CHINA MARINE FOOD GROUP LTD - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - CHINA MARINE FOOD GROUP LTD	Financial_Report.xls
EX-31.1 - CERTIFICATION - CHINA MARINE FOOD GROUP LTD	cmfo_ex311.htm
EX-31.2 - CERTIFICATION - CHINA MARINE FOOD GROUP LTD	cmfo_ex312.htm
EX-32.2 - CERTIFICATION - CHINA MARINE FOOD GROUP LTD	cmfo_ex322.htm
EX-32.1 - CERTIFICATION - CHINA MARINE FOOD GROUP LTD	cmfo_ex321.htm

U.S. Securities and Exchange Commission

Washington, D. C. 20549

FORM 10-Q

þ	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

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

For the transition period from _____ to _____

Commission File No. 001-34422

CHINA MARINE FOOD GROUP LIMITED

(Name of Registrant in its Charter)

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

Da Bao Industrial Zone, Shishi City Fujian, China 362700

(Address of Principal Executive Offices)

Issuer's Telephone Number: 86-595-8898-7588

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subjected to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes þ No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ

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: May 14, 2013, Common Stock: 29,722,976.

CHINA MARINE FOOD GROUP LIMITED.

FORM 10-Q

QUARTERLY PERIOD ENDED MARCH 31, 2013

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		35

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		39

	Signatures		40

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 March 31, 2013 and Audited Condensed Consolidated Balance Sheet as of December 31, 2012		4

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2013 and 2012		5

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012		6

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2013		7

Notes to Unaudited Condensed Consolidated Financial Statements as of March 31, 2013		8 - 22

TABLE OF CONTENTS

CHINA MARINE FOOD GROUP LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	March 31, 2013		December 31, 2012
	(Unaudited)		(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,774,088	$	880,259
Accounts receivable, net		25,553,045		54,045,852
Inventories		67,200,419		36,415,013
Prepaid expenses and other current assets		5,114,857		400,664

Total current assets		101,642,409		91,741,788

Property, plant and equipment, net		35,669,816		35,737,296
Land use rights, net		2,962,693		2,966,805
Construction in progress		398,940		158,702
Intangible assets, net		15,141,462		15,616,259

TOTAL ASSETS	$	155,815,320	$	146,220,850

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	18,989,564	$	8,760,375
Accounts payable, trade		2,769,083		4,227,177
Amount due to a shareholder		266,674		-
Income tax payable		-		321,306
Accrued liabilities and other payables		5,801,750		6,217,260

Total current liabilities		27,827,071		19,526,118

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 March 31, 2013 and December 31, 2012		-		-
Common stock, $0.001 par value; 100,000,000 shares authorized; 29,722,976 shares issued and outstanding as of March 31, 2013 and December 31, 2012		29,723		29,723
Additional paid-in capital		50,097,677		50,097,677
Statutory reserve		9,696,177		9,696,177
Accumulated other comprehensive income		13,650,682		12,946,218
Retained earnings		54,157,802		53,568,622
Total China Marine Food Group Limited shareholders’ equity		127,632,061		126,338,417
Non-controlling interests		356,188		356,315
Total shareholders’ equity		127,988,249		126,694,732

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	155,815,320	$	146,220,850

See accompanying notes to condensed consolidated financial statements.

TABLE OF CONTENTS

CHINA MARINE FOOD GROUP LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

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

(Unaudited)

	For the Three Months Ended March 31,
	2013			2012
REVENUE, NET
Processed seafood products	$	11,662,422		$	9,903,103
Marine catch		255,925			-
Algae-based beverage products		9,566,516			5,180,826
		21,484,863			15,083,929

COST OF REVENUE (INCLUSIVE OF DEPRECIATION AND AMORTIZATION)
Processed seafood products		(8,117,878	)		(7,270,735	)
Marine catch		(277,650	)		-
Algae-based beverage products		(5,844,309	)		(3,214,251	)
		(14,239,837	)		(10,484,986	)

GROSS PROFIT		7,245,026			4,598,943

OPERATING EXPENSES:
Depreciation and amortization		(618,734	)		(696,070	)
Sales and marketing		(4,780,800	)		(4,581,249	)
General and administrative		(741,633	)		(538,141	)
Stock-based compensation		-			(667,246	)

TOTAL OPERATING EXPENSES		(6,141,167	)		(6,482,706	)


INCOME (LOSS) FROM OPERATIONS		1,103,859			(1,883,763	)

OTHER INCOME (EXPENSES):
Rental income		50,662			49,305
Interest income		9,473			33,049
Interest expense		(211,514	)		(35,306	)

INCOME (LOSS) BEFORE INCOME TAXES		952,480			(1,836,715	)

INCOME TAX EXPENSE		(363,427	)		(207,720	)

NET INCOME (LOSS)		589,053			(2,044,435	)

Less: net loss attributable to non-controlling interests		127			46

NET INCOME (LOSS) ATTRIBUTABLE TO CHINA MARINE FOOD GROUP LIMITED	$	589,180		$	(2,044,389	)

Other comprehensive income:
- Foreign currency translation gain		704,464			830,593

COMPREHENSIVE INCOME (LOSS)	$	1,293,644		$	(1,213,796	)

Net income (loss) per share attributable to China Marine Food Group Limited
- Basic	$	0.02		$	(0.07	)
- Diluted	$	0.02		$	(0.07	)

Weighted average shares outstanding
- Basic		29,722,976			29,697,976
- Diluted		29,722,976			29,697,976

See accompanying notes to condensed consolidated financial statements.

TABLE OF CONTENTS

CHINA MARINE FOOD GROUP LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(Unaudited)

	For the Three Months Ended March 31,
	2013			2012

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	589,053		$	(2,044,435	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		844,054			771,392
Reversal of doubtful accounts		(143,180	)		(296,548	)
Changes in operating assets and liabilities:
Accounts receivable		28,635,987			59,309,683
Inventories		(30,785,406	)		(34,750,682	)
Prepaid expenses and other current assets		(4,714,193	)		(3,945,784	)
Accounts payable, trade		(1,458,094	)		(851,220	)
Income tax payable		(415,510	)		(173,761	)
Accrued liabilities and other payables		(321,306	)		(1,014,527	)

Net cash (used in) provided by operating activities		(7,768,595	)		17,004,118

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		-			(6,868	)
Cash paid to construction in progress		(240,238	)		(592,595	)

Net cash used in investing activities		(240,238	)		(599,463	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Advance from (Repayment of) amount due to a shareholder		266,674			(1,225	)
Proceeds from short-term borrowings		18,958,403			-
Repayment of short-term borrowings		(8,794,150	)		-

Net cash provided by (used in) financing activities		10,430,927			(1,225	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		2,422,094			16,403,430

Effect of exchange rate changes in cash and cash equivalents		471,735			465,709

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		880,259			586,914

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,774,088		$	17,456,053

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes	$	1,406,832		$	381,481
Cash paid for interest	$	211,514		$	35,306

See accompanying notes to condensed consolidated financial statements.

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CHINA MARINE FOOD GROUP LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

	China Marine Food Group Limited shareholders’ equity
	Common stock				Additional paid-in capital		Statutory reserve		Accumulated other comprehensive income		Retained earnings		Non- controlling interests			Total shareholders’ equity
	No. of shares		Amount		Additional paid-in capital		Statutory reserve		Accumulated other comprehensive income		Retained earnings		Non- controlling interests			Total shareholders’ equity

Balance as of December 31, 2012		29,722,976	$	29,723	$	50,097,677	$	9,696,177	$	12,946,218	$	53,568,622	$	356,315		$	126,694,732

Net income for the period		-		-		-		-		-		589,180		(127	)		589,053
Foreign currency translation adjustment		-		-		-		-		704,464		-		-			704,464
Balance as of March 31, 2013		29,722,976	$	29,723	$	50,097,677	$	9,696,177	$	13,650,682	$	54,157,802	$	356,188		$	127,988,249

See accompanying notes to condensed consolidated financial statements.

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

NOTE - 1 BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States (“GAAP”), and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended March 31, 2013 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2013 or for any future periods.

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included in the Annual Report on the Form 10-K for the year ended December 31, 2012. The condensed consolidated balance sheet as of December 31, 2012 has been derived from audited financial statements.

NOTE - 2 ORGANIZATION AND BUSINESS BACKGROUND

China Marine Food Group Limited (“China Marine” or “the Company”), formerly known as New Paradigm Productions, Inc., was incorporated in the State of Nevada on October 1, 1999. The Company is headquartered and the principal operations are in Shishi City, Fujian Province, People’s Republic of China (“PRC”). The Company, through its subsidiaries, manufactures and distributes processed seafood products and algae-based beverage products. The Company also conducts marine catch activities 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 NYSE MKT 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 - 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying condensed consolidated financial statements and notes.

l	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.

l	Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and also requires disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates made by management include revenue recognition estimates, valuation of goodwill and intangible assets, equity instruments and allowance for doubtful accounts.

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

(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 the financial institutions in the PRC, which are insured by the People’s Bank of China. The Company had cash concentration risk of $3,740,559 and $879,647 as of March 31, 2013 and December 31, 2012, 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. Currently, the Company provides 0.5% of gross accounts receivable as the general allowance for doubtful accounts based on historical experience.

●	Inventories

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

As of March 31, 2013 and December 31, 2012, 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.

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

Depreciation expense for the three months ended March 31, 2013 and 2012 were $263,793 and $113,541, respectively, which included $222,480 and $72,492 in cost of revenue.

Certain property, plant and equipment with original costs of $1,408,833 have become fully depreciated as of March 31, 2013.

●	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. The activities of the algae-based drink business are considered as a separate reporting unit. 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.

The Company evaluates the valuation of its goodwill according to the provisions of Accounting Standards Codification (“ASC”) 350, Intangible-Goodwill and Other, to determine if the current value of goodwill has been impaired. Goodwill of a reporting unit will be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. As discussed below, the Company experienced a triggering event during the third quarter of 2012 because results were lower than expected compared to the Company’s forecasts for its algae-based drink business during the year ended December 31, 2012. In accordance with ASC 350-20-35-18, if impairment is probable and can be reasonably estimated, the impairment should be recorded in the current reporting period. Accordingly, based on the preliminary results of the management’s valuation of the drink business, the Company recorded a goodwill impairment loss of 100% or $2.6 million during the third quarter of 2012. The amount was finalized in the fourth quarter as discussed below.

Changes in the carrying amount of goodwill are as follows:

	March 31, 2013		December 31, 2012

Beginning balance	$	-	$	2,553,757
Less: Goodwill impairment		-		(2,571,488	)
Effect of foreign currency translation		-		17,731
Ending balance	$	-	$	-

In accordance with ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, the Company performs an asset impairment test whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. For the year ended December 31, 2012, the Company engaged an independent valuation expert to value the Company’s intangible assets balance related to the algae-based drink business reporting unit. The result of the assessment of the Company’s intangible assets indicated that its carrying amount exceeded its fair value as of December 31, 2012. Accordingly, the difference of $2.2 million was recorded as impairment to the drink business intangible assets. This impairment of the intangible assets was considered in the finalization of the impairment of the goodwill.

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

Drink business amortization expenses for the three months ended March 31, 2013 and 2012 were $559,850 and $637,507, respectively. Using the current exchange rate, the estimated annual amortization expense is $2,243,080 for each of the five succeeding years.

Changes in the carrying amount of intangible assets are as follows:

	March 31, 2013			December 31, 2012

Beginning balance	$	15,616,259		$	20,225,220
Less: Accumulated amortization		(559,850	)		(2,547,711	)
Less: Intangible assets impairment		-			(2,223,879	)
Effect of foreign currency translation		85,053			162,629
Ending balance	$	15,141,462		$	15,616,259

During the three month ended March 31, 2013, the algae-based drink revenue was higher than that for the same quarter a year ago and exceeded the Company’s latest forecasts used in the annual impairment tests. Management believed that there were no impairment indicators during the three months ended March 31, 2013 and concluded that the intangible assets balance of $15.1 million as of March 31, 2013 was fairly stated. Given our expansion plan into additional untapped areas of the domestic market together with continuous marketing and promotional campaigns, we expect the sales of our beverage segment to remain strong for the rest of the fiscal year. However, if the drink business’s 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.

●	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. Apart from the impairment of goodwill and intangible assets as disclosed in the above, there was no impairment for other long-lived assets as of March 31, 2013 and December 31, 2012.

●	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 ices, 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.

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

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 and ices when title has transferred to the buyer, which usually coincides with the signing of the sales contract on the transaction date or the transaction date being stipulated in the sales contract. The Company experienced no material product returns and recorded no reserve for sales returns for the period ended March 31, 2013 and December 31, 2012.

For processed seafood products, the Company offers sales incentives, consisting of free products, to customers based on yearly sales targets. For algae-based beverage products, the Company offers two types of sales incentives, both consisting of free products. Quarterly incentives are based on the number of cases sold during the quarter and yearly incentives are also based on number of cases sold, as well as other thresholds. These are non-cash incentives and are solely used for promotional activities purposes. These amounts totaling $170,514 and $81,052 for the period ended March 31, 2013 and 2012, respectively, are accrued as sales and marketing expenses during the same month revenue is recognized.

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

●	Income taxes

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

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

For the period ended March 31, 2013 and December 31, 2012, the Company did not have any interest and penalties associated with tax positions. As of March 31, 2013 and December 31, 2012, 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.

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

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

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

	March 31,
	2013		2012
Period-end exchange rates RMB:US$1		6.2666		6.3122
Average exchange rates RMB:US$1 for three months period ended		6.2769		6.2976

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.

●	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 carrying value of financial items of the Company, included 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, approximate their fair values due to their short-term nature and are classified within Level 1 of the fair value hierarchy.

The fair value of short-term borrowings and amount due to a shareholder as of March 31, 2013 and December 31, 2012 was $18,989,564, $266,674 and $8,760,375, $nil, respectively, which are identical to their carrying values.

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

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 intangible assets.

●	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.

●	Recent accounting pronouncements

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarified that the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or are subject to a master netting arrangement or similar agreement. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. Retrospective presentation for all comparative periods presented is required. The adoption of ASU 2013-01 is not expected to have material impact on the Company’s consolidated financial statements.

In February 2013, the Financial Accounting Standards Board issued ASU 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, it requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012 for public entities. Early adoption is permitted. The Company does not expect that the adoption of ASU 2013-02 will have a material impact on its consolidated financial statements.

NOTE - 4 ACCOUNTS RECEIVABLE, NET

Accounts receivable consisted of the following:

	March 31, 2013				December 31, 2012

Account receivable, at cost		$	25,681,452		$	54,317,439
Less: allowance for doubtful accounts			(128,407	)		(271,587	)
Account receivable, net		$	25,553,045		$	54,045,852

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

Changes in the allowance for doubtful accounts are as follows:

	March 31, 2013			December 31, 2012

Beginning balance	$	271,587		$	344,943
Reversal of doubtful accounts		(143,180	)		(73,356	)
Amounts written off		-			-
Ending balance	$	128,407		$	271,587

NOTE - 5 INVENTORIES

Inventories consisted of the following:

	March 31, 2013		December 31, 2012

Raw materials	$	63,759,271	$	33,337,600
Work-in-process		3,132,247		2,646,855
Finished goods		163,922		269,440
Packaging materials		144,979		161,118
Total	$	67,200,419	$	36,415,013

For the period ended March 31, 2013 and December 31, 2012, the Company recorded no allowance for slow-moving and obsolete inventories.

NOTE - 6 CONSTRUCTION IN PROGRESS

In November 2012, Mingxiang entered into an agreement with an independent third party (the “Third Party Contractor #1”) in relation to the construction of staff dormitories at our new cold storage facility. The construction is expected to be completed in the first half of 2013. Total estimated construction costs are approximately $1.2 million. As of March 31, 2013, the Company recorded approximately $0.4 million as construction in progress. Hence the aggregate contingent payments related to the Third Party Contractor #1 are approximately $0.8 million as of March 31, 2013.

In 2010, Mingxiang entered into an agreement with an independent third party (the “Third Party Contractor #2”) in relation to the construction of a cold storage facility. A supplementary agreement was entered into between Mingxiang and the Third Party Contractor #2 in September 2011 related to additional gross areas, machineries and equipment required for the facility. The facilities commenced operations in July 2012. Accordingly, the Company transferred approximately $25.0 million of construction in progress to property, plant and equipment after commencement of operations and paid a total of approximately $24.2 million in construction costs as at March 31, 2013. The aggregated retention payments related to the Third Party Contractor #2 are approximately $0.8 million as of March 31, 2013.

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

NOTE - 7 SHORT-TERM BORROWINGS

The Company’s wholly-owned subsidiary, Mingxiang, obtained short-term bank loans in the aggregate amount of $8,760,375 as of December 31, 2012, from the Agricultural Bank of China and the China Construction Bank, registered financial institutions in the PRC. During the first quarter of 2013, we have fully repaid the outstanding short-term bank loans in the aggregate amount of about $8.8 million to the Agricultural Bank of China and the China Construction Bank, respectively, and obtained new short-term bank loans in the aggregate amount of about $19.0 million from the Agricultural Development Bank of China and the China Construction Bank, registered financial institutions in the PRC. As of March 31, 2013, the short-term bank loans were in the aggregate amount of $18,989,564. The weighted average effective interest rate per annum was 6.34% and 5.49% for the period ended March 31, 2013 and 2012, respectively, payable quarterly. Interest expenses for the three months ended March 31, 2013 and 2012 were $211,514 and $35,306, respectively and none of the interest incurred was capitalized. The short-term loans are due by December, 2013, January and February, 2014, respectively.

NOTE - 8 AMOUNT DUE TO A SHAREHOLDER

As of March 31, 2013 and December 31, 2012, the amounts of $266,674 and $nil 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 - 9 NON-CONTROLLING INTERESTS

Non-controlling interests consisted of the following:

	March 31, 2013

20% share of equity interest in Xianghe	$	509,763
Less: advance to a non-controlling shareholder of a subsidiary		(153,575	)
Net amount	$	356,188

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

NOTE - 10 INCOME TAXES

For the period ended March 31, 2013 and 2012, the local (“United States of America”) and foreign components of income (loss) before income taxes were comprised of the following:

	Three Months Ended March 31,
	2013		2012
Tax jurisdiction from:
– Local	$	-	$	-
– Foreign		952,480		(1,836,715	)
Income (loss) before income taxes	$	952,480	$	(1,836,715	)

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

The provision for income taxes consisted of the following:

	Three Months Ended March 31,
	2013		2012
Current:
– Local	$	-	$	-
– Foreign		363,427		207,720

Deferred:
– Local		-		-
– Foreign		-		-
Income tax expense	$	363,427	$	207,720

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 March 31, 2013, China Marine incurred $26,466 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 $9,131 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 March 31, 2013 and 2012, respectively. As of March 31, 2013, Ocean Technology incurred $883,499 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 $145,777 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.

The PRC

The Company generated all of its net income from subsidiaries operating in the PRC for the period ended March 31, 2013 and 2012. 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%.

Mingxiang received a notice of recognition as an enterprise of new and high technology in July 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 was qualified for a reduced tax rate of 15% on its assessable income for the period of three years, which expired on July 30, 2012.

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

The reconciliation of income tax rate to the effective income tax rate for the period ended March 31, 2013 and 2012 is as follows:

	Three Months Ended March 31,
	2013			2012

Income (loss) before income taxes from PRC subsidiaries	$	989,409		$	(1,799,432	)
Statutory income tax rate		25	%		25	%
Income tax expense at statutory tax rate		247,352			(449,858	)

Tax effect from Tax Holiday		-			114,101
Tax effect on net operating losses from PRC subsidiaries		6,837			411,816
Tax effect on non-taxable income		-			4,868
Tax effect on non-deductible expenses		109,238			126,793
Income taxes at effective rate	$	363,427		$	207,720

As of March 31, 2013, the PRC operation incurred $129,029 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 $32,257 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

Income (loss) before income tax expense was $952,480 and ($1,836,715) for the period ended March 31, 2013 and 2012 and was mainly attributed to subsidiaries with operations in China. Income tax related to China income for the period ended March 31, 2013 and 2012 was $363,427 and $207,720. The combined pro forma effects of the income tax expense exemptions and reductions available to us are as follows:

	Three Months Ended March 31,
	2013		2012
Amount of tax holiday effect	$	-	$	(114,101	)
Tax holiday effect on basic losses per share	$	-	$	(0.004	)
Tax holiday effect on diluted losses per share	$	-	$	(0.004	)

NOTE - 11 SEGMENT REPORTING, GEOGRAPHICAL INFORMATION

(a) Business information

The Company’s chief operating decision maker has been identified as chairman, Mr. Liu, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. Based on this assessment, the Company has determined that it has three operating and reporting segments for the period ended March 31, 2013 and 2012 which are processed seafood products, marine catch and algae-based beverage products.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 3). The Company had no inter-segment sales for the period ended March 31, 2013 and 2012.

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

Summarized financial information concerning the Company’s reportable segments is shown in the following table for the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31, 2013
	Processed seafood products			Marine catch			Algae-based beverage products			Total

Revenue, net	$	11,662,422		$	255,925		$	9,566,516		$	21,484,863
Cost of revenue		(8,117,878	)		(277,650	)		(5,844,309	)		(14,239,837	)
Gross profit	$	3,544,544		$	(21,725	)	$	3,722,207		$	7,245,026

Expenditure for long-lived assets	$	-		$	240,238		$	-		$	-

	Three Months Ended March 31, 2012
	Processed seafood products			Marine catch		Algae-based beverage products			Total

Revenue, net	$	9,903,103		$	-	$	5,180,826		$	15,083,929
Cost of revenue		(7,270,735	)		-		(3,214,251	)		(10,484,986	)
Gross profit	$	2,632,368		$	-	$	1,966,575		$	4,598,943

Expenditure for long-lived assets	$	6,868		$	592,595	$	-		$	599,463

Expenditure for long-lived assets incurred for the period ended March 31, 2013 and 2012 mainly relates to the construction of a cold storage facility and related staff dormitories which are used to store the Company’s inventory for marine catch and processed seafood products, provide marine catch cold storage services and marine catch ice making.

(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 March 31,
	2013		2012
Revenue, net:
The PRC	$	21,484,863	$	15,083,929
Asia		-		-

Total revenue, net	$	21,484,863	$	15,083,929

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

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

NOTE - 12 CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a) Major customers

The followings are tables summarizing the revenue from customers that individually represents greater than 10% of the total revenue for the period ended March 31, 2013 and 2012 and their outstanding balances as at period-end dates.

	Three Months Ended March 31, 2013
Customer	Revenue		Percentage of total revenue			Accounts receivable, net		Percentage of total accounts receivable, net

Customer A	$	4,588,563		21	%	$	7,205,068		28	%
Customer B		2,830,311		13	%		5,580,407		22	%
Customer C		2,432,659		11	%		3,115,099		12	%

Total	$	9,851,533		45	%	$	15,900,574		62	%

	Three Months Ended March 31, 2012
Customer	Revenue		Percentage of total revenue			Accounts receivable, net		Percentage of total accounts receivable, net

Customer B	$	1,654,409		11	%	$	936,956		10	%

Total	$	1,654,409		11	%	$	936,956		10	%

(b) Major vendors

The followings are tables summarizing the purchases from vendor that individually represents more than 10% of the total purchases for the period ended March 31, 2013 and 2012 and their outstanding balances as at period-end dates.

	Three Months Ended March 31, 2013
Vendor	Purchases		Percentage of total purchases			Accounts payable, trade		Percentage of total accounts payable, trade

Vendor A	$	10,080,857		27	%	$	-		-
Vendor B		9,531,424		25	%		144,616		5	%
Vendor C		9,179,702		24	%		147,896		6	%

Total	$	28,791,983		76	%	$	292,512		11	%

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

	Three Months Ended March 31, 2012
Vendor	Purchases		Percentage of total purchases			Accounts payable, trade		Percentage of total accounts payable, trade

Vendor A	$	35,963,818		88	%	$	-		-

Total	$	35,963,818		88	%	$	-		-

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 - 13 COMMITMENTS AND CONTINGENCIES

(a) Operating lease commitments

Ocean Technology leased certain office space under a non-cancellable operating lease agreement with a term of three years with fixed monthly rentals expiring on February 17, 2014, and generally not containing material renewal options. Total rent expenses for the three months ended March 31, 2013 and 2012 was $20,000, respectively. Future minimum rental payments due under the non-cancelable operating lease agreement are approximately $71,000 in total in the following twelve months.

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CHINA MARINE FOOD GROUP LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

(b) Capital commitments

As of March 31, 2013, Mingxiang was contingently liable as guarantor with respect to the loan of $478,728 (equivalent to RMB 3,000,000) to an unrelated third party, Shishi Han Jiang Hua Lian Knitting and Clothing Factory (“Han Jiang Hua Lian”). The term of this guarantee is for the period from November 2008 through December 2017. Pursuant to the loan agreement, Han Jiang Hua Lian will repay the loan by installments and be fully settled by December 31, 2017. Should Han Jiang Hua Lian fail to make its debt payments due at any time from the date of guarantee, Mingxiang will be obligated to perform under the guarantee by primarily making the required payments, including late fees and penalties. The maximum potential amount of future payments that the Mingxiang is required to make under the guarantee is $478,728 (equivalent to RMB 3,000,000).

As of December 31, 2010, Mingxiang was contingently liable as guarantor with respect to the loans of $758,518 (equivalent to RMB 5,000,000) to an unrelated third party, Shishi Yu Ching Knitting and Clothing Company (“Yu Ching”). The term of this guarantee is for the period from January 2009 through January 2011. During 2011, Yu Ching repaid the principal amount of the loan in the amount of $758,518 (equivalent to RMB 5,000,000) but left the amount of loan interest unsettled due to a disagreement between Yu Ching and the creditor in relation to the calculation of the loan interest. Should Yu Ching fail to make its loan interest payments due at any time from the date of guarantee, Mingxiang will be obligated to perform under the guarantee by primarily making the required payments, including late fees and penalties. As of March 31, 2013, Yu Ching has not repaid the interest portion of the debt.

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 March 31, 2013, the Company has not recorded any liabilities under these guarantees.

NOTE - 14 SUBSEQUENT EVENT

In accordance with ASC 855 “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, we have evaluated all events or transactions that occurred after March 31, 2013 up through the date we issued the condensed consolidated financial statements. During this period, we did not have any material recognizable subsequent events.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following review concerns the three months ended March 31, 2013 and 2012, 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 Xianghe Food Science and Technology Co., Ltd. (“Xianghe”), 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 and ices. 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. A majority of these rental contracts are based on a one-year lease term and only one rental contract is based on a four-year lease term.

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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 “China Well-Known Trademark” and the “Fujian Famous Brand” award by the State Administration for Industry and Commerce and the Fujian Commerce Authority, respectively. 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. The completion of the new cold storage facility in July 2012 helps to improve our capacity for conducting marine catch trading business in Fujian and also reduce storage and freezing costs, as storage and freezing services were formerly leased. The facility is currently providing ice making services to the port area, but the corresponding income is relatively immaterial compared to the revenues generated from trading of marine catch.

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 54.3% and 65.7% of our total sales in the first quarter of 2013 and 2012, respectively. Trading of our marine catch accounted for approximately 1.2% and nil of our total sales in the first quarter of 2013 and 2012, respectively. Sales of our algae-based beverage products accounted for approximately 44.5% and 34.3% of our total sales in the first quarter of 2013 and 2012, 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 74.9% and 72.4% of our total cost of revenue of processed seafood products in the first quarter of 2013 and 2012, 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, including leakage of radioactive water. 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.

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●

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, ISO9001:2008, 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 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 March 31, 2013, we employed 511 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 the Chinese New Year and lower during summer time. Sales for our algae-based beverage products are expected to be higher before the Chinese New Year and during the summer. Since the production will cease during the Chinese New Year holidays and it takes several months to resume demand from our distributors back to normal level, sales in the first quarter of the fiscal year are usually lower than that in the prior quarter.

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 financed the total $27.3 million in land use rights and construction costs from funds generated by operations. The facilities commenced operations in July 2012. Accordingly, we transferred approximately $25.0 million of construction in progress to property, plant and equipment after commencement of operations.

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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 are currently utilizing certain cold storage spaces and freezing for our own products, which do 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. We are not currently providing cold storage or freezing services to third parties and only generating de minims revenues from ice making services, but we intend to increase sales of these services to third parties should we have sufficient capacity in excess of the needs for our own products.

RESULTS OF OPERATIONS

We derive our sales from the sales of processed seafood products, marine catch and algae-based beverage products. The breakdown of our sales and gross profit by product, as well as by geographical location of our customers for the three months ended March 31, 2013 and 2012 are set out below:

Breakdown of our past performance by principal products and geographical region

Sales by product

	Three Months Ended March 31,
	2013				2012
	US$’000		%		US$’000		%

Processed seafood products		11,662		54.3		9,903		65.7
Marine catch		256		1.2		-		-
Algae-based beverage products		9,567		44.5		5,181		34.3
Total		21,485		100.0		15,084		100.0

Sales by geographical region

	Three Months Ended March 31, 2013
	Processed seafood products				Marine catch				Algae-based beverage products				Total
	US$’000		%		US$’000		%		US$’000		%		US$’000		%
PRC
Shandong		1,223		10.5		-		-		-		-		1,223		5.7
Zhejiang		4,479		38.4		-		-		4,589		48.0		9,068		42.2
Fujian		5,524		47.4		256		100.0		4,978		52.0		10,758		50.1
Guangdong/ Shenzhen		436		3.7		-		-		-		-		436		2.0
Total PRC		11,662		100.0		256		100.0		9,567		100.0		21,485		100.0
Asia		-		-		-		-		-		-		-		-
Total		11,662		100.0		256		100.0		9,567		100.0		21,485		100.0

	Three Months Ended March 31, 2012
	Processed seafood products				Marine catch				Algae-based beverage products				Total
	US$’000		%		US$’000		%		US$’000		%		US$’000		%
PRC
Shandong		879		8.9		-		-		-		-		879		5.8
Zhejiang		3,747		37.8		-		-		1,301		25.1		5,048		33.5
Fujian		4,757		48.0		-		-		3,880		74.9		8,637		57.3
Guangdong/ Shenzhen		520		5.3		-		-		-		-		520		3.4
Total PRC		9,903		100.0		-		-		5,181		100.0		15,084		100.0
Asia		-		-		-		-		-		-		-		-
Total		9,903		100.0		-		-		5,181		100.0		15,084		100.0

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Three months ended March 31, 2013 compared to three months ended March 31, 2012

Sales

Our revenue increased by approximately $6.4 million or 42.4% from $15.1 million for the three months ended March 31, 2012 to $21.5 million for the same period ended March 31, 2013. The increase in revenue was primarily attributed to the increase in sales of our processed seafood and algae-based beverage products. Sales of our processed seafood products increased by $1.8 million or 17.8% year over year to $11.7 million, whereas sales of algae-based beverage products increased by $4.4 million or 84.7% to $9.6 million for the same periods under review. Our marine catch segment realized sales of $0.3 million for the three months ended March 31, 2013, compared to $nil million for the same period under review.

As a result of consumers’ perception of seafood 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. During the year 2012 and through the first quarter of 2013, sales of our seafood products have largely recovered to pre-earthquake levels. 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, 2013 is the fourth 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 mainly 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. Sales of our algae-based beverage products in 2012 and the three months ended March 31, 2013 recovered significantly as a result of our continuous contribution to the related sales and marketing campaigns. 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 64, as of March 31, 2013.

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, plenty of storage space 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 March 31,
	2013				2012
	US$’000		%		US$’000		%

Processed seafood products		8,118		57.0		7,271		69.3
Marine catch		278		2.0		-		-
Algae-based beverage products		5,844		41.0		3,214		30.7
Total		14,240		100.0		10,485		100.0

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Cost of revenue - Processed seafood products

Our cost of revenue of processed seafood products 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 March 31,
	2013				2012
	US$’000		%		US$’000		%

Raw materials		6,077		74.9		5,261		72.4
Packaging materials		937		11.5		819		11.3
Direct labor		438		5.4		577		7.9
Manufacturing overhead		666		8.2		614		8.4
Total		8,118		100.0		7,271		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.

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 in 2011, 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 74.9% and 72.4% of our cost of revenue in the first quarter of 2013 and 2012, respectively. The increase in percentage of raw materials cost was mainly due to decreased direct labor costs as a result of reduced headcount for production of processed seafood products for the periods under review. The increase in raw material costs was in line with our increased production and sales of processed seafood products.

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 facilities. 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 11.5% and 11.3% of our cost of revenue in the first quarter of 2013 and 2012, respectively. The increase in packaging material costs for the periods under review was in line with the increased production and sales of processed seafood products.

Direct labor

Direct labor costs accounted for approximately 5.4% and 7.9% of our cost of revenue in the first quarter of 2013 and 2012, 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.

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The total headcount for the processed seafood segment as at March 31, 2013 has decreased to 262 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 first quarter of 2013 was mainly due to the reduction in headcount.

Manufacturing overhead

Manufacturing overhead comprises depreciation, water, electricity and other fuel costs which are used directly in the production of finished goods. The increase in manufacturing overhead for the periods under review was in line with the increased production and sales of processed seafood products.

Cost of revenue - Marine catch

	Three Months Ended March 31,
	2013				2012
	US$’000		%		US$’000		%

Raw materials		135		48.5		-		-
Other expenses		143		51.5		-		-
Total		278		100.0		-		-

Raw materials

We buy the marine catch from the suppliers and then sell to the customers on a direct basis. The marine catch is predominantly sold to 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 due to the increased sales of trading materials and ices.

Other expenses

Other expenses mainly relate to the costs of packaging materials and ice required to keep the marine catch fresh, and also the associated costs of ice making services for the first quarter of 2013.

Cost of revenue - Algae-based beverage products

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

	Three Months Ended March 31,
	2013				2012
	US$’000		%		US$’000		%

Raw materials		876		15.0		464		14.4
Packaging materials		3,942		67.5		2,182		67.9
Manufacturing overhead		1,026		17.5		568		17.7
Total		5,844		100.0		3,214		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 15.0% and 14.4% of our cost of revenue in the first quarter of 2013 and 2012, 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.

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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 67.5% and 67.9% of our cost of revenue in the first quarter of 2013 and 2012, 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 one third party manufacturer to produce our algae-based beverage products. Manufacturing costs are charged based on the production volume. We will use multiple manufacturers going forward so as to mitigate the concentration risks.

Gross profit by product

	Three Months Ended March 31,
	2013						2012
	US$’000			%			US$’000		%

Processed seafood products		3,544			48.9			2,632		57.2
Marine catch		(22	)		(0.3	)		-		-
Algae-based beverage products		3,723			51.4			1,967		42.8
Total		7,245			100.0			4,599		100.0

Gross profit margin by profit

	Three Months Ended March 31,
	2013			2012
	%			%

Processed seafood products		30.4			26.6
Marine catch		(8.5	)		-
Algae-based beverage products		38.9			38.0
Total		33.7			30.5

Gross profit

Gross profit increased by 57.5% or $2.6 million, from $4.6 million for the three months ended March 31, 2012 to $7.2 million for the same period in 2013. Overall gross profit margin increased by 3.2% from 30.5% for the three months ended March 31, 2012 to 33.7% for the same period in 2013. Gross profit margin for the processed seafood products operations increased from 26.6% for the three months ended March 31, 2012 to 30.4% for the same period in 2013 which was mainly due to the improved economies of scale and decreased direct labor costs as a result of reduced headcount. Marine catch sales are mainly 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. Ice making services contributed negative gross profit margin in the first quarter of 2013 mainly due to low demand of ice during Lunar Chinese New Year period and therefore corresponding income was not able to cover the invariable costs like labor costs and depreciation. Gross profit margin for the algae-based beverage segment increased from 38.0% to 38.9% for the comparative periods under review mainly due to the improved economies of scale.

Depreciation and amortization

Depreciation and amortization accounted for approximately 2.9% and 4.6% of our total revenue in the first quarter of 2013 and 2012, 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 $2.2 million.

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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 increased to $4.8 million in the first quarter of 2013 from $4.6 million in the first quarter of 2012 and accounted for approximately 22.3% and 30.4% of our total revenue in the first quarter of 2013 and 2012, 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 newly acquired beverage products. We have spent approximately $1.8 million in advertising campaigns including TV commercials and $2.6 million in promotional costs including subsidized products for promotional purposes, free gifts and other direct marketing events during the first quarter of 2013 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 93 as at March 31, 2013, of which 64 were related to the beverage products segment.

General and administrative expenses

Our general and administrative expenses comprise mainly salaries and staff benefits for employees, legal and professional fees, research and development costs, traveling and entertainment expenses.

Our general and administrative expenses increased to $0.7 million in the first quarter of 2013 compared to $0.5 million in the first quarter of 2012 and accounted for approximately 3.5% and 3.6% of our total revenue in the first quarter of 2013 and 2012, respectively. The increase in the general and administrative expenses was mainly due to the decreased reversal of allowance for doubtful accounts and increased bonus provision 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 our 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. There was no compensation expense during the first quarter of 2013.

Goodwill and intangible assets impairment

During the year ended December 31, 2012, the algae-based drink revenues were lower than expected and the corresponding selling expenses were higher than expected compared to the Company’s forecasts. Although the drink business significantly improved revenues during 2012 compared to 2011, the Company incurred significant sales and marketing expenses during the year to support this revenue growth, which resulted in a significant operating loss for the algae-based drink business. As a result, during our third quarter of 2012, we determined there was a triggering event and recorded a goodwill impairment loss of 100% or $2.6 million based on the preliminary results indicating a carrying value of our goodwill was greater than the fair market value. Our goodwill balance is $nil as of March 31, 2013 and December 31, 2012.

Subsequently, the independent valuation expert completed the complete drink business valuation and management concluded that the fair value of the intangible assets as of December 31, 2012 was $15.6 million. The valuation report included a number of significant management assumptions regarding the future growth and profitability of our drink business. This resulted in an intangible assets impairment loss of $2.2 million for the year ended December 31, 2012. As of March 31, 2013 and December 31, 2012, our intangible assets balance is $15.1 million and $15.6 million, respectively. The impairment of the intangible assets was considered in the finalization of the impairment of the goodwill. The valuation of the remaining intangible, as noted above, is based on a number of assumptions and should actual results differ from these assumptions, further impairment may be necessary.

Please refer to Note 3 of the accompanying financial statements for further details of goodwill and intangible assets.

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Other income

Other income mainly 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 one 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 flows.

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 1.0% and 0.2% of our total revenue in the first quarter of 2013 and 2012, respectively. During the first quarter of 2013, net short-term loans of $10.2 million were drawn down mainly for optimal pricing of marine catch purchases and to maintain the effectiveness of the facility lines with the banks. The weighted average effective interest rates per annum were 6.34% and 5.49% in the first quarter of 2013 and 2012, respectively.

Income before income tax

Our income before income tax increased by $2.8 million from $1.8 million loss in the first quarter of 2012 to $1.0 million in income for the same period in 2013. The increase was mainly due to the increase in total revenue and overall gross profit of approximately $6.4 million and $2.6 million, respectively, 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, Mingxiang, Xianghe, Jixiang 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%.

Income tax expenses for the three months ended 2013 and 2012 and were approximately $0.4 million and $0.2 million, respectively. The effective tax rates were 38.2% and -11.3%, respectively, for the three months ended 2013 and 2012.

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 March 31, 2013 amounted to approximately $3.8 million, with new net short-term loans of $10.2 million being drawn down during the first quarter of 2013.

A summary of our cash flows for the three months ended March 31, 2013 and 2012 is as follows:

	Three Months Ended March 31,
US$’000	2013			2012

Net cash (used in) provided by operating activities		(7,769	)		17,004
Net cash used in investing activities		(240	)		(600	)
Net cash provided by (used in) financing activities		10,431			(1	)
Net change in cash and cash equivalents		2,422			16,403
Foreign currency translation adjustment		472			466
Cash and cash equivalents at the beginning of the period		880			587
Cash and cash equivalents at the end of the period		3,774			17,456

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Net cash (used in) provided by operating activities

Our net cash used in operating activities for the three months ended March 31, 2013 amounted to approximately $7.8 million, which was a decrease of $24.8 million compared to net cash provided by operating activities for the same period in 2012. The decrease was mainly attributable to the decrease in the collection of accounts receivable of $30.5 million, partially offset by the increase in the net operating income of $2.6 million and the increase in inventories of $4.0 million which were largely composed of trading materials during the same period under review.

As of March 31, 2013, our cash and cash equivalents increased to approximately $3.8 million from $0.9 million at December 31, 2012 mainly as a result of additional sales, collection of outstanding accounts receivable and net bank borrowings. Our accounts receivable decreased to $25.6 million at March 31, 2013 from $54.0 million at December 31, 2012, while our inventory increased to $67.2 million at March 31, 2013 from $36.4 million at December 31, 2012. The increase of inventory in the first quarter of 2013 was mainly due to the purchase of marine catch in blocks from suppliers. We intend to sell the stocks to customers.

Net cash used in investing activities

For the three months ended March 31, 2013, our net cash used in investing activities was approximately $0.2 million which was mainly attributable to the additional costs for the construction of staff dormitories at our new cold storage facility.

Net cash provided by (used in) financing activities

For the three months ended March 31, 2013, our net cash provided by investing activities was approximately $10.4 million which was mainly attributable to the net borrowing of short-term bank loans.

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 financed the total $27.3 million in land use rights and construction costs from funds generated by operations. The facilities commenced operations in July 2012. Accordingly, we transferred approximately $25.0 million of construction in progress to property, plant and equipment after commencement of operations and paid approximately $24.2 million in construction costs as at March 31, 2013. The aggregated retention payments related to the Third Party Contractor are approximately $0.8 million as of March 31, 2013.

During the first quarter of 2013, our wholly-owned subsidiary, Mingxiang, obtained net short-term bank loans, which loans totaled $19.0 million as of March 31, 2013. The loans were drawn down mainly for optimal pricing of marine catch purchases and to maintain the effectiveness of the facility lines with the banks. The short-term loans are due by December, 2013, January and February, 2014, respectively. We could manage our operating cash flows, including collection of accounts receivable, sales of our inventories and purchase less of trading materials, in case our cash is not adequate to pay off the loans.

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.

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COMMITMENTS AND CONTINGENCIES

Operating lease commitments

Capital commitments

Guarantees

According to the Personal Guarantee Agreement between Mingxiang and Mr. Liu, our 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.

ISSUANCE OF COMMON STOCK

None.

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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 for the year ended December 31, 2012.

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:

	Three Months Ended March 31,
	2013		2012
	%		%
Sales
RMB		100.0		100.0
US dollars		0.0		0.0
Total		100.0		100.0

On July 21, 2005, the RMB was unpegged against the US dollars and pegged against a basket of currencies on a “managed-float currency regime”. As at March 31, 2013, the exchange rate was approximately US$1.00 to RMB6.2666. 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

None.

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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 March 31, 2013.

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 March 31, 2013 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 most recent quarter ended March 31, 2013, 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 for the year ended December 31, 2012, 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 93.2% and 96.8% of our total purchases of raw materials for the three months ended March 31, 2013 and 2012, 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 commenced operations in 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, but since the facility commenced operations, we have needed the cold storage and freezing capacity for our own products.

We have yet to enter into any agreement or arrangement with third parties related to such new line of business, except for de minimis sales of ice to local fishermen. No assurance can be given that the new business will achieve profitable operations. The new line of business will also depend on our need for the storage and freezing capacity for our own trading materials and 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.

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.

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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.

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ITEM 6. EXHIBITS

INDEX TO EXHIBITS

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

Dated: May 14, 2013	By:	/s/ Pengfei Liu
		Pengfei Liu, Chief Executive Officer (Principal executive officer)

Dated: May 14, 2013	By:	/s/ Marco Hon Wai Ku
		Marco Hon Wai Ku, Chief Financial Officer (Principal financial officer and principal accounting officer)

CHINA MARINE FOOD GROUP LTD - FORM 10-Q - May 14, 2013

Attached files

CHINA MARINE FOOD GROUP LTD Reports