U. S.
Securities and Exchange Commission
Washington,
D. C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended June 30, 2009
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from _____ to
_____
|
Commission
File No. 333-40790
CHINA MARINE FOOD GROUP
LIMITED
(Name of
Registrant in its Charter)
Nevada
|
|
87-0640467
|
(State
or Other Jurisdiction of
incorporation or organization)
|
|
(I.R.S.
Employer I.D. No.)
|
Da Bao Industrial Zone,
Shishi City Fujian, China
362700
(Address
of Principal Executive Offices)
Issuer's
Telephone Number: 86-595-8898-7588
Indicate by
check mark whether the Registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of
the Securities Exchange Act of
1934 during the preceding 12
months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been
subjected to such filing requirements for the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files.) Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check One)
Large
accelerated filer o Accelerated
filer o Non-accelerated filer
o Small
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes o No x
APPLICABLE
ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the Registrant's classes of common stock, as of the latest
practicable date: July 31, 2009, Common Voting Stock: 23,026,301
CHINA
MARINE FOOD GROUP LIMITED
INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
Page
|
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2009 and December 31,
2008
|
F-2
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Income for the
Three and Six Months ended June 30, 2009 and 2008
|
F-3
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Six Months ended June 30,
2009 and 2008
|
F-4
|
|
|
Condensed
Consolidated Statement of Stockholders’ Equity for the Six Months ended
June 30, 2009
|
F-5
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
F-6
– F-20
|
|
|
CHINA
MARINE FOOD GROUP LIMITED
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
OF JUNE 30, 2009 AND DECEMBER 31, 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
20,488,131 |
|
|
$ |
31,640,307 |
|
Accounts
receivable, net
|
|
|
10,576,055 |
|
|
|
4,819,434 |
|
Inventories
|
|
|
17,254,081 |
|
|
|
6,679,488 |
|
Prepaid
expenses and other current assets
|
|
|
1,598,673 |
|
|
|
326,977 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
49,916,940 |
|
|
|
43,466,206 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
8,622,056 |
|
|
|
5,944,515 |
|
Land
use rights, net
|
|
|
622,844 |
|
|
|
630,150 |
|
Construction
in progress
|
|
|
- |
|
|
|
1,604,855 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
59,161,840 |
|
|
$ |
51,645,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$ |
4,134,525 |
|
|
$ |
4,289,341 |
|
Accounts
payable, trade
|
|
|
1,597,735 |
|
|
|
416,463 |
|
Amount
due to a stockholder
|
|
|
6,091 |
|
|
|
170,091 |
|
Income
tax payable
|
|
|
520,805 |
|
|
|
362,326 |
|
Accrued
liabilities and other payable
|
|
|
850,358 |
|
|
|
1,387,427 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
7,109,514 |
|
|
|
6,625,648 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (see Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 1,000,000 shares
authorized;
0 shares issued and outstanding as of June
30,
2009 and December 31, 2008
|
|
|
- |
|
|
|
- |
|
Common
stock, $0.001 par value; 100,000,000 shares
authorized;
23,026,301 shares issued and outstanding
as
of June 30, 2009 and December 31, 2008
|
|
|
23,026 |
|
|
|
23,026 |
|
Additional
paid-in capital
|
|
|
16,752,945 |
|
|
|
16,752,945 |
|
Statutory
reserve
|
|
|
4,883,700 |
|
|
|
4,883,700 |
|
Accumulated
other comprehensive income
|
|
|
3,508,500 |
|
|
|
3,448,436 |
|
Retained
earnings
|
|
|
26,884,155 |
|
|
|
19,911,971 |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
52,052,326 |
|
|
|
45,020,078 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
59,161,840 |
|
|
$ |
51,645,726 |
|
See
accompanying notes to condensed consolidated financial statements.
CHINA
MARINE FOOD GROUP LIMITED
CONDENSED
CONSOLIDATED STATEMENTS OF
OPERATIONS
AND COMPREHENSIVE INCOME
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
(Unaudited)
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$ |
14,756,384 |
|
|
$ |
13,067,599 |
|
|
$ |
31,304,436 |
|
|
$ |
23,849,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
(inclusive of depreciation and amortization)
|
|
|
(9,850,602 |
) |
|
|
(8,800,852 |
) |
|
|
(22,292,879 |
) |
|
|
(15,979,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,905,782 |
|
|
|
4,266,747 |
|
|
|
9,011,557 |
|
|
|
7,869,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(19,680 |
) |
|
|
(10,346 |
) |
|
|
(39,052 |
) |
|
|
(19,766 |
) |
Sales
and marketing
|
|
|
(143,494 |
) |
|
|
(164,695 |
) |
|
|
(257,556 |
) |
|
|
(253,279 |
) |
General
and administrative
|
|
|
(515,842 |
) |
|
|
(517,695 |
) |
|
|
(981,596 |
) |
|
|
(794,862 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
(679,016 |
) |
|
|
(692,736 |
) |
|
|
(1,278,204 |
) |
|
|
(1,067,907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
4,226,766 |
|
|
|
3,574,011 |
|
|
|
7,733,353 |
|
|
|
6,801,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidy
income
|
|
|
71 |
|
|
|
63,626 |
|
|
|
143,208 |
|
|
|
63,626 |
|
Rental
income
|
|
|
20,396 |
|
|
|
18,458 |
|
|
|
40,771 |
|
|
|
36,394 |
|
Interest
income
|
|
|
70,592 |
|
|
|
133,066 |
|
|
|
161,062 |
|
|
|
172,326 |
|
Interest
expense
|
|
|
(56,020 |
) |
|
|
(78,163 |
) |
|
|
(118,728 |
) |
|
|
(159,604 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
4,261,805 |
|
|
|
3,710,998 |
|
|
|
7,959,666 |
|
|
|
6,914,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(538,222 |
) |
|
|
(477,776 |
) |
|
|
(987,482 |
) |
|
|
(890,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
3,723,583 |
|
|
$ |
3,233,222 |
|
|
$ |
6,972,184 |
|
|
$ |
6,024,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
3,109 |
|
|
|
803,272 |
|
|
|
60,064 |
|
|
|
2,111,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$ |
3,726,692 |
|
|
$ |
4,036,494 |
|
|
$ |
7,032,248 |
|
|
$ |
8,135,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
–
Basic
|
|
$ |
0.16 |
|
|
$ |
0.14 |
|
|
$ |
0.30 |
|
|
$ |
0.26 |
|
–
Diluted
|
|
$ |
0.16 |
|
|
$ |
0.13 |
|
|
$ |
0.30 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
–
Basic
|
|
|
23,026,301 |
|
|
|
23,026,301 |
|
|
|
23,026,301 |
|
|
|
23,026,301 |
|
–
Diluted
|
|
|
23,026,301 |
|
|
|
25,196,105 |
|
|
|
23,026,301 |
|
|
|
25,196,105 |
|
See
accompanying notes to condensed consolidated financial statements.
CHINA
MARINE FOOD GROUP LIMITED
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
6,972,184 |
|
|
$ |
6,024,233 |
|
Adjustments
to reconcile net income to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
156,216 |
|
|
|
104,513 |
|
Loss
on disposal of property, plant and equipment
|
|
|
- |
|
|
|
64,462 |
|
Allowance
for doubtful accounts
|
|
|
28,928 |
|
|
|
2,342 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(5,785,549 |
) |
|
|
(1,144,759 |
) |
Inventories
|
|
|
(10,574,593 |
) |
|
|
(463,909 |
) |
Prepaid
expenses and other current assets
|
|
|
(1,271,696 |
) |
|
|
(228,478 |
) |
Accounts
payable, trade
|
|
|
1,181,272 |
|
|
|
299,872 |
|
Income
tax payable
|
|
|
158,479 |
|
|
|
144,454 |
|
Accrued
liabilities and other payable
|
|
|
(537,069 |
) |
|
|
97,014 |
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(9,671,828 |
) |
|
|
4,899,744 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(217,471 |
) |
|
|
(382,321 |
) |
Addition
of construction in progress
|
|
|
(995,235 |
) |
|
|
(1,341,372 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(1,212,706 |
) |
|
|
(1,723,693 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
(Repayment
to) advance from a stockholder
|
|
|
(164,000 |
) |
|
|
44,508 |
|
Proceeds
from issuance of common stock
|
|
|
- |
|
|
|
173,556 |
|
Proceeds
from short-term borrowings
|
|
|
4,134,525 |
|
|
|
8,844,844 |
|
Payment
on short-term borrowings
|
|
|
(4,289,341 |
) |
|
|
(5,388,690 |
) |
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(318,816 |
) |
|
|
3,674,218 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
51,174 |
|
|
|
1,893,997 |
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(11,152,176 |
) |
|
|
8,744,266 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
31,640,307 |
|
|
|
24,476,647 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$ |
20,488,131 |
|
|
$ |
33,220,913 |
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
Cash
paid for income taxes
|
|
$ |
829,003 |
|
|
$ |
745,803 |
|
Cash
paid for interest
|
|
$ |
118,728 |
|
|
$ |
159,604 |
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Transfer
from construction in progress to property, plant and
equipment
|
|
$ |
2,600,090 |
|
|
$ |
- |
|
See
accompanying notes to condensed consolidated financial statements.
CHINA
MARINE FOOD GROUP LIMITED
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
(Unaudited)
|
|
Common
stock
|
|
|
Additional
paid-in
|
|
|
Statutory
|
|
|
Accumulated
other
comprehensive
|
|
|
Retained
|
|
|
Total
stockholder’s
|
|
|
|
No
of share
|
|
|
Par
value
|
|
|
capital
|
|
|
reserve
|
|
|
income
|
|
|
earnings
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2009
|
|
|
23,026,301 |
|
|
$ |
23,026 |
|
|
$ |
16,752,945 |
|
|
$ |
4,883,700 |
|
|
$ |
3,448,436 |
|
|
$ |
19,911,971 |
|
|
$ |
45,020,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,972,184 |
|
|
|
6,972,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
60,064 |
|
|
|
- |
|
|
|
60,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2009
|
|
|
23,026,301 |
|
|
$ |
23,026 |
|
|
$ |
16,752,945 |
|
|
$ |
4,883,700 |
|
|
$ |
3,508,500 |
|
|
$ |
26,884,155 |
|
|
$ |
52,052,326 |
|
See
accompanying notes to condensed consolidated financial statements.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
NOTE-1
|
BASIS
OF PRESENTATION
|
The
accompanying unaudited condensed consolidated financial statements have been
prepared by management in accordance with both accounting principles generally
accepted in the United States (“GAAP”), and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Certain information and note disclosures normally
included in audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
those rules and regulations, although the Company believes that the disclosures
made are adequate to make the information not misleading.
In the
opinion of management, the consolidated balance sheet as of December 31, 2008
which has been derived from audited financial statements and these unaudited
condensed consolidated financial statements reflect all normal and recurring
adjustments considered necessary to state fairly the results for the periods
presented. The results for the period ended June 30, 2009 are not necessarily
indicative of the results to be expected for the entire fiscal year ending
December 31, 2009 or for any future periods.
These
unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the Management’s Discussion and the audited
financial statements and notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 2008.
NOTE-2
|
ORGANIZATION
AND BUSINESS BACKGROUND
|
China
Marine Food Group Limited (“China Marine” or “the Company”) was incorporated in
the State of Nevada on October 1, 1999 in the former name of New Paradigm
Productions, Inc. On November 16, 2007, the Company changed its current name to
“China Marine Food Group Limited”.
China
Marine, through its subsidiaries, mainly engages in the manufacture and
distribution of seafood products, including dried and frozen seafood products,
and trades with customers in domestic and overseas markets, with its principal
place of business in Shishi City, Fujian Province, China.
China
Marine and its subsidiaries are hereinafter referred to as “the
Company”.
NOTE-3
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The
accompanying condensed consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying condensed consolidated financial statements and
notes.
In
preparing these consolidated financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheets and revenues and expenses during the period reported. Actual
results may differ from these estimates.
The
unaudited condensed consolidated financial statements include the financial
statements of China Marine and its subsidiaries.
All
significant inter-company balances and transactions within the Company have been
eliminated upon consolidation.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
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 six months or less as of the purchase
date of such investments.
The
Company mainly maintains cash and cash equivalent balances at a financial
institution in the PRC, which are insured by the People’s Bank of China. The
Company had cash concentration risk of $20,473,164 and $31,614,368 as of June
30, 2009 and December 31, 2008, respectively.
l
|
Accounts
receivable and allowance for doubtful
accounts
|
Accounts
receivable are recorded at the invoiced amount and do not bear interest.
Management reviews the adequacy of the allowance for doubtful accounts on an
ongoing basis, using historical collection trends and aging of receivables.
Management also periodically evaluates individual customer’s financial
condition, credit history, and the current economic conditions to make
adjustments in the allowance when it is considered necessary. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company does
not have any off-balance-sheet credit exposure related to its
customers.
As of
June 30, 2009 and December 31, 2008, the allowance for doubtful accounts was
$53,146 and $24,218, respectively.
For the
period ended June 30, 2009 and 2008, the Company provided the allowance for
doubtful accounts of $28,928 and $2,342, respectively.
Inventories
consist of frozen materials from marine catch, processed seafood products and
materials used in the manufacture of the Company’s products. Inventories are
stated at the lower of cost or net realizable value, with cost being determined
on a weighted average basis. Costs include purchased cost of raw fishes, direct
labor and manufacturing overhead costs. The Company periodically reviews
historical sales activity to determine excess, slow moving items and potentially
obsolete items and also evaluates the impact of any anticipated changes in
future demand. The Company provides inventory allowances based on excess and
obsolete inventories determined principally by customer demand.
l
|
Property,
plant and equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date on
which they become fully operational and after taking into account their
estimated residual values:
|
Depreciable
life
|
|
Residual
value
|
Buildings
|
30-50
years
|
|
10%
|
Plant
and machinery
|
10-30
years
|
|
10%
|
Office
equipments
|
8-10
years
|
|
10%
|
Motor
vehicles
|
5
years
|
|
10%
|
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
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.
As of
June 30, 2009, certain property, plant and equipment were pledged as securities
in connection with the outstanding short-term borrowings.
Depreciation
expense for the three and six months ended June 30, 2009 and 2008 were $79,061,
$148,042 and $50,511, $96,602, respectively.
Certain
property, plant and equipment with original costs of $835,948 have become fully
depreciated as of June 30, 2009.
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. As of June 30, 2009, construction in
progress was fully completed for operational use and transferred to property,
plant and equipment accordingly.
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.
As of
June 30, 2009, certain land use rights were pledged as securities in connection
with the outstanding short-term borrowings.
Amortization
expense for the three and six months ended June 30, 2009 and 2008 were $4,089,
$8,174 and $4,013, $7,911, respectively.
l
|
Impairment
of long-lived
assets
|
In
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, all long-lived assets such as property,
plant and equipment, land use rights and construction in progress held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is evaluated by a
comparison of the carrying amount of assets to estimated discounted net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed the fair value of the assets. There
has been no impairment as of June 30, 2009.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
In
accordance with the SEC’s Staff Accounting Bulletin No. 104, “Revenue Recognition”, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling price
is fixed or determinable and collectibility is reasonably assured.
The
Company derives revenues from the processing, distribution and sale of processed
seafood products and sale of marine catch. The Company recognizes its revenues
net of value-added taxes (“VAT”). The Company is subject to VAT which is levied
on the majority of the products at the rate ranging from 13% to 17% on the
invoiced value of sales. Output VAT is borne by customers in addition to the
invoiced value of sales and input VAT is borne by the Company in addition to the
invoiced value of purchases to the extent not refunded for export
sales.
The
Company recognizes revenue from the sale of products upon delivery to the
customers and the transfer of title and risk of loss. The Company experienced no
product returns and has recorded no reserve for sales returns for the period
ended June 30, 2009 and 2008.
The
Company has distributor arrangements with certain parties for sale of its
processed seafood products. The distributor agreements do not provide
chargeback, price protection, or stock rotation rights. Accordingly, the Company
records the revenue, net of VAT incurred when products are delivered to and
received by the distributors.
Rental
income from operating leases on real estate properties is recognized on a
straight-line basis over the lease period.
SFAS No.
130, “Reporting Comprehensive
Income”, establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as defined
includes all changes in equity during a period from non-owner sources.
Accumulated other comprehensive income, as presented in the accompanying
statement of changes in stockholders’ equity, consists of changes in unrealized
gains and losses on foreign currency translation. This comprehensive income is
not included in the computation of income tax expense or benefit.
The
Company accounts for income tax using SFAS No. 109 “Accounting for Income
Taxes”, which requires the asset and liability approach for financial
accounting and reporting for income taxes. Under this approach, deferred income
taxes are provided for the estimated future tax effects attributable to
temporary differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases, and for the expected future tax
benefits from loss carry-forwards and provisions, if any. Deferred tax assets
and liabilities are measured using the enacted tax rates expected in the years
of recovery or reversal and the effect from a change in tax rates is recognized
in the statement of operations and comprehensive income in the period of
enactment. A valuation allowance is provided to reduce the amount of deferred
tax assets if it is considered more likely than not that some portion of, or all
of the deferred tax assets will not be realized.
The
Company also adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”). FIN 48 prescribes a more likely than not
threshold for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. This Interpretation also provides
guidance on derecognition of income tax assets and liabilities, classification
of current and deferred income tax assets and liabilities, accounting for
interest and penalties associated with tax positions, accounting for income
taxes in interim periods, and income tax disclosures. In accordance with FIN 48,
the Company also adopted the policy of recognizing interest and penalties, if
any, related to unrecognized tax positions as income tax expense. For the period
ended June 30, 2009, the Company did not have any interest and penalties
associated with tax positions. As of June 30, 2009, the Company did not have any
significant unrecognized uncertain tax positions.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
Company conducts major businesses in the PRC and is subject to tax in this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax
authority.
The
Company calculates net income per share in accordance with SFAS No. 128, “Earnings per Share.” Basic
income per share is computed by dividing the net income by the weighted-average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.
l
|
Foreign
currencies translation
|
Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the consolidated statement of operation and
comprehensive income.
The
reporting currency of the Company is the United States dollars ("US$"). The
Company's subsidiaries in the PRC maintain their books and records in its local
currency, the Renminbi Yuan ("RMB"), which is functional currency as being the
primary currency of the economic environment in which these entities
operate.
In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with SFAS No. 52, “Foreign
Currency Translation”, using the exchange rate on the balance sheet date.
Revenues and expenses are translated at average rates prevailing during the
period. The gains and losses resulting from translation of financial statements
of foreign subsidiaries are recorded as a separate component of accumulated
other comprehensive income within the statement of changes in stockholders’
equity.
Translation
of amounts from RMB into US$1 has been made at the following exchange rates for
the respective period:
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Period-end
rates RMB:US$1 exchange rate
|
|
|
6.8448 |
|
|
|
6.8718 |
|
Average
rates RMB:US$1 exchange rate
|
|
|
6.8432 |
|
|
|
7.0726 |
|
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
Company adopts SFAS No. 123 (revised 2004), "Share-Based Payment" ("FAS
123R") using the fair value method. Under FAS 123(R), stock-based compensation
cost is measured at the grant date based on the fair value of the award or using
the Black-Scholes pricing model and is recognized as expense over the
appropriate service period.
Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operational decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.
SFAS No.
131 “Disclosures about Segments of an
Enterprise and Related Information” establishes standards for reporting
information about operating segments on a basis consistent with the Company’s
internal organization structure as well as information about geographical areas,
business segments and major customers in financial statements. For the period
ended June 30, 2009, the Company operates in two principal reportable segments:
sale of processed seafood products and trading of marine
catch.
Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (FAS
157), for all financial instruments and non-financial instruments accounted for
at fair value on a recurring basis. Effective January 1, 2009, the Company
adopted SFAS 157 for all non-financial instruments accounted for at fair value
on a non-recurring basis. SFAS 157 establishes a new framework for measuring
fair value and expands related disclosures. Effective April 1, 2009, the Company
adopted FASB FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. Adoption of
the FSP had an insignificant effect on the Company’s financial
statements.
FAS 157
establishes a new framework for measuring fair value and expands related
disclosures. Broadly, FAS 157 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. FAS 157 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
l
|
Fair
value of financial
instruments
|
The
Company values its financial instruments as required by SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments”. The estimated fair value amounts have been
determined by the Company, using available market information and appropriate
valuation methodologies. The estimates presented herein are not necessarily
indicative of amounts that the Company could realize in a current market
exchange.
The
Company’s financial instruments primarily include cash and cash equivalents,
accounts receivable, prepaid expenses and other current assets, short-term
borrowings, accounts payable, amount due to a stockholder, income tax payable,
accrued liabilities and other payable.
As of the
balance sheet date, the estimated fair values of financial instruments were not
materially different from their carrying values as presented due to short
maturities of these instruments.
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.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial
Instruments.” This FSP amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” and Accounting Principles Board (“APB”) Opinion
No. 28, “Interim Financial
Reporting.” (“FAS 107”) This FSP requires publicly-traded entities
to disclose in the body or in the accompanying notes of its summarized financial
information for interim reporting periods and in its financial statements for
annual reporting periods, the fair value of all financial instruments for which
it is practicable to estimate that value, whether recognized or not recognized
in the statement of financial position, as required by FAS 107. This FSP is
effective for interim and annual reporting periods ending after June 15,
2009. The Company adopted FSP FAS 107-1 and APB 28-1 for the period
ended June 30, 2009.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“FAS
165”), which establishes general standards of accounting for, and requires
disclosure of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The Company
adopted the provisions of FAS 165 for the quarter ended June 30,
2009. The adoption of FAS 165 did not have a material effect on the
consolidated financial statements.
In
June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets, an amendment to SFAS No. 140” (“FAS 166”). FAS 166
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures in order to enhance information reported to users of financial
statements by providing greater transparency about transfers of financial
assets, including securitization transactions, and an entity’s continuing
involvement in and exposure to the risks related to transferred financial
assets. FAS 166 is effective for fiscal years beginning after November 15,
2009. The Company will adopt FAS 166 in fiscal 2010 and is evaluating
the impact it will have on the consolidated results of the Company.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“FAS 167”). The amendments include: (1) the elimination of
the exemption for qualifying special purpose entities, (2) a new approach for
determining who should consolidate a variable-interest entity, and (3) changes
to when it is necessary to reassess who should consolidate a variable-interest
entity. FAS 167 is effective for the first annual reporting period beginning
after November 15, 2009 and for interim periods within that first annual
reporting period. The Company will adopt FAS 167 in fiscal 2010 and is
evaluating the impact it will have on the consolidated results of the
Company.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
™ and the Hierarchy of
Generally Accepted Accounting Principles — a replacement of FASB Statement No.
162” (“FAS 168”). FAS 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” and establishes the “FASB Accounting Standard
Codification ™ ” (“Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with generally
accepted accounting principles in the United States. All guidance contained in
the Codification carries an equal level of authority. On the effective date of
FAS 168, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other nongrandfathered non-SEC accounting
literature not included in the Codification will become nonauthoritative. FAS
168 is effective for financial statements issued for interim and annual periods
ending after September 15, 2009. The Company has evaluated this new statement,
and has determined that it will not have a significant impact on the
determination or reporting of the financial results.
Inventories
consisted of the following:
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
11,156,544 |
|
|
$ |
5,076,881 |
|
Work-in-process
|
|
|
5,825,989 |
|
|
|
1,262,854 |
|
Finished
goods
|
|
|
65,323 |
|
|
|
126,300 |
|
Packaging
materials
|
|
|
206,225 |
|
|
|
213,453 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
17,254,081 |
|
|
$ |
6,679,488 |
|
For the
period ended June 30, 2009 and 2008, the Company recorded no allowance for
slow-moving and obsolete inventories.
NOTE-5
|
SHORT-TERM
BORROWINGS
|
Short-term
borrowings consisted of the following:
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
Bank
loans, payable to a financial institution in the PRC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB5,400,000, due on February 2, 2009
|
|
|
- |
|
|
|
787,839 |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,000,000, due on February 17, 2009
|
|
|
- |
|
|
|
437,688 |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB5,000,000, due on February 19, 2009
|
|
|
- |
|
|
|
729,479 |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB4,000,000, due on February 25, 2009
|
|
|
- |
|
|
|
583,584 |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB5,000,000, due on February 21, 2009
|
|
|
- |
|
|
|
729,479 |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,000,000, due on April 7, 2009
|
|
|
- |
|
|
|
437,688 |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB4,000,000, due on May 18, 2009
|
|
|
- |
|
|
|
583,584 |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB5,400,000, due on February 12, 2010
|
|
|
788,920 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,000,000, due on February 16, 2010
|
|
|
438,289 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,900,000, due on February 18, 2010
|
|
|
569,776 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB5,000,000, due on February 24, 2010
|
|
|
730,481 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB4,000,000, due on February 26, 2010
|
|
|
584,385 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB4,000,000, due on March 17, 2010
|
|
|
584,385 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Equivalent
to RMB3,000,000, due on March 26, 2010
|
|
|
438,289 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
borrowings
|
|
$ |
4,134,525 |
|
|
$ |
4,289,341 |
|
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
Company’s wholly-owned subsidiary, Mingxiang obtained short-term bank loans in
the aggregate amount of $4,134,525 and $4,289,341 as of June 30, 2009 and
December 31, 2008 respectively with Agricultural Bank of China, a registered
financial institution in the PRC. The weighted average effective interest rate
per annum was 5.42% and 7.38% for the three months ended June 30, 2009 and 2008
respectively, payable quarterly.
All bank
borrowings were secured by certain land use rights, property, plant and
equipment and guaranteed by the Company’s subsidiaries, Rixiang and Jixiang,
also the major stockholder, Mr. Pengfei Liu (“Mr. Liu”) and Ms. Yazuo
Qiu.
NOTE-6
|
AMOUNT
DUE TO A STOCKHOLDER
|
As of
June 30, 2009 and December 31, 2008, the amounts of $6,091 and $170,091
represented temporary advances for working capital purposes from a major
stockholder, Mr. Liu, which was unsecured, interest free and repayable on
demand.
For the
period ended June 30, 2009 and 2008, the local (“United States of America”) and
foreign components of income (loss) before income taxes were comprised of the
following:
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Tax
jurisdiction from:
|
|
|
|
|
|
|
–
Local
|
|
$ |
(2,000 |
) |
|
$ |
(1,792 |
) |
–
Foreign
|
|
|
7,961,666 |
|
|
|
6,916,282 |
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$ |
7,959,666 |
|
|
$ |
6,914,490 |
|
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
The
provision for income taxes consisted of the following:
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Current:
|
|
|
|
|
|
|
–
Local
|
|
$ |
- |
|
|
$ |
- |
|
–
Foreign
|
|
|
987,482 |
|
|
|
890,257 |
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
–
Local
|
|
|
- |
|
|
|
- |
|
–
Foreign
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$ |
987,482 |
|
|
$ |
890,257 |
|
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
June 30, 2009, China Marine incurred $8,703 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 $3,002 on the
expected future tax benefits from the net operating loss carryforwards as the
management believes it is more likely than not that these assets will not be
realized in the future.
Hong
Kong
The
Company’s subsidiary, Ocean Technology (China) Company Limited (formerly Nice
Enterprise Trading H.K. Co., Limited) (“Ocean Technology”) is subject to Hong
Kong Profits Tax at the statutory rate of 16.5% on its assessable income for the
period ended June 30, 2009 and December 31, 2008, respectively. For the period
ended June 30, 2009, Ocean Technology incurred an operating loss of $69,446 for
income tax purposes. The Company has provided for a full valuation allowance
against the deferred tax assets of $55,680 on the expected future tax benefits
from the net operating loss carryforwards as the management believes it is more
likely than not that these assets will not be realized in the
future.
The
PRC
The
Company generated all of its net income from subsidiaries operating in the PRC
for the period ended June 30, 2009 and 2008. Rixiang, Jixiang and Mingxiang are
subject to the Corporate Income Tax governed by the Income Tax Law of the
People’s Republic of China, at a statutory rate of 25%.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
Rixiang,
Jixiang and Mingxiang are approved as a foreign investment enterprise and
entitled to, starting from the first profitable year, a two-year exemption from
corporate income tax and a 50%-reduction in its preferential corporate income
tax rate of 24% for the following three years ("Tax Holiday"). Such Tax Holiday
of Jixiang and Mingxiang expired in prior years and Rixiang continues to enjoy
the Tax Holiday through fiscal year 2009, after which it expires.
On March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT Law, among
other things, imposes a unified income tax rate of 25% for both domestic and
foreign invested enterprises with effect from January 1, 2008. Hence, Rixiang
will continue to enjoy to the unexpired Tax Holiday of 50%-reduction on the
unified income tax through 2009, subject to a transitional policy under the
Corporate Income Tax Law. Jixiang and Mingxiang are subject to the unified
income rate of 25% on their taxable income.
As of
June 30, 2009, the PRC operation incurred $1,398,088 of net operating loss
carryforward available for income tax purposes that may be used to offset future
taxable income and will begin to expire in 5 years from the year of incurrence,
if unutilized. The Company has provided for a full valuation allowance against
the deferred tax assets of $349,522 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.
NOTE-8
|
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 two operating and reporting segments for
the period ended June 30, 2009 and 2008, which are sale of processed seafood
products and trading of marine catch.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 3). The Company had no
inter-segment sales for the period ended June 30, 2009 and 2008.
Summarized
financial information concerning the Company’s reportable segments is shown in
the following table for the three and six months ended June 30, 2009 and
2008:
|
|
Three
months ended June 30, 2009
|
|
|
|
Processed
seafood
products
|
|
|
Marine
catch
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$ |
14,251,342 |
|
|
$ |
505,042 |
|
|
$ |
14,756,384 |
|
Cost
of revenue
|
|
|
(9,423,653 |
) |
|
|
(426,949 |
) |
|
|
(9,850,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$ |
4,827,689 |
|
|
$ |
78,093 |
|
|
$ |
4,905,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure
for long-lived assets
|
|
$ |
313,243 |
|
|
$ |
- |
|
|
$ |
313,243 |
|
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
|
|
Three
months ended June 30, 2008
|
|
|
|
Processed
seafood
products
|
|
|
Marine
catch
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$ |
12,362,727 |
|
|
$ |
704,872 |
|
|
$ |
13,067,599 |
|
Cost
of revenue
|
|
|
(8,180,982 |
) |
|
|
(619,870 |
) |
|
|
(8,800,852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$ |
4,181,745 |
|
|
$ |
85,002 |
|
|
$ |
4,266,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure
for long-lived assets
|
|
$ |
1,713,093 |
|
|
$ |
- |
|
|
$ |
1,713,093 |
|
|
|
Six
months ended June 30, 2009
|
|
|
|
Processed
seafood
products
|
|
|
Marine
catch
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$ |
25,454,324 |
|
|
$ |
5,850,112 |
|
|
$ |
31,304,436 |
|
Cost
of revenue
|
|
|
(16,973,949 |
) |
|
|
(5,318,930 |
) |
|
|
(22,292,879 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$ |
8,480,375 |
|
|
$ |
531,182 |
|
|
$ |
9,011,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure
for long-lived assets
|
|
$ |
1,212,706 |
|
|
$ |
- |
|
|
$ |
1,212,706 |
|
|
|
Six
months ended June 30, 2008
|
|
|
|
Processed
seafood
products
|
|
|
Marine
catch
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net
|
|
$ |
22,296,270 |
|
|
$ |
1,553,381 |
|
|
$ |
23,849,651 |
|
Cost
of revenue
|
|
|
(14,619,309 |
) |
|
|
(1,360,687 |
) |
|
|
(15,979,996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$ |
7,676,961 |
|
|
$ |
192,694 |
|
|
$ |
7,869,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure
for long-lived assets
|
|
$ |
1,723,693 |
|
|
$ |
- |
|
|
$ |
1,723,693 |
|
(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:
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
The
PRC
|
|
$ |
14,577,731 |
|
|
$ |
12,373,961 |
|
|
$ |
30,711,600 |
|
|
$ |
22,894,392 |
|
Asia
|
|
|
178,653 |
|
|
|
693,638 |
|
|
|
592,836 |
|
|
|
955,259 |
|
Total
revenue, net
|
|
$ |
14,756,384 |
|
|
$ |
13,067,599 |
|
|
$ |
31,304,436 |
|
|
$ |
23,849,651 |
|
All the
Company’s long-lived assets are located in the PRC in both periods.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
NOTE-9
|
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 Company’s revenue for the three months ended
June 30, 2009 and their outstanding balances as at period-end date.
|
|
|
Three
months ended June 30, 2009
|
|
Customers
|
|
|
Revenue
|
|
|
Percentage
of
total revenue
|
|
|
Accounts
receivable,
trade
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
A
|
|
|
$ |
1,497,102 |
|
|
|
10 |
% |
|
$ |
1,268,410 |
|
Customer
B
|
|
|
|
1,406,910 |
|
|
|
10 |
% |
|
|
1,263,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$ |
2,904,012 |
|
|
|
20 |
% |
|
$ |
2,531,875 |
|
For the
six months ended June 30, 2009, one customer represented more than 10% of the
Company’s revenue. This customer accounts for 16% of revenue amounting to
$4,904,734, with $8,880 of accounts receivable.
For the
three and six months ended June 30, 2008, no customer represented more than 10%
of the Company’s revenue and accounts receivable, respectively.
(b) Major
vendors
The
following is a table summarizing the purchases from vendors that individually
represents greater than 10% of the total purchases for the six months ended June
30, 2009 and 2008 and their outstanding balances as at period-end
dates.
|
|
|
Six
months ended June 30, 2009
|
|
Vendors
|
|
|
Purchases
|
|
|
Percentage
of
total purchases
|
|
|
Accounts
payable,
trade
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
|
$ |
8,232,297 |
|
|
|
25 |
% |
|
$ |
265,957 |
|
Vendor
B
|
|
|
|
6,639,283 |
|
|
|
20 |
% |
|
|
352,303 |
|
Vendor
C
|
|
|
|
6,264,866 |
|
|
|
19 |
% |
|
|
- |
|
Vendor
D
|
|
|
|
5,558,546 |
|
|
|
17 |
% |
|
|
287,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$ |
26,694,992 |
|
|
|
81 |
% |
|
$ |
905,281 |
|
|
|
|
Six
months ended June 30, 2008
|
|
Vendors
|
|
|
Purchases
|
|
|
Percentage
of
total purchases
|
|
|
Accounts
payable,
trade
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor
A
|
|
|
$ |
3,578,415 |
|
|
|
22 |
% |
|
$ |
138,889 |
|
Vendor
B
|
|
|
|
3,105,823 |
|
|
|
19 |
% |
|
|
148,069 |
|
Vendor
D
|
|
|
|
2,514,891 |
|
|
|
15 |
% |
|
|
35,996 |
|
Vendor
E
|
|
|
|
1,820,797 |
|
|
|
11 |
% |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$ |
11,019,926 |
|
|
|
67 |
% |
|
$ |
322,954 |
|
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
(c) Credit
risk
Financial
instruments that are potentially subject to credit risk consist principally of
trade receivables. The Company believes the concentration of credit risk in its
trade receivables is substantially mitigated by its ongoing credit evaluation
process and relatively short collection terms. The Company does not generally
require collateral from customers. The Company evaluates the need for an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.
(d) Interest
rate risk
As the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.
The
Company’s interest-rate risk arises from bank borrowings. Borrowings issued at
variable rates expose the Company to cash flow interest rate risk. The Company
manages interest rate risk by varying the issuance and maturity dates variable
rate debt, limiting the amount of variable rate debt, and continually monitoring
the effects of market changes in interest rates. As of June 30, 2009, all of
borrowings were at variable rates. The interest rates and terms of repayment of
bank borrowings are disclosed in Note 5.
(e) Exchange
rate risk
The
reporting currency of the Company is US$, to date the majority of the revenues
and costs are denominated in RMB and a significant portion of the assets and
liabilities are denominated in RMB. As a result, the Company is exposed to
foreign exchange risk as its revenues and results of operations may be affected
by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates
against US$, the value of the RMB revenues and assets as expressed in US$
financial statements will decline. The Company does not hold any derivatives or
other financial instruments that expose to substantial exchange rate
risk.
(f) Economic
and political risks
Substantially
all of the Company’s products are processed in the PRC. The Company’s operations
are subject to various political, economic, and other risks and uncertainties
inherent in the PRC and not typically associated with companies in North America
and Western Europe. Among other risks, the Company’s operations are subject to
the risks of restrictions on transfer of funds; export duties, quotas, and
embargoes; domestic and international customs and tariffs; changing taxation
policies; foreign exchange restrictions; and political conditions and
governmental regulations in the PRC.
CHINA
MARINE FOOD GROUP LIMITED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009
(Currency
expressed in United States Dollars (“US$”))
(Unaudited)
NOTE-10
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
lease commitments
The
Company leased certain office space under a non-cancellable operating lease
agreement with a term of 3 years with fixed monthly rentals, expiring on
February 17, 2011, and generally did not contain significant renewal
options. Total rent expenses for the period ended June 30, 2009 was
$38,572.
Future
minimum rental payments due under the non-cancelable operating lease agreement
are as follows:
Year
ending June 30,
|
|
|
|
2010
|
|
$ |
77,145 |
|
2011
|
|
|
48,904 |
|
|
|
|
|
|
Total:
|
|
$ |
126,049 |
|
ITEM 2. Management's Discussion and Analysis
or Financial Condition and Results of Operation
The
following analysis should be read in conjunction with the consolidated financial
statements and notes for the six months ended June 30, 2009 and 2008, and the
financial statements and notes thereto presented in the Form 10-Q.
Forward
Looking Statements
The
information in this discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties, including statements regarding our
capital needs, business strategy and expectations. Any statements contained
herein that are not statements of historical facts may be deemed to be
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may", "will", "should", "expect", "plan",
"intend", "anticipate", "believe", "estimate", "predict", "potential" or
"continue", the negative of such terms or other comparable terminology. Actual
events or results may differ materially. We disclaim any obligation to publicly
update these statements, or disclose any difference between its actual results
and those reflected in these statements. The information constitutes
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
OVERVIEW
We are a
holding company whose primary business operations are conducted through our
direct, wholly owned subsidiary, Ocean Technology (China) Company Limited
(Formerly Nice Enterprise Trading H.K. Co., Limited) (“Ocean Technology”), and
its direct wholly owned subsidiary, Shishi Rixiang Marine Foods Co. Ltd.
(“Rixiang”), which is incorporated in the PRC. Rixiang, in turn, is the sole
shareholder of our indirect subsidiaries. Shishi Huabao Mingxiang Foods Co., Ltd
(“Mingxiang”) and Shishi Huabao Jixiang Water Products Co., Ltd (“Jixiang”),
both PRC operating companies, Mingxiang and Jixiang are property holding
companies. These two companies operate solely to manage our land use rights and
properties, including our production plant, cold storage facility, office tower
and staff dormitory.
We engage
in the business of processing, distribution and sale of processed seafood
products, as well as the sale of marine catch. Our objective is to establish
ourselves as a leading producer of processed seafood products in the PRC and
overseas markets.
Sales
Our dried
processed seafood products include dried prawns, dried squids, dried file fish,
roasted prawns, shredded roasted squids, roasted squids, roasted file fish,
roasted sea eels and other seafood items. Our dried processed seafood is
predominantly sold under our registered trademark, the “Mingxiang” brand name.
Our brand name has won the “Fujian Famous Brand” award by the Fujian Commerce
Authority. Our dried processed seafood products are mainly sold to distributors
in Fujian and Zhejiang provinces, who in turn distribute them to major
supermarkets and retailers in these provinces.
Our
frozen processed seafood products include frozen Japanese butter fish, frozen
octopus and frozen squid rings. These are sold directly to wholesalers within
the PRC and overseas, either through direct export or through export agents. Our
products are sold to overseas markets such as Japan, South Korea, Taiwan
and Philippines.
We
purchase all the raw materials for our processed seafood products from
independent fishermen in nearby markets for further processing. We also buy the
marine catch from the suppliers and then sell to the customers on a direct
basis. The marine catch is predominantly exported to overseas customers through
our distributors in Liaoning, Fujian and Shandong provinces, some of
whom directly export the marine catch to South Korea and Taiwan.
Sales of
our processed seafood products accounted for approximately 96.6% and 94.6%
of our total sales in the second quarter of 2009 and 2008, respectively. Sales
of our marine catch accounted for approximately 3.4% and 5.4% of our total
sales in the second quarter of 2009 and 2008, respectively. Since the
processed seafood segment has significant growth potential and the profit margin
of the processed seafood segment (33.9% and 33.8% for the second quarter of 2009
and 2008 respectively) is much higher than that of marine catch segment (15.5%
and 12.1% for the second quarter of 2009 and 2008, respectively), we will
continue to focus our resources on the processed seafood segment going
forward.
A
detailed breakdown of our sales by major geographical markets is set out in the
section “Results of Operations” herein.
Factors
that can affect our sales are as follows:
|
·
|
The
level of sales is dependent on the supply of raw materials on a timely
basis. Raw material costs accounted for approximately 76.2% and 79.1%
of our total cost of sales of processed seafood products in the second
quarter of 2009 and 2008 respectively. The availability of these raw
materials could be affected by a large number of factors, including, inter alia, the
availability of fish stock, weather conditions, government policies and
regulations where such fishing is carried out, the stability of supplies
from fishermen and pressure from environmental or animal rights
groups.
|
|
·
|
Specifically,
fishing activities in waters around the PRC are restricted in June and
July each year to ensure sustainable aquatic resources. As such, some of
our suppliers such as fishermen are restricted from fishing during this
period due to the restrictions against fishing along the Taiwan Strait
imposed by the PRC’s Ministry of Agriculture. There is no assurance that
the PRC government may not impose more stringent fishing regulations,
including but not limited to longer or more frequent periods that restrict
fishing.
|
|
·
|
Any shortage in the supply of or
increase in the prices of the raw materials for our processed seafood
products will adversely affect our
sales.
|
|
·
|
Our
ability to maintain existing accreditations such as HACCP, ISO9001:2000,
ISO14001:2004 and the EU Export Certification accreditations will affect
our ability to maintain our presence in our existing market and to expand
into new market territories.
|
|
·
|
Our
ability to price our products competitively against existing competitors
and new market entrants by achieving economies of
scale.
|
|
·
|
Our
ability to build on our established track record and reputation as a
supplier of high quality processed seafood products and capability to
deliver products in a timely
manner.
|
|
·
|
Our
ability to maintain existing business relationships and to secure new
customers, which may be affected by the general economic or political
conditions in our local and overseas
markets.
|
|
·
|
Our
ability to introduce new products to capture a wider group of
consumers and to cater to different and changing consumers’
preferences.
|
Please
refer to the section “Risk Factors” herein for further information on other
factors that may affect our revenue.
Production
facilities and employees
Our
production facilities are located at Dabao Industrial Zone, Xiangzhi Town,
Shishi City, Fujian Province, the PRC. We have five production lines for the
processing of dried processed seafood products: roasted file fish, roasted
prawns, shredded roasted squid, roasted squids and smoked products, and one
production line for the processing of frozen seafood products.
As at
June 30, 2009, we employed 734 employees.
Seasonality
We do not
experience any significant seasonality in relation to sales for our processed
seafood products. However, sales are usually higher before and during the
Chinese New Year. In 2008, we also experienced a strong sales demand before the
Olympics games being held in Beijing in August. As for the trading of marine
catch, sales may be lower in June and July due to the reduced supplies as a
result of the restriction on fishing in the Taiwan Strait during these two
months. In 2009, the restricted period on fishing has been shifted to a bit
earlier from mid May to mid July as announced by the Ministry of
Agriculture.
RESULTS
OF OPERATIONS
We derive
our sales from the sales of processed seafood products and marine catch, the
breakdown of our sales and gross profit by product, as well as by geographical
location of our customers for the three and six months ended June 30, 2009 and
2008 are set out below:
Breakdown
of our past performance by principal products and geographical
regions
Sales
by product
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
14,251 |
|
|
|
96.6 |
|
|
|
12,363 |
|
|
|
94.6 |
|
|
|
25,454 |
|
|
|
81.3 |
|
|
|
22,296 |
|
|
|
93.5 |
|
Marine
catch
|
|
|
505 |
|
|
|
3.4 |
|
|
|
705 |
|
|
|
5.4 |
|
|
|
5,850 |
|
|
|
18.7 |
|
|
|
1,554 |
|
|
|
6.5 |
|
Total
|
|
|
14,756 |
|
|
|
100.0 |
|
|
|
13,068 |
|
|
|
100.0 |
|
|
|
31,304 |
|
|
|
100.0 |
|
|
|
23,850 |
|
|
|
100.0 |
|
Sales
by geographical region
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
PRC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong
|
|
|
1,016 |
|
|
|
6.9 |
|
|
|
1,255 |
|
|
|
9.6 |
|
|
|
1,755 |
|
|
|
5.6 |
|
|
|
2,502 |
|
|
|
10.5 |
|
Zhejiang
|
|
|
6,908 |
|
|
|
46.8 |
|
|
|
6,491 |
|
|
|
49.7 |
|
|
|
12,079 |
|
|
|
38.6 |
|
|
|
11,511 |
|
|
|
48.3 |
|
Fujian
|
|
|
4,283 |
|
|
|
29.0 |
|
|
|
3,949 |
|
|
|
30.2 |
|
|
|
8,100 |
|
|
|
25.9 |
|
|
|
7,834 |
|
|
|
32.8 |
|
Jiangsu/
Shanghai
|
|
|
1,172 |
|
|
|
8.0 |
|
|
|
288 |
|
|
|
2.2 |
|
|
|
1,952 |
|
|
|
6.2 |
|
|
|
454 |
|
|
|
1.9 |
|
Guangdong/
Shenzhen
|
|
|
1,082 |
|
|
|
7.3 |
|
|
|
312 |
|
|
|
2.4 |
|
|
|
1,921 |
|
|
|
6.1 |
|
|
|
514 |
|
|
|
2.2 |
|
Others
|
|
|
117 |
|
|
|
0.8 |
|
|
|
80 |
|
|
|
0.6 |
|
|
|
4,905 |
|
|
|
15.7 |
|
|
|
80 |
|
|
|
0.3 |
|
Total
PRC (1)
|
|
|
14,578 |
|
|
|
98.8 |
|
|
|
12,375 |
|
|
|
94.7 |
|
|
|
30,712 |
|
|
|
98.1 |
|
|
|
22,895 |
|
|
|
96.0 |
|
Asia
(2)
|
|
|
178 |
|
|
|
1.2 |
|
|
|
693 |
|
|
|
5.3 |
|
|
|
592 |
|
|
|
1.9 |
|
|
|
955 |
|
|
|
4.0 |
|
Total
|
|
|
14,756 |
|
|
|
100.0 |
|
|
|
13,068 |
|
|
|
100.0 |
|
|
|
31,304 |
|
|
|
100.0 |
|
|
|
23,850 |
|
|
|
100.0 |
|
(1)
|
Sales
to PRC include sales to local PRC distributors who in turn sell our
products to Taiwan, Japan and South Korea. Such sales amounted to $0.2
million and $0.6 million in the second quarter of 2009 and 2008
respectively.
|
(2)
|
Sales
to Asia mainly relate to exports to Japan
and Philippines.
|
Three
months ended June 30, 2009 compared to three months ended June 30, 2008,
and
Six
months ended June 30, 2009 compared to six months ended June 30,
2008
Sales
We
continued to grow steadily in the second quarter of 2009. Our revenue during the
three months ended June 30, 2009 increased to $14.8 million by
approximately $1.7 million or 12.9% compared to $13.1 million during the same
period ended June 30, 2008. The increase in revenue was due to the continued
growth in sales of our processed seafood products. Sales of our processed
seafood products increased by $1.9 million or 15.3% from $12.4 million during
the three months ended June 30, 2008 to $14.3 million during the same
period ended June 30, 2009, whereas sales of our marine catch segment during the
three months ended June 30, 2009 decreased by $0.2 million to $0.5 million
compared to the same period ended June 30, 2008.
Likewise,
our revenue during the six months ended June 30, 2009 increased to $31.3 million
by approximately $7.4 million or 31.3% compared to $23.9 million we realized
during the six months ended June 30, 2008. Sales of our processed seafood
products increased by $3.2 million or 14.2%, whereas sales of our marine catch
segment increased by $4.3 million or over 200% due to the significant
increase in sales of our trading materials in the first quarter of this
year.
The
processed seafood products operations continued to be our growth driver. The
higher sales in the processed seafood products segment were mainly due
to our continued success in the sales and marketing efforts. Accordingly,
the number of sales staff has further increased from 19 to 24 during the period
under review.
Having
recognized that the processed seafood segment has significant growth potential
and attractive profit margin, we will continue to focus our resources on the
processed seafood segment going forward.
Cost
of sales
Our cost
of sales comprises the cost of our processed seafood operations and the cost of
our marine catch. The breakdown is as follows:
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
9,424 |
|
|
|
95.7 |
|
|
|
8,181 |
|
|
|
93.0 |
|
|
|
16,974 |
|
|
|
76.1 |
|
|
|
14,619 |
|
|
|
91.5 |
|
Marine
catch
|
|
|
427 |
|
|
|
4.3 |
|
|
|
620 |
|
|
|
7.0 |
|
|
|
5,319 |
|
|
|
23.9 |
|
|
|
1,361 |
|
|
|
8.5 |
|
Total
|
|
|
9,851 |
|
|
|
100.0 |
|
|
|
8,801 |
|
|
|
100.0 |
|
|
|
22,293 |
|
|
|
100.0 |
|
|
|
15,980 |
|
|
|
100.0 |
|
Cost
of sales – Processed seafood products
Our cost
of sales comprises mainly raw materials, packaging materials, direct labor and
manufacturing overheads. The following table sets out details of our cost of
sales:
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
7,184 |
|
|
|
76.2 |
|
|
|
6,474 |
|
|
|
79.1 |
|
|
|
12,607 |
|
|
|
74.3 |
|
|
|
11,779 |
|
|
|
80.6 |
|
Packaging
materials
|
|
|
1,151 |
|
|
|
12.2 |
|
|
|
667 |
|
|
|
8.2 |
|
|
|
2,200 |
|
|
|
13.0 |
|
|
|
1,201 |
|
|
|
8.2 |
|
Direct
labor
|
|
|
522 |
|
|
|
5.6 |
|
|
|
383 |
|
|
|
4.7 |
|
|
|
922 |
|
|
|
5.4 |
|
|
|
732 |
|
|
|
5.0 |
|
Manufacturing
overheads
|
|
|
567 |
|
|
|
6.0 |
|
|
|
657 |
|
|
|
8.0 |
|
|
|
1,245 |
|
|
|
7.3 |
|
|
|
907 |
|
|
|
6.2 |
|
Total
|
|
|
9,424 |
|
|
|
100.0 |
|
|
|
8,181 |
|
|
|
100.0 |
|
|
|
16,974 |
|
|
|
100.0 |
|
|
|
14,619 |
|
|
|
100.0 |
|
Raw
materials
Raw
materials comprise mainly of seafood such as fish, prawns and squids. We use
seafood which are fished from the open sea and not bred through aquaculture. The
costs of these raw materials are dependent on the prevailing market prices,
which are relatively stable as there is a stable and abundant supply from the
existing market. We are located close to the Xiangzhi (Shishi) fishing port,
which is one of the largest fishing ports in Fujian province, and one of the
state-level fishing port centres.
We
believe our strategic location allows us to have up-to-date information on the
market price of our raw materials and this has allowed us to purchase our raw
materials at the best available price. Our proximity to our suppliers has
also allowed us to have fresh supplies of raw materials and this has enabled us
to ensure freshness and quality in our finished products. The proximity has also
enabled us to reduce raw material transportation costs and lead-time to obtain
our supplies.
Raw
material costs accounted for approximately 74.3% and 80.6% of our cost of sales
for the six months ended June 30, 2009 and 2008 respectively. The percentage of
raw materials cost as a proportion of the total cost of sales is affected by the
product mix for the relevant financial year and the market price of the raw
materials. We mitigate the fluctuation in pricing by bulk purchasing and stock
management. We are able to stock up our raw materials when prices are lower, as
we have our own cold storage facility and we can also utilize other nearby
facilities for storage when needs arise. This will ensure a steady supply of raw
materials for the processing of seafood products throughout the
year.
The
increase in raw material costs for the periods under review was mainly due to
the increased production and sales of processed seafood products, whereas direct
labor and manufacturing overheads are relatively considered as invariable cost
factors comparing to raw materials and packaging materials.
Packaging
materials
Packaging
materials accounted for approximately 13.0% and 8.2% of our cost of sales
for the six months ended June 30, 2009 and 2008 respectively.
The
increase in packaging material costs for the periods under review was mainly due
to the increased production and sales of processed seafood products. We have
experienced a mild price increase in packaging materials since late
2008 due to inflation and use of individual packages for some of our new
products but believe that it will not bring material impact on the overall gross
profit margin because we will continue to enjoy economies of scale in material
costs along with the increase in production volume.
Direct
labor
Direct
labor costs accounted for 5.4% and 5.0% of our cost of sales for the six months
ended June 30, 2009 and 2008 respectively. Direct labor includes mainly salaries
and wages paid to employees who are involved in the production processes. Direct
labor costs are dependent on factors such as production volume, number of
employees, wage rate and applicable government regulations (including minimum
wage requirements, statutory welfare and insurance fund contributions). The
fluctuation in the direct labor costs as a percentage of costs of sales is
dependent on the degree of processing required for the end products. The
increase in our production scale over the past few years has enabled us to enjoy
economies of scale and higher productivity through job specialization and
training.
The total
headcount as of June 30, 2009 has increased to 734 compared to 561 as
of the end of the second quarter of 2008. The increase was mainly due to
the increase in number of production headcount due to increased scale of
production along the year.
Manufacturing
overheads
Manufacturing
overheads comprise depreciation, amortization, seasonings, water, electricity
and other fuel costs which are used directly in the production of finished
goods.
The
increase in manufacturing overheads for the six months periods under review
was mainly due to the increased scale of production and the expansion of
production facilities along the year.
Cost
of sales - Marine catch
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
382 |
|
|
|
89.5 |
|
|
|
575 |
|
|
|
92.7 |
|
|
|
5,150 |
|
|
|
96.8 |
|
|
|
1,262 |
|
|
|
92.7 |
|
Other
expenses
|
|
|
45 |
|
|
|
10.5 |
|
|
|
45 |
|
|
|
7.3 |
|
|
|
169 |
|
|
|
3.2 |
|
|
|
99 |
|
|
|
7.3 |
|
Total
|
|
|
427 |
|
|
|
100.0 |
|
|
|
620 |
|
|
|
100.0 |
|
|
|
5,319 |
|
|
|
100.0 |
|
|
|
1,361 |
|
|
|
100.0 |
|
Raw
materials
We buy
the marine catch from the suppliers and then sell to the customers on a direct
basis. The marine catch is predominantly sold to overseas customers and
distributors in Liaoning, Fujian and Shandong provinces, some of
whom directly export the marine catch to South Korea and Taiwan.
The
increase in raw material costs for the six months periods under review was in
line with the increased sales of trading materials we purchased in the second
half of 2008.
Other
expenses
Other
expenses mainly relate to the costs of packaging materials, ice required to keep
the freshness of the marine catch and the related overheads.
Gross
profit by product
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
4,827 |
|
|
|
98.4 |
|
|
|
4,182 |
|
|
|
98.0 |
|
|
|
8,480 |
|
|
|
94.1 |
|
|
|
7,677 |
|
|
|
97.5 |
|
Marine
catch
|
|
|
78 |
|
|
|
1.6 |
|
|
|
85 |
|
|
|
2.0 |
|
|
|
531 |
|
|
|
5.9 |
|
|
|
193 |
|
|
|
2.5 |
|
Total
|
|
|
4,905 |
|
|
|
100.0 |
|
|
|
4,267 |
|
|
|
100.0 |
|
|
|
9,011 |
|
|
|
100.0 |
|
|
|
7,870 |
|
|
|
100.0 |
|
Gross
profit margin by product
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
33.9 |
|
|
|
33.8 |
|
|
|
33.3 |
|
|
|
34.4 |
|
Marine
catch
|
|
|
15.5 |
|
|
|
12.1 |
|
|
|
9.1 |
|
|
|
12.4 |
|
Total
|
|
|
33.2 |
|
|
|
32.7 |
|
|
|
28.8 |
|
|
|
33.0 |
|
Gross
profit
Gross
profit grew by 15.0% or $0.6 million, from $4.3 million during the three months
ended June 30, 2008 to $4.9 million during the same period in 2009. Gross profit
margin improved by 0.5% from 32.7% during the three months ended June 30, 2008
to 33.2% during the same period in 2009. Gross profit margin for the
processed seafood products operations was increased from 33.8% to 33.9%, whereas
gross profit margin for the marine catch segment was improved from 12.1% to
15.5% during the same period under review.
Similarly,
gross profit grew by 14.5% or $1.1 million, from $7.9 million during the six
months ended June 30, 2008 to $9.0 million during the same period in 2009.
However, the gross profit margin for the six months ended June 30, 2009
dropped by 4.2% to 28.8% from 33.0% during the same period in
2008.
The
decrease in overall gross profit margin for the six months periods under review
was largely attributable to the significant increase in sales of marine catch
which the gross profit margin is much lower than that of the processed seafood
products. Whereas the decrease in gross profit margin for the processed seafood
products for the periods under review was mainly due to the inflation and the
increase in the costs associated with the packaging materials as explained
per above.
Sales
and marketing expenses
Our sales
and marketing expenses comprise mainly salaries of sales and marketing staff,
investor relations fees, advertisement and costs in participating in
exhibitions.
Our sales
and marketing expenses accounted for approximately 0.8% and 1.1% of our total
revenue during the six months ended June 30, 2009 and 2008 respectively. We
maintained our marketing efforts along the year so as to strengthen our brand
position in both existing and new markets. In this connection, the amount of
sales and marketing expenses are relatively stable for the periods under
review.
General
and administrative expenses
Our
general and administrative expenses comprise mainly salaries and staff benefits
for employees, legal and professional fees, research and development costs,
traveling and entertainment expenses.
Our
general and administrative expenses accounted for approximately 3.1% and 3.3% of
our total revenue during the six months ended June 30, 2009 and 2008
respectively. The increase in the general and administrative expenses was
mainly attributable to the higher payroll costs as a result of hiring some
experienced professional staff so as to cope with the expanding operations and
the higher R&D costs, including staff and testing materials costs, for
development of new products which are expected to be launched later this
year.
Other
income
Other
income relates mainly to rental income, government subsidies and interest
income.
Rental
income relates to the collection of rental on the 33 shop spaces at our factory
in Dabao Industrial Zone. The rental contracts are based on one year lease term.
The government subsidies mainly relate to grants by the Ministry of Science and
Technology for the development of high-value seafood products with the use of
low-value raw materials. Interest income is earned from cash balances with banks
from operational cash flow and net proceeds from the private placement taken
place in November 2007.
Interest
expense
Our
interest expense relates to interest costs incurred on the various short-term
bank borrowings taken by us for working capital requirements. Our interest
expense accounted for approximately 0.4% and 0.7% of our total revenue during
the six months ended June 30, 2009 and 2008 respectively.
Income
before income tax
Our
income before income tax increased by $1.0 million or 15.1%, from $6.9 million
during the six months ended June 30, 2008 to $7.9 million during the same
period in 2009. The increase was mainly due to the combined effects of the
increase in sales of 31.3% and the decrease in gross profit margin by 4.2%,
which was partially offset by the increase in the general and administrative
expenses, as a result of the factors described above.
Income
tax expense
Our
profit is subject to the prevailing tax rate applicable to the respective
jurisdictions in which we operate.
Prior to
January 2005, our business was carried out under Mingxiang which was
incorporated as a PRC limited liability company and thus was subject to an
Enterprise Income Tax rate of 33% of its taxable income.
According
to the Income Tax Law of the PRC for Enterprises with Foreign Investment and
Foreign Enterprises, foreign investment enterprises (“FIE”) engaged in
production established in coastal economic open zones or in the old urban
districts of cities where the special economic zones or the economic and
technological development zones are located may pay income taxes at a reduced
rate of 24%. In addition, foreign investment enterprises engaged in
production having a period of operation of not less than 10 years shall be
exempted from income tax for the first 2 profit-making years and a 50% reduction
in the income tax payable for the next 3 years.
In March
2007, the Chinese government enacted the Corporate Income Tax Law, and
promulgated related regulations, which were effective January 1,
2008. The Corporate Income Tax Law, among other things, imposes a
unified income tax rate of 25% for both domestic and foreign invested
enterprises. For enterprises engaged in production established in
coastal economic open zones or in the old urban districts of cities where the
special economic zones or the economic and technological development zones enjoy
a favorable tax rate of 24%, the income tax rate will change to 25% with
effective from January 1, 2008. However, the new provision allows these
enterprises to continue to enjoy their unexpired tax holiday under the previous
income tax laws and rules.
With
effect from January 1, 2005, Rixiang acquired the business operations of
Mingxiang, which subsequently became a property holding company. Rixiang was
incorporated as a FIE and was granted the tax incentives for FIEs, and was
exempted from income tax for 2005 and 2006. Rixiang is therefore
subject to PRC state income tax of 12% for 2007 and then 12.5% for 2008 and
2009.
Jixiang
is also a property holding company and is subject to tax on its assessable
income.
The lower
effective tax rates for the financial years under review were mainly due to tax
exemption granted under the tax incentives. However, such tax incentives may be
withdrawn in the future without prior notice.
LIQUIDITY
AND CAPITAL RESOURCES
We funded
our operations through a combination of stockholders’ equity, borrowings and
cash generated from our operations. Our cash and cash equivalents as
of June 30, 2009 amounted to approximately $20.5 million, a decrease of
$11.1 million or 35.2% compared to $31.6 million as of December 31, 2008.
Our total indebtedness as of June 30, 2009 comprised of short-term bank loans in
the amount of $4.1 million compared to $4.3 million as of December 31,
2008.
A summary
of our cash flows for the six months ended June 30, 2009 and 2008 is as
follows:
|
|
Six
months ended June 30,
|
|
US$’000
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(9,672 |
) |
|
|
4,900 |
|
Net
cash used in investing activities
|
|
|
(1,213 |
) |
|
|
(1,724 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(318 |
) |
|
|
3,674 |
|
Foreign
currency translation adjustment
|
|
|
51 |
|
|
|
1,894 |
|
Net
change in cash and cash equivalents
|
|
|
(11,152 |
) |
|
|
8,744 |
|
Cash
and cash equivalents at the beginning of the period
|
|
|
31,640 |
|
|
|
24,477 |
|
Cash
and cash equivalents at the end of the period
|
|
|
20,488 |
|
|
|
33,221 |
|
Net
cash (used in) provided by operating activities
Our net
cash used in operating activities for the six months ended June 30, 2009
amounted to approximately $9.7
million, whereas our net cash provided by operating activities for the
same period in 2008 amounted to approximately $4.9 million. The reduction of net
cash this year was mainly attributable to the significant increase in the
inventories and accounts receivable of $10.6 million and $5.8 million
respectively.
We
purchased a significant amount of raw materials during the second quarter of
2009. Of which $8.7 million spent for raw materials were used to purchase
marine catch which could be resold in the market when prices go up in the future
when supplies are limited. We also stocked up certain raw materials in the
second quarter of 2009 for our own production due to limited supplies during the
restricted fishing period in June and July.
The
increase in accounts receivable was mainly in line with the increase in sales
volume during the periods under review and the extension of credit period to our
major customers so as to cope with the current market practice.
Net
cash used in investing activities
For the
six months ended June 30, 2009, our net cash used in investing activities was
approximately $1.2 million, mainly attributable to the addition of fixed
assets in relation to the development of new processing plant, the associated
machineries and staff quarter.
Net
cash (used in) provided by financing activities
Our net
cash used in financing activities was approximately $0.3 million for
the six months ended June 30, 2009, a decrease of approximately $4.0
million compared to net cash provided by financing activities for the same
period in 2008. The decrease was mainly attributable to the borrowing of
short-term bank loans in the first quarter of 2008 for working capital
purposes.
Use
of proceeds
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 meet up with our current operating expenditures. Working
capital at June 30, 2009 totaled $42.8 million, an increase of $6.0 million from
our working capital at December 31, 2008 of $36.8 million. The increase in
working capital was primarily attributable to the net income we realized for the
period.
We have
financed our expansion plan in 2009 in part from the proceeds raised from the
private placement closed on November 17, 2007. The construction of our new
facilities, which will increase production capacity by 100%, is underway. We
expect that the new facilities will be completed and commence full operation no
later than the third quarter end of 2009. The total anticipated capital
expenditures for this new facility expansion, including all necessary equipment,
are expected to be less than $3 million.
Apart
from the expansion plan discussed above and the commitments set out in the
section of “Commitments and Contingencies” herein, we do not have any other
material commitments for capital expenditures and other expenditures. We believe
that the current operating activities would be able to generate adequate cash
flows supporting the daily operations.
COMMITMENTS
AND CONTINGENCIES
Operating
lease commitments
Ocean
Technology leased certain office space under a non-cancellable operating lease
agreement with a term of 3 years with fixed monthly rentals, expiring on
February 17, 2011, and generally did not contain significant renewal options.
Total rent expenses for the six months ended June 30, 2009 was approximately
$38,572. Future minimum rental payments due under the non-cancelable operating
lease agreement are approximately $126,000 in total in the following two years
ending June 30, 2010 and 2011.
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.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments.” This FSP amends SFAS No. 107, “Disclosures
about Fair Value of Financial Instruments,” and Accounting Principles Board
(“APB”) Opinion No. 28, “Interim Financial Reporting.” (“FAS 107”) This FSP
requires publicly-traded entities to disclose in the body or in the accompanying
notes of its summarized financial information for interim reporting periods and
in its financial statements for annual reporting periods, the fair value of all
financial instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the statement of financial position, as
required by FAS 107. This FSP is effective for interim and annual reporting
periods ending after June 15, 2009. The Company adopted FSP FAS 107-1 and APB
28-1 for the period ended June 30, 2009.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“FAS 165”), which
establishes general standards of accounting for, and requires disclosure of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. The Company adopted the provisions of
FAS 165 for the quarter ended June 30, 2009. The adoption of FAS 165 did not
have a material effect on the consolidated financial statements.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets, an amendment to SFAS No. 140” (“FAS 166”). FAS 166 eliminates the
concept of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional disclosures in order to
enhance information reported to users of financial statements by providing
greater transparency about transfers of financial assets, including
securitization transactions, and an entity’s continuing involvement in and
exposure to the risks related to transferred financial assets. FAS 166 is
effective for fiscal years beginning after November 15, 2009. The Company will
adopt FAS 166 in fiscal 2010 and is evaluating the impact it will have on the
consolidated results of the Company.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“FAS 167”). The amendments include: (1) the elimination of the exemption
for qualifying special purpose entities, (2) a new approach for determining who
should consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. FAS 167
is effective for the first annual reporting period beginning after November 15,
2009 and for interim periods within that first annual reporting period. The
Company will adopt FAS 167 in fiscal 2010 and is evaluating the impact it will
have on the consolidated results of the Company.
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
™ and the Hierarchy of Generally Accepted Accounting Principles — a replacement
of FASB Statement No. 162” (“FAS 168”). FAS 168 replaces SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” and establishes the “FASB
Accounting Standard Codification ™ ” (“Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with generally accepted accounting principles in the United States.
All guidance contained in the Codification carries an equal level of authority.
On the effective date of FAS 168, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
nongrandfathered non-SEC accounting literature not included in the Codification
will become nonauthoritative. FAS 168 is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Company has evaluated this new statement, and has determined that it will not
have a significant impact on the determination or reporting of
the
financial results.
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 future, particularly as we penetrate into overseas markets, our financial
results may be subject to fluctuations between those foreign currencies and
RMB.
The
percentage of our sales denominated in RMB and US dollars are as
follows:
|
|
Six
months ended June 30,
|
|
(%)
|
|
2009
|
|
|
2008
|
|
Sales
|
|
|
|
|
|
|
RMB
|
|
|
98.1 |
|
|
|
96.0 |
|
US
dollars
|
|
|
1.9 |
|
|
|
4.0 |
|
Total
|
|
|
100.0 |
|
|
|
100.0 |
|
On July
21, 2005, the RMB was unpegged against the US dollars and pegged against a
basket of currencies on a “managed-float currency regime”. As at June 30, 2009,
the exchange rate was approximately US$1.00 to RMB6.8448. 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. In the event that we incur
foreign exchange losses, our financial performance will be adversely
affected.
We do not
have a formal hedging policy with respect to our foreign exchange exposure as
our foreign exchange gains/ losses for the periods 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 did not have a material impact on our
financial performance.
Web Site Access to Our Periodic SEC
Reports
You may
read and copy any public reports we filed with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site http://www.sec.gov
that contains reports and information statements, and other information that we
filed electronically.
ITEM
3. Quantitative and Qualitative Disclosures about Market Risks
Interest
Rate Risk
We are
exposed to interest rate risk primarily with respect to our short-term bank
loans. Although the interest rates are fixed at the benchmark lending rate for
the terms of the loans, the terms are typically twelve months and interest rates
are subject to change upon renewal. Interest rates for our short-term bank loans
have been decreased quite significantly in the first quarter of 2008 from 7.93%
to 5.31% in the second quarter of 2009. A hypothetical 1.0% increase in the
annual interest rates for all of our credit facilities at $4.1 million would
decrease net income before provision for income tax by approximately $41,000 per
annum. Management monitors the banks’ interest rates in conjunction with our
cash requirements to determine the appropriate level of debt balances relative
to other sources of funds. We have not entered into any hedging transactions in
an effort to reduce our exposure to interest rate risk.
Foreign
Exchange Risk
While our
reporting currency is the US dollar, almost all of our consolidated revenues and
consolidated costs and expenses are denominated in RMB. All of our assets are
denominated in RMB except for some cash and cash equivalents and accounts
receivables. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the
exchange rate between US dollar and RMB. If the RMB depreciates against the US
dollar, the value of our RMB revenues, earnings and assets as expressed in our
US dollar financial statements will decline. We have not entered into any
hedging transactions in an effort to reduce our exposure to foreign exchange
risk.
Inflation
Inflationary
factors such as increases in the costs of our products and overhead costs may
adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin, sales and
marketing expenses, general and administrative expenses as a percentage of net
revenues if the selling prices of our products do not increase to cope with
these increased costs.
ITEM 4T. 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 the end of the
period covered by this report. Based upon that evaluation, our Chief Executive
Officer and Principal Financial Officer concluded that our disclosure controls
and procedures as of the end of the period covered by this report 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.
Changes
in Internal Control Over Financial Reporting.
During
the most recent quarter ended June 30, 2009, there has been no change in our
internal control over financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting. We established an Audit Committee, consisting of three
independent directors, whose responsibilities include assisting in monitoring
our internal controls.
Except
for the establishment of the audit committee, there were no other changes in
internal control over financial reporting during the period ended June 30,
2009.
PART
II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are
not involved in any material pending legal proceedings at this time, and
management is not aware of any contemplated proceeding by any governmental
authority.
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
production of processed seafood products is largely dependent on the continuous
supply of fresh seafood, which in turn could be affected by a large number of
factors, including environmental factors, the availability of seafood stock,
weather conditions, the policies and regulations of the governments of the
relevant territories where such fishing is carried out, the ability of the
fishing companies and fishermen that supply us to continue their operations and
pressure from environmental or animal rights groups.
Specifically,
fishing activities in waters around the PRC are restricted in certain months to
ensure sustainable aquatic resources. In particular, the PRC Ministry of
Agriculture imposes restrictions against fishing in the South China Sea in the
months of June and July. There is no assurance that the PRC government may not
impose more stringent fishing regulations, including but not limited to longer
or more frequent periods that restrict fishing. Such restrictions against
fishing or unfavorable weather conditions have a direct impact on the
availability of the raw materials required for the production of our processed
seafood products, and could lead to a shortage and/or an increase in the prices
of our raw materials. Any shortage in the supply of or increase in the prices of
the raw materials for our processed seafood products will adversely affect our
business, profitability and financial condition.
Our
profitability will be affected by fluctuations in the prices of our major raw
materials.
Our
financial performance may be affected by changes in production costs
brought about by fluctuations in the prices of our raw materials. 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 two major customers. In the event these two major customers
cease to purchase or reduce their purchases from us, and we are unable to secure
new contracts, our sales will be adversely affected.
For the
three months ended June 30, 2009, two customer represented more than 10% of our
revenue, each of which accounted for 10% of our revenue in the amount of
approximately $1.4 million. In the event these two customers do not continue to
purchase from us or reduce their purchases from us or develop their own ability
to manufacture the products that we sell to them, and we are unable to secure
new contracts or new customers that can replace the loss of these customers
within a short time frame, our business and profitability may be adversely
affected.
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 products, we rely on certain of our major
suppliers for a significant portion of the supply of fresh seafood. Purchases
from our top four suppliers of raw materials accounted for approximately 81.2%
and 67.0%, of our total purchases of raw materials during the six months ended
June 30, 2009 and 2008, 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.
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 depends on population growth and consumer
preferences. Our profitability and continued growth depends on our ability to
expand our customer base in existing and new markets by introducing new products
that are fast growing and profitable in the populations that we serve, as well
as our ability to develop commercially viable products through our product
development efforts. If we do not succeed in these efforts, the growth of our
sales may slow down and adversely affect our profitability.
Since
we do not have long-term contracts with our suppliers and customers there is no
guarantee that our suppliers will continue to supply us with raw materials, or
that our customers will continue to purchase our products.
We do not
have long-term contracts with our suppliers and our customers. Accordingly,
there can be no assurance that we will continue to be able to obtain sufficient
quantities of raw materials in a timely manner from our existing suppliers on
acceptable terms, or that our existing customers will continue to purchase our
products on terms that are acceptable to us or at all. In the event that we are
unable to source for new suppliers or new customers on terms that are acceptable
to us, our business and operations will be adversely affected.
We may be exposed to potential risks
relating to our internal controls over financial reporting and our ability to
have those controls attested to by our independent auditors.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the SEC
adopted rules requiring public companies to include a report of management on
the company’s internal controls over financial reporting in their annual
reports, including Form 10-K. In addition, the independent registered public
accounting firm auditing a company’s financial statements must also attest to
and report on management’s assessment of the effectiveness of the company’s
internal controls over financial reporting as well as the operating
effectiveness of the company’s internal controls. We were not subject to these
requirements for the fiscal year ended December 31, 2008; accordingly, we have
not evaluated our internal control systems in order to allow our management to
report on, and our independent auditors to attest to, our internal controls as
required by these requirements of SOX 404. Under current law, we will be subject
to these requirements beginning with our annual report for the fiscal year ended
December 31, 2009. We can provide no assurance that we will comply with all of
the requirements imposed thereby. There can be no assurance that we will receive
a positive attestation from our independent auditors. In the event we identify
significant deficiencies or material weaknesses in our internal controls that we
cannot remediate in a timely manner or we are unable to receive a positive
attestation from our independent auditors with respect to our internal controls,
investors and others may lose confidence in the reliability of our financial
statements.
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 and expanding our production facilities. There can be no
assurance that the construction of new production facilities, which are expected
to increase our capacity by 100%, will be completed by the end of 2009 as
expected. Our expansion plans involve a number of risks, including inter alia the costs of
investment in fixed assets, costs of working capital tied up in inventories, as
well as other working capital requirements. Our expansion will also depend on
our ability to secure new customers and/or sufficient orders. Failure to secure
new customers or sufficient orders or to meet our customers’ orders would
materially and adversely affect our business and financial
performance.
There is
no assurance that our future plans will result in commercial success. If we are
unable to execute our expansion plans successfully, our business and financial
performance would be materially and adversely affected.
Changes
in consumer preferences or discretionary consumer spending could adversely
impact our results.
Our
continued growth and success depends in part on the popularity of our products.
Sales of our processed seafood products and marine catch as a percentage of our
total sales for the three and six months ended June 30, 2009 were as
follows:
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processed
seafood products
|
|
|
14,251 |
|
|
|
96.6 |
|
|
|
12,363 |
|
|
|
94.6 |
|
|
|
25,454 |
|
|
|
81.3 |
|
|
|
22,296 |
|
|
|
93.5 |
|
Marine
catch
|
|
|
505 |
|
|
|
3.4 |
|
|
|
705 |
|
|
|
5.4 |
|
|
|
5,850 |
|
|
|
18.7 |
|
|
|
1,554 |
|
|
|
6.5 |
|
Total
|
|
|
14,756 |
|
|
|
100.0 |
|
|
|
13,068 |
|
|
|
100.0 |
|
|
|
31,304 |
|
|
|
100.0 |
|
|
|
23,850 |
|
|
|
100.0 |
|
Shifts in
consumer preferences or eating habits away from processed seafood products will
materially affect our business. In addition, our continued success depends, in
general, on the economic conditions, disposable income and consumer confidence
in the countries in which we sell our products, all of which can affect
discretionary consumer spending in such countries. Adverse changes in these
factors would reduce the flow of customers and limit our pricing which will
reduce our profitability.
Our
business activities are subject to certain laws and regulations and our
operations may be affected if we should fail to have in force the requisite
licenses and permits.
We are
required to obtain various licenses and permits in order to conduct our business
of production and export of processed seafood products. These include the
Hygiene Registration Certificate, which is a requirement in order to carry on
the production of food products in the PRC, as well as the HACCP certificate and
EU export registration, which is a requirement in order to export our processed
seafood products to certain countries. Our business is also subject to
applicable laws and regulations. Please see the section “Government Regulations”
of our Form 10-K for the fiscal year ended December 31, 2008 filed on March 23,
2009 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 and frozen processed seafood products, being perishable in nature, may
deteriorate due to various reasons such as malfunctioning cold storage
facilities, delivery delays or poor handling. This may lead to a delay in
production or delivery of our products, a loss in revenue, costs incurred in the
purchase of replacement raw materials and payment of compensation to our
customers. Any deterioration in our raw materials or processed seafood products
could have a material adverse effect on our business, operations and
reputation.
Currently,
we do not have any product liability insurance in respect of our products. We
believe that premiums for product liability insurances are high compared to the
risk of claims. In the event that the consumption of our processed seafood
products causes harm, illness or death to a consumer of our products, whether as
a result of product deterioration, spoiling, sabotage, willful action, omission
or negligence, we may be liable to complaints, lawsuits and claims from
consumers of our products which in turn could generate negative publicity and
materially and adversely affect our business, financial condition and our
operations.
Outbreak
of disease or widespread contamination in any of the raw materials or the
flavorings 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 or the flavorings that we use in the
production of our products or food scares in the markets in which our processed
seafood products are manufactured or sold may have an adverse impact on our
business as it may lead to a loss in consumer confidence and reduce the demand
of our processed seafood products. It may also affect our sources of supply and
we may have to look for alternative sources of supply which may be more costly,
or which may not be available. If this develops into actual events, our
operations and profitability will be adversely affected.
Any
failure to meet health and hygiene standards may result in the suspension of
licenses, accreditations or the loss of our ability to import and export our
products.
We are
subject to annual checks carried out by the General Administration of Quality
Supervision, Inspection and Quarantine of the PRC (CIQ). The CIQ’s annual check
encompasses the inspection of food preparation, production and processing
operations, as well as health checks on our employees. Failure to meet the
required standards may result in our being required to take remedial measures to
meet the health and hygiene standards, or in extreme cases, the cancellation or
suspension of the license(s) and accreditation(s) required for us to carry on
our operations. In the event that this should occur, our operations and
financial condition will be materially and adversely affected and could lead to
a loss in customer confidence in our products.
In
addition, the CIQ makes random inspections on the processed seafood products
that we export. Failure to meet the required standards of hygiene may affect our
ability to export our processed seafood products and meet our customers’ orders
on time. It may also lead to a restriction on our ability to export our
processed seafood products which will materially and adversely affect our
business, financial condition and operations.
We bear the risk of loss in shipment
of our products and have no insurance to cover such loss.
Under the
shipping terms of our standard customer contracts, we bear the risk of loss in
shipment of our products and do not insure this risk. Since management considers
the risk of loss to be minimal, with export sales representing about 1.9% of our
total sales in the six months ended June 30, 2009. 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,
operational personnel and our other executive officers. 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. These distributors sub-distribute our dried processed seafood products
to about 2,200 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.
Any
outbreak of earthquake, tsunami, adverse weather or oceanic conditions or other
calamities may result in disruption in our operations and could adversely affect
our sales.
We are
based in Fujian Province which is situated in southeast China on the coast of
the East China Sea. Fujian is a vital navigation hub between the East China Sea
and South China Sea, and is also rich in agricultural and marine resources. Our
main raw materials for our marine catch business come from the Taiwan Straight,
which is also the place where we conduct our marine catch
operations.
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
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 the practice of 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.
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.
As a
result of this credit risk exposure of our customers defaulting on their
payments to us, we may have to make larger allowances for doubtful trade
receivables or incur bad debt write-offs, both of which may have an adverse
impact on our profitability.
We
may be subject to foreign exchange risk and may incur losses arising from
exchange differences upon settlement.
We sell
our dried processed seafood products, frozen processed seafood products and
marine catch mainly to local customers. Our sales are denominated in RMB and
US$, while our purchases are denominated in RMB.
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”. At June 30, 2009, the
closing exchange rate was approximately US$1.00 to RMB6.8448. There is no
assurance that the PRC’s foreign exchange policy will not be further altered. In
the event that the PRC’s policy is altered, significant fluctuations in the
exchange rates of RMB against the US$ 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.
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 for the fiscal year ended
December 31, 2008 filed on March 23, 2009. Despite the protection of our
trademark under the intellectual property laws of the PRC, such laws may not be
adequate or effectively enforced against third parties who may violate our
proprietary rights by illegally using our trademarks or our brand name. Our
products and brand names may be replicated or counterfeited, which in turn may
adversely affect our reputation and brand image.
Policing
unauthorized use of our trademarks or brand is difficult and costly,
particularly in countries where the laws may not fully protect our proprietary
rights. There can be no assurance that our means of protecting our proprietary
rights will be adequate. Any unauthorized use of our trademarks and brand may
damage our brand, recognition and reputation. This may lead to our customers
losing confidence in our brand and products, which, in turn, may lead to a loss
in our business and hence sales.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Our
operations in the PRC are subject to the laws and regulations of the PRC and any
changes in the laws or policies of the PRC may have a material impact on our
operations and financial performance.
As our
processed seafood products and marine catch businesses are carried out in the
PRC, we are subject to and have to operate within the framework of the PRC legal
system. Any changes in the laws or policies of the PRC or the implementation
thereof, for example in areas such as foreign exchange controls, tariffs, trade
barriers, taxes, export license requirements and environmental protection, may
have a material impact on our operations and financial performance.
The
corporate affairs of our companies in the PRC are governed by their articles of
association and the corporate and foreign investment laws and regulations of the
PRC. The principles of the PRC laws relating to matters such as the fiduciary
duties of directors and other corporate governance matters and foreign
investment laws in the PRC are relatively new. Hence, the enforcement of
investors or shareholders' rights under the articles of association of a PRC
company and the interpretation of the relevant laws relating to corporate
governance matters remain largely untested in the PRC.
Introduction
of new laws or changes to existing laws by the PRC government may adversely
affect our business if stricter regulations are imposed on the overseas business
practices of PRC companies.
Our
operations are carried out through our wholly-owed subsidiaries which are
located in the PRC. As such, the laws of the PRC govern our businesses and
operations. The PRC legal system is a codified system of written laws,
regulations, circulars, administrative directives and internal guidelines. The
PRC government is still in the process of developing its legal system to
encourage foreign investment and to align itself with global practices and
standards. As the PRC economy is undergoing development at a faster rate than
the changes to its legal system, some degree of uncertainty exists in connection
with whether and how existing laws and regulations apply to certain events and
circumstances. Some of the laws and regulations and the interpretation,
implementation and enforcement of such laws and regulations are also at an
experimental stage and are subject to policy changes. Hence, precedents on the
interpretation, implementation and enforcement of certain PRC laws are limited
and court decisions in the PRC do not have binding effect on lower courts.
Accordingly, the outcome of dispute resolutions and litigation may not be as
consistent or predictable as in other more developed jurisdictions and it may be
difficult to obtain swift and equitable enforcement of the laws in the PRC, or
to obtain enforcement of a judgment by a court or another
jurisdiction.
In
particular, on August 8, 2006, six PRC regulatory bodies, including the Ministry
of Commerce (MOFCOM) and the China Securities Regulatory Commission (“CSRC”),
jointly promulgated the new “Regulations on Foreign Investors Merging with or
Acquiring Domestic Enterprises”, which took effect on September 8, 2006 (“2006
M&A Rules”). The 2006 M&A Rules regulate, inter alia, the acquisition
of PRC domestic companies by foreign investors.
On
September 21, 2006, the CSRC promulgated the “Guidelines on Domestic Enterprises
Indirectly Issuing or Listing and Trading their Stocks on Overseas Stock
Exchanges” (the “CSRC Guidelines”).
Under the
2006 M&A Rules and the CSRC Guidelines, the listing of overseas special
purpose vehicles (“SPV”) which are controlled by PRC entities or individuals are
subject to the prior approval of the CSRC.
The 2006
M&A Rules and the CSRC Guidelines do not provide any express requirement for
an SPV to retroactively obtain CSRC approval where the restructuring steps had
been completed prior to September 8, 2006.
Yuan Tai
Law Offices, our Legal Adviser on PRC Law, is of the opinion that (i) we have
obtained all the necessary governmental approvals from PRC authorities for the
restructuring of our subsidiaries prior to September 8, 2006, (ii) we do not
need to obtain CSRC approval and (iii) it is not necessary for us to comply
retroactively with the requirement of obtaining the prior approval of the CSRC
for our public listing in the U.S.
There is
no assurance that these PRC authorities will not issue further directives,
regulations, clarifications or implementation rules requiring us to obtain
further approvals in relation to our public listing in the U.S.
PRC
foreign exchange control may limit our ability to utilize our cash effectively
and affect our ability to receive dividends and other payments from our PRC
subsidiaries.
Our PRC
subsidiaries, which are foreign investment entities (“FIEs”), are subject to the
PRC rules and regulations on currency conversion. In the PRC, the State
Administration of Foreign Exchange (“SAFE”) regulates the conversion of the RMB
into foreign currencies. Currently, foreign investment enterprises (including
wholly foreign-owned enterprises) are required to apply to the SAFE for “Foreign
Exchange Registration Certificates for FIEs”. With such registration
certification (which have to be renewed annually), FIEs are allowed to open
foreign currency accounts including the “current account” and “capital account”.
Currently, transactions within the scope of the "current account" (for example,
remittance of foreign currencies for payment of dividends) can be effected
without requiring the approval of the SAFE. However, conversion of currency in
the “capital account” (for example, for capital items such as direct
investments, loans and securities) still requires the approval of the SAFE. Our
PRC operating subsidiary Rixiang has obtained the "Foreign Exchange Registration
Certificates for FIEs", which is subject to annual review.
There is
no assurance that the PRC regulatory authorities will not impose restrictions on
the convertibility of the RMB for FIEs. In 2008 and 2007, approximately 95.1%
and 99.5% 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 located in the PRC. Our subsidiaries are
therefore subject to the relevant laws in the PRC. U.S. law may provide
shareholders with certain rights and protection which may not have corresponding
or similar provisions under the laws of the PRC. As such, investors in our
common stock may or may not be accorded the same level of shareholder rights and
protection that would be accorded under the Securities Act. In addition, all our
current executive directors are non-residents of the U.S. and the assets of
these persons are mainly located outside the U.S. As such, there may be
difficulty for our shareholders to affect service of process in the U.S., or to
enforce a judgment obtained in the U.S. against any of these
persons.
We
are subject to the PRC's environmental laws and regulations and in the event
stricter rules are imposed to protect the environment, we may have to incur
higher costs to comply with such rules.
Our
production facilities in the PRC will be subject to environmental laws and
regulations imposed by the PRC authorities, inter alia, in respect of air
protection, waste management and water protection. In the event stricter rules
are imposed on air protection, waste management and water protection by the PRC
authorities, we may have to incur higher costs to comply with such rules.
Accordingly, our financial performance may be adversely affected. In addition,
we require license for the discharge of pollutants for our operations, which is
subject to annual review and renewal. In the event that we fail to renew our
license with the relevant authority, our operations and financial performance
will be adversely affected.
The
outbreak of avian influenza and/or other communicable diseases, if uncontrolled,
could affect our financial performance and prospects.
The avian
influenza virus is a virus found chiefly in birds, but infections with these
viruses can occur in humans. In January of 2004, the first case of the avian
influenza was reported in Guangxi, Hunan and Hubei provinces. Later reports also
came from Anhui, Liaoning, Shanghai and Guangdong provinces. As of August
2006, there have been 88 recorded outbreaks of the avian influenza in the
PRC.
Because
our operations are carried out through our wholly-owned subsidiaries located in
the PRC, the outbreak of avian influenza and/or other communicable diseases, if
uncontrolled, can have an adverse effect on business sentiments and environment.
In addition, if any of our employees, our customers or our suppliers, is
affected by the outbreak of communicable diseases, it can adversely affect,
among others, our operations, our customers' orders and our supply of raw
materials. Accordingly, our sales and profitability will be materially and
adversely affected.
Changes in
China’s political or economic situation could harm us and our operating
results.
Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the government could change these
economic reforms or any of the legal systems at any time. This could either
benefit or damage our operations and profitability. Some of the things that
could have this effect are:
|
·
|
Level
of government involvement in the economy;
|
|
·
|
Control
of foreign exchange;
|
|
·
|
Methods
of allocating resources;
|
|
·
|
Balance
of payments position;
|
|
·
|
International
trade restrictions; and
|
|
·
|
International
conflict.
|
The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many ways. As
a result of these differences, we may not develop in the same way or at the same
rate as might be expected if the Chinese economy were similar to those of the
OECD member countries.
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities. Government action in the future may require us
to divest ourselves of any interest we hold in Chinese properties.
China
only recently has permitted provincial and local economic autonomy and private
economic activities. The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to continue to operate in
China may be affected by changes in its laws and regulations, including those
relating to taxation, import and export tariffs, environmental regulations, land
use rights, property and other matters. We believe that our operations in China
are in material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of the jurisdictions in
which we operate may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or
interpretations.
Accordingly,
government actions in the future including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Future
inflation in China may inhibit our ability to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and highly
fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2%. These factors have led
to the adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. High inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for
our products.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
The
majority of our revenues will be settled in Renminbi and U.S. dollars, and any
future restrictions on currency exchanged may limit our ability to use revenue
generated in Renminbi to fund any future business activities outside China or to
make dividend or other payments in the U.S. dollars. Although the Chinese
government introduced regulations in 1996 to allow greater convertibility of the
Renminbi for current account transactions, significant restrictions still
remain, including primarily the restriction that foreign-invested enterprises
may only buy, sell or remit foreign currencies after providing valid commercial
documents, at those banks in China authorized to conduct foreign exchange
business. In addition, conversion of Renminbi for capital account items,
including direct investment and loans, is subject to governmental approval in
China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the
convertibility of the Renminbi.
The
value of our securities will be affected by the foreign exchange rate between
U.S. dollars and Renminbi.
The value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and Renminbi, and between those currencies and other currencies in which
our sales may be denominated. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operational needs and should the Renminbi
appreciate against the U.S. dollar at that time, our financial position, the
business of the company, and the price of our common stock may be harmed.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of declaring dividends on our common stock or for other business
purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar
equivalent of our earnings from our subsidiaries in China would be
reduced.
RISKS
RELATED TO THE MARKET FOR OUR STOCK
Pengfei
Liu will have significant influence over the outcome of matters submitted to
Shareholders for approval.
Mr. Liu
currently owns approximately 51.3% of our authorized share capital. As a result,
he will be able to exercise significant influence over all matters requiring
shareholder approval, including the appointment of our directors and the
approval of significant corporate transactions. His ownership and
control may also have the effect of delaying or preventing a future change in
control, impeding merger, consolidation, takeover or other business combination
or discourage a potential acquirer from making a tender offer.
Our
share price may be volatile, which can result in substantial losses for
investors who purchase our common stock.
The
market price of our common stock may be highly volatile and can fluctuate
significantly and rapidly in response to, inter alia, the following
factors, some of which are beyond our control:
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Variations
in our operating results;
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Success
or failure of our management team in implementing business and growth
strategies;
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Gain
or loss of an important business relationship or adverse financial
performance by a significant customer or group of
customers;
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Changes
in securities analysts’ recommendations, perceptions or estimates of our
financial performance;
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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;
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Changes
or developments in laws, regulations or taxes in the seafood processing
and packaging industry in the PRC;
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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.
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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;
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Additions
or departures of key personnel;
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Fluctuations
in stock market prices and volume;
or
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Involvement
in litigation.
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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, 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 processes seafood products since
commencing our operations in 1994. Our “Mingxiang” brand has been conferred the
“Famous Brand” award, and our products have received several other awards such
as the “Green Food” award. Please see the section “Competition” of our Form 10-K
for the fiscal year ended December 31, 2008 filed on March 23, 2009. We have
also established a track record in the processed seafood industry which instills
confidence in our products and attracts new customers from South Korea, Japan,
Philippines, Papua New Guinea, Taiwan, Russia and Ukraine, as well as potential
customers from the European Union. Negative publicity involving us, any of our
directors or executive officers may adversely affect our stock market price
whether or not such negative publicity is justified.
Certain
provisions of our Amended Articles of Incorporation may make it more difficult
for a third party to effect a change-in-control.
Our
Amended Articles of Incorporation authorizes our board of directors to issue up
to 1,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
our board of directors without further action by the stockholders. These terms
may include voting rights including the right to vote as a series on particular
matters, preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. The issuance of any preferred
stock could diminish the rights of holders of our common stock, and therefore
could reduce the value of such common stock. In addition, specific rights
granted to future holders of preferred stock could be used to restrict our
ability to merge with, or sell assets to, a third party. The ability of our
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent the stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
INDEX
TO EXHIBITS
OF
CHINA
MARINE FOOD GROUP LIMITED
31.1
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Rule
13a-14 (a)/15d-14 (a) Certification of Chief Executive
Officer
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31.2
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Rule
13a-14 (a)/15d-14 (a) Certification of Chief Financial
Officer
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32.1
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Section
1350 Certification of Chief Executive Officer
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32.2
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Section
1350 Certification of Chief Financial
Officer
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SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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CHINA
MARINE FOOD GROUP LIMITED
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/s/
Pengfei Liu
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Dated:
August 10 , 2009
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Pengfei
Liu, Chief Executive Officer
(Principal
executive officer)
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/s/_Marco
Hon Wai Ku
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Dated:
August 10, 2009
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Marco
Hon Wai Ku, Chief Financial Officer
(Principal
financial officer)
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