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EX-32.1 - EXHIBIT 32.1 - CHINA MARINE FOOD GROUP LTDv318874_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - CHINA MARINE FOOD GROUP LTDv318874_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - CHINA MARINE FOOD GROUP LTDv318874_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - CHINA MARINE FOOD GROUP LTDv318874_ex31-1.htm

 

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, 2012

 

¨  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

 

Commission File No. 001-34422

 

CHINA MARINE FOOD GROUP LIMITED

 

(Name of Registrant in its Charter)

 

Nevada   87-0640467
     
(State or Other Jurisdiction of   (I.R.S. Employer I.D. No.)
incorporation or organization)    

 

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 ¨

 

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 x    No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)

 

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes  ¨    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: August 13, 2012, Common Stock: 29,722,976.

 

 
 

 

CHINA MARINE FOOD GROUP LIMITED.

FORM 10-Q

QUARTERLY PERIOD ENDED JUNE 30, 2012

 

INDEX

 

TABLE OF CONTENTS

 

  Page
   
PART I – FINANCIAL INFORMATION  
     
Item 1: Financial Statements 3 - 22
     
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operation 23 - 35
     
Item 3: Quantitative and Qualitative Disclosures About Market Risk 36
     
Item 4: Controls and Procedures 36
   
PART II – OTHER INFORMATION  
     
Item 1: Legal Proceedings 37
     
Item 1A: Risk Factors 37 - 38
     
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 38
     
Item 3: Defaults Upon Senior Securities 38
     
Item 4: Mine Safety Disclosures 38
     
Item 5: Other Information 38
     
Item 6: Exhibits 38
     
  Signatures 39

 

2
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

CHINA MARINE FOOD GROUP LIMITED

 

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
   
Unaudited Condensed Consolidated Balance Sheet as of June 30, 2012 and Audited Condensed Consolidated Balance Sheet as of December 31, 2011 4
   
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2012 and 2011 5
   
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 6
   
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2012 7
   
Notes to Unaudited Condensed Consolidated Financial Statements as of June 30, 2012 8 - 22

 

3
 

 

CHINA MARINE FOOD GROUP LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Currency expressed in United States Dollars (“US$”), except for number of shares)

 

   June 30, 2012   December 31, 2011 
   (Unaudited)   (Audited) 
ASSETS          
Current assets:          
Cash and cash equivalents  $17,368,072   $586,914 
Accounts receivable, net   57,319,283    68,643,678 
Inventories   8,905,317    8,886,234 
Prepaid expenses and other current assets   1,051,187    849,419 
           
Total current assets   84,643,859    78,966,245 
           
Property, plant and equipment, net   11,119,885    11,199,244 
Land use rights, net   3,003,753    3,023,569 
Construction in progress   24,203,941    22,923,143 
Intangible assets, net   19,091,622    20,225,220 
Goodwill   2,571,325    2,553,757 
           
TOTAL ASSETS  $144,634,385   $138,891,178 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current liabilities:          
Short-term borrowings  $7,164,482   $2,550,257 
Accounts payable, trade   5,563,618    2,583,549 
Amount due to a shareholder   46,794    50,361 
Income tax payable   -    174,525 
Accrued liabilities and other payables   4,540,463    3,424,288 
           
Total current liabilities   17,315,357    8,782,980 
           
Commitments and contingencies (see Note 13)          
           
Shareholders’ equity:          
Preferred stock, $0.001 par value; 1,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2012 and December 31, 2011   -    - 
Common stock, $0.001 par value; 100,000,000 shares authorized; 29,697,976 shares issued and outstanding as of June 30, 2012 and December 31, 2011   29,698    29,698 
Additional paid-in capital   50,074,952    50,074,952 
Statutory reserve   9,696,177    9,696,177 
Accumulated other comprehensive income   12,791,554    11,897,382 
Retained earnings   54,370,185    58,053,435 
Total China Marine Food Group Limited shareholders’ equity   126,962,566    129,751,644 
Non-controlling interests   356,462    356,554 
Total shareholders’ equity   127,319,028    130,108,198 
           

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $144,634,385   $138,891,178 

 

See accompanying notes to condensed consolidated financial statements.

 

4
 

 

CHINA MARINE FOOD GROUP LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2012   2011   2012   2011 
Revenue, net                    
Processed seafood products  $10,657,284   $13,423,305   $20,560,387   $33,292,076 
Marine catch   38,334,101    -    38,334,101    75,976 
Algae-based beverage products   12,292,806    8,645,909    17,473,632    15,357,726 
    61,284,191    22,069,214    76,368,120    48,725,778 
                     
Cost of revenue (inclusive of depreciation and amortization)                    
Processed seafood products   (7,630,558)   (9,762,761)   (14,901,293)   (22,886,407)
Marine catch   (37,086,105)   -    (37,086,105)   (47,350)
Algae-based beverage products   (7,592,003)   (5,155,255)   (10,806,254)   (9,028,359)
    (52,308,666)   (14,918,016)   (62,793,652)   (31,962,116)
                     
Gross profit   8,975,525    7,151,198    13,574,468    16,763,662 
                     
Operating expenses:                    
Depreciation and amortization   (695,145)   (676,540)   (1,391,215)   (1,339,827)
Sales and marketing   (8,698,313)   (3,918,204)   (13,279,562)   (5,504,324)
General and administrative   (1,208,921)   (682,351)   (1,747,062)   (1,342,983)
Stock-based compensation   -    (663,374)   (667,246)   (663,374)
                     
TOTAL OPERATING EXPENSES   (10,602,379)   (5,940,469)   (17,085,085)   (8,850,508)
                     
(LOSS) Income FROm operations   (1,626,854)   1,210,729    (3,510,617)   7,913,154 
                     
Other income (expenses):                    
Subsidy income   15,866    -    15,866    - 
Rental income   49,224    24,259    98,529    48,227 
Interest income   28,672    46,219    61,721    67,383 
Interest expense   (105,815)   -    (141,121)   - 
(LOSS) Income before income taxes   (1,638,907)   1,281,207    (3,475,622)   8,028,764 
                     
Income tax expense   -    (269,694)   (207,720)   (1,399,495)
                     
NET (LOSS) INCOME   (1,638,907)   1,011,513    (3,683,342)   6,629,269 
                     
Less: net loss attributable to non-controlling interests   46    74    92    118 
                     
Net (LOSS) income attributable to China Marine Food Group Limited  $(1,638,861)  $1,011,587   $(3,683,250)  $6,629,387 
                     
Other comprehensive income:                    
- Foreign currency translation gain   63,579    1,624,130    894,172    2,362,629 
                     
COMPREHENSIVE (LOSS) INCOME  $(1,575,282)  $2,635,717   $(2,789,078)  $8,992,016 
Net (loss) income per share attributable to China Marine Food Group Limited                    
- Basic  (0.06)  $0.03   $(0.12)  $0.23 
- Diluted  $(0.06)  $0.03   $(0.12)  $0.23 
                     
Weighted average shares outstanding                    
- Basic   29,697,976    29,677,976    29,697,976    29,329,909 
- Diluted   29,697,976    29,677,976    29,697,976    29,329,909 

See accompanying notes to condensed consolidated financial statements.

 

5
 

 

CHINA MARINE FOOD GROUP LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

   For the Six Months Ended June 30, 
   2012   2011 
Cash flows from operating activities:          
Net (loss) income  $(3,683,342)  $6,629,269 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   1,539,539    1,487,294 
Reversal of doubtful accounts   (56,906)   (157,507)
Compensatory stock awards   -    2,646,000 
Changes in operating assets and liabilities:          
Accounts receivable   11,381,301    31,501,311 
Inventories   (19,083)   (9,388,603)
Prepaid expenses and other current assets   (201,768)   (2,841,779)
Accounts payable, trade   2,980,069    (749,329)
Income tax payable   (174,525)   (537,004)
Accrued liabilities and other payables   1,116,175    (1,576,634)
           
Net cash provided by operating activities   12,881,460    27,013,018 
           
Cash flows from investing activities:          
Purchase of property, plant and equipment   (68,300)   (14,683)
Cash paid to construction in progress   (1,124,690)   (4,934,302)
           
Net cash used in investing activities   (1,192,990)   (4,948,985)
           
Cash flows from financing activities:          
Repayment of amount due to a shareholder   (3,567)   (224,250)
Proceeds from short-term borrowings   7,171,530    - 
Repayment on short-term borrowings   (2,570,327)   - 
           
Net cash provided by (used in) financing activities   4,597,636    (224,250)
           
NET CHANGE IN CASH AND CASH EQUIVALENTS   16,286,106    21,839,783 
           
Effect of exchange rate changes in cash and cash equivalents   495,052    948,819 
           
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   586,914    15,556,772 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $17,368,072   $38,345,374 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for income taxes  $382,245   $1,936,499 
Cash paid for interest  $141,121   $- 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS          
Transfer from construction in progress to property, plant and equipment  $-   $1,807,283 

 

See accompanying notes to condensed consolidated financial statements.

 

6
 

 

CHINA MARINE FOOD GROUP LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

 

   China Marine Food Group Limited shareholders’ equity         
               Accumulated             
       Additional       Other       Non-   Total 
   Common stock   paid-in   Statutory   comprehensive   Retained   controlling   shareholders’ 
   No. of shares   Amount   Capital   reserve   income   earnings   Interests   equity 
                                 
Balance as of December 31, 2011   29,697,976   $29,698   $50,074,952   $9,696,177   $11,897,382   $58,053,435   $356,554   $130,108,198 
                                         
Net loss for the period   -    -    -    -    -    (3,683,250)   (92)   (3,683,342)
Foreign currency translation adjustment   -    -    -    -    894,172    -    -    894,172 
                                         
Balance as of June 30, 2012   29,697,976   $29,698   $50,074,952   $9,696,177   $12,791,554   $54,370,185   $356,462   $127,319,028 

 

See accompanying notes to condensed consolidated financial statements.

 

7
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

NOTE - 1BASIS 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, 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, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2012 or for any future periods.

 

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included in the Annual Report on the Form 10-K/A for the year ended December 31, 2011. The condensed consolidated balance sheet as of December 31, 2011 has been derived from audited financial statements.

 

NOTE - 2ORGANIZATION AND BUSINESS BACKGROUND

 

China Marine Food Group Limited (“China Marine” or the “Company”), formerly known as New Paradigm Productions, Inc., was incorporated in the State of Nevada on October 1, 1999. The Company is headquartered and the principal operations are in Shishi City, Fujian Province, People Republic of China (“PRC”). The Company, through its subsidiaries, manufactures and distributes processed seafood products and algae-based beverage products. The Company also trades marine catch sporadically throughout the year based on opportunities. The Company’s customers are located in domestic provinces in the PRC and overseas markets. The Company is publicly traded on the AMEX under the symbol “CMFO” and can be found on the worldwide web at www.china-marine.cn.

 

China Marine and its subsidiaries are hereinafter referred to as “the Company”.

 

NOTE - 3SUMMARY 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.

 

·Use of estimates

 

In preparing these condensed consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the periods reported. Actual results may differ from these estimates.

 

·Basis of consolidation

 

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. Results of acquired subsidiaries are consolidated from the date on which control is transferred to the Company and are no longer consolidated from the date that control ceases.

 

8
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

·Cash and cash equivalents

 

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

 

The Company maintains cash and cash equivalent balances at a financial institution in the PRC, which are insured by the People’s Bank of China. The Company had cash concentration risk of $17,344,168 and $538,132 as of June 30, 2012 and December 31, 2011, respectively, which amounts exclude Ocean Technology.

 

·Accounts receivable and allowance for doubtful accounts

 

Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.

 

·Inventories

 

Inventories consist of frozen products from marine catch, processed seafood products, algae-based beverage products and materials used in the manufacture of the Company’s products. Inventories are stated at the lower of cost or net realizable value, with cost being determined on a weighted average basis. Costs include purchased cost of raw materials, direct labor and manufacturing overhead costs. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand.

 

As of June 30, 2012 and December 31, 2011, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.

 

·Property, plant and equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

 

  Depreciable life  Residual value 
Buildings  30-50 years   10%
Plant and machinery  5-30 years   10%
Motor vehicles  8-10 years   10%
Office equipments  5 years   10%

 

Expenditure for repairs and maintenance is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.

 

Depreciation expense for the three and six months ended June 30, 2012 and 2011 were $111,359, $224,900 and $113,417, $218,730, respectively, which included $70,176, $142,668 and $72,245, $142,010 in cost of revenue.

 

Certain property, plant and equipment with original costs of $1,341,856 have become fully depreciated as of June 30, 2012.

 

9
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

·Construction in progress

 

Construction in progress is stated at cost, which includes the cost of construction, acquisition of plant and equipment and other direct costs attributable to the construction. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized interest is incurred during the period of construction.

 

·Goodwill and intangible assets

 

Goodwill and intangible assets were the result of the acquisition of Xianghe. Goodwill represents the cost of the acquired algae-based drink business in excess of the fair value of identifiable tangible and intangible net assets purchased. Intangible assets include trademarks and algae-based beverage know-how and are recorded at cost less accumulated amortization and any recognized impairment loss. The algae-based beverage know-how is amortized over its estimated useful life of 10 years on a straight-line basis, which coincides with the timing provided from the PRC protection guidelines for our product. For the year ended December 31, 2011, the Company engaged an independent valuation expert to assist in determining the fair value of the identifiable tangible and intangible net assets of the acquired business.

 

The Company evaluates the valuation of its goodwill according to the provisions of Accounting Standards Codification (“ASC”) 350 to determine if the current value of goodwill has been impaired. The Company early adopted Accounting Standard Update (ASU) No. 2011-08, Intangibles-Goodwill and Other (Topic 350) during the year ended December 31, 2011. Goodwill of a reporting unit will be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Company did not experience any such events or circumstances during the six months ended June 30, 2012. The Company will perform the annual goodwill impairment test during the fourth quarter of each calendar year.

 

In accordance with ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, the Company performed its annual impairment test for its intangible assets during the fourth quarter of the year ended December 31, 2011 and received the results from an independent valuation expert in the first quarter of 2012. The intangible asset balance relates to the algae-based drink business reporting unit. The result of the assessment of the Company’s intangible assets indicated that its fair values exceeded its carrying amounts. The valuation report prepared by an independent valuation expert concluded that the fair value of the intangible asset as of December 31, 2011 is reasonably stated by the amount of $21,173,433 and we determined that there had been no impairment of intangible assets.

 

Given the Company’s sales of algae-based beverage products for the six months ended June 30, 2012 were lower-than-expected compared to the forecasts on an annualized basis, the Company considered if these results were a triggering event (as defined under ASU No. 2011-08) causing the Company to perform an interim impairment analysis. The significantly improved results obtained during the three months ended June 30, 2012 compared to the disappointed results obtained during the three months ended March 31, 2012 prove the Company has the ability to meet 2012 forecasts. The Company incurred significant selling and marketing expenses for the six months ended June 30, 2012 to support the revenue growth and a series of marketing and promotional campaigns will be continued. At the same time, the Company will continue to expand its distribution network and increase the number of retail points as part of its business plan. If the drink business actual operating results do not continue to improve as forecasted, the Company may be required to perform a full impairment analysis and record impairment charges in future quarters. Such an impairment charge would have a material adverse effect on the Company’s reported results.

 

Amortization expense for the three and six months ended June 30, 2012 and 2011 were $636,476, $1,273,983 and $618,379, $1,229,333, respectively. Using the current exchange rate, the estimated annual amortization expense is $2,545,461 for each of the five succeeding years.

 

10
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

·Impairment of long-lived assets

 

In accordance with the provisions of ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as property, plant and equipment, land use rights and intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. There has been no impairment as of June 30, 2012 and December 31, 2011.

 

·Revenue recognition

 

In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.

 

The Company derives revenues from the processing, distribution and sale of processed seafood products, sale of marine catch, and the sale and distribution of algae-based beverage products. The Company recognizes its revenues net of value-added taxes (“VAT”). The Company is subject to VAT which is levied on the majority of the products at the rate ranging from 13% to 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

 

The Company recognizes revenue from the sale of processed seafood products and algae-based beverage products upon receipt of the delivery confirmation provided by the distributor’s carrier and the title and risk of loss of the product has transferred to the distributor. The distributor agreements do not provide chargeback, price protection, or stock rotation rights. The Company recognizes revenue from marine catch when title has transferred to the buyer. The Company experienced no material product returns and recorded no reserve for sales returns for the period ended June 30, 2012 and December 31, 2011.

 

The Company offers sales incentives to customers based on yearly sales targets. These are non-cash incentives and are solely used for promotional activities purposes. These amounts of $256,277 are accrued as sales and marketing expenses as of June 30, 2012 during the same month revenue is recognized.

 

Rental income from operating leases on real estate properties is recognized on a straight-line basis over the lease period.

 

·Income taxes

 

The provision for income taxes is determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

11
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

For the period ended June 30, 2012 and December 31, 2011, the Company did not have any interest and penalties associated with tax positions. As of June 30, 2012 and December 31, 2011, the Company did not have any significant unrecognized uncertain tax positions.

 

The Company conducts major businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authority.

 

·Foreign currencies translation

 

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the consolidated statement of operations and comprehensive income.

 

The reporting currency of the Company is the United States Dollars ("US$"). The Company's subsidiaries in the PRC maintain their books and records in its local currency, the Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment in which these entities operate.

 

In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of changes in shareholders’ equity.

 

Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective period:

 

   June 30, 
   2012   2011 
Period-end exchange rates RMB:US$1   6.3089    6.4630 
Average exchange rates RMB:US$1 for three months period ended   6.3078    6.4924 
Average exchange rates RMB:US$1 for six months period ended   6.3027    6.5316 

 

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

 

·Stock-based compensation

 

The Company adopts ASC Topic 718-20, "Compensation - Stock Compensation" ("ASC 718-20"), using the fair value method. Under ASC 718-20, stock-based compensation cost is measured at the grant date based on the fair value of the award or using the Black-Scholes pricing model and is recognized as expense over the appropriate service period.

 

12
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

·Related parties

 

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.

 

·Fair value measurement

 

The Company has adopted ASC Topic 820, Fair Value Measurement and Disclosure, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and include the following:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.

 

The Company’s financial items are classified within Level 1 of the fair value hierarchy. The carrying amount of cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other current assets, short-term borrowings, accounts payable, amount due to a shareholder, income tax payable and accrued liabilities and other payables are reasonable estimates of their fair value because of the short term nature of these items.

 

The fair value of short-term borrowings and amount due to a shareholder as of June 30, 2012 was $7,164,482 and $46,794, respectively, which is estimated based on the quoted prices in active markets for identical assets or liabilities and identical to their carrying values.

 

The Company does not have any assets or liabilities that are measured on a recurring basis at fair value.

 

The Company uses the discounted cash flow approach when determining fair values of its non-recurring fair value measurements. Certain unobservable units for these assets are offered quotes, lack of marketability, long-term revenue growth rates and discounts rates. For Level 3 measurements, significant increases or decreases in either of those inputs in isolation could result in a significantly lower or higher fair value measurement. In general, a change in the long-term growth rate of our algae-based drink business could negatively affect the fair value of our goodwill and intangible assets.

 

13
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

·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.

 

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles—Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company is expected to adopt this ASU no later than January 1, 2013. The Company has not yet determined the effect this ASU will have on the Company's annual impairment testing of intangibles.

 

During December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” The amendments in ASU 2011-11 require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This amendment is effective for annual reporting periods beginning on or after January 1, 2013. The adoption of ASU 2011-11 results in changes to presentation and disclosure only and is not expected to have an impact on our consolidated results of operations and financial condition.

 

During September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment.” The amendments in ASU 2011-08 are intended to reduce the cost and complexity associated with goodwill impairment tests required under the Accounting Standard Codification Topic 350 Intangibles – Goodwill and Other. The update permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company has adopted ASU 2011-08, which may result in the elimination of the additional requirements under Topic 350 during the annual impairment analysis performed during the fourth quarter of each fiscal year.

 

During June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. The Company has adopted ASU No. 2011-05, which resulted in the components of comprehensive income to be presented within the consolidated statements of operations and comprehensive income (loss).

 

During May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).” This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. This pronouncement is effective for reporting periods beginning on or after December 15, 2011. The adoption of ASU 2011-04 did not have an impact to our consolidated financial position or results of operations.

 

14
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

NOTE - 4ACCOUNTS RECEIVABLE, NET

 

Accounts receivable consisted of the following:

 

   June 30, 2012   December 31, 2011 
         
Account receivable, at cost  $57,607,320   $68,988,621 
Less: allowance for doubtful accounts   (288,037)   (344,943)
Account receivable, net  $57,319,283   $68,643,678 

 

Changes in the allowance for doubtful accounts are as follows:

 

   June 30, 2012   December 31, 2011 
         
Beginning balance  $344,943   $243,872 
(Reversal of) Provision for doubtful accounts   (56,906)   101,071 
Amounts written off   -    - 
Ending balance  $288,037   $344,943 

 

NOTE - 5INVENTORIES

 

Inventories consisted of the following:

 

   June 30, 2012   December 31, 2011 
         
Raw materials  $6,027,443   $3,982,617 
Work-in-process   2,633,664    3,941,723 
Finished goods   97,206    804,880 
Packaging materials   147,004    157,014 
Total  $8,905,317   $8,886,234 

 

For the period ended June 30, 2012 and December 31, 2011, the Company recorded no allowance for slow-moving and obsolete inventories.

 

NOTE - 6CONSTRUCTION IN PROGRESS

 

During 2010, Mingxiang entered into an agreement with an independent third party (the “Third Party Contractor”) in relation to the construction of a cold storage facility. A supplementary agreement was entered into between Mingxiang and the Third Party Contractor in September 2011 related to additional gross areas, machineries and equipment required for the facility. The facilities have commenced operating since the end of July, 2012. Total estimated construction costs are approximately $25.0 million. As of June 30, 2012, the Company recorded approximately $24.2 million as construction in progress.

 

15
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

NOTE - 7SHORT-TERM BORROWINGS

 

The Company’s wholly-owned subsidiary, Mingxiang, obtained short-term bank loans in the aggregate amount of $7,164,482 and $2,550,257 as of June 30, 2012 and December 31, 2011, respectively, from the Agricultural Bank of China and the China Construction Bank, registered financial institutions in the PRC. The short-term loans are due by February, April and May, 2013, respectively. The weighted average effective interest rate per annum was 6.23% and 5.49% for the period ended June 30, 2012 and December 31, 2011, respectively, payable quarterly. Interest expenses for the three and six months ended June 30, 2012 and 2011 were $105,815, $141,121 and $nil, $nil, respectively and none of the interest incurred was capitalized.

 

NOTE - 8AMOUNT DUE TO A STOCKHOLER

 

As of June 30, 2012 and December 31, 2011, the amounts of $46,794 and $50,361 represented temporary advances for working capital purposes from a major shareholder and CEO, Mr. Liu, which were unsecured, interest free and repayable on demand.

 

NOTE - 9NON-CONTROLLING INTERESTS

 

Non-controlling interests consisted of the following:

 

   June 30, 2012 
     
20% share of equity interest in Xianghe  $509,007 
Less: advance to a non-controlling shareholder of a subsidiary   (152,545)
      
Net amount  $356,462 

 

Advance to a non-controlling shareholder of the Company’s subsidiary, Xianghe, was unsecured, interest free and repayable on demand.

 

NOTE - 10INCOME TAXES

 

For the period ended June 30, 2012 and 2011, the local (“United States of America”) and foreign components of (loss) income before income taxes were comprised of the following:

 

   Six Months Ended June 30, 
   2012   2011 
Tax jurisdiction from:          
– Local  $-   $- 
– Foreign   (3,475,622)   8,028,764 
           
(Loss) income before income taxes  $(3,475,622)  $8,028,764 

 

16
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

The provision for income taxes consisted of the following:

 

   Six Months Ended June 30, 
   2012   2011 
Current:          
– Local  $-   $- 
– Foreign   207,720    1,399,495 
           
Deferred:          
– Local   -    - 
– Foreign   -    - 
           
Income tax expense  $207,720   $1,399,495 

 

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 subject to United States tax law.

 

As of June 30, 2012, China Marine incurred $26,409 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 $9,111 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.

 

Hong Kong

 

The Company’s subsidiary, Ocean Technology, is subject to Hong Kong Profits Tax at the statutory rate of 16.5% on its assessable income for the period ended June 30, 2012 and 2011, respectively. As of June 30, 2012, Ocean Technology incurred $769,659 of net operating loss carryforwards available for income tax purposes. The Company has provided for a full valuation allowance against the deferred tax assets of $126,994 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, 2012 and 2011. Rixiang, Jixiang, Mingxiang, Xianghe and Xianglin are subject to the Corporate Income Tax governed by the Income Tax Law of the People’s Republic of China, at a unified income tax rate of 25%.

 

On October 15, 2009, Mingxiang has received a notice of recognition as an enterprise of new and high technology, which was jointly issued by the Science and Technology Department of Fujian, the Finance Department of Fujian, the State Tax Bureau of Fujian and the Local Taxation Bureau of Fujian, for a company engaged in advanced food processing technologies for the Fujian Province. As a new and high technology company, Mingxiang is qualified for a reduced income tax rate of 15% on its income before tax for a period of three years, expiring in 2012.

 

17
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

The reconciliation of income tax rate to the effective income tax rate for the period ended June 30, 2012 and 2011 is as follows:

 

   Six Months Ended June 30, 
   2012   2011 
         
(Loss) income before income taxes from PRC subsidiaries  $(3,395,253)  $8,099,469 
Statutory income tax rate   25%   25%
Income tax expense at statutory tax rate   (848,813)   2,024,867 
           
Tax effect from Tax Holiday   207,389    (927,452)
Tax effect on net operating losses from PRC subsidiaries   504,944    1,021 
Tax effect on non-taxable income   11,128    (19,246)
Tax effect on non-deductible expenses   333,072    320,305 
           
Income taxes at effective rate  $207,720   $1,399,495 

 

As of June 30, 2012, the PRC operation incurred $123,370 of net operating loss carryforwards available for income tax purposes that may be used to offset future taxable income and will begin to expire in 5 years from the year of incurrence, if unutilized. The Company has provided for a full valuation allowance against the deferred tax assets of $30,843 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future. The entities in the PRC do not file a consolidated return, so only the entity that generated the losses can utilize them.

 

Tax Holiday

 

(Loss) income before income tax expense was ($3,475,622) and $8,028,764 for the period ended June 30, 2012 and 2011 and was mainly attributed to subsidiaries with operations in China. Income tax related to China income for the period ended June 30, 2012 and 2011 was $207,720 and $1,399,495. The combined pro forma effects of the income tax expense exemptions and reductions available to us are as follows:

 

   Six Months Ended June 30, 
   2012   2011 
         
Amount of tax holiday effect  $(207,389)  $927,452 
Tax holiday effect on basic (losses) earnings per share  $(0.007)  $0.032 
Tax holiday effect on diluted (losses) earnings per share  $(0.007)  $0.032 

 

NOTE - 11SEGMENT REPORTING, GEOGRAPHICAL INFORMATION

 

(a)Business information

 

The Company’s chief operating decision maker has been identified as chairman, Mr. Liu, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. Based on this assessment, the Company has determined that it has three operating and reporting segments for the period ended June 30, 2012 and 2011 which are processed seafood products, marine catch and algae-based beverage products.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 3). The Company had no inter-segment sales for the period ended June 30, 2012 and 2011.

 

18
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

Summarized financial information concerning the Company’s reportable segments is shown in the following tables for the three and six months ended June 30, 2012 and 2011:

 

   Three Months Ended June 30, 2012 
   Processed seafood
products
   Marine catch   Algae-based
beverage products
   Total 
                 
Revenue, net  $10,657,284   $38,334,101   $12,292,806   $61,284,191 
Cost of revenue   (7,630,558)   (37,086,105)   (7,592,003)   (52,308,666)
                     
Gross profit  $3,026,726   $1,247,996   $4,700,803   $8,975,525 
                     
Expenditure for long-lived assets  $532,095   $-   $-   $532,095 

 

   Three Months Ended June 30, 2011 
   Processed seafood
products
   Marine catch   Algae-based
beverage products
   Total 
                 
Revenue, net  $13,423,305   $-   $8,645,909   $22,069,214 
Cost of revenue   (9,762,761)   -    (5,155,255)   (14,918,016)
                     
Gross profit  $3,660,544   $-   $3,490,654   $7,151,198 
                     
Expenditure for long-lived assets  $3,200,411   $-   $-   $3,200,411 

 

   Six Months Ended June 30, 2012 
   Processed seafood
products
   Marine catch   Algae-based
beverage products
   Total 
                 
Revenue, net  $20,560,387   $38,334,101   $17,473,632   $76,368,120 
Cost of revenue   (14,901,293)   (37,086,105)   (10,806,254)   (62,793,652)
                     
Gross profit  $5,659,094   $1,247,996   $6,667,378   $13,574,468 
                     
Expenditure for long-lived assets  $1,131,558   $-   $-   $1,131,558 

 

   Six Months Ended June 30, 2011 
   Processed seafood
products
   Marine catch   Algae-based
beverage products
   Total 
                 
Revenue, net  $33,292,076   $75,976   $15,357,726   $48,725,778 
Cost of revenue   (22,886,407)   (47,350)   (9,028,359)   (31,962,116)
                     
Gross profit  $10,405,669   $28,626   $6,329,367   $16,763,662 
                     
Expenditure for long-lived assets  $4,948,985   $-   $-   $4,948,985 

 

19
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

Expenditure for long-lived assets incurred for the period ended June 30, 2012 and 2011 mainly relates to the construction of a cold storage facility which will be used for both processed seafood products and marine catch segments.

 

(b)Geographic information

 

The Company’s operations are located in two main geographical areas. The Company’s sales by geographical market are analyzed as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2011   2012   2011 
Revenue, net                
The PRC  $60,238,229   $22,069,214   $75,322,158   $48,649,802 
Asia   1,045,962    -    1,045,962    75,976 
Total revenue, net  $61,284,191   $22,069,214   $76,368,120   $48,725,778 

 

All the Company’s long-lived assets are located in the PRC in both periods.

 

NOTE - 12CONCENTRATIONS 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 represent greater than 10% of the total revenue for the six months ended June 30, 2012 and their outstanding balances as at period-end dates.

 

   Six Months Ended June 30, 2012 
Customer  Revenue   Percentage
of total revenue
   Accounts
receivable, net
   Percentage of
total accounts
receivable, net
 
                 
Customer A  $22,290,359    29%   $25,163,353    44% 
Customer B   16,575,711    22%    17,359,628    30% 
                     
Total:  $38,866,070    51%   $42,522,981    74% 

 

For the six months ended June 30, 2011, one customer represented more than 10% of the Company’s total revenue. This customer accounted for 11% of the Company’s revenue amounting to $5,231,600, with $2,598,518 of accounts receivable which represented 15% of total accounts receivable, net.

 

(b)Major vendors

 

For the six months ended June 30, 2012, one vendor represented more than 10% of the Company’s total purchases. This vendor accounted for 71% of the Company’s total purchases amounting to $35,934,717, with $nil of accounts payable.

 

20
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

The following is a table summarizing the purchases from vendor that individually represent more than 10% of the total purchases for the period ended June 30, 2011 and their outstanding balances as at period-end dates.

 

   Six Months Ended June 30, 2011 
Vendors  Purchases   Percentage
of total purchases
   Accounts
payable, trade
   Percentage of total 
accounts payable, 
trade
 
                 
Vendor A  $14,597,064    52%   $-    - 
Vendor B   4,343,738    16%    167,792    5% 
Vendor C   3,015,155    11%    108,270    4% 
                     
Total:    $21,955,957    79%   $276,062    9% 

 

(c)Credit risk

 

Financial instruments that are potentially subject to credit risk consist principally of trade receivables. The Company believes the concentration of credit risk in its trade receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

 

(d)Exchange rate risk

 

The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates against US$, the value of the RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivatives or other financial instruments that expose to substantial exchange rate risk.

 

(e)Economic and political risks

 

Substantially all of the Company’s products are processed in the PRC. The Company’s operations are subject to various political, economic, and other risks and uncertainties inherent in the PRC and not typically associated with companies in North America and Western Europe. Among other risks, the Company’s operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations in the PRC.

 

NOTE - 13COMMITMENTS AND CONTINGENCIES

 

(a)Operating lease commitments

 

Ocean Technology leased certain office space under a non-cancellable operating lease agreement with a term of 3 years with fixed monthly rentals expiring on February 17, 2014, and generally not containing significant renewal options. Total rent expenses for the six months ended June 30, 2012 and 2011 was $40,000 and $39,618, respectively. Future minimum rental payments due under the non-cancelable operating lease agreement are approximately $131,000 in total in the following two years.

 

21
 

 

CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

(b)Capital commitments

 

In 2010, Mingxiang entered into an agreement with an independent third party (the “Third Party Contractor”) in relation to the construction of a cold storage facility. A supplementary agreement was entered into between Mingxiang and the Third Party Contractor in September 2011 related to additional gross areas, machineries and equipment required for the facility. The facilities have commenced operating since the end of July, 2012. Total estimated construction costs are expected to be approximately $25.0 million. As of June 30, 2012, the Company recorded approximately $24.2 million as construction in progress. Hence the aggregated contingent payments related to the Third Party Contractor are approximately $0.8 million as of June 30, 2012.

 

(c)Guarantees

 

As of June 30, 2012, Mingxiang was contingently liable as guarantor with respect to the loan of $475,519 (equivalent to RMB3,000,000) to an unrelated third party, Shishi Han Jiang Hua Lian Knitting and Clothing Factory (“Han Jiang Hua Lian”). The term of this guarantee is for the period from November 2008 through December 2017. Pursuant to the loan agreement, Han Jiang Hua Lian will repay the loan by installments and be fully settled by December 31, 2017. Should Han Jiang Hua Lian fail to make its debt payments due at any time from the date of guarantee, Mingxiang will be obligated to perform under the guarantee by primarily making the required payments, including late fees and penalties. The maximum potential amount of future payments that the Mingxiang is required to make under the guarantee is $475,519 (equivalent to RMB3,000,000).

 

As of December 31, 2010, Mingxiang was contingently liable as guarantor with respect to the loans of $792,531 (equivalent to RMB5,000,000) to an unrelated third party, Shishi Yu Ching Knitting and Clothing Company (“Yu Ching”). The term of this guarantee is for the period from January 2009 through January 2011. During 2011, Yu Ching repaid the principal amount of the loan in the amount of $792,531 (equivalent to RMB5,000,000) but left the amount of loan interest unsettled due to a disagreement between Yu Ching and the creditor in relation to the calculation of the loan interest. Should Yu Ching fail to make its loan interest payments due at any time from the date of guarantee, Mingxiang will be obligated to perform under the guarantee by primarily making the required payments, including late fees and penalties.

 

According to the Personal Guarantee Agreement between Mingxiang and Mr. Liu, CEO, Mr. Liu agreed to bear all liabilities and costs incurred from a direct claim by the creditor if either Han Jiang Hua Lian or Yu Ching fails to make payments to the creditor upon due dates.

 

In accordance with Accounting Standard Codification (“ASC”) 460-10 “Guarantees”, a guarantor must recognize a liability for the fair value of the obligations it assumes under certain guarantees. Mingxiang did not receive any consideration for the guarantee and has determined the fair value of the indemnification to be insignificant. As of June 30, 2012, the Company has not recorded any liabilities under these guarantees.

 

NOTE - 14SUBSEQUENT EVENT

 

In accordance with ASC 855 “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, we have evaluated all events or transactions that occurred after June 30, 2012 up through the date we issued the condensed consolidated financial statements.

 

On November 18, 2011, the Company entered into an Investor Relations Consulting Agreement with MZHCI LLC (“MZHCI”) to provide consulting services for the Company. In connection with such service, the Company agreed to issue 25,000 shares of common stock to MZHCI. The shares of common stock were valued at $22,750 or $0.91 per share and issued on July 27, 2012.

 

We did not have any material recognizable subsequent event except above issuance of shares.

 

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ITEM 2.     Management's Discussion and Analysis of Financial Condition and Results of Operation

 

The following review concerns the six months ended June 30, 2012 and 2011, which should be read in conjunction with 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 (“Ocean Technology”), and its subsidiaries, Shishi Rixiang Marine Foods Co., Ltd. (“Rixiang”) and Shishi Huabao Mingxiang Foods Co., Ltd. (“Mingxiang”), Shishi Huabao Jixiang Water Products Co., Ltd. (“Jixiang”), and Shishi Xianglin Trading Co., Ltd. (“Xianglin”), which are incorporated in the PRC. We engage in the business of processing, distribution and sale of processed seafood products and algae-based beverage products, as well as the trading of marine catch. Our objective is to establish ourselves as a leading producer of processed seafood products and algae-based beverage products in the PRC and overseas markets.

 

Reverse acquisition and private placement

 

On November 17, 2007, we completed a reverse acquisition transaction with Ocean Technology through a share exchange with Ocean Technology’s former stockholders.

 

Pursuant to the Share Exchange Agreement, the former shareholders of Ocean Technology exchanged 100% of their outstanding capital stock in Ocean Technology for approximately 15,624,034 shares of our common stock, or approximately 93.15% of our outstanding shares of common stock after the share exchange.

 

Concurrently with the closing of the reverse acquisition on November 17, 2007, we completed a private placement of our securities to certain accredited investors who subscribed for an aggregate of 6,199,441 shares of our common stock and warrants to purchase an aggregate of 1,239,888 shares of our common stock at $3.214 per unit, each unit consisting of one share of common stock and a warrant to purchase one-fifth of one share of our common stock. Each warrant issued to the investors had a term of three years and all unexercised warrants expired in November 2010.

 

Sales

 

We are a seafood producer engaged in the processing, distribution and sale of seafood products and algae-based beverage products, as well as the trading of marine catch. In 2010, we became a manufacturer of algae-based soft drinks through our acquisition of an 80% interest in Xianghe, which is also an operating subsidiary of Ocean Technology.

 

All rental income, which is relatively immaterial compared to our principal revenues from sale of processed seafood products, beverage products and trading of marine catch, is recognized as "Other Income" in our financial statements. In particular, Mingxiang and Rixiang are responsible for the rental income related to the collection on the 31 and 6 shop spaces, respectively, at our factory in Dabao Industrial Zone. Majority of these rental contracts are based on a one-year lease term and only 1 rental contract is based on a four-year lease term.

 

23
 

 

Our dried processed seafood products include dried prawns, dried squids, dried file fish, roasted prawns, shredded roasted squids, roasted squids, roasted file fish and other seafood items. The raw materials for our processed seafood products are solely purchased from independent fishermen in nearby markets for further processing. Our dried processed seafood is predominantly sold under our registered trademark, the “Mingxiang” brand name. Our brand name has been awarded the “Fujian Famous Brand” award by the Fujian Commerce Authority. Our dried processed seafood products are mainly sold to distributors in Fujian and Zhejiang provinces, as well other nearby provinces, who in turn distribute them to major supermarkets and retailers throughout these provinces.

 

For marine catch, we buy the marine catch from the suppliers and then sell to either trading companies or distributors on a direct basis as opportunistic purchases and sales according to the seasonality of respective seafood species. The marine catch is predominantly sold to distributors in Liaoning, Fujian and Shandong provinces, and overseas customers in the Philippines and Indonesia.

 

Our branded “Hi-Power” algae-based drink was developed by the Yellow Sea Fisheries Research Institute at Chinese Academy of Fishery Sciences in coordination with the founder, Qiu. Hi-Power is marketed as a high-protein content drink, low in calories and fat, which provides the consumers a combination of immune system benefits, improved digestion and reductions in hyperglycemia and hypertension. Hi-Power’s target market focuses on health-conscious consumers in China’s fast-growing beverage market. Xianghe has a network of distributors in Fujian and Zhejiang which sell Hi-Power to retail food stores, restaurants, food supply dealers and the hospitality industry.

 

Sales of our processed seafood products accounted for approximately 17.4% and 60.8% of our total sales in the second quarter of 2012 and 2011, respectively. Trading of our marine catch accounted for approximately 62.5% and nil of our total sales in the second quarter of 2012 and 2011, respectively. Sales of our algae-based beverage products accounted for approximately 20.1% and 39.2% of our total sales in the second quarter of 2012 and 2011, respectively. We expect the sales of our algae-based beverage products will remain strong in the coming years given our continuous expansion into untapped areas and contribution over the related sales and marketing campaigns since our acquisition at the beginning of 2010.

 

A detailed breakdown of our sales by major geographical markets is set out in the section “Results of Operations” herein.

 

Factors that can affect our sales are as follows:

 

·The level of sales is dependent on the supply of raw materials on a timely basis. Raw material costs accounted for approximately 73.2% and 71.8% of our total cost of revenue of processed seafood products in the second quarter of 2012 and 2011, respectively. The availability of these raw materials could be affected by a large number of factors, including, inter alia, the availability of fish stock, weather conditions, water contamination, government policies and regulations where such fishing is carried out, the stability of supplies from fishermen and pressure from environmental or animal rights groups.

 

·Specifically, fishing activities in waters around the PRC are restricted in June and July each year to ensure sustainable aquatic resources. As such, some of our suppliers such as fishermen are restricted from fishing during this period due to the restrictions against fishing along the Taiwan Strait imposed by the PRC’s Ministry of Agriculture. There is no assurance that the PRC government may not impose more stringent fishing regulations, including but not limited to longer or more frequent periods that restrict fishing.

 

·Any shortage or contamination in the supply of or increase in the prices of the raw materials for our processed seafood and algae-based beverage products will adversely affect our sales and profit margins.

 

·In March 2011, the northern region of Japan experienced a severe earthquake followed by a tsunami. The earthquake and tsunami caused extensive and severe structural damage in Japan, including heavy damage to roads and railways as well as fires in many areas, and a dam collapse and damage to several nuclear reactors. Although to date the damage caused by the earthquake and tsunami have not damaged our access to raw materials, there can be no assurance that such access may not be affected. Even though government officials and health experts in Japan and China stated the doses of nuclear radiation leaks are low and not a threat to human health unless the tainted products are consumed in abnormally excessive quantities, concern of seafood contamination adversely affected our sales of seafood and algae-based beverage products as a result of consumers’ perception of food safety in relation to the nuclear radiation leaks in Japan.

 

24
 

 

·In May 2011, inspectors of the government of Taiwan detected dangerous levels of industrial plasticizers in sports drinks and soft drinks, used to substitute for palm oil as clouding agents in drinks, with levels far in excess of the daily allowed intake. One plasticizer, known as DEHP, is a possible carcinogen, and thought capable of wreaking havoc with children’s reproductive organs. Since then, the plasticizers have been found in a range of foods and drinks. China, Hong Kong, South Korea and the Philippines have recalled beverage bottles suspected of contamination imported from Taiwan. The beverage products sector in the East Asia region was adversely affected by the food scandal, and new legislation with higher food safety standard of beverage products may be implemented in the PRC. The DEHP crisis may affect our beverage products business as a result of any failure to comply with the new standard or adverse changes in the beverage products sector.

 

·Our ability to maintain existing accreditations such as HACCP, ISO9001:2000, ISO14001:2004 and the EU Export Certification accreditations will affect our ability to maintain our presence in our existing market and to expand into new market territories.

 

·Our ability to price our products competitively against existing competitors and new market entrants by achieving economies of scale.

 

·Our ability to build on our established track record and reputation as a supplier of high quality processed seafood products and capability to deliver products in a timely manner.

 

·Our ability to maintain existing business relationships and to secure new customers, which may be affected by the general economic or political conditions in our local and overseas markets.

 

·Our ability to introduce new products to capture a wider group of consumers and to cater to different and changing consumers’ preferences.

 

·Our ability to expand our drink business through marketing campaigns and penetration into new areas.

 

·Our ability to respond successfully to changes in the highly competitive beverage marketplace domestically and internationally.

 

Please refer to the section “Risk Factors” herein and discussed in our Annual Report on Form 10-K/A for the year ended December 31, 2011 for further information on other factors that may affect our revenue.

 

Production facilities and employees

 

Our production facilities are located at Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province, in the PRC. We have four production lines for the processing of dried processed seafood products: roasted file fish, roasted prawns, shredded roasted squid and roasted squids, and one production line for the processing of frozen seafood products.

 

As at June 30, 2012, we employed 548 employees.

 

Seasonality

 

We do not experience any significant seasonality in relation to sales for our processed seafood and algae-based beverage products. However, sales for our processed seafood products are usually higher before and during the Chinese New Year and lower during summer time. Sales for our algae-based beverage products are expected to be higher before and during the Chinese New Year and during the summer.

 

NEW BUSINESS DEVELOPMENT

 

Development of cold storage facilities

 

On November 6, 2009, we won the auction for the purchase of the 40-year use right of a land in Shishi City, Fujian. In September 2010, we entered into an agreement with a third party contractor to build cold storage facilities on the land with a capacity of approximately 20,000 tons, to take advantage of its proximity to the port where we obtain fresh marine catch to be processed into seafood products. We are financing the total estimated $27.3 million in land use rights and construction costs from funds generated by operations. The facilities have commenced operating since the end of July, 2012. We have paid approximately $24.2 million in relation to the construction costs as at June 30, 2012 and the total estimated construction costs are approximately $25.0 million.

 

25
 

 

We intend to provide high standard, modernized cold storage, freezing and ice making services to the port area through the exclusive cold storage facilities. We may utilize certain cold storage spaces on our own going forward which will not only help to reduce storage costs but also are expected to improve margins for our current seafood segments as a result of bulk purchases at favorable prices.

 

RESULTS OF OPERATIONS

 

We derive our sales from the sales of processed seafood products, marine catch and algae-based beverage products. The breakdown of our sales and gross profit by product, as well as by geographical location of our customers for the three and six months ended June 30, 2012 and 2011 are set out below:

 

Breakdown of our past performance by principal products and geographical region

 

Sales by product

 

   Three months ended June 30,   Six months ended June 30, 
   2012       2011       2012       2011     
   US$’000   %   US$’000   %   US$’000   %   US$’000   % 
                                 
Processed seafood products   10,657    17.4    13,423    60.8    20,560    26.9    33,292    68.3 
Marine catch   38,334    62.5    -    -    38,334    50.2    76    0.2 
Algae-based beverage products   12,293    20.1    8,646    39.2    17,474    22.9    15,358    31.5 
Total   61,284    100.0    22,069    100.0    76,368    100.0    48,726    100.0 

 

Sales by geographical region

 

   Three months ended June 30, 2012 
   Processed seafood
products
   Marine catch   Algae-based
beverage products
   Total 
   US$’000   %   US$’000   %   US$’000   %   US$’000   % 
PRC                                        
Shandong   855    8.0    14,842    38.7    -    -    15,697    25.6 
Zhejiang   3,628    34.1    -    -    1,816    14.8    5,444    8.9 
Fujian   5,586    52.4    156    0.4    10,477    85.2    16,219    26.4 
Guangdong/ Shenzhen   588    5.5    -    -    -    -    588    1.0 
Jiangsu/ Shanghai   -    -    -    -    -    -    -    - 
Others (1)   -    -    22,290    58.2    -    -    22,290    36.4 
Total PRC   10,657    100.0    37,288    97.3    12,293    100.0    60,238    98.3 
Asia (2)   -    -    1,046    2.7    -    -    1,046    1.7 
Total   10,657    100.0    38,334    100.0    12,293    100.0    61,284    100.0 

 

   Three months ended June 30, 2011 
   Processed seafood
products
   Marine catch   Algae-based
beverage products
   Total 
   US$’000   %   US$’000   %   US$’000   %   US$’000   % 
PRC                                        
Shandong   966    7.2    -    -    -    -    966    4.4 
Zhejiang   6,018    44.8    -    -    969    11.2    6,987    31.7 
Fujian   5,678    42.3    -    -    7,677    88.8    13,355    60.5 
Guangdong/ Shenzhen   599    4.5    -    -    -    -    599    2.7 
Jiangsu/ Shanghai   158    1.2    -    -    -    -    158    0.7 
Others   4    0.0    -    -    -    -    4    0.0 
Total PRC   13,423    100.0    -    -    8,646    100.0    22,069    100.0 
Asia   -    -    -    -    -    -    -    - 
Total   13,423    100.0    -    -    8,646    100.0    22,069    100.0 

 

26
 

 

   Six months ended June 30, 2012 
   Processed seafood
products
   Marine catch   Algae-based
beverage products
   Total 
   US$’000   %   US$’000   %   US$’000   %   US$’000   % 
PRC                                        
Shandong   1,734    8.4    14,842    38.7    -    -    16,576    21.7 
Zhejiang   7,375    35.9    -    -    3,117    17.8    10,492    13.7 
Fujian   10,343    50.3    156    0.4    14,357    82.2    24,856    32.5 
Guangdong/ Shenzhen   1,108    5.4    -    -    -    -    1,108    1.5 
Jiangsu/ Shanghai   -    -    -    -    -    -    -    - 
Others (1)   -    -    22,290    58.2    -    -    22,290    29.2 
Total PRC   20,560    100.0    37,288    97.3    17,474    100.0    75,322    98.6 
Asia (2)   -    -    1,046    2.7    -    -    1,046    1.4 
Total   20,560    100.0    38,334    100.0    17,474    100.0    76,368    100.0 

 

   Six months ended June 30, 2011 
   Processed seafood
products
   Marine catch   Algae-based
beverage products
   Total 
   US$’000   %   US$’000   %   US$’000   %   US$’000   % 
PRC                                        
Shandong   2,798    8.4    -    -    -    -    2,798    5.7 
Zhejiang   14,296    43.0    -    -    969    6.3    15,265    31.3 
Fujian   13,563    40.7    -    -    14,389    93.7    27,952    57.4 
Guangdong/ Shenzhen   1,541    4.6    -    -    -    -    1,541    3.2 
Jiangsu/ Shanghai   1,090    3.3    -    -    -    -    1,090    2.2 
Others   4    0.0    -    -    -    -    4    0.0 
Total PRC   33,292    100.0    -    -    15,358    100.0    48,650    99.8 
Asia (2)   -    -    76    100.0    -    -    76    0.2 
Total   33,292    100.0    76    100.0    15,358    100.0    48,726    100.0 

 

(1)Sales to PRC Others mainly relate to the trading of marine catch transacted in Liaoning province.
(2)Sales to Asia relate to exports to the Philippines.

 

Three months ended June 30, 2012 compared to three months ended June 30, 2011, and six months ended June 30, 2012 compared to six months ended June 30, 2011

 

Sales

 

Our revenue increased by approximately $39.2 million or 177.7% from $22.1 million for the three months ended June 30, 2011 to $61.3 million for the same period ended June 30, 2012. The increase in revenue was mainly attributed to the increase in sales of our marine catch and algae-based beverage products, partially offset by the decrease in sales of our processed seafood products. Sales of our processed seafood products decreased by $2.8 million or 20.6% year over year to $10.7 million, whereas sales of algae-based beverage products increased by $3.6 million or 42.2% to $12.3 million for the same periods under review. Our marine catch segment realized sales of $38.3 million for the three months ended June 30, 2012, compared to nil for the same period in last year.

 

Our revenue during the six months ended June 30, 2012 increased to $76.4 million by approximately $27.6 million or 56.7% compared to $48.7 million we realized during the six months ended June 30, 2011. Sales of our processed seafood products decreased by $12.7 million or 38.2%, whereas sales of our marine catch segment increased by $38.3 million. Sales of our algae-based beverage products increased by $2.1 million or 13.8% to $17.5 million during the six months ended June 30, 2012.

 

27
 

 

As a result of consumers’ perception of food safety in relation to the nuclear radiation leaks in Japan which occurred in March 2011, sales of processed seafood products have been significantly and adversely affected since the second quarter of 2011. While we are confident that the seafood we use to produce our processed seafood products is safe, it is unclear how long it will take for consumer confidence in seafood products to normalize.

 

Calendar year ended December 31, 2012 is the third year in which we recognize sales of our algae-based beverage products since the acquisition of Xianghe on January 1, 2010. In 2010, our distribution network for the beverage segment was solely Fujian province. After gaining experience in Fujian, we expanded our distribution into Zhejiang province in the second quarter of 2011. The growth from Fujian and Zhejiang has been adversely affected by the public concern over the plasticizer contamination in the beverage industry, as well as the lower-than-expected temperatures in the southern regions of China during the summer of 2011. As a result of our continuous contribution to the related sales and marketing campaigns, sales of our algae-based beverage products for the second quarter of 2012 increased by $3.6 million or 42.2% to $12.3 million compared to the second quarter of 2011. Given our expansion plan into additional untapped areas of the domestic market and our increased marketing expenditures, we expect the sales of our beverage segment to remain strong in the coming years. Accordingly, the number of sales staff has increased significantly since January 1, 2010 from 23 to 96, as of June 30, 2012.

 

Trading of marine catch is deemed as opportunistic purchases and sales of frozen seafood materials and therefore the sales volume fluctuates significantly from period to period. We intend to buy marine catch in blocks from suppliers when their supplies are high and sell the stocks to customers when market prices go up. Usually the inventory cycle will be less than a year. Though the profit margin from the trading segment is relatively lower compared to that of both processed seafood and algae-based beverage products, the trading segment is a good source of revenue and profit given our expertise in the seafood industry and surplus cash in hand.

 

Cost of revenue

 

Our cost of revenue comprises the cost of our processed seafood and algae-based beverage products operations, as well as the cost of our marine catch. The breakdown is as follows:

 

   Three months ended June 30,   Six months ended June 30, 
   2012       2011       2012       2011     
   US$’000   %   US$’000   %   US$’000   %   US$’000   % 
                                 
Processed seafood products   7,631    14.6    9,763    65.4    14,902    23.7    22,887    71.6 
Marine catch   37,086    70.9    -    -    37,086    59.1    47    0.2 
Algae-based beverage products   7,592    14.5    5,155    34.6    10,806    17.2    9,028    28.2 
Total   52,309    100.0    14,918    100.0    62,794    100.0    31,962    100.0 

 

Cost of revenue - Processed seafood products

 

Our cost of revenue comprises mainly raw materials, packaging materials, direct labor and manufacturing overhead. The following table sets out details of our cost of revenue:

 

   Three months ended June 30,   Six months ended June 30, 
   2012       2011       2012       2011     
   US$’000   %   US$’000   %   US$’000   %   US$’000   % 
                                 
Raw materials   5,588    73.2    7,012    71.8    10,849    72.8    16,708    73.0 
Packaging materials   824    10.8    1,154    11.8    1,643    11.0    2,819    12.3 
Direct labor   572    7.5    788    8.1    1,149    7.7    1,518    6.6 
Manufacturing overhead   647    8.5    809    8.3    1,261    8.5    1,842    8.1 
Total   7,631    100.0    9,763    100.0    14,902    100.0    22,887    100.0 

 

Raw materials

 

Raw materials comprise mainly seafood such as fish, prawns and squids. We use seafood which are fished from the open sea and not bred through aquaculture. The costs of these raw materials are dependent on the prevailing market prices. There is a stable and abundant supply from the existing market. We are located close to the Xiangzhi (Shishi) fishing port, which is one of the largest fishing ports in Fujian province, and one of the state-level fishing port centres in the PRC.

 

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We believe our strategic location allows us to have up-to-date information on the market price of our raw materials and this has allowed us to purchase our raw materials at the best available price. Our proximity to our suppliers has also allowed us to have fresh supplies of raw materials and this has enabled us to ensure freshness and quality in our finished products. The proximity has also enabled us to reduce raw material transportation costs and lead-time to obtain our supplies.

 

Since the nuclear disaster in Japan last year, there was an upward pressure on the prices of our raw materials, including small-sized seafood materials, as a result of fiercer competition with the breeding farms where the small-sized seafood materials are used as feeds.

 

Raw material costs accounted for approximately 72.8% and 73.0% of our cost of revenue for the six months ended June 30, 2012 and 2011, respectively. The decrease in raw material costs for the periods under review was mainly due to our decreased production and sales of processed seafood products, whereas direct labor and manufacturing overhead are relatively considered as invariable cost factors comparing to raw materials and packaging materials.

 

The percentage of raw materials cost as a proportion of the total cost of revenue is affected by the product mix of the relevant financial year and the market price of the raw materials. We mitigate the fluctuation in market prices of raw materials by bulk purchasing and stock management. We are able to stock up our raw materials when prices are lower, as we have our own cold storage facility and we can also utilize other nearby facilities for storage when needs arise. This will ensure a steady supply of raw materials for the processing of seafood products throughout the year.

 

Packaging materials

 

Packaging materials accounted for approximately 11.0% and 12.3% of our cost of revenue for the six months ended June 30, 2012 and 2011, respectively. The decrease was primarily because the rate of increase in direct labor costs and manufacturing overhead was higher than that in packaging costs for the periods under review. The decrease in packaging material costs for the periods under review was mainly due to the decreased production and sales of processed seafood products.

 

Direct labor

 

Direct labor costs accounted for approximately 7.7% and 6.6% of our cost of revenue for the six months ended June 30, 2012 and 2011, respectively. Direct labor includes mainly salaries and wages paid to employees who are involved in the production process. Direct labor costs are dependent on factors such as production volume, number of employees, wage rate and applicable government regulations (including minimum wage requirements, statutory welfare and insurance fund contributions). The fluctuation in direct labor costs as a percentage of costs of sales is dependent on the degree of processing required for the end products.

 

The total headcount for the processed seafood segment as at June 30, 2012 has decreased to 333 from 582 as of December 31, 2011, as a result of the decreased production and sales of processed seafood products. The decrease in direct labor costs for the second quarter of 2012 was mainly due to the reduction in headcount, partially offset by the increased wage rates during the first half of 2012 to cope with the market standard.

 

Manufacturing overhead

 

Manufacturing overhead comprises depreciation, water, electricity and other fuel costs which are used directly in the production of finished goods. The decrease in manufacturing overhead for the periods under review was mainly due to the decreased production and sales of processed seafood products.

 

Cost of revenue - Marine catch

 

   Three months ended June 30,   Six months ended June 30, 
   2012       2011       2012       2011     
   US$’000   %   US$’000   %   US$’000   %   US$’000   % 
                                 
Raw materials   36,910    99.5    -    -    36,910    99.5    36    76.6 
Other expenses   176    0.5    -    -    176    0.5    11    23.4 
Total   37,086    100.0    -    -    37,086    100.0    47    100.0 

 

29
 

 

Raw materials

 

We buy the marine catch from the suppliers and then sell to the customers on a direct basis. The marine catch is predominantly sold to distributors in Liaoning, Fujian and Shandong provinces, and overseas customers in the Philippines. The cost of the raw material is based on the market price at the time of purchase.

 

The increase in raw materials cost for the periods under review was in line with the increased sales of trading materials.

 

Other expenses

 

Other expenses mainly relate to the costs of packaging materials and ice required to keep the marine catch fresh.

 

Cost of revenue - Algae-based beverage products

 

Our cost of revenue comprises mainly raw materials, packaging materials and manufacturing overhead. The following table sets out details of our cost of revenue:

 

   Three months ended June 30,   Six months ended June 30, 
   2012       2011       2012       2011     
   US$’000   %   US$’000   %   US$’000   %   US$’000   % 
                                 
Raw materials   1,108    14.6    758    14.7    1,572    14.5    1,340    14.8 
Packaging materials   5,141    67.7    3,524    68.4    7,323    67.8    6,127    67.9 
Manufacturing overhead   1,343    17.7    873    16.9    1,911    17.7    1,561    17.3 
Total   7,592    100.0    5,155    100.0    10,806    100.0    9,028    100.0 

 

Raw materials

 

Raw materials comprise mainly the algae extracts and other beverage ingredients such as sugar and herbal powder. The costs of these raw materials are dependent on the prevailing market prices, which are relatively stable as there is a stable and abundant supply from the existing market.

 

Raw material costs accounted for approximately 14.5% and 14.8% of our cost of revenue for the six months ended June 30, 2012 and 2011, respectively. The percentage of raw materials cost as a proportion of the total cost of revenue is affected by changes in ingredient mix from time to time and the market price of the raw materials. The increase in raw materials cost for the periods under review was in line with the increased sales of our algae-based beverage products.

 

Packaging materials

 

Packaging materials comprise iron and aluminium foils, which are used to produce the cans, and paper boxes. The costs of these raw materials are dependent on the prevailing market prices with a stable and abundant supply from the existing market.

 

Packaging materials accounted for approximately 67.8% and 67.9% of our cost of revenue for the six months ended June 30, 2012 and 2011, respectively. The increase in packaging materials cost for the periods under review was in line with the increased sales of our algae-based beverage products.

 

Manufacturing overhead

 

We utilize two third party manufacturers to produce our algae-based beverage products. Manufacturing costs are charged based on the production volume. We will use a number of manufacturers going forward so as to mitigate the concentration risks.

 

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Gross profit by product

 

   Three months ended June 30,   Six months ended June 30, 
   2012       2011       2012       2011     
   US$’000   %   US$’000   %   US$’000   %   US$’000   % 
                                 
Processed seafood products   3,026    33.7    3,660    51.2    5,658    41.7    10,405    62.1 
Marine catch   1,248    13.9    -    -    1,248    9.2    29    0.2 
Algae-based beverage products   4,701    52.4    3,491    48.8    6,668    49.1    6,330    37.7 
Total   8,975    100.0    7,151    100.0    13,574    100.0    16,764    100.0 

 

Gross profit margin by profit

 

   Three months ended June 30,   Six months ended June 30, 
   2012   2011   2012   2011 
   %   %   %   % 
Processed seafood products   28.4    27.2    27.5    31.3 
Marine catch   3.3    -    3.3    37.7 
Algae-based beverage products   38.2    40.4    38.2    41.2 
Total   14.6    32.4    17.8    34.4 

 

Gross profit

 

Gross profit increased by 25.5% or $1.8 million, from $7.2 million for the three months ended June 30, 2011 to $9.0 million for the same period in 2012. Overall gross profit margin dropped by 17.8% from 32.4% for the three months ended June 30, 2011 to 14.6% for the same period in 2012. Gross profit margin for the processed seafood products operations increased from 27.2% for the three months ended June 30, 2011 to 28.4% for the same period in 2012 which was mainly due to the reduced headcount as a result of decreased scale of production and the change in the product mix, by which more products are sold with less packaging costs. Marine catch sales are deemed as opportunistic trading of frozen seafood in blocks and therefore the corresponding profit margin is dependent on the prevailing market conditions which could be fluctuated significantly from time to time. Gross profit margin for the algae-based beverage segment decreased from 40.4% to 38.2% for the same periods under review mainly due to the increased costs of raw materials and packaging materials.

 

Whereas gross profit dropped by 19.0% or $3.2 million, to $13.6 million for the six months ended June 30, 2012 comparing to the same period in 2011. Overall gross profit margin for the six months ended June 30, 2012 dropped from 34.4% to 17.8% for the same period in 2011. Gross profit margin for the processed seafood products operations decreased from 31.3% to 27.5%, which was mainly due to the decreased scale of production and the increased costs of raw materials and manufacturing overhead. Gross profit margin for the algae-based beverage segment was decreased from 41.2% to 38.2% for the same periods under review with similar reasons as explained above.

 

Depreciation and amortization

 

Depreciation and amortization accounted for approximately 1.8% and 2.7% of our total revenue for the six months ended June 30, 2012 and 2011, respectively. Depreciation and amortization was mainly related to the amortization of intangible assets associated with the acquisition of the beverage business declared effective at the beginning of 2010. The algae-based beverage know-how is amortized over its estimated useful life of 10 years, on a straight-line basis, at a yearly amortization charge of approximately $2.5 million.

 

Sales and marketing expenses

 

Our sales and marketing expenses comprise mainly salaries of sales and marketing staff, investor relations fees, advertising and promotional costs.

 

Our sales and marketing expenses accounted for approximately 17.4% and 11.3% of our total revenue for the six months ended June 30, 2012 and 2011, respectively. The increase in the sales and marketing expenses was mainly due to the increase of advertising and promotional costs to strengthen brand position and improve market awareness in both existing and new markets and cope with the marketing strategies associated with the beverage products. We have spent approximately $5.5 million in advertising campaigns including TV commercials and $6.6 million in promotional costs including subsidized products for promotional purposes, free gifts and other direct marketing events during the first half of 2012 to raise awareness of our processed seafood and algae-based beverage products. Accordingly, the number of sales staff has increased from 47 in 2010 to 135 as at June 30, 2012, of which 96 were related to the beverage products segment.

 

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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 increased to approximately $1.7 million for the six months ended June 30, 2012 compared to $1.3 million for the six months ended June 30, 2011 and accounted for approximately 2.3% and 2.8% of our total revenue for the six months ended June 30, 2012 and 2011, respectively. The increase in the general and administrative expenses was mainly due to the increased legal and professional fees and the smaller reversal of allowance for doubtful accounts during the periods under review.

 

Stock-based compensation

 

On April 1, 2011, the Company granted compensatory stock awards totaling 700,000 common shares to certain of its officers, directors and employees.  Based on the closing stock price of the grant date, the fair value of these stock awards are estimated to be approximately $2.7 million, which is recognized as compensation expense, using the straight-line method, over the service period of one year from April 1, 2011 to March 31, 2012.

 

Other income

 

Other income relates to rental income and interest income.

 

Rental income relates to the collection of rent on the 37 shop spaces at our factory in Dabao Industrial Zone. Majority of these rental contracts are based on a one-year lease term and only 1 rental contract is based on a four-year lease term. Interest income is earned from cash balances with banks as a result of operational cash inflow.

 

Interest expense

 

Our interest expense relates to interest costs incurred on the various short-term bank borrowings taken by us for working capital requirements. Our interest expense accounted for approximately 0.2% of our total revenue for the six months ended June 30, 2012. During the last three quarters, a short-term loan of $7.2 million was drawn down for working capital needs and to maintain the effectiveness of the facility line with the bank.

 

Income before income tax

 

Our income before income tax decreased by $11.5 million or 143.3%, from $8.0 million income for the six months ended June 30, 2011 to $3.5 million loss for the same period in 2012. The decrease was mainly due to the combination of the decrease in overall gross profit of approximately $3.2 million and the increase in the sales and marketing expenses of approximately $7.8 million, as a result of the factors described above.

 

Income tax expense

 

Our profit is subject to the prevailing tax rate applicable to the respective jurisdictions in which we operate.

 

Rixiang, Jixiang, Mingxiang, Xianghe and Xianglin are subject to the Corporate Income Tax governed by the Income Tax Law of the People’s Republic of China, at a unified income tax rate of 25%.

 

In 2009, Mingxiang received a notice of recognition as an enterprise of new and high technology in 2009, which was jointly issued by the Science and Technology Department of Fujian, the Finance Department of Fujian, the State Tax Bureau of Fujian and the Local Taxation Bureau of Fujian for the Company engaged in advanced food processing technologies for Fujian province. As a new and high technology company, Mingxiang is qualified for a reduced tax rate of 15% on its assessable income for the period of three years, through 2012.

 

Income tax expenses for the six months ended June 30, 2012 and 2011 and were approximately $0.2 million and $1.4 million, respectively. The effective tax rates were -6.0% and 17.4%, respectively, for the periods under review.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Our operations are funded through a combination of shareholders’ equity, borrowings and internally generated funds from our operations. Our cash and cash equivalents as at June 30, 2012 amounted to approximately $17.4 million, with short-term loans of $7.2 million being drawn down during the last three quarters.

 

A summary of our cash flows for the six months ended June 30, 2012 and 2011 is as follows:

 

   Six months ended June 30, 
US$’000  2012   2011 
         
Net cash provided by operating activities   12,881    27,013 
Net cash used in investing activities   (1,193)   (4,949)
Net cash provided by (used in) financing activities   4,598    (224)
Net change in cash and cash equivalents   16,286    21,840 
Foreign currency translation adjustment   495    948 
Cash and cash equivalents at the beginning of the period   587    15,557 
Cash and cash equivalents at the end of the period   17,368    38,345 

 

Net cash provided by operating activities

 

Our net cash provided by operating activities for the six months ended June 30, 2012 amounted to approximately $12.9 million, which was a decrease of $14.1 million compared to net cash provided by operating activities for the same period in 2011. The decrease was mainly attributable to the net operating loss during the first half of 2012 and the difference in the decrease in accounts receivable of approximately $11.3 million and $31.3 million for the six months ended June 30, 2012 and 2011, respectively.

 

As of June 30, 2012, our cash and cash equivalents increased to $17.4 million from $0.6 million at December 31, 2011 mainly as a result of additional sales, the collection of outstanding accounts receivable and additional borrowing of short-term loans. Our accounts receivable decreased to $57.3 million at June 30, 2012 from $68.6 million at December 31, 2011.

 

Net cash used in investing activities

 

For the six months ended June 30, 2012, our net cash used in investing activities was approximately $1.2 million which was mainly attributable to the additional costs for the construction of the cold storage facilities.

 

Net cash provided by (used in) financing activities

 

Our net cash provided by financing activities was approximately $4.6 million for the six months ended June 30, 2012, which was mainly attributable to the net borrowing of short-terms bank loans.

 

For the six months ended June 30, 2011, our net cash used in financing activities was approximately $0.2 million, which was mainly attributable to the repayment of amount due to a shareholder.

 

Capital resources

 

We believe that after taking into account of our cash position, available bank facilities and cash generated from operating activities, we have adequate working capital to satisfy our current operating expenditures for the next twelve months. From time to time, we may identify new expansion opportunities for which there will be a need to use cash. We manage our cash based on thorough consideration of our corporate strategy as well as the macro economic situation. Factors we take into account when managing our cash include interest rates, foreign currency fluctuation as well as the flexibility in executing our acquisition and operational strategies.

 

We have built cold storage facilities adjacent to the fishing port with a capacity of approximately 20,000 tons, to take advantage of its proximity to the port where we obtain fresh marine catch to be processed into seafood products. We are financing the total estimated $27.3 million in land use rights and construction costs from funds generated by operations. The facilities have commenced operating since the end of July, 2012. We paid approximately $24.2 million in construction costs as at June 30, 2012 and the total estimated construction costs are approximately $25.0 million.

 

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During the last three quarters, our wholly-owned subsidiary, Mingxiang, obtained short-term bank loans, which loans totaled $7.2 million as of June 30, 2012. The loans were drawn down for working capital needs and to maintain the effectiveness of the facility line with the bank. The short-term loans are due by February, April and May 2013, respectively, and we have the right to roll over the loans. The weighted average effective interest rate per annum was 6.23% for the period ended June 30, 2012, payable quarterly. Interest expenses for the three and six months ended June 30, 2012 were $105,815 and $141,121, respectively and none of the interest incurred was capitalized.

 

Apart from the expansion plan and short-term bank loans 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 for the next twelve months. We do not have present plans to raise additional funds.

 

COMMITMENTS AND CONTINGENCIES

 

Operating lease commitments

 

Ocean Technology leased certain office space under a non-cancellable operating lease agreement with a term of 3 years with fixed monthly rentals expiring on February 17, 2014, and generally not containing significant renewal options. Total rent expenses for the six months ended June 30, 2012 and 2011 was $40,000 and $39,618, respectively. Future minimum rental payments due under the non-cancelable operating lease agreement are approximately $131,000 in total in the following two years.

 

Capital commitments

 

In 2010, Mingxiang entered into an agreement with an independent third party (the “Third Party Contractor”) in relation to the construction of a cold storage facility. A supplementary agreement was entered into between Mingxiang and the Third Party Contractor in September 2011 related to additional gross areas, machineries and equipment required for the facility. The construction is completed in the third quarter of 2012. Total estimated construction costs are expected to be approximately $25.0 million. As of June 30, 2012, the Company recorded approximately $24.2 million as construction in progress. Hence the aggregated contingent payments related to the Third Party Contractor are approximately $0.8 million as of June 30, 2012.

 

Guarantees

 

As of June 30, 2012, Mingxiang was contingently liable as guarantor with respect to the loan of $475,519 (equivalent to RMB3,000,000) to an unrelated third party, Shishi Han Jiang Hua Lian Knitting and Clothing Factory (“Han Jiang Hua Lian”). The term of this guarantee is for the period from November 2008 through December 2017. Pursuant to the loan agreement, Han Jiang Hua Lian will repay the loan by installments and be fully settled by December 31, 2017. Should Han Jiang Hua Lian fail to make its debt payments due at any time from the date of guarantee, Mingxiang will be obligated to perform under the guarantee by primarily making the required payments, including late fees and penalties. The maximum potential amount of future payments that the Mingxiang is required to make under the guarantee is $475,519 (equivalent to RMB3,000,000).

 

As of December 31, 2010, Mingxiang was contingently liable as guarantor with respect to the loans of $792,531 (equivalent to RMB5,000,000) to an unrelated third party, Shishi Yu Ching Knitting and Clothing Company (“Yu Ching”). The term of this guarantee is for the period from January 2009 through January 2011. During 2011, Yu Ching repaid the principal amount of the loan in the amount of $792,531 (equivalent to RMB5,000,000) but left the amount of loan interest unsettled due to a disagreement between Yu Ching and the creditor in relation to the calculation of the loan interest. Should Yu Ching fail to make its loan interest payments due at any time from the date of guarantee, Mingxiang will be obligated to perform under the guarantee by primarily making the required payments, including late fees and penalties.

 

According to the Personal Guarantee Agreement between Mingxiang and Mr. Liu, CEO, Mr. Liu agreed to bear all liabilities and costs incurred from a direct claim by the creditor if either Han Jiang Hua Lian or Yu Ching fails to make payments to the creditor upon due dates.

 

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In accordance with Accounting Standard Codification (“ASC”) 460-10 “Guarantees”, a guarantor must recognize a liability for the fair value of the obligations it assumes under certain guarantees. Mingxiang did not receive any consideration for the guarantee and has determined the fair value of the indemnification to be insignificant. As of June 30, 2012, the Company has not recorded any liabilities under these guarantees.

 

ISSUANCE OF COMMON STOCK

 

None.

 

CRITICAL ACCOUNTING POLICIES and estimates

 

This section should be read together with the Summary of Significant Accounting Policies included as Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 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. Please refer to Note 3 of the accompanying financial statements for further details of recent accounting pronouncements.

 

FOREIGN EXCHANGE EXPOSURE

 

Our sales are denominated in RMB and US dollars whilst our purchases and operating expenses are mostly denominated in RMB. As such, we may be exposed to any significant transactional foreign exchange exposure for our operations. However, to the extent that we may enter into transactions in currencies other than RMB in the future, particularly as we penetrate into overseas markets, our financial results may be subject to fluctuations among those foreign currencies and RMB.

 

The percentage of our sales denominated in RMB and US dollars are as follows:

 

   Six months ended June 30, 
   2012   2011 
    %    % 
Sales          
RMB   98.6    99.8 
US dollars   1.4    0.2 
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, 2012, the exchange rate was approximately US$1.00 to RMB6.3089. There is no assurance that the PRC's foreign exchange policy will not be further altered. In the event that the PRC's policy is altered, significant fluctuations in the exchange rates of RMB against US dollars may arise. As a result, we will be subject to significant foreign exchange exposure and in the event that we incur foreign exchange losses, our financial performance will be adversely affected.

 

We do not have a formal hedging policy with respect to our foreign exchange exposure as our foreign exchange gains/ losses for the period under review have been relatively insignificant. We will continue to monitor our foreign exchange exposure in the future and will consider hedging any material foreign exchange exposure should the need arise. Should we enter into any hedging transaction in the future, such transaction shall be subject to review by our Board of Directors. In addition, should we establish any formal hedging policy in the future, such policy shall be subject to review and approval by our board prior to implementation.

 

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.

 

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ITEM 3.    Quantitative and Qualitative Disclosures about Market Risks

 

None.

 

ITEM 4.           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 June 30, 2012.

 

Under Rule 13a-15(e) and 15d-15(e), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of June 30, 2012 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 Controls over Financial Reporting

 

During the three months ended June 30 2012, there has been no change in our internal controls 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 controls over financial reporting.

 

Under Rule 13a-15(e) and 15d-15(e), the term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

·Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

 

·Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

 

·Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements.

 

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PART II - OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any pending legal proceedings which involve us or any of our properties or subsidiaries.

 

ITEM 1A.RISK FACTORS

 

In addition to the other information set forth in this Report, you should carefully consider the risks discussed in our Annual Report on Form 10-K/A for the year ended December 31, 2011, under the headings “Item 1. Business”, “Item 1A. Risk Factors” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” which risks could materially affect our business, financial condition or future results. The material changes in our risk factors from those described in the Annual Report on Form 10-K are as follows:

 

RISKS RELATED TO OUR BUSINESS

 

We are dependent on certain major suppliers for our raw materials. In the event we are no longer able to secure raw materials from these suppliers and are unable to find alternative sources of supply at similar or more competitive rates, our operations and profitability will be adversely affected.

 

For the production of our processed seafood and algae-based beverage products, we rely on our major suppliers for a significant portion of the supply of raw materials. Purchases from our top five suppliers of raw materials accounted for approximately 94.5% and 90.6% of our total purchases of raw materials for the six months ended June 30, 2012 and 2011, respectively. Purchases from our top supplier of raw materials accounted for approximately 71.0% and 52.0% of our total purchases of raw materials for the six months ended June 30, 2012 and 2011, 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 new cold storage facility will be subject to a number of development risks, including risks of entering into new business.

 

We have built cold storage facilities adjacent to the fishing port in Shishi city with a capacity of approximately 20,000 tons. The facilities have commenced operating since the end of July, 2012. We intend to enter into a new line of business to provide high standard, modernized cold storage, freezing and ice making services to the port area through the exclusive cold storage facilities.

 

We have yet to enter into any agreement or arrangement with third parties related to such new line of business. No assurance can be given that the new business will achieve profitable operations. The new line of business 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.

 

Our purchase of the beverage business involves the risks of entering into a new business.

 

On January 1, 2010, we purchased Xianghe, a beverage company, and entered into a new business segment where we needed to rely on the current management for the business acquired. Xianghe is a Fujian based manufacturer of the newly branded Hi-Power algae-based soft drinks. We did not have prior experience in the beverage business and the success of Xianghe is subject to all of the uncertainties regarding the development of a new business. Although we have started integrating the product into Mingxiang’s distribution network and further expanded the distribution into other untapped areas, there can be no assurance regarding the successful distribution and market acceptance of the beverage products. While we have successfully expanded sales of our beverage products from Fujian into Zhejang province and intend to expand our sales into additional untapped areas and have increased expenditures on advertising and promotions, our sales of algae-based products for the first six months of 2012 were lower than the forecasts on an annualized basis. If actual operating results of the drink business do not continue to improve as forecasted, the Company may be required to perform a full impairment analysis and record impairment charges in future quarters. Such an impairment charge would have a material adverse effect on the Company’s reported results.

 

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RISKS RELATED TO DOING BUSINESS IN CHINA

 

Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection.

 

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB.

 

Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

 

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.Mine Safety Disclosures

 

None.

 

ITEM 5.OTHER INFORMATION

 

None.

 

ITEM 6.EXHIBITS

 

INDEX TO EXHIBITS

OF

CHINA MARINE FOOD GROUP LIMITED

 

31.1   Rule 13a-14 (a)/15d-14 (a) Certification of Chief Executive Officer
31.2   Rule 13a-14 (a)/15d-14 (a) Certification of Chief Financial Officer
32.1   Section 1350 Certification of Chief Executive Officer
32.2   Section 1350 Certification of Chief Financial Officer

 

 XBRL Exhibit

101.INS† XBRL Instance Document.

101.SCH† XBRL Taxonomy Extension Schema Document.

101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF† XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB† XBRL Taxonomy Extension Label Linkbase Document.

101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document.

 

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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.

 

  CHINA MARINE FOOD GROUP LIMITED
   
  /s/ Pengfei Liu
Dated: August 14, 2012 Pengfei Liu, Chief Executive Officer
  (Principal executive officer)
   
  /s/ Marco Hon Wai Ku
Dated: August 14, 2012 Marco Hon Wai Ku, Chief Financial Officer
  (Principal financial officer and principal accounting officer)

 

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