shares and each selling
stockholder may offer all or part of the shares owned for resale from time to
time. In addition, none of the selling stockholders has any family relationships
with our officers, directors, or controlling stockholders. No selling
stockholder, except for Sterne, Agee & Leech, is a registered broker-dealer
or an affiliate of a registered broker-dealer. Furthermore, all of the selling
shareholders purchased the securities in the ordinary course of business, and at
the time of purchase, there were no agreements or understandings directly or
indirectly, with any party to distribute securities.
The term
“selling stockholders” also includes any transferees, pledges, donees, or other
successors in interest to the selling stockholders named in the table below. To
our knowledge, subject to applicable community property laws, each person named
in the table has sole voting and investment power with respect to the shares of
common stock set forth opposite such person’s name. We will file a supplement to
this Prospectus to name successors to any named selling stockholders who are
able to use this Prospectus to resell the securities registered
hereby.
Name and Address
|
|
Beneficial
Ownership
Before the
Offering
|
|
|
Shares of
Common Stock
Included in
Prospectus
|
|
|
Beneficial
Ownership
After the
Offering
(1)
|
|
|
Percentage
of Common
Stock Owned
After the
Offering
|
|
Halter
Financial Investments, L.P.
(2)
12890
Hilltop Road
Argyle,
TX 76226
|
|
|
1,005,200
|
|
|
|
1,005,200
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ai
Nyuet Ang
5
Lyndhurst Road, Singapore
438090
|
|
|
344,648
|
|
|
|
344,648
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hung
Yu Wong
5D,
78B Bonham Road
Hong
Kong
|
|
|
448,042
|
|
|
|
448,042
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Fuhui Road
Shishi
City, Fujian Province
China
|
|
|
459,530
|
|
|
|
459,530
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shangxiong
Qiu
15
Huangjinshan
Dongpu
Village #1 Hungshan Town
Shishi
City, Fujian Province
China
|
|
|
689,296
|
|
|
|
689,296
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liya
Qiu
101Xuexiaonan
Dongpu
Village, Hungshan Town
Shishi
City, Fujian Province
China
|
|
|
689,296
|
|
|
|
689,296
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hampton
Investment Group Ltd.
Room
3506
Bank
of America Tower, Harcourt Road,
Central
Hong
Kong
Attn.:
Mr. William Yan Sui Hui
|
|
|
942,037
|
|
|
|
942,037
|
|
|
|
0
|
|
|
|
*
|
|
Metrolink
Holdings Limited
Suite
4703, Central Plaza
18
Harbour Road, Wanchai
Hong
Kong
Attn.:
Mr. Kui Shing Andy Lai
|
|
|
344,648
|
|
|
|
344,648
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Golden
Nugget Resources Limited
(3)
Suite
4703, Central Plaza, 18 Harbour
Road,Wanchai,
Hong Kong
Attn.:
Ms. Lai Yung Wai
|
|
|
221,
966
|
|
|
|
221,966
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
** Alexandra Global
Master Fund Ltd.
(4)
c/o
Pusch & Gal
31
West 31
st
Street, 10
th
Floor
New
York, NY 10001
Attn:
Dov Gal, Esq
|
|
|
591,164
|
|
|
|
591,164
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
** Alpha Capital Anstalt
(5)
c/o
LH Financial Services, Corp
150
Central Park South, Second Floor
New
York, NY 10019
Attn:
Aci Kluger
|
|
|
85,563
|
|
|
|
85,563
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Anson Capital, LP
(6)
c/o
Bank of America
901
Main Street, Suite 6616
Dallas,
TX 75202
Attn:
Guillermo Femat
|
|
|
62,228
|
|
|
|
62,228
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Bald Eagle Fund Ltd.
(7)
c/o
Bald Eagle Fund Ltd
200
Park Avenue, Suite 3300
New
York, NY 10166
Attn:
Richard J. Keim
|
|
|
13,122
|
|
|
|
13,122
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Black Diamond Fund, LLP.
(8)
c/o
Brandon Goulding
155
Revere Drive, Suite 10
Northbrook,
IL 60062
|
|
|
186,683
|
|
|
|
186,683
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Charles Nirenburg
(9)
c/o
Kensington Management Group, LLC
200
Park Avenue, Suite 3300
New
York, NY 10166
Attn:
Richard J. Keim
|
|
|
13,170
|
|
|
|
13,170
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Chestnut Ridge Partners, LP
(10)
50
Tice Blvd
Woodcliff
Lake, NJ 07677
Attn:
Kenneth Holz
|
|
|
77,785
|
|
|
|
77,785
|
|
|
|
0
|
|
|
|
*
|
|
148
Wedgewood Lane
Whitefish,
MT 59937
|
|
|
18,668
|
|
|
|
18,668
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Dean Pisani
(12)
3129
Bass Pro Drive
Grapevine,
TX 76051
|
|
|
18,668
|
|
|
|
18,668
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Equity Management Associates, LLC
(13)
c/o
EMA, LLC
260
Bear Hill Road
Waltham,
MA 02451
Attn:
Richard Kosowsky
|
|
|
74,674
|
|
|
|
74,674
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Excalibur Small-Cap Opportunities, LP
(14)
33
Prince Author Ave.
Toronto,
ON M4R1B2
Attn:
Will Hechter
|
|
|
224,020
|
|
|
|
224,020
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Gary C. Evans
(15)
1808
Point de Vue
Flower
Mound, TX 75022
|
|
|
373,367
|
|
|
|
373,367
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Guerilla Partners, LP
(16)
c/o
Guerrilla Capital Management, LLC
237
Park Avenue, 9
th
Floor
New
York, NY 10017
Attn:
Peter Siris
|
|
|
112,010
|
|
|
|
112,010
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Harold Gear
(17)
2558
Admirals Walk Dr. S.
Orange
Park, FL 32073
|
|
|
12,445
|
|
|
|
12,445
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Hua Mei 21st Century Partners, LP
(19)
c/o
Guerilla Capital Management, LLC
237
Park Avenue, 9
th
Floor
New
York, NY 10017
Attn:
Peter Siris
|
|
|
224,020
|
|
|
|
224,020
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Heller Capital Investments, LLC
(18)
c/o
Heller Capital
700
East Palisades Avenue
Englewood
Cliffs, NJ 07632
Attn:
Ronald Heller
|
|
|
224,020
|
|
|
|
224,020
|
|
|
|
0
|
|
|
|
*
|
|
** Jayhawk Private
Equity Fund, LP
(20)
c/o
Jayhawk Capital Management, LLC
5410
West 61
st
Place, Suite 100
Mission,
KS 66205
Attn:
Mike Schmitz
|
|
|
398,603
|
|
|
|
398,603
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Jayhawk Private Equity Co. Investment Fund, LP
(21)
c/oJayhawk
Capital Management, LLC
5410
West 61
st
Place, Suite 100
Mission,
KS 66205
Attn:
Mike Schmitz
|
|
|
68,621
|
|
|
|
68,621
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
John Trescot
(22)
A
Ways Away
East
Polatka, FL 32131-4338
|
|
|
12,446
|
|
|
|
12,446
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Kensington Partners, LP
(23)
200
Park Avenue, Suite 3300
New
York, NY 10166
Attn:
Richard J. Keim
|
|
|
287,172
|
|
|
|
287,172
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Michael Studer
(24)
4804
Anchor Ct.
Flower
Mound, TX 75022
|
|
|
18,668
|
|
|
|
18,668
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
** Midsouth Investor
Fund, LP
(25)
201
5
th
Ave., North, Suite 1950
Nashville,
TN .37219
Attn:
L.O. Heidtke
|
|
|
149,347
|
|
|
|
149,347
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Mosaic Partners, LP
(26)
c/o
Baypoint Prime Brokerage
450
Sansome Street, 16
th
Floor
San
Francisco, CA 94111
Attn:
Kim Lippi
|
|
|
70,006
|
|
|
|
70,006
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Peter B. Orthwein Family Trust
(27)
c/o
Kensington Management Group, LLC
200
Park Avenue, Suite 3300
New
York, NY 10166
Attn:
Richard J. Keim
|
|
|
22,566
|
|
|
|
22,566
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Professional Offshore Opportunity Fund, Ltd.
(28)
1400
Old Country Road, Suite 206
Westbury,
NY 11590
Attn:
Marc Swikkle
|
|
|
93,342
|
|
|
|
93,342
|
|
|
|
0
|
|
|
|
*
|
|
**
RS Holdings, Inc.
(29)
c/o
Richard D. Squires
100
Crescent Court, Suite 450
Dallas,
TX 75201
|
|
|
112,010
|
|
|
|
112,010
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Saunders Capital Maters Fund, LP
(30)
c/o
Bank of America
901
Main Street, Suite 6616
Dallas,
TX 75202
Attn:
Guillermo Femat
|
|
|
77,785
|
|
|
|
77,785
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Silver Rock I, Ltd.
(31)
c/o
FCIM Corp
117
East 5
th
Street, 50 C
New
York, NY 10022
|
|
|
93,340
|
|
|
|
93,340
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
SPI Dallas Investments, LP
(32)
c/o
Richard D. Squires
10esc0
Crent Court, Suite 450
Dallas,
TX 75201
|
|
|
74,674
|
|
|
|
74,674
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
SPI Hawaii Investments, LP
(33)
c/o
SPI Holdings, LLC
650
California Street, #1288
San
Francisco, CA 94108
Attn:
Dennis Wong
|
|
|
112,010
|
|
|
|
112,010
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Squires Family, LP
(34)
c/o
Richard D. Squires
100
Crescent Court, Suite 450
Dallas,
TX 75201
|
|
|
93,342
|
|
|
|
93,342
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
Tradelink Securities, LLC
(35)
71
S. Wacker Dr., Suite 1900
Chicago,
IL 60606
Attn:
Daniel Weissman
|
|
|
1,866,833
|
|
|
|
1,866,833
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
** Triwizards
Fund, LP
(36)
c/o Baypoint Prime
Brokerage
450 Sansome Street, 16
th
Floor
San Francisco, CA
94111
Attn: Kim Lippi
|
|
|
31,114
|
|
|
|
31,114
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
** Turicum
Private Bank, Ltd.
(37)
c/o Baypoint Prime
Brokerage
450 Sansome Street, 16
th
Floor
San Francisco, CA
94111
Attn: Kim Lippi
|
|
|
23,335
|
|
|
|
23,335
|
|
|
|
0
|
|
|
|
*
|
|
** Whitebox
Intermarket Partners, LP
(38)
c/o Whitebox Advisors,
LLC
3033 Excelsior Blvd., Suite
300
Minneapolis, MN
55416-4675
Attn: Barb Reller
|
|
|
902,302
|
|
|
|
902,302
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
** William Gay
(39)
524 Stockton
Street
Jacksonville, FL
32204
Attn: Roger Painter
|
|
|
12,445
|
|
|
|
12,445
|
|
|
|
0
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
** William
Gruenburg
(40)
c/o Sterne Agee &
Leach
800 Shades Creek Parkway,
Suite 700
Birmingham, AL 35205
|
|
|
37,337
|
|
|
|
37,337
|
|
|
|
0
|
|
|
|
*
|
|
(1)
|
Assumes
all securities offered are sold.
|
(2)
|
Halter
Financial Investments, L.P. (“HFI”) is a Texas limited partnership of
which Halter Financial Investments GP, LLC, a Texas limited liability
company, is the sole general partner. The natural persons who are the
beneficial owners of a majority of the voting stock of Halter Financial
Investments GP, LLC include: (i) TPH Capital, L.P., a Texas limited
partnership of which TPH Capital GP, LLC is the general partner and
Timothy P. Halter is the sole member of TPH Capital GP, LLC; (ii)
Bellfield Capital, L.P., a Texas limited partnership of which Bellfield
Capital Management, LLC is the sole general partner and Dave Brigante is
the sole member of Bellfield Capital Management, LLC; (iii) Colhurst
Capital LP, a Texas limited partnership of which Colhurst Capital GP, LLC
is the general partner and George L. Diamond is the sole member of
Colhurst Capital GP, LLC; and (iv) Rivergreen Capital LLC of which Marat
Rosenberg is the sole member. The other limited partners of HFI are: (i)
TPH Capital, L.P., a Texas limited partnership of which TPH Capital GP,
LLC is the general partner and Timothy P. Halter is the sole member of TPH
Capital GP, LLC; (ii) Bellfield Capital, L.P., a Texas limited partnership
of which Bellfield Capital Management, LLC is the sole general partner and
Dave Brigante is the sole member of Bellfield Capital Management, LLC;
(iii) Colhurst Capital LP, a Texas limited partnership of which Colhurst
Capital GP, LLC is the general partner and George L. Diamond is the sole
member of Colhurts Capital GP, LLC; and (iv) Rivergreen Capital LLC of
which Marat Rosenberg is the sole member. As a result, each of the
foregoing persons may be deemed to be a beneficial owner of the shares
held of record by HFI.
|
(3)
|
Includes
221,966 shares underlying the warrant to purchase shares of our
stock.
|
(4)
|
Includes
591,164 shares of our common stock. Mikhail Filimonov is the controlling
person for Alexandra Global
Master
Fund Ltd.
|
(5)
|
Includes
85,563 shares of our common stock. Konrad Ackerman has sole voting and
investment control over the
securities
held by Alpha Capital
Anstalt.
|
(6)
|
Includes 62,228 shares of our
common stock. Bruce Winson is the controlling person for Anson Capital,
L.P.
|
(7)
|
Includes 10,935 shares of our
common stock and 2,187 shares underlying the warrant to purchase shares of
our stock. Dick Keim has sole voting and investment control over the
securities held by Bald Eagle Fund,
Ltd.
|
(8)
|
Includes 155,569 shares of our
common stock and 31,114 shares underlying the warrant to purchase shares
of our stock. Brandon Goulding has sole voting and investment control
over the securities held by Black Diamond Fund,
LLP.
|
(9)
|
Includes 10,975 shares of our
common stock and 2,195 shares underlying the warrant to purchase shares of
our stock.
|
(10)
|
Includes 77,785 shares of our
common stock. Kenneth Holz is the controlling person for Chestnut Ridge
Partners, L.P.
|
(11)
|
Includes 15,557 shares of our
common stock and 3,111 shares underlying the warrant to purchase shares of
our stock.
|
(12)
|
Includes 15,557 shares of our
common stock and 3,111 shares underlying the warrant to purchase shares of
our stock.
|
(13)
|
Includes 62,228 shares of our
common stock and 12,446 shares underlying the warrant to purchase shares
of our stock. Lawrence Leopard is the controlling person of Equity
Management Associates,
LLC.
|
(14)
|
Includes 186,683 shares of our
common stock and 37,337 shares underlying the warrant to purchase shares
of our stock. Will Hecther has sole voting and investment control
over the securities held by Excalibur Limited
Partnership.
|
(15)
|
Includes 311,139 shares of our
common stock and 62,228 shares underlying the warrant to purchase shares
of our stock.
|
(16)
|
Includes 93,342 shares of our
common stock and 18,668 shares underlying the warrant to purchase shares
of our stock. Peter Siris and Leigh Curry are the Managing Directors of
Guerrilla Capital Management, LLC, which is the General Partner of
Guerrilla Partners, LP and have voting power and investment power over
securities held by Guerrilla Partners,
LP.
|
(17)
|
Includes
10,372 shares of our common stock and 2,074 shares underlying the warrant
to purchase shares of our stock.
|
(18)
|
Includes 186,683 shares of our
common stock and 37,337 shares underlying the warrant to purchase shares
of our stock. Ronald Heller is the controlling person for Heller Capital
Investments, LLC.
|
(19)
|
Includes 186,683 shares of our
common stock and 37,337 shares underlying the warrant to purchase shares
of our stock. Leigh Curry is the controlling person for Hua Mei 21
st
Century Partners,
L.P.
|
(20)
|
Includes
219,532 shares of our common stock and 179,071 shares underlying the
warrant to purchase shares of our stock. Michael Schmitz is the control
person for Jayhawk Private Equity Fund,
LP.
|
(21)
|
Includes 13,822 shares of our
common stock and 54,799 shares underlying the warrant to purchase shares
of our stock. Michael Schmitz is the controlling person for Jayhawk
Private Equity Co. Investment Fund,
LP.
|
(22)
|
Includes 10,372 shares of our
common stock and 2,074 shares underlying the warrant to purchase shares of
our stock.
|
(23)
|
Includes 239,310 shares of our
common stock and 47,862 shares underlying the warrant to purchase shares
of our stock.Dick Keim has sole voting and investment control over the
securities held by Kensington Partners,
LP.
|
(24)
|
Includes 15,557 shares of our
common stock and 3,111 shares underlying the warrant to purchase shares of
our stock.
|
(25)
|
Includes 124,456 shares of our
common stock and 24,891 shares underlying the warrant to purchase shares
of our stock. L.O. Heidtke is the controlling person for Midsouth Investor
Fund, L.P.
|
(26)
|
Includes 70,006 shares of our
common stock. Stephen Monticelli is the controlling person for Mosaic
Partners, L.P.
|
(27)
|
Includes 18,805 shares of our
common stock and 3,761 shares underlying the warrant to purchase shares of
our stock.
|
(28)
|
Includes 77,785 shares of our
common stock and 15,557 shares underlying the warrant to purchase shares
of our stock. Marc K. Swickle has sole voting and investment control
over the securities held by Professional Offshore Opportunity Fund,
Ltd.
|
(29)
|
Includes 93,342 shares of our
common stock and 18,668 shares underlying the warrant to purchase shares
of our stock. Richard Squires is the controlling person for RS Holdings,
Inc.
|
(30)
|
Includes 77,785 shares of our
common stock Bruce Winson is the controlling person for Saunders Capital
Masters Fund, L.P.
|
(31)
|
Includes 77,783 shares of our
common stock and 15,557 shares underlying the warrant to purchase shares
of our stock. Rima Salam has sole voting and investment control over the
securities held by Silver Rock I,
Ltd.
|
(32)
|
Includes 62,228 shares of our
common stock and 12,446 shares underlying the warrant to purchase shares
of our stock. Richard Squires is the controlling person for SPI Dallas
Investments, L.P.
|
(33)
|
Includes
93,342 shares of our common stock and 18,668 shares underlying the warrant
to purchase shares of our stock. Richard Squires is the controlling person
for SPI Hawaii Investments, L.P.
|
(34)
|
Includes 77,785 shares of our
common stock and 15,557 shares underlying the warrant to purchase shares
of our stock. Richard Squires is the controlling person for Squires
Family, L.P.
|
(35)
|
Includes 1,866,833 shares of our
common stock. Daniel Weissman is the controlling person for Tradelink
Securities, LLC.
|
(36)
|
Includes 31,114 shares of our
common stock. Stephen Monticelli is the controlling person for Triwizards
Fund, L.P.
|
(37)
|
Includes 23,335 shares of our
common stock. Stephen Monticelli is the controlling person for Turicum
Private Bank, Ltd.
|
(38)
|
Includes 902,302 shares of our
common stock.
|
(39)
|
Includes 10,371 shares of our
common stock and 2,074 shares underlying the warrant to purchase shares of
our stock.
|
(40)
|
Includes 31,114 shares of our
common stock and 6,223 shares underlying the warrant to purchase shares of
our stock.
|
We will
not receive any of the proceeds from the sale of any shares by the selling
stockholders. We have agreed to bear expenses incurred by the selling
stockholders that relate to the registration of the shares being offered and
sold by the selling stockholders that relate to the registration of the shares
being offered and sold by the selling stockholders, including the SEC
registration fee and legal, accounting, printing and other expenses of this
offering.
PLAN OF
DISTRIBUTION
The
selling stockholders, may, from time to time, sell, transfer or otherwise
dispose of any or all of their shares of common stock or interest in shares of
common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions.
The
selling stockholders may use any one or more of the following methods when
disposing of shares or interest therein:
|
·
|
Ordinary brokerage transactions
and transactions in which the broker-dealer solicits
purchasers;
|
|
·
|
Block trades in which the
broker-dealer will attempt to sell the shares as agent, but may position
and resell a portion of the block as principal to facilitate the
transaction;
|
|
·
|
Purchases by a broker-dealer as
principal and resale by the broker-dealer for its
account;
|
|
·
|
An exchange distribution in
accordance with the rules of the applicable
exchange;
|
|
·
|
Privately negotiated
transactions;
|
|
·
|
Short
sales effected after the date the registration statement of which this
Prospectus is a part is declared
effective
by the SEC;
|
|
·
|
Through writing or settlement
options or other hedging transactions, whether through an options exchange
or otherwise;
|
|
·
|
Broker-dealers may agree with the
selling stockholders to sell a specified number of such shares at a
stipulated price per share;
and
|
|
·
|
A combination of any such methods
of sale.
|
The
selling stockholders may, from time to time, pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock, from time to time, under this
Prospectus, or under an amendment to this Prospectus, or under an amendment to
this Prospectus under Rule 424(b)(3) or other applicable provision of the
Securities Act amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
Prospectus. The selling stockholders also may transfer the shares of common
stock in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this Prospectus.
In
connection with the sale of our common stock or interest therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers that in turn may sell these securities. The selling stockholders
may also enter into option or other transactions with broker-dealers or other
financial institutions or the creation of one or more derivative securities
which require the delivery to such broker-dealer or other financial institution
of shares offered by this Prospectus, which shares such broker-dealer or other
financial institution may resell pursuant to this Prospectus (as supplemented or
amended to reflect such transaction).
The
aggregate proceeds to the selling stockholders from the sale of the common stock
offered by them will be purchase price of the common stock less discounts or
commission, if any. Each of the selling stockholders reserves the right to
accept and, together with their agents from time to time, to reject, in whole or
in part, any proposed purchase of common stock to be made directly or through
agents. We will not receive any of the proceeds from this offering.
Broker-dealers
engaged by the selling stockholders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchase of shares, from the purchaser) in amounts to be negotiated. The selling
stockholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved.
The
selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act, provided
that they meet the criteria and conform to the requirements of that
rule.
The
selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
“underwriters” within the meaning of Section 2(11) of the Securities Act. Any
discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling stockholders who are “underwriters” within the meaning of Section 2(11)
of the Securities Act will be subject to the Prospectus delivery requirements of
the Securities Act. We know of no existing arrangements between any of the
selling stockholders and any other stockholder, broker, dealer, underwriter, or
agent relating to the sale or distribution of the shares, nor can we presently
estimate the amount, if any, of such compensation. See “Selling Stockholders”
for description of any material relationship that a stockholder has with us and
the description of such relationship.
To the
extent required, the shares of our common stock to be sold, the names of the
selling stockholders, the respective purchase prices and public offering prices,
the names of any agents, dealer or underwriter, any applicable commissions or
discounts with respect to a particular offer will be set forth in an
accompanying Prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
Prospectus.
In order
to comply with the securities laws of some states, if applicable, the common
stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states, common stock may not be sold
unless it has been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is complied
with.
We have
advised the selling stockholders that the anti-manipulation rules of Regulation
M under the Exchange Act may apply to sales of shares in the market and to the
activities of the selling stockholders and their affiliates. In addition, we
will make copies of this Prospectus (as it may be supplemented or amended from
time to time) available to the selling stockholders for the purpose of
satisfying the Prospectus delivery requirements of the Securities Act. The
selling stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act.
We have
agreed to pay certain fees and expenses incurred by us incident to the
registration of the shares. Such fees and expenses are estimated to be
$1,240,000. We have agreed to indemnify the selling stockholders against
liabilities, including liabilities under the Securities Act and state securities
laws, relating to the registration of the shares offered by this
Prospectus.
We have
agreed with the selling stockholders to keep the registration statement of which
the Prospectus constitutes a part effective until the earlier of (1) such time
as all of the shares covered by this Prospectus have been disposed of pursuant
to and in accordance with the registration statement or (2) the date on which
the shares may be sold pursuant to Rule 144 of the Securities Act.
DESCRIPTION OF
SECURITIES
COMMON
STOCK
As of
June 11, 2010, we have 28,493,650 shares of common stock outstanding and a total
of 891,430 warrants outstanding as described herein. We do not have any other
outstanding options or convertible securities. Our authorized capital stock
consists of 100,000,000 common shares, $0.001 par value per share and 1,000,000
preferred shares, par value $0.001 per share. All shares of common stock are
entitled to share equally in dividends from sources legally available,
therefore, when, as and if declared by our board of directors, and upon our
liquidation or dissolution, whether voluntary or involuntary, to share equally
in our assets available for distribution to our stockholders.
Our board
of directors is authorized to issue additional shares of common stock not to
exceed the amount authorized by our Amended Articles of Incorporation, on such
terms and conditions and for such consideration as our board may deem
appropriate without further stockholder action. However, the board of directors
shall maintain a reserve from its duly authorized shares of common stock to
allow for the exercise of the warrants issued pursuant to the Securities
Purchase Agreement.
VOTING
RIGHTS
Each
holder of common stock is entitled to one vote per share on all matters on which
such stockholders are entitled to vote. Since the shares of common stock do not
have cumulative voting rights, the holders of more than 50% of the shares voting
for the election of directors can elect all the directors if they choose to do
so and, in such event, the holders of the remaining shares will not be able to
elect any person to our board of directors.
DIVIDEND
POLICY
Pursuant
to a Stock Purchase Agreement with Halter Financial Investments, L.P. dated
September 13, 2007, we paid a special cash dividend in the aggregate amount of
$392,028, or $0.364 per share, to holders of our common stock outstanding as of
September 12, 2007.
Other
than the cash dividend describe above, we have never paid or declared dividends.
However, holders of our common stock are entitled to dividends if declared by
the board of directors out of funds legally available. We do not, however,
anticipate the declaration or payment of any dividends in the foreseeable
future. We intend to retain earnings, if any, to finance the development and
expansion of our business. Future dividend policy will be subject to the
discretion of the board of directors and will be contingent upon future
earnings, if any, our financial condition, capital requirements, general
business conditions and other factors. Therefore, there can be no assurance that
any dividends of any kind will ever be paid.
PREFERRED
STOCK
We are
authorized to issue up to 1,000,000 shares of $0.001 par value preferred stock.
We have no shares of preferred stock outstanding. Under our Amended Articles of
Incorporation, our board of directors has the power, without further action by
the holders of the common stock, to determine the relative rights, preferences,
privileges and restrictions of the preferred stock, and to issue the preferred
stock in one or more series as determined by the board of directors. The
designation of rights, preferences, privileges and restrictions could include
preferences as to liquidation, redemption and conversion rights, voting rights,
dividends or other preferences, any of which may be dilutive of the interest of
the holders of the common stock.
The
issuance of any preferred stock could diminish the rights of holders of our
common stock, and therefore could reduce the value of such common stock. In
addition, specific rights granted to future holders of preferred stock could be
used to restrict our ability to merge with, or sell assets to, a third party.
The ability of our board of directors to issue preferred stock could make it
more difficult, delay, discourage, prevent or make it more costly to acquire or
effect a change-in-control, which in turn could prevent the stockholders from
recognizing a gain in the event that a favorable offer is extended and could
materially and negatively affect the market price of our common stock. The
Company’s Bylaws or Articles of Incorporation do not contain any other
provisions that would have the effect of delaying or preventing a change in
control.
WARRANTS
We
have granted a group of accredited investors three-year warrants to purchase up
to 1,239,888 shares of our common stock exercisable at any time at a price equal
to $4.1782 per share. As of June 11, 2010, 1,111,261 and 167,113 warrants to
purchase shares of common stock had been exercised pursuant to the cashless
exercise and cash provisions of the warrants, respectively and 619,910 shares of
common stock were issued.
We issued
warrants to Sterne Agee & Leach, Inc.’s designee, for the purchase of up to
an aggregate of 557,950 shares of our common stock, which warrants are for a
term of three years from issuance and have an exercise price of $4.1782 per
share or on a cashless exercise basis.
Our
consultants also received three-year warrants to purchase up to an aggregate of
371,966 shares of our common stock, which may be exercised at any time at a
price equal to $4.1782 per share.
The
exercise price of the foregoing warrants was determined based on the offering
price of our common stock sold in the private placement transaction completed on
November 17, 2007.
STOCK TRANSFER
AGENT
Interwest
Transfer Co., Inc. has been appointed to us to serve as our stock transfer
agent. Their mailing address is 1981 East 4800 South, Suite 100, Salt Lake City,
Utah, 84117. Their phone number is (801) 272-9294.
SHARES ELIGIBLE FOR FUTURE
SALE
As of
June 11, we had 28,493,650, outstanding shares of common stock.
Shares
covered by this Prospectus
All of
the 12,013,568 shares being registered in this offering may be sold without
restriction under the Securities Act.
Rule
144
The
resale of shares that are held by our affiliates and the resale of shares that
are held by non-affiliates for a period of six months are governed by the
following requirements of Rule 144 of the Securities Act.
In
general, under Rule 144, a person (or persons whose shares are aggregated) who
is an affiliate and who has beneficially owned shares of our common stock for at
least six months, would be entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of:
|
·
|
1%
of the number of shares of common stock then outstanding, which as of June
11, 2010 would equal 284,937
shares;
or
|
|
·
|
The
average weekly trading volume of our common stock during the four calendar
weeks preceding the filing
notice
on Form 144 with respect to such
sale.
|
Such
sales are also subject to certain manner of sale provisions, notice requirements
and the availability of current public information about us.
In
general, pursuant to Rule 144 under the Securities Act, a person (or persons
whose shares are aggregated) who is not deemed to have been an affiliate of ours
at any time during the three months preceding a sale of shares of our common
stock, and who has beneficially owned restricted securities within the meaning
of Rule 144 for at least six months (including any period of consecutive
ownership of preceding non-affiliated holders) would be entitled to sell those
shares, subject only to the availability of current public information about us.
A non-affiliated person who has beneficially owned restricted securities within
the meaning of Rule 144 for at least one year would be entitled to sell those
shares without regard to the current public information
requirement.
Rule 144
also provides that affiliates that sell our common shares that are not
restricted shares must nonetheless comply with the same restrictions applicable
to restricted shares, other than the holding period requirement.
The
selling stockholders will not be governed by the foregoing restrictions when
selling their shares pursuant to this Prospectus.
All of
the outstanding restricted shares of common stock as of June 11, 2010 are
eligible for resale under Rule 144, although 11,860,537 of such shares are owned
by affiliates.
SEC
Position on Rule 144 Sales
The SEC
has taken the position that promoters or affiliates of a blank check company and
their transferees, both before and after a business combination act as
“underwriters” under the Securities Act when reselling the securities of a blank
check company acquired prior to the consummation of its initial public offering.
The SEC has adopted amendments to Rule 144 that now make Rule 144 available to
promoters or affiliates of blank check companies and their transferees one year
after the consummation of a business combination by a blank check
company.
INTEREST
OF NAMED EXPERTS AND COUNSEL
ACCOUNTANTS
The
Audited Financial Statements included in this Prospectus and in the registration
statement have been audited by ZYCPA Company Limited (formerly Zhong
Yi (Hong Kong) C.P.A. Co., Ltd.) for the years of 2009, 2008, 2006, and 2005 and
by Cordovano and Honeck LLP for the year of 2007, independent registered public
accounting firms, to the extent and for the periods set forth in their reports
appearing elsewhere herein and in the registration statement, and are included
in reliance on such report, given the authority of said firms as experts in
auditing and accounting. ZYCPA Company Limited’s address is 9/F., Chinachem
Hollywood Center, 1-13 Hollywood Road, Central, Hong Kong and their telephone
number is 852-2573-2296. Cordovano and Honeck LLP’s address is 10779 E Ida Pl,
Englewood, Colorado USA and their telephone number is
303-741-6494.
LEGAL
MATTERS
The
validity of the common stock offered hereby will be passed upon for us by
McLaughlin & Stern LLP.
DESCRIPTION OF
BUSINESS
BUSINESS
DEVELOPMENT & ORGANIZATION WITHIN LAST FIVE YEARS
Overview
We are
a holding company whose primary business operations are conducted through our
direct, wholly owned subsidiary, Ocean Technology, and its subsidiaries -
Rixiang, Jixiang, and Mingxiang.. We engage in the business of processing,
distribution and sale of processed seafood products, as well as the sale of
marine catch. Xianghe is a manufacturer of algae-based soft drinks and it is
organized under the laws of the PRC. All subsidiaries are wholly-owned except
for Xianghe, in which Mingxiang owns an 80% interest. Our objective
is to establish ourselves as a leading producer of processed seafood products in
the PRC and overseas markets.
Our
Corporate Structure
Our
Corporate History
We were
incorporated in the State of Nevada on October 1, 1999 under the name New
Paradigm Productions, Inc. to engage in the production and marketing of
meditation music and related supplies.
Starting
January 1, 2000, we commenced a private placement of our common stock in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act and Regulation D promulgated thereunder. We offered 100,000
shares of our common stock at $0.35 per share to certain accredited investors.
The offering closed in March 2000 and we raised gross proceeds in the amount of
$35,000. As a result of the offering our issued and outstanding
common stock increased from 900,000 shares to 1,000,000 shares.
On July
5, 2000, we filed a registration statement on Form SB-2 with the Securities and
Exchange Commission or the SEC under the Securities Act, to register shares of
our common stock (Registration Statement No. 333-40790). The registration
statement was declared effective on October 26, 2000. We sold 77,000 shares of
our common stock
pursuant to
registration statement, raising a total of $77,000 in gross proceeds. As a
result of the offering, our issued and outstanding common stock increased to
1,077,000 shares.
On
September 13, 2007, we entered into a Stock Purchase Agreement (“SPA”) with
Halter Financial Investments, L.P., a Texas limited partnership (“HFI”) pursuant
to which we agreed to sell to HFI, 1,005,200 shares of our post reverse
stock-split common stock for $400,000. After consummation of the transaction,
HFI became the holder of 1,005,200 shares of our common stock, or 87.5% of the
1,148,826 shares of our then outstanding common stock. In addition, the terms of
the SPA required us to declare and pay a special cash dividend of $0.364 per
post stock-split share to our shareholders of record as of September 12, 2007.
Stockholders holding a total of 1,077,000 shares received a special cash
dividend in the total amount of $392,028 which amount was funded with proceeds
from the stock sale. Effective on September 25, 2007, we effectuated a 7.5 to 1
reverse stock split and increased our authorized shares of common stock to
100,000,000.
Upon the
closing of the HFI transaction, Jody St. Clair resigned as our sole director and
executive officer and in anticipation of her resignation, she appointed Richard
Crimmins as our sole director, President, Secretary-Treasurer, Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer.
We
discontinued our principal operations as of December 2002 and have been, until
our reverse acquisition with Ocean Technology on November 17, 2007
described below, investigating potential acquisitions or
opportunities.
Acquisition
of Ocean Technology and Related Financing
On
November 17, 2007, we completed a reverse acquisition transaction with Ocean
Technology through a share exchange with Ocean Technology’s former stockholders.
Pursuant to the share exchange agreement, the shareholders of Ocean Technology
exchanged 100% of their outstanding capital stock in Ocean Technology for
approximately 15,624,034 shares of our common stock, or approximately 93.15%
shares of our outstanding common stock after the share exchange. In connection
with the share exchange, a majority of our shareholders of record as of November
16, 2007 approved a resolution by our board of directors to change our name from
New Paradigm Productions, Inc. to China Marine Food Group Limited. The name
change became effective on January 9, 2008 upon the filing of a Certificate of
Amendment to our Amended Articles of Incorporation with the State of Nevada on
the twentieth day following the mailing of a Definitive Information Statement to
our shareholders. Concurrently with the closing of the reverse acquisition on
November 17, 2007, we completed a private placement of our securities to
certain accredited investors who subscribed for units consisting one share of
common stock and a warrant to purchase one-fifth of one share of our common
stock. The investors subscribed for aggregate of 6,199,441 shares of our common
stock and warrants to purchase an aggregate of 1,239,888 shares of our common
stock at $3.214 per unit. The units were offered and sold pursuant to exemptions
from registration under the Securities Act, including without limitation,
Regulation D and Regulation S promulgated under the Securities Act. Each warrant
issued to the investors has a term of three years and is exercisable at any time
for a price equal to $4.1782 in cash or on a cashless exercise basis.
Background
History of Ocean Technology
Prior to
the establishment of Mingxiang, Pengfei Liu, our founder, Executive Chairman and
CEO of our Company, was engaged in the trading of marine catch from 1983 to
1994, where he bought marine catch from local suppliers and sold them to seafood
traders in other regions such as Zhejiang Province.
In March
1994, Pengfei Liu, through his company Shishi City Xiangzhi Dabao Seafood
Processing Factory, entered into a joint venture with Zhoushan Fishery
Processing Factory to establish Mingxiang, to engage in the processing and sale
of seafood products. Mingxiang established its place of business close to
Xiangzhi (Shishi) Port, which is one of the largest fishing ports in the Fujian
Province, occupying premises with a land area of about 3,300 sq.m.
Mingxiang then commenced business as a small enterprise processing and supplying
roasted file fish to customers in Fujian and Zhejiang
Provinces.
Our
business grew steadily between 1994 and 1997. In 1997, to protect the goodwill
that had been built up for our products sold under our “Mingxiang (
明祥
)” brand, we
registered the “Mingxiang” brand in the PRC as a trademark. The trademark covers
marine food products such as dried fish slices, roasted shelled prawns and
shredded squid.
In 1998,
we added shredded roasted squid to our range of products and expanded our
production facilities to occupy a land area of about 8,000 sq.m. At that time,
we employed about 40 employees. We also commenced the construction of cold
storage facilities occupying a land area of about 2,000 sq.m. and with a storage
capacity of 1,000 tons.
In 1999,
we completed the construction of our cold storage facilities. The new cold
storage facilities increased the shelf-life of and enabled the prolonged storage
of the raw materials, works-in-progress and finished products of our processed
seafood products. With the cold storage facilities, we became less susceptible
to seasonal fluctuations in market demand and supply of raw materials and
products. This significantly increased our processed seafood production
capacity.
In 2000,
we expanded our product range to include roasted prawns. We also acquired an
additional land of about 7,300 sq.m. at our business premises to build
additional production facilities as well as office and staff dormitory
facilities.
Through a
series of equity transfers agreements from 1996, Mr. Liu and his spouse Yazuo
Qiu acquired full control of Mingxiang in 2001. With the change in shareholders’
control and the expanded scope of business to include export activities, we
obtained a new business license for Mingxiang on April 9, 2001. In the same
year, we obtained an import-export license from the Fujian Province
International Trade Cooperation Bureau. We believe we were one of the first
domestic companies in the processed seafood industry in Quanzhou City, Fujian
Province to obtain this license. This was a significant milestone in our history
as the license allowed us to export these products to foreign markets. In the
same year, we commenced the export of our processed seafood products to
Japan.
We also
established Jixiang in 2001. Jixiang is our property-holding company, and owns
the building ownership rights to all our properties save for two properties
which are owned by Mingxiang.
All our
land use rights and properties, including production plant, cold storage
facility, office tower and staff dormitory, are managed by these two property
holding companies, Mingxiang and Jixiang. In particular, Mingxiang is
responsible for the rental income related to the collection on the 33 shop
spaces at our factory in Dabao Industrial Zone. The rental contracts are based
on 1-year lease term. The operations of these two property holding companies are
solely property management.
In 2002,
our “Mingxiang” brand was recognized as a “Fujian Province Famous Brand”. In
June of the same year, we commenced our marine catch business, through the
chartering of two fishing vessels with an aggregate net tonnage of 44
tons.
In 2003, we commenced the export of our dried processed seafood
products to the Russian market. In May 2004, Ocean Technology., a company
incorporated in Hong Kong and wholly-owned by Pengfei Liu, established Rixiang,
a limited liability company with a registered capital of US$1,000,000. Rixiang
carried on the main businesses of processing and storage of marine food and
marine catch. Since January 2005, Rixiang has been the operating subsidiary of
our Company.
In 2003,
we also completed the construction of additional cold storage facilities. The
new cold storage facilities increased our cold storage capacity from 1,000 tons
to 2,020 tons.
We also
started selling frozen processed seafood products, which include frozen whole
squids and fishes in 2003. Since then, our frozen processed seafood product
range has expanded to include readily consumable products, including squid rings
and slices and octopus cuts and slices.
In 2003
and 2004, the processing of our frozen seafood products involved only basic
processing (such as cleaning, washing, sorting and packing). From 2005, our
frozen processed seafood products processes shifted to more advanced processing
as we observed a growing market in processed seafood products such as squid
slice, octopus cuts, octopus slices and squid rings.
In April
2006, our subsidiary Rixiang entered into a memorandum of understanding for
research and development collaboration with the Ocean University of China in
order to further develop our product development capabilities.
In
November 2009, Mingxiang won the auction for the purchase of the 40-year use
right of a land in Shishi City, Fujian. Covering an area of
8,691.4 square meters, the land is located next to the fishing port and the
Registrant’s processing facilities in Shishi City. We plan to build cold storage
facilities on the land with a capacity of approximately 20,000 tons. We intend
to complete the construction in late 2010. See “Description of
Business - Production Facilities and Process.”
On
January 1, 2010, Mingxiang exercised its option to purchase. Xianghe
is a manufacturer of the branded Hi-Power algae-based soft drinks. Xianghe has
developed a network of distributors in Fujian, Zhejiang, Guangdong and Hunan
which sell Hi-Power to retail food stores, restaurants food supply dealers and
the hospitality industry. In November 2009, Mingxiang entered into a
Credit or Share Purchase Option Agreement (the “Option Agreement”) with Qiu
Shang Jing (“Qiu”) and. Xianghe. Under the Option
Agreement Mingxiang made a loan to Xianghe in the amount
of RMB180,500,000 (approximately $26,400,000). The purchase
price payable to Qiu consisted of RMB9,500,000 (approximately $1,400,000)
payable by Mingxiang and RMB180,500,000 payable by
Xianghe. Mingxiang purchased shares representing eighty percent
(80%) of Xianghe from Qiu.
We
have grown from a domestic market-oriented seafood enterprise with over 80
employees in 2003 into a medium-sized nationwide seafood enterprise with
advanced processing facilities and equipment. As of March 31, 2010,
we had 849 employees. Our employees currently include 10 research and
development staff.
OUR
PRINCIPAL PRODUCTS AND THE MARKET
We are
a seafood producer engaged in the processing, distribution and sale of processed
seafood products under our “Mingxiang” brand, as well as the sale of marine
catch. In 2010, we also became a manufacturer of algae-based soft drinks through
our acquisition of Xianghe.
Our
business philosophy may be summarized in the following phrase:
“To
achieve benefits through innovation, and to develop new markets through
branding”
Our dried processed seafood products are predominantly sold
under our registered trademark, the “Mingxiang (
明祥
)” brand. These
products are sold through 24 distributors in seven provinces in the PRC such as
Fujian, Guangdong, Jiangsu, Shandong, Sichuan, Zhejiang and Liaoning
and in turn sub-distributed to about 2,500 retail points (including major
supermarkets and retailers such as Wal-Mart and Carrefour) throughout these
provinces. In September 2009, we reached agreement with a Hong Kong based
confectionary store chain which will use our seafood snack foods exclusively for
a private label program for chain’s planned 300 store roll-out in the PRC in
2009. Our frozen processed seafood products are sold to both domestic and
overseas customers. Our marine catch is sold to customers in Fujian and Shandong
Provinces, some of whom directly export the marine catch to Japan, South Korea
and Taiwan.
Our
business premises are located close to Xiangzhi (Shishi) Port, the largest
fishing port in Fujian Province and one of the state-level fishing port centers.
We have also been designated as a state base for the quality control testing of
marine products in Fujian Province.
Our
branded “Hi-Power” algae-based soft beverage product was developed by the Yellow
Sea Fisheries Research Institute Chinese Academy of Fishery Science in
coordination with Xianghe’s founder, Qiu Shang Jing. Hi-Power beverage is
marketed as a high-protein drink, low in calories and fat, can help the
consumers improve their immune and digestion system and reduce the like hood of
hyperglycemia and hypertension diseases. Our target market focuses on middle
class health-conscious consumers in China’s fast-growing beverage market. We
have developed a network of exclusive distributors in Fujian, Zhejiang,
Guangdong and Hunan provinces in China, which sell our Hi-Power beverage product
to retail food stores, restaurant food supply dealer and hospitality industry in
their respective distribution territories.
Our
objective is to establish ourselves as a leading producer of processed seafood
products in the PRC and overseas markets.
Processed
Seafood Products
Using
a combination of Japanese traditional seafood processing methods and modern
scientific seafood processing techniques, our product development efforts during
the period under review have yielded 29 processed seafood products comprising
dried seafood products such as roasted squid, roasted file fish, roasted prawns,
shredded roasted squid and smoked eel as well as frozen processed seafood
products. Our frozen processed seafood products include frozen Japanese butter
fish, frozen octopus and frozen squid rings. Our production facilities are
located at Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province,
occupying a total land area of 17,600 sq.m. This includes cold storage
facilities with a total storage capacity of 2,020 tons. We have five production
lines for the processing of our roasted file fish, roasted prawns, shredded
roasted squid, roasted squid and smoked seafood products.
We
have established sales networks in various large and medium sized cities in the
PRC and our export markets, such as Japan and Russia. We believe our products
are sold by some of our distributors to end-consumers in South Korea, Taiwan and
Ukraine. Our dried processed seafood products are mainly sold in supermarkets in
Fujian and Zhejiang Provinces and their surrounding areas, and through our sales
network through 24 distributors, each of whom have its own sales network and are
authorized by us to distribute our products exclusively in a specific
vicinity.
Our
sales to domestic and foreign markets for the fiscal years ended December 31,
2005, 2006, 2007, 2008 and 2009 are set out below:
Dried
Processed Seafood Products
|
|
Year ended December 31,
|
|
|
Period ended
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
PRC
sales
|
|
|
93.2
|
|
|
|
98.8
|
|
|
|
99.3
|
|
|
|
99.2
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Export
sales
(1)
|
|
|
6.8
|
|
|
|
1.2
|
|
|
|
0.7
|
|
|
|
0.8
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Notes:
(1)
|
The
decrease in export sales was mainly due to our increased marketing efforts
in the PRC, which resulted in higher domestic
sales.
|
Frozen
Processed Seafood Products
|
|
Year ended December 31,
|
|
|
Period ended
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
PRC
sales
|
|
|
96.4
|
|
|
|
97.3
|
|
|
|
100.0
|
|
|
|
48.9
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Export
sales
(1)
|
|
|
3.6
|
|
|
|
2.7
|
|
|
|
0.0
|
|
|
|
51.1
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Notes:
(1)
|
These
comprise sales to local distributors made on an ad hoc
basis .
|
(2)
|
These
comprise sales to foreign
distributors.
|
Our
dried processed seafood products are predominantly sold under our registered
trademark, the “Mingxiang” brand.
A
portion of our frozen processed seafood products are consumed directly by
end-consumers with little or no additional processing. All our dried and frozen
processed seafood products are manufactured free of preservatives. We use
ingredients such as sugar, salt and spices in the production of our dried
processed seafood products. The raw materials for our processed seafood products
are obtained through fresh marine catch and not from seafood breeding
farms.
We have obtained the “Green
Food” awards in respect of our roasted file fish, frozen fish, roasted king
prawns and shredded squid. We are committed to the highest standards of quality
control in the production of our processed seafood products, as evidenced by our
ISO9001, ISO14001, HACCP certification and the EU export
registration.
Our
credit-worthiness, quality and processed seafood products have received
considerable acknowledgement and favorable feedback from the public. Please
refer to the section “Awards and Certification” of this Prospectus for further
details of the awards and certifications that we have received.
Today,
our products are exported to many countries including Japan, Philippines,
Ukraine and Papua New Guinea. Mingxiang is a State-designated base for quality
assurance testing of marine products. Please see the section “Quality Assurance”
of this Prospectus for more details.
Marine
Catch
In 2006
and 2007, we engaged in the sale of marine catch. We worked with local fishermen
and charter six fishing vessels with an aggregate net tonnage of 256 tons, to
harvest marine catch from the East China Sea and the Taiwan Strait. Our marine
catch was harvested from the deep seas and was not bred through
aquaculture.
The
marine catch was sold to seafood traders in Fujian and Shandong Provinces, the
PRC, some of whom directly export the marine catch to Japan, South Korea, and
Taiwan. To preserve the freshness of the marine catch sold to our customers, we
constantly packed the harvested marine catch in ice and endeavored to deliver
the marine catch to our customers within the shortest time practicable. Upon the
return of the vessels to Xiangzhi (Shishi) Port, a small proportion of the
marine catch was sold to our customers at Xiangzhi (Shishi) Port itself, and the
rest was transported back to our business premises at Dabao Industrial Zone,
Xiangzhi Town, Shishi City, Fujian Province for further sorting and packing.
Thereafter, most of our marine catch was collected by our customers at our
business premises, and a small proportion was transported to our customers at
their respective destinations. Please refer to the section “Production
Facilities and Processes” of this Prospectus for further details as to the
fishing operations conducted for the sale of our marine catch.
Due to
the nature of the fishing operations, the size of a customer’s order typically
depends on the volume of marine catch that the fishing vessels harvest in a
fishing trip. A customer therefore typically places an order only after
receiving information as to the volume of marine catch harvested in a fishing
trip. Our marine catch is priced based on market price, fishing yield and
seasonality. We believe these factors do not cause substantial fluctuations in
the prices of our marine catch.
Starting
from 2008, we did not charter any fishing vessels nor harvest the marine catch
ourselves. Instead, we buy the marine catch from the suppliers and then sell to
the customers on a direct basis. The marine catch is predominantly sold to
overseas customers and distributors in Fujian, Shandong and Liaoning provinces,
some of whom directly export the marine catch to South Korea and
Taiwan.
Our
Products
Our
products can be divided into three main categories, namely (1) processed seafood
products; (2) marine catch; and (3) “Hi-Power”algae-based beverage product. The
production of the processed seafood products and marine catch are undertaken by
our subsidiary, Rixiang and the production of algae-based beverage product is
undertaken by our subsidiary, Xianghe.
The
following table sets out some of our main products, as well as the main markets
in which they are sold:
Processed
Seafood
Products
|
|
Products
/ Species
|
|
Main
Markets
Markets
in the PRC
|
|
Foreign
Markets
|
|
|
|
|
|
|
|
(a)
Dried processed seafood products
|
|
Roasted
file fish, shredded roasted squid, roasted squid, smoked eel, roasted
prawn, barbecued squid, sliced barbecued squid, sliced roasted octopus,
spicy sliced octopus, spicy baby squid, spicy sliced squid, spicy squid
head
|
|
Zhejiang
Province
Fujian
Province
Shandong
Province
Greater
Shanghai Region
Guangdong
Province
Sichuan
Province
Liaoning
Province
|
|
Japan
and Ukraine
|
|
|
|
|
|
|
|
(b)
Frozen processed seafood products
|
|
Cuttlefish,
octopus, pomfret, shelled prawns, sliced squid
|
|
Shandong
Province (for sale in South Korea)
|
|
Philippines
and Papua New Guinea
|
|
|
|
|
|
|
|
|
|
|
|
Fujian
Province (for sale in Taiwan)
|
|
|
|
|
|
|
|
|
|
Marine
Catch
|
|
Cuttlefish
(Sepia esculenta), hairtail fish (Trichiurus japonicus), Japanese
butter fish (Psenepis Anomala), squid (Loligo bleekeri), horse
mackerel
|
|
Fujian
Province (for sale in Taiwan)
Shandong
Province (for sale in South Korea)
Lianoing
Province
|
|
Philippines
and Papua New Guinea
|
|
|
|
|
|
|
|
“Hi-Power”
Algae-Based Beverage Product
|
|
|
|
Fujian
Province
Zhejiang
Province Guangdong Province Hunan Provinces
|
|
Nil
|
Processed
Seafood Products
We
purchase fresh seafood, the primary ingredient from which our dried and frozen
processed seafood products are manufactured, from fishermen and traders. Our raw
materials are stored in cold storage facilities located at our production
facilities. The production processes of our dried and frozen processed seafood
products are described in further detail under the section “Production
Facilities and Process”.
Dried Processed Seafood
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roasted
file fish
|
|
Roasted
squid
|
|
Roasted
prawn
|
|
Smoked
eel
|
The main
dried processed seafood products manufactured by us are roasted file fish,
shredded roasted squid, roasted squid, roasted prawn and smoked
eel.
The
ingredients used in the production of our dried processed seafood products are
fresh seafood (such as fish, prawns and cuttlefish), natural flavoring, sugar,
salt and spices.
Frozen Processed Seafood
Products
|
|
|
|
|
|
|
Pomfret
|
|
Octopus
|
|
Shelled
prawns
|
|
Sliced
squid
|
Our
frozen processed seafood products comprise cuttlefish, octopus, pomfret, shelled
prawns and sliced squid. Some of our frozen seafood products (such as cuttlefish
and squid) are packaged and can be consumed without additional processing. Our
other frozen processed seafood products are intermediate products sold to our
customers for further processing before sale to the end-consumer. Our frozen
processed seafood products are mainly exported to Japan and South Korea directly
or through our customers.
Marine
Catch
The
principal species of marine catch harvested in the East China Sea and Taiwan
Strait and sold by our Company are as follows:
Cuttlefish (
Sepia
esculenta
)
|
|
|
|
|
Cuttlefish
is commonly found in the East China Sea and the Taiwan Strait. Cuttlefish
is often processed and sold as fresh sushi and snacks.
|
|
|
|
Hairtail Fish (
Trichiurus
japonicus
)
|
|
|
|
|
Hairtail
fish, usually found in the East China Sea and the Taiwan Strait, is one of
the best-selling marine catch in the PRC. It is a regular dish for home
working and fine-dining restaurants
|
|
|
|
Japanese Butter Fish
(
Psenepis
Anomala
)
|
|
|
|
|
Japanese
butter fish is usually found in the East China Sea and the Taiwan Strait
between September and November every year.
|
Squid (
Loligo
bleekeri
)
|
|
|
|
|
Squids
are commonly found in the seas of the Taiwan Strait. Squid contains many
nutrients such as proteins, fats, carbohydrate, calcium and phosphorus.
Its fine taste and springy texture makes the squid a popular food with
consumers.
|
“Hi-Power”
Algae-Based Beverage Product
|
|
“Hi-Power”
drink provides many health benefits, including:
•High
protein, low fat and calories;
•Enhance
immune system;
•
Improve digestion;
and
•
Reduce hyperglycemia and
hypertension.
|
Production
Facilities and Process
The
production of our dried and frozen processed seafood products is carried out at
our production facilities in Dabao Industrial Zone, Xiangzhi Town, Shishi City,
Fujian Province. At December 31, 2009, we own five production lines
for the manufacture of dried processed seafood products and one production line
for the manufacture of frozen processed seafood products. After the upgrade of
our production facilities in 2009, the maximum annual production capacities of
our production lines increased to about 19,000 tons of dried processed seafood
products and 1,000 tons of frozen processed seafood products. The construction
of our new facilities was completed and commenced full operation by the third
quarter end of 2009. We also own cold storage facilities with
cold storage capacity of 2,020 tons.
On
November 6, 2009, we won the auction for the purchase of the 40-year use right
of a land in Shishi City, Fujian. Covering an area of 8,691.4 square meters, the
land is located next to the fishing port and our production facilities in the
same city. The purchase price for the land use right is $2.3 million which has
been fully paid as of December 31, 2009.
We plan
to build cold storage facilities on the land with a capacity of approximately
20,000 tons, to take advantage of its proximity to the port where we obtain
fresh marine catch to be processed into seafood products. We intend to finance
the total estimated $20.0 million in land use rights and construction
costs from funds generated by operations and the facilities are expected to
be up and running in the first half of 2011. There were no material capital
commitments in relation to the construction costs as at March 31, 2010.
Subsequent to full settlement of the land cost, a formal agreement with the
local land and resources department was executed on December 30,
2009.
We
intend to provide high standard, modernized cold storage, frozening and ice
making services to the port area through the exclusive cold storage facilities.
We may utilize certain cold storage spaces on our own going forward which will
not only help to reduce storage costs but also expect to improve margins for our
current seafood segments as a result of bulk purchases at favorable
prices.
We place
great emphasis on quality assurance at every stage of our production process and
have clearly defined procedures to manufacture products of consistently high
quality. Please refer to the section “Quality Assurance” of this Prospectus for
more details.
Dried Processed Seafood
Products
The key
stages of our production process for our dried processed seafood products are as
follows:
|
1.
|
Receiving and
storing raw and packaging materials.
All raw materials undergo visual
inspection to ensure freshness and firmness before they are accepted and
stored. Inspection is carried out by way of random
sampling.
|
Samples
are taken from each batch of raw materials and sent to the quality control
department where physical (e.g. visual inspection), chemical and micro-organism
tests are conducted. Raw materials which do not adhere to our requirements are
rejected.
Our other
ingredients such as salt, sugar and spices are sourced from suppliers within the
PRC. They are stored in warehouses or temperature-controlled facilities after
inspection and approval.
Our
packaging materials are kept in a warehouse after they have been inspected and
approved.
|
2.
|
Ice-packing.
To maintain the freshness of our
raw materials, a portion of the raw materials is packed in ice and
transported directly to our production facilities for processing, whereas
the remaining raw materials are packed in ice and transported to our cold
storage facilities for storage at minus two to two degrees Celsius for no
longer than 24 hours, upon which they must be delivered to the production
facilities for processing.
|
|
3.
|
Cleaning.
At the production facilities,
the raw materials are cleaned by removing unwanted portions such as heads,
innards and shells.
|
|
4.
|
Slicing.
The raw materials are then
sliced on stainless steel
tables.
|
|
5.
|
Washing and
draining.
The raw
materials are then sent to the washing pool for washing so as to remove
oil, blood stains, remnant innards and other stains. After washing, the
raw materials are drained to remove excess water
content.
|
|
6.
|
Marinating
and adding flavoring.
Other ingredients such as salt,
sugar and spices are then added in the required amounts according to our
recipes, left to marinate for a set period and mixed at stipulated
intervals.
|
|
7.
|
Steam-drying
/ Roasting.
The raw
materials are arranged on wire mesh trays, which are stacked in trolleys
and rolled into a heating machine. Roasting takes place under controlled
temperatures via a roasting conveyor belt, where moisture levels are
monitored. Depending on the product, we will slice or shred the raw
materials after
roasting.
|
|
8.
|
Weighing,
packaging and metal detection.
The dried processed seafood
products are then packed into their respective packaging materials and
sealed. After a calibrated metal detector to ensure that the products do
not contain any traces of metal particles. Metal contamination might have
been inherent in the raw materials or caused by production process of
which some stages are
automated.
|
|
9.
|
Packing and
delivery.
The
packets of dried processed seafood products are then packed into boxes,
which are then stored in our warehouse. Our products are delivered to
customers on a “first in, first out”
basis.
|
Frozen Processed Seafood
Products
Part of
the production of our frozen processed seafood products is carried out in a
sterile sealed production unit. The key stages of our production process for our
frozen processed seafood products are as follows:
|
1.
|
Receiving and
storing raw materials.
As with our dried processed
seafood products, all the raw materials for our frozen processed seafood
products undergo inspection and approval before they are accepted and
stored. Inspection is carried out by way of random sampling. Samples are
taken from each batch of raw materials and sent to the quality control
department where physical (e.g. visual inspection), chemical and
micro-organism tests are conducted. Raw materials which do not adhere to
our requirements are
rejected.
|
Packaging
materials are kept in a warehouse after they have been inspected and
approved.
|
2.
|
Ice-packing.
To maintain the freshness of our
raw materials, a portion of the raw materials is packed in ice and
transported directly to our production facilities for processing, whereas
the remaining raw materials are packed in ice and transported to our cold
storage facilities for storage at minus two to two degrees Celsius for no
longer than 24 hours, upon which they must be delivered to the production
facilities for processing. These raw materials are removed from cold
storage only immediately prior to
processing.
|
|
3.
|
Cleaning and
washing.
At the
production facilities, the raw materials are cleaned by removing unwanted
portions such as heads, innards and
shells.
|
|
4.
|
Selection.
The raw materials are selected
based on weight for further
processing.
|
|
5.
|
Slicing and
shaping.
The raw
materials are then cut into slices and trimmed in order to attain the
desired dimensions.
|
|
6.
|
Cleaning and
sterilizing.
The raw
materials then undergo further cleaning and sterilizing in order to remove
bacteria.
|
|
7.
|
Grooving.
Where necessary for some of our
sliced products, grooves are made on the slices. The grooves enable
betterabsorption of condiments during
consumption.
|
|
8.
|
Arranging and
packaging.
The
slices are then placed in neat arrangements in designated
packs.
|
|
9.
|
Quick
freezing.
The slices
are then sent for quick freezing to a temperature of minus thirty-five
degrees Celsius.
|
|
10.
|
Metal
detection.
The
products are then passed through a metal detector to ensure they do not
contain any metal particles.
|
|
11.
|
Packing and
delivery.
The
products are then packed and sealed. All the packaged products are then
stored immediately in our cold storage facilities, where they are
delivered in a “first in, first out” basis. Our products are transported
in refrigerated containers which must comply with required standards of
cleanliness and hygiene. Delivery is provided by a third-party logistics
company using refrigeration containers at below minus 18 degrees
Celsius.
|
“Hi-Power” Algae-Based
Beverage Product
The
key stages of our production process for our “Hi-Power” algae-based beverage
products are as follows:
1.
|
P
rocurement
of raw materials
.
Choose and buy
natural algaes as raw materials from unpolluted sea
areas.
|
Samples
are taken from each batch of raw materials by way of random sampling and sent to
the quality control department where physical (e.g. visual inspection), chemical
and micro-organism tests are conducted. Raw materials which cannot meet our
requirements are rejected.
2.
|
Cleaning.
The
algaes are cleaned to remove sediment and
impurities.
|
3.
|
Stewing.
The algaes are
stewed in water at ratio of 30:70 at 80
℃
for 3
to 5 hours.
|
4.
|
E
nzymolysis
.
Adding a certain
amount of enzyme into stewed algae juice for enzymolysis
at 50-60
℃
for 1
to 2 hours.
|
5.
|
Filtration
and d
e
col
orization
.
After enzymolysis, the stewed algae juice will go through a process
of filtration in the ultrafiltration machine. The filtered algae
juice will become clear, transparent and free from impurities. The
transparent algae juice will then be pumped into the resin tank
for process of decolorization.
|
6.
|
Blending.
The
processed algae juice should be blended with the extract of honeysuckle,
bamboo leaves, licorice and other auxiliary materials in accordance with a
pre-defined formula.
|
7.
|
H
eating
and
h
omogenizing
.
Using the tubular
heater to heat the blended algae juice at 80-90
℃
for 5-10
seconds and then put it into the homogenizer at
20Mpa.
|
8.
|
F
iltration
.
Put the drinks
into
1μ
filter
for filtration.
|
9.
|
C
an
ning.
Washing the
can, before canning and sealing by using the automated canning
machine.
|
10.
|
S
terilization
.
Sterilizing the
canned drinks with a sterilizing pot. Temperature should be
controlled at 125
℃
for 15
minutes.
|
11.
|
Cooling
.
Cooling the drinks by
using the spray cooling method at 30-40
℃
. Tune
the production date and shelf life. Regular check on coding and
ensure the accuracy of coding position. Packaging should refer to the
specification of daily order
requests.
|
12.
|
Delivery.
The drinks
can be sold and delivered.
|
Awards
and Certifications
As
testimony to the quality of our products, our credit worthiness in the PRC
business community as well as our management capabilities, we have received
several awards and certification in the course of our history, as listed
below:
Year
|
|
Subsidiary
|
|
Award
|
|
Period
|
|
Awarding
Body
|
|
Significance
|
|
|
|
|
|
|
|
|
|
|
|
November
2001
|
|
Mingxiang
|
|
Branded
Products (fresh roasted prawn, roasted file fish, shredded
squid)
|
|
2001
|
|
2001
China International Agriculture Expo
|
|
Recognition
of our brand and our branding efforts
|
|
|
|
|
|
|
|
|
|
|
|
December
2001
|
|
Mingxiang
|
|
National
Brand-making Leading Enterprise
|
|
-
|
|
Ministry
of Agriculture, China
|
|
Recognition
of our efforts to create our brand and increase brand-awareness
of our products
|
|
|
|
|
|
|
|
|
|
|
|
January
2002
|
|
Mingxiang
|
|
Green
Consumer Recommendation
|
|
2002
- 2003
|
|
Fujian
Consumer Committee
|
|
Recognition
of our product quality, environmental friendly products, integrity in our
dealings with consumers
|
|
|
|
|
|
|
|
|
|
|
|
April
2003
|
|
Mingxiang
|
|
Leading
Corporation in Processing Agricultural Products (Province
level)
|
|
-
|
|
Fujian
Village Enterprise Bureau
|
|
Recognition
of our efforts and contribution in the development of processed
agricultural products
|
April
2003
|
|
Mingxiang
|
|
A-Grade
Tax Payer
|
|
2004 –
2005
|
|
Quanzhou
District Tax Bureau
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
2003
|
|
Mingxiang
|
|
Quanzhou
Contract-Abiding Creditworthy Enterprise
|
|
2001
- 2002
|
|
Quanzhou
Civil Administration
|
|
Recognition
of integrity in our operations and commercial dealings
|
|
|
|
|
|
|
|
|
|
|
|
September
2003
|
|
Mingxiang
|
|
Fujian
Province Aquatic Industrialization Leading Enterprise
|
|
2003
– 2004
|
|
Fujian
Province Marine Fisheries Bureau, Fujian Department of
Finance
|
|
Recognition
of our efforts and contribution in the development of processed
agricultural products
|
|
|
|
|
|
|
|
|
|
|
|
May
1, 2007
|
|
Mingxiang
|
|
Green
Food – roasted file fish
|
|
May
2007 – May 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
|
|
|
|
|
|
|
|
|
|
|
May
1, 2007
|
|
Mingxiang
|
|
Green
Food – dried shredded squid
|
|
May
2007 – May 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
|
|
|
|
|
|
|
|
|
|
|
May
1, 2007
|
|
Mingxiang
|
|
Green
Food – frozen fish
|
|
May
2007 – April 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
|
|
|
|
|
|
|
|
|
|
|
May
1, 2007
|
|
Mingxiang
|
|
Green
Food – roasted king prawn
|
|
May
2007 – May 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
|
|
|
|
|
|
|
|
|
|
|
May
17, 2007
|
|
Rixiang
|
|
Green
Food – roasted file fish
|
|
May
2007 – May 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
|
|
|
|
|
|
|
|
|
|
|
May
17, 2007
|
|
Rixiang
|
|
Green
Food – dried shredded squid
|
|
May
2007 – May 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
May
17, 2007
|
|
Rixiang
|
|
Green
Food – roasted yellow croaker
|
|
May
2007 – May 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
|
|
|
|
|
|
|
|
|
|
|
May
17, 2007
|
|
Rixiang
|
|
Green
Food – roasted prawn
|
|
May
2007 – May 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
|
|
|
|
|
|
|
|
|
|
|
May
17, 2007
|
|
Rixiang
|
|
Green
Food – roasted shredded squid
|
|
May
2007 – May 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
|
|
|
|
|
|
|
|
|
|
|
May
17, 2007
|
|
Rixiang
|
|
Green
Food – roasted fish bones
|
|
May
2007 – May 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
|
|
|
|
|
|
|
|
|
|
|
May
17, 2007
|
|
Rixiang
|
|
Green
Food – roasted squid
|
|
May
2007 – May 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
|
|
|
|
|
|
|
|
|
|
|
May
17, 2007
|
|
Rixiang
|
|
Green
Food – squid slices
|
|
May
2007 – May 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
|
|
|
|
|
|
|
|
|
|
|
May
17, 2007
|
|
Rixiang
|
|
Green
Food – roasted searobin fillet
|
|
May
2007 – May 2010
|
|
China
Green Food Development Centre
|
|
Recognition
of environmental awareness, non-pollution in our production
chain
|
|
|
|
|
|
|
|
|
|
|
|
January
2004
|
|
Mingxiang
|
|
Civilized
and Creditworthy Enterprise
|
|
2002
– 2003
|
|
Shishi
City Government Civilization Bureau, Shishi City Economic Bureau, Shishi
National Tax Bureau, Shishi District Tax Bureau
|
|
Recognition
of our regard for integrity in our operations, our creditworthiness and
contribution to the
economy
|
January
2004
|
|
Mingxiang
|
|
Quanzhou
Agricultural Industrialization Leading Enterprise
|
|
For
January 2004 – December 2006
|
|
Quanzhou
Department of Agriculture, Quanzhou Finance Bureau
|
|
Recognition
of our efforts and contribution in the development of processed
agricultural products
|
|
|
|
|
|
|
|
|
|
|
|
September
2008
|
|
Mingxiang
|
|
Key
Leading Enterprise (Province level)
|
|
2008
- 2009
|
|
Fujian
Province Agriculture Industrialization Leading Group
|
|
Recognition
of our efforts and contribution in the development of processed
agricultural products
|
|
|
|
|
|
|
|
|
|
|
|
December
2006
|
|
Mingxiang
|
|
A-Grade
Tax Payer Credit Enterprise
|
|
2004
- 2005
|
|
Quanzhou
National Tax Bureau, Quanzhou District Tax Bureau
|
|
Recognition
of our tax creditworthiness
|
|
|
|
|
|
|
|
|
|
|
|
December
2004
|
|
Mingxiang
|
|
National
Foodstuff Industry Excellent Leading Enterprise
|
|
2003
– 2004
|
|
China
Foodstuff Industry Association
|
|
Recognition
of quality of our products
|
|
|
|
|
|
|
|
|
|
|
|
May
2008
|
|
Mingxiang
|
|
2008
“AAA” bank-rated Creditworthy Enterprise
|
|
Valid
until April 30, 2009
|
|
China
Agricultural Bank, Fujian Branch
|
|
Recognition
of the quality of our enterprise, economic standing, operational
efficiency and potential for growth
|
|
|
|
|
|
|
|
|
|
|
|
September
2008
|
|
Mingxiang
|
|
Fujian
Province Famous Brand
|
|
Valid
for 3 years
|
|
Fujian
Province Branded Products Authentication Committee
|
|
Recognition
of our brand and our branding
efforts
|
DISTRIBUTION
Sales
and Marketing
Our
sales and marketing team comprises 30 employees, headed by our Executive
Chairman, Director and CEO Pengfei Liu. The team is responsible for monitoring
domestic sales, which includes co-coordinating orders from customers as well as
distributing our products to the customers.
Distribution
Network
We
have established a wide distribution network which allows us to maintain our
competitiveness in the industry. Our products are exported to various countries,
including Japan, Philippines Ukraine and Papua New Guinea. We believe our
products are sold by some of our distributors to end-consumers in South Korea,
Taiwan and Japan.
As of
March 31, 2010, we have 24 distributors in seven provinces in the PRC, namely
Fujian, Guangdong, Jiangsu, Shandong, Zhejiang, Sichuan and Liaoning, as
follows:
Province
|
|
No.
of Distributors
|
|
Fujian
|
|
|
11
|
|
Guangdong
|
|
|
1
|
|
Jiangsu
|
|
|
1
|
|
Shandong
|
|
|
2
|
|
Zhejiang
|
|
|
7
|
|
Liaoning
|
|
|
1
|
|
Sichuan
|
|
|
1
|
|
|
|
|
|
|
Total
|
|
|
24
|
|
These
distributors in turn sub-distribute our dried processed seafood products to over
2,500 retail points (including major supermarkets and retailers such as Wal-Mart
and Carrefour) throughout these provinces.
One of
our main considerations when appointing distributors is the purchasing and
consumer spending power in the particular region in which we intend to
distribute our products.
Before we
appoint new distributors or extend the distribution arrangement with existing
distributors to distribute our products in a particular region or country, the
potential distributor or existing distributor is subject to our stringent
selection or review process. We will only appoint distributors who are able to
meet our requirements such as sales target.
We select
each distributor based on four criteria:
|
a.
|
Strong
Financial Background
. We require the distributor to
provide us with its most recent audited financial statements so we may
verify whether its financial status is strong and healthy. We
further require the distributor to settle the bills in cash, without
offering any credit terms, in the first year of doing business with
us.
|
|
b.
|
Strong
Distribution Network
. The distributor
should have a strong, well-established marketing and distribution network
in the corresponding
region.
|
|
c.
|
Good
Reputation and Track Record
. We only select those
distributors with good reputations in the industry in regard to their
business background, marketing experience and distribution
network. In particular, the distributor should have a track
record in developing and maintaining the brand images of the products it
distributes.
|
|
d.
|
Marketing
Strategy
. We require the
distributor to implement our overall marketing strategy for our products
and to supplement it by designing its own marketing plans specifically for
the respective region. The distributor should be able to assist
us in building our brand image and achieving a significant market
share in a said period of
time.
|
We
appoint different distributors for different products in different regions in
the PRC and in the various overseas markets.
We
usually appoint one exclusive distributor to cover a specific county, district,
city or province. Under the distributorship agreements, our distributors are
obliged to price and sell our products in accordance with the indicative prices
which we provide, and are not permitted to arbitrarily adjust the sale price of
the products except in accordance with product promotions. The distributors must
also duly carry out market operation activities and promotional methods which
are jointly developed with us, and to bear the costs of its own advertisements
and marketing activities. The distributorship agreements also contain provisions
for the protection of our intellectual property rights.
In
addition to selling products under our brands, we have also begun to distribute
products under private labels. In September 2009, we reached agreement with a
Hong Kong based confectionary store chain which will use our seafood snack foods
exclusively for a private label program for the chain’s planned 300 store
roll-out in China in 2009.
For our
export sales, we sell our products through sales agents or traders in the PRC or
directly to distributors in the overseas market.
Our sales
and marketing team is also responsible for marketing our products within the
PRC. The team contacts and visits our customers regularly to obtain feedback and
suggestions on our products, and to foster and build our relationships with
them. We normally sign distributorship agreements with a one-year term. Our
agreements stipulate the price range in which the distributors may sell our
products and also stipulate sales targets which our distributors have to achieve
before the agreements are renewed.
We
advertise our products regularly in supermarket brochures, and outdoor
billboards. We also participate in exhibitions in the PRC such as the China
Export Trade Fair and the China Seafood Exposition, as well as overseas
exhibitions such as those in South Korea, Japan and Boston, USA.
“Hi-Power” Algae-Based
Beverage Product
Sales
and Marketing
Our
sales and marketing team comprises 64 employees, headed by our Executive
Chairman, Director and CEO Mr. Pengfei Liu. The team is responsible for
developing and implementing the Company’s overall development and promotional
strategy for our algae-based beverage products, which includes co-coordinating
orders from customers as well as distributing our products to the
customers.
Distribution
Network
Xianghe
has developed a network of distributors with exclusive territories in Fujian,
Zhejiang, Guangdong and Hunan provinces, which sell Hi-Power to retail food
stores, restaurant food supply dealers and the hospitality industry and we
intend to integrate the beverage product into Mingxiang’s distribution
network.
NEW
PRODUCTS
Peptide
and Protein Products
On April
28, 2006, our subsidiary Rixiang entered into a memorandum of understanding for
collaboration with the Ocean University of China’s Food Sciences and Engineering
Institute for the development of: (1) bioactive peptide products from leftovers
of aquatic processed products; and (2) collagen protein and collagen peptide
protein products from fish skin. For details, please see “Research and
Development.”
COMPETITION
We
operate in a competitive environment and we expect to face more intense
competition from our existing competitors and new market entrants in the future.
We believe that the principal competitive factors in our industry include,
inter alia
, brand awareness,
product range and quality, customer and supplier relationships, cost and quality
of raw materials, technical expertise in production and pricing. Of these
factors, we believe that product quality is the most important.
To the
best of our knowledge, our principal competitors within the PRC are the
following major seafood product manufacturers in the PRC:
Business
|
|
Principal
Competitors
|
Dried
and Frozen Processed Seafood Products
|
|
(1)
China Aquatic Zhoushan Marine Fisheries Corporation; and
(2)
Liaoning Dalian Seafood Industry Group Co., Ltd.
Both
in terms of their size and operations
|
|
|
|
Sale
of Marine Catch
|
|
(1)
Fujian Seafood Industry Co., Ltd; and
(2)
Fujian Huayang Aquatic Products Group Co., Ltd.
Both
in terms of their geographical proximity to our customer
base
|
|
|
|
“Hi-Power”
Algae-Based Beverage Product
|
|
No
direct
competitor.
|
There
may be companies based in other countries which offer a similar product range as
we do but which currently operate in different markets from us. In the future,
we may face competition from these companies as we expand into their markets and
vice
versa
.
Competitive
Strengths
We
believe that our competitive strengths are as follows:
1.
|
We have a wide distribution
network
|
We
have established a wide distribution network which allows us to maintain our
competitiveness in the industry. We have 24 distributors in seven provinces
in the PRC such as Fujian, Guangdong, Jiangsu, Shandong, Zhejiang, Sichuan and
Liaoning. These distributors in turn sub-distribute our dried processed seafood
products to over 2,500 retail points (including major supermarkets and
retailers such as Wal-Mart and Carrefour) throughout these provinces. We also
have a strong overseas customer base in various countries including Japan,
Philippines, Ukraine and Papua New Guinea.
Besides,
Xianghe has developed a network of distributors with exclusive territories in
Fujian, Zhejiang, Guangdong and Hunan which sell Hi-Power to retail food stores,
restaurants food supply dealers and the hospitality industry. We also intend to
integrate the Hi-Power algae-based soft drinks into our distribution
network.
Please
refer to the section “Major Customers” for further details.
2.
|
We have an established brand name
and track record
|
We have
been involved in the production of processed seafood products since commencing
our operations in 1994. Our “Mingxiang” brand has been conferred the “Famous
Brand” award. In addition, we have also obtained the “Green Food” award in
respect of our roasted file fish, shredded roasted squid, roasted king prawn and
frozen fish products. This attests to the established standing of our
“Mingxiang” brand and the high quality of our products. We have also received
several other awards and accreditations as described in the section “Awards and
Certifications”. We believe such accolades attest to our established reputation
in the industry.
We also
believe that our established track record in the processed seafood industry
instills confidence in our products and attracts new customers from South Korea,
Japan, Taiwan, Russia and Ukraine, and potential customers from the European
Union. Our stable customer base and large distributor network in Fujian Province
and Zhejiang Province have enabled our Company to introduce new products into
these markets in a shorter time and gain quicker market acceptance and
recognition.
3.
|
We develop high quality
products
|
We use
fresh seafood as the primary ingredient for our processed seafood products. Our
superior recipes and production know-how enable us to develop and produce
products with high-quality taste and texture and which are well-received by
end-consumers.
We have
been awarded HACCP certification and have obtained the EU export registration,
which enable us to export our products to the US and the EU, respectively. In
addition, our products, namely our roasted file fish, shredded roasted squid,
roasted squid, roasted prawn and frozen fish have been certified as “Green
Food”, a recognition that the production of our products is carried out under
certain sanitary conditions with limited use of chemical additives. We believe
we are one of the first companies in the seafood industry in Fujian Province to
be awarded this certification, which is a further testament to the quality
of our products.
4.
|
We have a strong leadership as
well as a dedicated and experienced management and procurement
team
|
Our
Company is led by our Executive Chairman and CEO, Pengfei Liu, who has more than
30 years of experience in the seafood industry. Mr. Liu’s drive and passion have
been instrumental in our success to-date. He has conceptualized and implemented
our strategies in the past and successfully led us in our transition from a
small and local seafood enterprise to a nationwide seafood enterprise with
advanced seafood processing facilities.
Mr. Liu
is ably supported by a team of experienced managers, most of whom have an
average of five to ten years’ experience in their respective fields. These
personnel support our Executive Chairman and CEO in charting and managing our
growth. We believe the members of our procurement team have a strong grasp and
good understanding of industry trends, market cycles and seasonal factors, and
have the ability to discern and procure high-quality seafood at reasonable
prices.
The
management team receives regular training in the course of our Company obtaining
and renewing our ISO and HACCP qualifications. The training, which is conducted
over 10 to 15 days every year, involves process management, quality control,
sanitary and hygiene operating procedures and standards. We believe that such
training raises our competence and environmental / sanitary awareness, and
places us in an advantageous position compared to other operators in the seafood
industry who do not undergo such training.
Besides,
Hi-Power was developed by the Yellow Sea Fisheries Research Institute Chinese
Academy of Fishery Sciences in coordination with the founder, Qiu Shang Jing,
who has been engaged in the natural algae industry for over 10 years time and he
has a profound expertise on algae products. In addition, Xianghe has an
experienced management team and its management and other employees will continue
to work at Xianghe after the acquisition.
5.
|
We have established strong
relationships with our customers /
distributors
|
We have
maintained close working relationships with our customers who are reputable
distributors of processed seafood products. Our relationships with some of our
PRC customers and distributors have been established for more than ten years. In
particular, we have enjoyed good relationships with, among others, Qingdao
Haizhan Seafood Co., Ltd. (“Qingdao Haizhan”), Wenzhou Rixin Foodstuff Co., Ltd.
(“Wenzhou Rixin”), and Zhejiang Ruian Laodu Seafood Wholesale Proprietor
(“Zhejiang Ruian Laodu”), for an average of approximately 8 years.
Qingdao
Haizhan is in the business of distributing dried and frozen seafood
products. To the best of our knowledge, Qingdao Haizhan has a
distribution network of over 1,000 retailers and a sales workforce of about 60
people.
Wenzhou
Rixin is a distributor of dried seafood in Wenzhou City, Zhejiang
Province. To the best of our knowledge, Wenhou Rixin has a
distribution network of about 1,000 retailers and a sales workforce of about 60
people.
Zhejiang
Ruian Laodu is a large distributor of dried seafood in Ruian City, Zhejiang
Province. To the best of our knowledge, Zhejiang Ruian Laodu has a distribution
network of about 300 retailers and a sales workforce of about 20
people.
Regarding
the percentage of sales represented by each party listed above; please refer to
the section “Major Customers” for details.
We view
our customers as long-term business partners who are important in the strategic
growth of our operations and broadening the geographic reach of our
products.
6.
|
We are strategically
located
|
We are
based in Fujian Province which is situated in southeast China on the coast of
the East China Sea. Fujian is one of the nine coastal provinces in the PRC and
is a vital navigation hub between the East China Sea and the South China Sea. It
is also rich in agricultural and marine resources.
Our main
raw materials for our marine catch business come from the Taiwan Strait, which
is also where we conduct our marine catch operations. The Taiwan Strait is rich
in marine resources. Our business operations and production facilities are
located at Shishi City, Fujian Province, where Xiangzhi (Shishi) Port has been
designated as one of the national-level fishing ports. It is the largest port in
Fujian Province and is one of the five largest fishing ports in the PRC in terms
of supply of marine catch and tonnage of fishing vessels. Fujian Province is
rich in agricultural and marine resources, which enables our procurement of raw
materials for our processed seafood business at low cost. We believe our
strategic location gives us access to an abundant supply of fresh marine
products and hence allows us to manage our costs more effectively.
7.
|
We have strong research and
development capabilities
|
We
place strong emphasis on the quality of our products and on our ability to
develop new products. To ensure that our products are well-received by our
customers and consumers, we have carried out research and development to improve
the taste, texture and packaging of our processed seafood products. Through our
research and development efforts, we have developed new products and improved
the quality of our existing products, which have been well-received by our
customers and consumers. These products include our crispy fish-bone snacks,
roasted squid and roasted prawns, spicy sliced octopus, spicy baby squid, spicy
sliced squid and spicy squid head.
Our
strong product development capabilities allow us to constantly introduce new
products into the market and maintain consumer interest and loyalty in our
“Mingxiang” brand products. We believe that our strategic
collaboration with the Ocean University of China will further strengthen our
research and development capabilities.
Besides,
Hi-Power was developed by the Yellow Sea Fisheries Research Institute Chinese
Academy of Fishery Sciences in coordination with the founder. We will leverage
the strong research and development capabilities from the Yellow Sea Fisheries
Research Institute Chinese Academy of Fishery Sciences together with the Ocean
University of China on product development going forward.
8.
|
We are a designated National
Marine Products Quality Assurance Testing
Base
|
We have
been designated as a quality assurance testing base by the National Marine Foods
Quality Supervision Testing Centre and our testing base is the only assessment
base in the southern provinces of the PRC. We test the hygiene and quality of
ingredients and products according to industrial standards. Our testing base
caters to seafood processing companies from Fujian, Guangdong, Guangxi and
Zhejiang Provinces, the PRC. We believe our role in quality assurance testing
further strengthens our reputation as a producer of quality processed seafood
products.
For the
above reasons, we believe that we will be able to maintain our market position
and competitive edge over our competitors.
MAJOR
SUPPLIERS
The
following table sets out our five major suppliers of raw materials for the year
ended December 31, 2005, 2006, 2007 ,2008 and 2009:
|
|
As a Percentage of Our Purchases of Raw Materials (%)
|
|
|
|
Year ended December 31,
|
|
|
Three
months
period
ended
March
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
Shishi
City Tianwang Seafood Products Trading Proprietor
|
|
|
12.2
|
|
|
|
14.3
|
|
|
|
21.8
|
|
|
|
23.6
|
|
|
|
27.8
|
|
|
|
31.0
|
|
Shishi
City Fugui Seafood Products Trading Proprietor
|
|
|
10.7
|
|
|
|
11.7
|
|
|
|
18.5
|
|
|
|
20.5
|
|
|
|
20.8
|
|
|
|
13.4
|
|
Jinjiang
City Shenhu Town Hongyuan Seafood Products Trading
Proprietor
|
|
|
10.9
|
|
|
|
7.9
|
|
|
|
17.6
|
|
|
|
17.0
|
|
|
|
18.0
|
|
|
|
22.0
|
|
Dalian
Kangwei Trading Company Limited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14.4
|
|
|
|
-
|
|
Shishi
City Dongfan Seafood Products Trading Proprietor
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9.3
|
|
|
|
19.6
|
|
Dalian
Xinghai Import & Export Co., Ltd.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17.9
|
|
|
|
-
|
|
|
|
-
|
|
Shishi
City Huali Seafood Products Trading Proprietor
|
|
|
13.4
|
|
|
|
10.0
|
|
|
|
16.4
|
|
|
|
11.8
|
|
|
|
-
|
|
|
|
11.4
|
|
Shishi
City Nanfu Seafood Products Wholesale Proprietor.
|
|
|
17.8
|
|
|
|
18.6
|
|
|
|
15.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL
|
|
|
65.0
|
|
|
|
62.5
|
|
|
|
89.9
|
|
|
|
90.8
|
|
|
|
90.3
|
|
|
|
97.4
|
|
Trading
in fresh fish and other seafood is mainly carried out by individual fishermen,
who ply their trade in and around various fishing ports in Shishi City, Fujian
Province. The above major suppliers are fish and seafood traders in markets in
and surrounding Shishi City, Fujian Province. We procure from these suppliers
for fresh fish and other seafood, which are used as raw materials in the
production of our processed seafood products. These suppliers also supply fresh
fish and other seafood to other companies.
Before
2005, we mainly sourced for supplies of fresh fish and other seafood directly
from various fishermen when their trawlers docked at the ports. For convenience
and greater savings in procurement expenses, from 2005 onwards we sourced our
supplies from the five major suppliers, Therefore the percentage of our
purchases from the above five major suppliers increased significantly in
2005.
Though
certain of our major suppliers accounted for more than 8% of our total purchases
individually for the fiscal year ended December 31, 2009 and the three months
period ended March 31, 2010, we believe we are able to source our raw materials
from alternative suppliers should the need arise.
The
following table sets out our five major suppliers of purchases for the
production of algae-based beverage product for the years ended December 31,
2009:
|
|
As a Percentage of Purchases
(%)
|
|
|
|
Year
ended December 31, 2009
|
|
Fujian
Fuzhen Metal Packaging Company Limited
|
|
|
61.6
|
|
Qing
Dao Ming Yue Algae Group Company Limited
|
|
|
14.4
|
|
Zhangzhou
Baoxian Food and Beverage Company Limited
|
|
|
14.2
|
|
Shishi
City Jinhong Paper Products Company Limited
|
|
|
6.0
|
|
Damin
Food (Zhangzhou) Company Limited
|
|
|
3.6
|
|
TOTAL
|
|
|
99.8
|
|
None of
our directors, executive officers and controlling shareholders is related to or
has any interest in any of our major suppliers listed above. To the best of our
knowledge, save as disclosed above, none of our major suppliers is related to or
has any interest in one another, and none of our major suppliers is related to
or has any interest in the customers stated in the section “Major Customers”
below.
MAJOR
CUSTOMERS
The
following table sets out our major customers accounting for 5.0% or more of our
Company’s sales for the year ended December 31, 2005, 2006, 2007, 2008 and 2009;
and for the three months period ended March 31, 2010:
|
|
|
|
As a Percentage of Our Sales (%)
|
|
|
|
|
|
Year ended December 31,
|
|
Three
months
period
ended
March
31,
|
|
|
|
Products
|
|
2005
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2009
|
|
2010
|
|
Dalian
Jiyang Import and Export Co., Ltd.
(
1
)
|
|
Marine
catch, namely cuttlefish, squid, hairtail fish
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16.9
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wenzhou
Rixin Foodstuff Co., Ltd.
(2)
|
|
Dried
processed seafood products
|
|
10.8
|
|
|
14.0
|
|
|
|
9.8
|
|
|
|
9.5
|
|
|
|
7.3
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wenling
City Xingfeng Foodstuff Co., Ltd.
(
3
)
|
|
Dried
processed seafood products
|
|
7.0
|
|
|
9.7
|
|
|
|
8.9
|
|
|
|
10.4
|
|
|
|
7.2
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhejiang
Ruian Laodu Seafood Wholesale Proprietor
(
4
)
|
|
Dried
and frozen processed seafood products
|
|
5.1
|
|
|
7.9
|
|
|
|
9.3
|
|
|
|
8.7
|
|
|
|
6.0
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuzhou
Chaohui Foodstuff Company
(
5
)
|
|
Dried
processed seafood products
|
|
-
|
|
|
5.3
|
|
|
|
7.9
|
|
|
|
9.0
|
|
|
|
5.8
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai
City Yangpu Area Xianghui Seafood Products Company
(
6
)
|
|
Dried
processed seafood products
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5.5
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangzhou
Jia Rui Foodstuff Limited
(formerly
Shenzhen City Agricultural Products and Fenghu Specialty and Dried
ProductsTown Rifenglong Company)
(
7
)
|
|
Dried
processed seafood products
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5.5
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jinjiang
City Dongshun Seafood Products Trading Proprietor
(8)
|
|
Marine
catch, namely cuttlefish, squid, hairtail fish
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5.1
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qingdao
Haizhan Seafood Co., Ltd
(
9
)
|
|
Dried
and frozen processed seafood products
|
|
9.8
|
|
|
14.3
|
|
|
|
9.9
|
|
|
|
7.3
|
|
|
|
-
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenjiamen
Liyizhougan Seafood Products Trading Proprietor
(
10
)
|
|
Dried
and frozen processed seafood products
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
6.6
|
|
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhoushan
City Maoyuan Foodstuff Import and Export Co., Ltd.
(
11
)
|
|
Dried
and frozen processed seafood products
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
5.9
|
|
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhouriyu
Seafood Products Trading Proprietor
(
12
)
|
|
Dried
and frozen processed seafood products
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
5.4
|
|
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
32.7
|
|
|
51.2
|
|
|
|
45.8
|
|
|
|
62.8
|
|
|
|
59.3
|
|
43.3
|
|
Notes:
|
1)
|
Dalian Jiyang Import and Export
Co., Ltd. is a trader of goods and import of technology in China, and has,
to the best of our knowledge, a distribution network of about 19 retailers
and a sales workforce of about 8 people. It has been our customer since
2008 and our sales to Dalian Jiyang Import and Export Co., Ltd. increased
due to the increasing of import and export
trades.
|
|
2)
|
Wenzhou Rixin Foodstuff Co., Ltd.
is a distributor of dried seafood in Wenzhou City, Zhejiang Province, and
has, to the best of our knowledge, a distribution network of about 1,000
retailers. It was one of our first distributors and has been our key
business partner since 1994. Our sales to Wenzhou Rixing Foodstuff Co.,
Ltd. increased due to the expansion of its geographic distribution
coverage from the city to the suburban
areas.
|
|
3)
|
Wenling City Xingfeng Foodstuff
Co., Ltd. is a distributor of dried seafood in Wenling City, Zhejiang
Province, and has, to the best of our knowledge, a distribution network of
over 700 retailers. It has been our customer since 1997. Our sales to
Wenling City Xingfeng Foodstuff Co Ltd increased due to the expansion of
their geographic distribution coverage from county to city-level in
Wenling City, Zhejiang Province.Fuzhou Chaohui Foodstuff Co., Ltd. is a
distributor of dried processed seafood products located in Fuzhou City,
Fujian Province. It became one of our major customers in 2005
and ours sales to Fuzhou Chaohui Foodstuff Co., Ltd. increased
substantially during the past two
years.
|
|
4)
|
Zhejiang Ruian Laodu Seafood
Wholesale Proprietor is a large distributor of dried seafood in Ruian
City, Zhejiang Province. It has been our customer since 2005 but has
increased its purchases from us due to the expansion of its distribution
network which covers, to the best of our knowledge, 300
retailers.
|
|
5)
|
Fuzhou Chaohui Foodstuff Co.,
Ltd. is a distributor of dried processed seafood products located in
Fuzhou City, Fujian
Province. It became
one of our major customers in 2005 and ours sales to Fuzhou Chaohui
Foodstuff Co., Ltd. increased substantially during the past two
years.
|
|
6)
|
Shanghai City Yangpu Area
Xianghui Seafood Products Company is a trader of stereotypes packaged and
non-direct import food products, has, to the best of our knowledge, a
distribution network of about 688 retailers and a sales
workforce
of about 16 people. It has been
our customer since 2007. Our sales to Shanghai City Yangpu Area Xianghui
Seafood Products Company increased due to increasing market
demand.
|
|
7)
|
Shenzhen
City Agricultural Products and Fenghu Specialty and Dried Products Town
Rifenglong Company is a trader of cooked and dried seafood products, has,
to the best of our knowledge, a distribution network of about 398
retailers and a sales workforce of about 19 people. It has been our
customer since 2007. Our sales to Shenzhen City Agricultural Products
and
Fenghu Specialty and Dried Products Town Rifenglong Company increased due
to increasing market demand.
|
|
8)
|
Ningbo City Second Bridge Market
Zhiding Seasoner is a wholesaler and retailer of cooked seafood
products, has, to the best of our knowledge, a distribution network of
about 129 retailers and a sales workforce of about 22 people. It has been
our customer since 2001. Our sales to Ningbo City Second Bridge Market
Zhiding Seasoner increased due to increasing market
demand.
|
|
9)
|
Zhouriyu Seafood Products Trading
Proprietor is a distributor of dried and frozen seafood products in
Wenzhou City, Zhejiang Province, and has, to the best of our knowledge, a
distribution network of about 132 retailers and a sales workforce of about
57 people. It has been our customer since 1997. Our sales to Zhouriyu
Seafood Products Trading Proprietor increased due to the expansion of
their distribution network in Wenzhou City, Zhejiang Province, which have
resulted in increased orders from
them.
|
|
10)
|
Shenjiamen Liyizhougan Seafood
Products Trading Proprietor is a distributor of dried and frozen seafood
products in Zhoushan City, Zhejiang Province, and has, to the best of our
knowledge, a distribution network of about 273 retailers and a sales
workforce of about 45 people. It has been our customer since 2000. Our
sales to Shenjiamen Liyizhougan Seafood Products Trading Proprietor
increased due to the expansion of their distribution network in Zhoushan
City, Zhejiang Province, which have resulted in increased orders from
them.
|
|
11)
|
Qingdao Haizhan Seafood Co., Ltd.
deals in dried and frozen seafood products and, to the best of our
knowledge, has a distribution network of over 1,000 retailers. It has been
our customer since 1996. The company is wholly-owned by another of our
major customer, Qingdao Xinqinghua Seafood Products Company, and its
associates. Our sales to Qingdao Haizhan Seafood Co., Ltd. have increased
from 2005 to 2006 as it expanded its sales network to include
supermarkets, which have resulted in increased orders from them. We
believe that we will be less reliant on Qingdao Haizhan Seafood Co., Ltd.
and Qingdao Xinqinghua Seafood Products Company for our sales in future,
as we enter new markets and increase market penetration of existing
markets.
|
|
12)
|
Zhoushan City Maoyuan Foodstuff
Import and Export Co., Ltd. is a distributor of dried and frozen
seafood products in Zhoushan City, Zhejiang Province, and has, to the best
of our knowledge, a distribution network of about 51 retailers and a sales
workforce of about 18 people. It has been our customer since 2003. Our
sales to Zhoushan City Maoyuan Foodstuff Import and Export Co., Ltd.
increased due to the expansion of their distribution network in Zhoushan
City, Zhejiang Province, which have resulted in increased orders from
them.
|
The
following table sets out our major customers accounting for 5.0% or more of the
company’s sales of algae-based beverage product for the year ended December 31,
2009.
|
|
As
a Percentage of Sales (%)
|
|
|
|
Year
ended December 31, 2009
|
|
Xiamen
Dexiang Trading Proprietor Company Limited
|
|
|
28.1
|
%
|
Wenzhou
Ruixiang Wholesale of Foods Company Limited
|
|
|
27.0
|
%
|
Guangdong
Heyi Wholesale of Foods Trading Company Limited
|
|
|
25.8
|
%
|
Hunan
Huaihua Meida Wholesale of Foods Company
|
|
|
19.1
|
%
|
TOTAL
|
|
|
100.0
|
%
|
Notes:
1)
|
Xiamen
Dexiang Trading Proprietor Company Limited is a wholesaler of foods, has,
to the best of our knowledge, a distribution network of about 51 retailers
and a sales workforce of about 88 people. It has been our customer since
June, 2009.
|
2)
|
Wenzhou
Ruixiang Wholesale of Foods Company Limited is a wholesaler of foods, has,
to the best of our knowledge, a distribution network of about 75 retailers
and a sales workforce of about 126 people. It has been our customer since
June, 2009.
|
3)
|
Guangdong
Heyi Wholesale of Foods Trading Company Limited is a wholesaler of foods,
has, to the best of our knowledge, a distribution network of about 62
retailers and a sales workforce of about 103 people. It has been our
customer since June, 2009.
|
4)
|
Hunan
Huaihua Meida Wholesale of Foods Company is a wholesaler of foods, has, to
the best of our knowledge, a distribution network of about 39 retailers
and a sales workforce of about 52 people. It has been our customer since
June, 2009.
|
None of
our directors, executive officers and controlling shareholders is related to or
has any interest in any of our major customers listed above. To the best of our
knowledge, save as disclosed above, none of our major customers is related to or
has any interest in one another, and none of our major customers is related to
or has any interest in the suppliers stated in the section “Major Suppliers” in
this Prospectus. We are not dependent on any one of our major customers as we
are able to sell our fresh fish and seafood range, as well as our processed
dried seafood products to other customers.
INTELLECTUAL
PROPERTY
Except as
disclosed below, we are not dependent on nor do we own any registered trademark
or patent or any other intellectual property rights:
Trademarks
Our brand
name distinguishes our products from that of our competitors and increase
consumer awareness of our products. We have currently registered the following
trademarks:
Trademark
|
|
Class
|
|
Place of
Registration
|
|
Status / Validity
Period
|
(1)
|
|
Class
40 covering processed seafood, agricultural foods, processed teas,
processed herbs, chemical testing and processing
|
|
PRC
|
|
Registered
/ January 28, 2003 to January 27, 2013
|
|
|
|
|
|
|
|
|
|
Class
29
covering
m
eat,
fish, poultry and game; meat extracts; preserved, dried and cooked fruits
and vegetables; jellies, jams, compotes; eggs, milk and milk products;
edible oils and fats
|
|
PRC
|
|
Registered
under the name of Mingxiang on July 8, 2009 and awaiting approval
confirmation
|
|
|
|
|
|
|
|
|
|
Class
30
covering
c
offee,
tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and
preparations made from cereals, bread, pastry and confecti
onery,
ices; honey, treacle; yeast, baking-powder; salt, mustard; vinegar, sauces
(condiments); spices; ice
|
|
PRC
|
|
Registered
under the name of Mingxiang on July 8, 2009 and awaiting approval
confirmation
|
|
|
|
|
|
|
|
|
|
Class
32 covering beers; mineral and aerated waters and other non-alcoholic
drinks; fruit drinks and fruit juices; syrups and other preparations for
making beverages
|
|
PRC
|
|
Registered
under the name of Mingxiang on July 8, 2009 and awaiting approval
confirmation
|
|
|
|
|
|
|
|
|
|
Clas
s
32
covering
b
eers;
mineral and aerated waters and other non-alcoholic drinks; fruit drinks
and fruit juices; syrups and other preparations for making
beverages
|
|
PRC
|
|
Registered
under the name of Mingxiang on August 27, 2009 and awaiting approval
confirmation
|
Note
:
|
1)
|
The above “Mingxiang”
trademark was originally registered under the name of “Fujian Province
Shishi City Huabao Mingxiang Foods Development Co.” on January 14, 1997.
In a Confirmation of Approval to Trademark Transfer dated June 14, 2001,
the PRC Trademark Bureau approved the transfer of this trademark to
Mingxiang and the trademark is now registered in Mingxiang’s name under a
Trademark Registration Certificate No.
930539.
|
We intend
to further develop our “Mingxiang” brand image in the markets where we currently
operate, and to promote it in new markets. In that regard, we intend to apply
for registration of our trademark in the overseas markets where we conduct our
sales, as we consider appropriate.
Registered
Packaging Designs
We hold
registered packaging designs in respect of the packaging of the majority of our
processed seafood products. The details are as follows:
Description of Registered Packaging Designs
|
|
Place of Registration
|
|
Status/Validity of Period
|
Packaging
for Sakura squid
|
|
PRC
|
|
10
years from March 28, 2003
|
Packaging
for roasted squid
|
|
PRC
|
|
10
years from April 11, 2001,
|
Save as
disclosed above, as at the date of this Prospectus, our business or
profitability is not materially dependent on any other trademarks, copyrights,
registered designs, patents, grant of licenses from third parties, new
manufacturing processes and intellectual property rights.
GOVERNMENT
REGULATIONS
The
following is a description of the material licenses and permits issued to
companies in our Company in order for us to carry out our operations, other than
those pertaining to general business registration requirements:
Hygiene
Certificates
We view
hygiene control as a critical aspect of food production operations and place
great emphasis on the hygienic preparation of our processed seafood products to
ensure they are safe for consumption. We have received the following hygiene
certificates in relation to our operations:
Subsidiary
|
|
Name of
Certificate
|
|
Description of
License/Permit
|
|
Issuing Authority
|
|
Period of
Validity
|
|
|
|
|
|
|
|
|
|
Mingxiang
|
|
Hygiene
License
|
|
Permit
to process seafood products
|
|
Shishi
City Hygiene Bureau
|
|
May
18, 2008 to May 17, 2012
|
|
|
|
|
|
|
|
|
|
Rixiang
|
|
Hygiene
License
|
|
Permit
to process seafood and agricultural products, research and processing
biochemical products.
|
|
Shishi
City Hygience Bureau
|
|
May
18, 2008 to May 17, 2012
|
|
|
|
|
|
|
|
|
|
Rixiang
|
|
Certificate
of Hygiene Registration
|
|
Registration
of conformity with hygiene standards for the export of the following food
products: frozen processed seafood products (excluding double-shelled
categories and dried processed seafood products)
|
|
National
Accreditation Supervision Committee
|
|
May
31, 2009 to May 31, 2012
|
Other
Licenses and Permits
Our other
licenses and permits are as follows:
Subsidiary
|
|
Name of
Certificate
|
|
Description of
License/Permit
|
|
Issuing Authority
|
|
Period of
Validity
|
|
|
|
|
|
|
|
|
|
Mingxiang
|
|
National
Industrial Product Manufacturing License
|
|
Permit
to process seafood (dried)
|
|
Fujian
Province Quality Technology Supervisory Bureau
|
|
November
10, 2009 to November 10, 2011
|
|
|
|
|
|
|
|
|
|
Rixiang
|
|
National
Industrial Product Manufacturing License
|
|
Permit
to process seafood (dried)
|
|
Fujian
Province Quality Technology Supervisory Bureau
|
|
April
16, 2007 to April 15, 2010
|
|
|
|
|
|
|
|
|
|
Rixiang
|
|
Customs
Registration Certificate
|
|
Permit
to file import-export documents with China Customs
|
|
China
Customs
|
|
June
20, 2009 to June 19, 2012
|
|
|
|
|
|
|
|
|
|
Mingxiang
|
|
Certificate
of Approval for Enterprises with Foreign Trade Rights in the People’s
Republic of China
|
|
To
import-export company’s products and technologies, raw materials,
facilities, equipment
|
|
Fujian
Foreign Trade Economic Cooperation Department
|
|
Valid
from September 4, 2000; no expiration date
|
|
|
|
|
|
|
|
|
|
Rixiang
|
|
EU
Export Registration
|
|
Approval
for Rixiang to export marine products to EU
|
|
European
Commission
|
|
Valid
from October 6, 2006; no expiration
date
|
Save as
disclosed above, as at the date of this Form 10-K, our business or profitability
is not materially dependent on any other licenses and permits.
RESEARCH
AND DEVELOPMENT
We
believe that constant innovation in developing new processes and products that
are well-received by consumers is vital to our continued success. As of March
31, 2010, our research and development team comprised ten personnel. The focus
of our research and development is directed towards satisfying the preferences
of consumers, with the following objectives:
|
1.
|
To improve our products in the
areas of safety and quality (of taste, texture, hygiene and
packaging);
|
|
2.
|
To develop new
products;
|
|
3.
|
To achieve full customer
satisfaction;
|
|
4.
|
To reduce costs and create value;
and
|
|
5.
|
To develop products for low-value
fish types and to increase the value of processing
by-products.
|
Our main
research and development activities include: (1) experimenting with various
small fish species for the production of fish mash, (2) improving the taste and
texture of our dried processed seafood products, (3) finding new uses for
leftovers such as fish heads, prawn heads and shells which would otherwise be
disposed, and (4) developing new products, including marine health products. Our
research and development efforts enable us to develop efficient production
processes which lower the cost of production, yet produce superior-quality
products.
Some of
the highlights of our research and development activities are set out
below.
Product
Development
Through
our research and development activities, we have developed products which have
been well-received by consumers and improved our production processes. We have
through our research and development introduced 29 new processed seafood
products, including smoked eel, Sakura squid, and sliced squid, spicy sliced
octopus, spicy baby squid, spicy sliced squid and spicy squid head. We believe
that our constant product innovation has led to our increasing reputation as a
producer of processed natural seafood products.
Collaboration
with Ocean University of China
On April
28, 2006, our subsidiary Rixiang entered into a memorandum of understanding for
collaboration with the Ocean University of China’s Food Sciences and Engineering
Institute. The Ocean University of China is one of the renowned institutions in
the PRC for ocean studies. The collaboration with Ocean University of China will
allow us to tap into its technical know-how, to acquire new technical knowledge
and processing techniques. In turn, we serve as a research base of the research
and development work of Ocean University of China. We believe that we will
benefit from the exchange of information and technological
know-how.
The
collaboration with Ocean University of China since April 2006 have been focused
on developing new products and by-products from raw marine catch used in the
processing of seafood products, in particular (1) the development of bioactive
peptide products from leftovers of aquatic processed products; and (2) the
development of collagen protein and collagen peptide protein products from fish
skin:
1.
|
Development of bioactive
peptide products from leftovers of processed seafood
products
|
Bioactive
peptide protein found in aquatic products is used to produce angiogenesis
converting enzyme (ACE) inhibitors. ACE is a compound which increases the
pressure within blood vessels, thereby causing high blood pressure. An ACE
inhibitor helps slow the activity of the ACE. Using Bioactive peptide protein
developed ACE inhibitors avoids the harmful side effects associated with using
synthetic medicine for lowering hypertension.
2.
|
Development of collagen
protein and collagen peptide protein products from fish
skin
|
This
technique involves the extraction of collagen protein from fish skin. The
collagen protein is then converted into marine biological collagen peptide
protein using a directional enzyme hydrolysis technology and velum separation
technology. Fish-skin collagen protein is mainly used as an ingredient for
cosmetic products and health food products. We note that some cosmetics
manufacturers have begun to use marine biological collagen peptide protein and
collagen protein in their products.
The Ocean
University of China would provide technical and training support in the
development of production techniques and commercialization of the above said
products. The research and development activities are conducted at our
production facilities at Dabao Industrial Zone, Xiangzhi Town, Shishi City,
Fujian Province.
Our
research and development expenses amounted to approximately $20,000, $98,000,
$33,000, $87,000 and $237,000 for 2005, 2006, 2007, 2008 and 2009, respectively;
and approximately $53,000 for the three months period ended March 31, 2010.
Research and development expenses are presented as part of general and
administrative expenses in the financial statements.
QUALITY
ASSURANCE
We
believe that the quality of our products is the key to our continued growth and
success. We place great emphasis on quality assurance and the consistent quality
of our products at all stages of our production processes. We attribute our
success to date to our commitment to and production of quality products. As
such, we believe that good quality control has been a key competitive strength
of our Company. Our aim is that our “Mingxiang” brand should continue to be
identified with tasty and high-quality processed marine seafood
products.
As a
testimony to our commitment to quality products and processes, we have been
awarded the following awards and certifications:
Subsidiary
|
|
Award/Certification
|
|
Awarding/Certification Body
|
|
Validity Period
|
Rixiang
|
|
Validation
of conformity with HACCP standards
(1)
for the export of marine products to the US
|
|
CIQ
|
|
March
25, 2009 to March 24, 2010
|
|
|
|
|
|
|
|
Rixiang
|
|
EU
(2)
export registration for export of our marine products to the
EU
|
|
European
Commission
|
|
No
validity period
|
|
|
|
|
|
|
|
Mingxiang
|
|
ISO9001:2008
(3)
quality management system certification
|
|
CNAB
& CCIC Quality Certification Centre
|
|
December
9, 2009 to December 8, 2010
|
|
|
|
|
|
|
|
Mingxiang
|
|
ISO14001:2004
(4)
environmental
management system certification in respect of the processing of fish and
prawn-type marine food products and the relevant environmental
management
|
|
CNAB
& CCIC Conformity Assessment Services Co, Ltd.
|
|
November
27, 2008 to November 26,
2011
|
Notes
:
|
1)
|
Under
the PRC’s Regulations on Administration of Certification of Hazard
Analysis and Critical Control Point System (HACCP), applicants for the
HACCP certification have to apply to CNAB-recognized certification and
accreditation entities and comply with domestic and international sanitary
criteria set out in various legislation including the PRC Sanitary
Requirements for Export Food Manufacturing Enterprises and the HACCP
System and Guidelines for its Application by the Codex Alimentarius
Commission. CIQ, a HACCP-certification authority, will verify an
exporter’s HACCP certification if (a) the product to be exported falls
within one of the following categories, namely (1) canned food, (2) marine
food products (excluding live, fresh, dry and marinated products), (3)
meat and meat products, (4) frozen vegetables, (5) fruit or vegetable
juice, (6) instant frozen food containing meat or marine food products; or
(b) where such verification is required by authorities in the destination
country. We believe that the HACCP certification enables our products to
be more widely accepted by our domestic and international customers and
aid to increase the export of our
products.
|
|
2)
|
The
EU certification process ensures that the product conforms to the
appropriate provisions and relevant legislation which implements certain
European Directives. In the case of marine food products, the
applicable European Directives include 91/493/EEC and
94/356/EC.
|
|
3)
|
ISO9001:2008
is an international standard for quality management developed by the
International Organization for Standardization. It sets
requirements as to how an organization should manage its processes that
influence product quality, and evaluates an organization’s resource
management, process management and evaluation process that ensure its
products conform to customer and applicable regulatory
requirements.
|
|
4)
|
ISO14001:2004
is an internationally recognized standard for environment management
systems, including energy management, waste management and process
improvement.
|
Please
refer to the section “Awards and Certifications” of this Prospectus for further
details of awards and certifications which we have obtained in respect of our
products. To attain and maintain these accreditations, we have set up a quality
control program in accordance with ISO9001:2000 standards. We have a
comprehensive document management system in respect of our quality control
system manuals, program documents, records and related documentation, which
encompasses issuance, amendment, filing, recovery and destruction of the
documents. Our quality control measures are designed to ensure we meet the
standards under Sanitation Standard Operating Procedures (“SSOP”), Good
Manufacturing Practice (“GMP”) and HACCP quality assurance systems, production
control and product quality specifications. SSOP is an action plan that details
procedures to maintain sanitary conditions throughout a food processing
facility. This includes procedures on food handling and sanitation practices
such as proper thawing methods, prevention of contamination and certain aspects
of employee and environmental hygiene. GMP includes regulations promulgated by
the U.S. Food and Drug Administration under the authority of the Federal Food,
Drug and Cosmetic Act, which requires manufacturers, processors and packagers of
drugs, medical devices and food to take proactive steps to ensure that their
products are safe, pure and effective.
Our
quality control program requires our employees to undergo training conducted
internally in relation to our quality control policies, targets and procedures,
as well as production and processing techniques and operational
procedures.
We have
established the following quality control procedures to ensure the high standard
of quality of our processed seafood products:
In-coming
All
incoming raw materials are inspected and approved by our quality control
department. The quality control checks include hygiene, freshness and safety
checks and dimensional checks (for packaging materials) to ensure that the raw
materials conform to our health, freshness and safety standards and required
specifications. Inspection is carried out by way of random sampling. Samples are
extracted from each batch of raw materials and sent to the quality control
department, where physical and chemical tests are conducted in our
laboratory.
Raw
materials that pass the quality control checks are then sent for storage in the
cold storage facilities until they are required in the production
process.
In-process
At each
stage in the production process, we have quality inspectors who are responsible
for sieving out inferior products, and to do random selection of products for
testing in our laboratory. In our laboratory, these samples are tested for
micro-organisms and to ensure that they fulfill hygiene and safety standards.
Our machinery and equipment are also inspected regularly to ensure that they are
in good working condition.
Finished
products
The
finished products undergo a final round of inspection before they are sent to
the warehouse for storage to await delivery to our customers. Random samples are
selected and brought to our laboratory for testing to ensure that they fulfill
hygiene, safety and product standards. In respect of product standards, for
example, we test our dried processed products to ensure that there is adequate
but not excessive water content. Our finished products also go through a
specially calibrated metal detector to ensure that products are not contaminated
by metal particles from the production equipment.
After-sales
Our
quality control department is also responsible for after-sales service, to
address customers’ feedback or complaints.
Quality Assurance Testing
Base
In
January 2001, we were designated as a quality assurance testing base by the
National Marine Foods Quality Supervision Testing Centre. The National Marine
Foods Quality Supervision Testing Centre was established in 1986 and is based in
Qingdao City, Shandong Province. This testing body is responsible for quality
testing of the state’s designated products, research and development and grading
of marine products, including fresh, frozen, dried and pickled marine processed
products. As a designated testing base, we test the hygiene and quality of
ingredients and products according to industrial standards. Our testing base
caters to seafood processing companies from Fujian, Guangdong, Guangxi and
Zhejiang Provinces, all in the PRC. We believe that we benefit in the provision
of such services, as we are kept informed of industry news and technological
developments. Currently we do not charge a fee for such
services.
ENVIRONMENTAL
LAW COMPLIANCE
On
December 15, 2005, we received a Certificate of Environment Management System,
certifying that we have been assessed and are in compliance with the environment
management standard ISO14001: 2004. The scope of certification is for the
production and the relative environmental management activity of fish, shrimp
and other marine food. The registration number of the certificate is
00108E20847ROM/3502. The certificate is renewed in 2008 which is valid until
November 26, 2011.
When our
production plant was constructed, it was designed to comply with these
environmental laws by directly disposing of the use water to a nearby sewage
treatment plant for further handling. Because our production plant was built to
comply with these environmental laws, we are not required to pay for any ongoing
fees to the sewage treatment plant, nor has there been any material effects on
our capital expenditures, earnings and competitive position.
EMPLOYEES
We set
out below the total number of our employees and the various functions which they
serve as at December 31, 2005, 2006, 2007, 2008 and 2009 respectively; and as at
March 31, 2010.
Functions
|
|
Year ended December 31,
|
|
|
Three
months
period
ended
March
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
Sales
and Marketing
|
|
|
9
|
|
|
|
16
|
|
|
|
19
|
|
|
|
23
|
(2)
|
|
|
24
|
|
|
|
30
|
(2)
|
Finance
and Administration
|
|
|
13
|
|
|
|
17
|
|
|
|
20
|
|
|
|
35
|
(2)
|
|
|
37
|
|
|
|
42
|
(2)
|
Fishing and
Procurement
(1)
|
|
|
114
|
|
|
|
135
|
|
|
|
102
|
(2)
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
Production,
Research & Development, and Quality Control
|
|
|
353
|
|
|
|
492
|
|
|
|
493
|
|
|
|
549
|
(2)
|
|
|
704
|
|
|
|
705
|
(2)
|
TOTAL
|
|
|
489
|
|
|
|
660
|
|
|
|
634
|
|
|
|
611
|
|
|
|
769
|
|
|
|
781
|
|
Note
:
|
1)
|
These figures include those
fishermen who operated the fishing vessels that we chartered for our
marine catch business in 2006 and 2007, who were paid by our Company.
Starting from 2008, we no longer charter any fishing vessels but simply
source those raw materials from suppliers per customers’
requests.
|
|
2)
|
The increase in number of
employees was in line with the expansion on our production capacities
and marketing efforts during the
year.
|
Almost
all of our employees are based in the PRC. Our PRC permanent employees are
unionized. We have not experienced any strikes, labor disputes or work stoppages
by our employees and believe our relationship with our employees is
good.
As
of March 31, 2010, we had 781 employees.
We set
out below the total number of employees and the various functions which they
serve with respect to the algae-based beverage product as at December 31, 2009
and March 31, 2010.
Functions
|
|
As
at December 31, 2009
|
|
|
As
at March 31, 2010
|
|
Sales
and Marketing
|
|
|
12
|
|
|
|
64
|
|
Finance
and Administration
|
|
|
7
|
|
|
|
2
|
|
Procurement
|
|
|
1
|
|
|
|
1
|
|
Production,
Research & Development and Quality Control
|
|
|
1
|
|
|
|
1
|
|
TOTAL
|
|
|
21
|
|
|
|
68
|
|
As of
March 31, 2010, we had 68 employees with respect to the algae-based beverage
product
.
Staff
Training
We view
our human resource as one of our key assets and place great emphasis on staff
training that not only imparts job skills but also inculcates desirable working
attitudes.
Therefore,
our employees at all levels are required to undergo training relevant for their
positions. The training includes technical training which is conducted by both
internal and external trainers. Training aspects include quality control, export
trading procedures, permits, quality standards and compliance with quality
standards, as well as management training.
In
addition, a new employee undergoes orientation on hygiene requirements,
compliance with company policies and procedures as well as the required
technical skills before taking up his appointment.
Website Access to our SEC
Reports
You
may obtain a copy of the following reports, free of charge through the SEC’s
website at www.sec.gov as soon as reasonably practicable after electronically
filing them with, or furnishing them to, the SEC: our previous Annual Reports on
Form 10-K; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K;
and amendments to those reports filed or furnished pursuant to Section 13(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our
Internet website and the information contained therein or connected thereto are
not intended to be incorporated into this Annual Report on
Form 10-K.
The
public may also read and copy any materials filed with the SEC at the SEC's
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The Public
Reference Room may be contact at (800) SEC-0330. You may also access our other
reports via that link to the SEC website.
DESCRIPTION OF
PROPERTY
LAND
USE RIGHTS
On
November 6, 2009, our subsidiary Mingxiang won the auction for the purchase of
the 40-year use right of a land in Shishi City, Fujian. Covering an area of
8,691.4 square meters, the land is located next to the fishing port and the
Registrant’s processing facilities in Shishi City. The fishing port
in Shishi is one of the five largest fishing ports in the PRC. The purchase
price for the land use right is RMB 15.55 million ($2.28 million),.
As of
December 31, 2009, we owned the following land-use rights in Dabao Industrial
Zone, Xiangzhi Town, Shishi City, Fujian Province:
Certificate
Reference No.
|
|
Location
|
|
Use
|
|
Date of Expiration
of
Tenure
|
|
Land Area
(square meters)
|
|
Encumbrance
|
Shi
Xiang Guo Yong
(2006) No.
0005
|
|
Dabao
Industrial
|
|
Industrial
|
|
December
31, 2052
|
|
3,374.05
|
|
Nil
|
|
|
Zone,
Xiangzhi
|
|
|
|
|
|
|
|
|
|
|
Town,
Shishi City,
|
|
|
|
|
|
|
|
|
|
|
Fujian
Province
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Di Xiang Guo Yong
|
|
Plot
II,
|
|
Industrial
|
|
December
31, 2052
|
|
3,638.25
|
|
Nil
|
(2007) No.
0004
|
|
Dabao
Industrial
|
|
|
|
|
|
|
|
|
|
|
Zone,
Xiangzhi
|
|
|
|
|
|
|
|
|
|
|
Town,
Shishi City, Fujian Province
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Di Xiang Guo Yong
(2007) No.
0003
|
|
Plot
III,
Dabao
Industrial
|
|
Industrial
|
|
December
31, 2052
|
|
3,955.84
|
|
Nil
|
|
|
Zone,
Xiangzhi
|
|
|
|
|
|
|
|
|
|
|
Town,
Shishi City,
|
|
|
|
|
|
|
|
|
|
|
Fujian
Province
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Di Xiang Guo Yong
(2007) No.
0002
|
|
Dabao
Industrial
Zone,
Xiangzhi
|
|
Industrial
|
|
December
31, 2052
|
|
6,721.40
|
|
Nil.
|
|
|
Town,
Shishi City,
|
|
|
|
|
|
|
|
|
|
|
Fujian
Province
|
|
|
|
|
|
|
|
|
Certificate
Reference No.
|
|
Location
|
|
Use
|
|
Date of Expiration
of Tenure
|
|
Land Area
(square meters)
|
|
Encumbrance
|
Shi
Xiang Guo Yong
(2006) No.
0005
|
|
Dabao
Industrial
|
|
Industrial
|
|
December
31, 2052
|
|
3,374.05
|
|
Nil
|
|
|
Zone,
Xiangzhi
|
|
|
|
|
|
|
|
|
|
|
Town,
Shishi City,
|
|
|
|
|
|
|
|
|
|
|
Fujian
Province
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Di Xiang Guo Yong
|
|
Plot
II,
|
|
Industrial
|
|
December
31, 2052
|
|
3,638.25
|
|
Nil
|
(2007) No.
0004
|
|
Dabao
Industrial
|
|
|
|
|
|
|
|
|
|
|
Zone,
Xiangzhi
|
|
|
|
|
|
|
|
|
|
|
Town,
Shishi City, Fujian Province
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Di Xiang Guo Yong
(2007) No.
0003
|
|
Plot
III,
Dabao
Industrial
|
|
Industrial
|
|
December
31, 2052
|
|
3,955.84
|
|
Nil
|
|
|
Zone,
Xiangzhi
|
|
|
|
|
|
|
|
|
|
|
Town,
Shishi City,
|
|
|
|
|
|
|
|
|
|
|
Fujian
Province
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Di Xiang Guo Yong
(2007) No.
0002
|
|
Dabao
Industrial
Zone,
Xiangzhi
|
|
Industrial
|
|
December
31, 2052
|
|
6,721.40
|
|
Nil.
|
|
|
Town,
Shishi City,
|
|
|
|
|
|
|
|
|
|
|
Fujian
Province
|
|
|
|
|
|
|
|
|
BUILDINGS
As at
December 31, 2009, weowned the following building ownership rights in Dabao
Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province:
Reference
No.
|
|
Location
|
|
Use
|
|
Date
of Expiry
of
Tenure
|
|
Land/Floor
Area
(square
meters)
|
|
Encumbrance
|
Shi
Jian Fang Quan Zheng Xiang Zhi Zi
No.
00109
|
|
Block
A at Plot II
Dabao
Industrial
Zone,
Xiangzhi Town, Shishi City,
|
|
Production
and
packaging
facilities
|
|
June
5, 2051
|
|
705.60/1,489.60
|
|
Nil
|
|
|
Fujian
Province
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Jian Fang Quan Zheng Xiang Zhi Zi
No.
00110
|
|
Block
B at Plot II
Dabao
Industrial
Zone,
Xiangzhi Town, Shishi City,
|
|
Boiler
facilities
|
|
June
5, 2051
|
|
145.38/145.38
|
|
Nil
|
|
|
Fujian
Province
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Jian Fang Quan Zheng Xiang Zhi Zi
No.
00111
|
|
Block
C at Plot II
Dabao
Industrial
Zone,
Xiangzhi Town, Shishi City,
Fujian
Province
|
|
Production
and
cutting/slicing
facilities
|
|
June
5, 2051
|
|
934.46/1,991.29
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Jian Fang Quan Zheng Xiang Zhi Zi
No.
00112
|
|
Cold
storage facility at
Plot
III
Dabao
Industrial
Zone,
Xiangzhi Town, Shishi City,
Fujian
Province
|
|
Cold
Storage
|
|
June
5, 2051
|
|
1,224.84/1,214.16
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Jian Fang Quan Zheng Xiang Zhi Zi
No.
00114
|
|
Block
A at
Daobao
Industrial
Zone,
Xiangzhi Town,
Shishi
City, Fujian
Province
|
|
Staff
dormitory
|
|
June
5, 2051
|
|
1,561.17/3,413.79
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Jian Fang Quan Zheng Xiang Zhi Zi
No.
00115
|
|
Block
B at
Daobao
Industrial
Zone,
Xiangzhi Town,
Shishi
City, Fujian
|
|
Office
|
|
September
28,
2052
|
|
942.19/3,268.41
|
|
Nil
|
|
|
Province
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Fang Quan
|
|
Block
A at
|
|
Factory
Space
|
|
December
31,
|
|
620.00/620.00
|
|
Nil
|
Zheng
Xiang
|
|
Dabao
Industrial
|
|
|
|
2052
|
|
|
|
|
Zhi
Zi
No.
00567
|
|
Zone,
Xiangzhi Town,
|
|
|
|
|
|
|
|
|
|
|
Shishi
City, Fujian
|
|
|
|
|
|
|
|
|
|
|
Province
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Fang Quan
|
|
Block
B at
|
|
Factory
Use
|
|
December
31,
|
|
670.56/670.56
|
|
Nil
|
Zheng
Xiang
|
|
Dabao
Industrial
|
|
|
|
2052
|
|
|
|
|
Zhi
Zi
No.
00568
|
|
Zone,
Xiangzhi Town,
|
|
|
|
|
|
|
|
|
|
|
Shishi
City, Fujian
|
|
|
|
|
|
|
|
|
|
|
Province
|
|
|
|
|
|
|
|
|
Note
:
|
1)
|
Mingxiang
owned the building ownership rights to these two properties. Jixiang owned
the building ownership rights to the other
properties.
|
|
2)
|
As
at December 31, 2009, we are in the process of application for building
ownership rights for the new production facilities and staff dormitory
with floor areas at about 3,000 and 2,850 sq. m.,
respectively.
|
LEGAL
PROCEEDINGS
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any pending legal proceedings which involve us or any of our properties or
subsidiaries.
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET
INFORMATION
Our
common stock is currently quoted on NYSE AMEX and, prior to August 14, 2009, was
quoted on OTC Bulletin Board, under the trading symbol CMFO. The CUSIP number is
16943R 106. The following table shows the high and low prices of our common
shares on the OTC Bulletin Board for each quarter within the last three fiscal
years.
Year
Ended December 31, 2010
|
|
High ($)
|
|
|
Low($)
|
|
1
st
Quarter
|
|
|
8.44
|
|
|
|
6.07
|
|
Year
Ended December 31, 2009
|
|
High ($)
|
|
|
Low($)
|
|
1
st
Quarter
|
|
|
1.73
|
|
|
|
1.10
|
|
2
nd
Quarter
|
|
|
3.96
|
|
|
|
1.62
|
|
3
rd
Quarter
|
|
|
5.83
|
|
|
|
3.40
|
|
4
th
Quarter
|
|
|
8.08
|
|
|
|
4.09
|
|
Year
Ended December 31, 2008
|
|
High ($)
|
|
|
Low ($)
|
|
1
st
Quarter
|
|
|
6.00
|
|
|
|
3.
55
|
|
2
nd
Quarter
|
|
|
6.00
|
|
|
|
3.15
|
|
3
rd
Quarter
|
|
|
3.35
|
|
|
|
2.00
|
|
4
th
Quarter
|
|
|
2.21
|
|
|
|
1.45
|
|
Year
Ended December 31, 2007
|
|
High
($)
|
|
|
Low
($)
|
|
1
st
Quarter
|
|
|
0.75
|
|
|
|
0.75
|
|
2
nd
Quarter
|
|
|
0.75
|
|
|
|
0.80
|
|
3
rd
Quarter
|
|
|
15.00
|
|
|
|
0.80
|
|
4
th
Quarter
|
|
|
4.78
|
|
|
|
2.55
|
|
The above
quotations for our common stock reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual
transactions.
HOLDERS
As of
June 11, 2010, there were 41 holders of record of our common
stock.
DIVIDENDS
Pursuant
to a Stock Purchase Agreement with Halter Financial Investments, L.P. dated
September 13, 2007, we paid a special cash dividend in the aggregate amount of
$392,028, or $0.364 per share, to holders of our common stock outstanding on
September 12, 2007.
Other
than the cash dividend describe above, we have never paid or declared dividends.
However, holders of our common stock are entitled to dividends if declared by
our board of directors out of funds legally available. We do not, however,
anticipate the declaration or payment of any dividends in the foreseeable
future. We intend to retain earnings, if any, to finance the development and
expansion of our business. Future dividend policy will be subject to the
discretion of our board of directors and will be contingent upon future
earnings, if any, our financial condition, capital requirements, general
business conditions and other factors. Therefore, there can be no assurance that
any dividends of any kind will ever be paid.
SELECTED CONSOLIDATED
FINANCIAL DATA
The
following tables summarize our consolidated financial data for the periods
presented. You should read the following financial information together with the
information under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our consolidated financial statements and the
related notes to these consolidated financial statements appearing elsewhere in
this Prospectus. The selected consolidated statements of operations data for the
three months financial period ended March 31, 2010 and 2009, and the
consolidated balance sheet data as of March 31, 2010 are derived from our
unaudited consolidated financial statements, which are included elsewhere
herein. The unaudited consolidated financial statements have been prepared on
the same basis as our audited financial statements and include, in the opinion
of management, all adjustments that management considers necessary for a fair
presentation of the financial information set forth in those
statements.
The
selected consolidated statements of operations data for the financial years
ended December 31, 2009, 2008, 2006 and 2005; and the selected consolidated
balance sheet data as of December 31, 2009, 2008, 2006 and 2005 are derived from
our consolidated financial statements, which are included elsewhere herein, and
have been audited by ZYCPA Company Limited (“ZYCPA”) (formerly Zhong Yi (Hong
Kong) C.P.A. Company Limited), an independent registered public accounting firm,
as indicated in their report. The selected consolidated statements of operations
data for the financial years ended December 31, 2007; and the selected
consolidated balance sheet data as of December 31, 2007 are derived from our
consolidated financial statements, which are included elsewhere in this
Prospectus, and have been audited by Cordovano and Honeck, LLP (“C & H”), an
independent registered public accounting firm, as indicated in their report.
Historical results are not necessarily indicative of the results to be expected
in future periods.
|
|
Year
Ended December 31,
|
|
|
Three Months Ended
March
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
14,939
|
|
|
$
|
27,442
|
|
|
$
|
36,425
|
|
|
$
|
48,799
|
|
|
$
|
69,586
|
|
|
$
|
1
6
,
548
|
|
|
$
|
19,650
|
|
Cost
of sales
|
|
|
(11,198
|
)
|
|
|
(19,730
|
)
|
|
|
(25,649
|
)
|
|
|
(33,607
|
)
|
|
|
(50,456
|
)
|
|
|
(12,442
|
)
|
|
|
(13,042
|
)
|
Gross
profit
|
|
|
3,741
|
|
|
|
7,712
|
|
|
|
10,776
|
|
|
|
15,192
|
|
|
|
19,130
|
|
|
|
4,106
|
|
|
|
6,608
|
|
Depreciation
and amortization
|
|
|
(26
|
)
|
|
|
(32
|
)
|
|
|
(37
|
)
|
|
|
(58
|
)
|
|
|
(80
|
)
|
|
|
(19
|
)
|
|
|
(623
|
)
|
Selling
and distribution expenses
|
|
|
(57
|
)
|
|
|
(94
|
)
|
|
|
(149
|
)
|
|
|
(608
|
)
|
|
|
(609
|
)
|
|
|
(114
|
)
|
|
|
(385
|
)
|
General
and administrative expenses
|
|
|
(208
|
)
|
|
|
(388
|
)
|
|
|
(598
|
)
|
|
|
(2,068
|
)
|
|
|
(2,276
|
)
|
|
|
(466
|
)
|
|
|
(620
|
)
|
Other
income
|
|
|
128
|
|
|
|
110
|
|
|
|
223
|
|
|
|
647
|
|
|
|
681
|
|
|
|
254
|
|
|
|
42
|
|
Interest
expense
|
|
|
(215
|
)
|
|
|
(272
|
)
|
|
|
(333
|
)
|
|
|
(319
|
)
|
|
|
(231
|
)
|
|
|
(63
|
)
|
|
|
(40
|
)
|
Income
before income tax
|
|
|
3,363
|
|
|
|
7,036
|
|
|
|
9,882
|
|
|
|
12,786
|
|
|
|
16,615
|
|
|
|
3,698
|
|
|
|
4,982
|
|
Income
tax expense
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
(1,221
|
)
|
|
|
(1,663
|
)
|
|
|
(2,051
|
)
|
|
|
(449
|
)
|
|
|
(1,056
|
)
|
Net
income attributable to non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Net
income attributable to the Shareholders of the Company
|
|
$
|
3,349
|
|
|
$
|
7,036
|
|
|
$
|
8,661
|
|
|
$
|
11,123
|
|
|
$
|
14,564
|
|
|
$
|
3,
249
|
|
|
$
|
3,926
|
|
Earnings
per Share —basic (US$)
(1)
|
|
$
|
0.214
|
|
|
$
|
0.450
|
|
|
$
|
0.377
|
|
|
$
|
0.483
|
|
|
$
|
0.632
|
|
|
$
|
0.141
|
|
|
$
|
0.163
|
|
Earnings
per Share — diluted (US$)
(2)
|
|
$
|
0.214
|
|
|
$
|
0.450
|
|
|
$
|
0.344
|
|
|
$
|
0.483
|
|
|
$
|
0.
597
|
|
|
$
|
0.141
|
|
|
$
|
0.157
|
|
Note:
(1)
|
Assume
there are 22,972,301 shares for the financial year ended December 31,
2005, 2006 and 2007, 23,010,842 shares for the financial year ended
December 31, 2008, 23,062,839 shares for the financial year ended December
31, 2009, 23,026,301 for the three months financial period ended March 31,
2009, and 24,125,064 shares for the three months financial period ended
March 31, 2010 of basic common stock outstanding after this offering was
applied retrospectively.
|
(2)
|
Assume
there are 25,142,105 shares for the financial year ended December 31,
2005, 2006 and 2007, 23,010,842 shares for the financial year ended
December 31, 2008, 24,391,942 shares for the financial year ended December
31, 2009, 23,026,301 for the three months financial period ended March 31,
2009, and 25,016,494 shares for the three months financial period ended
March 31, 2010 of diluted common stock outstanding after this offering was
applied retrospectively.
|
|
|
As at December 31,
|
|
|
As at
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
(unaudited)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,622
|
|
|
$
|
9,182
|
|
|
$
|
24,477
|
|
|
$
|
31,640
|
|
|
$
|
7,143
|
|
|
$
|
47,376
|
|
Total
current assets
|
|
|
6,833
|
|
|
|
11,643
|
|
|
|
30,013
|
|
|
|
43,466
|
|
|
|
56,406
|
|
|
|
60,655
|
|
Total
assets
|
|
|
10,906
|
|
|
|
15,430
|
|
|
|
34,130
|
|
|
|
51,646
|
|
|
|
67,895
|
|
|
|
97,470
|
|
Short-term
borrowings
|
|
|
3,230
|
|
|
|
3,793
|
|
|
|
772
|
|
|
|
4,289
|
|
|
|
4,139
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
7,837
|
|
|
|
5,115
|
|
|
|
2,602
|
|
|
|
6,626
|
|
|
|
8,047
|
|
|
|
4,205
|
|
Total
stockholders’ equity
|
|
|
3,069
|
|
|
|
10,315
|
|
|
|
31,528
|
|
|
|
45,020
|
|
|
|
59,848
|
|
|
|
93,265
|
|
MANAGEMENT'S DISCUSSION AND
ANALYSIS OR FINANCIAL CONDITION AND RESULTS OF OPERATION
The
following discussion of our results of operations and financial position should
be read in conjunction with the consolidated financial statements and notes for
the three months ended March 31, 2010 and 2009, and our Audited Consolidated
Financial Statements for the Financial Years Ended December 31, 2009, 2008 and
2007 as set out in this Prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
significantly from those projected in the forward-looking statements. Factors
that might cause future results to differ significantly from those projected in
the forward-looking statements include, but are not limited to, those discussed
below and elsewhere in this Prospectus, particularly in the “Risk Factors”
section of this Prospectus. Under no circumstances should the inclusion of such
forward-looking statements herein be regarded as a representation, warranty or
prediction with respect to the accuracy of the underlying assumptions by us or
any other person. Investors are cautioned not to place undue reliance on these
forward-looking statements that speak only as of the date hereof. Please refer
to the section “Special Notes regarding Forward-Looking Statements” of this
Prospectus.
OVERVIEW
We are
a holding company whose primary business operations are conducted through our
direct, wholly owned subsidiary, Ocean Technology (China) Company Limited
(“Ocean Technology”), and its subsidiaries, Shishi Rixiang Marine Foods Co. Ltd.
(“Rixiang”) and Shishi Huabao Mingxiang Foods Co., Ltd. (“Mingxiang”), which are
incorporated in the PRC. We engage in the business of processing, distribution
and sale of processed seafood products and algae-based beverage products, as
well as the sale of marine catch. Our objective is to establish ourselves as a
leading producer of processed seafood products in the PRC and overseas
markets.
Reverse
acquisition and private placement
On
November 17, 2007, we completed a reverse acquisition transaction with Ocean
Technology through a share exchange with Ocean Technology’s former
stockholders.
Pursuant
to the share exchange agreement, the shareholders of Ocean
Technology exchanged 100% of their outstanding capital stock in Ocean
Technology for approximately 15,624,034 shares of our common stock, or
approximately 93.15% shares of our outstanding common stock after the share
exchange. In connection with the share exchange, a majority of our shareholders
of record as of November 16, 2007 approved a resolution by our board of
directors to change our name from New Paradigm Productions, Inc. to China Marine
Food Group Limited (“China Marine”). The name change became effective on January
9, 2008 upon the filing of a Certificate of Amendment to our Amended Articles of
Incorporation with the State of Nevada on the twentieth day following the
mailing of a Definitive Information Statement to our shareholders.
Concurrently
with the closing of the reverse acquisition on November 17, 2007, we completed a
private placement of our securities to certain accredited investors who
subscribed for units consisting one share of common stock and a warrant to
purchase one-fifth of one share of our common stock. The investors subscribed
for aggregate of 6,199,441 shares of our common stock and warrants to purchase
an aggregate of 1,239,888 shares of our common stock at $3.214 per unit. The
units were offered and sold pursuant to exemptions from registration under
the Securities Act, including without limitation, Regulation D and Regulation S
promulgated under the Securities Act. Each warrant issued to the investors has a
term of three years and is exercisable at any time for a price equal to $4.1782
in cash or on a cashless exercise basis.
Upon the
close of the reverse acquisition, Richard Crimmins, our sole director, submitted
his resignation letter pursuant to which he resigned from all offices of the
Company he holds which resignations will become effective immediately. Mr. Liu
replaced him as our Chief Executive Officer and Interim Secretary effective on
the close of the reverse acquisition. Prior to the effective date of the reverse
acquisition, Mr. Liu served at Ocean Technology as its Chief Executive
Officer.
For
accounting purposes, the share exchange transaction was treated as a reverse
acquisition with Ocean Technology as the acquirer and China Marine as the
acquired party. When we refer herein to business and financial information for
periods prior to the consummation of the reverse acquisition, we are referring
to the business and financial information of Ocean Technology on a consolidated
basis unless the context suggests otherwise.
Sales
We are a
seafood producer engaged in the processing, distribution and sale of seafood
products and algae-based beverage products, as well as the sale of marine catch.
Our subsidiary, Shishi Huabao Jixiang Water Products Co., Ltd (“Jixiang”) is a
property holding company. Jixiang operates solely to manage our land use rights
and properties, including our production plant, cold storage facility, office
tower and staff dormitory.
Our dried
processed seafood products include dried prawns, dried squids, dried file fish,
roasted prawns, shredded roasted squids, roasted squids, roasted file fish and
other seafood items. Our dried processed seafood is predominantly sold under our
registered trademark, the “Mingxiang” brand name. Our brand name has been
awarded the “Fujian Famous Brand” award by the Fujian Commerce Authority. Our
dried processed seafood products are mainly sold to distributors in Fujian and
Zhejiang provinces, who in turn distribute them to major supermarkets and
retailers throughout these provinces.
The
raw materials for our processed seafood products are solely purchased from
independent fishermen in nearby markets for further processing. We simply buy
the marine catch from the suppliers and then sell to the customers on a direct
basis. The marine catch is predominantly sold to overseas customers and
distributors in the Fujian and Shandong provinces, some of whom directly export
the marine catch to South Korea and Taiwan.
On
January 1, 2010, Mingxiang exercised its option to acquire 80% of the registered
capital stock of Shishi Xianghe Food Science and Technology Co., Ltd.
(“Xianghe”) pursuant to the terms of a share purchase agreement dated January 1,
2010. Xianghe is a Fujian based manufacturer of the branded Hi-Power
algae-based soft drinks. Hi-Power was developed by the Yellow Sea Fisheries
Research Institute Chinese Academy of Fishery Sciences in coordination with the
founder, Qiu. Hi-Power is marketed as a high-protein content drink, low in
calories and fat, which provides the consumers a combination of immune system
benefits, improved digestion and reductions in hyperglycemia and hypertension.
Hi-Power’s target market focuses on health-conscious consumers in China’s
fast-growing beverage market. Xianghe has developed a network of
distributors in Fujian, Zhejiang, Guangdong and Hunan which sell Hi-Power to
retail food stores, restaurants food supply dealers and the hospitality
industry.
Mingxiang
intends to integrate the algae-based beverage products of Xianghe into
Mingxiang’s distribution network. Xianghe has an experienced management
team and its management and other employees will continue to work at Xianghe
after the acquisition. Xianghe utilizes third party manufacturers to
produce the beverages.
Sales
of our processed seafood products accounted for approximately 84.0% and 67.7% of
our total sales in the first quarter of 2010 and 2009 respectively; and
approximately 74.8%, 90.9% and 76.5% of our total sales in year 2009, 2008
and 2007 respectively. Sales of our marine catch accounted for approximately
2.0% and 32.3% of our total sales in the first quarter of 2010 and 2009
respectively; and approximately 25.2%, 9.1% and 23.5% of our total
sales in year 2009, 2008 and 2007 respectively. The decrease in sales of marine
catch this year was mainly related to the sales of raw materials in the first
quarter of 2009 which we purchased in the second half of 2008 with the intention
for trading purposes. Having recognized that the processed seafood segment has
significant growth potential and better profit margin comparing to the trading
of marine catch, we will continue to focus our resources on the processed
seafood segment going forward.
A
detailed breakdown of our sales by major geographical markets is set out in the
section “Results of Operations” herein.
Factors
that can affect our sales are as follows:
|
·
|
The
level of sales is dependent on the supply of raw materials on a timely
basis. Raw material costs accounted for approximately 73.2% and 71.8% of
our total cost of sales of processed seafood products in the first quarter
of 2010 and 2009 respectively; and approximately 74.4%, 77.9%
and 74.3% of our total cost of sales of processed seafood products in
year 2009, 2008 and 2007 respectively. The availability of these raw
materials could be affected by a large number of factors, including,
inter alia
, the
availability of fish stock, weather conditions, government policies and
regulations where such fishing is carried out, the stability of supplies
from fishermen and pressure from environmental or animal rights
groups.
|
|
·
|
Specifically,
fishing activities in waters around the PRC are restricted in June and
July each year to ensure sustainable aquatic resources. As such, some of
our suppliers such as fishermen are restricted from fishing during this
period due to the restrictions against fishing along the Taiwan Strait
imposed by the PRC’s Ministry of Agriculture. There is no assurance that
the PRC government may not impose more stringent fishing regulations,
including but not limited to longer or more frequent periods that restrict
fishing.
|
|
·
|
Any
shortage in the supply of or increase in the prices of the raw materials
for our processed seafood products will adversely affect our
sales.
|
|
·
|
Our
ability to maintain existing accreditations such as HACCP, ISO9001:2000,
ISO14001:2004 and the EU Export Certification accreditations will affect
our ability to maintain our presence in our existing market and to expand
into new market territories.
|
|
·
|
Our
ability to price our products competitively against existing competitors
and new market entrants by achieving economies of
scale.
|
|
·
|
Our
ability to build on our established track record and reputation as a
supplier of high quality processed seafood products and capability to
deliver products in a timely
manner.
|
|
·
|
Our
ability to maintain existing business relationships and to secure new
customers, which may be affected by the general economic or political
conditions in our local and overseas
markets.
|
|
·
|
Our
ability to introduce new products to capture a wider group of consumers
and to cater to different and changing consumers’
preferences.
|
Please
refer to the section “Risk Factors” herein for further information on other
factors that may affect our revenue.
Production
facilities and employees
Our
production facilities are located at Dabao Industrial Zone, Xiangzhi Town,
Shishi City, Fujian Province, the PRC. We have five production lines for the
processing of dried processed seafood products: roasted file fish, roasted
prawns, shredded roasted squid, roasted squids and smoked products, and one
production line for the processing of frozen seafood products.
As at
March 31, 2009, we had 849 employees.
Seasonality
We do
not experience any significant seasonality in relation to sales for our
processed seafood products. However, sales are usually higher before and during
the Chinese New Year. In 2008, we also experienced a strong sales demand before
the Olympics games being held in Beijing in August. As for the trading of marine
catch, sales may be lower in June and July due to the reduced supplies as a
result of the restriction on fishing in the Taiwan Strait during these two
months. In 2009, the restricted period on fishing has been shifted to a bit
earlier from mid May to mid July as announced by the Ministry of
Agriculture.
NEW
BUSINESS DEVELOPMENT
Acquisition
of land for development of cold storage facilities
On
November 6, 2009, we won the auction for the purchase of the 40-year use right
of a land in Shishi City, Fujian. Covering an area of 8,691.4 square meters, the
land is located next to the fishing port and our production facilities in the
same city. The purchase price for the land use right is $2.3 million which has
been fully paid as of December 31, 2009.
We plan
to build cold storage facilities on the land with a capacity of approximately
20,000 tons, to take advantage of its proximity to the port where we obtain
fresh marine catch to be processed into seafood products. We intend to finance
the total estimated $20.0 million in land use rights and construction
costs from funds generated by operations and the facilities are expected to
be up and running in the first half of 2011. There were no material capital
commitments in relation to the construction costs as at March 31, 2010.
Subsequent to full settlement of the land cost, a formal agreement with the
local land and resources department was executed on December 30,
2009.
We
intend to provide high standard, modernized cold storage, frozening and ice
making services to the port area through the exclusive cold storage facilities.
We may utilize certain cold storage spaces on our own going forward which will
not only help to reduce storage costs but also expect to improve margins for our
current seafood segments as a result of bulk purchases at favorable
prices.
Acquisition
of branded algae-based beverage company on January 1, 2010
On
November 27, 2009, we entered into a Credit or Share Purchase Option Agreement
(the “Option Agreement”) with Qiu Shang Jing (“Qiu”) and Shishi Xianghe Food
Science and Technology Co., Ltd. (“Xianghe”). The Option Agreement
provided us to make a loan to Xianghe in the amount of approximately $26.4
million to be used for working capital purposes. In consideration for the loan,
we received the option to buy shares representing eighty percent (80%) of
Xianghe (the “Shares”) from its sole shareholder, Qiu. We intended to fund
the loan from the currently available cash of the Group.
Xianghe
is a Fujian based manufacturer of the branded Hi-Power algae-based soft drinks.
Hi-Power was developed by the Yellow Sea Fisheries Research Institute Chinese
Academy of Fishery Sciences in coordination with the founder, Qiu. Hi-Power is
marketed as a high-protein content drink, low in calories and fat, which
provides the consumers a combination of immune system benefits, improved
digestion and reductions in hyperglycemia and
hypertension. Hi-Power’s target market focuses on health-conscious
consumers in China’s fast-growing beverage market. Xianghe has developed a
network of distributors in Fujian, Zhejiang, Guangdong and Hunan which sell
Hi-Power to retail food stores, restaurants food supply dealers and the
hospitality industry.
On
January 1, 2010, we exercised the option to acquire the Shares pursuant to the
terms of a Share Purchase Agreement (the “Purchase Agreement”). The Shares were
purchased from Qiu and the purchase price for the Shares was approximately $27.8
million, paid as follows:
(i)
|
Approximately
$26.4 million, which Xianghe owed to us, was transferred to be the
consideration for the purchase of the Shares of Xianghe which we shall pay
to Qiu.
|
(ii)
|
Approximately
$1.4 million shall be paid by us to Qiu within 30 days after completion of
the audit report of Xianghe for the year ended December 31,
2009.
|
The
Purchase Agreement grants us a right of first refusal to purchase the 20% of the
registered capital stock of Xianghe retained by Qiu for a maximum price of
approximately $7.0 million if Qiu intends to sell his shares. The Purchase
Agreement also provides that if Xianghe has any funding requirement from the
shareholders, we and Qiu shall provide the capital into Xianghe on a pro rata
basis according to respective shareholdings.
We
intend to integrate the Hi-Power algae-based soft drinks into our current
distribution network. Xianghe has an experienced management team and its
management and other employees will continue to work at Xianghe after the
acquisition. Xianghe utilizes third party manufacturers to produce the
beverages.
At the
closing date of business acquisition on January 1, 2010, Mingxiang entered into
a business transfer agreement with Qiu. Pursuant to the business transfer
agreement, Qiu agreed to transfer the algae-based soft drinks business from
Xianghe to Mingxiang as part of the business restructuring of Xianghe. It was
also agreed that Qiu would not share any of the results of the algae-based soft
drinks business operated under Mingxiang in the future. As a result, Mingxiang
fully integrated the business operation of algae-based soft drinks from Xianghe
and was allowed to entitle 100% operating results generated from the algae-based
soft drinks business, subject to the precedent condition. Upon the completion of
business acquisition and business transfer, Xianghe became a dormant
company.
In
connection with the business transfer, it was also agreed between both parties
that Xianghe still assumed $83,021 revenue and $1,475 net income from the
algae-based soft drinks business during the transitional period in January 2010
and as a result, $295 net income was attributed to the non-controlling interests
as of the end of this fiscal quarter. Non-controlling interests from the
business combination mainly represented 20% share of pre-acquisition equity in
Xianghe as of December 31, 2009 in the condensed consolidated balance
sheet.
Completion
of $30,000,000 financing through registered direct offering of common stock on
January 25, 2010
On
January 25, 2010, the Company closed the financing to sell 4,615,388 shares of
common stock at a price of $6.50 per share. Net proceeds, after underwriting
discounts and commissions and before offering expenses payable by the Company,
were approximately $28,500,000. In connection with the registered direct
offering, the Company also issued 177,000 shares of common stock to a consultant
for the provision of financial advisory service rendered in this registered
direct offering. The fair value of this stock issuance was determined at a price
of $6.50 per share based on the market price of the shares on the grant date and
recorded in additional paid-in capital.
The
Company intends to use the net proceeds from this offering for working capital
and general corporate purposes. The shares were sold under the Company's
previously filed shelf registration statement that was declared effective by the
Securities and Exchange Commission on December 23, 2009. Global Hunter
Securities LLC and Brean Murray Carret & Co., LLC acted as co-lead placement
agents and joint book-running managers in the transaction.
As of
March 31, 2010, the number of authorized and outstanding shares of the Company’s
common stock was 100,000,000 and 28,493,650 shares,
respectively.
RESULTS
OF OPERATIONS
We
derive our sales from the sales of processed seafood products, marine catch and
algae-based beverage products, the breakdown of our sales and gross profit by
product, as well as by geographical location of our customers for the three
months ended March 31, 2010 and 2009 are set out below:
Breakdown
of our past performance by principal products and geographical
regions
Sales
by product
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
16,498
|
|
|
|
84.0
|
|
|
|
11,203
|
|
|
|
67.7
|
|
Marine
catch
|
|
|
398
|
|
|
|
2.0
|
|
|
|
5,345
|
|
|
|
32.3
|
|
Algae-based
beverage products
|
|
|
2,754
|
|
|
|
14.0
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
1
9,650
|
|
|
|
100.0
|
|
|
|
16,548
|
|
|
|
100.0
|
|
Sales
by geographical region
|
|
Three
months ended March 31, 2010
|
|
|
|
Processed
seafood
products
|
|
|
Marine
catch
|
|
|
Algae-based
beverage
products
|
|
|
Total
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
PRC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong
|
|
|
1,419
|
|
|
|
8.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,419
|
|
|
|
7.2
|
|
Zhejiang
|
|
|
7,077
|
|
|
|
42.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140
|
|
|
|
5.1
|
|
|
|
7,217
|
|
|
|
36.7
|
|
Fujian
|
|
|
5,189
|
|
|
|
31.5
|
|
|
|
103
|
|
|
|
25.9
|
|
|
|
2,169
|
|
|
|
78.7
|
|
|
|
7,461
|
|
|
|
38.0
|
|
Guangdong/
Shenzhen
|
|
|
1,441
|
|
|
|
8.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
397
|
|
|
|
14.4
|
|
|
|
1,838
|
|
|
|
9.4
|
|
Jiangsu/
Shanghai
|
|
|
811
|
|
|
|
4.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
811
|
|
|
|
4.1
|
|
Sichuan/
Chongqing
|
|
|
561
|
|
|
|
3.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
561
|
|
|
|
2.9
|
|
Others
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48
|
|
|
|
1.8
|
|
|
|
48
|
|
|
|
0.2
|
|
Total
PRC (1)
|
|
|
16,498
|
|
|
|
100.0
|
|
|
|
103
|
|
|
|
25,9
|
|
|
|
2,754
|
|
|
|
100.0
|
|
|
|
19,355
|
|
|
|
98.5
|
|
Asia
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
295
|
|
|
|
74.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
295
|
|
|
|
1.5
|
|
Total
|
|
|
16,498
|
|
|
|
100.0
|
|
|
|
398
|
|
|
|
100.0
|
|
|
|
2,754
|
|
|
|
100.0
|
|
|
|
19,650
|
|
|
|
100.0
|
|
|
|
Three months ended March 31, 2009
|
|
|
|
Processed seafood
products
|
|
|
Marine catch
|
|
|
Algae-based beverage
products
|
|
|
Total
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
PRC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong
|
|
|
666
|
|
|
|
6.0
|
|
|
|
73
|
|
|
|
1.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
739
|
|
|
|
4.5
|
|
Zhejiang
|
|
|
5,171
|
|
|
|
46.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,171
|
|
|
|
31.2
|
|
Fujian
|
|
|
3,747
|
|
|
|
33.4
|
|
|
|
70
|
|
|
|
1.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,817
|
|
|
|
23.1
|
|
Guangdong/
Shenzhen
|
|
|
839
|
|
|
|
7.5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
839
|
|
|
|
5.1
|
|
Jiangsu/
Shanghai
|
|
|
780
|
|
|
|
7.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
780
|
|
|
|
4.7
|
|
Sichuan/
Chongqing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others
(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,788
|
|
|
|
89.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,788
|
|
|
|
28.9
|
|
Total
PRC (1)
|
|
|
11,203
|
|
|
|
100.0
|
|
|
|
4,931
|
|
|
|
92.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,134
|
|
|
|
97.5
|
|
Asia
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
414
|
|
|
|
7.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
414
|
|
|
|
2.5
|
|
Total
|
|
|
11,203
|
|
|
|
100.0
|
|
|
|
5,345
|
|
|
|
100.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,548
|
|
|
|
100.0
|
|
(1)
|
Sales
to PRC include sales to local PRC distributors who in turn sell our
products to Taiwan and South Korea. Such sales amounted to $0.1
million in both the first quarter of 2010 and
2009.
|
(2)
|
Sales
to Asia mainly relate to exports to the
Philippines.
|
(3)
|
Sales
to PRC Others mainly relate to the trading of marine catch transacted in
Liaoning province.
|
Three
months ended March 31, 2010 compared to three months ended March 31,
2009
Sales
Our
revenue increased by approximately $3.1 million or 18.7% from $16.5 million for
the three months ended March 31, 2009 to $19.6 million for the same period ended
March 31, 2010. The increase in revenue was mainly due to the continued growth
in sales of our processed seafood products and the newly acquired algae-based
beverage business, partially offset by the decrease in sales of our marine catch
segment. Sales of our processed seafood products increased by $5.3 million or
47.3%, whereas sales of our marine catch segment decreased by $4.9 million
or 92.6% year over year.
The
processed seafood products operations continued to be the growth driver for us
as our products continue to gain market acceptance, particularly in Zhejiang and
Fujian provinces. The higher sales in the processed seafood products segment
were mainly due to the continued sales and marketing effort in these two
provinces. Accordingly, the number of sales staff has further increased from 24
to 30 during the period under review.
Having
recognized that the processed seafood segment has significant growth potential
and attractive profit margin, we will continue to focus our resources on the
processed seafood segment going forward.
This
is the first quarter for us to recognize the sales of our algae-based beverage
products since the acquisition declared effective at the beginning of this year.
Given our continuous contribution over the related sales and marketing
campaigns, we expect the sales of our beverage segment will continue to grow
quarter over quarter in 2010.
Cost
of sales
Our
cost of sales comprises the cost of our processed seafood operations and the
cost of our marine catch, as well as the cost of our algae-based beverage
products. The breakdown is as follows:
|
|
Three months ended March 31,
|
|
US$
’000
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
10,969
|
|
|
|
7,550
|
|
Marine
catch
|
|
|
289
|
|
|
|
4,892
|
|
Algae-based
beverage products
|
|
|
1,784
|
|
|
|
-
|
|
Total
|
|
|
1
3,042
|
|
|
|
12,442
|
|
Cost
of sales – Processed seafood products
Our
cost of sales comprises mainly raw materials, packaging materials, direct labor
and manufacturing overhead. The following table sets out details of our cost of
sales:
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
8,027
|
|
|
|
73.2
|
|
|
|
5,423
|
|
|
|
71.8
|
|
Packaging
materials
|
|
|
1,366
|
|
|
|
12.4
|
|
|
|
1,049
|
|
|
|
13.9
|
|
Direct
labor
|
|
|
724
|
|
|
|
6.6
|
|
|
|
400
|
|
|
|
5.3
|
|
Manufacturing
overhead
|
|
|
852
|
|
|
|
7.8
|
|
|
|
678
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,969
|
|
|
|
100.0
|
|
|
|
7,550
|
|
|
|
100.0
|
|
Raw
materials
Raw
materials comprise mainly seafood such as fish, prawns and squids. We use
seafood which are fished from the open sea and not bred through aquaculture. The
costs of these raw materials are dependent on the prevailing market prices,
which are relatively stable as there is a stable and abundant supply from the
existing market. We are located close to the Xiangzhi (Shishi) fishing port,
which is one of the largest fishing ports in Fujian province, and one of the
state-level fishing port centres.
We
believe our strategic location allows us to have up-to-date information on the
market price of our raw materials and this has allowed us to purchase our raw
materials at the best available price. Our proximity to our suppliers has
also allowed us to have fresh supplies of raw materials and this has enabled us
to ensure freshness and quality in our finished products. The proximity has also
enabled us to reduce raw material transportation costs and lead-time to obtain
our supplies.
Raw
material costs accounted for approximately 73.2% and 71.8% of our cost of sales
in the first quarter of 2010 and 2009 respectively. The percentage of raw
materials cost as a proportion of the total cost of sales is affected by the
product mix for the relevant financial year and the market price of the raw
materials. We mitigate the fluctuation in pricing by bulk purchasing and stock
management. We are able to stock up our raw materials when prices are lower, as
we have our own cold storage facility and we can also utilize other nearby
facilities for storage when needs arise. This will ensure a steady supply of raw
materials for the processing of seafood products throughout the
year.
The
increase in raw material costs for the periods under review was mainly due to
the increased production and sales of processed seafood products, whereas direct
labor and manufacturing overhead are relatively considered as invariable cost
factors comparing to raw materials and packaging materials.
Packaging
materials
Packaging
materials accounted for approximately 12.4% and 13.9% of our cost of sales
in the first quarter of 2010 and 2009 respectively.
The
increase in packaging material costs for the periods under review was mainly due
to the increased production and sales of processed seafood
products.
Direct
labor
Direct
labor costs accounted for 6.6% and 5.3% of our cost of sales in the first
quarter of 2010 and 2009 respectively. Direct labor includes mainly salaries and
wages paid to employees who are involved in the production processes. Direct
labor costs are dependent on factors such as production volume, number of
employees, wage rate and applicable government regulations (including minimum
wage requirements, statutory welfare and insurance fund contributions). The
fluctuation in the direct labor costs as a percentage of costs of sales is
dependent on the degree of processing required for the end products. The
increase in our production scale over the past few years has enabled us to enjoy
economies of scale and higher productivity through job specialization and
training.
The
total headcount for processed seafood segment as at March 31, 2010 has increased
to 781 from 672 as at the first quarter end of 2009. The increase was mainly due
to the increase in number of production headcount due to increased scale of
production along the year.
Manufacturing
overhead
Manufacturing
overhead comprises depreciation, amortization, seasonings, water,
electricity and other fuel costs which are used directly in the production of
finished goods.
The
increase in manufacturing overhead for the periods under review was mainly
due to the increased scale of production and the expansion of production
facilities along the year.
Cost
of sales - Marine catch
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
243
|
|
|
|
83.9
|
|
|
|
4,768
|
|
|
|
97.5
|
|
Other
expenses
|
|
|
46
|
|
|
|
16.1
|
|
|
|
124
|
|
|
|
2.5
|
|
Total
|
|
|
289
|
|
|
|
100.0
|
|
|
|
4,892
|
|
|
|
100.0
|
|
Raw
materials
We buy
the marine catch from the suppliers and then sell to the customers on a direct
basis. The marine catch is predominantly sold to overseas customers and
distributors in Liaoning, Fujian and Shandong provinces, some of whom directly
export the marine catch to South Korea and Taiwan.
The
decrease in raw material costs for the periods under review was in line with the
decreased sales of trading materials.
Other
expenses
Other
expenses mainly relate to the costs of packaging materials, ice required to keep
the freshness of the marine catch and the related overhead.
Cost
of sales – Algae-based Beverage Products
Our
cost of sales comprises mainly raw materials, packaging materials and
manufacturing overhead. The following table sets out details of our cost of
sales:
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
461
|
|
|
|
25.9
|
|
|
|
-
|
|
|
|
-
|
|
Packaging
materials
|
|
|
1,084
|
|
|
|
60.7
|
|
|
|
-
|
|
|
|
-
|
|
Manufacturing
overhead
|
|
|
239
|
|
|
|
13.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,784
|
|
|
|
100.0
|
|
|
|
-
|
|
|
|
-
|
|
Raw
materials
Raw
materials comprise mainly the algae extracts and other beverage ingredients such
as herbal powder and sugar. The costs of these raw materials are dependent
on the prevailing market prices, which are relatively stable as there is a
stable and abundant supply from the existing market.
Raw
material costs accounted for approximately 25.9% of our cost of sales in the
first quarter of 2010. The percentage of raw materials cost as a proportion of
the total cost of sales is affected by the product mix for the relevant
financial year and the market price of the raw materials.
Packaging
materials
Packaging
materials accounted for approximately 60.7% of our cost of sales in the
first quarter of 2010. The percentage of packaging materials cost as a
proportion of the total cost of sales is affected by the product mix for the
relevant financial year and the market price of the packaging
materials.
Manufacturing
overhead
We
utilize third party manufacturers to produce our algae-based beverage products.
Manufacturing costs are charged based on the production volume. We are going to
use a number of manufacturers going forward so as to mitigate the concentration
risks.
Gross
profit by product
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
5,529
|
|
|
|
83.7
|
|
|
|
3,653
|
|
|
|
89.0
|
|
Marine
catch
|
|
|
109
|
|
|
|
1.6
|
|
|
|
453
|
|
|
|
11.0
|
|
Algae-based
beverage products
|
|
|
970
|
|
|
|
14.7
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
6,608
|
|
|
|
100.0
|
|
|
|
4,106
|
|
|
|
100.0
|
|
Gross
profit margin by product
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
%
|
|
|
%
|
|
Processed
seafood products
|
|
|
33.5
|
|
|
|
32.6
|
|
Marine
catch
|
|
|
27.4
|
|
|
|
8.5
|
|
Algae-based
beverage products
|
|
|
35.2
|
|
|
|
-
|
|
Overall
|
|
|
33.6
|
|
|
|
24.8
|
|
Gross
profit
Gross
profit grew by 60.9% or $2.5 million, from $4.1 million to $6.6
million for the periods under review. Overall gross profit margin improved by
8.8 percentage point from 24.8% for the three months ended March 31, 2009 to
33.6% for the same period in 2010. Gross profit margin for the processed seafood
products operations was increased from 32.6% to 33.5%, whereas gross profit
margin for the marine catch segment was increased from 8.5% to 27.4% for the
same periods under review. Gross profit margin for the newly acquired beverage
products was 35.2% for the first quarter of 2010.
The
increase in overall gross profit margin was largely attributable to the
significant increase in sales of processed seafood products and the newly
acquired beverage products which the gross profit margins are much higher than
that of processed seafood products and match catch segments.
Depreciation
and amortization
Depreciation
and amortization accounted for approximately 3.2% and 0.1% of our total revenue
in the first quarter of 2010 and 2009 respectively. The increase in depreciation
and amortization was mainly attributable to the amortization of intangible
assets associated with the acquisition of the beverage business declared
effective at the beginning of this year. The algae-based beverage know-how is
amortized over its estimated useful life of 10 years, on a straight-line
basis, at a yearly amortization charge of approximately $2.3
million.
Sales
and marketing expenses
Our
sales and marketing expenses comprise mainly salaries of sales and marketing
staff, investor relations fees, advertisement and costs in participating in
exhibitions.
Our
sales and marketing expenses accounted for approximately 2.0% and 0.7% of our
total revenue in the first quarter of 2010 and 2009 respectively. The
increase in the sales and marketing expenses was mainly due to the increase of
advertising and exhibition costs so as to strengthen our brand position in both
existing and new markets and cope with the marketing strategies associated with
the newly acquired beverage products. Accordingly, the number of sales staff has
further increased from 24 in 2009 to 94 in 2010, of which 64 headcount
was related to the beverage products segment.
General
and administrative expenses
Our
general and administrative expenses comprise mainly salaries and staff benefits
for employees, legal and professional fees, research and development costs,
traveling and entertainment expenses.
Our
general and administrative expenses accounted for approximately 3.2% and 2.8% of
our total revenue in the first quarter of 2010 and
2009 respectively. The increase in the general and administrative
expenses was mainly attributable by the higher payroll costs as a result of
hiring more experienced professional staff so as to cope with the expanding and
newly acquired operations.
Other
income
Other
income relates mainly to rental income, government subsidies and interest
income.
Rental
income relates to the collection of rental on the 36 shop spaces at our factory
in Dabao Industrial Zone. The rental contracts are based on one year lease term.
The government subsidies in last year mainly related to grants by the Ministry
of Science and Technology for the development of high-value seafood products
with the use of low-value raw materials. Interest income is earned from cash
balances with banks as a result of strong operational cash inflow and net
proceeds from the private placement and registered direct offering of common
stock taken place in November 2007 and January 2010,
respectively.
Interest
expense
Our
interest expense relates to interest costs incurred on the various short-term
bank borrowings taken by us for working capital requirements. Our interest
expense accounted for approximately 0.2% and 0.4% of our total revenue in the
first quarter of 2010 and 2009 respectively. We have repaid all short-term
bank borrowings during the first quarter of 2010.
Income
before income tax
Our
income before income tax increased by $1.3 million or 34.7%, from $3.7 million
in the first quarter of 2009 to $5.0 million for the same period in
2010. The increase was mainly due to the combination of the increase in sales of
18.7% and the increase in gross profit margin by 8.8 percentage point as a
whole, which was partially offset by the increase in depreciation and
amortization, the sales and marketing expenses and the general and
administrative expenses, as a result of the factors described
above.
Income
tax expense
Our
profit is subject to the prevailing tax rate applicable to the respective
jurisdictions in which we operate.
According
to the Income Tax Law of the PRC for Enterprises with Foreign Investment and
Foreign Enterprises, foreign investment enterprises (“FIE”) engaged in
production established in coastal economic open zones or in the old urban
districts of cities where the special economic zones or the economic and
technological development zones are located may pay income taxes at a reduced
rate of 24%. In addition, foreign investment enterprises engaged in production
having a period of operation of not less than 10 years shall be exempted from
income tax for the first 2 profit-making years and a 50% reduction in the income
tax payable for the next 3 years.
In
March 2007, the Chinese government enacted the Corporate Income Tax Law, and
promulgated related regulations, which were effective January 1, 2008. The
Corporate Income Tax Law, among other things, imposes a unified income tax rate
of 25% for both domestic and foreign invested enterprises. For enterprises
engaged in production established in coastal economic open zones or in the old
urban districts of cities where the special economic zones or the economic and
technological development zones enjoy a favorable tax rate of 24%, the income
tax rate will change to 25% with effective from January 1, 2008. However, the
new provision allows these enterprises to continue to enjoy their unexpired tax
holiday under the previous income tax laws and rules.
Xianghe
and Xianglin are approved as a domestic enterprise. Rixiang, Jixiang and
Mingxiang are approved as a foreign investment enterprise and entitled to,
starting from the first profitable year, a two-year exemption from corporate
income tax and a 50%-reduction in its preferential corporate income tax rate of
24% for the following three years ("Tax Holiday"). Such Tax Holiday of Rixiang,
Jixiang and Mingxiang were expired in prior years.
The
higher effective tax rate for the period under review was mainly due to the
expiry of the Tax Holiday.
Mingxiang
has received a notice of recognition as enterprise of new and high technology in
2009, which was jointly issued by The Science and Technology Department of
Fujian, The Finance Department of Fujian, The State Tax Bureau of Fujian and The
Local Taxation Bureau of Fujian for the Company engaged in advanced food
processing technologies for the Fujian Province. As a new and high technology
company, Mingxiang is qualified for a reduced tax rate of 15% on its assessable
income for the period of three years, through 2012.
Years
ended December 31, 2009, 2008 and 2007
We
derive our sales from the sales of processed seafood products and marine catch,
the breakdown of our sales and gross profit by product, as well as by
geographical location of our customers for the years ended December 31, 2009,
2008 and 2007 are set out below:
Breakdown
of our past performance by principal products and geographical
regions
Sales
by product
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
52,049
|
|
|
|
74.8
|
|
|
|
44,370
|
|
|
|
90.9
|
|
|
|
27,863
|
|
|
|
76.5
|
|
Marine
catch
|
|
|
17,537
|
|
|
|
25.2
|
|
|
|
4,429
|
|
|
|
9.1
|
|
|
|
8,562
|
|
|
|
23.5
|
|
Total
|
|
|
69,586
|
|
|
|
100.0
|
|
|
|
48,799
|
|
|
|
100.0
|
|
|
|
36,425
|
|
|
|
100.0
|
|
Sales
by geographical region
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong
|
|
|
3,771
|
|
|
|
5.4
|
|
|
|
4,306
|
|
|
|
8.8
|
|
|
|
5,047
|
|
|
|
13.9
|
|
Zhejiang
|
|
|
24,360
|
|
|
|
35.0
|
|
|
|
22,342
|
|
|
|
45.8
|
|
|
|
14,131
|
|
|
|
38.8
|
|
Fujian
|
|
|
19,385
|
|
|
|
27.9
|
|
|
|
14,600
|
|
|
|
29.9
|
|
|
|
16,041
|
|
|
|
44.0
|
|
Guangdong/
Shenzhen
|
|
|
3,852
|
|
|
|
5.5
|
|
|
|
1,805
|
|
|
|
3.7
|
|
|
|
-
|
|
|
|
-
|
|
Jiangsu/
Shanghai
|
|
|
3,826
|
|
|
|
5.5
|
|
|
|
1,699
|
|
|
|
3.5
|
|
|
|
-
|
|
|
|
-
|
|
Sichuan/
Chongqing
|
|
|
867
|
|
|
|
1.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others
(1)
|
|
|
1
1
,
728
|
|
|
|
16.8
|
|
|
|
1,
650
|
|
|
|
3.4
|
|
|
|
1,0
11
|
|
|
|
2.8
|
|
Total
PRC (2)
|
|
|
67,789
|
|
|
|
97.4
|
|
|
|
46,402
|
|
|
|
95.1
|
|
|
|
36,230
|
|
|
|
99.5
|
|
Asia
(3)
|
|
|
1,797
|
|
|
|
2.6
|
|
|
|
2,397
|
|
|
|
4.9
|
|
|
|
97
|
|
|
|
0.2
|
|
Others
(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
98
|
|
|
|
0.3
|
|
Total
|
|
|
69,586
|
|
|
|
100.0
|
|
|
|
48,799
|
|
|
|
100.0
|
|
|
|
36,425
|
|
|
|
100.0
|
|
(1)
|
Sales
to PRC Others mainly relate to the trading of marine catch transacted in
Liaoning province.
|
(2)
|
Sales
to PRC include sales to local PRC distributors who in turn sell our
products to Taiwan, Japan and South Korea. Such sales amounted to $4.0
million, $2.3 million and $6.1 million in year 2009, 2008 and
2007 respectively.
|
(3)
|
Sales
to Asia mainly relate to exports to Japan, Philippines and Papua New
Guinea.
|
(4)
|
Export
sales to other countries include sales to
Ukraine.
|
Year
2009 compared to Year 2008, and Year 2008 compared to Year
2007
Sales
Our
revenue increased by approximately $20.8 million or 42.6% from $48.8 million in
2008 to $69.6 million in 2009. The increase in revenue was due to the continued
growth both in sales of our processed seafood products and marine catch segment.
Sales of our processed seafood products increased by $7.7 million or 17.3%,
whereas sales of our marine catch segment increased by $13.1 million or over
three-fold.
Comparing
results in 2007 and 2008, our revenue increased by approximately $12.4 million
or 34.0% from $36.4 million in 2007 to $48.8 million 2008. Sales of our
processed seafood products increased by $16.5 million or 59.2%, whereas sales of
our marine catch segment dropped by $4.1 million or 48.3%.
The
processed seafood products operations continued to be the growth driver for us
as our products continue to gain market acceptance, particularly in Fujian and
Zhejiang provinces. The higher sales in the processed seafood products segment
were mainly due to our continued success in the sales and marketing efforts. We
also penetrated into two new neighborhood markets, Jiangsu and Guangdong
provinces, in the second quarter of 2008 and another new inland market, Sichuan
province, in the third quarter of 2009. Accordingly, the number of sales staff
has further increased from 19 in 2007 to 24 as at December 31,
2009.
In
2007, we worked with local fishermen and chartered a number of fishing vessels
to harvest marine catch from the East China Sea and the Taiwan Strait. All the
harvest from our marine catch was sold to customers on a direct basis. We did
not use any of our own marine catch for the production of our processed seafood
products.
Starting
from 2008, we do not charter any fishing vessels nor harvest the marine catch
ourselves. Instead, we simply buy the marine catch from the suppliers and then
sell to the customers on a direct basis. The marine catch is predominantly sold
to overseas customers and distributors in Fujian, Shandong and Liaoning
provinces, some of whom directly export the marine catch to South Korea and
Taiwan.
Having
recognized that the processed seafood segment has significant growth potential
and attractive profit margin, we will continue to focus our resources on the
processed seafood segment going forward.
Cost
of sales
Our
cost of sales comprises the cost of our processed seafood operations and the
cost of our marine catch. The breakdown is as follows:
|
|
Year ended December 31,
|
|
US$
’000
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
34,721
|
|
|
|
29,617
|
|
|
|
18,798
|
|
Marine
catch
|
|
|
15,735
|
|
|
|
3,990
|
|
|
|
6,851
|
|
Total
|
|
|
50,456
|
|
|
|
33,607
|
|
|
|
25
,649
|
|
Cost
of sales – Processed seafood products
Our
cost of sales comprises mainly raw materials, packaging materials, direct labor
and manufacturing overhead. The following table sets out details of our cost of
sales:
|
|
Year ended December 31,
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
25,822
|
|
|
|
74.4
|
|
|
|
23,070
|
|
|
|
77.9
|
|
|
|
13,964
|
|
|
|
74.3
|
|
Packaging
materials
|
|
|
4,444
|
|
|
|
12.8
|
|
|
|
2,982
|
|
|
|
10.1
|
|
|
|
1,339
|
|
|
|
7.1
|
|
Direct
labor
|
|
|
1,987
|
|
|
|
5.7
|
|
|
|
1,526
|
|
|
|
5.1
|
|
|
|
1,507
|
|
|
|
8.0
|
|
Manufacturing
overhead
|
|
|
2,468
|
|
|
|
7.1
|
|
|
|
2,039
|
|
|
|
6.9
|
|
|
|
1,98
8
|
|
|
|
1
0
.6
|
|
Total
|
|
|
34,721
|
|
|
|
100.0
|
|
|
|
29,617
|
|
|
|
100.0
|
|
|
|
18,798
|
|
|
|
100.0
|
|
Raw
materials
Raw
materials comprise mainly seafood such as fish, prawns, squids, salt, sugar and
other seasonings. We use seafood which are fished from the open sea and not bred
through aquaculture. The costs of these raw materials are dependent on the
prevailing market prices, which are relatively stable as there is a stable and
abundant supply from the existing market. We are located close to the Xiangzhi
(Shishi) fishing port, which is one of the largest fishing ports in Fujian
province, and one of the state-level fishing port centres.
We
believe our strategic location allows us to have up-to-date information on the
market price of our raw materials and this has allowed us to purchase our raw
materials at the best available price. Our proximity to our suppliers has
also allowed us to have fresh supplies of raw materials and this has enabled us
to ensure freshness and quality in our finished products. The proximity has also
enabled us to reduce raw material transportation costs and lead-time to obtain
our supplies.
Raw
material costs accounted for approximately 74.4%, 77.9% and 74.3% of our cost of
sales in year 2009, 2008 and 2007 respectively. The percentage of raw materials
cost as a proportion of the total cost of sales is affected by the product mix
for the relevant financial year and the market price of the raw materials. We
mitigate the fluctuation in pricing by bulk purchasing and stock management. We
are able to stock up our raw materials when prices are lower, as we have our own
cold storage facility and we can also utilize other nearby facilities for
storage when needs arise. This will ensure a steady supply of raw materials for
the processing of seafood products throughout the year.
The
increase in raw material costs for the years under review was mainly due to the
increased production and sales of processed seafood products, whereas direct
labor and manufacturing overhead are relatively considered as invariable cost
factors comparing to raw materials and packaging materials.
Packaging
materials
Packaging
materials accounted for approximately 12.8%, 10.1% and 7.1% of our cost of sales
in year 2009, 2008 and 2007 respectively.
The
increase in packaging material costs for the years under review was mainly due
to the increased production and sales of processed seafood products. We have
experienced a mild price increase in packaging materials since late 2008 due to
inflation and use of individual packages for some of our new products but
believe that it will not bring material impact on the overall gross profit
margin going forward because we will continue to enjoy economies of scale in
material costs along with the increase in production volume.
Direct
labor
Direct
labor costs accounted for 5.1% to 8.0% of our cost of sales for the years under
review. Direct labor includes mainly salaries and wages paid to employees who
are involved in the production process. Direct labor costs are dependent on
factors such as production volume, number of employees, wage rate and applicable
government regulations (including minimum wage requirements, statutory welfare
and insurance fund contributions). The fluctuation in the direct labor costs as
a percentage of costs of sales is dependent on the degree of processing required
for the end products. The increase in our production scale over the past few
years has enabled us to enjoy economies of scale and higher productivity through
job specialization and training.
The
total production headcount as at December 31, 2009 has increased to 693 from 540
as at the end of 2008. The increase was mainly due to the increase in number of
production headcount due to increased scale of production along the
year.
Manufacturing
overhead
Manufacturing
overhead comprises depreciation, water, electricity and other fuel costs
which are used directly in the production of finished goods.
The
increase in manufacturing overhead for the years under review was mainly
due to the increased scale of production and the expansion of production
facilities along the year.
Cost
of sales - Marine catch
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
15,287
|
|
|
|
97.2
|
|
|
|
3,642
|
|
|
|
91.3
|
|
|
|
-
|
|
|
|
-
|
|
Rental
/ charter hires
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
930
|
|
|
|
13.6
|
|
Crew
salaries and wages
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
437
|
|
|
|
6.4
|
|
Bunker
fuel
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,484
|
|
|
|
50.8
|
|
Repair
& maintenance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,154
|
|
|
|
16.8
|
|
Other
expenses
|
|
|
4
48
|
|
|
|
2.8
|
|
|
|
348
|
|
|
|
8.7
|
|
|
|
846
|
|
|
|
12.4
|
|
Total
|
|
|
15,735
|
|
|
|
100.0
|
|
|
|
3,990
|
|
|
|
100.0
|
|
|
|
6,851
|
|
|
|
100.0
|
|
Raw
materials
We buy
the marine catch from the suppliers and then sell to the customers on a direct
basis. The marine catch is predominantly sold to overseas customers and
distributors in Liaoning, Fujian and Shandong provinces, some of whom directly
export the marine catch to South Korea and Taiwan.
The
increase in raw material costs for the years under review was mainly in line
with the corresponding increased sales of trading materials.
Rental
/ charter hires
We
commenced our marine catch operation in September 2002, with the chartering of
two fishing vessels with an aggregate net tonnage of 44 tons. In December 2007,
we have a fleet of six chartered fishing vessels with an aggregate net tonnage
of 256 tons. However, taking into consideration of the significant growth
potential in the processed seafood segment and the deteriorating gross profit
margin for the sales of marine catch due to higher fuel and operating costs, we
decided to focus our resources on the processed seafood segment going forward.
In this connection, all the chartering agreements with the fishermen have been
terminated by us at the end of 2007. We are not subject to any penalties for
terminating these chartering agreements which are about to be ended in 2008 or
2009.
Starting
from 2008, we simply buy the marine catch from the suppliers and then sell to
the customers on a direct basis.
Crew
salaries and wages
We
have entered into agreements with the owners of fishing vessels, from whom we
have chartered six fishing vessels for our marine catch operations by the end of
2007. The size of the fishing crew has increased over the last few years as we
increased the number of fishing vessels. Pursuant to the agreements, we are
required to bear the salaries and wages of the fishing crew.
Bunker
fuel
Our
main cost of operations was the cost of bunker fuel for the operation of the
chartered vessels. The price of bunker fuel was dependent on world oil price
which has been increased significantly during the years under
review.
Repair
and maintenance
Repair
and maintenance costs relate to the repair of the vessels and the fishing nets
used for our marine catch operations. The vessels require regular maintenance
both during their voyages and when they are back to the port.
Other
expenses
Other
expenses mainly relate to the costs of packaging materials and ice required to
keep the freshness of the marine catch. The fishes are sorted and packed in ice
boxes and then sent directly to customers upon reaching the
port.
Gross
profit by product
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
17,328
|
|
|
|
90.6
|
|
|
|
14,753
|
|
|
|
97.1
|
|
|
|
9,065
|
|
|
|
84.1
|
|
Marine
catch
|
|
|
1,802
|
|
|
|
9.4
|
|
|
|
439
|
|
|
|
2.9
|
|
|
|
1,711
|
|
|
|
15.9
|
|
Total
|
|
|
1
9,130
|
|
|
|
100.0
|
|
|
|
15,192
|
|
|
|
100.0
|
|
|
|
10,776
|
|
|
|
100.0
|
|
Gross
profit margin by profit
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
33.3
|
|
|
|
33.2
|
|
|
|
32.5
|
|
Marine
catch
|
|
|
10.3
|
|
|
|
9.9
|
|
|
|
20.0
|
|
Total
|
|
|
27.5
|
|
|
|
31.1
|
|
|
|
29.6
|
|
Gross
profit
Gross
profit grew by 25.9% or $3.9 million, from $15.2 million in 2008 to $19.1
million in 2009. Gross profit margin dropped by 3.6 percentage point from 31.1%
in 2008 to 27.5% in 2009. Gross profit margin for the processed seafood products
operations was remained stable at 33.3% comparing to 33.2% in last year, whereas
gross profit margin for the marine catch segment was improved from 9.9% to 10.3%
for the same years under review.
Gross
profit grew by 41.0% or $4.4 million, from $10.8 million in 2007 to $15.2
million in 2008. Gross profit margin improved by 1.5 percentage point from 29.6%
in 2007 to 31.1% in 2008.
The
increase in gross profit margin for our processed seafood products during the
years under review was mainly due to the increase in our selling prices and the
cost savings in terms of material costs and overhead stemming from better
utilization of our facilities as we enjoy economies of scale from higher
production volume, partially offset by the inflation we experienced during the
years under review.
Starting
from 2008, we no longer charter any vessels and simply trade the marine catch to
the distributors. As a result, the gross profit margin earned from
the marine catch segment was lower comparing to the prior
year.
Having
recognized that the processed seafood segment has significant growth potential
and better profit margin comparing to the trading of marine catch, we will
continue to focus our resources on the processed seafood segment going
forward.
Sales
and marketing expenses
Our
sales and marketing expenses comprise mainly salaries of sales and marketing
staff, investor relations fees, advertisement and costs for participating in
exhibitions.
Our
sales and marketing expenses accounted for approximately 0.9%, 1.2% and 0.4% of
our total revenue in year 2009, 2008 and 2007 respectively. The increase in
the sales and marketing expenses in 2008 was mainly due to the hiring of an
investor relations firm and the increase of advertising and exhibition costs so
as to strengthen our brand position in both existing and new markets.
Accordingly, the number of sales staff has further increased from 19 in
2007 to 23 in 2008. In 2009, we continued to maintain the sales and
marketing efforts to strengthen our brand position and therefore the amount of
sales and marketing expenses were relatively stable comparing to the prior
year.
General
and administrative expenses
Our
general and administrative expenses comprise mainly salaries and staff benefits
for employees, legal and professional fees, research and development costs,
traveling and entertainment expenses.
Our
general and administrative expenses accounted for approximately 3.3%, 4.2% and
1.6% of our total revenue in year 2009, 2008 and 2007
respectively.
The
increase in the general and administrative expenses from 2007 to 2008 was mainly
attributable by the higher payroll costs as a result of hiring some experienced
professional staff so as to cope with the expanding operations and distributing
the bonuses to the executive directors, the higher traveling and entertainment
expenses mainly attributable to more overseas traveling like attending road
shows, some losses on disposal or replacement of fixed assets to enhance the
overall production capacity, the higher R&D costs for development of new
products and the higher legal and professional fees after we went public in the
last quarter of 2007.
Whereas
the increase in the general and administrative expenses from 2008 to 2009 was
mainly attributable by the higher R&D costs, including staff and testing
material costs, for development of new products during the year, the higher
legal and professional fees being incurred since uplisting to AMEX, the higher
payroll costs as a result of building up a strong management team so as to cope
with the expanding operations and the increase in bad debt provision consistent
with the higher accounts receivable period end balance, which was partially
offset by the decrease in losses on disposal or replacement of fixed assets in
2009.
Other
income
Other
income relates mainly to rental income, government subsidies and interest
income.
Rental
income relates to the collection of rental on the 38 shop spaces at our factory
in Dabao Industrial Zone. The rental contracts are based on one year lease term.
The government subsidies mainly relate to the grants by the government for the
product development research project focused on developing consumer-ready
seafood products from low-cost seafood items and the subsidies for the loan
interests so as to support agricultural industrialization. Interest income is
earned from cash balances with banks as a result of strong operational cash
inflow and net proceeds from the private placement taken place in November
2007.
Interest
expense
Our
interest expense relates to interest costs incurred on the various short-term
bank borrowings taken by us for working capital requirements. Our interest
expense accounted for approximately 0.3%, 0.7% and 0.9% of our total
revenue in year 2009, 2008 and 2007 respectively. Interest expense in 2009
decreased significantly when comparing to the prior year which was in line with
the decline in bank borrowing rates since the last quarter of
2008.
Income
tax expense
Our
profit is subject to the prevailing tax rate applicable to the respective
jurisdictions in which we operate.
Prior to
January 2005, our business was carried out under Mingxiang which was
incorporated as a PRC limited liability company and thus was subject to an
Enterprise Income Tax rate of 33% of its taxable income.
According to the Income
Tax Law of the PRC for Enterprises with Foreign Investment and Foreign
Enterprises, foreign investment enterprises (“FIE”) engaged in production
established in coastal economic open zones or in the old urban districts of
cities where the special economic zones or the economic and technological
development zones are located may pay income taxes at a reduced rate of 24%. In
addition, foreign investment enterprises engaged in production having a period
of operation of not less than 10 years shall be exempted from income tax for the
first 2 profit-making years and a 50% reduction in the income tax payable for
the next 3 years.
In March
2007, the Chinese government enacted the Corporate Income Tax Law, and
promulgated related regulations, which were effective January 1,
2008. The Corporate Income Tax Law, among other things, imposes a
unified income tax rate of 25% for both domestic and foreign invested
enterprises. For enterprises engaged in production established in
coastal economic open zones or in the old urban districts of cities where the
special economic zones or the economic and technological development zones enjoy
a favorable tax rate of 24%, the income tax rate will change to 25% with
effective from January 1, 2008. However, the new provision allows these
enterprises to continue to enjoy their unexpired tax holiday under the previous
income tax laws and rules.
With
effect from January 1, 2005, Rixiang acquired the business operations of
Mingxiang, which subsequently became a property holding company. Rixiang was
incorporated as a FIE and was granted the tax incentives for FIEs, and was
exempted from income tax for 2005 and 2006. Rixiang is therefore
subject to PRC state income tax of 12% for 2007 and then 12.5% for 2008 and
2009.
Jixiang
is also a property holding company and is subject to tax on its assessable
income.
The lower
effective tax rates for the financial years under review were mainly due to tax
exemption granted under the tax incentives.
We have
recently received a notice of recognition as enterprise of new and high
technology, which was jointly issued by The Science and Technology Department of
Fujian, The Finance Department of Fujian, The State Tax Bureau of Fujian and The
Local Taxation Bureau of Fujian for the Company engaged in advanced food
processing technologies for the Fujian Province. As a new and high technology
company, we are qualified for a reduced tax rate of 15% on the Company’s income
through 2012.
REVIEW
OF FINANCIAL POSITION
Current
assets
As at
December 31, 2008, our current assets increased to $43.4 million, representing
84.2% of our total assets of $51.6 million. It comprised cash and cash
equivalents of $31.6 million, accounts receivable of $4.8 million, inventories
of $6.7 million and other receivables and prepayments of $0.3
million.
As at
December 31, 2009, our current assets amounted to $56.4 million, representing
83.1% of our total assets of $67.9 million. It comprised cash and cash
equivalents of $7.1 million, accounts receivable of $18.8 million, inventories
of $3.9 million, note receivable of $26.4 million, and other receivables and
prepayments of $0.2 million.
Decrease
in cash and cash equivalents was mainly due to increase in accounts receivable,
and the addition of fixed assets and construction in progress in 2009, which was
partially offset by the cash inflow provided by operating activities and
decrease in inventories.
Accounts
receivable were mainly represented by amounts due from distributors and
wholesalers. Our Company usually extended unsecured credit period to long
established customers up to 3 months. Since our practice is to perform constant
credit checks and pursue the past due accounts proactively, there was no
material uncollectible debts identified in the past. Increase in accounts
receivable was mainly in line with the increase in sales volume during the years
under review and the extension of credit period to our major customers so as to
cope with the current market practice.
Inventories
were mainly related to work-in-progress comprising mainly frozen prawns, frozen
fish and squids which would be used for the production and processing of dried
and frozen products. Our inventories also included some finished goods, raw
materials and packaging materials.
Note
receivable was mainly represented by the convertible loan due from the
acquisition target company of $26.4 million.
Non-current
assets
As at
December 31, 2009, our non-current assets amounted to $11.5 million and
accounted for approximately 16.9% of our total assets. Our non-current assets
comprised mainly property, plant and equipment of $8.6 million, land use rights
of $0.6 million, and prepayment for land use right of $2.3 million. In 2009, we
increased our production capacity by 100% by the third quarter end of the year
and therefore certain fixed assets have been increased
accordingly.
As at
December 31, 2009, our property, plant and equipment amounting to $8.6 million
were made up mainly of buildings amounting to $6.2 million and plant and
machinery amounting to $1.9 million. Buildings related to our production plant,
cold room, office buildings and workers’ dormitories. Plant and machinery
related mainly to our production lines, freezing machines, roasting and drying
machines. The remaining $0.5 million related to office equipment and motor
vehicles.
Current
liabilities
As at
December 31, 2008, our current liabilities of $6.6 million comprised short-term
bank loans of $4.3 million, accounts payable of $0.4 million, amount due to a
shareholder of $0.2 million, income tax payable of $0.3 million and other
payables of $1.4 million.
Our
current liabilities of $8.0 million as at December 31, 2009 comprised short-term
bank loans of $4.1 million, accounts payable of $0.9 million, amount due to a
shareholder of $0.1 million, income tax payable of $0.6 million and other
payables of $2.3 million.
The
short-term bank loans were used for our working capital requirements.
The weighted average effective interest rate on the borrowing is about
5.31% per annum in 2009.
Regarding
the accounts payable, the related turnover day was about a week due to the short
credit period allowed by the fishermen which was consistent with the market
practice.
The
amount due to a shareholder was unsecured, interest free and with no fixed terms
of repayment.
Stockholders’
equity
As at
December 31, 2008, our stockholders’ equity amounted to $45.0 million and
comprised additional paid-in capital of $16.8 million, statutory reserve of $4.9
million, accumulated other comprehensive income of $3.4 million and retained
earnings of $19.9 million.
Our
stockholders’ equity of $59.8 million as at December 31, 2009 comprised
additional paid-in capital of $16.9 million, statutory reserve of $5.6 million,
accumulated other comprehensive income of $3.6 million and retained earnings of
$33.7 million.
Statutory
reserve is established for the purpose of providing employee facilities and
other collective benefits to the employees and is non-distributable other than
in liquidation. Under the PRC law, appropriation to the statutory reserve should
be at least 10% of the after-tax net income until the reserve is equal to 50% of
the registered capital. We appropriated about 15% of our after-tax net income to
the reserve on a yearly basis.
We did
not distribute any dividends both in 2008 and 2009.
LIQUIDITY
AND CAPITAL RESOURCES
Three
months period ended March 31, 2010 and 2009
Our
operations are funded through a combination of stockholders’ equity, borrowings
and internally generated funds from our operations. Our cash and cash
equivalents as at March 31, 2010 amounted to approximately $47.4
million, without any short-term bank loans after the full repayment during
the first quarter of 2010.
A
summary of our cash flows for the three months ended March 31, 2010 and 2009 is
as follows:
|
|
Three months ended March 31,
|
|
US$’000
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
14,496
|
|
|
|
6,970
|
|
Net
cash provided by (used in) investing activities
|
|
|
875
|
|
|
|
(899
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
24,889
|
|
|
|
(302
|
)
|
Foreign
currency translation adjustment
|
|
|
(2
8
|
)
|
|
|
48
|
|
Net
change in cash and cash equivalents
|
|
|
40,232
|
|
|
|
5,817
|
|
Cash
and cash equivalents at the beginning of the period
|
|
|
7,143
|
|
|
|
31,640
|
|
Cash
and cash equivalents at the end of the period
|
|
|
47,375
|
|
|
|
3
7,457
|
|
Net
cash provided by operating activities
Our
net cash provided by operating activities for the three months ended March 31,
2010 amounted to approximately $14.5 million, which was an increase of $7.5
million when comparing to net cash provided by operating activities for the same
period in 2009. The increase was mainly attributable to the higher net income
earned in the first quarter of 2010 and the decrease in accounts receivable of
$9.2 million, partially offset by the decrease in inventories recorded
in the same period last year.
Net
cash provided by (used in) investing activities
For
the three months ended March 31, 2010, our net cash provided by investing
activities was approximately $0.9 million which was mainly attributable
to the acquisition of a subsidiary, partially offset by addition of fixed
assets and purchase of land use right for the development of a cold storage
facility.
Net
cash provided by (used in) financing activities
Our
net cash provided by financing activities was approximately $24.9 million for
the three months ended March 31, 2010, which was an increase of
$25.2 million when comparing to net cash used in financing activities for
the same period in 2009. The increase was mainly attributable to the net
proceeds from the registered direct offering of common stock taken place in
January 2010, partially offset by the repayment of short-term bank loans in the
first quarter of this year.
Capital
resources
We
believe that after taking into account of our cash position, available bank
facilities and cash generated from operating activities, we have adequate
working capital to satisfy our current operating expenditures.
We
also plan to build the cold storage facilities adjacent to the fishing port
with a capacity of approximately 20,000 tons, to take advantage of its proximity
to the port where we obtain fresh marine catch to be processed into seafood
products. We intend to finance the total estimated $20.0 million in land use
rights and construction costs from available funds and expect to run the
new facility in the first half of 2011. There were no material capital
commitments in relation to the construction costs as at March 31,
2010.
After
the registered direct offering of common stock and repayment of bank loans, the
relative cost of capital resources would decrease correspondingly given the
increase in the equity financing and reduced level of debt
borrowings.
Apart
from the expansion plan discussed above and the commitments set out in the
section of “Commitments and Contingencies” herein, we do not have any other
material commitments for capital expenditures and other expenditures. We believe
that the current operating activities would be able to generate adequate cash
flows supporting the daily operations. We do not have any further fund raising
plan at the moment.
COMMITMENTS
AND CONTINGENCIES
Operating
lease commitments
Ocean
Technology leased certain office space under a non-cancellable operating lease
agreement with a term of 3 years with fixed monthly rentals, expiring on
February 17, 2011, and generally did not contain significant renewal options.
Total rent expenses for the period ended March 31, 2010 was approximately
$19,000. Future minimum rental payments due under the non-cancelable operating
lease agreement are approximately $68,000 in total in the next twelve
months.
Guarantees
As of
March 31, 2010, Mingxiang is contingently liable as guarantor with respect to
the loans of $731,294 (equivalent to RMB5,000,000) and $438,776 (equivalent to
RMB3,000,000) to two unrelated third parties, Shishi Yu Ching Knitting and
Clothing Company (“Yu Ching”) and Shishi Han Jiang Hua Lian Knitting and
Clothing Factory (“Han Jiang Hua Lian”), respectively. The term of these
guarantees are commenced from July 2009 through July 2011, with a renewal
provision of 2 years. At any time from the date of guarantees, should Yu Ching
or Han Jiang Hua Lian fail to make their due debt payments, Mingxiang will be
obligated to perform under the guarantees by primarily making the required
payments, including late fees and penalties. The maximum potential amount of
future payments that the Mingxiang is required to make under the guarantees is
$1,170,070 (equivalent to RMB8,000,000).
According
to the Personal Guarantee Agreement between Mingxiang and Mr. Liu, Mr. Liu
agreed to bear all liabilities and costs to be incurred from a direct claim by
the creditor if either Yu Ching or Han Jiang Hua Lian fails to make payment to
the creditor upon due dates.
In
accordance with ASC 460-10
“Guarantees”
, a guarantor
must recognize a liability for the fair value of the obligations it assumes
under certain guarantees. Mingxiang did not receive any consideration for the
guarantee and has determined the indemnification fair value to be insignificant.
As of March 31, 2010, the Company has not recorded any liabilities under these
guarantees.
Year
ended December 31, 2009, 2008 and 2007
Our
operations are funded through a combination of stockholders’ equity, borrowings
and internally generated funds from our operations. Our cash and cash
equivalents as at December 31, 2009 amounted to approximately $7.1 million and
our total indebtedness which comprises short-term bank loans was $4.1
million.
A
summary of our cash flows for 2009, 2008 and 2007 is as
follows:
|
|
Year ended December 31,
|
|
US$’000
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
5,668
|
|
|
|
6,000
|
|
|
|
6,701
|
|
Net
cash (used in) investing activities
|
|
|
(30,022
|
)
|
|
|
(4,179
|
)
|
|
|
(21
|
)
|
Net
cash (used in)/ provided by financing activities
|
|
|
(251
|
)
|
|
|
3,364
|
|
|
|
7,959
|
|
Foreign
currency translation adjustment
|
|
|
108
|
|
|
|
1,978
|
|
|
|
6
5
6
|
|
Net
change in cash and cash equivalents
|
|
|
(24,497
|
)
|
|
|
7,163
|
|
|
|
15,295
|
|
Cash
and cash equivalents at the beginning of the year
|
|
|
31,640
|
|
|
|
24,477
|
|
|
|
9,182
|
|
Cash
and cash equivalents at the end of the year
|
|
|
7,143
|
|
|
|
31,640
|
|
|
|
24,477
|
|
Year
2009
Net
cash provided by operating activities
In
2009, our net cash provided by operating activities amounted to approximately
$5.7 million. The major source of cash inflow from operating activities was from
net income of $14.6 million. Changes in operating assets and liabilities
included cash outflow resulting from increase in accounts receivable of $14.0
million as a result of increase in sales volume and extension of credit period
to major customers. This was partially offset by cash inflow from decrease in
inventories of 2.8 million.
Net
cash used in investing activities
In 2009,
our net cash used in investing activities was approximately $30.0
million which was mainly attributable to the increase in note receivable of
$26.4 million related to the convertible loan due from the acquisition target
company, and the increase in prepayment for land use right of $2.3 million due
to the land cost for development of cold storage facilities as well as the
addition of fixed assets and the transfer from construction in progress for the
development of new processing plant and the associated machineries. In this
connection, our production capacity has been doubled by the third quarter end of
2009.
Net
cash used in financing activities
In
2009, our cash used in financing activities was approximately $0.3 million. This
comprised a combined effect of repayment of bank loans and amount due to a
shareholder of $0.2 million and $0.1 million respectively.
Year
2008
Net
cash provided by operating activities
Our net
cash provided by operating activities in 2008 amounted to approximately $6.0
million, which was a decrease of $0.7 million when comparing to net cash
provided by operating activities in 2007. The decrease was mainly attributable
to the increase in the inventories of $5.5 million in 2008, partially offset by
the higher net income earned in the same year and the significant increase of
accounts receivable recorded in 2007.
We
purchased much more raw materials in 2008 and a significant portion of them
accounted for $5.3 million could be sold in the market when price goes up in the
future due to limited supplies.
Net
cash used in investing activities
In 2008,
our net cash used in investing activities was approximately $4.2
million which was attributable to the addition of fixed assets and
construction in progress at about $4.2 million in total, mainly for the
development of new processing plant, the associated machineries and staff
quarter. In this connection, our production capacity has been increased by 50%
in the fourth quarter of 2008.
Net
cash provided by financing activities
Our net
cash provided by financing activities was approximately $3.4 million in 2008,
which was a decrease of $4.6 million when comparing to net cash provided by
financing activities in 2007. The decrease was mainly due to the increase in
additional paid-in capital of $15.9 million which was raised from the
transaction of reverse acquisition and private placement taken place in November
2007, and was partially offset by the dividend being paid of $4.6 million
and net repayment of bank loans of $3.0 million in 2007.
Year
2007
Net
cash provided by operating activities
In 2007,
our net cash provided by operating activities amounted to approximately $6.7
million. The major source of cash inflow from operating activities was from net
income of $8.7 million. Changes in operating assets and liabilities included
cash outflow resulting from increase in accounts receivable of $2.9 million and
other receivables of $0.1 million. This was offset by cash inflow from cash
received from increase in accounts payable of $0.2 million, other payables of
$0.3 million and income tax payable of $0.3 million.
Net
cash used in investing activities
In 2007,
our net cash used in investing activities was approximately $21,000 which arose
from the acquisition of production and office equipment.
Net
cash provided by financing activities
In 2007,
our cash provided by financing activities was approximately $8.0 million. This
comprised mainly the increase in additional paid-in capital of $15.9 million
which was raised from the transaction of reverse acquisition and private
placement taken place in November 2007, net of offering costs of $4.0 million.
This was offset by the dividend being paid of $4.6 million, repayment of bank
loans of $3.0 million and decrease in amount due to a shareholder of $0.4
million.
Capital
resources
We
believe that after taking into account of our cash position, available bank
facilities and cash generated from operating activities, we have adequate
working capital to satisfy our current operating expenditures.
Considering
our latest development plan for the construction of cold storage facilities and
the new beverage products through the acquisition of Xianghe, we raised $30.0
million in gross proceeds through a common stock offering in January 2010. The
net proceeds from offering brought our working capital level back to a strong
position where both the current operations could be carried out smoothly and we
are well positioned for potential acquisition opportunities. Please refer to the
section “New Business Development” for details of the land purchase for
development of cold storage facilities and the acquisition of the beverage
company.
After the
registered direct offering of common stock, the relative cost of capital
resources would decrease correspondingly given the increase in the equity
financing and the similar level of bank borrowings.
Apart
from the expansion plan discussed above and the commitments set out in the
section “Commitments and Contingencies” herein, we do not have any other
material commitments for capital and other expenditures. We believe that the
current operating activities would be able to generate adequate cash flows
supporting the daily operations. We do not have any further fund raising plan at
the moment.
CAPITAL
EXPENDITURES AND INVESTMENTS
A
summary of our capital expenditures for the last three financial years ended
December 31, 2009, 2008 and 2007 is as follows:
|
|
Year
ended December 31,
|
|
US$’000
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Land
use rights
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Buildings
|
|
|
995
|
|
|
|
3,496
|
|
|
|
-
|
|
Plant
and machinery
|
|
|
316
|
|
|
|
308
|
|
|
|
20
|
|
Office
equipment
|
|
|
21
|
|
|
|
22
|
|
|
|
1
|
|
Motor
vehicles
|
|
|
16
|
|
|
|
367
|
|
|
|
-
|
|
|
|
|
1,348
|
|
|
|
4,193
|
|
|
|
21
|
|
In
October 2008, we placed certain facilities into service and began depreciating
the plant at that time when the assets are substantially complete and ready for
their intended use. The Company reclassified approximately $1.9 million from
construction in progress to property, plant and equipment
accordingly.
In 2009,
total capital expenditures of $1.3 million were attributable to the addition of
fixed assets for the development of new processing plant and the associated
machineries. In this connection, our production capacity has been doubled by the
third quarter end of 2009.
Use
of proceeds
We
believe that after taking into account our cash position, available bank
facilities and cash from operating activities, we have adequate working capital
for our present requirements.
However,
we do have the expansion plan for the use of proceeds being raised from the
private placement taken place on November 17, 2007. Here below is the breakdown
for the use of proceeds and the expected timeline for corresponding
commitments.
Use of Proceeds
|
|
Amount in $’m
|
|
Year to Spend
|
|
Construct
new cold storage facilities
|
|
|
6.0
|
|
2008-2009
|
|
Acquire
land use right and construct new processing plant
|
|
|
6.5
|
|
2008-2009
|
|
Upgrade
part of the processing plant and equipment
|
|
|
0.7
|
|
2008
|
|
Construct
new sterile sealed production unit
|
|
|
0.6
|
|
2008
|
|
Develop
and promote new markets
|
|
|
1.0
|
|
2008-2009
|
|
Support
research and development
|
|
|
0.8
|
|
2008-2009
|
|
Working
capital (including offering expenses)
|
|
|
4.4
|
|
2007-2008
|
|
Total
|
|
|
19.9
|
|
|
|
After the
private placement, the relative cost of capital resources would decrease
correspondingly given the increase in the equity financing and the same level of
bank borrowings.
Apart
from the expansion plan discussed above and the commitments set out in the
section of “Commitments and Contingencies” in the Prospectus, we do not have any
other material commitments for capital expenditures and other expenditures. We
believe that the current operating activities would be able to generate adequate
cash flows supporting the daily operations.. We may offer securities for gross
proceeds of a maximum of $40,000,000 pursuant to a shelf registration statement
on Form S-3 that was declared effective by the Securities and
Exchange Commission on December 23, 2009. On January 25, 2010,
we consummated an offering of 4,615,388 shares of common stock at a
price of $6.50 per share for gross proceeds of $30,000,022. We
received net proceeds of approximately $28,500,000 after deduction of placement
agent fees and expenses of the offering. We intend to use the
proceeds of the offering for general working capital and capital expenditures,
which may include potential acquisitions.
CAPITAL
EXPENDITURE AND INVESTMENTS
A
summary of our capital expenditures for the last three financial years ended
December 31, 2009, 2008 and 2007, and for the three months period ended March,
2010 are as follows:
(US$’000)
|
|
Year
ended December 31,
|
|
|
Three
months period
ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
use rights
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,344
|
|
Buildings
|
|
|
995
|
|
|
|
3,496
|
|
|
|
-
|
|
|
|
-
|
|
Plant
and machinery
|
|
|
316
|
|
|
|
308
|
|
|
|
20
|
|
|
|
-
|
|
Office
equipment
|
|
|
21
|
|
|
|
22
|
|
|
|
1
|
|
|
|
-
|
|
Motor
vehicles
|
|
|
16
|
|
|
|
367
|
|
|
|
-
|
|
|
|
78
|
|
|
|
|
1,348
|
|
|
|
4,193
|
|
|
|
21
|
|
|
|
2,422
|
|
In
October 2008, we placed certain facilities into service and began depreciating
the plant at that time when the assets are substantially complete and ready for
their intended use. The Company reclassified approximately $1.9 million from
construction in progress to property, plant and equipment
accordingly.
In 2009,
total capital expenditures of $1.3 million were attributable to the addition of
fixed assets for the development of new processing plant and the associated
machineries. In this connection, our production capacity has been doubled by the
third quarter end of 2009.
CRITICAL
ACCOUNTING POLICIES & RECENT ACCOUNTING PRONOUNCEMENTS
These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (“US
GAAP”).
The
consolidated financial statements include the financial statements of China
Marine and its subsidiaries.
All
significant intercompany balances and transactions within the Company have been
eliminated upon consolidation.
In
preparing these financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities in the balance sheets
and revenues and expenses during the years reported. Actual results could differ
from these estimates.
l
|
Cash
and cash equivalents
|
Cash and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
The
Company maintains cash and cash equivalent balances at a financial institution
in the PRC, which are insured by the People’s Bank of China. The Company had
cash concentration risk of $42,496,598
,
$7,125,721 and $31,640,307 as
of March 31, 2010, December 31, 2009 and 2008,
respectively.
l
|
Accounts
receivable and allowance for doubtful
accounts
|
Accounts
receivable are recorded at the invoiced amount and do not bear interest.
Management reviews the adequacy of the allowance for doubtful accounts on an
ongoing basis, using historical collection trends and aging of receivables.
Management also periodically evaluates individual customer’s financial
condition, credit history, and the current economic conditions to make
adjustments in the allowance when it is considered necessary. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company does
not have any off-balance-sheet credit exposure related to its
customers.
As of
March 31, 2010, December 31, 2009 and 2008, the allowance for doubtful accounts
was $48,551, $94,643 and $24,218, respectively.
Inventories
consist of frozen products from marine catch, processed seafood products and
materials used in the manufacture of the Company’s products. Inventories are
stated at the lower of cost or net realizable value, with cost being determined
on a weighted average basis. Costs include purchased cost of raw fishes, direct
labor and manufacturing overhead costs. The Company periodically reviews
historical sales activity to determine excess, slow moving items and potentially
obsolete items and also evaluates the impact of any anticipated changes in
future demand. The Company provides inventory allowances based on excess and
obsolete inventories determined principally by customer demand.
As of
March 31, 2010, December 31, 2009 and 2008, the Company did not record an
allowance for obsolete inventories, nor have there been any
write-offs.
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|
Property, plant and
equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date on
which they become fully operational and after taking into account their
estimated residual values:
|
|
Depreciable life
|
|
Residual value
|
|
Buildings
|
|
30-50
years
|
|
|
10
|
%
|
Plant
and machinery
|
|
10-30
years
|
|
|
10
|
%
|
Office
equipments
|
|
8-10
years
|
|
|
10
|
%
|
Motor
vehicles
|
|
5
years
|
|
|
10
|
%
|
Expenditure
for repairs and maintenance is expensed as incurred. When assets have retired or
sold, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the results of
operations.
All lands
in the PRC are owned by the PRC government. The government in the PRC, according
to the relevant PRC law, may sell the right to use the land for a specified
period of time. Thus, all of the Company’s land purchases in the PRC are
considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided over
the term of the land use right agreements on a straight-line basis, which is 50
years and they will expire in 2052.
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|
Impairment
of long-lived assets
|
In
accordance with the provisions of Accounting Standards Codification ("ASC")
Topic 360-10-5, “
Impairment or
Disposal of Long-Lived Assets
”, all long-lived assets such as property,
plant and equipment, land use rights and intangible assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is evaluated by a comparison of the
carrying amount of assets to estimated discounted net cash flows expected to be
generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair value of the assets. There has been no
impairment as of March 31, 2010.
In
accordance with the ASC Topic 605,
“Revenue Recognition”
, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling price
is fixed or determinable and collectibility is reasonably assured.
The
Company derives revenues from the processing, distribution and sale of processed
seafood products, sale of marine catch, and the sale and distribution of
algae-based beverage products. The Company recognizes its revenues net of
value-added taxes (“VAT”). The Company is subject to VAT which is levied on the
majority of the products at the rate ranging from 13% to 17% on the invoiced
value of sales. Output VAT is borne by customers in addition to the invoiced
value of sales and input VAT is borne by the Company in addition to the invoiced
value of purchases to the extent not refunded for export sales.
The
Company recognizes revenue from the sale of products upon delivery to the
customers and the transfer of title and risk of loss. The Company experienced no
product returns and recorded no reserve for sales returns for the period ended
March 31, 2010.
The
Company has distributor arrangements with certain parties for sale of its
processed seafood products and algae-based beverage products. The distributor
agreements do not provide chargeback, price protection, or stock rotation
rights.
Rental
income from operating leases on real estate properties is recognized on a
straight-line basis over the lease period.
Cost
of revenue consists primarily of purchase cost of raw fishes, direct labor,
depreciation and manufacturing overhead, which are directly attributable to the
manufacture of processed seafood products. Shipping and handling costs,
associated with the distribution of seafood products to customers, are recorded
in cost of revenue and are recognized when the related seafood product is
shipped to the customer.
l
|
Government subsidy
income
|
Subsidy
income is received at a discretionary amount as determined by the local PRC
government. Subsidy income is recognized at their fair value where there is a
reasonable assurance that the subsidy will be received and the Company will
comply with applicable conditions. Subsidy income is recognized in the
accompanying consolidated statements of operations at the period when it was
received from the local PRC government.
Advertising
costs are expensed as incurred under ASC Topic 720-35,
“Advertising Costs”
. The
Company incurred advertising expense of $149,239, $196,461 and $151,177 for the
three months period ended March 31, 2010, years ended December 31, 2009 and
2008, respectively.
Research and
development
Research
and development costs are expensed when incurred in the development of new
products or processes including significant improvements and refinements of
existing products. Such costs mainly relate to labor and material cost. The
Company incurred $52,385, $236,595 and $87,327 of such costs for the years ended
December 31, 2009 and 2008, respectively.
Contributions
to retirement schemes (which are defined contribution plans) are charged to
general and administrative expenses in the accompanying consolidated statements
of operation and comprehensive income as the related employee service is
provided.
ASC Topic
220,
“Reporting Comprehensive
Income”,
establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as defined
includes all changes in equity during a period from non-owner sources.
Accumulated other comprehensive income, as presented in the accompanying
statement of changes in stockholders’ equity, consists of changes in unrealized
gains and losses on foreign currency translation. This comprehensive income is
not included in the computation of income tax expense or benefit.
The
Company adopts ASC Topic 740,
“Income Taxes”
, regarding
accounting for uncertainty in income taxes which prescribes the recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken on a tax return. In
addition, the guidance requires the determination of whether the benefits of tax
positions will be more likely than not sustained upon audit based upon the
technical merits of the tax position. For tax positions that are determined to
be more likely than not sustained upon audit, a company recognizes the largest
amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not
determined to be more likely than not sustained upon audit, a company does not
recognize any portion of the benefit in the financial statements. The guidance
provides for de-recognition, classification, penalties and interest, accounting
in interim periods and disclosure.
For
the three months period ended March 31, 2010, years ended December 31, 2009 and
2008, the Company did not have any interest and penalties associated with tax
positions. As of March 31, 2010, December 31, 2009 and 2008, the Company did not
have any significant unrecognized uncertain tax positions.
The
Company conducts major businesses in the PRC and is subject to tax in this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax
authority.
The
Company calculates net income per share in accordance with ASC Topic 260,
“Earnings per Share.”
Basic
income per share is computed by dividing the net income by the weighted-average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.
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|
Foreign currencies
translation
|
Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the consolidated statement of operation and
comprehensive income.
The
reporting currency of the Company is the United States dollars ("US$"). The
Company's subsidiaries in the PRC maintain their books and records in its local
currency, the Renminbi Yuan ("RMB"), which is functional currency as being the
primary currency of the economic environment in which these entities
operate.
In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with SFAS No. 52, “
Foreign
Currency Translation”
, using the exchange rate on the balance sheet
date. Revenues and expenses are translated at average rates prevailing during
the period. The gains and losses resulting from translation of financial
statements of foreign subsidiaries are recorded as a separate component of
accumulated other comprehensive income within the statement of changes in
stockholders’ equity.
Translation
of amounts from RMB into US$1 has been made at the following exchange rates for
the respective period:
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Period-end
rates RMB:US$1 exchange rate
|
|
|
6.8361
|
|
|
|
6.8456
|
|
Average
rates RMB:US$1 exchange rate
|
|
|
6.8360
|
|
|
|
6.8466
|
|
|
|
Decmeber 31,
2009
|
|
|
December 31,
2008
|
|
Period-end
rates RMB:US$1 exchange rate
|
|
|
6.8372
|
|
|
|
6.8542
|
|
Average
rates RMB:US$1 exchange rate
|
|
|
6.8409
|
|
|
|
6.9623
|
|
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|
Stock-based
compensation
|
The
Company adopts ASC Topic 718-20,
"Compensation - Stock
Compensation"
("ASC 718-20"), using the fair value method. Under ASC
718-20, stock-based compensation cost is measured at the grant date based on the
fair value of the award or using the Black-Scholes pricing model and is
recognized as expense over the appropriate service period.
Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operational decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.
ASC
Topic 280,
“
Segment Reporting”
establishes standards for reporting information about operating segments on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers in
financial statements. For the three months period ended March 31, 2010, year
ended December 31, 2009 and 2008, the Company operates in two principal
reportable segments: sale of processed seafood products and trading of marine
catch.
ASC
Topic 820-10, “
Fair Value
Measurements and Disclosures
” ("ASC 820-10") establishes a new framework
for measuring fair value and expands related disclosures. Broadly, ASC 820-10
framework requires fair value to be determined based on the exchange price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants. ASC 820-10 establishes a
three-level valuation hierarchy based upon observable and non-observable inputs.
These tiers include: Level 1, defined as observable inputs such as quoted prices
in active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined
as unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
For
financial assets and liabilities, fair value is the price the Company would
receive to sell an asset or pay to transfer a liability in an orderly
transaction with a market participant at the measurement date. In the absence of
active markets for the identical assets or liabilities, such measurements
involve developing assumptions based on market observable data and, in the
absence of such data, internal information that is consistent with what market
participants would use in a hypothetical transaction that occurs at the
measurement date.
Cash
and cash equivalents, accounts receivable, prepaid expenses and other current
assets, accounts payable, amount due to a stockholder, income tax payable and
accrued liabilities and other payable are carried at cost which approximates
fair value. The estimated fair value of short-term borrowing was $4.1 million
and $4.3 million as of December 31, 2009 and 2008, respectively, based on
current market prices or interest rates. Any changes in fair value of assets or
liabilities carried at fair value are recognized in other comprehensive income
for each period.
l
|
Recent
accounting pronouncements
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the
results of its operations.
In
June 2009, the Financial Accounting Standards Board (“FASB”) expanded ASC
810-10, to provide guidance for variable interest entities (VIEs). The change
modifies our approach for determining the primary beneficiary of a VIE by
assessing whether we have control over such entities. This change is effective
for us on July 1, 2010. The Company is currently evaluating the requirements of
the VIE provisions of ASC 810-10, but does not expect a material impact on its
condensed consolidated financial statements.
In
October 2009, the FASB issued Accounting Standard Update (ASU) No. 2009-13,
“Revenue Recognition
”
(Topic 605). The accounting standard update addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services separately rather than as a combined unit. Specifically, this subtopic
addresses how to separate deliverables and how to measure and allocate
arrangement consideration to one or more units of accounting. ASU 2009-13 will
be effective for us on July 1, 2010. The Company is currently evaluating the
requirements of ASU 2009-13, but does not expect a material impact on its
condensed consolidated financial statements.
FASB
ASC 810, “
Consolidation
” (“ASC 810”),
establishes accounting and reporting standards for minority interests, which are
recharacterized as noncontrolling interests. ASC 810 was revised so that
noncontrolling interests are classified as a component of equity separate from
the parent’s equity; purchases or sales of equity interests that do not result
in a change in control are accounted for as equity transactions; net income
attributable to the noncontrolling interest are included in consolidated net
income in the statement of operations; and upon a loss of control, the interest
sold, as well as any interest retained, is recorded at fair value, with any gain
or loss recognized in earnings. This revision was effective for the Company as
of January 1, 2009. It applies prospectively, except for the presentation and
disclosure requirements, for which it applies retroactively. In addition, ASC
810 amends the consolidation guidance applicable to variable interest entities.
The amendments will significantly affect the overall consolidation analysis
under ASC 810. This phase of ASC 810 became effective for the Company on January
1, 2010 and did not impact the Company’s consolidation conclusions for its
variable interest entities.
In
January 2010, the FASB issued an amendment to the fair value measurement and
disclosure standard improving disclosures about fair value measurements. This
amended guidance requires separate disclosure of significant transfers in and
out of Levels 1 and 2 and the reasons for the transfers. The amended guidance
also requires that in the Level 3 reconciliation, the information about
purchases, sales, issuances and settlements be disclosed separately on a gross
basis rather than as one net number. The guidance for the Level 1 and 2
disclosures was adopted on January 1, 2010, and did not have an impact on our
consolidated financial position, results of operations or cash flows. The
guidance for the activity in Level 3 disclosures is effective January 1, 2011,
and will not have an impact on our consolidated financial position, results of
operations or cash flows as the amended guidance provides only disclosure
requirements. The Company had no significant transfers between Level 1, 2 or 3
inputs during the quarter ended March 31, 2010.
In
February 2010, the FASB issued amended guidance on subsequent events. Under this
amended guidance, SEC filers are no longer required to disclose the date through
which subsequent events have been evaluated in originally issued and revised
financial statements. This guidance was effective immediately and the Company
adopted these new requirements for the quarter ended March 31,
2010.
FOREIGN
EXCHANGE EXPOSURE
Our sales
are denominated in RMB and US dollars whilst our purchases and operating
expenses are all denominated in RMB. As such, we may be exposed to any
significant transactional foreign exchange exposure for our operations. However,
to the extent that we may enter into transactions in currencies other than RMB
in future, particularly as we penetrate into overseas markets, our
financial results may be subject to fluctuations between those foreign
currencies and RMB.
The
percentage of our sales denominated in RMB and US dollars are as
follows:
|
|
Three
months period ended March 31,
|
|
(%)
|
|
2010
|
|
|
2009
|
|
Sales
|
|
|
|
|
|
|
RMB
|
|
|
98.5
|
|
|
|
97.5
|
|
US
dollars
|
|
|
1.5
|
|
|
|
2.5
|
|
Total
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
Year
ended December 31,
|
|
(%)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Sales
|
|
|
|
|
|
|
|
|
|
RMB
|
|
|
97.4
|
|
|
|
95.1
|
|
|
|
99.5
|
|
US
dollars
|
|
|
2.6
|
|
|
|
4.9
|
|
|
|
0.5
|
|
Total
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
On
July 21, 2005, the RMB was unpegged against the US dollars and pegged against a
basket of currencies on a “managed-float currency regime”. As at March 31, 2009,
the exchange rate was approximately US$1.00 to RMB6.8361; and as at December 31,
2009, the exchange rate was approximately US$1.00 to RMB6.8372. There is no
assurance that the PRC's foreign exchange policy will not be further altered. In
the event that the PRC's policy is altered, significant fluctuations in the
exchange rates of RMB against US dollars may arise. As a result we will be
subject to significant foreign exchange exposure and in the event that we incur
foreign exchange losses, our financial performance will be adversely
affected.
Our
net foreign exchange gains or losses for the last three financial years ended
December 31, 2009, 2008 and 2007 are as follows:
|
|
Year
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
foreign exchange (losses)/ gains (US$’000)
|
|
|
(3
|
)
|
|
|
(19
|
)
|
|
|
14
|
|
As
a percentage of income before tax (%)
|
|
|
0.02
|
|
|
|
0.15
|
|
|
|
0.14
|
|
We do not
have a formal hedging policy with respect to our foreign exchange exposure as
our foreign exchange gains/ losses for the period under review have been
relatively insignificant. We will continue to monitor our foreign exchange
exposure in the future and will consider hedging any material foreign exchange
exposure should the need arise. Should we enter into any hedging transaction in
the future, such transaction shall be subject to review by our board of
directors. In addition, should we establish any formal hedging policy in the
future, such policy shall be subject to review and approval by our board prior
to implementation.
INFLATION
During
the period under review, inflation did not have a material impact on our
financial performance.
Web Site Access to Our Periodic SEC
Reports
You
may read and copy any public reports we filed with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Room 1580, Washington D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site
http://www.sec.gov
that contains reports and information statements, and other information that we
filed electronically.
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On
January 27, 2009, China Marine Food Group Limited (the “Company”) dismissed
Cordovano and Honeck LLP (“CHLLP”) as its independent registered public
accounting firm. The decision to dismiss CHLLP was approved by the Board of
Directors of the Company.
The
reports of CHLLP on the Company’s balance sheet as of December 31,
2007 and the related statement of operations, stockholders’ equity
and cash flows for the year ended December 31, 2007, did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principle.
During
the fiscal year ended December 31, 2007 and each of the quarters ended March 31,
2008, June 30, 2008 and September 30, 2008, there were no disagreements with
CHLLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of CHLLP, would have caused it to make reference to the subject
matter of the disagreement in connection with their reports on the Company’s
balance sheets as of December 31, 2007 and the related statements of operations,
stockholders’ equity and cash flows for each of the quarters in the year ended
December 31, 2007.
During
the fiscal year ended December 31, 2007 and each of the quarters ended March 31,
2008, June 30, 2008 and September 30, 2008, there were no reportable events as
defined in Item 304(a)(1)(v) of Regulation S-K.
Concurrently,
the Company engaged ZYCPA Company Limited (formerly Zhong Yi (Hong Kong) C.P.A.
Company Limited) as its new independent registered public accounting firm to
audit the Company’s financial statements for the year ended December 31, 2008.
During the Company’s two most recent fiscal years, ZYCPA was engaged as an
independent accountant to audit the significant subsidiaries of the Company
located in Hong Kong and the People’s Republic of China.
Prior to
ZYCPA’s engagement, the Company did not consult with ZYCPA regarding any matters
described in Item 304(a)(2)(i) or Item 304(a)(2)(ii) of
Regulation S-K.
On
January 23, 2008, concurrent with the decision to dismiss ZYCPA as its
independent auditor, the board of directors unanimously voted to engage CHLLP as
its new independent auditor. ZYCPA is the affiliated firm of CHLLP in
Asia.
We
furnished a copy of this disclosure to ZYCPA and requested ZYCPA furnish us with
a letter addressed to the SEC stating whether it agrees with the statements made
by us herein in response to Item 304(1) of Regulation S-K and, if not, stating
the reason in which it does not agree. A copy of this letter was filed by us as
Exhibit 16 to our current report on Form 8-K, filed on January 31,
2008.
On
January 27, 2009, concurrent with the decision to dismiss CHLLP, as its
independent auditor, the Board of Directors unanimously voted to engage ZYCPA as
its new independent auditor. ZYCPA is the affiliated firm of CHLLP in
Asia.
We
furnished a copy of this disclosure to CHLLP and requested CHLLP furnish us with
a letter address to the SEC stating whether it agrees with the statements made
by us herein in response to Item 304(1) of Regulation S-K and, if not, stating
the reason in which it does not agree. A copy of this letter was filed by
us as Exhibit 16 to our current report on Form 8-K filed on February 2,
2009.
During
the two most recent financial years ended December 31, 2009 and 2008 to the date
of this statement, there were no disagreements with CHLLP and ZYCPA or any
matter of accounting principals or practices, financial disclosures, or auditing
scope or procedure. There were no reportable events, as described in Item
304(a)(1)(v) of Regulation S-K, during our two most recent financial years ended
December 31, 2007 and 2008 to the date of this statement.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
We are
exposed to interest rate risk primarily with respect to our short-term bank
loans. Although the interest rates are fixed at the benchmark lending
rate for the terms of the loans, the terms are typically twelve months and
interest rates are subject to change upon renewal. Interest rates for our
short-term bank loans have been decreased quite significantly from 7.47% in the
last quarter of 2008 to 5.31% in the same period of 2009. A hypothetical 1.0%
increase in the annual interest rates for all of our credit facilities at $4.1
million would decrease net income before provision for income tax by
approximately $41,000 per annum. Management monitors the banks’ interest rates
in conjunction with our cash requirements to determine the appropriate level of
debt balances relative to other sources of funds. We have not entered into any
hedging transactions in an effort to reduce our exposure to interest rate
risk.
Foreign
Exchange Risk
While our
reporting currency is the US dollar, almost all of our consolidated revenues and
consolidated costs and expenses are denominated in RMB. All of our assets are
denominated in RMB except for some cash and cash equivalents and accounts
receivables. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the
exchange rate between US dollar and RMB. If the RMB depreciates against the US
dollar, the value of our RMB revenues, earnings and assets as expressed in our
US dollar financial statements will decline. We have not entered into any
hedging transactions in an effort to reduce our exposure to foreign exchange
risk.
Inflation
Inflationary
factors such as increases in the costs of our products and overhead costs may
adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and
selling and distribution, general and administrative expenses as a percentage of
net revenues if the selling prices of our products do not increase to cope with
these increased costs.
DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS, AND CONTROL PERSONS
DIRECTORS
AND OFFICERS
The
following sets forth the name and position of each of our current executive
officers and directors.
Directors
Name
|
|
Age
|
|
Position held
|
|
|
|
|
|
Pengfei
LIU
|
|
54
|
|
CEO,
Secretary and Director
|
|
|
|
|
|
Marco
Hon Wai KU
|
|
36
|
|
Chief
Financial Officer
|
|
|
|
|
|
Weipeng
LIU
|
|
34
|
|
Director
|
|
|
|
|
|
Xiaochuan
LI
|
|
65
|
|
Independent
Director
|
|
|
|
|
|
Changhu
XUE
|
|
45
|
|
Independent
Director
|
|
|
|
|
|
Honkau
WAN
|
|
36
|
|
Independent
Director
|
None of
the Directors and Executive Officers is related to each other or the Substantial
Shareholder.
Pengfei Liu
is our CEO,
Secretary and Director. He is the founder of our Company, and has been
spearheading the expansion and growth of our Company. Mr. Liu is responsible for
our operations, marketing, public relations, strategic planning and development
of new products and markets and overall running of our Company.
From
1975 to 1981, Mr. Liu served as a seaman with the Zhejiang East Ocean Navy. From
1981 to 1993, he worked as a trader in seafood. In 1994, Mr. Liu established
Mingxiang. In October 2003, Mr. Liu was elected as member of the executive
committee of the China Aquatic Products Processing and Marketing Association
(CAPPMA). In December 2003, Mr. Liu was appointed committee member of the Shishi
Committee (Fujian Province) of the Chinese People’s Political Consultative
Conference. In January 2005, Mr. Liu was elected vice-chairman of the executive
committee of Quanzhou Food Products Industry Association. In December 2005, Mr.
Liu was appointed as a member of the executive committee of the China Chamber of
International Commerce, Shishi Chamber of Commerce. In August 2006, Mr. Liu was
appointed executive member of the general meeting of the Fujian Aquatic Products
Processing and Marketing Association (FAPPMA). Mr. Liu is not a member of the
board of directors for any public company or any investment company, neither has
he been a member of the board of directors for such companies for the past five
years.
The Board
believes that Mr. Liu has the experience, qualifications, attributes and skills
necessary to serve on the Board because of his over 30 years of experience in
the seafood industry, his having provided leadership and strategic direction to
the Company as its founder and his unparalleled knowledge of the Company and its
business.
Marco Hon Wai Ku
is our Chief
Financial Officer and joined our Company in July 2007. He is responsible for the
corporate finance function of our Company and oversees matters relating to
accounting, financial administration and the compliance and reporting
obligations of our Company. Mr. Ku obtained a bachelor’s degree in Finance from
the Hong Kong University of Science and Technology in 1996, and is currently a
Fellow Member of the Hong Kong Institute of Certified Public
Accountants.
Prior
to joining us, from 1996 to 2000, Mr. Ku was with KPMG, where he last held the
position as Assistant Manager. From August 2000 to February 2003, he was
the Manager - Corporate Services in Logistics Information Network Enterprise
(HK) Limited, a subsidiary of Hutchison Port Holdings Ltd., where he later
worked as Manager - Management Accounting from March 2003 to September 2004.
From October 2004 to September 2005, he worked as a Financial Controller for
Hongkong.com Company Limited (a Hong Kong listed company within the China.com
Group). And from October 2005 to April 2007, he co-founded KISS Catering Group,
which is a food and beverage business in Beijing. Mr. Ku is not a director of
any public company or any investment company, neither has he been a member of
the board of directors for such companies for the past five
years.
Weipeng Liu
is our Director,
who is also employed to oversee the construction, operation and maintenance of
our equipment and production facilities in the capacity of Manager of
Operations. After graduating with a degree in mechanical design and
manufacturing and automation from Fuzhou University in 1997, Mr. Liu joined our
Company as Mingxiang and Rixiang’s facilities manager. He was appointed to serve
as a director of Rixiang in October 2006.
Mr. Liu is not a
director of any public company or any investment company, neither has he been a
member of the board of directors for such companies for the past five
years.
The Board
believes that Mr. Liu has the experience, qualifications, attributes and skills
necessary to serve on the Board because of his over 10 years of experience with
the Company and his knowledge of our equipment and production
facilities.
Xiaochuan Li
has been the
Director of the Division for Test of the Safety and Quality of Aquatic Products
in the Yellow Sea Fisheries Research Institute of the Chinese Academy of Fishery
Sciences since 1978, where he is responsible for the marine products processing
technology research and carrying out coordination in terms of both quality and
quantity examination and formulating related standards. From 1987 to 2005, Mr.
Li was the Center Director of the National Center for Quality Supervision and
Test of Aquatic Products. During his tenure, Mr. Li was responsible for
overseeing the daily operation of the laboratory and inspection center. Mr. Li
is not a director of any public company or any investment company, neither has
he been a member of the board of directors for such companies for the past five
years.
The Board
believes that Mr. Li has the experience, qualifications, attributes and skills
necessary to serve on the Board because of his over 30 years of experience with
the seafood industry, his management skills as the Director of the Division for
Test of the Safety and Quality of Aquatic Products in the Yellow Sea Fisheries
Research Institute of the Chinese Academy of Fishery Sciences and for his
experience in testing and quality control of seafood
products .
Changhu Xue
is a professor of
Aquatic Product Processing and Preserving Engineering at the Ocean University of
China. Mr. Xue is a Council Member of China Society of Fisheries and the
Chairman of the Fish Processing and Comprehensive Utilization Sub-committee of
the China Society of Fisheries. He is also the Chief Secretary of the Steering
Committee for Light Industry and Food Education in the Ministry of Education for
the People’s Republic of China. Mr. Xue’s major focus of research has been in
aquatic product processing and fisheries chemistry. Mr. Xue has completed over
20 state and provincial research projects including the research schemes in the
National Natural Science Foundation of China and has published over 100 papers
and articles in academic journals. In 1990, Mr. Xue was the first recipient of a
doctoral degree in Agriculture and Aquatic Products in China. Mr. Xue has
obtained 8 patent certificates and 2 technological achievements awarded by the
provincial authority. Mr. Xue is not a director of any public company or any
investment company, neither has he been a member of the board of directors for
such companies for the past five years.
The Board believes that
Mr. Xue has the experience, qualifications, attributes and skills necessary to
serve on the Board because of his extensive academic knowledge of the seafood
industry and research accomplishments.
Honkau Wan
has practiced as a
certified public accountant (“CPA”) since 2003. His firm provides professional
auditing, consultancy and secretarial services to his clients on a variety of
industries. From 2000 to 2002, Mr. Wan served in a multi-national company as an
internal auditor, where he participated in evaluating the internal control
systems of the group companies and made recommendations to the management. The
multi-national company was involved in the following industries: financial
institutions, property development, airline and security broker in Hong Kong,
China, United States and other Asia Pacific countries. From 1996 to 1999, Mr.
Wan was with KPMG auditing financial institutions. Mr. Wan received a BBA in
Accounting, with Honors, from the Hong Kong Polytechnic University in 1996. Mr.
Wan is not a director of any public company or any investment company, neither
has he been a member of the board of directors for such companies for the past
five years.
The
Board believes that Mr. Wan has the experience, qualifications, attributes and
skills necessary to serve on the Board because of his over 15 years of relevant
experience in finance and accounting.
There are
no agreements or understandings for any of our executive officers or directors
to resign at the request of another person, and no officer or director is acting
on behalf of nor will any of them act at the direction of any other
person.
SIGNIFICANT
EMPLOYEES
Other
than the officers described above, we do not expect any other individuals to
make a significant contribution to our business.
FAMILY
RELATIONSHIPS
There are
no family relationships among our officers, directors, persons nominated for
such positions, or significant shareholders.
INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS
None
of our directors, executive officers, or control persons have been involved in
any of the following events during the past ten years:
|
l
|
Any bankruptcy petition filed
by or against any business of which such person was a general partner or
executive officer either at the time of bankruptcy or within two years
prior to that time; or
|
|
l
|
Any conviction in a criminal
proceeding or being subject to a pending criminal proceeding (excluding
traffic violations and other minor offenses);
or
|
|
l
|
Being subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any type of
business, securities or banking activities;
or
|
|
l
|
Being found by a court of
competent jurisdiction (in a civil violation), the SEC or the Commodity
Future Trading Commission to have violated a federal or state securities
or commodities law, and the judgment has not been reversed, suspended, or
vacated; or
|
|
l
|
Being
the subject of, or a party to, any Federal or State judicial or
administrative order, judgment, decree, or finding, not subsequently
reversed, suspended or vacated, relating to an alleged violation of: any
Federal or State securities or commodities law or regulation; or any law
or regulation respecting financial institutions or insurance companies
including, but not limited to, a temporary or permanent injunction, order
of disgorgement or restitution, civil money penalty or temporary or
permanent cease-and-desist order, or removal or prohibition order; or any
law or regulation prohibiting mail or wire fraud or fraud in connection
with any business entity. This violation does not apply to any settlement
of a civil proceeding among private litigants;
or
|
|
l
|
Being
the subject of, or a party to, any sanction or order, not subsequently
reversed, suspended or vacated, of any self-regulatory organization (as
defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))),
any registered entity (as defined in Section 1(a)(29) of the Commodity
Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange,
association, entity or organization that has disciplinary authority over
its members or persons associated with a
member.
|
BOARD
COMMITTEES
The Board
of Directors is composed of five directors: Mr. Pengfei Liu, Mr. Weipeng Liu,
Mr. Xiaochuan Li, Mr. Changhu Xue and Mr. Honkau Wan. All board action requires
the approval of a majority of directors in attendance at a meeting at which a
quorum is present.
On June 18, 2009, the Company
established an Audit Committee of the Board with the responsibility for
assisting the Board in fulfilling its oversight role regarding the Company’s
financial reporting process, its system of internal control and its compliance
with applicable laws, regulations and company policies. Honkau Wan,
Xiaochuan Li, and Changhu Xue were elected to be members of the Audit Committee
and shall serve the Committee until their successors are duly elected and
qualified.
On June 18,
2009, the Company also established a Governance Committee and a Compensation
Committee, and elected Xiaochuan Li and Changhu Xue as members to each of the
Committee.
The
Audit Committee is primarily responsible for reviewing the services performed by
our independent auditors, evaluating our accounting policies and our system of
internal controls. The Company’s Board of Directors has determined that the
registrant has one audit committee financial expert, Honkau Wan, serving on its
Audit Committee. Honkau Wan has been CPA since 2003 and understands the
generally accepted accounting principles and financial statements. He is
considered as independent director as defined in the listing standards
applicable to the Registrant. His relevant experiences are disclosed in the
above content in Item 10 of this Form 10-K.
The
Nominating Committee is primarily responsible for nominating directors and
setting policies and procedures for the nomination of directors. The
Corporate Governance Committee is also responsible for overseeing the
creation and implementation of our corporate governance policies and
procedures. The Company does not have procedures by which security holders
may recommend nominees to the Company’s Board of Directors.
The
Compensation Committee is primarily responsible for reviewing and approving our
salary and benefit policies (including equity plans), including
compensation of executive officers.
CODE
OF ETHICS
We
adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of
2002 on January 24, 2008. On August 10, 2009, we amended our Standards of
Business Conduct and Finance Code of Professional Conduct. The amended Standards
of Business and Finance Code of Professional Conduct apply to our officers,
directors and employees. The principal change to the Finance Code of
Professional Conduct was to make it applicable to all employees and not only
employees in the finance department to comply with the rules of the NYSE/AMEX.
The principal change to the Standard of Business Conduct was to provide
guidelines to employees to report any suspected or known violations of the
Finance Code of Professional Conduct, the Standards of Business Conduct, or
other China Marine policies.
All
employees will:
|
·
|
Act
with honesty and integrity, avoiding actual or apparent conflicts of
interest in their personal and professional
relationships.
|
|
·
|
Provide
shareholders with information that is accurate, complete, objective, fair,
relevant, timely, and understandable, including information in our filings
with and other submissions to the U.S. Securities and Exchange Commission
and other public bodies.
|
|
·
|
Comply
with rules and regulations of federal, state, provincial and local
governments, and of other appropriate private and public regulatory
agencies.
|
|
·
|
Action
in good faith, responsibly, with due care, competence, and diligence,
without misrepresenting material facts or allowing one’s independent
judgment to be subordinated.
|
|
·
|
Respect
the confidentiality of information acquired in the course of one’s work
except when authorized or otherwise legally obligated to
disclose.
|
|
·
|
Not
use confidential information acquired in the course of one’s work for
personal advantage.
|
|
·
|
Share
knowledge and maintain professional skills importance and relevancy to
shareholders’ needs.
|
|
·
|
Proactively
promote and be an example of ethical behavior as a responsible individual
among peers, in the working environment and the
community.
|
|
·
|
Exercise
responsible use, control, and stewardship over all China Marine assets and
resources that are employed by or entrusted to
us.
|
|
·
|
Not
coerce, manipulate, mislead, or unduly influence any authorized audit or
interfere with any auditor engaged in the performance of an internal or
independent audit of China Marine’s system of internal controls, financial
statements, or accounting books and
records.
|
This
Finance Code of Professional Conduct embodies principles which we are expected
to adhere to and advocate. These principles of ethical business conduct
encompass rules regarding both individual and peer responsibilities, as well as
responsibilities to China Marine shareholders and the public. The CEO, CFO, and
all employees are expected to abide by this Code. Any violations of the China
Marine’s Finance Code of Professional Conduct may result in disciplinary action,
up to and including termination of employment.
EXECUTIVE
COMPENSATION
COMPENSATION
DISCUSSION AND ANALYSIS
Background
and Compensation Philosophy
Our
Compensation Committee consists of Xiaochuan Li and Changhu Xue, both
independent directors. The Compensation Committee and, prior to its
establishment in June 2009, our Board of Directors determined the compensation
to be paid to our executive officers based on our financial and operating
performance and prospects, the level of compensation paid to similarly situated
executives in comparably sized companies, such as HQ Sustainable Maritime
Industries, Inc., Zhongpin Inc. and American Dairy, Inc., and contributions made
by the officers’ to our success. Each of the named officers will be
measured by a series of performance criteria by the board of directors, or the
compensation committee, on a yearly basis. Such criteria will be set forth
based on certain objective parameters such as job characteristics, required
professionalism, management skills, interpersonal skills, related experience,
personal performance and overall corporate performance.
Our Board
of Directors and Compensation Committee have not adopted or established a formal
policy or procedure for determining the amount of compensation paid to our
executive officers. The Compensation Committee makes an independent evaluation
of appropriate compensation to key employees, with input from management. The
Compensation Committee has oversight of executive compensation plans, policies
and programs.
Our
compensation program for our executive officers and all other employees is
designed such that it will not incentivize unnecessary risk-taking. The base
salary component of our compensation program is a fixed amount and does not
depend on performance. Our cash incentive program takes into account multiple
metrics, thus diversifying the risk associated with any single performance
metric, and we believe it does not incentivize our executive officers to focus
exclusively on short-term outcomes. Our equity awards are subject to vesting to
align the long-term interests of our executive officers with those of our
stockholders.
Elements
of Compensation
We
provide our executive officers with a base salary and certain bonuses to
compensate them for services rendered during the year. Our policy of
compensating our executives with a cash salary has served us well. Because
of our history of attracting and retaining executive talent, we do not believe
it is necessary at this time to provide our executives equity incentives, or
other benefits in order for us to continue to be successful, apart from the
common stock award granted to Mr. Ku as described below.
Base
Salary
The
base salary paid to Mr. Pengfei Liu, Mr. Shaobin Yang and Mr. Marco Ku during
2007 was $22,000, $18,000 and $32,000, respectively. In 2008, the base
salary paid to Mr. Liu, Mr. Yang and Mr. Ku was increased to approximately
$138,000, $65,000 and $118,000, respectively. The 2009 annual compensation
for Mr. Pengfei Liu, Mr. Marco Hon Wai Ku and Mr. Weipeng Liu is $140,000,
$140,000 and $44,000, respectively. All such amounts were paid in
cash. The value of base salary reflects each executive’s skill set and the
market value of that skill set in the sole discretion of our Board of Directors
and/or our executive officers. The compensation paid to our each independent
directors Xiaochuan Li, Changhu Xue, and Honkau Wan in the year of 2009 are
$8,800, $8,800, and $7,700, respectively.
Discretionary
Bonus
We
have determined and provided our executive officers with discretionary bonuses
at the end of each fiscal year. Our Compensation Committee will review the
necessity of such scheme on a yearly basis based on our financial and operating
performance and prospects, the level of compensation paid to similarly situated
executives in comparably sized companies and contributions made by the officers’
to our success. Since the PBT for the year ended December 31, 2009
was $16,703,071, Pengfei Liu and Weipeng Liu would be eligible to receive a
discretionary bonus for 2009 in an amount of $131,000 and $27,000,
respectively.
Equity
Incentives
We have
not established an equity based incentive program and have not granted stock
based awards as a component of compensation, apart from the common stock award
of approximately 30,000 shares awarded to Mr. Ku upon the completion of his
third year’s service for the Company. In the future, we may adopt and establish
an equity incentive plan pursuant to which awards may be granted if our
Compensation Committee determines that it is in the best interests of our
stockholders and the Company to do so.
Retirement
Benefits
Our
executive officers are not presently entitled to company-sponsored retirement
benefits.
Perquisites
We have
not provided our executive officers with any material perquisites and other
personal benefits and, therefore, we do not view perquisites as a significant or
necessary element of our executive’s compensation.
Deferred
Compensation
We do not
provide our executives the opportunity to defer receipt of annual
compensation.
The
following table sets forth information for the period indicated with respect to
the persons who served as our CEO, CFO and other most highly compensated
executive officers who served on our board of directors.
SUMMARY
COMPENSATION TABLE
Name
and
Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
Pengfei
Liu, CEO
|
|
2007
|
|
|
22,000
|
|
|
|
26,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,000
|
|
|
|
2008
|
|
|
138,000
|
|
|
|
98,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
236,000
|
|
|
|
2009
|
|
|
140,000
|
|
|
|
131,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shaobin
Yang, Deputy CEO (1)
|
|
2007
|
|
|
18,000
|
|
|
|
16,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,000
|
|
|
|
2008
|
|
|
65,000
|
|
|
|
33,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
98,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marco
Hon Wai Ku, CFO (2)
|
|
2007
|
|
|
32,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,000
|
|
|
|
2008
|
|
|
118,000
|
|
|
|
-
|
|
|
|
34,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
152,000
|
|
|
|
2009
|
|
|
140,000
|
|
|
|
-
|
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weipeng
Liu, Director
|
|
2007
|
|
|
11,000
|
|
|
|
11,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,000
|
|
|
|
2008
|
|
|
43,000
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63,000
|
|
|
|
2009
|
|
|
44,000
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,000
|
|
|
(1)
|
Mr. Yang resigned from the
Company on December 28,
2008.
|
|
(2)
|
Mr.
Ku joined the Company in July 2007.
|
On
November 17, 2007, we entered into a reverse acquisition transaction with Ocean
Technology that was structured as a share exchange and in connection with that
transaction; Mr. Liu became the Chief Executive Officer (“CEO”). Prior to
the effective date of the reverse acquisition, Mr. Liu served at Ocean
Technology as the CEO. The annual, long term and other compensation shown
in this table include the amount Mr. Liu received from Ocean Technology prior to
the consummation of the reverse acquisition.
SERVICE
AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS
On
November 17, 2007, we entered into separate service agreements (“Service
Agreements”) with our executive directors, namely, Pengfei Liu, Shaobin Yang and
Weipeng Liu, on substantially similar terms, which will remain effective until
December 31, 2010. On December 28, 2008, the Company received the
resignation of Shaobin Yang as our Executive Director and Deputy Chief Executive
Officer. Mr. Yang resigned for personal reasons and had no disagreements
with the Company, its Board of Directors or management. After December 31, 2010,
each of the Service Agreements will continue for a further term of three years
unless otherwise terminated by the respective parties to the Service Agreement
giving not less than six months’ notice in writing to the counterparty to such
agreement. Each of the Service Agreements may be terminated if any of the
executive directors commits a breach of his Service Agreement, such as being
convicted of any offence involving fraud or dishonesty or being adjudicated
bankrupt. There are no benefits payable to an executive director upon
termination of his Service Agreement. The Service Agreement covers the
terms of employment, such as salary and bonus. A copy of each of the
Service Agreements for each of our three directors was filed as Exhibits 10.5,
10.6 and 10.7 of the Form 8-K filed on November 23, 2007 with the
Commission.
We
also have entered into a service agreement with Marco Hon Wai Ku who joined the
Company as our chief financial officer in July 2007. The service agreement
with Mr. Ku is renewable on a year-to-year basis and may be terminated by either
party giving not less than two months’ notice in writing to the other. The
service agreement was renewed in July 2009 for an additional one year
term. The service agreement may also be terminated if Mr. Ku commits
a breach of the agreement, such as being convicted of any offence involving
fraud or dishonesty or being adjudicated bankrupt. The service agreement
covers the terms of employment, such as salary and bonus. Under the service
agreement, Mr. Ku has also agreed not to enter into businesses that will compete
with us for a period of six months after the termination of the service
agreement. Mr. Ku will be paid annual cash compensation, including
his travel and housing allowance, of approximately $140,000, and will receive a
common stock award of 30,000 shares upon the completion of his third year’s
service for the Company.
We also
have entered into Independent Director Agreements (the “Agreements”) with
Xiaochuan Li, Changhu Xue and Honkau Wan (“Director” or “Directors”). The
Agreements shall terminate on the date of the Director’s removal or resignation
with each 12-month period ending on the anniversary date of the Director’s
appointment constituting a Service Year. Compensation for Xiaochuan Li and
Changhu Xue shall be RMB60,000 and Honkau Wan should be HK$60,000 per Service
Year, respectively. Further, the Company will reimburse the Directors for
expenses incurred in good faith in the performance of the Director’s duties for
the Company.
We will
bear all travelling and travel-related expenses, entertainment expenses and
other out-of-pocket expenses reasonably incurred by our executive directors in
the process of discharging their respective duties on our
behalf.
The
following table sets forth the total compensation paid to each independent Board
member in 2009.
Director
Compensation For 2009
Name
|
|
|
|
|
|
|
|
Fees
|
|
|
|
Earned
|
|
|
|
|
|
|
|
|
|
or
paid
|
|
|
Stock
|
|
|
|
|
|
|
in
Cash
|
|
|
Awards
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xiaochuan
LI
|
|
$
|
8,776
|
(1)
|
|
$
|
0
|
|
|
$
|
8,776
|
|
Changhu
XUE
|
|
$
|
8,776
|
(1)
|
|
$
|
0
|
|
|
$
|
8,776
|
|
Honkau
WAN
|
|
$
|
7,692
|
(2)
|
|
$
|
0
|
|
|
$
|
7,692
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
$
|
25,244
|
|
|
(1)
|
This
amount is based on the exchange rate as of December 31, 2009 of US$1 equal
to RMB6.8372.
|
|
(2)
|
This
amount is based on the exchange rate of US$1 equal to
HK$7.80.
|
Director
Compensation For 2008
Name
|
|
|
|
|
|
|
|
Fees
|
|
|
|
Earned
|
|
|
|
|
|
|
|
|
|
or
paid
|
|
|
Stock
|
|
|
|
|
|
|
in
Cash
|
|
|
Awards
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Xiaochuan
LI
|
|
$
|
8,754
|
(1)
|
|
$
|
0
|
|
|
$
|
8,754
|
|
Changhu
XUE
|
|
$
|
8,754
|
(1)
|
|
$
|
0
|
|
|
$
|
8,754
|
|
Honkau
WAN
|
|
$
|
7,692
|
(2)
|
|
$
|
0
|
|
|
$
|
7,692
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
$
|
25,200
|
|
|
(1)
|
This
amount is based on the exchange rate as of December 31, 2008 of US$1 equal
to RMB6.8542.
|
|
(2)
|
This
amount is based on the exchange rate of US$1 equal to
HK$7.80.
|
|
Except
as disclosed herein, we have no other existing or proposed service
agreement with any of our
directors.
|
BONUSES
AND DEFERRED COMPENSATION
In
addition, we will pay to each of Pengfei Liu and Weipeng Liu an incentive bonus
based on our PBT, where “PBT” refers to the audited combined profit from our
operations and before income tax and before any dividend distribution (excluding
non-recurring exceptional items and extraordinary items) and before minority
interests for the relevant financial year.
The
amount of incentive bonus that Pengfei Liu is expected to receive in each
financial year will be determined as follows:
PBT
|
|
Rate
of Incentive Bonus
|
|
|
Pengfei
Liu
|
Where
the PBT is between US $ 10,684,000 and US $ 13,356,000
|
|
0.75%
of the PBT
|
Where
the PBT is US $ 13,356,000 or more but not more than US $
16,027,000
|
|
0.75%
of the PBT for the first US $ 13,356,000 of PBT; and
1.0%
on the amount over US $ 13,356,000
|
Where
the PBT is US $ 16,027,000 and above
|
|
0.75%
of the PBT for the first US $ 13,356,000 of PBT;
1.0%
on the US $ 2,671,000 after the first US $ 13,356,000 of PBT;
and
1.5%
on the amount over US $
16,027,000
|
The
amount of incentive bonus that Weipeng Liu is expected to receive in each
financial year will be determined as follows:
PBT
|
|
Rate
of Incentive Bonus
|
|
|
Weipeng
Liu
|
Where
the PBT is between US $ 10,684,000 and US $ 13,356,000
|
|
0.15%
of the PBT
|
Where
the PBT is above US $ 13,356,000
|
|
0.15%
of the PBT for the first US $ 13,356,000 of PBT; and
0.25%
on the amount over US $
13,356,000
|
The
incentive bonuses will be paid in the first quarter of the year following the
year of assessment. The first assessment year for incentive bonuses will be
year 2008.
This
particular performance metric was chosen by the board of directors because they
believed that such scheme would help in measuring the rewards provided to the
senior executives and the directors in an open, fair, and measurable manner
given the bonuses were tied in with the performance of the group. A
progressive basis was selected because the senior executives and the directors
could be highly motivated under the said scheme and we believe this should
improve long-term stockholder value over time. This particular performance
metric was arbitrarily determined by the board of directors after considering
our historical business performance and the expected returns which could be
possibly achieved if the business strategies and development plans could be
implemented and well managed by the management. This performance metric
will be consistently reviewed by the Compensation Committee.
We do not
have any deferred compensation or retirement plans.
OPTION
GRANTS IN THE LAST FISCAL YEAR
We did
not grant any options or stock appreciation rights to our named executive
officers or directors in the fiscal year 2009. As of December 31, 2009,
none of our executive officers or directors owned any of our derivative
securities.
INDEMNIFICATION
OF DIRECTORS AND EXECUTIVE OFFICERS
Our
bylaws provide for the indemnification of our present and prior directors and
officers or any person who may have served at our request as a director or
officer of another corporation in which we own shares of capital stock or of
which we are a creditor, against expenses actually and necessarily incurred by
them in connection with the defense of any actions, suits or proceedings in
which they, or any of them, are made parties, or a party, by reason of being or
having been director(s) or officer(s) of us or of such other corporation, in the
absence of negligence or misconduct in the performance of their duties. This
indemnification policy could result in substantial expenditure by us, which we
may be unable to recoup.
Insofar
as indemnification by us for liabilities arising under the Securities Exchange
Act of 1934 may be permitted to our directors, officers and controlling persons
pursuant to provisions of the Amended Articles of Incorporation and Bylaws, or
otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy and is, therefore, unenforceable. In
the event that a claim for indemnification by such director, officer or
controlling person of us is in the successful defense of any action, suit or
proceeding is asserted by such director, officer or controlling person in
connection with the securities being offered, we will, unless in the opinion of
our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such
indemnification.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following tables set forth information regarding beneficial ownership of the
28,393,650 shares of common stock that were issued and outstanding as of June
11, 2010 (i) by each person who is known to us to beneficially own more than 5%
of our common stock; (ii) by each of our officers and directors; and (iii) by
all of our officers and directors as a group. Beneficial ownership is determined
in accordance with Rule 13d-3 under the Securities Exchange Act of 1934 and does
not necessarily bear on the economic incidents of ownership or the rights to
transfer the shares described below. Unless otherwise indicated each stockholder
has sole voting power and dispositive power with respect to the indicated
shares.
Unless
otherwise specified, the address of each of the persons set forth below is in
care of Da Bao Industrial Zone, Shishi City, Fujian, China, 362700.
Title of Class
|
|
Name & Address of
Beneficial Owner
|
|
Office, If
Applicable
|
|
Amount and
Nature of Beneficial
Ownership
|
|
|
Percent of Class
|
|
Common Stock
$0.001 par value
|
|
Pengfei
Liu
Shishi
City, Fujian
Province,
China
|
|
CEO
|
|
|
11,806,537
|
|
|
|
41.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock $0.001 par value
|
|
Marco
Hon Wai Ku
Shishi
City, Fujian
Province,
China
|
|
CFO
|
|
|
54,000
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock $0.001 par value
|
|
Jayhawk
Private Equity Fund, LP (1)
5410
West 61
st
Place, Suite 100
Mission,
KS 66205
|
|
|
|
|
1,892,822
|
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock $.001 par value
|
|
All
officers and directors as a group
|
|
|
|
|
11,860,537
|
|
|
|
41.6
|
%
|
|
(1)
|
Includes
shares of common stock and shares issuable upon exercise of warrants owned
by the two affiliated entities Jayhawk Private Equity Fund, LP and Jayhawk
Private Equity Co-Invest Fund, LP. Jayhawk Private Equity Fund, LP is the
beneifical owner of 1,341,069 shares of common stock and 398,603 shares
issuable upon exercise of warrants, and Jayhawk Private Equity Co-Invest
Fund, LP is the beneficial owner of 84,529 shares of common stock and
68,621 shares issuable upon exercise of warrants,
respectively.
|
CHANGES
OF CONTROL
There are
currently no arrangements which would result in a change in
control.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
INTERESTED
PERSON TRANSACTIONS
Except as
disclosed herein, we have not entered into any related transaction with any
of our directors, executive officers or controlling shareholder or their
affiliates.
The
transactions discussed in this section were not available to third parties.
Pengfei Liu was the only beneficial owner of Xianglin, Jixiang, Mingxiang and
Rixiang when each of the transactions took place. This is why Pengfei Liu and
his wife, Yazuo Qiu, would provide financing for the companies in advance and
provide guarantees without any consideration.
Past
Interested Person Transactions
Details
of the material interested person transactions for the fiscal years ended
December 31, 2009, 2008 and 2007 are set forth below:
Year of
Transaction
|
|
Acquirer
|
|
Acquiree
|
|
Nature/Amount of Property
Acquired or to be Acquired
|
|
Terms of Transaction
|
|
|
|
|
|
|
|
|
|
2007
|
|
Ocean
Technology
|
|
Pengfei
Liu, CEO and Controlling Shareholder
|
|
$262,000
advance.
|
|
Advance
was unsecured, repayable on demand and
interest-free.
|
|
|
|
|
|
|
|
|
|
2008
|
|
Ocean
Technology
|
|
Pengfei
Liu, CEO and Controlling Shareholder
|
|
$170,000
advance.
|
|
Advance
was unsecured, repayable on demand and
interest-free.
|
|
|
|
|
|
|
|
|
|
2009
|
|
Ocean
Technology
|
|
Pengfei
Liu, CEO and Controlling Shareholder
|
|
$70,000
advance.
|
|
Advance
was unsecured, repayable on demand and
interest-free.
|
From time
to time, we have extended advances to Pengfei Liu. The amounts advanced to
Pengfei Liu were interest-free, unsecured and had no fixed terms of
repayment. All advances to Pengfei Liu have been fully repaid as at October
31, 2005. Pengfei Liu had also, from time to time, extended advances to us
for working capital purposes.
Present
Interested Person Transactions
a)
|
Provision
of guarantees by Pengfei Liu and Yazuo
Qiu
|
As at
December 31, 2009, the guarantees provided by these directors and their
respective associates to secure bank facilities from the Agricultural Bank of
China, Shishi Branch, are as follows:
Party to which banking
facilities are granted
|
|
Loan Amount (US$’000)
|
|
Outstanding Loan Amount
(US$’000)
|
|
Guarantees
|
|
|
|
|
|
|
|
Mingxiang
|
|
790
|
|
790
|
|
Guaranteed
by Pengfei Liu and Yazuo Qiu
|
|
|
|
|
|
|
|
Mingxiang
|
|
439
|
|
439
|
|
Guaranteed
by Pengfei Liu and Yazuo Qiu
|
|
|
|
|
|
|
|
Mingxiang
|
|
570
|
|
570
|
|
Guaranteed
by Pengfei Liu and Yazuo Qiu
|
|
|
|
|
|
|
|
Mingxiang
|
|
731
|
|
731
|
|
Guaranteed
by Pengfei Liu and Yazuo Qiu
|
|
|
|
|
|
|
|
Mingxiang
|
|
585
|
|
585
|
|
Guaranteed
by Pengfei Liu and Yazuo Qiu
|
|
|
|
|
|
|
|
Mingxiang
|
|
585
|
|
585
|
|
Guaranteed
by Pengfei Liu and Yazuo Qiu
|
|
|
|
|
|
|
|
Mingxiang
|
|
439
|
|
439
|
|
Guaranteed
by Pengfei Liu and Yazuo
Qiu
|
The
facilities provided by the Agricultural Bank of China, Shishi Branch, were used
to finance our working capital requirements.
As at
December 31, 2009, the total outstanding loan amounts held by us were
approximately $4.1 million, and the full amounts are guaranteed by Pengfei Liu
and Yazuo Qiu. The effective interest rate on these short-term loans is
approximately 5.31% per annum. No consideration was provided to
Pengfei Liu and Yazuo Qiu in exchange for their guarantees.
As of
December 31, 2009, Mingxiang is contingently liable as guarantor with respect to
the loans of $731,294 (equivalent to RMB5,000,000) and $438,776 (equivalent to
RMB3,000,000) to two unrelated third parties, Shishi Yu Ching Knitting and
Clothing Company (“Yu Ching”) and Shishi Han Jiang Hua Lian Knitting and
Clothing Factory (“Han Jiang Hua Lian”), respectively. The term of these
guarantees are commenced from July 2009 through July 2011, with a renewal
provision of 2 years. At any time from the date of guarantees, should Yu Ching
or Han Jiang Hua Lian fail to make their due debt payments, Mingxiang will be
obligated to perform under the guarantees by primarily making the required
payments, including late fees and penalties. The maximum potential amount of
future payments that the Mingxiang is required to make under the guarantees is
$1,170,070 (equivalent to RMB8,000,000).
According
to the Personal Guarantee Agreement between Mingxiang and Mr. Liu, Mr. Liu
agreed to bear all liabilities and costs to be incurred from a direct claim by
the creditor if either Yu Ching or Han Jiang Hua Lian fails to make payment to
the creditor upon due dates.
In
accordance with ASC 460-10
“Guarantees”
, a guarantor
must recognize a liability for the fair value of the obligations it assumes
under certain guarantees. Mingxiang did not receive any consideration for the
guarantee and has determined the indemnification fair value to be insignificant.
As of December 31, 2009, the Company has not recorded any liabilities under
these guarantees.
REVIEW,
APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS
All
ongoing and future transactions between us and any of our officers and directors
and their respective affiliates, including loans by our officers and directors,
will be on terms believed by us to be no less favorable than are available from
unaffiliated third parties. Such transactions or loans, including any
forgiveness of loans, will require prior approval by the Corporate Governance
and Nominating Committee (whose members are “independent” directors) and by a
majority of our disinterested “independent” directors (to the extent we have
any) or the members of our board who do not have an interest in the transaction,
in either case who had access, at our expense, to our attorneys or independent
legal counsel. We will not enter into any such transaction unless our
disinterested (“independent”) directors determine that the terms of such
transaction are no less favorable to us than those that would be available to us
with respect to such a transaction from unaffiliated third parties. We will not
enter into a business combination or invest alongside any of our directors,
officers, any affiliate of ours or of any of our directors or officers or a
portfolio company of any affiliate of our directors or officers.
POTENTIAL
CONFLICTS OF INTERESTS
Save as
disclosed below and under the section “Interested Person Transactions”, during
the past three financial years:
|
a)
|
None of our directors, executive
officers or controlling shareholder or their affiliates have had any
interest, direct or indirect, in any material transaction to which we are
a party.
|
|
b)
|
None of our directors, executive
officers or controlling shareholder or their affiliates has had any
interest, direct or indirect, in any company that carries the same
business or similar trade which competes materially and directly with our
existing business.
|
|
c)
|
None of our directors, executive
officers or controlling shareholder or their affiliates has had any
interest, direct or indirect, in any enterprise or company that is our
major customer or supplier of goods or
services.
|
|
d)
|
None of our directors, executive
officers or controlling shareholder or their affiliates has had any
interest, direct or indirect, in any material transaction we have
undertaken within the last three
years.
|
WHERE YOU CAN FIND MORE
INFORMATION
We have
filed with the SEC a registration statement on Form S-1 under the Securities Act
with respect to the common stock offered in this offering. This Prospectus does
not contain all of the information set forth in the registration statement. For
further information with respect to us and the common stock offered in this
offering, we refer you to the registration statement and to the attached
exhibits. With respect to each such document filed as an exhibit to the
registration statement, we refer you to the exhibit for a more complete
description of the matters involved.
You may
inspect our registration statement and the attached exhibits and schedules
without charge at the public reference facilities maintained by the SEC at 100 F
Street, N.E., Washington, D.C. 20549. You may obtain copies of all or any part
of our registration statement from the SEC upon payment of prescribed fees. You
may obtain information on the operation of the public reference room by calling
the SEC at 1-800-SEC-0330.
Our SEC
filings, including the registration statement and the exhibits filed with the
registration statement, are also available from the SEC’s website at
www.sec.gov, which contains reports, proxy and information statements and other
information regarding issuers that file electronically with the
SEC.
CHINA
MARINE FOOD GROUP LIMITED
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
Report
of Independent Registered Public Accounting Firm, ZYCPA Company
Limited
|
|
F-2
|
|
|
|
Consolidated
Balance Sheets
|
|
F-3
|
|
|
|
Consolidated
Statements of Operation and Comprehensive Income
|
|
F-4
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
F-5
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
F-6
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-7
- F-29
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and stockholders of
China
Marine Food Group Limited
We
have audited the accompanying consolidated balance sheets of China Marine Food
Group Limited and its subsidiaries (“the Company”) as of December 31, 2009 and
2008 and the related consolidated statements of operations and comprehensive
income, cash flows and changes in stockholders’ equity for the years ended
December 31, 2009 and 2008. The financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits include consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2009 and 2008 and the results of their operation and their cash flows for
the years ended December 31, 2009 and 2008 and in conformity with accounting
principles generally accepted in the United States of America.
/s/ ZYCPA Company
Limited
|
|
|
|
ZYCPA
Company Limited
|
|
Certified
Public Accountants
|
|
|
|
Hong
Kong, China
|
|
March
22, 2010
|
|
CHINA
MARINE FOOD GROUP LIMITED
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,143,232
|
|
|
$
|
31,640,307
|
|
Accounts
receivable, net
|
|
|
18,834,062
|
|
|
|
4,819,434
|
|
Inventories
|
|
|
3,876,950
|
|
|
|
6,679,488
|
|
Note
receivable
|
|
|
26,399,696
|
|
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
151,653
|
|
|
|
326,977
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
56,405,593
|
|
|
|
43,466,206
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
8,599,977
|
|
|
|
5,944,515
|
|
Land
use rights, net
|
|
|
615,355
|
|
|
|
630,150
|
|
Prepayment
for land use right
|
|
|
2,274,323
|
|
|
|
-
|
|
Construction
in progress
|
|
|
-
|
|
|
|
1,604,855
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
67,895,248
|
|
|
$
|
51,645,726
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
4,139,121
|
|
|
$
|
4,289,341
|
|
Accounts
payable, trade
|
|
|
885,286
|
|
|
|
416,463
|
|
Amount
due to a stockholder
|
|
|
69,587
|
|
|
|
170,091
|
|
Income
tax payable
|
|
|
618,664
|
|
|
|
362,326
|
|
Accrued
liabilities and other payable
|
|
|
2,334,384
|
|
|
|
1,387,427
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
8,047,042
|
|
|
|
6,625,648
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (see Note 19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 1,000,000 shares authorized; 0 shares issued and
outstanding as of December 31, 2009 and 2008
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value; 100,000,000 shares authorized; 23,413,639 and
23,026,301 shares issued and outstanding as of December 31, 2009 and
2008
|
|
|
23,414
|
|
|
|
23,026
|
|
Additional
paid-in capital
|
|
|
16,888,532
|
|
|
|
16,752,945
|
|
Statutory
reserve
|
|
|
5,614,517
|
|
|
|
4,883,700
|
|
Accumulated
other comprehensive income
|
|
|
3,576,135
|
|
|
|
3,448,436
|
|
Retained
earnings
|
|
|
33,745,608
|
|
|
|
19,911,971
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
59,848,206
|
|
|
|
45,020,078
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
67,895,248
|
|
|
$
|
51,645,726
|
|
See
accompanying notes to consolidated financial statements.
CHINA
MARINE FOOD GROUP LIMITED
CONSOLIDATED
STATEMENTS OF OPERATION AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
Years ended December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
69,585,683
|
|
|
$
|
48,798,804
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
(inclusive of depreciation and amortization)
|
|
|
(50,456,225
|
)
|
|
|
(33,606,972
|
)
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
19,129,458
|
|
|
|
15,191,832
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(79,725
|
)
|
|
|
(58,310
|
)
|
Sales
and marketing
|
|
|
(608,685
|
)
|
|
|
(608,259
|
)
|
General
and administrative
|
|
|
(2,276,006
|
)
|
|
|
(2,067,802
|
)
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
(2,964,416
|
)
|
|
|
(2,734,371
|
)
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
16,165,042
|
|
|
|
12,457,461
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
Subsidy
income
|
|
|
309,901
|
|
|
|
68,225
|
|
Rental
income
|
|
|
82,299
|
|
|
|
73,941
|
|
Interest
income
|
|
|
288,687
|
|
|
|
505,173
|
|
Interest
expense
|
|
|
(230,433
|
)
|
|
|
(319,229
|
)
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
16,615,496
|
|
|
|
12,785,571
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(2,051,042
|
)
|
|
|
(1,662,761
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
14,564,454
|
|
|
$
|
11,122,810
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
127,699
|
|
|
|
2,195,540
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
14,692,153
|
|
|
$
|
13,318,350
|
|
|
|
|
|
|
|
|
|
|
Net
income per share – basic
|
|
$
|
0.63
|
|
|
$
|
0.48
|
|
Net
income per share – diluted
|
|
$
|
0.60
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
23,062,839
|
|
|
|
23,010,842
|
|
Weighted
average shares outstanding – diluted
|
|
|
24,391,942
|
|
|
|
23,010,842
|
|
See
accompanying notes to consolidated financial statements.
CHINA
MARINE FOOD GROUP LIMITED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
|
|
Years ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
14,564,454
|
|
|
$
|
11,122,810
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
330,419
|
|
|
|
237,400
|
|
Loss
on disposal of property, plant and equipment
|
|
|
1,386
|
|
|
|
156,681
|
|
Stock
issued to an executive
|
|
|
66,975
|
|
|
|
77,136
|
|
Stock
issued for service
|
|
|
69,000
|
|
|
|
96,420
|
|
Allowance
for doubtful accounts
|
|
|
70,425
|
|
|
|
3,196
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(14,085,053
|
)
|
|
|
(639,193
|
)
|
Inventories
|
|
|
2,802,538
|
|
|
|
(5,492,153
|
)
|
Prepaid
expenses and other current assets
|
|
|
175,324
|
|
|
|
(161,449
|
)
|
Accounts
payable, trade
|
|
|
468,823
|
|
|
|
(20,157
|
)
|
Income
tax payable
|
|
|
256,338
|
|
|
|
21,232
|
|
Accrued
liabilities and other payable
|
|
|
946,957
|
|
|
|
598,575
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
5,667,586
|
|
|
|
6,000,498
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(353,177
|
)
|
|
|
(634,069
|
)
|
Proceeds
from disposal of property, plant and equipment
|
|
|
-
|
|
|
|
13,906
|
|
Cash
paid to construction in progress
|
|
|
(995,235
|
)
|
|
|
(3,558,441
|
)
|
Cash
paid to prepayment for land use right
|
|
|
(2,274,323
|
)
|
|
|
-
|
|
Advances
to note receivable
|
|
|
(26,399,696
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(30,022,431
|
)
|
|
|
(4,178,604
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment
of amount due to a stockholder
|
|
|
(100,504
|
)
|
|
|
(92,297
|
)
|
Proceeds
from short-term borrowings
|
|
|
4,139,121
|
|
|
|
8,844,844
|
|
Payment
on short-term borrowings
|
|
|
(4,289,341
|
)
|
|
|
(5,388,690
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(250,724
|
)
|
|
|
3,363,857
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes in cash and cash equivalents
|
|
|
108,494
|
|
|
|
1,977,909
|
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(24,497,075
|
)
|
|
|
7,163,660
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
31,640,307
|
|
|
|
24,476,647
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
7,143,232
|
|
|
$
|
31,640,307
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
1,794,704
|
|
|
$
|
1,641,529
|
|
Cash
paid for interest
|
|
$
|
230,433
|
|
|
$
|
319,229
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS
|
|
|
|
|
|
|
|
|
Transfer
from construction in progress to property, plant and
equipment
|
|
$
|
2,600,090
|
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements.
CHINA
MARINE FOOD GROUP LIMITED
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
Common stock
|
|
|
Additional
paid-in
|
|
|
Statutory
|
|
|
Accumulated
other
comprehensive
|
|
|
Retained
|
|
|
Total
stockholder’s
|
|
|
|
No. of shares
|
|
|
Amount
|
|
|
capital
|
|
|
reserve
|
|
|
income
|
|
|
earnings
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
|
22,972,301
|
|
|
$
|
22,972
|
|
|
$
|
16,579,443
|
|
|
$
|
3,110,266
|
|
|
$
|
1,252,896
|
|
|
$
|
10,562,595
|
|
|
$
|
31,528,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued to an executive
|
|
|
24,000
|
|
|
|
24
|
|
|
|
77,112
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77,136
|
|
Stock
issued for service
|
|
|
30,000
|
|
|
|
30
|
|
|
|
96,390
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
96,420
|
|
Net
income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,122,810
|
|
|
|
11,122,810
|
|
Appropriation
to statutory reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,773,434
|
|
|
|
-
|
|
|
|
(1,773,434
|
)
|
|
|
-
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,195,540
|
|
|
|
-
|
|
|
|
2,195,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2008
|
|
|
23,026,301
|
|
|
$
|
23,026
|
|
|
$
|
16,752,945
|
|
|
$
|
4,883,700
|
|
|
$
|
3,448,436
|
|
|
$
|
19,911,971
|
|
|
$
|
45,020,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued to an executive
|
|
|
30,000
|
|
|
|
30
|
|
|
|
66,945
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,975
|
|
Stock
issued for service
|
|
|
25,051
|
|
|
|
25
|
|
|
|
68,975
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,000
|
|
Exercise
of warrants
|
|
|
332,287
|
|
|
|
333
|
|
|
|
(333
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,564,454
|
|
|
|
14,564,454
|
|
Appropriation
to statutory reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
730,817
|
|
|
|
-
|
|
|
|
(730,817
|
)
|
|
|
-
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
127,699
|
|
|
|
-
|
|
|
|
127,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2009
|
|
|
23,413,639
|
|
|
$
|
23,414
|
|
|
$
|
16,888,532
|
|
|
$
|
5,614,517
|
|
|
$
|
3,576,135
|
|
|
$
|
33,745,608
|
|
|
$
|
59,848,206
|
|
See
accompanying notes to consolidated financial statements.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
1. ORGANIZATION
AND BUSINESS BACKGROUND
China
Marine Food Group Limited (“China Marine” or “the Company”) was incorporated in
the State of Nevada on October 1, 1999 in the former name of New Paradigm
Productions, Inc. On November 16, 2007, the Company changed its current name to
“China Marine Food Group Limited”.
China
Marine, through its subsidiaries, mainly engages in the manufacture and
distribution of seafood products, including dried and frozen seafood products,
and trades with customers in domestic and overseas markets, with its principal
place of business in Shishi City, Fujian Province, China.
Recapitalization
and reorganization
On
November 17, 2007, China Marine completed a stock exchange transaction with the
stockholders of Ocean Technology (China) Company Limited (“Ocean Technology”),
whereby 15,624,034 shares of the Company’s common stock were issued to the
stockholders of Ocean Technology in exchange for 100% of their outstanding
capital stock in Ocean Technology. As a result of the stock exchange, the former
stockholders of Ocean Technology owned approximately 93.15% of the issued and
outstanding shares of common stock of the Company.
Concurrently
with the closing of the stock exchange on November 17, 2007, China Marine
completed a private placement of securities to certain accredited investors who
subscribed to units consisting of one share of common stock and one warrant to
purchase one-fifth of one share of the common stock. The investors subscribed to
an aggregate of 6,199,441 units, consisting of 6,199,441 shares of the Company’s
common stock and warrants to purchase an aggregate of 1,239,888 shares of the
common stock at $3.214 per unit. The units were offered and sold pursuant to
exemptions from registration under the Securities Act of 1933, including without
limitation, Regulation D and Regulation S promulgated under the Securities Act.
The gross cash proceeds from the private placement totaled $19,925,000 less
estimated offering expenses of $5,941,014 cash and warrant shares granted. Also
in connection with this stock exchange and private placement transactions, China
Marine granted 929,916 warrant shares to certain agents and consultants
exercisable at $4.1782 per share for a term of 3 years.
On
November 16, 2007, China Marine approved to change to its current name with a
new stock symbol "CMFO”.
Upon
completion of the stock exchange and private placement transactions, Ocean
Technology became a wholly-owned subsidiary of China Marine. The stock exchange
transaction has been accounted for as a reverse acquisition and recapitalization
of China Marine whereby Ocean Technology is deemed to be the accounting acquirer
(legal acquiree) and China Marine to be the accounting acquiree (legal
acquirer). The accompanying consolidated financial statements are in substance
those of Ocean Technology, with the assets and liabilities, and revenues and
expenses, of China Marine being included effective from the date of stock
exchange transaction. China Marine is deemed to be a continuation of the
business of Ocean Technology.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
Business
history of subsidiaries
Name
|
|
Place of incorporation
and kind of
legal entity
|
|
Principal activities
and place of
operation
|
|
Particulars of issued/
registered share
capital
|
|
Effective
interest
held
|
|
|
|
|
|
|
|
|
|
Ocean
Technology (China) Company Limited (“Ocean
Technology”)
|
|
Hong
Kong, a limited liability company
|
|
Investment
holding in Hong Kong
|
|
10,000
issued shares of HK$1 each
|
|
100%
|
|
|
|
|
|
|
|
|
|
Shishi
Rixiang Marine Foods Co., Ltd. (“Rixiang”)
|
|
The
PRC, a limited liability company
|
|
Trading
and distribution of marine products in the PRC and
overseas
|
|
$11,000,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
Shishi
Huabao Mingxiang Foods Co., Ltd (“Mingxiang”)
|
|
The
PRC, a limited liability company
|
|
Property
holding
|
|
RMB30,000,000
|
|
100%
|
Shishi
Huabao Jixiang Water Products Co., Ltd (“Jixiang”)
|
|
The
PRC, a limited liability company
|
|
Property
holding
|
|
RMB4,500,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
Shishi
Xianglin Trading Co., Ltd. (“Xianglin”)
|
|
The
PRC, a limited liability company
|
|
Dormant
|
|
RMB800,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
China
Marine and its subsidiaries are hereinafter referred to as “the
Company”.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (“US
GAAP”).
The
consolidated financial statements include the financial statements of China
Marine and its subsidiaries.
All
significant intercompany balances and transactions within the Company have been
eliminated upon consolidation.
In
preparing these financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities in the balance sheets
and revenues and expenses during the years reported. Actual results could differ
from these estimates.
l
|
Cash
and cash equivalents
|
Cash
and cash equivalents are carried at cost and represent cash on hand, demand
deposits placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
The
Company maintains cash and cash equivalent balances at a financial institution
in the PRC, which are insured by the People’s Bank of China. The Company had
cash concentration risk of $7,125,721 and $31,640,307 as of December 31, 2009
and 2008, respectively.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
l
|
Accounts
receivable and allowance for doubtful
accounts
|
Accounts
receivable are recorded at the invoiced amount and do not bear interest.
Management reviews the adequacy of the allowance for doubtful accounts on an
ongoing basis, using historical collection trends and aging of receivables.
Management also periodically evaluates individual customer’s financial
condition, credit history, and the current economic conditions to make
adjustments in the allowance when it is considered necessary. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company does
not have any off-balance-sheet credit exposure related to its
customers.
As of
December 31, 2009 and 2008, the allowance for doubtful accounts was $94,643 and
$24,218, respectively.
Inventories
consist of frozen products from marine catch, processed seafood products and
materials used in the manufacture of the Company’s products. Inventories are
stated at the lower of cost or net realizable value, with cost being determined
on a weighted average basis. Costs include purchased cost of raw fishes, direct
labor and manufacturing overhead costs. The Company periodically reviews
historical sales activity to determine excess, slow moving items and potentially
obsolete items and also evaluates the impact of any anticipated changes in
future demand. The Company provides inventory allowances based on excess and
obsolete inventories determined principally by customer demand.
As of
December 31, 2009 and 2008, the Company did not record an allowance for obsolete
inventories, nor have there been any write-offs.
l
|
Property,
plant and equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date on
which they become fully operational and after taking into account their
estimated residual values:
|
|
Depreciable life
|
|
Residual value
|
|
Buildings
|
|
30-50
years
|
|
|
10%
|
|
Plant
and machinery
|
|
10-30
years
|
|
|
10%
|
|
Office
equipments
|
|
8-10
years
|
|
|
10%
|
|
Motor
vehicles
|
|
5
years
|
|
|
10%
|
|
Expenditure
for repairs and maintenance is expensed as incurred. When assets have retired or
sold, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the results of
operations.
All
lands in the PRC are owned by the PRC government. The government in the PRC,
according to the relevant PRC law, may sell the right to use the land for a
specified period of time. Thus, all of the Company’s land purchases in the PRC
are considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided over
the term of the land use right agreements on a straight-line basis, which is 50
years and they will expire in 2052.
l
|
Impairment
of long-lived assets
|
In
accordance with the provisions of Accounting Standards Codification ("ASC")
Topic 360-10-5, “
Impairment or
Disposal of Long-Lived Assets
”, all long-lived assets such as property,
plant and equipment, land use rights and construction in progress held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is evaluated by a
comparison of the carrying amount of assets to estimated discounted net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed the fair value of the assets. There
has been no impairment as of December 31, 2009 and 2008.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
In
accordance with the ASC Topic 605,
“Revenue Recognition”
, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling price
is fixed or determinable and collectibility is reasonably
assured.
The
Company derives revenues from the processing, distribution and sale of processed
seafood products and sale of marine catch. The Company recognizes its revenues
net of value-added taxes (“VAT”). The Company is subject to VAT which is levied
on the majority of the products at the rate ranging from 13% to 17% on the
invoiced value of sales. Output VAT is borne by customers in addition to the
invoiced value of sales and input VAT is borne by the Company in addition to the
invoiced value of purchases to the extent not refunded for export
sales.
The
Company recognizes revenue from the sale of products upon delivery to the
customers and the transfer of title and risk of loss. The Company experienced no
product returns and has recorded no reserve for sales returns for the years
ended December 31, 2009 and 2008.
The
Company has distributor arrangements with certain parties for sale of its
processed seafood products. The distributor agreements do not provide
chargeback, price protection, or stock rotation rights. Accordingly, the Company
records the revenue, net of VAT incurred when products are delivered to and
received by the distributors.
Rental
income from operating leases on real estate properties is recognized on a
straight-line basis over the lease period.
Cost
of revenue consists primarily of purchase cost of raw fishes, packaging
materials, direct labor, depreciation and manufacturing overhead, which are
directly attributable to the manufacture of processed seafood products and
marine catch. Shipping and handling costs, associated with the distribution of
finished products to customers, are borne by the customers.
l
|
Government
subsidy income
|
Subsidy
income is received at a discretionary amount as determined by the local PRC
government. Subsidy income is recognized at their fair value where there is a
reasonable assurance that the subsidy will be received and the Company will
comply with applicable conditions. Subsidy income is recognized in the
accompanying consolidated statements of operations at the period when it was
received from the local PRC government.
Advertising
costs are expensed as incurred under ASC Topic 720-35,
“Advertising Costs”
. The
Company incurred advertising expense of $196,461 and $151,177 for the years
ended December 31, 2009 and 2008, respectively.
l
|
Research
and development
|
Research
and development costs are expensed when incurred in the development of new
products or processes including significant improvements and refinements of
existing products. Such costs mainly relate to labor and material cost. The
Company incurred $236,595 and $87,327 of such costs for the years ended December
31, 2009 and 2008, respectively.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
Contributions
to retirement schemes (which are defined contribution plans) are charged to
general and administrative expenses in the accompanying consolidated statements
of operation and comprehensive income as the related employee service is
provided.
ASC
Topic 220,
“Reporting
Comprehensive Income”,
establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income as defined includes all changes in equity during a period from non-owner
sources. Accumulated other comprehensive income, as presented in the
accompanying statement of changes in stockholders’ equity, consists of changes
in unrealized gains and losses on foreign currency translation. This
comprehensive income is not included in the computation of income tax expense or
benefit.
The
Company adopts ASC Topic 740,
“Income Taxes”
, regarding
accounting for uncertainty in income taxes which prescribes the recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken on a tax return. In
addition, the guidance requires the determination of whether the benefits of tax
positions will be more likely than not sustained upon audit based upon the
technical merits of the tax position. For tax positions that are determined to
be more likely than not sustained upon audit, a company recognizes the largest
amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not
determined to be more likely than not sustained upon audit, a company does not
recognize any portion of the benefit in the financial statements. The guidance
provides for de-recognition, classification, penalties and interest, accounting
in interim periods and disclosure.
For
the years ended December 31, 2009 and 2008, the Company did not have any
interest and penalties associated with tax positions. As of December 31, 2009
and 2008, the Company did not have any significant unrecognized uncertain tax
positions.
The
Company conducts major businesses in the PRC and is subject to tax in this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax
authority.
The
Company calculates net income per share in accordance with ASC Topic 260,
“Earnings per Share.”
Basic
income per share is computed by dividing the net income by the weighted average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.
l
|
Foreign
currencies translation
|
Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the consolidated statement of operation and
comprehensive income.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
The
reporting currency of the Company is the United States Dollars ("US$"). The
Company's subsidiaries in the PRC maintain their books and records in its local
currency, the Renminbi Yuan ("RMB"), which is functional currency as being the
primary currency of the economic environment in which these entities
operate.
In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with ASC Topic 830-30, “
Translation of Financial
Statement”
, using the exchange rate on the balance sheet date. Revenues
and expenses are translated at average rates prevailing during the period. The
gains and losses resulting from translation of financial statements of foreign
subsidiaries are recorded as a separate component of accumulated other
comprehensive income within the statement of changes in stockholders’
equity.
Translation
of amounts from RMB into US$1 has been made at the following exchange rates for
the respective year:
|
|
2009
|
|
|
2008
|
|
Year-end
rates RMB:US$1 exchange rate
|
|
|
6.8372
|
|
|
|
6.8542
|
|
Average
yearly rates RMB:US$1 exchange rate
|
|
|
6.8409
|
|
|
|
6.9623
|
|
l
|
Stock-based
compensation
|
The
Company adopts ASC Topic 718-20,
"
Compensation -
Stock Compensation"
("ASC
718-20"), using the fair value method. Under ASC 718-20, stock-based
compensation cost is measured at the grant date based on the fair value of the
award or using the Black-Scholes pricing model and is recognized as expense over
the appropriate service period.
Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operational decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.
ASC
Topic 280,
“
Segment
Reporting
”
establishes standards for
reporting information about operating segments on a basis consistent with the
Company’s internal organization structure as well as information about
geographical areas, business segments and major customers in financial
statements. For the years ended December 31, 2009 and 2008, the Company operates
in two principal reportable segments: sale of processed seafood products and
trading of marine catch.
ASC
Topic 820-10, “
Fair Value
Measurements and Disclosures
” ("ASC 820-10") establishes a new framework
for measuring fair value and expands related disclosures. Broadly, ASC 820-10
framework requires fair value to be determined based on the exchange price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants. ASC 820-10 establishes a
three-level valuation hierarchy based upon observable and non-observable inputs.
These tiers include: Level 1, defined as observable inputs such as quoted prices
in active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined
as unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
For
financial assets and liabilities, fair value is the price the Company would
receive to sell an asset or pay to transfer a liability in an orderly
transaction with a market participant at the measurement date. In the absence of
active markets for the identical assets or liabilities, such measurements
involve developing assumptions based on market observable data and, in the
absence of such data, internal information that is consistent with what market
participants would use in a hypothetical transaction that occurs at the
measurement date.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
Cash
and cash equivalents, accounts receivable, prepaid expenses and other current
assets, accounts payable, amount due to a stockholder, income tax payable and
accrued liabilities and other payable are carried at cost which approximates
fair value. The estimated fair value of short-term borrowing was $4.1 million
and $4.3 million as of December 31, 2009 and 2008, respectively, based on
current market prices or interest rates. Any changes in fair value of assets or
liabilities carried at fair value are recognized in other comprehensive income
for each period.
l
|
Recent
accounting pronouncements
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and does not believe the future adoption of any such
pronouncements may be expected to cause a material impact on its financial
condition or the results of its operations.
During
2009, Accounting Standards Codification (“ASC”) became the source of
authoritative U.S. GAAP recognized by the Financial Accounting Standards Board
(“FASB”) for nongovernmental entities, except for certain FASB Statements not
yet incorporated into ASC. Rules and interpretive releases of the SEC under
federal securities laws are also sources of authoritative U.S. GAAP for
registrants. The discussion below includes the applicable ASC
reference.
The
Company adopted ASC Topic 810-10, “
Consolidation
” (formerly SFAS
No. 160, “
Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51
”) effective January 2, 2009. Topic 810-10 changes the manner of
presentation and related disclosures for the noncontrolling interest in a
subsidiary (formerly referred to as a minority interest) and for the
deconsolidation of a subsidiary. The adoption of these sections did not have a
material impact on the Company’s consolidated financial
statements.
ASC
Topic 815-10, “
Derivatives and
Hedging
” (formerly SFAS No. 161, “
Disclosures about Derivative
Instruments and Hedging Activities
”) was adopted by the Company effective
January 2, 2009. The guidance under ASC Topic 815-10 changes the manner of
presentation and related disclosures of the fair values of derivative
instruments and their gains and losses.
In
April 2009, the FASB issued an update to ASC Topic 820-10, “
Fair Value Measurements and
Disclosures
” (“ASC 820-10) (formerly FASB Staff Position No. SFAS 157-4,
“
Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly
”). The
standard provides additional guidance on estimating fair value in accordance
with ASC 820-10 when the volume and level of transaction activity for an asset
or liability have significantly decreased in relation to normal market activity
for the asset or liability have significantly decreased and includes guidance on
identifying circumstances that indicate if a transaction is not orderly. The
Company adopted this pronouncement effective April 1, 2009 with no impact on its
consolidated financial statements.
In
April 2009, the FASB issued FSP SFAS No. 107-1, “
Disclosures about Fair Value of
Financial Instruments
” (“ASC 825-10”). ASC 825-10 requires fair value of
financial instruments disclosure for interim reporting periods of publicly
traded companies as well as in annual financial statements. ASC 825-10 is
effective for interim periods ending after June 15, 2009 and was adopted by the
Company in the second quarter of 2009. There was no material impact to the
Company’s consolidated financial statements as a result of the adoption of ASC
825-10.
In
April 2009, the FASB issued FSP APB No. 28-1, “
Interim Financial Reporting
”
(“ASC 825-10”). ASC 825-10 requires the fair value of financial instruments
disclosure in summarized financial information at interim reporting periods. ASC
825-10 is effective for interim periods ending after June 15, 2009 and was
adopted by the Company in the second quarter of 2009. There was no material
impact to the Company’s consolidated financial statements as a result of the
adoption of ASC 825-10.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
In
June 2009, the FASB finalized SFAS No. 167, “
Amending FASB interpretation No.
46(R)
”, which was included in ASC Topic 810-10-05 “
Variable Interest Entities
”.
The provisions of ASC Topic 810-10-05 amend the definition of the primary
beneficiary of a variable interest entity and will require the Company to make
an assessment each reporting period of its variable interests. The provisions of
this pronouncement are effective January 1, 2010. The Company is evaluating the
impact of the statement on its consolidated financial
statements.
In
July 2009, the FASB issued SFAS No. 168, “
The Hierarchy of Generally Accepted
Accounting Principles
”. SFAS 168 codified all previously issued
accounting pronouncements, eliminating the prior hierarchy of accounting
literature, in a single source for authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. SFAS 168, now ASC Topic 105-10
“
Generally Accepted Accounting
Principles
”, is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of this
pronouncement did not have an effect on the Company’s consolidated financial
statements.
In
August 2009, the FASB issued an update of ASC Topic 820, “
Measuring Liabilities at Fair Value
”. The new guidance provides clarification that in circumstances in which
a quoted price in an active market for the identical liability is not available,
a reporting entity is required to measure fair value using prescribed
techniques. The Company adopted the new guidance in the third quarter of 2009
and it did not materially affect the Company’s financial position and results of
operations.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13,
“
Revenue Recognition (Topic
605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB
Emerging Issues Task Force)
” which amends ASC 605-25, “
Revenue Recognition:
Multiple-Element Arrangements
.” ASU No. 2009-13 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting and how to allocate consideration to each unit of
accounting in the arrangement. This ASU replaces all references to fair value as
the measurement criteria with the term selling price and establishes a hierarchy
for determining the selling price of a deliverable. ASU No. 2009-13 also
eliminates the use of the residual value method for determining the allocation
of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded
disclosures. This ASU will become effective for us for revenue arrangements
entered into or materially modified on or after April 1, 2011. Earlier
application is permitted with required transition disclosures based on the
period of adoption. The Company is currently evaluating the application date and
the impact of this standard on its consolidated financial
statements.
In
September 2009, the FASB issued certain amendments as codified in ASC 605-25,
“
Revenue Recognition;
Multiple-Element Arrangements
.” These amendments provide
clarification on whether multiple deliverables exist, how the arrangement should
be separated, and the consideration allocated. An entity is required to
allocate revenue in an arrangement using estimated selling prices of
deliverables in the absence of vendor-specific objective evidence or third-party
evidence of selling price. These amendments also eliminate the use of the
residual method and require an entity to allocate revenue using the relative
selling price method. The amendments significantly expand the disclosure
requirements for multiple-deliverable revenue arrangements. These
provisions are to be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010, with earlier application permitted. The Company is currently
evaluating the impact of these amendments to its consolidated financial
statements.
In
November 2009, the FASB issued ASU 2009-16, “
Transfers and Servicing
(Topic 860) –
Accounting
for Transfers of Financial Assets
,” which formally codifies FASB
Statement No. 166, “
Accounting
for Transfers of Financial Assets
.” ASU 2009-16 is a revision to SFAS No.
140, “
Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities
,”
and requires more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transfer of financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. The provisions are
effective January 1, 2010, for a calendar year-end entity, with early
application not being permitted. Adoption of these provisions is not
expected to have a material impact on the Company’s consolidated financial
statements.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
The
majority of the Company’s sales are on open credit terms and in accordance with
terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible. If
actual collections experience changes, revisions to the allowance may be
required.
Accounts
receivable consisted of the following:
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Accounts
receivable, at cost
|
|
$
|
18,928,705
|
|
|
$
|
4,843,652
|
|
Less:
allowance for doubtful accounts
|
|
|
(94,643
|
)
|
|
|
(24,218
|
)
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
18,834,062
|
|
|
$
|
4,819,434
|
|
For
the years ended December 31, 2009 and 2008, the Company provided the allowance
for doubtful accounts of $70,425 and $3,196, respectively.
Inventories
consisted of the following:
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
510,104
|
|
|
$
|
5,076,881
|
|
Work-in-process
|
|
|
3,018,720
|
|
|
|
1,262,854
|
|
Finished
goods
|
|
|
151,197
|
|
|
|
126,300
|
|
Packaging
materials
|
|
|
196,929
|
|
|
|
213,453
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,876,950
|
|
|
$
|
6,679,488
|
|
For
the years ended December 31, 2009 and 2008, the Company recorded no allowance
for slow-moving and obsolete inventories.
On
November 27, 2009, the Company’s subsidiary, Mingxiang entered into a Credit or
Share Purchase Option Agreement (the “Agreement”) among Shishi Xianghe Food
Science and Technology Co., Ltd (“Xianghe”) and its owner, Mr. Qiu Shang Jing
(“Mr. Qiu”). Pursuant to the Agreement, Mingxiang provided a short-term loan to
Xianghe in the amount of approximately $26,400,000 (equivalent to
RMB180,500,000) for working capital purposes, which carried interest at 5% per
annum, monthly payable and matures on January 26, 2010. This loan was secured by
all of the registered capital of Xianghe owned by Mr. Qiu.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
In
addition, the Agreement offered Mingxiang the option to acquire from Mr. Qiu 80%
registered capital of Xianghe at a consideration of approximately $27,800,000
(equivalent to RMB190,000,000) if Mingxiang decided that Mingxiang did not want
Xianghe to repay the loan. Should Mingxiang elect to exercise the option,
Mingxiang needs to give a written notice to Xianghe and to transfer the
$26,400,000 from Xianghe to Mr. Qiu. The remaining RMB9,500,000 (approximately
$1,400,000) consideration shall be paid to Mr. Qiu by Mingxiang within 30
days after completion of Xianghe’s audit report.
On
January 1, 2010, Mingxiang exercised the option and became an equity owner of
Xianghe.
6.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property,
plant and equipment, net, consisted of the following:
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Buildings
|
|
$
|
6,620,904
|
|
|
$
|
4,008,018
|
|
Plant
and machinery
|
|
|
3,484,371
|
|
|
|
3,162,665
|
|
Office
equipments
|
|
|
65,010
|
|
|
|
43,994
|
|
Motor
vehicles
|
|
|
578,810
|
|
|
|
561,279
|
|
|
|
|
10,749,095
|
|
|
|
7,775,956
|
|
Less:
accumulated depreciation
|
|
|
(2,149,118
|
)
|
|
|
(1,831,441
|
)
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$
|
8,599,977
|
|
|
$
|
5,944,515
|
|
As of
December 31, 2009 and 2008, certain property, plant and equipment with the net
book value of $2,277,824 and $2,380,187, respectively, were pledged as
securities in connection with the outstanding short-term borrowings, as
described in more details in Note 8.
Depreciation
expenses for the years ended December 31, 2009 and 2008 were $314,065 and
$221,327, respectively, which included $240,272 and $168,847 in cost of
revenue.
During
2009, construction in progress was fully completed for operational use and
transferred to property, plant and equipment accordingly.
Certain
property, plant and equipment with original costs of $988,770 and $749,260 have
become fully depreciated as of December 31, 2009 and 2008,
respectively.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
Land
use rights consisted of the following:
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Land
use rights, at cost
|
|
$
|
805,937
|
|
|
$
|
803,938
|
|
Less:
accumulated amortization
|
|
|
(190,582
|
)
|
|
|
(173,788
|
)
|
|
|
|
|
|
|
|
|
|
Land
use rights, net
|
|
$
|
615,355
|
|
|
$
|
630,150
|
|
As of
December 31, 2009 and 2008, certain land use rights with the net book value of
$401,682 and $411,088, respectively, were pledged as securities in connection
with the outstanding short-term borrowings, as described in Note
8.
Amortization
expenses for the years ended December 31, 2009 and 2008 were $16,354 and
$16,073, respectively, in which $10,422 and $10,243 were included in cost of
revenue. Estimated aggregate future amortization expense for the succeeding 5
years and thereafter as of December 31, 2009 is as follows:
Years
ending December 31,
|
|
|
|
2010
|
|
$
|
16,354
|
|
2011
|
|
|
16,354
|
|
2012
|
|
|
16,354
|
|
2013
|
|
|
16,354
|
|
2014
|
|
|
16,354
|
|
Thereafter
|
|
|
533,585
|
|
|
|
|
|
|
Total
|
|
$
|
615,355
|
|
8.
|
PREPAYMENT
FOR LAND USE RIGHTS
|
On
November 6, 2009, the Company’s subsidiary, Mingxiang won the auction for the
purchase of the 40-year use right of a land in Shishi City, Fujian Province, the
PRC. Mingxiang executed an Auction Confirmation Letter regarding this purchase,
which was confirmed by the Company that conducted the auction. Covering an area
of 8,691.4 square meters, the land is located next to the fishing port and the
Company’s processing facilities in Shishi City. The purchase price for the land
use right is $2,274,323 (equivalent to RMB 15.55 million).
The
Company plans to build cold storage facilities on the land with a capacity of
approximately 20,000 tons, to take advantage of its proximity to the port where
the Company obtains fresh seafood catch to be processed into seafood products.
The Company expects to complete the construction in late
2010.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
Short-term
borrowings consisted of the following:
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Bank
loans, payable to a financial institution in the PRC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB5,400,000, due on February 2, 2009
|
|
|
-
|
|
|
|
787,839
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,000,000, due on February 17, 2009
|
|
|
-
|
|
|
|
437,688
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB5,000,000, due on February 19, 2009
|
|
|
-
|
|
|
|
729,479
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB4,000,000, due on February 25, 2009
|
|
|
-
|
|
|
|
583,584
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB5,000,000, due on February 21, 2009
|
|
|
-
|
|
|
|
729,479
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,000,000, due on April 7, 2009
|
|
|
-
|
|
|
|
437,688
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB4,000,000, due on May 18, 2009
|
|
|
-
|
|
|
|
583,584
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB5,400,000, due on February 12, 2010
|
|
|
789,797
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,000,000, due on February 16, 2010
|
|
|
438,776
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,900,000, due on February 18, 2010
|
|
|
570,409
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB5,000,000, due on February 24, 2010
|
|
|
731,293
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB4,000,000, due on February 26, 2010
|
|
|
585,035
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB4,000,000, due on March 17, 2010
|
|
|
585,035
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,000,000, due on March 26, 2010
|
|
|
438,776
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
borrowings
|
|
$
|
4,139,121
|
|
|
$
|
4,289,341
|
|
The
Company’s wholly-owned subsidiary, Mingxiang obtained short-term bank loans in
the aggregate amount of $4,139,121 and $4,289,341 as of December 31, 2009 and
2008, respectively, with Agricultural Bank of China, a registered financial
institution in the PRC. The weighted average effective interest rate per annum
was 5.31% and 7.85% for 2009 and 2008, respectively, payable
quarterly.
All
bank borrowings were guaranteed by the major stockholder, Mr. Pengfei Liu (“Mr.
Liu”) and his associated, Ms. Yazuo Qiu and were secured by certain land use
rights, property, plant and equipment held by the Company’s subsidiaries,
Mingxiang, Rixiang and Jixiang with an aggregate net book value of $2,679,506 as
of December 31, 2009 (2008: $2,791,275).
10.
|
AMOUNT
DUE TO A STOCKHOLER
|
As of
December 31, 2009 and 2008, the amounts of $69,587 and $170,091 represented
temporary advances for working capital purposes from a major stockholder, Mr.
Liu, which was unsecured, interest free and repayable on
demand.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
11.
|
ACCRUED
LIABILITIES AND OTHER PAYABLE
|
Accrued
liabilities and other payable consisted of the following:
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Value-added
tax payable
|
|
$
|
1,259,353
|
|
|
$
|
582,010
|
|
Accrued
payroll and benefits
|
|
|
732,958
|
|
|
|
547,956
|
|
Accrued
construction cost
|
|
|
130,146
|
|
|
|
94,549
|
|
Accrued
operating expenses
|
|
|
48,457
|
|
|
|
76,866
|
|
Accrued
professional expenses
|
|
|
150,107
|
|
|
|
79,457
|
|
Other
payable
|
|
|
13,363
|
|
|
|
6,589
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,334,384
|
|
|
$
|
1,387,427
|
|
(a) Issuance
of common stock
On
July 26, 2008, the Company entered into an Employment Agreement with its CFO in
which the Company agreed to provide restricted common stock award totaling
30,000 shares at the anniversary of the agreement or at the time of successful
listing of the Company on any stock exchange other than OTCBB, whichever is
earlier. During 2009, the Company issued 30,000 shares of common stock to its
CFO at the fair value of $66,975.
On
February 20, 2009, the Company entered into an Investor Relations Consulting
Agreement with Hayden Communications International, Inc (''HCI'') in exchange
for consulting services to the Company. The Company agreed to provide 20,000
shares of restricted common stock to HCI upon the effectiveness of a
registration statement on Form S-1. The shares of common stock were valued at
$29,000 in total.
In
2009, the Company and its legal counsel, McLaughlin & Stern LLP
(“McLaughlin”), came into an agreement that the Company agreed to issue 5,051
shares of restricted common stock to McLaughlin in exchange for certain legal
services to the Company. The shares of common stock were valued at $40,000 in
total.
(b) Private
placement offering
On
November 17, 2007, the Company completed a private placement of securities to
certain accredited investors who subscribed to units consisting of one share of
common stock and one warrant to purchase one-fifth of one share of the Company’s
common stock. The investors subscribed to an aggregate of 6,199,441 units,
consisting of 6,199,441 shares of common stock and warrants of the Company to
purchase an aggregate of 1,239,888 shares of the common stock at $3.214 per
unit. The units were offered and sold pursuant to exemptions from registration
under the Securities Act, including without limitation, Regulation D and
Regulation S promulgated under the Securities Act. The gross cash proceeds from
the private placement totaled $19,925,000 less estimated offering expense of
$5,941,014, which includes the fair value of warrants granted to consultants and
agents, as discussed below.
On
November 17, 2007, in connection with the securities purchase agreement, the
Company also entered into a registration rights agreement, under which it agreed
to use its commercially reasonable efforts to cause the common stock issued and
issuable upon exercise of the warrants issued to the investors, placement agent,
and consultants, to be registered for resale on an appropriate form for
registration to be filed with the SEC within 30 days following the closing. If
the registration statement is not filed within such 30 day period or does not
become effective within 180 days after closing, the Registrant is subject to a
monthly penalty of 1% of the offering amount, up to a maximum of $1,000,000.
Upon the effectiveness of the registration statement, the Registrant will also
maintain the effectiveness of the registration statement for a specified period
of time. The registration statement has declared effective on December 14, 2007,
therefore no penalty was accrued.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
Additionally,
the Company’s principal stockholder and director, Mr. Liu, entered into a
Lock-Up Agreement with the investors whereby Mr. Liu agreed that he will not (i)
sell, offer to sell, contract or agree to sell, hypothecate, hedge, pledge grant
any option to purchase or otherwise dispose of or agree to dispose of, directly
or indirectly, any shares or warrants or other rights to purchase the shares or
other shares of common stock, or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the common stock, or warrants or other rights to purchase shares
of common stock, whether any such transaction is to be settled by delivery of
such securities, in cash or otherwise, during the period beginning on November
17, 2007 through and including the date which is 6 months after the closing of
the effective registration statement.
Pursuant
to a Make Good Agreement signed between Mr. Liu and the investors on November
17, 2007, Mr. Liu agreed to transfer an aggregate 6,199,441 shares of the
Company’s common stock into an escrow account, which he beneficially owned and
is subject to the automatic release upon the attainment of certain
performance-based goals. If the Company does not generate net income of $10.549
million for the fiscal year ending December 31, 2008 and $14.268 million for the
fiscal year ending December 31, 2009, the shares held in escrow will be
transferred to the private placement investors, on a pro rata basis in
accordance with the following formula: If the 2008 net income threshold is not
achieved then an amount of shares equal to (($10.549 million - 2008 adjusted net
income)/$10.549 million) multiplied by 50% of the escrowed shares will be
transferred to the private placement investors. If the 2009 net income threshold
is not achieved then an amount of shares equal to (($14.268 million - 2009
adjusted net income)/$14.268 million) multiplied by 50% of the escrowed shares
will be transferred to the private placement investors. In the event that the
net income for 2008 and 2009 meet the minimum net income thresholds for those
respective years, then no transfer of the escrowed shares shall be made to the
private placement investors and the shares will then be returned to Mr. Liu.
Management has determined that the thresholds for the year ended December 31,
2008 and 2009 have been met.
(c) Warrants
granted, accounted for under the fair value method
In
connection with the private placement offering, on November 17, 2007, the
Company granted to consultants and agents warrants to purchase an aggregate of
929,916 shares of the Company’s common stock at an exercise price of $4.1782 per
share or on a cashless exercise basis. The warrants vested immediately and will
expire on November 16, 2010. The market price of the stock was $4.1782 per share
on the grant date. The Company valued the warrants at $2.0873 per share, or
$1,941,014, using the Black-Scholes option-pricing model under ASC 718-20 and
was recorded as offering expense in additional paid-in capital in the fiscal
year 2007.
During
the year ended December 31, 2009, certain warrant holders exercised 840,701
warrants on a cashless exercise basis to purchase 332,287 shares of the
Company’s common stock.
A
summary of warrant activity for the years ended December 31, 2009 and 2008 is as
follows:
|
|
Number of
warrants
|
|
|
Weighted
average
exercise price
|
|
|
Remaining
contractual
term (year)
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable as of January 1, 2008
|
|
|
2,169,804
|
|
|
|
4.1782
|
|
|
|
2.87
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
and exercisable as of December 31, 2008
|
|
|
2,169,804
|
|
|
$
|
4.1782
|
|
|
|
1.87
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(840,701
|
)
|
|
|
4.1782
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
and exercisable as of December 31, 2009
|
|
|
1,329,103
|
|
|
$
|
4.1782
|
|
|
|
0.88
|
|
|
|
-
|
|
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
(d) Distribution
of dividends
The
Company did not declare any dividends for the years ended December 31, 2008 and
2009.
As of
December 31, 2009, the number of authorized shares and outstanding shares of the
Company’s common stock was 100,000,000 shares and 23,413,639 shares,
respectively.
Basic
net income per share is computed using the weighted average number of the
ordinary shares outstanding during the year. Diluted net income per share is
computed using the weighted average number of ordinary shares and ordinary share
equivalents outstanding during the year.
The
following table sets forth the computation of basic and diluted net income per
share for the years ended December 31, 2009 and 2008:
|
|
Years ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Basis
and diluted net income per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
-
Net income in computing basic and diluted net income per
share
|
|
$
|
14,564,454
|
|
|
$
|
11,122,810
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
-
Weighted average ordinary shares outstanding
|
|
|
23,062,839
|
|
|
|
23,010,842
|
|
-
Warrant shares outstanding
|
|
|
1,329,103
|
|
|
|
-
|
|
Shares
used in computing basic and diluted net income per
share
|
|
|
24,391,942
|
|
|
|
23,010,842
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.63
|
|
|
$
|
0.48
|
|
Diluted
net income per share
|
|
$
|
0.60
|
|
|
$
|
0.48
|
|
For
the year ended December 31, 2008, warrants exercisable to 2,169,804 shares of
common stock were excluded from the diluted earnings per share calculation as
the exercise price of the warrants was higher than the average market price of
the stock during the period, thereby making the warrants anti-dilutive under the
treasury method.
For
the years ended December 31, 2009 and 2008, the local (“United States of
America”) and foreign components of income (loss) before income taxes were
comprised of the following:
|
|
Years ended December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Tax
jurisdiction from:
|
|
|
|
|
|
|
–
Local
|
|
$
|
(4,623
|
)
|
|
$
|
(6,703
|
)
|
–
Foreign
|
|
|
16,620,119
|
|
|
|
12,792,274
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
16,615,496
|
|
|
$
|
12,785,571
|
|
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
The
provision for income taxes consisted of the following:
|
|
Years
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Current:
|
|
|
|
|
|
|
–
Local
|
|
$
|
-
|
|
|
$
|
-
|
|
–
Foreign
|
|
|
2,051,042
|
|
|
|
1,662,761
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
–
Local
|
|
|
-
|
|
|
|
-
|
|
–
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
2,051,042
|
|
|
$
|
1,662,761
|
|
The
effective tax rate in the years presented is the result of the mix of income
earned in various tax jurisdictions that apply a broad range of income tax
rates. The Company has subsidiaries that operate in various countries: Hong Kong
and the PRC that are subject to tax in the jurisdictions in which they operate,
as follows:
United
States of America
China
Marine is registered in the State of Nevada and is subjected to United States of
America tax law.
As of
December 31, 2009, China Marine incurred $11,326 of net operating losses
carryforwards available for federal tax purposes that may be used to offset
future taxable income and will begin to expire in 2028, if unutilized. The
Company has provided for a full valuation allowance against the deferred tax
assets of $3,907 on the expected future tax benefits from the net operating loss
carryforwards as the management believes it is more likely than not that these
assets will not be realized in the future.
Hong
Kong
The
Company’s subsidiary, Ocean Technology is subject to Hong Kong Profits Tax at
the statutory rate of 16.5% on its assessable income for the years ended
December 31, 2009 and 2008, respectively. For the year ended December 31, 2009,
Ocean Technology incurred an operating loss of $139,051 for income tax purposes.
The Company has provided for a full valuation allowance against the deferred tax
assets of $67,165 on the expected future tax benefits from the net operating
loss carryforwards as the management believes it is more likely than not that
these assets will not be realized in the future.
The
PRC
The
Company generated all of its net income from subsidiaries operating in the PRC
for the years ended December 31, 2009 and 2008. Rixiang, Jixiang, Mingxiang and
Xianglin are subject to the Corporate Income Tax governed by the Income Tax Law
of the People’s Republic of China, at a statutory rate of 25%.
Xianglin
is approved as a domestic enterprise. Rixiang, Jixiang and Mingxiang are
approved as a foreign investment enterprise and entitled to, starting from the
first profitable year, a two-year exemption from corporate income tax and a
50%-reduction in its preferential corporate income tax rate of 24% for the
following three years ("Tax Holiday"). Such Tax Holiday of Jixiang and Mingxiang
were expired in prior years and Rixiang continues to enjoy the Tax Holiday
expiring through fiscal year 2009.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
On
March 16, 2007, the National People’s Congress approved the Corporate Income Tax
Law of the People’s Republic of China (the “New CIT Law”). The new CIT Law,
among other things, imposes a unified income tax rate of 25% for both domestic
and foreign invested enterprises with effect from January 1, 2008. Hence,
Rixiang will continue to enjoy to the unexpired Tax Holiday of 50%-reduction on
the unified income tax through 2009, subject to a transitional policy under the
Corporate Income Tax Law. Jixiang, Mingxiang and Xianglin are subject to the
unified income rate of 25% on the taxable income.
On
October 15, 2009, Mingxiang has received a notice of recognition as an
enterprise of new and high technology, which was jointly issued by The Science
and Technology Department of Fujian, The Finance Department of Fujian, The State
Tax Bureau of Fujian and The Local Taxation Bureau of Fujian for a company
engaged in advanced food processing technologies for the Fujian Province. As a
new and high technology company, Mingxiang qualifies for a reduced tax rate of
15% on the company's income through 2012.
The
reconciliation of income tax rate to the effective income tax rate based on
income before income taxes for PRC operation for the years ended December 31,
2009 and 2008 is as follows:
|
|
Years
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
16,759,164
|
|
|
$
|
13,019,994
|
|
Statutory
income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Income
taxes at statutory rate
|
|
|
4,189,791
|
|
|
|
3,254,998
|
|
|
|
|
|
|
|
|
|
|
Tax
effect on utilization of net operating loss
carryforwards
|
|
|
(89,216
|
)
|
|
|
-
|
|
Tax
effect on net operating loss from PRC subsidiaries
|
|
|
1,523
|
|
|
|
70,524
|
|
Tax
effect on non-taxable items
|
|
|
(14
|
)
|
|
|
-
|
|
Tax
effect from Tax Holiday
|
|
|
(2,051,042
|
)
|
|
|
(1,662,761
|
)
|
|
|
|
|
|
|
|
|
|
Income
taxes at effective rate
|
|
$
|
2,051,042
|
|
|
$
|
1,662,761
|
|
As of
December 31, 2009, the PRC operation incurred $1,180,210 of net operating losses
carryforward available for income tax purposes that may be used to offset future
taxable income and will begin to expire in 5 years from the year of incurrence,
if unutilized. The Company has provided for a full valuation allowance against
the deferred tax assets of $295,053 on the expected future tax benefits from the
net operating loss carryforwards as the management believes it is more likely
than not that these assets will not be realized in the future.
The
following table sets forth the significant components of the aggregate net
deferred tax assets of the Company as of December 31, 2009 and
2008:
|
|
As
of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforwards from:
|
|
|
|
|
|
|
–
Local
|
|
$
|
3,907
|
|
|
$
|
2,312
|
|
–
Hong Kong
|
|
|
67,165
|
|
|
|
44,221
|
|
–
PRC
|
|
|
295,053
|
|
|
|
380,698
|
|
|
|
|
366,125
|
|
|
|
427,231
|
|
Less:
valuation allowance
|
|
|
(366,125
|
)
|
|
|
(427,231
|
)
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
Management
believes that it is more likely than not that the net deferred assets will not
be fully realizable in the future. Accordingly, the Company provided for a full
valuation allowance against its net deferred tax assets of $366,125 and $427,231
as of December 31, 2009 and 2008, respectively. During 2009, the valuation
allowance decreased by $61,106, primarily relating to net operating loss
carryforwards.
15.
|
CHINA
CONTRIBUTION PLAN
|
Under
the PRC Law, full-time employees of the Company’s subsidiaries in the PRC,
Rixiang, Jixiang and Mingxiang are entitled to staff welfare benefits including
medical care, welfare subsidies, unemployment insurance and pension benefits
through a China government-mandated multi-employer defined contribution plan.
The Company is required to accrue for these benefits based on certain
percentages of the employees’ salaries. The total contributions made for such
employee benefits were $545,068 and $364,184 for the years ended December 31,
2009 and 2008, respectively.
Under
the PRC Law, the Company’s subsidiaries in the PRC, Rixiang, Jixiang, Mingxiang
and Xianglin are required to make appropriation at the end of each fiscal year
to the statutory reserve based on after-tax net earnings and determined in
accordance with generally accepted accounting principles of the People’s
Republic of China (the “PRC GAAP”). Appropriation to the statutory reserve
should be at least 10% of the after-tax net income until the reserve is equal to
50% of the registered capital. The statutory reserve is established for the
purpose of providing employee facilities and other collective benefits to the
employees and is non-distributable other than in liquidation.
For
the years ended December 31, 2009, and 2008, Rixiang contributed $730,817 and
$1,773,434 to statutory reserve, respectively. Jixiang, Mingxiang and Xianglin
made no appropriation to the statutory reserve since they did not generate
after-tax net income during these periods.
17.
|
SEGMENT
REPORTING, GEOGRAPHICAL
INFORMATION
|
The
Company’s chief operating decision maker has been identified as chairman, Mr.
Liu, who reviews consolidated results when making decisions about allocating
resources and assessing performance of the Company. Based on this assessment,
the Company has determined that it has two operating and reporting segments for
the years ended December 31, 2009 and 2008 which are sale of processed seafood
products and trading of marine catch.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 2). The Company had no
inter-segment sales for the years ended December 31, 2009 and
2008.
Summarized
financial information concerning the Company’s reportable segments is shown in
the following table for the years ended December 31, 2009 and
2008:
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
|
|
Year ended December 31, 2009
|
|
|
|
Processed seafood
products
|
|
|
Marine catch
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
52,049,023
|
|
|
$
|
17,536,660
|
|
|
$
|
69,585,683
|
|
Cost
of revenue
|
|
|
(34,721,649
|
)
|
|
|
(15,734,576
|
)
|
|
|
(50,456,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
17,327,374
|
|
|
$
|
1,802,084
|
|
|
$
|
19,129,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure
for long-lived assets
|
|
$
|
1,348,412
|
|
|
$
|
-
|
|
|
$
|
1,348,412
|
|
|
|
Year ended December 31, 2008
|
|
|
|
Processed seafood
products
|
|
|
Marine catch
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
44,370,010
|
|
|
$
|
4,428,794
|
|
|
$
|
48,798,804
|
|
Cost
of revenue
|
|
|
(29,617,071
|
)
|
|
|
(3,989,901
|
)
|
|
|
(33,606,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
14,752,939
|
|
|
$
|
438,893
|
|
|
$
|
15,191,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure
for long-lived assets
|
|
$
|
4,192,510
|
|
|
$
|
-
|
|
|
$
|
4,192,510
|
|
(b)
|
Geographic
information
|
The
Company’s operations are located in two main geographical areas. The Company’s
sales by geographical market are analyzed as follows:
|
|
Years
ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Revenue,
net:
|
|
|
|
|
|
|
The
PRC
|
|
$
|
67,788,576
|
|
|
$
|
46,401,415
|
|
Asia
|
|
|
1,797,107
|
|
|
|
2,397,389
|
|
|
|
|
|
|
|
|
|
|
Total
revenue, net
|
|
$
|
69,585,683
|
|
|
$
|
48,798,804
|
|
All
the Company’s long-lived assets are located in the PRC in both
years.
18.
|
CONCENTRATIONS
OF RISK
|
The
Company is exposed to the following concentrations of risk:
The
following is a table summarizing the revenue from customers that individually
represents greater than 10% of the total revenue for the years ended December
31, 2009 and 2008 and their outstanding balances at year-end
dates.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
|
Year ended December 31, 2009
|
|
December 31, 2009
|
|
Customers
|
Revenue
|
|
|
Percentage
of total
revenue
|
|
Accounts
receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
Customer
A
|
|
$
|
11,726,167
|
|
|
|
17
|
%
|
|
$
|
6,799,701
|
|
|
Year
ended December 31, 2008
|
|
December
31, 2008
|
|
Customers
|
Revenue
|
|
|
Percentage
of
total
revenue
|
|
Accounts
receivable,
net
|
|
|
|
|
|
|
|
|
|
|
|
Customer
B
|
|
$
|
5,088,870
|
|
|
|
10
|
%
|
|
$
|
469,639
|
|
The
following is a table summarizing the purchases of raw materials from vendors
that individually represents greater than 10% of the total purchases for the
years ended December 31, 2009 and 2008 and their outstanding balances as at
year-end dates.
|
|
|
Year ended December 31, 2009
|
|
|
December 31, 2009
|
|
Vendors
|
|
|
Purchases
|
|
|
Percentage
of raw
materials
purchases
|
|
|
Accounts
payable, trade
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
|
$
|
10,745,846
|
|
|
|
28
|
%
|
|
$
|
18,183
|
|
Vendor
B
|
|
|
|
8,026,950
|
|
|
|
21
|
%
|
|
|
-
|
|
Vendor
C
|
|
|
|
6,953,216
|
|
|
|
18
|
%
|
|
|
11,813
|
|
Vendor
D
|
|
|
|
5,545,993
|
|
|
|
14
|
%
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,272,005
|
|
|
|
81
|
%
|
|
$
|
29,996
|
|
|
|
|
Year ended December 31, 2008
|
|
|
December 31, 2008
|
|
Vendors
|
|
|
Purchases
|
|
|
Percentage
of raw
materials
purchases
|
|
|
Accounts
payable, trade
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
|
$
|
7,481,338
|
|
|
|
22
|
%
|
|
$
|
40,069
|
|
Vendor
B
|
|
|
|
6,488,740
|
|
|
|
19
|
%
|
|
|
15,535
|
|
Vendor
E
|
|
|
|
5,664,055
|
|
|
|
17
|
%
|
|
|
-
|
|
Vendor
C
|
|
|
|
5,389,778
|
|
|
|
16
|
%
|
|
|
-
|
|
Vendor
F
|
|
|
|
3,752,759
|
|
|
|
11
|
%
|
|
|
27,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,776,670
|
|
|
|
85
|
%
|
|
$
|
83,002
|
|
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
(c) Credit
risk
Financial
instruments that are potentially subject to credit risk consist principally of
trade receivables. The Company believes the concentration of credit risk in its
trade receivables is substantially mitigated by its ongoing credit evaluation
process and relatively short collection terms. The Company does not generally
require collateral from customers. The Company evaluates the need for an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.
(d) Interest
rate risk
As the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.
The
Company’s interest-rate risk arises from bank borrowings. Borrowings issued at
variable rates expose the Company to cash flow interest rate risk. The Company
manages interest rate risk by varying the issuance and maturity dates variable
rate debt, limiting the amount of variable rate debt, and continually monitoring
the effects of market changes in interest rates. As of December 31, 2009, all of
borrowings were at variable rates. The interest rates and terms of repayment of
bank borrowings are disclosed in Note 8.
(e) Exchange
rate risk
The
reporting currency of the Company is US$, to date the majority of the revenues
and costs are denominated in RMB and a significant portion of the assets and
liabilities are denominated in RMB. As a result, the Company is exposed to
foreign exchange risk as its revenues and results of operations may be affected
by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates
against US$, the value of the RMB revenues and assets as expressed in US$
financial statements will decline. The Company does not hold any derivatives or
other financial instruments that expose to substantial exchange rate
risk.
(f) Economic
and political risks
Substantially
all of the Company’s products are processed in the PRC. The Company’s operations
are subject to various political, economic, and other risks and uncertainties
inherent in the PRC and not typically associated with companies in North America
and Western Europe. Among other risks, the Company’s operations are subject to
the risks of restrictions on transfer of funds; export duties, quotas, and
embargoes; domestic and international customs and tariffs; changing taxation
policies; foreign exchange restrictions; and political conditions and
governmental regulations in the PRC.
19.
|
COMMITMENTS
AND CONTINGENCIES
|
(a)
|
Operating
lease commitments
|
The
Company leased certain office space under a non-cancellable operating lease
agreement with a term of 3 years with fixed monthly rentals, expiring on
February 17, 2011, and generally did not contain significant renewal options.
Total rent expenses for the years ended December 31, 2009 and 2008 was $77,145
and $76,882, respectively. Future minimum rental payments due under the
non-cancelable operating lease agreement are as follows:
Years
ending December 31:
|
|
|
|
2010
|
|
$
|
77,145
|
|
2011
|
|
|
10,332
|
|
|
|
|
|
|
Total
|
|
$
|
87,477
|
|
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
As of
December 31, 2009, Mingxiang is contingently liable as guarantor with respect to
the loans of $731,294 (equivalent to RMB5,000,000) and $438,776 (equivalent to
RMB3,000,000) to two unrelated third parties, Shishi Yu Ching Knitting and
Clothing Company (“Yu Ching”) and Shishi Han Jiang Hua Lian Knitting and
Clothing Factory (“Han Jiang Hua Lian”), respectively. The term of these
guarantees are commenced from July 2009 through July 2011, with a renewal
provision of 2 years. At any time from the date of guarantees, should Yu Ching
or Han Jiang Hua Lian fail to make their due debt payments, Mingxiang will be
obligated to perform under the guarantees by primarily making the required
payments, including late fees and penalties. The maximum potential amount of
future payments that the Mingxiang is required to make under the guarantees is
$1,170,070 (equivalent to RMB8,000,000).
According
to the Personal Guarantee Agreement between Mingxiang and Mr. Liu, Mr. Liu
agreed to bear all liabilities and costs to be incurred from a direct claim by
the creditor if either Yu Ching or Han Jiang Hua Lian fails to make payment to
the creditor upon due dates.
In
accordance with ASC 460-10
“Guarantees”
, a guarantor
must recognize a liability for the fair value of the obligations it assumes
under certain guarantees. Mingxiang did not receive any consideration for the
guarantee and has determined the indemnification fair value to be insignificant.
As of December 31, 2009, the Company has not recorded any liabilities under
these guarantees.
Certain
amounts in the prior periods presented have been reclassified to conform to the
current period financial statement presentation.
(a)
|
Acquisition
of branded algae-based beverage
company
|
On
November 27, 2009, the Company entered into a Credit or Share Purchase Option
Agreement (the “Option Agreement”) with Qiu Shang Jing (“Qiu”) and Shishi
Xianghe Food Science and Technology Co., Ltd. (“Xianghe”). The Option Agreement
provided the Company to make a loan to Xianghe in the amount of
approximately $26.4 million to be used for working capital purposes. In
consideration for the loan, the Company received the option to buy shares
representing eighty percent (80%) (the “Shares”) of Xianghe from its sole
shareholder, Qiu. China Marine intended to fund the loan from the currently
available cash of the Group.
Xianghe
is a Fujian based manufacturer of the branded Hi-Power algae-based soft drinks.
Hi-Power was developed by the Yellow Sea Fisheries Research Institute Chinese
Academy of Fishery Sciences in coordination with the founder, Qiu. Hi-Power is
marketed as a high-protein content drink, low in calories and fat, which
provides the consumers a combination of immune system benefits, improved
digestion and reductions in hyperglycemia and hypertension. Hi-Power’s target
market focuses on health-conscious consumers in China’s fast-growing beverage
market. Xianghe has developed a network of distributors in Fujian,
Zhejiang, Guangdong and Hunan which sell Hi-Power to retail food stores,
restaurants food supply dealers and the hospitality industry.
On
January 1, 2010, the Company exercised the option to acquire the Shares pursuant
to the terms of a Share Purchase Agreement (the “Purchase Agreement”). The
Shares were purchased from Qiu and the purchase price for the Shares was
approximately $27.8 million, paid as follows:
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
(iii)
|
Approximately
$26.4 million, which Xianghe owed to the Company, was transferred to be
the consideration for the purchase of the Shares of Xianghe which the
Company shall pay to
Qiu.
|
(iv)
|
Approximately
$1.4 million shall be paid by the Company to Qiu within 30 days
after completion of the audit report of Xianghe for the year ended
December 31, 2009.
|
The
Purchase Agreement grants the Company a right of first refusal to purchase the
20% of the registered capital stock of Xianghe retained by Qiu for a maximum
price of approximately $7.0 million if Qiu intends to sell his shares. The
Purchase Agreement also provides that if Xianghe has any funding requirement
from the shareholders, the Company and Qiu shall provide the capital into
Xianghe on a pro rata basis according to respective
shareholdings.
China
Marine intends to integrate the Hi-Power algae-based soft drinks into its
current distribution network. Xianghe has an experienced management team and its
management and other employees will continue to work at Xianghe after the
acquisition. Xianghe utilizes third party manufacturers to produce the
beverages.
(b)
|
Completion
of $30,000,000 financing through registered direct offering of common
stock
|
On
January 25, 2010, the Company closed the financing to sell 4,615,388 shares of
common stock at a price of $6.50 per share. Net proceeds, after underwriting
discounts and commissions and before offering expenses payable by the Company,
were approximately $28,500,000. The Company intends to use the net proceeds from
this offering for working capital and general corporate purposes. The shares
were sold under the Company's previously filed shelf registration statement that
was declared effective by the Securities and Exchange Commission on December 23,
2009. Global Hunter Securities LLC and Brean Murray Carret & Co., LLC acted
as co-lead placement agents and joint book-running managers in the
transaction.
Supplementary
Data: Unaudited Pro Forma Financial
Information
The
following unaudited pro forma condensed consolidated balance sheet as of
December 31, 2009 and the unaudited pro forma condensed consolidated statement
of operations are derived from the historical financial statements of the
Company and Xianghe and have been prepared to give effect to the Company’s
acquisition of Xianghe on January 1, 2010. The unaudited pro forma condensed
consolidated balance sheet is presented as if the acquisition had occurred as of
the balance sheet date. The unaudited pro forma condensed consolidated statement
of operations is presented as if the acquisition had occurred on January 1,
2010.
The
acquisition has been accounted for under the purchase method of accounting which
requires the total purchase price to be allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The excess purchase
price of over the amounts assigned to tangible or intangible assets acquired and
liabilities assumed is recognized as goodwill.
The
following unaudited pro forma condensed consolidated financial statements have
been prepared for illustrative purposes only and do not purport to reflect the
results the combined company may achieve in future periods or the historical
results that would have been obtained. These unaudited pro forma condensed
consolidated financial statements, including the notes hereto, should be read in
conjunction with (i) the historical consolidated financial statements for the
Company included in its Form 10-K filed on March 22, 2010 and (ii) the
historical financial statements of Xianghe included in the Company’s Form 8-K/A
dated March 16, 2010.
CHINA
MARINE FOOD GROUP LIMITED
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS
OF DECEMBER 31, 2009
(Currency
expressed in United States Dollars (“US$”))
|
|
The Company
|
|
|
Xianghe
|
|
|
Pro forma
adjustment
|
|
|
|
|
|
Pro forma
consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,143,232
|
|
|
$
|
435,933
|
|
|
|
|
|
|
|
|
$
|
7,579,165
|
|
Accounts
receivable, net
|
|
|
18,834,062
|
|
|
|
1,391,457
|
|
|
|
|
|
|
|
|
|
20,225,519
|
|
Inventories
|
|
|
3,876,950
|
|
|
|
10,871
|
|
|
|
|
|
|
|
|
|
3,887,821
|
|
Note
receivable
|
|
|
26,399,696
|
|
|
|
-
|
|
|
|
(26,399,696
|
)
|
|
A
|
|
|
|
-
|
|
Amount
due from an owner
|
|
|
-
|
|
|
|
1,442,623
|
|
|
|
(1,400,304
|
)
|
|
A
|
|
|
|
42,319
|
|
Prepaid
expenses and other current assets
|
|
|
151,653
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
151,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
56,405,593
|
|
|
|
3,280,884
|
|
|
|
|
|
|
|
|
|
|
31,886,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
2,391,866
|
|
|
A
|
|
|
|
2,391,866
|
|
Property,
plant and equipment, net
|
|
|
8,599,977
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
8,600,372
|
|
Intangible
asset, net
|
|
|
-
|
|
|
|
8,596
|
|
|
|
23,471,410
|
|
|
A
|
|
|
|
23,480,006
|
|
Prepayment
for land use right
|
|
|
2,274,323
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
2,274,323
|
|
Land
use rights, net
|
|
|
615,355
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
615,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
67,895,248
|
|
|
$
|
3,289,875
|
|
|
|
|
|
|
|
|
|
$
|
69,248,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
4,139,121
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
$
|
4,139,121
|
|
Accounts
payable, trade
|
|
|
885,286
|
|
|
|
402,982
|
|
|
|
|
|
|
|
|
|
|
1,288,268
|
|
Amount
due to a stockholder/an owner
|
|
|
69,587
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
69,587
|
|
Income
tax payable
|
|
|
618,664
|
|
|
|
225,180
|
|
|
|
|
|
|
|
|
|
|
843,844
|
|
Accrued
liabilities and other payable
|
|
|
2,334,384
|
|
|
|
240,808
|
|
|
|
|
|
|
|
|
|
|
2,575,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
8,047,042
|
|
|
|
868,970
|
|
|
|
|
|
|
|
|
|
|
8,916,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Common
stock
|
|
|
23,414
|
|
|
|
733,483
|
|
|
|
(733,483
|
)
|
|
B
|
|
|
|
23,414
|
|
Additional
paid-in capital
|
|
|
16,888,532
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
16,888,532
|
|
Statutory
reserve
|
|
|
5,614,517
|
|
|
|
253,364
|
|
|
|
(253,364
|
)
|
|
B
|
|
|
|
5,614,517
|
|
Accumulated
other comprehensive income
|
|
|
3,576,135
|
|
|
|
(1,670
|
)
|
|
|
1,670
|
|
|
B
|
|
|
|
3,576,135
|
|
Retained
earnings
|
|
|
33,745,608
|
|
|
|
1,435,728
|
|
|
|
(1,435,728
|
)
|
|
B
|
|
|
|
33,745,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
59,848,206
|
|
|
|
2,420,905
|
|
|
|
|
|
|
|
|
|
|
59,848,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
484,181
|
|
|
B
|
|
|
|
484,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
67,895,248
|
|
|
$
|
3,289,875
|
|
|
|
|
|
|
|
|
|
$
|
69,248,399
|
|
CHINA
MARINE FOOD GROUP LIMITED
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT
OF OPERATIONS
FOR
THE YEAR ENDED DECEMBER 31, 2009
(Currency
expressed in United States Dollars (“US$”))
|
|
The Company
|
|
|
Xianghe #1
|
|
|
Pro forma
adjustments
|
|
|
|
|
Pro forma
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
69,585,683
|
|
|
$
|
7,568,657
|
|
|
|
|
|
|
|
$
|
77,154,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
(50,456,225
|
)
|
|
|
(4,530,736
|
)
|
|
|
|
|
|
|
|
(54,986,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
19,129,458
|
|
|
|
3,037,921
|
|
|
|
|
|
|
|
|
22,167,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(79,725
|
)
|
|
|
(418
|
)
|
|
|
|
|
|
|
|
(80,143
|
)
|
Sales
and distribution
|
|
|
(608,685
|
)
|
|
|
(632,290
|
)
|
|
|
|
|
|
|
|
(1,240,975
|
)
|
General
and administrative
|
|
|
(2,276,006
|
)
|
|
|
(83,770
|
)
|
|
|
|
|
|
|
|
(2,359,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
(2,964,416
|
)
|
|
|
(716,478
|
)
|
|
|
|
|
|
|
|
(3,680,894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
16,165,042
|
|
|
|
2,321,443
|
|
|
|
|
|
|
|
|
18,486,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidy
income
|
|
|
309,901
|
|
|
|
-
|
|
|
|
|
|
|
|
|
309,901
|
|
Rental
income
|
|
|
82,299
|
|
|
|
-
|
|
|
|
|
|
|
|
|
82,299
|
|
Interest
income
|
|
|
288,687
|
|
|
|
823
|
|
|
|
(70,010
|
)
|
C
|
|
|
|
219,500
|
|
Interest
expense
|
|
|
(230,433
|
)
|
|
|
(70,010
|
)
|
|
|
70,010
|
|
C
|
|
|
|
(230,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expenses
|
|
|
450,454
|
|
|
|
(69,187
|
)
|
|
|
|
|
|
|
|
|
381,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
16,615,496
|
|
|
|
2,252,256
|
|
|
|
|
|
|
|
|
|
18,867,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(2,051,042
|
)
|
|
|
(563,164
|
)
|
|
|
|
|
|
|
|
|
(2,614,206
|
)
|
Non-controlling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(337,818
|
)
|
C
|
|
|
|
(337,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
14,564,454
|
|
|
$
|
1,689,092
|
|
|
|
|
|
|
|
|
$
|
15,915,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
Basic
|
|
$
|
0.63
|
|
|
|
-
|
|
|
|
|
|
D
|
|
|
$
|
0.69
|
|
–
Diluted
|
|
$
|
0.60
|
|
|
|
-
|
|
|
|
|
|
D
|
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
Basic
|
|
|
23,062,839
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
23,062,839
|
|
–
Diluted
|
|
|
24,391,942
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
24,391,942
|
|
Notes:
#1 Representing
with the operating result for the period from July 28, 2009 (Inception) to
December 31, 2009.
#2 The
pro forma condensed consolidated statement of operations for the year ended
December 31, 2008 is not required as Xianghe was not in existence during 2008
fiscal year.
NOTE
1
|
BASIS
OF PRESENTATION
|
The
unaudited pro forma condensed consolidated balance sheet assumes that the
purchase took place on January 1, 2010 and certain assets and liabilities of
Xianghe were acquired and assumed by the Company. Such financial statement
combines the historical consolidated balance sheet of the Company and Xianghe at
December 31, 2009. The unaudited pro forma condensed consolidated statement of
operations assume that the purchase took place on December 31, 2009, and combine
the historical consolidated statement of operations of the Company and Xianghe
for the year ended December 31, 2009.
There
were no significant transactions on a combined basis between the acquired entity
and the Company during the periods presented.
The
following unaudited pro forma condensed consolidated financial information was
prepared using the purchase method of accounting as required by Accounting
Standards Codification Topic 805,
“Business Combinations”.
The
purchase price has been allocated to the assets acquired and liabilities assumed
based upon management’s preliminary estimate of their respective fair values as
of the date of acquisition. Any differences between the fair value of the
consideration issued and the fair value of the assets and liabilities acquired
will be recorded as goodwill.
NOTE
2
|
PRO
FORMA ADJUSTMENTS
|
These
unaudited pro forma condensed consolidated financial statements reflect the
following pro forma adjustments:
The
following table summarizes the historical value of the assets acquired and
liabilities assumed at the date of acquisition. The allocation of the purchase
price consideration is presented as below:
Acquired
assets:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
435,933
|
|
Accounts
receivable, net
|
|
|
1,391,457
|
|
Inventories
|
|
|
10,871
|
|
Amount
due from an owner
|
|
|
1,442,623
|
|
Property,
plant and equipment, net
|
|
|
395
|
|
Intangible
assets, net
|
|
|
8,596
|
|
|
|
|
|
|
Total
assets acquired
|
|
|
3,289,875
|
|
|
|
|
|
|
Less:
liabilities assumed
|
|
|
|
|
Accounts
payable, trade
|
|
|
402,982
|
|
Amount
due to an owner
|
|
|
-
|
|
Income
tax payable
|
|
|
225,180
|
|
Accrued
liabilities and other payable
|
|
|
240,808
|
|
|
|
|
|
|
Total
liabilities assumed
|
|
|
868,970
|
|
|
|
|
|
|
Less:
non-controlling interest
|
|
|
484,181
|
|
|
|
|
|
|
Net
assets acquired
|
|
|
1,936,724
|
|
Algae-based
drink know-how *
|
|
|
23,471,410
|
|
Goodwill
|
|
|
2,391,866
|
|
|
|
|
|
|
Purchase
price consideration
|
|
$
|
27,800,000
|
|
Pursuant
to the Share Purchase Agreement (the “Agreement”), the aggregate purchase price
is approximately $27,800,000 (equivalent to RMB190,000,000), in which
approximately $26,400,000 is payable by Xianghe upon the conversion of its
short-term loan and approximately $1,400,000 is payable by the Company’s
subsidiary, Mingxiang.
Algae-based
drink know-know is acquired at its fair value, based upon the independent
valuation report.
To
reflect (1) the elimination of the stockholders' equity accounts of Xianghe, (2)
the equity component of the purchase price, and (3) the purchase price
allocation as reflected above in Adjustment (A).
To
reflect (1) the elimination of interest expense and interest income on
short-term loan from Mingxiang to Xianghe and (2) to record net income
attributable to non-controlling interest.
Pro
forma basic income per common share is computed by dividing the pro forma net
income applicable to common stockholders by the pro forma weighted average
number of common shares assumed to be outstanding during the periods of
computation. Pro forma diluted income per common share is computed using the pro
forma weighted average number of common shares and, if dilutive, potential
common shares outstanding during the periods.
CHINA
MARINE FOOD GROUP LIMITED
INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Page
|
|
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2010 and December 31,
2009
|
|
F-36
|
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Income for the
Three Months ended March 31, 2010 and 2009
|
|
F-37
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Three Months ended
March 31, 2010 and 2009
|
|
F-38
|
|
|
|
Condensed
Consolidated Statements of Stockholders’ Equity for the Three Months ended
March 31, 2010
|
|
F-39
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
F-40
- F-53
|
CHINA
MARINE FOOD GROUP LIMITED
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
OF MARCH 31, 2010 AND DECEMBER 31, 2009
(Currency
expressed in United States Dollars (“US$”), except for number of
shares))
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
47,375,573
|
|
|
$
|
7,143,232
|
|
Accounts
receivable, net
|
|
|
9,652,488
|
|
|
|
18,834,062
|
|
Inventories
|
|
|
3,260,603
|
|
|
|
3,876,950
|
|
Note
receivable
|
|
|
-
|
|
|
|
26,399,696
|
|
Prepaid
expenses and other current assets
|
|
|
366,771
|
|
|
|
151,653
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
60,655,435
|
|
|
|
56,405,593
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
8,595,441
|
|
|
|
8,599,977
|
|
Land
use rights, net
|
|
|
2,940,779
|
|
|
|
615,355
|
|
Prepayment
for land use right
|
|
|
-
|
|
|
|
2,274,323
|
|
Intangible
assets
|
|
|
22,904,874
|
|
|
|
-
|
|
Goodwill
|
|
|
2,373,024
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
97,469,553
|
|
|
$
|
67,895,248
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
-
|
|
|
$
|
4,139,121
|
|
Accounts
payable, trade
|
|
|
2,167,338
|
|
|
|
885,286
|
|
Amount
due to a stockholder
|
|
|
69,598
|
|
|
|
69,587
|
|
Income
tax payable
|
|
|
736,644
|
|
|
|
618,664
|
|
Accrued
liabilities and other payable
|
|
|
1,231,182
|
|
|
|
2,334,384
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
4,204,762
|
|
|
|
8,047,042
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (see Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 1,000,000 shares authorized; 0 shares issued and
outstanding as of March 31, 2010 and December 31, 2009
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value; 100,000,000 shares authorized; 28,493,650 and
23,413,639 shares issued and outstanding as of March 31, 2010 and December
31, 2009
|
|
|
28,494
|
|
|
|
23,414
|
|
Additional
paid-in capital
|
|
|
45,912,198
|
|
|
|
16,888,532
|
|
Statutory
reserve
|
|
|
5,614,517
|
|
|
|
5,614,517
|
|
Accumulated
other comprehensive income
|
|
|
3,553,582
|
|
|
|
3,576,135
|
|
Retained
earnings
|
|
|
37,671,446
|
|
|
|
33,745,608
|
|
Total
China Marine Food Group Limited stockholders’ equity
|
|
|
92,780,237
|
|
|
|
59,848,206
|
|
Non-controlling
interests
|
|
|
484,554
|
|
|
|
-
|
|
Total
stockholders’ equity
|
|
|
93,264,791
|
|
|
|
59,848,206
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
97,469,553
|
|
|
$
|
67,895,248
|
|
See
accompanying notes to condensed consolidated financial
statements.
CHINA
MARINE FOOD GROUP LIMITED
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
(Unaudited)
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Revenue,
net
|
|
|
|
|
|
|
Processed
seafood products
|
|
$
|
16,497,907
|
|
|
$
|
11,202,982
|
|
Marine
catch
|
|
|
398,519
|
|
|
|
5,345,070
|
|
Algae-based
beverage products
|
|
|
2,753,983
|
|
|
|
-
|
|
|
|
|
19,650,409
|
|
|
|
16,548,052
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
(inclusive of depreciation and amortization)
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
(10,969,020
|
)
|
|
|
(7,550,296
|
)
|
Marine
catch
|
|
|
(289,245
|
)
|
|
|
(4,891,981
|
)
|
Algae-based
beverage products
|
|
|
(1,783,730
|
)
|
|
|
-
|
|
|
|
|
(13,041,995
|
)
|
|
|
(12,442,277
|
)
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
6,608,414
|
|
|
|
4,105,775
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(622,736
|
)
|
|
|
(19,372
|
)
|
Sales
and marketing
|
|
|
(385,218
|
)
|
|
|
(114,062
|
)
|
General
and administrative
|
|
|
(619,998
|
)
|
|
|
(465,754
|
)
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
(1,627,952
|
)
|
|
|
(599,188
|
)
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
4,980,462
|
|
|
|
3,506,587
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
Subsidy
income
|
|
|
-
|
|
|
|
143,137
|
|
Rental
income
|
|
|
22,601
|
|
|
|
20,375
|
|
Interest
income
|
|
|
18,859
|
|
|
|
90,470
|
|
Interest
expense
|
|
|
(39,697
|
)
|
|
|
(62,708
|
)
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
4,982,225
|
|
|
|
3,697,861
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(1,056,092
|
)
|
|
|
(449,260
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
3,926,133
|
|
|
|
3,248,601
|
|
|
|
|
|
|
|
|
|
|
Less:
net income attributable to non-controlling interests
|
|
|
(295
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to China Marine Food Group Limited
|
|
$
|
3,925,838
|
|
|
$
|
3,248,601
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
-
Foreign currency translation (loss) gain
|
|
|
(22,553
|
)
|
|
|
56,955
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
3,903,285
|
|
|
$
|
3,305,556
|
|
|
|
|
|
|
|
|
|
|
Net
income per share attributable to China Marine Food Group Limited –
basic
|
|
$
|
|
|
|
$
|
|
|
Net
income per share attributable to China Marine Food Group Limited –
diluted
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
24,125,064
|
|
|
|
23,026,301
|
|
Weighted
average shares outstanding – diluted
|
|
|
25,016,494
|
|
|
|
23,026,301
|
|
See
accompanying notes to condensed consolidated financial
statements.
CHINA
MARINE FOOD GROUP LIMITED
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,926,133
|
|
|
$
|
3,248,601
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
690,060
|
|
|
|
73,066
|
|
(Reversal
of) allowance for doubtful accounts
|
|
|
(46,092
|
)
|
|
|
11,288
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
9,227,666
|
|
|
|
(2,257,516
|
)
|
Inventories
|
|
|
616,347
|
|
|
|
5,432,655
|
|
Prepaid
expenses and other current assets
|
|
|
(215,118
|
)
|
|
|
134,108
|
|
Accounts
payable, trade
|
|
|
1,282,052
|
|
|
|
313,998
|
|
Income
tax payable
|
|
|
117,980
|
|
|
|
64,502
|
|
Accrued
liabilities and other payable
|
|
|
(1,103,202
|
)
|
|
|
(51,096
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
14,495,826
|
|
|
|
6,969,606
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(77,705
|
)
|
|
|
(35,847
|
)
|
Cash
paid to construction in progress
|
|
|
-
|
|
|
|
(863,616
|
)
|
Purchase
of land use right
|
|
|
(69,778
|
)
|
|
|
-
|
|
Net
cash received from acquisition of a subsidiary
|
|
|
1,022,153
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
874,670
|
|
|
|
(899,463
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment
of amount due to a stockholder
|
|
|
11
|
|
|
|
(146,311
|
)
|
Proceeds
from the registered direct offering, net of expenses
|
|
|
28,328,466
|
|
|
|
-
|
|
Proceeds
from exercise of warrants
|
|
|
700,280
|
|
|
|
-
|
|
Proceeds
from short-term borrowings
|
|
|
-
|
|
|
|
4,134,042
|
|
Payment
on short-term borrowings
|
|
|
(4,139,121
|
)
|
|
|
(4,289,341
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
24,889,636
|
|
|
|
(301,610
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes in cash and cash equivalents
|
|
|
(27,791
|
)
|
|
|
48,433
|
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
40,232,341
|
|
|
|
5,816,966
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
7,143,232
|
|
|
|
31,640,307
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
47,375,573
|
|
|
$
|
37,457,273
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
938,112
|
|
|
$
|
384,758
|
|
Cash
paid for interest
|
|
$
|
39,697
|
|
|
$
|
62,708
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS
|
|
|
|
|
|
|
|
|
Transfer
from prepayment for land use right to land use rights
|
|
$
|
2,274,323
|
|
|
$
|
-
|
|
Transfer
from construction in progress to property, plant and
equipment
|
|
$
|
-
|
|
|
$
|
1,840,330
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
TRANSACTIONS IN CONNECTION WITH THE ACQUISITION OF
XIANGHE
|
|
|
|
|
|
|
|
|
Transfer
from note receivable to purchase price payable
|
|
$
|
26,399,696
|
|
|
$
|
-
|
|
Consideration
payable by Xianghe on behalf of Mingxiang
|
|
$
|
1,400,304
|
|
|
$
|
-
|
|
See
accompanying notes to condensed consolidated financial
statements.
CHINA
MARINE FOOD GROUP LIMITED
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE THREE MONTHS ENDED MARCH 31, 2010
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
China
Marine Food Group Limited stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
Additional
paid-in
|
|
|
Statutory
|
|
|
Accumulated
other
comprehensive
|
|
|
Retained
|
|
|
Non-
controlling
|
|
|
Total
stockholders’
|
|
|
|
No.
of shares
|
|
|
Amount
|
|
|
capital
|
|
|
reserve
|
|
|
income
|
|
|
earnings
|
|
|
interests
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2009
|
|
|
23,413,639
|
|
|
$
|
23,414
|
|
|
$
|
16,888,532
|
|
|
$
|
5,614,517
|
|
|
$
|
3,576,135
|
|
|
$
|
33,745,608
|
|
|
$
|
-
|
|
|
$
|
59,848,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued under the registered direct offering, net of
expenses
|
|
|
4,792,388
|
|
|
|
4,792
|
|
|
|
28,323,674
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,328,466
|
|
Cashless
exercise of warrants
|
|
|
120,017
|
|
|
|
120
|
|
|
|
(120
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash
exercise of warrants
|
|
|
167,606
|
|
|
|
168
|
|
|
|
700,112
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
700,280
|
|
Net
income for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,925,838
|
|
|
|
295
|
|
|
|
3,926,133
|
|
Share
of non-controlling interests from business combination
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
484,259
|
|
|
|
484,259
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,553
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2010
|
|
|
28,493,650
|
|
|
$
|
28,494
|
|
|
$
|
45,912,198
|
|
|
$
|
5,614,517
|
|
|
$
|
3,553,582
|
|
|
$
|
37,671,446
|
|
|
$
|
484,554
|
|
|
$
|
93,264,791
|
|
See
accompanying notes to condensed consolidated financial
statements.
NOTE
- 1
|
BASIS
OF PRESENTATION
|
The
accompanying unaudited condensed consolidated financial statements have been
prepared by management in accordance with both accounting principles generally
accepted in the United States (“GAAP”), and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Certain information and note disclosures normally
included in audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information not misleading.
In the
opinion of management, the consolidated balance sheet as of December 31, 2009
which has been derived from audited financial statements and these unaudited
condensed consolidated financial statements reflect all normal and recurring
adjustments considered necessary to state fairly the results for the periods
presented. The results for the period ended March 31, 2010 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2010 or for any future periods.
These
unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the Management’s Discussion and the audited
financial statements and notes thereto included in the Annual Report on the Form
10-K for the year ended December 31, 2009.
NOTE
- 2
|
ORGANIZATION
AND BUSINESS BACKGROUND
|
China
Marine Food Group Limited (“China Marine” or “the Company”) was incorporated in
the State of Nevada on October 1, 1999 in the former name of New Paradigm
Productions, Inc. On November 16, 2007, the Company changed its current name to
“China Marine Food Group Limited”.
China
Marine, through its subsidiaries, mainly engages in the manufacture and
distribution of processed seafood products and trades with customers in domestic
and overseas markets, as well as engaged in the sale and distribution of
algae-based beverage products in the PRC with its principal place of business in
Shishi City, Fujian Province, China.
China
Marine and its subsidiaries are hereinafter referred to as “the
Company”.
NOTE
- 3
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
The
accompanying condensed consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying condensed consolidated financial statements and
notes.
In
preparing these condensed consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities in the balance sheets and revenues and expenses during the periods
reported. Actual results may differ from these estimates.
The
unaudited condensed consolidated financial statements include the financial
statements of China Marine and its subsidiaries. All significant inter-company
balances and transactions within the Company have been eliminated upon
consolidation.
l
|
Cash
and cash equivalents
|
Cash
and cash equivalents are carried at cost and represent cash on hand, demand
deposits placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
The
Company mainly maintains cash and cash equivalent balances at a financial
institution in the PRC, which are insured by the People’s Bank of China. The
Company had cash concentration risk of $42,496,598 and $7,125,721 as of March
31, 2010 and December 31, 2009, respectively.
l
|
Accounts
receivable and allowance for doubtful
accounts
|
Accounts
receivable are recorded at the invoiced amount and do not bear interest.
Management reviews the adequacy of the allowance for doubtful accounts on an
ongoing basis, using historical collection trends and aging of receivables.
Management also periodically evaluates individual customer’s financial
condition, credit history, and the current economic conditions to make
adjustments in the allowance when it is considered necessary. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company does
not have any off-balance-sheet credit exposure related to its
customers.
As of
March 31, 2010 and December 31, 2009, the allowance for doubtful accounts was
$48,551 and $94,643, respectively.
Inventories
consist of frozen products from marine catch, processed seafood products,
algae-based beverage products and materials used in the manufacture of the
Company’s products. Inventories are stated at the lower of cost or net
realizable value, with cost being determined on a weighted average basis. Costs
include purchased cost of raw materials, direct labor and manufacturing overhead
costs. The Company periodically reviews historical sales activity to determine
excess, slow moving items and potentially obsolete items and also evaluates the
impact of any anticipated changes in future demand. The Company provides
inventory allowances based on excess and obsolete inventories determined
principally by customer demand.
As of
March 31, 2010 and December 31, 2009, the Company did not record an allowance
for obsolete inventories, nor have there been any write-offs.
l
|
Property,
plant and equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date on
which they become fully operational and after taking into account their
estimated residual values:
|
|
Depreciable
life
|
|
Residual
value
|
|
Buildings
|
|
30-50
years
|
|
|
10
|
%
|
Plant
and machinery
|
|
10-30
years
|
|
|
10
|
%
|
Office
equipments
|
|
8-10
years
|
|
|
10
|
%
|
Motor
vehicles
|
|
5
years
|
|
|
10
|
%
|
Expenditure
for repairs and maintenance is expensed as incurred. When assets have retired or
sold, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the results of
operations.
Depreciation
expense for the three months ended March 31, 2010 and 2009 were $84,021 and
$68,981, respectively.
Certain
property, plant and equipment with original costs of $989,987 have become fully
depreciated as of March 31, 2010.
All
lands in the PRC are owned by the PRC government. The government in the PRC,
according to the relevant PRC law, may sell the right to use the land for a
specified period of time. Thus, all of the Company’s land purchases in the PRC
are considered to be leasehold land and are stated at cost less accumulated
amortization and any recognized impairment loss. Amortization is provided over
the term of the land use right agreements on a straight-line basis, which are 40
years and 50 years, and they will expire in 2049 and 2052,
respectively.
Amortization
expense for the three months ended March 31, 2010 and 2009 were $18,742 and
$4,085, respectively.
Intangible
assets include trademarks and algae-based beverage know-how acquired from
business combination and are recorded at cost less accumulated amortization and
any recognized impairment loss. The trademarks are to be amortized subject to
the successful registration from the PRC Trademark Authority. The algae-based
beverage know-how is amortized over its estimated useful life of 10 years on a
straight-line basis.
Amortization
expense for the three months ended March 31, 2010 and 2009 were $587,297 and
$nil, respectively. The estimated amortization expense is $2,348,357 for each of
the five succeeding years.
l
|
Impairment
of long-lived assets
|
In
accordance with the provisions of Accounting Standards Codification ("ASC")
Topic 360-10-5, “
Impairment or
Disposal of Long-Lived Assets
”, all long-lived assets such as property,
plant and equipment, land use rights and intangible assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is evaluated by a comparison of the
carrying amount of assets to estimated discounted net cash flows expected to be
generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair value of the assets. There has been no
impairment as of March 31, 2010.
Goodwill
represents the cost of the acquired businesses in excess of the fair value of
identifiable tangible and intangible net assets purchased. The Company generally
seeks the assistance of independent valuation experts in determining the fair
value of the identifiable tangible and intangible net assets of the acquired
business.
The
Company tests goodwill for impairment on an annual basis. In this process, the
Company relies on a number of factors including operating results, business
plans and future cash flows. Recoverability of goodwill is evaluated using a
two-step process. The first step involves a comparison of the fair value of a
reporting unit with its carrying value. If the carrying amount of the reporting
unit exceeds its fair value, the second step of the process involves a
comparison of the fair value and carrying value of the goodwill of that
reporting unit. If the carrying value of the goodwill of a reporting unit
exceeds the fair value of that goodwill, an impairment loss is recognized in an
amount equal to the excess. Goodwill of a reporting unit will be tested for
impairment between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of the reporting unit below its
carrying amount.
As at
March 31, 2010, the Company determines that no goodwill impairment charge
is required.
In
accordance with the ASC Topic 605,
“Revenue Recognition”
, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling price
is fixed or determinable and collectibility is reasonably
assured.
The
Company derives revenues from the processing, distribution and sale of processed
seafood products, sale of marine catch, and the sale and distribution of
algae-based beverage products. The Company recognizes its revenues net of
value-added taxes (“VAT”). The Company is subject to VAT which is levied on the
majority of the products at the rate ranging from 13% to 17% on the invoiced
value of sales. Output VAT is borne by customers in addition to the invoiced
value of sales and input VAT is borne by the Company in addition to the invoiced
value of purchases to the extent not refunded for export sales.
The
Company recognizes revenue from the sale of products upon delivery to the
customers and the transfer of title and risk of loss. The Company experienced no
product returns and recorded no reserve for sales returns for the period ended
March 31, 2010.
The
Company has distributor arrangements with certain parties for sale of its
processed seafood products and algae-based beverage products. The distributor
agreements do not provide chargeback, price protection, or stock rotation
rights.
Rental
income from operating leases on real estate properties is recognized on a
straight-line basis over the lease period.
l
|
Comprehensive
income or loss
|
ASC
Topic 220,
“Comprehensive
Income”,
establishes standards for reporting and display of comprehensive
income or loss, its components and accumulated balances. Comprehensive income or
loss as defined includes all changes in equity during a period from non-owner
sources. Accumulated other comprehensive income or loss, as presented in the
accompanying statement of changes in stockholders’ equity, consists of changes
in unrealized gains and losses on foreign currency translation. This
comprehensive income is not included in the computation of income tax expense or
benefit.
The
Company adopts ASC Topic 740,
“Income Taxes”
, regarding
accounting for uncertainty in income taxes which prescribes the recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken on a tax return. In
addition, the guidance requires the determination of whether the benefits of tax
positions will be more likely than not sustained upon audit based upon the
technical merits of the tax position. For tax positions that are determined to
be more likely than not sustained upon audit, a company recognizes the largest
amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not
determined to be more likely than not sustained upon audit, a company does not
recognize any portion of the benefit in the financial statements. The guidance
provides for de-recognition, classification, penalties and interest, accounting
in interim periods and disclosure.
For
the period ended March 31, 2010, the Company did not have any interest and
penalties associated with tax positions. As of March 31, 2010, the Company did
not have any significant unrecognized uncertain tax positions.
The
Company conducts major businesses in the PRC and is subject to tax in this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax
authority.
The
Company calculates net income per share in accordance with ASC Topic 260,
“Earnings per Share.”
Basic
income per share is computed by dividing the net income by the weighted average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.
l
|
Foreign
currencies translation
|
Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the consolidated statement of operation and
comprehensive income.
The
reporting currency of the Company is the United States Dollar ("US$"). The
Company's subsidiaries in the PRC maintain their books and records in its local
currency, the Renminbi Yuan ("RMB"), which is functional currency as being the
primary currency of the economic environment in which these entities
operate.
In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with ASC Topic 830-30, “
Translation of Financial
Statement”
, using the exchange rate on the balance sheet date. Revenues
and expenses are translated at average rates prevailing during the period. The
gains and losses resulting from translation of financial statements of foreign
subsidiaries are recorded as a separate component of accumulated other
comprehensive income within the statement of changes in stockholders’
equity.
Translation
of amounts from RMB into US$1 has been made at the following exchange rates for
the respective period:
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
Period-end
rates RMB:US$1 exchange rate
|
|
|
6.8361
|
|
|
|
6.8456
|
|
Average
rates RMB:US$1 exchange rate
|
|
|
6.8360
|
|
|
|
6.8466
|
|
l
|
Stock-based
compensation
|
The
Company adopts ASC Topic 718-20,
"Compensation - Stock
Compensation"
("ASC 718-20"), using the fair value method. Under ASC
718-20, stock-based compensation cost is measured at the grant date based on the
fair value of the award or using the Black-Scholes pricing model and is
recognized as expense over the appropriate service period.
For
non-employee stock-based compensation, the Company also adopts ASC Topic 505-50,
“
Equity-Based Payments to
Non-Employees”
, stock-based compensation related to non-employees is
accounted for based on the fair value of the related stock or options or the
fair value of the services at the grant date, whichever is more readily
determinable in accordance with ASC Topic 718-20.
Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operational decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.
ASC
Topic 280,
“
Segment Reporting”
establishes standards for reporting information about operating segments on a
basis consistent with the Company’s internal organization structure as well as
information about geographical areas, business segments and major customers in
financial statements. For the period ended March 31, 2010, the Company operates
in three principal reportable segments: sale of processed seafood products,
trading of marine catch and sale of algae-based beverage
products.
ASC
Topic 820-10, “
Fair Value
Measurements and Disclosures
” ("ASC 820-10") establishes a new framework
for measuring fair value and expands related disclosures. Broadly, ASC 820-10
framework requires fair value to be determined based on the exchange price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants. ASC 820-10 establishes a
three-level valuation hierarchy based upon observable and non-observable inputs.
These tiers include: Level 1, defined as observable inputs such as quoted prices
in active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined
as unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
For
financial assets and liabilities, fair value is the price the Company would
receive to sell an asset or pay to transfer a liability in an orderly
transaction with a market participant at the measurement date. In the absence of
active markets for the identical assets or liabilities, such measurements
involve developing assumptions based on market observable data and, in the
absence of such data, internal information that is consistent with what market
participants would use in a hypothetical transaction that occurs at the
measurement date.
Cash
and cash equivalents, accounts receivable, prepaid expenses and other current
assets, accounts payable, amount due to a stockholder, income tax payable,
accrued liabilities and other payable are carried at cost which approximates
fair value. Any changes in fair value of assets or liabilities carried at fair
value are recognized in other comprehensive income for each
period.
l
|
Recent
accounting pronouncements
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the
results of its operations.
In
June 2009, the Financial Accounting Standards Board (“FASB”) expanded ASC
810-10, to provide guidance for variable interest entities (VIEs). The change
modifies our approach for determining the primary beneficiary of a VIE by
assessing whether we have control over such entities. This change is effective
for us on July 1, 2010. The Company is currently evaluating the requirements of
the VIE provisions of ASC 810-10, but does not expect a material impact on its
condensed consolidated financial statements.
In
October 2009, the FASB issued Accounting Standard Update (ASU) No. 2009-13,
“Revenue Recognition
”
(Topic 605). The accounting standard update addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services separately rather than as a combined unit. Specifically, this subtopic
addresses how to separate deliverables and how to measure and allocate
arrangement consideration to one or more units of accounting. ASU 2009-13 will
be effective for us on July 1, 2010. The Company is currently evaluating the
requirements of ASU 2009-13, but does not expect a material impact on its
condensed consolidated financial statements.
FASB
ASC 810, “
Consolidation
” (“ASC 810”),
establishes accounting and reporting standards for minority interests, which are
recharacterized as noncontrolling interests. ASC 810 was revised so that
noncontrolling interests are classified as a component of equity separate from
the parent’s equity; purchases or sales of equity interests that do not result
in a change in control are accounted for as equity transactions; net income
attributable to the noncontrolling interest are included in consolidated net
income in the statement of operations; and upon a loss of control, the interest
sold, as well as any interest retained, is recorded at fair value, with any gain
or loss recognized in earnings. This revision was effective for the Company as
of January 1, 2009. It applies prospectively, except for the presentation and
disclosure requirements, for which it applies retroactively. In addition, ASC
810 amends the consolidation guidance applicable to variable interest entities.
The amendments will significantly affect the overall consolidation analysis
under ASC 810. This phase of ASC 810 became effective for the Company on January
1, 2010 and did not impact the Company’s consolidation conclusions for its
variable interest entities.
In
January 2010, the FASB issued an amendment to the fair value measurement and
disclosure standard improving disclosures about fair value measurements. This
amended guidance requires separate disclosure of significant transfers in and
out of Levels 1 and 2 and the reasons for the transfers. The amended guidance
also requires that in the Level 3 reconciliation, the information about
purchases, sales, issuances and settlements be disclosed separately on a gross
basis rather than as one net number. The guidance for the Level 1 and 2
disclosures was adopted on January 1, 2010, and did not have an impact on our
consolidated financial position, results of operations or cash flows. The
guidance for the activity in Level 3 disclosures is effective January 1, 2011,
and will not have an impact on our consolidated financial position, results of
operations or cash flows as the amended guidance provides only disclosure
requirements. The Company had no significant transfers between Level 1, 2 or 3
inputs during the quarter ended March 31, 2010.
In
February 2010, the FASB issued amended guidance on subsequent events. Under this
amended guidance, SEC filers are no longer required to disclose the date through
which subsequent events have been evaluated in originally issued and revised
financial statements. This guidance was effective immediately and the Company
adopted these new requirements for the quarter ended March 31,
2010.
NOTE
-
4
|
ACQUISITION
OF BRANDED ALGAE-BASED BEVERAGE
COMPANY
|
On
November 27, 2009, the Company entered into a Credit or Share Purchase Option
Agreement (the “Option Agreement”) with Qiu Shang Jing (“Qiu”) and Shishi
Xianghe Food Science and Technology Co., Ltd. (“Xianghe”). The Option Agreement
provided the Company to make a loan to Xianghe in the amount of approximately
$26.4 million to be used for working capital purposes. In consideration for the
loan, the Company received the option to buy shares representing eighty percent
(80%) of Xianghe from its sole shareholder, Qiu. The interest rate on the loan
is 5.0% per annum. Qiu agreed to pledge all of his shares in Xianghe to
guarantee the performance by Xianghe under the Option Agreement. The Company
intended to fund the loan from the currently available cash.
The
maturity date of the loan was January 26, 2010. Upon maturity of the loan, the
Company exercised the option to purchase shares representing eighty percent
(80%) of Xianghe. The purchase price payable to Qiu consisted of approximately
$1.4 million payable by the Company and $26.4 million payable by
Xianghe.
Xianghe
is a Fujian based manufacturer of the branded Hi-Power algae-based soft drinks.
Hi-Power was developed by the Yellow Sea Fisheries Research Institute Chinese
Academy of Fishery Sciences in coordination with the founder, Qiu. Hi-Power is
marketed as a high-protein content drink, low in calories and fat, which
provides the consumers a combination of immune system benefits, improved
digestion and reductions in hyperglycemia and hypertension. Hi-Power’s target
market focuses on health-conscious consumers in China’s fast-growing beverage
market. Xianghe has developed a network of distributors in Fujian, Zhejiang,
Guangdong and Hunan which sell Hi-Power to retail food stores, restaurants food
supply dealers and the hospitality industry.
On
January 1, 2010, the Company exercised the option to acquire shares representing
eighty percent (80%) of the registered capital stock (the “Shares”) of Xianghe
pursuant to the terms of a Share Purchase Agreement (the “Purchase Agreement”).
The Shares were purchased from Qiu and the purchase price for the Shares was
approximately $27.8 million, paid as follows:
|
(v)
|
Approximately
$26.4 million, which Xianghe owed to the Company, was transferred to be
the consideration for the purchase of the Shares of Xianghe which the
Company shall pay to Qiu.
|
(vi)
|
Approximately
$1.4 million shall be paid by the Company to Qiu within 30 days after
completion of the audit report of Xianghe for the year ended December
31, 2009.
|
The
Purchase Agreement grants the Company a right of first refusal to purchase the
20% of the registered capital stock of Xianghe retained by Qiu for a maximum
price of approximately $7.0 million if Qiu intends to sell his shares. The
Purchase Agreement also provides that if Xianghe has any funding requirement
from the shareholders, the Company and Qiu shall provide the capital into
Xianghe on a pro rata basis according to respective
shareholdings.
The
Company intends to integrate the Hi-Power algae-based soft drinks into our
current distribution network. Xianghe has an experienced management team and its
management and other employees will continue to work at Xianghe after the
acquisition. Xianghe utilizes third party manufacturers to produce the
beverages.
The
following table summarizes the fair value of the assets acquired and liabilities
assumed at the date of acquisition. The allocation of the purchase price
consideration is presented as below:
Acquired
assets:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
435,933
|
|
Accounts
receivable, net
|
|
|
1,391,457
|
|
Inventories
|
|
|
10,871
|
|
Amount
due from an owner
|
|
|
1,442,623
|
|
Property,
plant and equipment, net
|
|
|
395
|
|
Intangible
assets, net
|
|
|
8,596
|
|
|
|
|
|
|
Total
assets acquired
|
|
|
3,289,875
|
|
|
|
|
|
|
Less:
liabilities assumed
|
|
|
|
|
Accounts
payable, trade
|
|
|
402,982
|
|
Income
tax payable
|
|
|
225,180
|
|
Accrued
liabilities and other payable
|
|
|
240,808
|
|
|
|
|
|
|
Total
liabilities assumed
|
|
|
868,
970
|
|
|
|
|
|
|
Less:
non-controlling interests
|
|
|
484,181
|
|
|
|
|
|
|
Net
assets acquired
|
|
|
1,936,724
|
|
Algae-based
drink know-how
|
|
|
23,471,410
|
|
Goodwill
|
|
|
2,391,866
|
|
|
|
|
|
|
Purchase
price consideration
|
|
$
|
27,800,000
|
|
Pursuant
to the Purchase Agreement, the aggregate purchase price was approximately
$27,800,000 (equivalent to RMB190,000,000), in which approximately $26,400,000
was payable by Xianghe upon the conversion of its short-term loan and
approximately $1,400,000 was payable by the Company’s subsidiary, Mingxiang.
Algae-based drink know-know acquired from the business combination was
determined at its fair value, based upon the independent valuation
report.
At the
closing date of business acquisition on January 1, 2010, Mingxiang entered into
a business transfer agreement with Qiu. Pursuant to the business transfer
agreement, Qiu agreed to transfer the algae-based soft drinks business from
Xianghe to Mingxiang as part of the business restructuring of Xianghe. It was
also agreed that Qiu would not share any of the results of the algae-based soft
drinks business operated under Mingxiang in the future. As a result, Mingxiang
fully integrated the business operation of algae-based soft drinks from Xianghe
and was allowed to entitle 100% operating results generated from the algae-based
soft drinks business, subject to the precedent condition. Upon the completion of
business acquisition and business transfer, Xianghe became a dormant
company.
In
connection with the business transfer, it was also agreed between both parties
that Xianghe still assumed $83,021 revenue and $1,475 net income from the
algae-based soft drinks business during the transitional period in January 2010
and as a result, $295 net income was attributed to the non-controlling interests
as of the end of this fiscal quarter. Non-controlling interests from the
business combination mainly represented 20% share of pre-acquisition equity in
Xianghe as of December 31, 2009 in the condensed consolidated balance
sheet.
Inventories
consisted of the following:
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1,308,021
|
|
|
$
|
510,104
|
|
Work-in-process
|
|
|
1,783,843
|
|
|
|
3,018,720
|
|
Finished
goods
|
|
|
22,039
|
|
|
|
151,197
|
|
Packaging
materials
|
|
|
146,700
|
|
|
|
196,929
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,260,603
|
|
|
$
|
3,876,950
|
|
For
the period ended March 31, 2010 and 2009, the Company recorded no allowance for
slow-moving and obsolete inventories.
NOTE
-
6
|
SHORT-TERM
BORROWINGS
|
Short-term
borrowings consisted of the following:
|
|
March 31, 2010
|
|
|
December 31,2009
|
|
Bank
loans, payable to a financial institution in the PRC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB5,400,000, due on February 12, 2010
|
|
|
-
|
|
|
|
789,797
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,000,000, due on February 16, 2010
|
|
|
-
|
|
|
|
438,776
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,900,000, due on February 18, 2010
|
|
|
-
|
|
|
|
570,409
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB5,000,000, due on February 24, 2010
|
|
|
-
|
|
|
|
731,293
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB4,000,000, due on February 26, 2010
|
|
|
-
|
|
|
|
585,035
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB4,000,000, due on March 17, 2010
|
|
|
-
|
|
|
|
585,035
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,000,000, due on March 26, 2010
|
|
|
-
|
|
|
|
438,776
|
|
|
|
|
|
|
|
|
|
|
Total
borrowings
|
|
$
|
-
|
|
|
$
|
4,139,121
|
|
As of
March 31, 2010, all the short-term borrowings were repaid in full at their
respective expiry dates. The weighted average effective interest rate was 5.31%
and 5.95% per annum, with interest expense of $39,697 and $62,708
for the three months ended March 31, 2010 and 2009 respectively, payable
quarterly.
NOTE
-
7
|
AMOUNT
DUE TO A STOCKHOLDER
|
As of
March 31, 2010 and December 31, 2009, the amounts of $69,598 and $69,587
represented temporary advances for working capital purposes from a major
stockholder, Mr. Liu, which was unsecured, interest free and repayable on
demand.
NOTE
-
8
|
STOCKHOLDERS’
EQUITY
|
(a) Warrants
In
connection with the private placement offering, on November 17, 2007, the
Company granted to consultants and agents warrants to purchase an aggregate of
929,916 shares of the Company’s common stock at an exercise price of $4.1782 per
share or on a cashless exercise basis. The warrants vested immediately and will
expire on November 16, 2010. The market price of the stock was $4.1782 per share
at the grant date. The Company valued the warrants at $2.0873 per share, or
$1,941,014, using the Black-Scholes option-pricing model under ASC 718-20 and
was recorded as offering expense in additional paid-in capital in the fiscal
year 2007.
During
the period ended March 31, 2010, certain warrant holders exercised 437,673
warrants in total on a cash and cashless exercise basis to purchase 167,606
shares and 120,017 shares of the Company’s common stock,
respectively.
A
summary of warrant activity for the period ended March 31, 2010 is as
follows:
|
|
Number of
warrants
|
|
|
Weighted
average
exercise price
|
|
|
Remaining
contractual
term (year)
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable as of December 31, 2009
|
|
|
1,329,103
|
|
|
|
4.1782
|
|
|
|
0.88
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(437,673
|
)
|
|
|
4.1782
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
and exercisable as of March 31, 2010
|
|
|
891,430
|
|
|
$
|
4.1782
|
|
|
|
0.63
|
|
|
|
-
|
|
(b) Registered
direct offering
On
January 25, 2010, the Company has closed the financing to sell 4,615,388 shares
of common stock at a price of $6.50 per share. Net proceeds, after underwriting
discounts and commissions and before offering expenses of approximately
$1,500,000 payable by the Company, are approximately $28,500,000. In connection
with the registered direct offering, the Company also issued 177,000 shares of
common stock to a consultant for the provision of financial advisory service
rendered in this registered direct offering. The fair value of this stock
issuance was determined at a price of $6.50 per share based on the market price
of the shares at the grant date and recorded in additional paid-in
capital.
The
Company intends to use the net proceeds from this offering for working capital
and general corporate purposes. The shares were sold under the Company's
previously filed shelf registration statement that was declared effective by the
Securities and Exchange Commission on December 23, 2009. Global Hunter
Securities LLC and Brean Murray Carret & Co., LLC acted as co-lead placement
agents and joint book-running managers in the transaction.
As of
March 31, 2010, the number of authorized and outstanding shares of the Company’s
common stock was 100,000,000 and 28,493,650 shares,
respectively.
For
the period ended March 31, 2010 and 2009, the local (“United States of America”)
and foreign components of income before income taxes were comprised of the
following:
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Tax
jurisdiction from:
|
|
|
|
|
|
|
–
Local
|
|
$
|
-
|
|
|
$
|
-
|
|
–
Foreign
|
|
|
4,982,225
|
|
|
|
3,697,861
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
4,982,225
|
|
|
$
|
3,697,861
|
|
The
provision for income taxes consisted of the following:
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Current:
|
|
|
|
|
|
|
–
Local
|
|
$
|
-
|
|
|
$
|
-
|
|
–
Foreign
|
|
|
1,056,092
|
|
|
|
449,260
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
–
Local
|
|
|
-
|
|
|
|
-
|
|
–
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
1,056,092
|
|
|
$
|
449,260
|
|
The
effective tax rate in the periods presented is the result of the mix of income
earned in various tax jurisdictions that apply a broad range of income tax
rates. The Company has subsidiaries that operate in various countries: Hong Kong
and the PRC that are subject to tax in the jurisdictions in which they operate,
as follows:
United
States of America
China
Marine is registered in the State of Nevada and is subject to United States of
America tax law.
As of
March 31, 2010, China Marine incurred $11,326 of net operating losses
carryforwards available for federal tax purposes that may be used to offset
future taxable income and will begin to expire in 2028, if unutilized. The
Company has provided for a full valuation allowance against the deferred tax
assets of $3,907 on the expected future tax benefits from the net operating loss
carryforwards as the management believes it is more likely than not that these
assets will not be realized in the future.
Hong
Kong
The
Company’s subsidiary, Ocean Technology (China) Company Limited (“Ocean
Technology”) is subject to Hong Kong Profits Tax at the statutory rate of 16.5%
on its assessable income for the periods ended March 31, 2010 and 2009,
respectively. As of March 31, 2010, Ocean Technology incurred $441,095 of net
operating losses carryforwards available for income tax purposes. The Company
has provided for a full valuation allowance against the deferred tax assets of
$72,781 on the expected future tax benefits from the net operating loss
carryforwards as the management believes it is more likely than not that these
assets will not be realized in the future.
The
PRC
The
Company generated all of its net income from subsidiaries operating in the PRC
for the period ended March 31, 2010 and 2009. Shishi Rixiang Marine Food Co.,
Ltd. (“Rixiang”), Shishi Huabao Jixiang Water Products Co., Ltd. (Jixiang”),
Shishi Huabao Mingxiang Foods Co., Ltd. (Mingxiang”), Shishi Xianghe Food
Science and Technology Co., Ltd. (“Xianghe”) and Shishi Xianglin Trading Co.,
Ltd. (“Xianglin”) are subject to the Corporate Income Tax governed by the Income
Tax Law of the People’s Republic of China, at a unified income tax rate of
25%.
Xianghe
and Xianglin are approved as a domestic enterprise. Rixiang, Jixiang and
Mingxiang are approved as a foreign investment enterprise and entitled to,
starting from the first profitable year, a two-year exemption from corporate
income tax and a 50%-reduction in its preferential corporate income tax rate of
24% for the following three years ("Tax Holiday"). Such Tax Holiday of Rixiang,
Jixiang and Mingxiang were expired in prior years.
On
October 15, 2009, Mingxiang has received a notice of recognition as an
enterprise of new and high technology, which was jointly issued by The Science
and Technology Department of Fujian, The Finance Department of Fujian, The State
Tax Bureau of Fujian and The Local Taxation Bureau of Fujian for a company
engaged in advanced food processing technologies for the Fujian Province. As a
new and high technology company, Mingxiang is qualified for a reduced income tax
rate of 15% on its income before tax for a period of three years, expiring
through 2012.
As of
March 31, 2010, the PRC operation did not incur any net operating losses
carryforward available for income tax purposes that may be used to offset future
taxable income and will begin to expire in 5 years from the year of incurrence,
if unutilized.
NOTE
-
10
|
SEGMENT
REPORTING, GEOGRAPHICAL
INFORMATION
|
(c) Business
information
The
Company’s chief operating decision maker has been identified as chairman, Mr.
Liu, who reviews consolidated results when making decisions about allocating
resources and assessing performance of the Company. Based on this assessment,
the Company has determined that it has three operating and reporting segments
for the period ended March 31, 2010 and 2009 which are processed seafood
products, marine catch and algae-based beverage products.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 3). The Company had no
inter-segment sales for the period ended March 31, 2010 and
2009.
Summarized
financial information concerning the Company’s reportable segments is shown in
the following table for the three months ended March 31, 2010 and
2009:
|
|
Three months ended March 31, 2010
|
|
|
|
Processed seafood
products
|
|
|
Marine catch
|
|
|
Algae-based
beverage products
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
16,497,907
|
|
|
$
|
398,519
|
|
|
$
|
2,753,983
|
|
|
$
|
19,650,409
|
|
Cost
of revenue
|
|
|
(10,969,020
|
)
|
|
|
(289,245
|
)
|
|
|
(1,783,730
|
)
|
|
|
(13,041,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
5,528,887
|
|
|
$
|
109,274
|
|
|
$
|
970,253
|
|
|
$
|
6,608,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure
for long-lived assets
|
|
$
|
156,474
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
156,474
|
|
|
|
Three months ended March 31, 2009
|
|
|
|
Processed seafood
products
|
|
|
Marine catch
|
|
|
Algae-based
beverage products
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
11,202,982
|
|
|
$
|
5,345,070
|
|
|
$
|
-
|
|
|
$
|
16,548,052
|
|
Cost
of revenue
|
|
|
(7,550,296
|
)
|
|
|
(4,891,981
|
)
|
|
|
-
|
|
|
|
(12,442,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
3,652,686
|
|
|
$
|
453,089
|
|
|
$
|
-
|
|
|
$
|
4,105,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure
for long-lived assets
|
|
$
|
899,463
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
899,463
|
|
(d) Geographic
information
The
Company’s operations are located in two main geographical areas. The Company’s
sales by geographical market are analyzed as follows:
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Revenue,
net:
|
|
|
|
|
|
|
The
PRC
|
|
$
|
19,355,577
|
|
|
$
|
16,133,869
|
|
Asia
|
|
|
294,832
|
|
|
|
414,183
|
|
|
|
|
|
|
|
|
|
|
Total
revenue, net
|
|
$
|
19,650,409
|
|
|
$
|
16,548,052
|
|
All
the Company’s long-lived assets are located in the PRC in both
periods.
NOTE
- 11
|
CONCENTRATIONS
OF RISK
|
The
Company is exposed to the following concentrations of risk:
(a) Major
customers
For
the period ended March 31, 2010, no customer represented more than 10% of the
Company’s revenue and accounts receivable, respectively.
For
the period ended March 31, 2009, one customer represented more than 10% of the
Company’s revenue. This customer accounts for 29% of revenue amounting to
$4,788,066, with $148,442 of accounts receivable.
(b) Major
vendors
The
following is a table summarizing the purchases of raw materials from vendors
that individually represents more than 10% of the total purchases for the period
ended March 31, 2010 and 2009 and their outstanding balances as at period-end
dates.
|
|
Three months ended March 31, 2010
|
|
Vendors
|
|
Purchases
|
|
|
Percentage
of total purchases
|
|
|
Accounts
payable, trade
|
|
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
$
|
2,467,679
|
|
|
|
31
|
%
|
|
$
|
115,082
|
|
Vendor
B
|
|
|
1,748,525
|
|
|
|
22
|
%
|
|
|
162,393
|
|
Vendor
C
|
|
|
1,557,481
|
|
|
|
20
|
%
|
|
|
148,923
|
|
Vendor
D
|
|
|
1,066,281
|
|
|
|
13
|
%
|
|
|
61,868
|
|
Vendor
E
|
|
|
904,427
|
|
|
|
11
|
%
|
|
|
113,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
7,744,393
|
|
|
|
97
|
%
|
|
$
|
601,896
|
|
|
|
Three months ended March 31,
2009
|
|
|
|
Purchases
|
|
|
Percentage
of total purchases
|
|
|
Accounts
payable, trade
|
|
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
$
|
1,926,063
|
|
|
|
15
|
%
|
|
$
|
44,966
|
|
Vendor
D
|
|
|
1,528,152
|
|
|
|
12
|
%
|
|
|
58,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
3,454,215
|
|
|
|
27
|
%
|
|
$
|
103,358
|
|
(c) Credit
risk
Financial
instruments that are potentially subject to credit risk consist principally of
trade receivables. The Company believes the concentration of credit risk in its
trade receivables is substantially mitigated by its ongoing credit evaluation
process and relatively short collection terms. The Company does not generally
require collateral from customers. The Company evaluates the need for an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.
(d) Exchange
rate risk
The
reporting currency of the Company is US$, to date the majority of the revenues
and costs are denominated in RMB and a significant portion of the assets and
liabilities are denominated in RMB. As a result, the Company is exposed to
foreign exchange risk as its revenues and results of operations may be affected
by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates
against US$, the value of the RMB revenues and assets as expressed in US$
financial statements will decline. The Company does not hold any derivatives or
other financial instruments that expose to substantial exchange rate
risk.
(e) Economic
and political risks
Substantially
all of the Company’s products are processed in the PRC. The Company’s operations
are subject to various political, economic, and other risks and uncertainties
inherent in the PRC and not typically associated with companies in North America
and Western Europe. Among other risks, the Company’s operations are subject to
the risks of restrictions on transfer of funds; export duties, quotas, and
embargoes; domestic and international customs and tariffs; changing taxation
policies; foreign exchange restrictions; and political conditions and
governmental regulations in the PRC.
NOTE
-
12
|
COMMITMENTS
AND CONTINGENCIES
|
(c)
|
Operating
lease commitments
|
The
Company leased certain office space under a non-cancelable operating lease
agreement with a term of 3 years with fixed monthly rentals, expiring on
February 17, 2011, and generally did not contain significant renewal options.
Total rent expenses for the period ended March 31, 2010 and 2009 were $19,286
and $19,286, respectively.
As of
March 31, 2010, the Company has the future minimum rental payments of $68,191
under the non-cancelable operating lease in the next twelve
months.
As of
March 31, 2010, Mingxiang is contingently liable as guarantor with respect to
the loans of $731,294 (equivalent to RMB5,000,000) and $438,776 (equivalent to
RMB3,000,000) to two unrelated third parties, Shishi Yu Ching Knitting and
Clothing Company (“Yu Ching”) and Shishi Han Jiang Hua Lian Knitting and
Clothing Factory (“Han Jiang Hua Lian”), respectively. The term of these
guarantees are commenced from July 2009 through July 2011, with a renewal
provision of 2 years. At any time from the date of guarantees, should Yu Ching
or Han Jiang Hua Lian fail to make their due debt payments, Mingxiang will be
obligated to perform under the guarantees by primarily making the required
payments, including late fees and penalties. The maximum potential amount of
future payments that the Mingxiang is required to make under the guarantees is
$1,170,070 (equivalent to RMB8,000,000).
According
to the Personal Guarantee Agreement between Mingxiang and Mr. Liu, Mr. Liu
agreed to bear all liabilities and costs to be incurred from a direct claim by
the creditor if either Yu Ching or Han Jiang Hua Lian fails to make payment to
the creditor upon due dates.
In
accordance with ASC 460-10
“Guarantees”
, a guarantor
must recognize a liability for the fair value of the obligations it assumes
under certain guarantees. Mingxiang did not receive any consideration for the
guarantee and has determined the indemnification fair value to be insignificant.
As of March 31, 2010, the Company has not recorded any liabilities under these
guarantees.
PART
II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF
ISSUANCE AND DISTRIBUTION
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by us in connection with the sale of common
stock being registered. All amounts, other than the SEC registration fee, are
estimates. We will pay all these expenses.
Expense
|
|
]
Amount to be
Paid
|
|
SEC
Registration Fee
|
|
$
|
1,375.74
|
|
Printing
Fees/Expenses
|
|
$
|
18,000
|
|
Legal
Fees and Expenses
|
|
$
|
400,000
|
|
Accounting
Fees and Expenses
|
|
$
|
210,000
|
|
Blue
Sky Fees & Expenses
|
|
$
|
5,000
|
|
Transfer
Agent and Registrar Fees
|
|
$
|
5,000
|
|
Miscellaneous
1
|
|
$
|
650,000
|
|
TOTAL
|
|
$
|
1,289,375.74
|
|
1
Miscellaneous expenses included consulting, valuation and road show
expenses.
ITEM 14. INDEMNIFICATION OF
OFFICERS AND DIRECTORS
Our
bylaws provide for the indemnification of our present and prior directors and
officers or any person who may have served at our request as a director or
officer of another corporation in which we own shares of capital stock or of
which we are a creditor, against expenses actually and necessarily incurred by
them in connection with the defense of any actions, suits or proceedings in
which they, or any of them, are made parties, or a party, by reason of being or
having been director(s) or officer(s) of us or of such other corporation, in the
absence of negligence or misconduct in the performance of their duties. This
indemnification policy could result in substantial expenditure by us, which we
may be unable to recoup.
Insofar
as indemnification by us for liabilities arising under the Securities Exchange
Act of 1934 may be permitted to our directors, officers and controlling persons
pursuant to provisions of the Amended Articles of Incorporation and Bylaws, or
otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy and is, therefore, unenforceable. In
the event that a claim for indemnification by such director, officer or
controlling person of us is in the successful defense of any action, suit or
proceeding is asserted by such director, officer or controlling person in
connection with the securities being offered, we will, unless in the opinion of
our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
TEM 15. RECENT SALES OF
UNREGISTERED SECURITIES
We
entered into a Stock Purchase Agreement (“SPA”) with Halter Financial
Investments, L.P., a Texas limited partnership (“HFI”) on September 13, 2007.
Pursuant to this SPA, the Company agreed to sell to HFI 1,005,200 unregistered
shares of post-reverse shares of the Company’s common stock in exchange for
$400,000. Moreover, the Company agreed to a 7.5 to 1 reverse stock split and to
increase its authorized shares of common stock to 100,000,000. A special cash
dividend of $0.364 per-split share was paid to the then-current shareholders of
the company. HFI did not participate in such dividend. As a result of the
transaction, HFI became the holder of 1,005,200 shares of common stock, or 87.5%
of the 1,148,826 shares of the Company’s outstanding common
stock.
The
subject shares were sold to HFI without registration under the Securities Act,
as amended, in reliance on the exemption from such registration requirements
provided by Section 4(2) of the Securities Act for transactions not involving
any public offering. The shares were sold without general advertising or
solicitation, the Purchaser acknowledged that it was purchasing “restricted
securities” which had not been registered with the Securities Act and which were
subject to certain restrictions on resale, and the certificate representing the
shares was imprinted with a restricted stock legend indicating that the shares
had not been registered and could not be resold without registration under the
Securities Act or the availability of an exemption from the registration
requirements thereof.
On
November 17, 2007, we entered into a Share Exchange Agreement with Nice
Enterprise and its original stockholders pursuant to which we acquired all of
the issued and outstanding shares of Nice Enterprise from said stockholders in
exchange for 15,624,034 shares of our common stock. This issuance was made in
reliance on Section 4(2) of the Act for the offer and sale of securities not
involving a public offering and regulation D promulgated
thereunder.
Concurrently
with the closing of the reverse acquisition on November 17, 2007, we completed a
private placement of our securities to certain accredited investors who
subscribed for units consisting one share of common stock and a warrant to
purchase one-fifth of one share of our common stock. The investors subscribed
for aggregate of 6,199,441 shares of our common stock and warrants to purchase
an aggregate of 1,239,888 shares of our common stock at $3.214 per unit. The
units were offered and sold pursuant to exemptions from registration under
the Securities Act, including without limitation, Regulation D and Regulation S
promulgated under the Securities Act. More information regarding this
transaction can be found starting on page 6 of this Prospectus.
From
September 2009 through January 2010, we issued 509,282 shares of common stock to
fourteen stockholders upon the conversion of an aggregate of 1,081
and 67,113 common stock purchase warrants pursuant to the cashless and cash
exercise provisions of such warrants, respectively. The warrants had
been issued in November 2007. These issuances were made in reliance on Section
4(2) of the Act for the offer and sale of securities not involving a public
offering and regulation D promulgated thereunder.
In the
instance described above where we issued securities in reliance upon Regulation
D, we relied upon Rule 506 of Regulation D of the Securities Act. These
stockholders who received the securities in such instances made representations
that (a) the stockholder is acquiring the securities for his, her or its own
account for investment and not for the account of any other person and not with
a view to or for distribution, assignment or resale in connection with any
distribution within the meaning of the Securities Act, (b) the stockholder
agrees not to sell or otherwise transfer the purchased shares unless they are
registered under the Securities Act and any applicable state securities laws, or
an exemption or exemptions from such registration are available, (c) the
stockholder has knowledge and experience in financial and business matters such
that he, she, or it is capable of evaluating the merits and risks of an
investment in us, (d) the stockholder has access to all of our documents,
records, and books pertaining to the investment and was provided the opportunity
to ask questions and receive answers regarding the terms and conditions of the
offering and to obtain any additional information which we possessed or were
able to acquire without unreasonable effort and expense, and (e) the stockholder
has no need for liquidity in its investment in us and could afford the complete
loss of such investment. Management made the determination that the investors in
instances where we relied on Regulation D are Accredited Investors (such as
defined in Regulation D) based upon management’s inquiry into their
sophistication and net worth. In addition, there was no general solicitation or
advertising for securities issued in reliance upon Regulation
D.
ITEM 16. EXHIBITS &
FINANCIAL STATEMENT SCHEDULES
Exhibit
Number
|
Exhibit Description
|
|
|
2.1
|
Share
Exchange Agreement, dated November 17, 2007 by and among the Registrant,
Nice Enterprise and its stockholders. (Filed with the Commission on Form
8-K dated November 23, 2007 as Exhibit 2.1)
|
|
|
3.1
|
Amended
Articles of Incorporation of the Registrant as filed with the Secretary of
State of Nevada, as amended to date. (Filed with the Commission on Form
8-K dated November 23, 2007 as Exhibit 3.1)
|
|
|
3.2
|
Amended
and Restated Bylaws of the Registrant. (Filed with the Commission on Form
8-K dated November 23, 2007 as Exhibit 3.2)
|
|
|
4.1
|
Form
of Registration Rights Agreement dated November 17, 2007. (Filed with the
Commission on Form 8-K dated November 23, 2007 as Exhibit
4.1)
|
|
|
4.2
|
Form
of Common Stock Purchase Warrant issued to Investors dated November 17,
2007. (Filed with the Commission on Form 8-K dated November 23, 2007 as
Exhibit 4.2)
|
|
|
4.3
|
Form
of Common Stock Purchase Warrant issued to Sterne Agee & Leach, Inc.
and its designee. (Filed with the Commission on Form 8-K/A dated November
30, 2007 as Exhibit 4.3)
|
|
|
4.4
|
Form
of Common Stock Purchase Warrant issued to Yorkshire Capital Limited and
its designee. (Filed with the Commission on Form 8-K/Adated November 30,
2007 as Exhibit 4.4)
|
|
|
5
|
Opinion
of McLaughlin & Stern, LLP dated June 15,
2010.*
|
|
|
10.1
|
Form
of Securities Purchase Agreement dated November 17, 2007. (Filed with the
Commission on Form 8-K/A on November 30, 2007 as Exhibit
10.1)
|
|
|
10.2
|
Closing
Escrow Agreement dated November 17, 2007, by and among the Registrant,
Sterne Agee & Leach, Inc. and Thelen Reid Brown Raysman & Steiner,
LLP. (Filed with the Commission on Form 8-K dated November 23, 2007 as
Exhibit 10.3)
|
|
|
10.3
|
Employment
Contract dated November 17, 2007, between the Registrant and Pengfei Liu.
(Filed with the Commission on Form 8-K dated November 23, 2007 as Exhibit
10.5)
|
|
|
10.4
|
Employment
Contract dated November 17, 2007, between the Registrant and Shaobin Yang.
(Filed with the Commission on Form 8-K dated November 23, 2007 as Exhibit
10.7)
|
|
|
10.5
|
Employment
Contract dated November 17, 2007, between the Registrant and Weipeng Liu.
(Filed with the Commission on Form 8-K dated November 23, 2007 as Exhibit
10.6)
|
|
|
10.6
|
Employment
Contract dated July 26, 2007, between Nice Enterprise and Marco Hon Wai
Ku. (Filed with the Commission on Form 8-K dated November 23, 2007 as
Exhibit 10.8)
|
|
|
10.7
|
Consulting
Agreement dated January 1, 2007 between Yorkshire Capital Ltd. and Nice
Enterprise Trading H.K. Co., Ltd. (Filed with the Commission on Form 8-K
dated November 23, 2007 as Exhibit 10.9)
|
|
|
10.8
|
Common
Stock Purchase Agreement dated September 13, 2007, by and between New
Paradigm Productions, Inc. and Halter Financial Investments, L.P. (Filed
with the Commission on Form 8-K dated September 14, 2007 as Exhibit
10.1)
|
10.9
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated October 26, 2006. (Filed with
the Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as
Exhibit 10.9)
|
|
|
10.10
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated April 18, 2007. (Filed with the
Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
10.9)
|
|
|
10.11
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated April 29, 2007. (Filed with the
Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
10.9)
|
|
|
10.12
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated June 3, 2007. (Filed with the
Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
10.9)
|
|
|
10.13
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated June 13, 2007. (Filed with the
Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
10.9)
|
|
|
10.14
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated July 2, 2007. (Filed with the
Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
10.9)
|
|
|
10.15
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated August 21, 2007. (Filed with the
Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
10.9)
|
|
|
10.16
|
Make
Good Escrow Agreement dated November 17, 2007, by and among the
Registrant, Sterne Agee & Leach, Inc., Mr. Pengfei Liu, and Interwest
Transfer Company, Inc. (Filed with the Commission on Form 8-K dated
November 23, 2007 as Exhibit 10.2)
|
|
|
10.17
|
Lock-up
Agreement dated November 17, 2007, by and among the Registrant and Mr.
Pengfei Liu. (Filed with the Commission on Form 8-K dated November 23,
2007 as Exhibit 10.4)
|
|
|
10.18
|
Investor
Relations Consulting Agreement, by and between the Registrant and Hayden
Communications International, Inc. dated February 20, 2008. (Filed with
the Commission on Form 8-K dated March 21, 2008 as Exhibit
10.1)
|
|
|
10.19
|
Employment
Supplementary Agreement between Nice Enterprise Trading H.K. Co., Limited
and Marco Hon Wai Ku dated July 26, 2009
|
|
|
10.20
|
Executed
Auction Confirmation Letter dated November 6, 2009 by Shishi Huabao
Mingxiang Foods Co., Ltd and Fujian Jiafu Auction Firm Limited Liability
Company. (Filed with the commission on Form 8-K dated November 12,
2009)
|
|
|
10.21
|
Credit
or Share Purchase Option Agreement amongst Shishi Huabao Mingxiang Food
Co., Ltd., Qiu Shang Jing and Shishi Xianghe Food Science and Technology
Co., Ltd. November 27, 2009. (Filed with the commission on Form 8-K dated
December 2, 2009)
|
|
|
10.22
|
Share
Purchase Agreement dated January 1, 2010 amongst Shishi Huabao Mingxiang
Foods Co. Ltd. and Qiu Shang Jing and Ltd. (Filed with the Commission on
Form 8-K dated January 5, 2010).
|
|
|
10.23
|
Form
of Securities Purchase Agreement between the Company and each Purchaser
dated as of January 20, 2010 (Filed with the Commission on Form
8-K dated January 20,
2010).
|
10.24
|
Form
of Escrow Agreement between the Company, Global Hunter Securities, Brean
Murray, Carret & Co. LLC, Sichenzia Ross Friedman Ference LLP and
certain purchasers dated as of January 20, 2010. (Filed with the
Commission on Form 8-K dated January 20, 2010).
|
|
|
10.25
|
Placement
Agent Agreement between the Company, Global Hunter Securities and Brean
Murray, Carret & Co., LLC dated as of January 15,
2010. (Filed with the Commission on Form 8-K dated January 20,
2010).
|
|
|
10.26
|
Financing
Consultancy Engagement Letter between the Company and World Global
Investments Hong Kong Limited dated October 18, 2009. (Filed with the
Commission on Form 8-K dated January 20, 2010).
|
|
|
14.1
|
Business
Code of Conduct (Filed with the Commission on Form 8-K dated January 24,
2008 as Exhibit 14.1 and Form 8-K dated August 17, 2009 as Exhibit
5.05.1)
|
|
|
14.2
|
Financial
Code of Conduct (Filed with the Commission on Form 8-K dated January 24,
2008 as Exhibit 14.2 and Form 8-K dated August 17, 2009 as Exhibit
5.05.2)
|
|
|
14.3
|
Amendments
to the By-Laws (Filed with the Commission on Form 8-K dated August 17,
2009 as Exhibit 5.03)
|
|
|
14.4
|
Charter
for the Audit Committee (Filed with the Commission on Form 8-K dated
August 17, 2009 as Exhibit 5.05.1)
|
|
|
14.5
|
Charter
for the Corporate Governance and Nominating Committee (Filed with the
Commission on Form 8-K dated August 17, 2009 as Exhibit
5.05.2)
|
|
|
14.6
|
Charter
for the Compensation Committee (Filed with the Commission on Form 8-K
dated August 17, 2009 as Exhibit 5.05.3)
|
|
|
21
|
Subsidiaries
List (Filed with the Commission on Form 10-K dated March 23, 2009 as
Exhibit 21)
|
|
|
23.1
|
Consent
of ZY-CPA Company Limited dated June 14, 2010*
|
|
|
23.2
|
Consent
of McLaughlin & Stern, LLP, included in Exhibit
5.
|
|
|
24
|
Power
of Attorney (Filed with the Commission on Form 10-K dated March 23, 2009
as Exhibit 24))
|
|
|
99.1
|
Press
release dated January 20, 2010 by the Company (Filed with the
Commission on Form 8-K dated January 20,
2010).
|
ITEM 17.
UNDERTAKINGS
The
undersigned registrant hereby undertakes to:
(1)
|
File, during any period in which
offers or sales are being made, a post-effective amendment to this
registration statement to:
|
(a)
|
Include any Prospectus required
by Section 10(a) (3) of the Securities Act,
and
|
(b)
|
Reflect in the Prospectus any
facts or events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in the
information in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of Prospectus filed
with the Commission pursuant to Rule 424(b) under the Securities Act if,
in the aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective registration
statement, and
|
(c)
|
Include any additional or changed
material information on the plan of
distribution.
|
(2)
|
For determining liability under
the Securities Act, treat each post-effective amendment as a new
registration statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide
offering.
|
(3)
|
File a post-effective amendment
to remove from registration any of the securities that remain unsold at
the end of the offering.
|
(4)
|
For
determining any liability under the Securities Act, treat the information
omitted from the form of Prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of Prospectus
filed by the registrant under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective. Each Prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an offering, other
than registration statements relying on Rule 430B or other than
Prospectuses filed in reliance on Rule 430A, shall be deemed to be part of
and included in the registration statement as of the date it is first used
after effectiveness.
Provided, however,
that
no statement made in a registration statement or Prospectus that is part
of the registration statement or
made in a document
incorporated or deemed incorporated by reference into the
registration statement or Prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to
such first use, supersede or modify any statement that was made in the
registration statement or Prospectus that was part of the registration
statement or made in any such document immediately prior to such date of
first use.
|
(5)
|
For determining any liability
under the Securities Act, treat each post-effective amendment that
contains a form of Prospectus as a new registration statement for the
securities offered in the registration statement, and that offering of the
securities at that time as the initial bona fide offering of those
securities.
|
(6)
|
Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the
event that a
claim for ndemnification
against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connec
tion with the
secur
ities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be governed by
the final adjudication of such
issue.
|
SIGNATURES
Pursuant
to the requirements of the 1933 Act, the Registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Shishi on the 14th day
of June
|
CHINA
MARINE FOOD GROUP LIMITED
|
|
|
|
|
By:
|
/s/ Pengfei Liu
|
|
|
Pengfei
Liu
|
|
|
Chief
Executive Officer and Secretary
(Principal Executive
Officer)
|
|
|
|
|
By:
|
/s/ Marco Hon Wai
Ku
|
|
|
Marco
Hon Wai Ku
|
|
|
Chief
Financial Officer (Principal Financial
Officer)
|
Pursuant
to the requirements of the Securities Act, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.
Each person whose signature appears below constitutes and appoints Pengfei Liu
and Marco Hon Wai Ku, and each of them individually, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and his or her name, place and stead, in any and
all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the SEC,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ Pengfei Liu
|
|
Chief
Executive Officer, Secretary & Director
|
|
6/14/2010
|
Pengfei
Liu
|
|
|
|
|
|
|
|
|
|
/s/ Marco Hon Wai Ku
|
|
Chief
Financial Officer
|
|
6/14/2010
|
Marco
Hon Wai Ku
|
|
|
|
|
|
|
|
|
|
/s/ Weipeng Liu
|
|
Director
|
|
6/14
/2010
|
Weipeng
Liu
|
|
|
|
|
|
|
|
|
|
/s/ Xiaochuan Li
|
|
Director
|
|
6/14/2010
|
Xiaochuan
Li
|
|
|
|
|
|
|
|
|
|
/s/ Changhu Xue
|
|
Director
|
|
6/14/2010
|
Changhu
Xue
|
|
|
|
|
|
|
|
|
|
/s/ Honkau Wan
|
|
Director
|
|
6/14/2010
|
Honkau
Wan
|
|
|
|
|
ITEM 16. EXHIBITS &
FINANCIAL STATEMENT SCHEDULES
Exhibit
Number
|
Exhibit Description
|
|
|
2.1
|
Share
Exchange Agreement, dated November 17, 2007 by and among the Registrant,
Ocean Technology and its stockholders. (Filed with the Commission on Form
8-K dated November 23, 2007 as Exhibit 2.1)
|
|
|
3.1
|
Amended
Articles of Incorporation of the Registrant as filed with the Secretary of
State of Nevada, as amended to date. (Filed with the Commission on Form
8-K dated November 23, 2007 as Exhibit 3.1)
|
|
|
3.2
|
Amended
and Restated Bylaws of the Registrant. (Filed with the Commission on Form
8-K dated November 23, 2007 as Exhibit 3.2)
|
|
|
4.1
|
Form
of Registration Rights Agreement dated November 17, 2007. (Filed with the
Commission on Form 8-K dated November 23, 2007 as Exhibit
4.1)
|
|
|
4.2
|
Form
of Common Stock Purchase Warrant issued to Investors dated November 17,
2007. (Filed with the Commission on Form 8-K dated November 23, 2007 as
Exhibit 4.2)
|
|
|
4.3
|
Form
of Common Stock Purchase Warrant issued to Sterne Agee & Leach, Inc.
and its designee. (Filed with the Commission on Form 8-K/A dated November
30, 2007 as Exhibit 4.3)
|
|
|
4.4
|
Form
of Common Stock Purchase Warrant issued to Yorkshire Capital Limited and
its designee. (Filed with the Commission on Form 8-K/Adated November 30,
2007 as Exhibit 4.4)
|
|
|
5
|
Opinion
of McLaughlin & Stern, LLP dated June 15,
2010.*
|
|
|
10.1
|
Form
of Securities Purchase Agreement dated November 17, 2007. (Filed with the
Commission on Form 8-K/A on November 30, 2007 as Exhibit
10.1)
|
|
|
10.2
|
Closing
Escrow Agreement dated November 17, 2007, by and among the Registrant,
Sterne Agee & Leach, Inc. and Thelen Reid Brown Raysman & Steiner,
LLP. (Filed with the Commission on Form 8-K dated November 23, 2007 as
Exhibit 10.3)
|
|
|
10.3
|
Employment
Contract dated November 17, 2007, between the Registrant and Pengfei Liu.
(Filed with the Commission on Form 8-K dated November 23, 2007 as Exhibit
10.5)
|
|
|
10.4
|
Employment
Contract dated November 17, 2007, between the Registrant and Shaobin Yang.
(Filed with the Commission on Form 8-K dated November 23, 2007 as Exhibit
10.7)
|
|
|
10.5
|
Employment
Contract dated November 17, 2007, between the Registrant and Weipeng Liu.
(Filed with the Commission on Form 8-K dated November 23, 2007 as Exhibit
10.6)
|
|
|
10.6
|
Employment
Contract dated July 26, 2007, between Ocean Technology and Marco Hon Wai
Ku. (Filed with the Commission on Form 8-K dated November 23, 2007 as
Exhibit 10.8)
|
|
|
10.7
|
Consulting
Agreement dated January 1, 2007 between Yorkshire Capital Ltd. and Ocean
Technology (China) Company Limited (formerly Nice Enterprise Trading H.K.
Co., Limited) (Filed with the Commission on Form 8-K dated November 23,
2007 as Exhibit 10.9)
|
|
|
10.8
|
Common
Stock Purchase Agreement dated September 13, 2007, by and between New
Paradigm Productions, Inc. and Halter Financial Investments, L.P. (Filed
with the Commission on Form 8-K dated September 14, 2007 as Exhibit
10.1)
|
10.9
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated October 26, 2006. (Filed with
the Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as
Exhibit 10.9)
|
|
|
10.10
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated April 18, 2007. (Filed with the
Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
10.9)
|
|
|
10.11
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated April 29, 2007. (Filed with the
Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
10.9)
|
|
|
10.12
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated June 3, 2007. (Filed with the
Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
10.9)
|
|
|
10.13
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated June 13, 2007. (Filed with the
Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
10.9)
|
|
|
10.14
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated July 2, 2007. (Filed with the
Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
10.9)
|
|
|
10.15
|
Loan
Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
Subranch Agricultural Bank of China dated August 21, 2007. (Filed with the
Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
10.9)
|
|
|
10.16
|
Make
Good Escrow Agreement dated November 17, 2007, by and among the
Registrant, Sterne Agee & Leach, Inc., Mr. Pengfei Liu, and Interwest
Transfer Company, Inc. (Filed with the Commission on Form 8-K dated
November 23, 2007 as Exhibit 10.2)
|
|
|
10.17
|
Lock-up
Agreement dated November 17, 2007, by and among the Registrant and Mr.
Pengfei Liu. (Filed with the Commission on Form 8-K dated November 23,
2007 as Exhibit 10.4)
|
|
|
10.18
|
Investor
Relations Consulting Agreement, by and between the Registrant and Hayden
Communications International, Inc. dated February 20, 2008. (Filed with
the Commission on Form 8-K dated March 21, 2008 as Exhibit
10.1)
|
|
|
10.19
|
Employment
Supplementary Agreement between Ocean Technology (China) Company Limited
(formerly Nice Enterprise Trading H.K. Co., Limited), and Marco Hon
Wai Ku dated July 26, 2009
|
|
|
10.20
|
Executed
Auction Confirmation Letter dated November 6, 2009 by Shishi Huabao
Mingxiang Foods Co., Ltd and Fujian Jiafu Auction Firm Limited Liability
Company. (Filed with the commission on Form 8-K dated November 12,
2009)
|
|
|
10.21
|
Credit
or Share Purchase Option Agreement amongst Shishi Huabao Mingxiang Food
Co., Ltd., Qiu Shang Jing and Shishi Xianghe Food Science and Technology
Co., Ltd. November 27, 2009. (Filed with the commission on Form 8-K dated
December 2, 2009)
|
|
|
10.22
|
Share
Purchase Agreement dated January 1, 2010 amongst Shishi Huabao Mingxiang
Foods Co. Ltd. and Qiu Shang Jing and Ltd. (Filed with the Commission on
Form 8-K dated January 5, 2010
|
|
|
10.23
|
Form
of Securities Purchase Agreement between the Company and each Purchaser
dated as of January 20, 2010 (Filed with the Commission on Form
8-K dated January 20, 2010).
|
|
|
10.24
|
Form
of Escrow Agreement between the Company, Global Hunter Securities, Brean
Murray, Carret & Co. LLC, Sichenzia Ross Friedman Ference LLP and
certain purchasers dated as of January 20, 2010. (Filed with the
Commission on Form 8-K dated January 20,
2010).
|
10.25
|
Placement
Agent Agreement between the Company, Global Hunter Securities and Brean
Murray, Carret & Co., LLC Dated as of January 15,
2010. (Filed with the Commission on Form 8-K dated January 20,
2010).
|
|
|
10.26
|
Financing
Consultancy Engagement Letter between the Company and World Global
Investments Hong Kong Limited dated October 18, 2009. (Filed with the
Commission on Form 8-K dated January 20, 2010).
|
|
|
14.1
|
Business
Code of Conduct (Filed with the Commission on Form 8-K dated January 24,
2008 as Exhibit 14.1 and Form 8-K dated August 17, 2009 as Exhibit
5.05.1)
|
|
|
14.2
|
Financial
Code of Conduct (Filed with the Commission on Form 8-K dated January 24,
2008 as Exhibit 14.2 and Form 8-K dated August 17, 2009 as Exhibit
5.05.2)
|
|
|
14.3
|
Amendments
to the By-Laws (Filed with the Commission on Form 8-K dated August 17,
2009 as Exhibit 5.03)
|
|
|
14.4
|
Charter
for the Audit Committee (Filed with the Commission on Form 8-K dated
August 17, 2009 as Exhibit 5.05.1)
|
|
|
14.5
|
Charter
for the Corporate Governance and Nominating Committee (Filed with the
Commission on Form 8-K dated August 17, 2009 as Exhibit
5.05.2)
|
|
|
14.6
|
Charter
for the Compensation Committee (Filed with the Commission on Form 8-K
dated August 17, 2009 as Exhibit 5.05.3)
|
|
|
21
|
Subsidiaries
List (Filed with the Commission on Form 10-K dated March 23, 2009 as
Exhibit 21)
|
|
|
23.1
|
Consent
of ZY-CPA Company Limited dated June 14, 2010*
|
|
|
23.2
|
Consent
of McLaughlin & Stern, LLP, included in Exhibit
5.
|
|
|
24
|
Power
of Attorney (Filed with the Commission on Form 10-K dated March 23, 2009
as Exhibit 24))
|
|
|
99.1
|
Press
release dated January 20, 2010 by the Company (Filed with the
Commission on Form 8-K dated January 20,
2010).
|
*
filed herewith
Grafico Azioni China Marine Food (CE) (USOTC:CMFO)
Storico
Da Mag 2024 a Giu 2024
Grafico Azioni China Marine Food (CE) (USOTC:CMFO)
Storico
Da Giu 2023 a Giu 2024