ITEM 1A. Risk Factors
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 41.0% and 57.4% of our sales in the fiscal years ended December 31, 2011 and 2010, respectively. 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 but not limited to, environmental factors, the availability of seafood stock, weather conditions, water contamination, 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.
The nuclear disaster in Japan that occurred in 2011, can also affect the continuous supply and pricing of our supply of the fresh materials although we have not experienced any material problems with the supply or pricing of such supply to date.
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 72.9% and 75.4% of our total cost of revenue of processed seafood products in the fiscal years ended December 31, 2011 and 2010, respectively. 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 51.6% and 36.4% of our sales in the fiscal years ended December 31, 2011 and 2010, respectively. The largest customer accounted for 25.3% and 12.5% of our sales in the fiscal years ended December 31, 2011 and 2010, respectively. In the event these customers do not continue to purchase from us or reduce their purchases from us or develop their own abilities 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” for more details.
We are dependent on certain 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 approximately 88.0% and 81.7% of our total purchases of raw materials in the fiscal years ended December 31, 2011 and 2010, respectively. 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” 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 dependent on population growth and consumer preferences. Therefore, we believe that our profitability and continued growth is dependent 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. Please refer to the section “Research and Development” for further details of our research and development efforts.
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.
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. There can be no assurance that the construction of the new cold storage facility will be completed and start operating in the first half of 2012 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.
The construction of our new cold storage facility will be subject to a number of development risks, which could cause cost overruns and delays or prevent completion of the project .
Construction of our new cold storage facility in Shishi City with a capacity of approximately 20,000 tons is scheduled to be completed in the first half of 2012 but there can be no assurance that the construction, which was originally scheduled to be completed by December 31, 2011, will be completed by such date. A small delay was experienced due to adverse weather conditions and the shortage of labor during the Chinese Lunar New Year period. Delays in the construction of the new cold storage facility project beyond the estimated development periods, as well as cost overruns, could increase the cost of completion beyond the amounts that we estimate. Any delay in completion of the new cold storage facility project may also reduce or delay in the receipt of revenues projected from the expansion project. As a result, any significant construction delay, whatever the cause, could have a material adverse effect on our business, results of operations, financial condition and prospects.
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, marine catch and algae-based beverage products as a percentage of our total sales for the period under review were as follows:
Shifts in consumer preferences or dieting habits in the PRC away from processed seafood products or algae-based beverage products will materially affect our business. Consumer preferences regarding health and food safety are evolving in the PRC and the success of our food products depends on our ability to identify the tastes and dietary habits of consumers and to offer products that appeal to their preferences, including concerns of consumers regarding health and wellness, food safety, product attributes, and ingredients. 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. Please see the section “Government Regulations” of this Form 10-K for a summary of the material laws and regulations that apply to our Company.
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, frozen and 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 food safety regulation may result in the suspension of licenses, accreditations or the loss of our ability to sell our products.
The manufacture and marketing of food products is heavily regulated in the PRC under the Food Safety Law enacted in 2009. If we fail to comply with the Food Safety Law or any other applicable laws and regulations, we may be subject to investigations, criminal sanctions or civil remedies, including fines, injunctions, prohibitions on exporting, seizures or debarments from government contracts or the loss of liquor licenses. The cost of compliance or the consequences of non-compliance, including debarments, could have a material adverse effect on our business and results of operations. In addition, governmental units may make changes in the regulatory frameworks within which we operate that may require either the corporation as a whole or individual businesses to incur substantial increases in costs in order to comply with such laws and regulations.
In May 2011, inspectors of the government of Taiwan detected dangerous levels of industrial plasticizers in sports drinks and soft drinks, used to substitute for palm oil as clouding agents in drinks, with levels far in excess of the daily allowed intake. One plasticizer, known as DEHP, is a possible carcinogen, and thought capable of wreaking havoc with children’s reproductive organs. Since then, the plasticizers have been found in a range of foods and drinks. China, Hong Kong, South Korea and the Philippines have recalled beverage bottles suspected of contamination imported from Taiwan. Although none of our products were subject to the recall, the beverage products sector in the East Asia region was adversely affected by the food scandal, and new legislation with higher food safety standard of beverage products may be implemented in the PRC. The DEHP crisis may affect our beverage products business as a result of any failure to comply with the new standard or adverse changes in the beverage products sector.
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 and algae-based beverage products that we export. Failure to meet the required standards of hygiene may affect our ability to export our processed seafood and algae-based beverage products and meet our customers’ orders on time. It may also lead to a restriction on our ability to export our processed seafood and algae-based beverage 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 0.4% of our total sales for the years ended December 31, 2011 and 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 December 31, 2011, our distribution network is comprised of 18 exclusive distributors for our dried processed seafood products located in five provinces and seven exclusive distributors for our algae-based beverage products located in two provinces. These distributors sub-distribute our dried processed seafood products to about 3,200 retail points and our algae-based beverage products to about 15,000 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 Strait, which is also where we conduct our marine catch operations.
In March 2011, the northern region of Japan experienced a severe earthquake followed by a tsunami. The earthquake and tsunami caused extensive and severe structural damage in Japan, including heavy damage to roads and railways as well as fires in many areas, and damage to several nuclear reactors. Although to date the damage caused by the earthquake tsunami or radiation leaks have not significantly damaged our access to or price of materials or the quality of such raw materials, there can be no assurance that such access, price or quality may not be affected. In addition, public concern about seafood contamination can also adversely affect our sales of seafood products as a result of consumers’ perception of food safety issues resulting from nuclear radiation leaks in Japan.
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. Fresh products, including seafood products used as our raw materials, are vulnerable to adverse weather conditions, including windstorms, floods, drought and temperature extremes, which are quite common but difficult to predict and may be influenced by global climate change. Similarly, 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.
On January 1, 2010, we purchased Xianghe, a beverage company, and entered into a new business segment where we needed to rely on the current management for the business acquired. Xianghe is a Fujian based manufacturer of the branded Hi-Power algae-based soft drinks. We did not have prior experience in the beverage business and the success of Xianghe is subject to all of the uncertainties regarding the development of a new business. Although we have started integrating the product into Mingxiang’s distribution network and further expanded the distribution into other untapped areas, 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 beverage industry is highly competitive. 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 is dependent on sales in Fujian province and any significant disruption in sales in this province could adversely affect our beverage business.
During the year ended December 31, 2011, approximately 85.9% of our sales of the beverage product were in Fujian province. Although we have experienced strong growth in sales in Fujian province and have expanded our sales to Zhejiang province and intend to expand our sales to other provinces, any significant disruption in sales in Fujian could adversely affect our beverage business.
Our beverage business is 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 our beverage product. 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 dependent on certain major manufacturers for production of beverage products.
For the production of our beverage products, we rely on two manufacturers for all of the production of our beverage products. We believe that alternate manufacturers are available but there may be some disruption in supplies until we can obtain product from such manufacturers. In the event we are no longer able to secure product from these manufacturers, our operations and profitability of the beverage business will be adversely affected.
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 81 and 71 days in 2011 and 2010, respectively. Our allowances for doubtful trade receivables as at December 31, 2011 and 2010 were approximately $345,000 and $244,000, respectively; and at about 0.5% of our gross trade receivables.
As a result of this credit risk exposure of our customers defaulting on their payments to us, we may have to make larger allowances for doubtful trade receivables or incur bad debt write-offs, both of which may have an adverse impact on our profitability.
We may be subject to foreign exchange risk and may incur losses arising from exchange differences upon settlement.
We sell our processed seafood products, marine catch and algae-based beverage products mainly to local customers. Direct exports as a percentage of our sales ranged between 0.1% to 2.6% during the period under review. Our sales are denominated in RMB and US$, while our purchases are denominated in RMB.
For the fiscal year of 2011 and 2010, the percentages of our sales denominated in RMB and US$ were as follows:
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, 2011, the closing exchange rate was approximately US$1.00 to 6.3523. There is no assurance that the PRC’s foreign exchange policy will not be further altered. In the event that the PRC’s policy is altered, significant fluctuations in the exchange rates of RMB against the US$ 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.
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” of our Form 10-K. 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.
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. Furthermore, should China’s economic growth slow or should China’s economy contract, or the economies of the provinces that are our principal markets experience slower growth or economic contraction, consumer demand for our products and/or our ability to charge desired prices for our products could 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, Europe, United States, or in our industry. These and other economic factors could have a material adverse effect on our financial condition and operating results.
During 2008 and 2009, worldwide economic conditions deteriorated in many countries and regions, resulting in weak equity markets, tightening of business credit and liquidity, a contraction of consumer credit, business failures, increased unemployment and declines in consumer confidence and spending. Despite more positive trends beginning in the second half of 2009, the current turmoil in the sovereign debt markets as a result of the European debt crisis from 2011 has resulted in general market uncertainty and in worsening economic conditions particularly in Europe. If global economic and financial market conditions remain uncertain and/or weak for an extended period of time, any of the following factors, among others, could have a material adverse effect on our financial condition and results of operations:
·slower consumer spending may result in reduced demand for our products, reduced orders from customers for our products, order cancellations, lower revenues, increased inventories, and lower gross margins;
·continued volatility in the global markets and fluctuations in exchange rates for foreign currencies and contracts in foreign currencies could negatively impact our reported financial results and condition;
·continued volatility in the prices for commodities and raw materials we use in our products could have a material adverse effect on our costs, gross margins, and ultimately our profitability;
·if our customers experience declining revenues, or experience difficulty obtaining financing in the capital and credit markets to purchase our products, this could result in reduced orders for our products, order cancellations, inability of customers to timely meet their payment obligations to us, extended payment terms, higher accounts receivable, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense;
·a severe financial difficulty experienced by our customers may cause them to become insolvent or cease business operations, which could reduce the availability of our products to consumers; and
·any difficulty or inability on the part of manufacturers of our products or other participants in our supply chain in obtaining sufficient financing to purchase raw materials or to finance general working capital needs may result in delays or non-delivery of shipments of our products.
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, marine catch and algae-based beverage products 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.
Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.
Substantially all of our sales are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Furthermore, 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 2011 and 2010, approximately 99.9% and 99.6% 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 are 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.
Price inflation in China could affect our results of operations if we are unable to pass along production cost price increases to our customers.
Inflation in China has recently increased substantially. The annual inflation rate in China was reported at 4.1 percent in December 2011. These factors have led to the adoption by the Chinese government, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. Price inflation can affect our results of operations if we are unable to pass along production cost price increases to customers. Similarly, the cost of the ongoing construction of our new facility and the installation of our equipment may increase as a result of these recent inflationary trends, which are expected to continue in the near future. Accordingly, inflation in China may weaken our competitiveness domestically or in international markets.
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 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.
As of December 31, 2011, Mr. Liu owns approximately 41.0% of our outstanding common stock. As a result, he can 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.
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 processed 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 domestic and overseas markets. 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.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the United States Securities and Exchange Commission. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our Company. This situation will be costly and time consuming and distract our management from growing our Company. If such allegations are not proven to be groundless, our Company and business operations will be severely impacted and your investment in our stock could be rendered worthless.
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.
ITEM 1B.
ITEM 1B.Unresolved Staff Comments
Not applicable.
ITEM 2.
ITEM 2.Properties
LAND USE RIGHTS
There is no private ownership of land in China and all urban land ownership is held by the government of the PRC, its agencies and collectives. Land use rights can be obtained from the government for a period of up to 50 years for industrial usage, 40 years for commercial usage and 70 years for residential usage, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of the PRC (State Land Administration Bureau) upon payment of the required land transfer fee.
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 parcel is located alongside the fishing port and near 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 was RMB 15.55 million ($2.28 million).
As of December 31, 2011, we owned the following land-use rights in Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province:
BUILDINGS
As at December 31, 2011, we owned the following building ownership rights in Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province:
ITEM 3.
ITEM 3.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.
PART II.
ITEM 5.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
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 NYSE AMEX and OTC Bulletin Board for each quarter within the last three fiscal years.
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 March 26, 2012, there were 37 holders of record of our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
On April 1, 2011, the Company granted compensatory stock awards totaling 700,000 common shares to certain of its officers, directors and employees. These stock awards vested in full on the date of the grant but are subject to forfeiture in full if the grantee ceases to be employed by the Company for any reason within one year from the date of the grant, pursuant to stock award agreements between the Company and grantees dated April 1, 2011. Based on the closing stock price of the grant date, the fair value of these stock awards are estimated to be approximately $2.7 million, which will be recognized as compensation expense, using the straight-line method, over the service period of one year from April 1, 2011 to March 31, 2012.
On February 15, 2011, the Company entered into an Investor Relations Consulting Agreement with Hayden Communications International, Inc (“HCI”) to provide consulting services for the Company. In connection with such service, the Company agreed to issue 20,000 shares of restricted common stock to HCI. The shares of common stock were valued at $51,800 or $2.59 per share and issued on July 14, 2011.
DIVIDENDS
During the year ended December 31, 2010, the Company’s subsidiary, Xianghe, declared final dividend of $1,313,080 (equivalent to RMB 8,901,106) relating to the pre-acquisition result for the fiscal year 2009 to Mr. Qiu and was fully paid in April 2010.
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.
ITEM 6.
ITEM 6.Selected Financial Data
Not Applicable
ITEM 7.
ITEM 7.Management's Discussion and Analysis of Financial Condition and Results of Operation
Forward Looking Statements
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this document. The following discussion contains forward-looking statements. China Marine Food Group Limited is referred to herein as “we”, “us”, “our”, or the “Company.”
The words or phrases “would be,” “will allow,” “expect to”, “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” or similar expressions are intended to identify forward-looking statements. Such statements include, among others, those statements concerning our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including, among others: (a) those risks and uncertainties related to general economic conditions in China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under “Liquidity and Capital Resources”. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or any other circumstances after the date of such statement unless required by law. For additional information regarding these risks and uncertainties, see “Risk Factors”. Our consolidated financial statements have been prepared in accordance with U.S. GAAP.
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”), Shishi Huabao Jixiang Water Products Co., Ltd. (“Jixiang”), and Shishi Xianglin Trading Co., Ltd. (“Xianglin”), 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 trading of marine catch. Our objective is to establish ourselves as a leading producer of processed seafood products and algae-based beverage 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 former 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% of our outstanding shares of common stock after the share exchange.
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 an 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, each unit consisting of one share of common stock and a warrant to purchase one-fifth of one share of our common stock. Each warrant issued to the investors had a term of three years and all unexercised warrants expired in November 2010.
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 trading of marine catch. In 2010, we became a manufacturer of algae-based soft drinks through our acquisition of an 80% interest in Xianghe, which is also an operating subsidiary of Ocean Technology.
All rental income, which is relatively immaterial compared to our principal revenues from sale of processed seafood products, beverage products and trading of marine catch, is recognized as "Other Income" in our financial statements. In particular, Mingxiang and Jixiang are responsible for the rental income related to the collection on the 31 and 6 shop spaces, respectively, at our factory in Dabao Industrial Zone. The rental contracts are based on a one-year lease term.
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. The raw materials for our processed seafood products are solely purchased from independent fishermen in nearby markets for further processing. 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, as well other nearby provinces, who in turn distribute them to major supermarkets and retailers throughout these provinces.
For marine catch, we buy the marine catch from the suppliers and then sell to either trading companies or distributors on a direct basis as opportunistic purchases and sales according to the seasonality of respective seafood species. The marine catch is predominantly sold to distributors in Liaoning, Fujian and Shandong provinces, and overseas customers in the Philippines and Indonesia.
Our branded “Hi-Power” was developed by the Yellow Sea Fisheries Research Institute at 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 a network of distributors in Fujian and Zhejiang which sell Hi-Power to retail food stores, restaurants, food supply dealers and the hospitality industry.
Sales of our processed seafood products accounted for approximately 41.0% and 57.4%of our total sales in 2011 and 2010, respectively. Trading of our marine catch accounted for approximately 38.4% and 21.4%of our total sales in 2011 and 2010, respectively. Sales of our algae-based beverage products accounted for approximately 20.6% and 21.2% of our total sales in 2011 and 2010, respectively. We expect the sales of our algae-based beverage products will remain strong in the coming years given our continuous expansion into untapped areas and contribution over the related sales and marketing campaigns since our acquisition at the beginning of 2010.
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 72.9% and 75.4% of our total cost of revenue of processed seafood products in year 2011 and 2010, 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, water contamination, 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 or contamination in the supply of or increase in the prices of the raw materials for our processed seafood and algae-based beverage products will adversely affect our sales and profit margins.
·In March 2011, the northern region of Japan experienced a severe earthquake followed by a tsunami. The earthquake and tsunami caused extensive and severe structural damage in Japan, including heavy damage to roads and railways as well as fires in many areas, and a dam collapse and damage to several nuclear reactors. Although to date the damage caused by the earthquake and tsunami have not damaged our access to raw materials, there can be no assurance that such access may not be affected. Even though government officials and health experts in Japan and China stated the doses of nuclear radiation leaks are low and not a threat to human health unless the tainted products are consumed in abnormally excessive quantities, concern of seafood contamination adversely affected our sales of seafood and algae-based beverage products as a result of consumers’ perception of food safety in relation to the nuclear radiation leaks in Japan.
·In May 2011, inspectors of the government of Taiwan detected dangerous levels of industrial plasticizers in sports drinks and soft drinks, used to substitute for palm oil as clouding agents in drinks, with levels far in excess of the daily allowed intake. One plasticizer, known as DEHP, is a possible carcinogen, and thought capable of wreaking havoc with children’s reproductive organs. Since then, the plasticizers have been found in a range of foods and drinks. China, Hong Kong, South Korea and the Philippines have recalled beverage bottles suspected of contamination imported from Taiwan. The beverage products sector in the East Asia region was adversely affected by the food scandal, and new legislation with higher food safety standard of beverage products may be implemented in the PRC. The DEHP crisis may affect our beverage products business as a result of any failure to comply with the new standard or adverse changes in the beverage products sector.
·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.
·Our purchase of the beverage business involves the risk of entering into a new business.
·Our ability to respond successfully to changes in the highly competitive beverage marketplace domestically and internationally.
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, in the PRC. We have four production lines for the processing of dried processed seafood products: roasted file fish, roasted prawns, shredded roasted squid and roasted squids, and one production line for the processing of frozen seafood products.
As at December 31, 2011, we employed 848 employees.
Seasonality
We do not experience any significant seasonality in relation to sales for our processed seafood and algae-based beverage products. However, sales for our processed seafood products are usually higher before and during the Chinese New Year and lower during summer time. Sales for our algae-based beverage products are expected to be higher before and during the Chinese New Year and during summer time.
NEW BUSINESS DEVELOPMENT
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. In September 2010, we entered into an agreement with a third party contractor and began 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 are financing the total estimated $26.5 million in land use rights and construction costs from funds generated by operations. The facilities are expected to be operational in the first half of 2012. We have paid approximately $22.9 million in relation to the construction costs as at December 31, 2011 and the total estimated construction costs are approximately $24.2 million.
We intend to provide high standard, modernized cold storage, freezing 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.
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 years ended December 31, 2011 and 2010 are set out below:
Breakdown of our past performance by principal products and geographical region
Sales by product
Sales by geographical region
(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 and South Korea. Such sales amounted to $0.01 million and $0.4 million in year 2011 and 2010, respectively.
(3)Sales to Asia mainly relate to exports to the Philippines and Indonesia.
Year 2011 compared to Year 2010
Sales
Our revenue increased by approximately $21.2 million or 17.3% from $122.7 million in 2010 to $143.9 million in 2011. The increase in revenue was mainly due to the increase in sales of marine catch and the newly acquired algae-based beverage business, partially offset by the decrease in sales of our processed seafood products. Sales of our processed seafood products decreased by $11.5 million or 16.3% year over year to $59.0 million, whereas sales of algae-based beverage products increased by $3.7 million or 14.1% to $29.7 million. Sales of our marine catch segment increased by $29.1 million or 111.1% for the same periods under review.
The processed seafood products operations continued to grow significantly in the first quarter of 2011 as our products continue to gain market acceptance, particularly in Fujian and Zhejiang provinces. As a result of consumers’ perception of food safety in relation to the nuclear radiation leaks in Japan which occurred in March 2011, sales of processed seafood products have been significantly affected since the second quarter of 2011. However, we believe that our sales have stabilized by the end of third quarter in 2011. While we are confident that the seafood we use to produce our processed seafood products are safe, it is unclear how long it will take for consumer confidence in seafood products to normalize.
This is the second year to recognize sales of our algae-based beverage products since the acquisition on January 1, 2010. In 2010, our distribution network for the beverage segment was solely Fujian province. After gaining experience in Fujian in the prior year, we expanded our distribution into Zhejiang province in the second quarter of 2011. The growth from Zhejiang was offset due to the public concern over the plasticizer contamination in the beverage industry in the second half of 2011, as well as the lower-than-expected temperature in the southern regions during the summer time. However, given our continuous contribution to the related sales and marketing campaigns and our expansion plan into more untapped areas, we expect the sales of our beverage segment to remain strong in the coming years. Accordingly, the number of sales staff has increased significantly since January 1, 2010 from 23 to a staff of 134, as of December 31, 2011.
Trading of marine catch is deemed as opportunistic purchases and sales of frozen seafood materials and therefore the sales volume fluctuates significantly from period to period. We intend to buy marine catch in blocks from suppliers when their supplies are high and sell the stocks to customers when market prices go up. Usually the inventory cycle will be less than a year. Though the profit margin from the trading segment is relatively lower compared to that of both processed seafood and algae-based beverage products, the trading segment is a good source of revenue and profit given our expertise in the seafood industry and surplus cash in hand.
Cost of revenue
Our cost of revenue comprises the cost of our processed seafood and algae-based beverage products operations, as well as the cost of our marine catch. The breakdown is as follows:
Cost of revenue - Processed seafood products
Our cost of revenue comprises mainly raw materials, packaging materials, direct labour and manufacturing overhead. The following table sets out details of our cost of revenue:
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. 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 in the PRC.
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.
Since the nuclear disaster in Japan earlier this year, there was an upward pressure on the prices of our raw materials, including small-sized seafood materials, as a result of fiercer competition with the breeding farms where the small-sized seafood materials are used as feeds.
Raw material costs accounted for approximately 72.9% and 75.4% of our cost of revenue in year 2011 and 2010, respectively. The decrease was primarily because the percentage of increase in direct labor costs and manufacturing overhead was higher than that in raw material costs for the periods under review.
The decrease in raw material costs for the periods under review was mainly due to our decreased 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.
The percentage of raw materials cost as a proportion of the total cost of revenue is affected by the product mix of the relevant financial year and the market price of the raw materials. We mitigate the fluctuation in market prices of raw materials 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.
Packaging materials
Packaging materials accounted for approximately 12.0% and 12.9% of our cost of revenue in year 2011 and 2010, respectively. The decrease was primarily because the percentage of increase in direct labor costs and manufacturing overhead was higher than that in packaging costs for the periods under review. The decrease in packaging material costs for the periods under review was mainly due to the decreased production and sales of processed seafood products.
Direct labor
Direct labor costs accounted for approximately 7.1% and 5.2% of our cost of revenue for the year ended 2011 and 2010, respectively. 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 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 the processed seafood segment as at December 31, 2011 has decreased to 582 from 682 as at the end of 2010. The increase in direct labor costs for the year ended 2011 was mainly due to the increased wage rates since April 2011 to cope with the market standard.
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 costs from the expansion of production facilities along the years for increased production
Cost of revenue - Marine catch
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 distributors in Liaoning, Fujian and Shandong provinces, and overseas customers in the Philippines and Indonesia. The cost of the raw material is based on the market price at the time of purchase. The increase in raw material costs for the years ended are in line with the increased revenue from sales of marine catch.
Other expenses
Other expenses mainly relate to the costs of packaging materials and ice required to keep the marine catch fresh.
Cost of revenue - Algae-based beverage products
Our cost of revenue comprises mainly raw materials, packaging materials and manufacturing overhead. The following table sets out details of our cost of revenue:
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 14.2% and 16.8% of our cost of revenue in year 2011 and 2010, respectively. The percentage of raw materials cost as a proportion of the total cost of revenue is affected by changes in ingredient mix from time to time and the market price of the raw materials.
Packaging materials
Packaging materials comprise iron and aluminium foils, which are used to produce the cans, and paper boxes. The costs of these raw materials are dependent on the prevailing market prices with a stable and abundant supply from the existing market.
Packaging materials accounted for approximately 68.3% and 66.3% of our cost of revenue in year 2011 and 2010, respectively. The increase in the percentage of packaging materials cost as a proportion of the total cost of revenue during the years was mainly due to the increased packaging materials cost.
Manufacturing overhead
We utilize two 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. The increase in the percentage of manufacturing overhead as a proportion of the total cost of revenue during the years was mainly due to the increased manufacturing costs.
Gross profit by product
Gross profit margin by profit
Gross profit
Gross profit dropped by 15.3% or $5.7 million, from $37.4 million in 2010 to $31.7 million in 2011. Overall gross profit margin dropped by 8.5% from 30.5% in 2010 to 22.0% in 2011. Gross profit margin for the processed seafood products operations decreased from 34.5% in 2010 to 29.8% this year which was mainly due to the decreased scale of production and the increased costs of raw materials, packaging materials, direct labor and manufacturing overhead. Gross profit margin for the marine catch segment dropped from 9.4% in 2010 to 4.1% this year. Marine catch sales are deemed as opportunistic trading of frozen seafood in blocks and therefore the corresponding profit margin is dependent on the prevailing market conditions which could be fluctuated significantly from time to time. Gross profit margin for the algae-based beverage segment decreased from 41.0% to 40.2% for the same years under review mainly due to the increased costs of packaging materials and manufacturing overhead.
Depreciation and amortization
Depreciation and amortization accounted for approximately 1.9% and 2.1% of our total revenue in year 2011 and 2010, respectively. Depreciation and amortization was mainly related to the amortization of intangible assets associated with the acquisition of the beverage business declared effective at the beginning of 2010. 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 $2.5 million.
Sales and marketing expenses
Our sales and marketing expenses comprise mainly salaries of sales and marketing staff, investor relations fees, advertising and promotional costs.
Our sales and marketing expenses accounted for approximately 9.8% and 5.2% of our total revenue in year 2011 and 2010, respectively. The increase in the sales and marketing expenses in 2011 was mainly due to the increase of advertising and promotional costs so as to strengthen brand position and improve market awareness 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 increased from 47 in 2010 to 173 as at December 31, 2011, of which 134 were 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 1.8% and 2.6% of our total revenue in year 2011 and 2010, respectively. The decrease in the general and administrative expenses from 2010 to 2011 was mainly attributable by the lower R&D costs due to the softness of seafood demand and the reduced discretionary bonus for the executive directors for the year of 2011.
Stock-based compensation
On April 1, 2011, the Company granted compensatory stock awards totaling 700,000 common shares to certain of its officers, directors and employees. Based on the closing stock price of the grant date, the fair value of these stock awards are estimated to be approximately $2.7 million, which is recognized as compensation expense, using the straight-line method, over the service period of one year from April 1, 2011 to March 31, 2012.
Other income
Other income relates mainly to rental income, government subsidies and interest income.
Rental income relates to the collection of rent on the 37 shop spaces at our factory in Dabao Industrial Zone. The rental contracts are based on a one year lease term. The government subsidies mainly relates to grants by Shishi City Municipal People's Government for the achievement of Key Leading Enterprise of Agricultural Industrialization in 2011. Interest income is earned from cash balances with banks as a result of operational cash inflow and registered direct offering of common stock which took place in January 2010.
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 0.01% and 0.03% of our total revenue in year 2011 and 2010, respectively. In the fourth quarter of 2011, a short-term loan of $2.5 million was drawn down for working capital needs and to maintain the effectiveness of the facility line with the bank.
Income before income tax
Our income before income tax decreased by $15.0 million or 58.5%, from $25.6 million in 2010 to $10.6 million in 2011. The decrease was mainly due to the combination of the decrease in sales of 17.3% for the processed seafood segment, the decrease in corresponding gross profit margin by 4.7%, and the increase in the sales and marketing expenses and the stock-based compensation costs, which was partially offset by the increase in sales of 14.1% for the algae-based beverage segment and the lower 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.
Rixiang, Jixiang, Mingxiang, Xianghe and 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%.
In 2009, Mingxiang received a notice of recognition as an 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.
Income tax expenses for the years ended December 31, 2011 and 2010 and were approximately $2.0 million and $4.5 million, respectively. The effective tax rates were 19.3% and 17.4%, respectively, for those years.
REVIEW OF FINANCIAL POSITION
Current assets
As at December 31, 2010, our current assets increased to $74.2 million, representing 59.9% of our total assets of $123.8 million. Current assets were consisted of cash and cash equivalents of $15.6 million, accounts receivable of $48.5 million, inventories of $10.0 million and other receivables and prepayments of $0.1 million.
As at December 31, 2011, our current assets increased to $79.0 million, representing 56.9% of our total assets of $138.9 million. Current assets were consisted of cash and cash equivalents of $0.6 million, accounts receivable of $68.6 million, inventories of $8.9 million and other receivables and prepayments of $0.9 million.
The decrease in cash and cash equivalents as at December 31, 2011 was mainly due to increased accounts receivable related to significant marine catch sales of $47.2 million during the fourth quarter of 2011 and the addition of fixed assets and construction in progress during the year.
Accounts receivable were mainly represented by amounts due from distributors and wholesalers. We 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 of the last quarter of 2011.
Inventories were mainly related to raw materials and work-in-progress comprising mainly frozen prawns, fish and squids which would be used for the production of processed seafood products. Our inventories also included some finished goods and packaging materials.
Non-current assets
As at December 31, 2011, our non-current assets amounted to $59.9 million and accounted for approximately 43.1% of our total assets. Our non-current assets comprised mainly property, plant and equipment of $11.2 million, land use rights of $3.0 million, and construction in progress of $22.9 million. As of December 31, 2011, the carrying value of intangible assets and goodwill were approximately $20.2 million and $2.6 million, respectively.
As at December 31, 2011, our property, plant and equipment amounting to $11.2 million were made up mainly of buildings amounting to $8.7 million and plant and machinery amounting to $2.0 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.
The increase in non-current assets relates to the cold storage facility we are building on the land we purchased in 2009. The facility is expected to be operational in the first half of 2012 and therefore the associated construction costs are being recognized as construction in progress as at December 31, 2011. Total estimated construction costs are approximately $24.2 million. As of December 31, 2011 and 2010, the Company recorded approximately $22.9 million and $11.6 million, respectively, as construction in progress.
Current liabilities
As at December 31, 2010, our current liabilities amounted to $9.4 million and comprised accounts payable of $3.8 million, amount due to a shareholder of $0.3 million, income tax payable of $0.5 million and other payables of $4.8 million.
As at December 31, 2011 our current liabilities of $8.8 million comprised of short-term borrowing of $2.5 million, accounts payable of $2.6 million, amount due to a shareholder of $0.1 million, income tax payable of $0.2 million and other payables of $3.4 million.
The short-term bank loans were used for our working capital requirements. The weighted average effective interest rate on the borrowing is about 5.49% and 5.31% per annum in 2011 and 2010, respectively.
Regarding the accounts payable, the related turnover day was less than two weeks 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.
The decrease in other payables from 2011 to 2010 mainly relates to the decrease of value-added tax provision.
Shareholders’ equity
As at December 31, 2010, our shareholders’ equity amounted to $114.4 million and consisted of additional paid-in capital of $47.4 million, statutory reserve of $9.3 million, accumulated other comprehensive income of $7.4 million, retained earnings of $49.9 million and non-controlling interests of $0.4 million.
Our shareholders’ equity of $130.1 million as at December 31, 2011 consisted of additional paid-in capital of $50.1 million, statutory reserve of $9.7 million, accumulated other comprehensive income of $11.9 million, retained earnings of $58.0 million and non-controlling interests of $0.4 million.
The increase in shareholders’ equity from 2010 to 2011 is due to the current operating profit of $8.6 million, increased in additional paid in capital of $2.7 million for stock awards and increase in other comprehensive income of $4.5 million due to translation adjustments.
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.
LIQUIDITY AND CAPITAL RESOURCES
Our operations are funded through a combination of shareholders’ equity, borrowings and internally generated funds from our operations. Our cash and cash equivalents as at December 31, 2011 amounted to approximately $0.6 million, with a new short-term loan of $2.5 million being drawn down in the fourth quarter of 2011.
A summary of our cash flows for 2011 and 2010 is as follows:
Year 2011
Net cash used in operating activities
In 2011, our net cash used in operating activities amounted to approximately $8.4 million. The major source of cash inflow from operating activities was from net income of $8.6 million. Changes in operating assets and liabilities included cash outflow resulting from increase in accounts receivable of $20.1 million. This was partially offset by cash inflow from a decrease in inventories of $1.1 million and non-cash amortization of intangible assets of $2.5 million.
The increase in accounts receivable was mainly due to the block sales of marine catch trading materials of $47.2 million in the fourth quarter of 2011, which was collected during the first quarter of 2012.
Our trade receivables turnover days were approximately 81 and 71 days in 2011 and 2010, respectively. Our allowances for doubtful trade receivables as at December 31, 2011 and 2010 were approximately $345,000 and $244,000, respectively; and were about 0.5% of our gross trade receivables.
Net cash used in investing activities
In 2011, our net cash used in investing activities was approximately $11.0 million, which was mainly attributable to the addition of construction in progress of $11.0 million for the development of the cold storage facilities.
Net cash provided by financing activities
In 2011, our cash provided by financing activities was approximately $2.3 million. The increase was mainly attributable to the proceeds from short-term borrowing of $2.5 million, partially offset by the repayment of amounts due to a shareholder of $0.2 million.
Year 2010
Net cash used in operating activities
In 2010, our net cash used in operating activities amounted to approximately $6.3 million. The major source of cash inflow from operating activities was from net income of $21.1 million. Changes in operating assets and liabilities included cash outflow resulting from increase in accounts receivable of $29.8 million and inventories of $6.1 million. This was partially offset by the increase in accounts payable of $2.9 million and other payables of $2.5 million.
The increase in accounts receivable was mainly due to the extension of the credit period to our major customers so as to cope with the current market practice and the block sales of marine catch trading materials of $25.3 million in December 2010, which was collected during the first quarter of 2011. The increase in inventory related to the build of product for the expected sales for the Chinese New Year, which occurred in February 2011.
Net cash used in investing activities
In 2010, our net cash used in investing activities was approximately $12.8 million, which was mainly attributable to addition of fixed assets of $0.2 million and construction in progress of $13.4 million for the development of the cold storage facilities, partially offset by the acquisition of a subsidiary of $1.0 million.
Net cash provided by financing activities
In 2010, our cash provided by financing activities was approximately $24.8 million. The increase was mainly attributable to the net proceeds of $28.3 million from the registered direct offering of common stock taken place in January 2010 and the proceeds from cash exercise of warrants of $1.9 million, partially offset by the repayment of short-term bank loans during the first quarter of 2010 of $4.1 million and dividend paid related to the pre-acquisition result for the fiscal year 2009 to a non-controlling shareholder of a subsidiary amounting to $1.3 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 for the next twelve months. From time to time, we may identify new expansion opportunities for which there will be a need to use cash. We manage our cash based on thorough consideration of our corporate strategy as well as the macro economic situation. Factors we take into account when managing our cash include interest rates, foreign currency fluctuation as well as the flexibility in executing our acquisition and operational strategies.
We are financing the total estimated $26.5 million in land use rights and construction costs for our new cold storage facility from available funds and expect to run the new facility in the first half of 2012. We have paid approximately $22.9 million in relation to the construction costs as at December 31, 2011.
After the registered direct offering of common stock and repayment of bank loans during 2010, the relative cost of capital resources decreased correspondingly given the increase in the equity financing and reduced level of debt borrowings.
In the fourth quarter of 2011, a short-term loan of $2.5 million was drawn down for working capital needs and to maintain the effectiveness of the facility line with the bank.
Apart from the expansion plan discussed above and the commitments set out in the section of “Commitments and Contingencies”, 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 for the next twelve months. We do not have present plans to raise additional funds.
CAPITAL EXPENDITURES AND INVESTMENTS
A summary of our capital expenditures for the last three financial years ended December 31, 2011 and 2010 is as follows:
In 2010, total capital expenditures of $13.7 million were mainly attributable to the construction of cold storage facilities and an additional floor at the existing staff quarter.
In 2011, total capital expenditures of $11.0 million were mainly attributable to the construction of cold storage facilities, an additional floor at the existing staff quarter and an algae extraction equipment line.
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, 2014, and generally not containing significant renewal options. Total rent expenses for the years ended December 31, 2011 and 2010 was $79,618 and $77,145, respectively. Future minimum rental payments due under the non-cancelable operating lease agreement are approximately $171,000 in total in the following three years.
Capital commitments
In 2010, Mingxiang entered into an agreement with an independent third party (the “Third Party Contractor”) in relation to the construction of a cold storage facility. A supplementary agreement was then entered into between Mingxiang and the Third Party Contractor in September 2011 related to additional gross areas, machineries and equipment required for the facility. The construction is expected to be completed in the first half of 2012. Total estimated construction costs are expected to be approximately $24.2 million. As of December 31, 2011, the Company recorded approximately $22.9 million as construction in progress. Hence the aggregated contingent payments related to the Third Party Contractor are approximately $1.3 million as of December 31, 2011.
Guarantees
As of December 31, 2011, Mingxiang was contingently liable as guarantor with respect to the loan of $472,270 (equivalent to RMB3,000,000) to an unrelated third party, Shishi Han Jiang Hua Lian Knitting and Clothing Factory (“Han Jiang Hua Lian”). The term of this guarantee is for the period from November 2008 through December 2017. Pursuant to the loan agreement, Han Jiang Hua Lian will repay the loan by installments and be fully settled by December 31, 2017. Should Han Jiang Hua Lian fail to make its debt payments due at any time from the date of guarantee, Mingxiang will be obligated to perform under the guarantee 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 guarantee is $472,270 (equivalent to RMB3,000,000).
As of December 31, 2010, Mingxiang was contingently liable as guarantor with respect to the loans of $787,116 (equivalent to RMB 5,000,000) to an unrelated third party, Shishi Yu Ching Knitting and Clothing Company (“Yu Ching”). The term of this guarantee is for the period from January 2009 through January 2011. During 2011, Yu Ching repaid the principal amount of the loan in the amount of $787,116 (equivalent to RMB 5,000,000) but left the amount of loan interest unsettled due to a disagreement between Yu Ching and the creditor in relation to the calculation of the loan interest. Should Yu Ching fail to make its loan interest payments due at any time from the date of guarantee, Mingxiang will be obligated to perform under the guarantee by primarily making the required payments, including late fees and penalties.
According to the Personal Guarantee Agreement between Mingxiang and Mr. Liu, CEO, Mr. Liu agreed to bear all liabilities and costs incurred from a direct claim by the creditor if either Han Jiang Hua Lian or Yu Ching fails to make payments to the creditor upon due dates.
In accordance with Accounting Standard Codification (“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 fair value of the indemnification to be insignificant. As of December 31, 2011, the Company has not recorded any liabilities under these guarantees.
ISSUANCE OF COMMON STOCK
On April 1, 2011, the Company granted compensatory stock awards totaling 700,000 common shares to certain of its officers, directors and employees. These stock awards vested in full on the date of the grant but are subject to forfeiture in full if the grantee ceases to be employed by the Company for any reason within one year from the date of the grant, pursuant to stock award agreements between the Company and grantees dated April 1, 2011. Based on the closing stock price of the grant date, the fair value of these stock awards are estimated to be approximately $2.7 million, which will be recognized as compensation expense, using the straight-line method, over the service period of one year from April 1, 2011 to March 31, 2012.
On February 15, 2011, the Company entered into an Investor Relations Consulting Agreement with Hayden Communications International, Inc (“HCI”) to provide consulting services for the Company. In connection with such service, the Company agreed to issue 20,000 shares of restricted common stock to HCI. The shares of common stock were valued at $51,800 or $2.59 per share and issued on July 14, 2011.
CRITICAL ACCOUNTING POLICIES & RECENT ACCOUNTING PRONOUNCEMENTS
·Non-controlling interest
Non-controlling interests in our subsidiaries are recorded in accordance with the provisions of ASC 810, “Consolidation”, and are reported as a component of our equity, separate from the parent’s equity. Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the non-controlling interests are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, If any, will be reported at fair value with any gain or loss recognized in earnings.
Under ASC 810-10-45-21, losses attributable to the parent and the non-controlling interest in a subsidiary may exceed their interests in the subsidiary’s equity. The excess, and any further losses attributable to the parent and the non-controlling interest, shall be attributed to those interests. That is, the non-controlling interest shall continue to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance.
·Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and also requires disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates made by management include revenue recognition estimates, valuation of equity instruments and allowance for doubtful accounts.
·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.
·Inventories
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, packaging 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, 2011 and 2010, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.
·Goodwill and intangible assets
Goodwill and intangible assets were the result of the acquisition of Xianghe. Goodwill represents the cost of the acquired algae-based drink business in excess of the fair value of identifiable tangible and intangible net assets purchased. Intangible assets include trademarks and algae-based beverage know-how and are recorded at cost less accumulated amortization and any recognized impairment loss. The algae-based beverage know-how is amortized over its estimated useful life of 10 years on a straight-line basis, which coincides with the timing provided from the PRC protection guidelines for our product. For the year ended December 31, 2011, the Company engaged an independent valuation expert to assist in determining the fair value of the identifiable tangible and intangible net assets of the acquired business.
The Company evaluates the valuation of its goodwill according to the provisions of Accounting Standards Codification (“ASC”) 350 to determine if the current value of goodwill has been impaired. The Company has also adopted Accounting Standard Update (ASU) No. 2011-08, Intangibles-Goodwill and Other (Topic 350). With ASU No. 2011-08, an entity is given the option to make a qualitative evaluation of goodwill impairment to determine whether it should calculate the fair value of its reporting unit. The Company made its qualitative evaluation of its goodwill considering, among other things, the general macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant entity-specific events. Based on this qualitative evaluation, the Company concluded that it was more likely than not that its goodwill was not impaired and it wasn’t required to calculate the fair value of its reporting unit as of December 31, 2011. 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. We performed our annual goodwill impairment during the fourth quarter of each calendar year.
In accordance with ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, the Company engaged a third party valuation firm to review the Company’s algae-based intangible assets for impairment. The Company performed its annual impairment test for its intangible assets during the fourth quarter of each calendar year. The intangible assets balance related to the algae-based drink business reporting unit. The test involved the assessment of the fair market value of the Company’s intangible assets, using a form of the income approach known as the excess earnings method and concludes that a discount rate of 21.5% is considered appropriate for valuing the Company. The market and cost approaches were not applied due to the lack of information deemed to be reliably indicative of value using either approach. The result of the assessment of the Company’s intangible assets indicated that its fair values exceeded its carrying amounts.
In particular, the Company provided a forecasted discounted cash flows analysis for the reporting unit based on discrete fifteen-year financial forecasts developed by management for planning purposes. Cash flows beyond the fifteen-year discrete forecasts were estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for the reporting unit and considered long-term earnings growth rates for publicly traded peer companies.
The key assumptions used in determining the fair value of the reporting unit are:
-The financial projections were prepared by the Management with due care and consideration reflecting the reasonable estimate of future relevant events.
-All information provided by the Management is true, accurate and complete.
-There will be no major changes in the existing political, legal, fiscal and economic conditions in countries in which the Company will carry on its business.
-There will be no major changes in the current taxation law in countries in which the Company operates.
-Future exchange rates and interest rates will not differ materially from those prevailing market expectations.
-The availability of finance will not be a constraint on the future growth of the Company’s operation.
-The Company will retain and have competent management, key personnel, and technical staff to support its ongoing operation.
-Industry trends and market conditions for related industries will not deviate significantly from economic forecasts.
-The forecasted average annual growth rate of revenue is 3% to 70% from 2012 to 2026. This reflects the following assumptions:
1)Increased market penetration into six provinces;
2)Increased demand in China for health related drinks; and
3)A long term growth rate into perpetuity has been determined to be 3% with reference to the birth rate, market penetration and other related factors.
-Cost of goods sold is forecasted to grow by 3% to 72% from 2012 to 2026.
-The discount rate applied to the cash flows is based on the weighted average cost of capital (“WACC”) of the Company. WACC is the weighted average of the estimated rate of return required by equity and debt holders for an investment of this type. Our analysis concluded that a discount rate of 21.5% is considered appropriate for valuing the Company.
-Publicly available information regarding our market capitalization was also considered in assessing the reasonableness of the cumulative fair values of our reporting units estimated using the excess earnings method.
Based upon the valuation report prepared by an independent valuation expert, it is concluded that the fair value of the intangible asset as of December 31, 2011 is reasonably stated by the amount of $21,173,433. During the years ended December 31, 2011 and 2010, we determined that there had been no impairment of intangible assets.
·Revenue recognition
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 collectability 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 processed seafood products and algae-based beverage products upon receipt of the delivery confirmation provided by the distributor’s carrier and the title and risk of loss of the product has transferred to the distributor. The distributor agreements do not provide chargeback, price protection, or stock rotation rights. The Company recognizes revenue from marine catch when title has transferred to the buyer. The Company experienced no product returns and recorded no reserve for sales returns for the years ended December 31, 2011 and 2010.
The Company offers sales incentives to customers based on yearly sales targets. These are non-cash incentives and are solely used for promotional activities purposes. These amounts are accrued as sales and marketing expenses during the same month revenue is recognized.
Rental income from operating leases on real estate properties is recognized on a straight-line basis over the lease period.
·Income taxes
The provision for income taxes is determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
For the years ended December 31, 2011 and 2010, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2011 and 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.
·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 operations 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 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 shareholders’ equity.
Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective years:
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
·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.
On April 1, 2011, the Company granted compensatory stock awards totaling 700,000 common shares to certain of its officers, directors and employees. These stock awards vested in full on the date of the grant but are subject to forfeiture in full if the grantee ceases to be employed by the Company for any reason within one year from the date of the grant, pursuant to stock award agreements between the Company and grantees dated April 1, 2011.
Based on the closing stock price of the grant date, the fair value of these stock awards are estimated to be approximately $2.6 million, which are recognized as compensation expense, using the straight-line method, over a period of one year from April 1, 2011 to March 31, 2012.
·Fair value measurement
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.
·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 December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” The amendments in ASU 2011-11 require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The adoption of ASU 2011-11 results in changes to presentation and disclosure only and is not expected to have an impact on our consolidated results of operations and financial condition.
During September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment.” The amendments in ASU 2011-08 are intended to reduce the cost and complexity associated with goodwill impairment tests required under the Accounting Standard Codification Topic 350 Intangibles - Goodwill and Other. The update permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company elected to early adopt ASU 2011-08, which resulted in the elimination of the additional requirements under Topic 350.
During June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. Effective December 31, 2011, the Company elected to early adopt ASU No. 2011-05. The Company's early adoption of this new guidance only resulted in a change in how the Company presents the components of comprehensive income, which is currently presented within the consolidated statements of operations and comprehensive (loss) income.
During May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).” This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. This pronouncement is effective for reporting periods beginning on or after December 15, 2011. The adoption of ASU 2011-04 is not expected to have a significant impact to our consolidated financial position or results of operations.
During January 2010, the FASB issued ASU No. 2010-6 to improve the disclosure and transparency of fair value measurements. These amendments clarify the level of disaggregation required, and the necessary disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. We adopted this ASU beginning January 1, 2011 and it did not have a significant impact on our consolidated financial position or results of operations.
FOREIGN EXCHANGE EXPOSURE
Our sales are denominated in RMB and US dollars whilst our purchases and operating expenses are mostly 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 the future, particularly as we penetrate into overseas markets, our financial results may be subject to fluctuations among those foreign currencies and RMB.
The percentage of our sales denominated in RMB and US dollars are as follows:
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 December 31, 2011, the exchange rate was approximately US$1.00 to RMB6.3523. 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 losses for the last two financial years ended December 31, 2011 and 2010 are as follows:
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 periods under review, inflation has a moderate impact on our financial performance as a result of increased raw materials, direct labor, packaging materials and other overhead costs. If prices for our products do not rise at a rate that is sufficient to fully absorb inflation-driven increases in our costs of supplies in the future, our profitability can be further adversely affected.
ITEM 7A.
ITEM 7A.Quantitative and Qualitative Disclosures about Market Risks
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. Inflation in China has recently increased substantially. The inflation rate in China was reported at 4.1 percent in December 2011. These factors have led to the adoption by the Chinese government, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. Price inflation can affect our ability to maintain current levels of gross margin and selling and distribution, general and administrative expenses as a percentage of net revenues if we are unable to pass along raw material price increases to customers. Similarly, the cost of the ongoing construction of our new facility and the installation of our equipment may increase as a result of these recent inflationary trends, which are expected to continue in the near future. Accordingly, inflation in China may weaken our competitiveness domestically or in international markets.
ITEM 8.
ITEM 8.Financial Statements
CHINA MARINE FOOD GROUP LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
China Marine Food Group Limited
Shishi City, Fujian, China
We have audited the accompanying consolidated balance sheets of China Marine Food Group Limited as of December 31, 2011 and 2010 and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2011 and 2010. These 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 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 included 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 China Marine Food Group Limited at December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO China Dahua CPA Co., Ltd. (Formally known as BDO China Li Xin Da Hua CPA Co., Ltd.)
Shenzhen, P.R. China
March 27, 2012
CHINA MARINE FOOD GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
(Currency expressed in United States Dollars (“US$”), except for number of shares)
See accompanying notes to consolidated financial statements
CHINA MARINE FOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Currency expressed in United States Dollars (“US$”), except for number of shares)
See accompanying notes to consolidated financial statements
CHINA MARINE FOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Currency expressed in United States Dollars (“US$”))
See accompanying notes to consolidated financial statements
CHINA MARINE FOOD GROUP LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Currency expressed in United States Dollars (“US$”), except for number of shares)
See accompanying notes to condensed consolidated financial statements.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
1. ORGANIZATION AND BUSINESS BACKGROUND
China Marine Food Group Limited (“China Marine” or “the Company”), formerly known as New Paradigm Productions, Inc., was incorporated in the State of Nevada on October 1, 1999. The Company is headquartered and the principal operations are in Shishi City, Fujian Province, People Republic of China (“PRC”). The Company, through its subsidiaries, manufactures and distributes processed seafood products and algae-based beverage products. The Company also trades marine catch sporadically throughout the year based on opportunities. The Company’s customers are located in domestic provinces in the PRC and overseas markets. The Company is publicly traded on the AMEX under the symbol “CMFO” and can be found on the worldwide web at www.china-marine.cn.
Recapitalization and reorganization
On November 17, 2007, China Marine completed a stock exchange transaction with the shareholders of Ocean Technology (China) Company Limited (“Ocean Technology”), whereby 15,624,034 shares of the Company’s common stock were issued to the shareholders of Ocean Technology in exchange for 100% of their outstanding capital stock in Ocean Technology. As a result of the stock exchange, the former shareholders of Ocean Technology owned approximately 93.15% of the issued and outstanding shares of common stock of the Company.
Ocean Technology became a wholly-owned subsidiary of China Marine. The stock exchange transaction was 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.
As of December 31, 2011, China Marine’s majority-owned subsidiaries were as follows
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
$33,000,000
100%
Shishi Huabao Mingxiang Foods Co., Ltd (“Mingxiang”)
The PRC, a limited liability company
Trading and distribution of marine products in the PRC and overseas; Sales and distribution of algae-based beverage products
RMB50,000,000
100%
Shishi Huabao Jixiang Water Products Co., Ltd (“Jixiang”)
The PRC, a limited liability company
Property holding
RMB4,500,000
100%
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
Name
Place of incorporation
and kind of
legal entity
Principal activities
and place of operation
Particulars of issued/
registered share
capital
Effective interest
Held
Shishi Xianghe Food Science and Technology Co., Ltd. (“Xianghe”)
The PRC, a limited liability company
Sale and distribution of algae-based beverage products
RMB5,000,000
80%
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
l Basis of consolidation
These accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The audited 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 Non-controlling interest
Non-controlling interests in our subsidiaries are recorded in accordance with the provisions of Accounting Standard Codification (“ASC”) 810, “Consolidation”, and are reported as a component of our equity, separate from the parent’s equity. Purchase or sale of equity interests that do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the non-controlling interests are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, If any, will be reported at fair value with any gain or loss recognized in earnings.
Under ASC 810-10-45-21, losses attributable to the parent and the non-controlling interest in a subsidiary may exceed their interests in the subsidiary’s equity. The excess, and any further losses attributable to the parent and the non-controlling interest, shall be attributed to those interests. That is, the non-controlling interest shall continue to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance.
l Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and also requires disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates made by management include revenue recognition estimates, valuation of equity instruments and allowance for doubtful accounts.
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 $538,132 and $14,364,156 as of December 31, 2011 and 2010, respectively, which amounts exclude Ocean Technology.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
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.
l Inventories
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 December 31, 2011 and 2010, 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 5-30 years
10%
Motor vehicles 8-10 years
10%
Office equipments 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.
l Construction in progress
Construction in progress is stated at cost, which includes the cost of construction, acquisition of plant and equipment and other direct costs attributable to the construction. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized interest is incurred during the period of construction.
l Land use rights
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.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
l Goodwill and intangible assets
Goodwill and intangible assets were the result of the acquisition of Xianghe. Goodwill represents the cost of the acquired algae-based drink business in excess of the fair value of identifiable tangible and intangible net assets purchased. Intangible assets include trademarks and algae-based beverage know-how and are recorded at cost less accumulated amortization and any recognized impairment loss. The algae-based beverage know-how is amortized over its estimated useful life of 10 years on a straight-line basis, which coincides with the timing provided from the PRC protection guidelines for our product. For the year ended December 31, 2011, the Company engaged an independent valuation expert to assist in determining the fair value of the identifiable tangible and intangible net assets of the acquired business.
The Company evaluates the valuation of its goodwill according to the provisions of Accounting Standards Codification (“ASC”) 350 to determine if the current value of goodwill has been impaired. The Company has also adopted Accounting Standard Update (ASU) No. 2011-08, Intangibles-Goodwill and Other (Topic 350). With ASU No. 2011-08, an entity is given the option to make a qualitative evaluation of goodwill impairment to determine whether it should calculate the fair value of its reporting unit. The Company made its qualitative evaluation of its goodwill considering, among other things, the general macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant entity-specific events. Based on this qualitative evaluation, the Company concluded that it was more likely than not that its goodwill was not impaired and it wasn’t required to calculate the fair value of its reporting unit as of December 31, 2011. 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. We performed our annual goodwill impairment during the fourth quarter of each calendar year.
In accordance with ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, the Company engaged a third party valuation firm to review the Company’s algae-based intangible assets for impairment. The Company performed its annual impairment test for its intangible assets during the fourth quarter of each calendar year. The intangible assets balance related to the algae-based drink business reporting unit. The test involved the assessment of the fair market value of the Company’s intangible assets, using a form of the income approach known as the excess earnings method and concludes that a discount rate of 21.5% is considered appropriate for valuing the Company. The market and cost approaches were not applied due to the lack of information deemed to be reliably indicative of value using either approach. The result of the assessment of the Company’s intangible assets indicated that its fair values exceeded its carrying amounts.
In particular, the Company provided a forecasted discounted cash flows analysis for the reporting unit based on discrete fifteen-year financial forecasts developed by management for planning purposes. Cash flows beyond the fifteen-year discrete forecasts were estimated using a terminal value calculation, which incorporated historical and forecasted financial trends for the reporting unit and considered long-term earnings growth rates for publicly traded peer companies.
The key assumptions used in determining the fair value of the reporting unit are:
-The financial projections were prepared by the Management with due care and consideration reflecting the reasonable estimate of future relevant events.
-All information provided by the Management is true, accurate and complete.
-There will be no major changes in the existing political, legal, fiscal and economic conditions in countries in which the Company will carry on its business.
-There will be no major changes in the current taxation law in countries in which the Company operates.
-Future exchange rates and interest rates will not differ materially from those prevailing market expectations.
-The availability of finance will not be a constraint on the future growth of the Company’s operation.
-The Company will retain and have competent management, key personnel, and technical staff to support its ongoing operation.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
-Industry trends and market conditions for related industries will not deviate significantly from economic forecasts.
-The forecasted average annual growth rate of revenue is 3% to 70% from 2012 to 2026. This reflects the following assumptions:
1)Increased market penetration into six provinces;
2)Increased demand in China for health related drinks; and
3)A long term growth rate into perpetuity has been determined to be 3% with reference to the birth rate, market penetration and other related factors.
-Cost of goods sold is forecasted to grow by 3% to 72% from 2012 to 2026.
-The discount rate applied to the cash flows is based on the weighted average cost of capital (“WACC”) of the Company. WACC is the weighted average of the estimated rate of return required by equity and debt holders for an investment of this type. Our analysis concluded that a discount rate of 21.5% is considered appropriate for valuing the Company.
-Publicly available information regarding our market capitalization was also considered in assessing the reasonableness of the cumulative fair values of our reporting units estimated using the excess earnings method.
Based upon the valuation report prepared by an independent valuation expert, it is concluded that the fair value of the intangible asset as of December 31, 2011, is reasonably stated by the amount of $21,173,433. During the years ended December 31, 2011 and 2010, we determined that there had been no impairment of intangible assets.
l Impairment of long-lived assets
In accordance with the provisions of 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 December 31, 2011 and 2010.
l Revenue recognition
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 collectability 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 processed seafood products and algae-based beverage products upon receipt of the delivery confirmation provided by the distributor’s carrier and the title and risk of loss of the product has transferred to the distributor. The distributor agreements do not provide chargeback, price protection, or stock rotation rights. The Company recognizes revenue from marine catch when title has transferred to the buyer. The Company experienced no product returns and recorded no reserve for sales returns for the years ended December 31, 2011 and 2010.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
The Company offers sales incentives to customers based on yearly sales targets. These are non-cash incentives and are solely used for promotional activities purposes. These amounts are accrued as sales and marketing expenses during the same month revenue is recognized.
Rental income from operating leases on real estate properties is recognized on a straight-line basis over the lease period.
l Advertising costs
Advertising costs are expensed as incurred under ASC Topic 720-35, “Advertising Costs”. The Company incurred advertising expense of $3,234,492 and $1,069,402 for the years ended December 31, 2011 and 2010, respectively.
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 shareholders’ 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.
l Income taxes
The provision for income taxes is determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
For the years ended December 31, 2011 and 2010, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2011 and 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.
l Earnings per share
The Company calculates earnings per share in accordance with ASC Topic 260, “Earnings per Share.” Basic earnings per share is computed by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings 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 operations and comprehensive income.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(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 shareholders’ equity.
Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective years:
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
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.
l Segment reporting
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 year ended December 31, 2011, the Company operates in three principal reportable segments: sale of processed seafood products, trading of marine catch and sale of algae-based beverage products in the PRC.
l Fair value measurement
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, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
l Financial instruments
Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, amount due to a shareholder, income tax payable and accrued liabilities and other payables are carried at cost which approximates fair value. The estimated fair value of short-term borrowing was $2.5 million and $nil million as of December 31, 2011 and 2010, respectively, based on current market prices or interest rates.
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 December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” The amendments in ASU 2011-11 require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The adoption of ASU 2011-11 results in changes to presentation and disclosure only and is not expected to have an impact on our consolidated results of operations and financial condition.
During September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment.” The amendments in ASU 2011-08 are intended to reduce the cost and complexity associated with goodwill impairment tests required under the Accounting Standard Codification Topic 350 Intangibles - Goodwill and Other. The update permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company elected to early adopt ASU 2011-08, which resulted in the elimination of the additional requirements under Topic 350.
During June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. Effective December 31, 2011, the Company elected to early adopt ASU No. 2011-05. The Company's early adoption of this new guidance only resulted in a change in how the Company presents the components of comprehensive income, which is currently presented within the consolidated statements of operations and comprehensive (loss) income.
During May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).” This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. This pronouncement is effective for reporting periods beginning on or after December 15, 2011. The adoption of ASU 2011-04 is not expected to have a significant impact to our consolidated financial position or results of operations.
During January 2010, the FASB issued ASU No. 2010-6 to improve the disclosure and transparency of fair value measurements. These amendments clarify the level of disaggregation required, and the necessary disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. We adopted this ASU beginning January 1, 2011 and it did not have a significant impact on our consolidated financial position or results of operations.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
3. 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, of which the maturity date was January 26, 2010. 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 funded the loan from the currently available cash.
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:
(i)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.
(ii)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, which was then fully settled.
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 $7.0 million if Qiu intends to sell his shares. The Purchase Agreement also provides that if Xianghe has any funding requirement from the shareholders, the Company and Qiu shall provide the capital into Xianghe on a pro rata basis according to respective shareholdings.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
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:
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 allowed 100% of the operating results generated from the algae-based soft drinks business, subject to the precedent condition. Upon the completion of the 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 $83,260 in revenue and $2,459 in net income which mainly came from the algae-based soft drinks business during the transitional period in January 2010 and as a result, $570 in net income was attributed to the non-controlling interests as of the year end of 2010. Non-controlling interests from the business combination mainly represented the 20% share of pre-acquisition equity in Xianghe as of December 31, 2009 in the consolidated balance sheet.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
As of December 31, 2011 and 2010, the allowance for doubtful accounts was $344,943 and $243,872, respectively.
Increase in accounts receivable was mainly due to the block sales of marine catch trading in the fourth quarter of 2011.
Changes in the allowance for doubtful accounts are as follows:
5. INVENTORIES
Inventories consisted of the following:
For the years ended December 31, 2011 and 2010, the Company recorded no allowance for slow-moving and obsolete inventories.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted of the following:
Depreciation expense for the years ended December 31, 2011 and 2010 were $447,174 and $349,234, respectively, which included $289,133 and $261,378 in cost of revenue.
Certain property, plant and equipment with original costs of $1,050,947 and $1,027,588 have become fully depreciated as of December 31, 2011 and 2010, respectively.
7. LAND USE RIGHTS
Land use rights consisted of the following:
As of December 31, 2011 and 2010, certain land use rights with the net book value of $409,898 and $nil, respectively, were pledged as securities in connection with the outstanding short-term borrowings, as described in Note 7.
Amortization expense for the years ended December 31, 2011 and 2010 were $79,404 and $75,604, respectively, in which $11,047 and $10,518 were included in cost of revenue. Estimated aggregate future amortization expense for the succeeding 5 years and thereafter as of December 31, 2011 is as follows:
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
8. CONSTRUCTION IN PROGRESS
In 2010, Mingxiang entered into an agreement with an independent third party in relation to the construction of an additional floor at the existing staff quarter. Total construction costs are approximately $2.2 million. The construction was completed in the first quarter of 2011 and transferred to property, plant and equipment accordingly.
In 2010, Mingxiang entered into an agreement with an independent third party in relation to the construction of an algae extraction equipment line. Total equipment costs are approximately $0.2 million. The equipment was completed in the first quarter of 2011 and transferred to property, plant and equipment accordingly.
During 2010, Mingxiang entered into an agreement with an independent third party (the “Third Party Contractor”) in relation to the construction of a cold storage facility. A supplementary agreement was then entered into between Mingxiang and the Third Party Contractor in September 2011 related to additional gross areas, machineries and equipment required for the facility. The construction is expected to be completed in the first half of 2012. Total estimated construction costs are approximately $24.2 million. As of December 31, 2011, the Company recorded approximately $22.9 million as construction in progress.
9. INTANGIBLE ASSETS
Intangible assets consisted of the following:
Amortization expense for the years ended December 31, 2011 and 2010 were $2,488,205 and $2,369,116, respectively. Using the current exchange rate, the estimated annual amortization expense is $2,528,069 for each of the five succeeding years.
10. SHORT-TERM BORROWINGS
The Company’s wholly-owned subsidiary, Mingxiang, obtained short-term bank loans in the aggregate amount of $2,550,257 and $nil as of December 31, 2011 and 2010, respectively, from the Agricultural Bank of China, a registered financial institution in the PRC. The weighted average effective interest rate per annum was 5.49% and 5.31% for 2011 and 2010, respectively, payable quarterly. Interest expenses for the years ended December 31, 2011 and 2010 were $11,483 and $40,032, respectively and none of the interest incurred was capitalized.
11. AMOUNT DUE TO A STOCKHOLER
As of December 31, 2011 and 2010, the amounts of $50,361 and $261,789 represented temporary advances for working capital purposes from a major shareholder and CEO, Mr. Liu, which were unsecured, interest free and repayable on demand.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
12. ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consisted of the following:
13. SHAREHOLDERS’ EQUITY
(a) Compensatory stock awards	
On April 1, 2011, the Company granted compensatory stock awards totaling 700,000 common shares to certain of its officers, directors and employees. These stock awards vested in full on the date of the grant but are subject to forfeiture in full if the grantee ceases to be employed by the Company for any reason within one year from the date of the grant, pursuant to stock award agreements between the Company and grantees dated April 1, 2011.
Based on the closing stock price of the grant date, the fair value of these stock awards are estimated to be approximately $2.7 million, which will be recognized as compensation expense, using the straight-line method, over the service period of one year from April 1, 2011 to March 31, 2012.
For the year ended December 31, 2011, the recognized stock-based compensation expenses and related tax benefits were $2,034,197 and $305,130, respectively.
The unrecognized stock-based compensation expense as of December 31, 2011 is $611,803, and the remaining expected term for this expense to be recognized is 3 months.
(b)	Issuance of common stock
On February 15, 2011, the Company entered into an Investor Relations Consulting Agreement with Hayden Communications International, Inc (“HCI”) to provide consulting services for the Company. In connection with such service, the Company agreed to issue 20,000 shares of restricted common stock to HCI. The shares of common stock were valued at $51,800 or $2.59 per share and issued on July 14, 2011.
(c)	Distribution of dividends
The Company did not declare any dividends for the years ended December 31, 2011 and 2010.
As of December 31, 2011, the number of authorized and outstanding shares of the Company’s common stock was 100,000,000 shares and 29,697,976 shares, respectively.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
14. NON-CONTROLLING INTERESTS
Non-controlling interests consisted of the following:
Advance to a non-controlling shareholder of the Company’s subsidiary, Xianghe, was unsecured, interest free and repayable on demand.
15. INCOME TAXES
For the years ended December 31, 2011 and 2010, the local (“United States of America”) and foreign components of income (loss) before income taxes were comprised of the following:
The provision for income taxes consisted of the following:
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, 2011, China Marine incurred $21,865 of net operating loss 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 $7,543 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
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 periods ended December 31, 2011 and 2010, respectively. As of December 31, 2011, Ocean Technology incurred $694,371 of net operating loss carryforwards available for income tax purposes. The Company has provided for a full valuation allowance against the deferred tax assets of $114,571 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, 2011 and 2010. Rixiang, Jixiang, Mingxiang, Xianghe and 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%.
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 in 2012.
The reconciliation of income tax rate to the effective income tax rate for the years ended December 31, 2011 and 2010 is as follows:
As of December 31, 2011, the PRC operation incurred $119,728 of net operating loss carryforwards 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 $29,932 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future. The entities in the PRC do not file a consolidated return, so only the entity that generated the losses can utilize them.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of December 31, 2011 and 2010:
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 $152,046 and $124,771 as of December 31, 2011 and 2010, respectively. During 2011, the valuation allowance increased by $27,275, primarily relating to net operating loss carryforwards.
Tax Holiday
Income before income tax expense was $10,612,331 and $25,594,689 for the years ended December 31, 2011 and 2010 and was mainly attributed to subsidiaries with operations in China. Income tax related to China income for the years ended December 31, 2011 and 2010 was $2,048,956 and $4,455,167. The combined pro forma effects of the income tax expense exemptions and reductions available to us are as follows:
16. CHINA CONTRIBUTION PLAN
Under the PRC Law, full-time employees of the Company’s subsidiaries in the PRC, Rixiang, Jixiang, Mingxiang and Xianghe 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 $778,644 and $727,067 for the years ended December 31, 2011 and 2010, respectively.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
17. EARNINGS PER SHARES
Reconciliation from basic earnings per share to diluted earnings per share:
18. STATUTORY RESERVE
Under the PRC Law, the Company’s subsidiaries in the PRC, Rixiang, Jixiang, Mingxiang, Xianghe 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, 2011, and 2010, Rixiang contributed $5,967 and $267,589 to statutory reserve, respectively, whereas Mingxiang contributed $426,969 and $3,381,135. Jixiang, Xianghe and Xianglin made no appropriation to the statutory reserve since they did not generate after-tax net income during these periods.
19. SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
(a) Business information
The Company’s chief operating decision maker has been identified as chairman, Mr. Liu, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. Based on this assessment, the Company has determined that it has three operating and reporting segments for the years ended December 31, 2011 and 2010 which are processed seafood products, marine catch and algae-based beverage products.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company had no inter-segment sales for the years ended December 31, 2011 and 2010.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
Summarized financial information concerning the Company’s reportable segments is shown in the following table for the years ended December 31, 2011 and 2010:
Expenditure for long-lived assets incurred for the years ended December 31, 2011 and 2010 mainly relates to the construction of a cold storage facility which will be used for both processed seafood products and marine catch segments.
(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:
All the Company’s long-lived assets are located in the PRC in both periods.
20. CONCENTRATIONS OF RISK
The Company is exposed to the following concentrations of risk:
(a)	Major customers
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, 2011 and 2010 and their outstanding balances as at year-end dates.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
(b)	Major vendors
The following is a table summarizing the purchases of raw materials from vendor that individually represents more than 10% of the total purchases for the years ended December 31, 2011 and 2010 and their outstanding balances as at year-end dates.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
(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)	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.
21. 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, 2014, and generally not containing significant renewal options. Total rent expenses for the years ended December 31, 2011 and 2010 was $79,618 and $77,145, respectively. Future minimum rental payments due under the non-cancelable operating lease agreement are as follows:
(b)Capital commitments
In 2010, Mingxiang entered into an agreement with an independent third party (the “Third Party Contractor”) in relation to the construction of a cold storage facility. A supplementary agreement was then entered into between Mingxiang and the Third Party Contractor in September 2011 related to additional gross areas, machineries and equipment required for the facility. The construction is expected to be completed by the first quarter end of 2012. Total estimated construction costs are approximately $24.2 million. As of December 31, 2011, the Company recorded approximately $22.9 million as construction in progress.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
(c) Guarantees
As of December 31, 2011, Mingxiang was contingently liable as guarantor with respect to the loan of $472,270 (equivalent to RMB 3,000,000) to an unrelated third party, Shishi Han Jiang Hua Lian Knitting and Clothing Factory (“Han Jiang Hua Lian”). The term of this guarantee is for the period from November 2008 through December 2017. Pursuant to the loan agreement, Han Jiang Hua Lian will repay the loan by installments and be fully settled by December 31, 2017. Should Han Jiang Hua Lian fail to make its debt payments due at any time from the date of guarantee, Mingxiang will be obligated to perform under the guarantee 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 guarantee is $472,270 (equivalent to RMB 3,000,000).
As of December 31, 2010, Mingxiang was contingently liable as guarantor with respect to the loans of $787,116 (equivalent to RMB 5,000,000) to an unrelated third party, Shishi Yu Ching Knitting and Clothing Company (“Yu Ching”). The term of this guarantee is for the period from January, 2009 through January, 2011. During 2011, Yu Ching repaid the principal amount of the loan in the amount of $787,116 (equivalent to RMB 5,000,000) but left the amount of loan interest unsettled due to a disagreement between Yu Ching and the creditor in relation to the calculation of the loan interest. Should Yu Ching fail to make its loan interest payments due at any time from the date of guarantee, Mingxiang will be obligated to perform under the guarantee by primarily making the required payments, including late fees and penalties.
According to the Personal Guarantee Agreement between Mingxiang and Mr. Liu, Mr. Liu agreed to bear all liabilities and costs incurred from a direct claim by the creditor if either Han Jiang Hua Lian or Yu Ching fails to make payments 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 fair value of the indemnification to be insignificant. As of December 31, 2011, the Company has not recorded any liabilities under these guarantees.
22. SUBSEQUENT EVENT
In accordance with ASC 855 “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, we have evaluated all events or transactions that occurred after December 31, 2011 up through the date we issued the condensed consolidated financial statements. During this period, we did not have any material recognizable subsequent events.
ITEM 9.
ITEM 9.	 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
On October 29, 2010, the Company engaged BDO China Dahua CPA Co., Ltd. (formerly known as BDO China Li Xin Da Hua CPA Co., Ltd.) (“BDO China”) as the Company’s new independent accountant. During the two most recent years ended December 31, 2009 and 2008, and any subsequent interim period through October 29, 2010, the Company did not consult with BDO China, the newly engaged accountant, regarding any matter described in Item 304(a)(2) of Regulation SK, including any issue related to the Company’s financial statements, subject of a disagreement, any reportable event or the type of audit opinion that might be rendered for the Company. The change of independent accountant was approved by the Audit Committee of the Board of Directors of the Company.
On October 29, 2010, the Company’s former independent accountant, ZYCPA Company Limited (“ZYCPA”) resigned as independent accountant of the Company. The former independent accountant’s reports on the Company’s financial statements for the last two fiscal years did not contain any adverse opinions or disclaimer of opinions, nor were the reports qualified or modified as to uncertainty, audit scope or accounting principles. Furthermore, the accountant’s reports did not include any disclosure of uncertainty regarding the Company’s ability to continue as a going concern.
During the fiscal years ended December 31, 2010 and 2011, there were no disagreements between the Company and ZYCPA, the former independent accountant, on any matter of accounting principles or practices, financial statement disclosure or auditing scope and procedure which, if not resolved to the satisfaction of the former accountant, would have caused it to make reference to the subject matter of the disagreement in connection with its report.
ITEM 9A.
ITEM 9A.	 Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer, Pengfei Liu, and Principal Financial Officer, Marco Hon Wai Ku, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act") as of Decmeber 31, 2011.
Under Rule 13a-15(e) and 15d-15(e), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of December 31, 2011 were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011.
Our internal control over financial reporting is a process designed by or under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.
In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in ‘Internal Control - Integrated Framework’. Our management has concluded that, as of December 31, 2011, our internal control over financial reporting is effective based on these criteria.
This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.
There were no changes in our internal controls over financial reporting during the year ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within China Marine Food Group Limited have been detected.
ITEM 9B.
ITEM 9B.	 Other Information
None
PART III.
ITEM 10.
ITEM 10.	 Directors and Executive Officers of the Registrant, and Corporate Governance
DIRECTORS AND OFFICERS
The following sets forth the name and position of each of our current executive officers and directors.
Name
Age
Position held
Pengfei LIU
CEO, Secretary and Director
Marco Hon Wai KU
Chief Financial Officer
Weipeng LIU
Director
Xiaochuan LI
Independent Director
Changhu XUE
Independent Director
Honkau WAN
Independent Director
None of the Directors and Executive Officers is related to each other or the Substantial Shareholder.
Pengfei Liu has served as the CEO and Secretary and as a Director of China Marine Food Group Limited since November 2007. 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 and has been employed full time as its Chief Executive Officer ever since. 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 other 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 other 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 has served as a Director of the Company since November 2007. Mr. Liu oversees the construction, operation and maintenance of our equipment and production facilities in the capacity of Manager of Operations, a position he has held since 1997. 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 graduated with a degree in mechanical design and manufacturing and automation from Fuzhou University in 1997. Mr. Liu is not a member of the board of directors of any other 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 served as an independent Director of the Company since October 2008. Mr. 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 also 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 member of the board of directors of any other 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 has served as an independent Director of the Company since October 2008. Since 1990, Mr. Xue has been 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 member of the board of directors of any other 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 served as an independent Director of the Company since October 2008. Mr. 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 member of the board of directors of any other 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:
·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
·Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); or
·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
·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
·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
·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 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 Governance Committee is primarily responsible for nominating directors and setting policies and procedures for the nomination of directors. The 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.
COMPLIANCE EITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities and Exchange Act of 1934 requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial statements of beneficial ownership on Form 3, reports of changes in ownership on Form 4 and annual reports concerning their ownership on Form 5. Executive officers, directors and greater than 10% stockholders are required by the SEC regulations to furnish us with copies of all Section 16(a) reports they file.
CODE OF ETHICS
We adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 on January 24, 2008. Our Standards of Business Conduct and Finance Code of Professional Conduct apply to our officers, directors and all employees. Our Standard of Business Conduct provides 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. Under the Code of Ethics and Standards of Business Conduct, 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.
ITEM 11.
ITEM 11. 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 determines 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 China Green Agriculture, Inc., Zhongpin Inc., American Dairy, Inc., Converted Organics Inc. and Agfeed Industries 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. Pursuant to their Service Agreements with the Company, Pengfei Liu and Weipeng Liu can receive a bonus based on the Company’s profitability before taxes (“PBT”). This is our first time to grant equity awards as incentive bonuses under our 2010 Stock Award Plan in April 2011. Our equity awards are subject to vesting to align the long-term interests of our executive officers with those of our stockholders.
On November 18, 2011, at the 2011 annual meeting of shareholders, our shareholders approved the non-binding advisory proposal regarding the Company's executive compensation and approved a proposal that the non-binding advisory shareholder vote on executive compensation to be held every three years.
Elements of Compensation
We provide our executive officers with a base salary, bonuses, and equity incentives to compensate them for services rendered during the year.
Base Salary
The 2010 base salary for Mr. Pengfei Liu, Mr. Marco Ku and Mr. Weipeng Liu is about $142,000, $142,000 and $44,000, respectively. The 2011 base salary for Mr. Pengfei Liu, Mr. Marco Ku and Mr. Weipeng Liu is about $149,000, $149,000 and $47,000, 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 director Xiaochuan Li, Changhu Xue, and Honkau Wan for 2011 is $9,500, $9,500, and $7,700, respectively.
Bonuses
Incentive bonuses for Mr. Pengfei Liu and Mr. Weipeng Liu are based on a fixed formula as more fully described below under “Bonuses and Deferred Compensation” and are based upon 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. Since the PBT for the year ended December 31, 2011 was less than the threshold of US$12,394,646, Mr. Pengfei Liu and Mr. Weipeng Liu were not eligible to receive any discretionary bonus for 2011 according to the calculation basis as detailed in the section “Bonuses and Deferred Compensation”.
We have determined and provided our other executive officers with cash or equity bonuses at the end of each fiscal year. Our Compensation Committee reviews the necessity of such bonuses 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.
Equity Incentives
In December 2010, the Board of Directors approved the 2010 Stock Award Plan (the "Plan") covering 2,800,000 shares. The shares underlying the Plan were subsequently registered pursuant to a form S-8 under the Securities Act. The Plan was approved by the Company’s shareholders at the 2011 annual meeting of shareholders.
The Plan is intended to benefit the stockholders of the Company by providing a means to attract, retain and reward individuals who can and do contribute to the longer-term financial success of the Company. Further, the recipients of stock-based awards under the Plan should identify their success with that of the company's shareholders and therefore will be encouraged to increase their proprietary interest in the Company. The Compensation Committee (the “Committee”) administers the Plan.
On April 1, 2011, the Company granted compensatory stock awards totaling 700,000 common shares, under the terms of the Plan to certain of its officers, directors and employees. These stock awards vested in full on the date of the grant but are subject to forfeiture in full if the grantee ceases to be employed by the Company for any reason within one year from the date of the grant, pursuant to stock award agreements between the Company and grantees dated April 1, 2011. The stock awards were approved by the Committee on March 31, 2011, on the basis that the Company seeks to align the long-term interests of the employees with those of shareholders and the long-term success of the Company. The Committee considered several factors, including the recognition that it had not previously authorized stock awards to employees or directors, the employees’ length of service to the Company and the Company's historical financial and operational performance.
The stock awards were granted to the following directors and officers; Mr. Pengfei Liu, Chief Executive Officer and Chairman of the Board, was granted 130,000 shares of common stock (2010: Nil); Mr. Weipeng Liu, a Director who is also our Facilities and Procurement Manager with responsibility for overseeing the construction, operation and maintenance of our equipment and production facilities, was granted 100,000 shares of common stock (2010: Nil); Mr. Hon Wai Ku, Chief Financial Officer of the Company, was granted 50,000 shares of common stock (2010: 30,000 shares). The balance of the shares issued were given to directors of sales and marketing for Mingxiang® foods and Hi-Power beverages, production and quality control managers at both locations and certain employees.
In the future, we may adopt and establish more equity incentive plans pursuant to which awards may be granted if our Committee determines that it is in the best interests of our stockholders and the Company to do so.
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 2011. As of December 31, 2011, none of our executive officers or directors owned any of our derivative securities.
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
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 and Weipeng Liu, on substantially similar terms. The Service Agreements were for initial three year terms, which were subsequently renewed through December 31, 2013. 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.
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 compensation and benefits for Mr. Ku is reviewed by the Compensation Committee on an annual basis. The service agreement may be terminated by either party giving not less than two months’ notice in writing to the other and 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.
Bonuses and Deferred Compensation
Pursuant to the Service Agreements, we will pay to each of Pengfei Liu and Weipeng Liu an incentive bonus based on our PBT.
The amount of incentive bonus that Pengfei Liu is expected to receive in each fiscal year will be determined as follows:
The amount of incentive bonus that Weipeng Liu is expected to receive in each fiscal year will be determined as follows:
The incentive bonuses will be paid in the first quarter of the year following the year of assessment. 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.
Director Compensation
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 is RMB 60,000 and Honkau Wan is HK $60,000 per Service Year, respectively. Further, the Company reimburses the Directors for expenses incurred in good faith in the performance of the Director’s duties for the Company.
The following table sets forth the total compensation paid to each independent Board member in 2011:
Director Compensation For 2011
(1) This amount is based on the exchange rate as of December 31, 2011 of US$1 equal to RMB6.3523.
(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.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Our Articles of Incorporation 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.
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.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following tables set forth information regarding beneficial ownership of 29,697,976 outstanding shares of common stock as of March 26, 2012 (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.
(1)Certain shares of common stock are subject to forfeiture if the owner ceases to be employed by the Company before the vesting date of April 1, 2012: Pengfei Liu - 130,000 shares, Weipeng Liu - 100,000 shares, and Marco Hon Wai Ku - 50,000 shares;
(2)Jayhawk Private Equity GP, L.P. is the general partner of Jayhawk Private Equity Co-Invest Fund, L.P. Jayhawk Private Equity Co-Invest Fund, L.P. that directly and indirectly owns the shares identified by this footnote in Table.
CHANGES OF CONTROL
There are currently no arrangements which would result in a change in control.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
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 principal beneficial owner of Xianglin, Jixiang, Mingxiang and Rixiang when each of the transactions took place. Therefore, Pengfei Liu and his wife, Yazuo Qiu, would provide financing for the companies in advance and provide guarantees without any consideration.
Details of the material interested person transactions for the fiscal year ended December 31, 2011 are set forth below:
Year of
Transaction
Acquirer
Acquiree
Nature/Amount of Property
Acquired or to be Acquired
Terms of Transaction
Ocean Technology
Pengfei Liu, CEO and Controlling Shareholder
$50,361 advance
Advance was unsecured, repayable on demand and interest-free.
As of December 31, 2011, Mingxiang was contingently liable as guarantor with respect to the loan of $472,270 (equivalent to RMB 3,000,000) to an unrelated third party, Shishi Han Jiang Hua Lian Knitting and Clothing Factory (“Han Jiang Hua Lian”). The term of this guarantee is for the period from November 2008 through December 2017. Pursuant to the loan agreement, Han Jiang Hua Lian will repay the loan by installments and be fully settled by December 31, 2017. Should Han Jiang Hua Lian fail to make its debt payments due at any time from the date of guarantee, Mingxiang will be obligated to perform under the guarantee 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 guarantee is $472,270 (equivalent to RMB 3,000,000).
As of December 31, 2010, Mingxiang was contingently liable as guarantor with respect to the loans of $787,116 (equivalent to RMB 5,000,000) to an unrelated third party, Shishi Yu Ching Knitting and Clothing Company (“Yu Ching”). The term of this guarantee is for the period from January, 2009 through January, 2011. During 2011, Yu Ching repaid the principal amount of the loan in the amount of $787,116 (equivalent to RMB 5,000,000) but left the amount of loan interest unsettled due to a disagreement between Yu Ching and the creditor in relation to the calculation of the loan interest. Should Yu Ching fail to make its loan interest payments due at any time from the date of guarantee, Mingxiang will be obligated to perform under the guarantee by primarily making the required payments, including late fees and penalties.
According to the Personal Guarantee Agreement between Mingxiang and Mr. Liu, Mr. Liu agreed to bear all liabilities and costs incurred from a direct claim by the creditor if either Han Jiang Hua Lian or Yu Ching fails to make payments 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 fair value of the indemnification to be insignificant. As of December 31, 2011, 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.
ITEM 14.
ITEM 14. Principal Accountant Fees and Services
The following is a summary of the fees billed to us by BDO China Dahua CPA Co., Ltd. (formerly known as BDO China Li Xin Da Hua CPA Co., Ltd.) for the fiscal years ended December 31, 2011 and 2010.
In the above table, in accordance with the SEC’s definitions and rules, audit fees consist of the aggregate fees billed for services rendered for the audit of our annual financial statements, the reviews of the financial statements included in our Forms 10-Q and for any other services that are normally provided by our independent auditors in connection with our statutory and regulatory filings or engagements.
Audit related fees consist of the aggregate fees billed for professional services rendered for assurance and related services that reasonably related to the performance of the audit or review of our financial statements that were not otherwise included in audit fees.
Tax fees consist of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
All other fees consist of the aggregate fees billed for products and services provided by our independent auditors and not otherwise included in audit fees, audit related fees or tax fees.
PART IV.
ITEM 15.
ITEM 15. Exhibits, Financial Statement
(a) Financial Statements
The financial statements are set forth under Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.
(b) Exhibits
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)
4.5
China Marine Food Group Limited 2010 Stock Award Plan. (Filed with the Commission on Form S-8 dated December 14, 2010 as Exhibit 4.1)
4.6 Form of Stock Award Agreement dated April 1, 2011 (filed with the Commission on Form 8-K dated April 5, 2011).
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 (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, 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. Qiu Shang Jing and Shishi Xianghe Food Science and Technology Co., 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 LLC, 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 Independent Director Agreement with Xiaochuan Li dated October 1, 2008 (filed with the Commission on Form 8-K dated October 30, 2008).
10.27
Independent Director Agreement with Changhu Xue dated October 1, 2008 (filed with the Commission on Form 8-K dated October 30, 2008).
10.28
Independent Director Agreement with Honkau Wan dated October 1, 2008 (filed with the Commission on Form 8-K dated October 30, 2008).
10.29
Letter of Consent between the Company and Pengfei Liu dated as of January 1, 2011 (filed herewith)
10.30
Letter of Consent between the Company and Weipeng Liu dated as of January 1, 2011 (filed herewith)
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)
16.1 Letter from ZYCPA (Filed with the Commission on Form 8-K dated October 29, 2010 as Exhibit 16.1)
16.2 Letter from Coddovano and Honeck LLP (Filed with the Commission on Form 8-K dated January 27, 2009 as Exhibit 16.1)
21.1 Subsidiaries List (Filed with the Commission on Form 10-K dated March 23, 2009 as Exhibit 21)
24.1 Power of Attorney (Filed with the Commission on Form 10-K dated March 23, 2009 as Exhibit 24))
31.1 Certification of Chief Executive Officer pursuant to 13a-14 and 15d-14 of the Exchange Act (filed herewith)
31.2 Certification of Chief Financial Officer pursuant to 13a-14 and 15d-14 of the Exchange Act (filed herewith)
32.1 Certificate pursuant to 18 U.S.C. ss. 1350 for Pengfei Liu, Chief Executive Officer (filed herewith)
32.2 Certificate pursuant to 18 U.S.C. ss. 1350 for Marco Hon Wai Ku , Chief Financial Officer (filed herewith)
99.1 Press release dated January 20, 2010 by the Company (Filed with the Commission on Form 8-K dated January 20, 2010).
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA MARINE FOOD GROUP LIMITED
/s/ Pengfei Liu
Dated: March 27, 2012 Pengfei Liu, Chief Executive Officer
(Principal executive officer)
/s/ Marco Hon Wai Ku
Marco Hon Wai Ku, Chief Financial Officer
Dated: March 27, 2012 (Principal financial officer and principal accounting officer)