CHINA MARINE FOOD GROUP LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
|
|
For the Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(6,183,597
|
)
|
|
$
|
7,436,830
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,405,530
|
|
|
|
2,248,254
|
|
Stock issued for service
|
|
|
22,750
|
|
|
|
51,800
|
|
Reversal of doubtful accounts
|
|
|
(216,340
|
)
|
|
|
(108,336
|
)
|
Loss on disposal of property, plant and equipment
|
|
|
-
|
|
|
|
22,045
|
|
Compensatory stock awards
|
|
|
-
|
|
|
|
2,646,000
|
|
Goodwill impairment
|
|
|
2,571,488
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
43,267,938
|
|
|
|
21,667,348
|
|
Inventories
|
|
|
(43,942,447
|
)
|
|
|
(6,866,217
|
)
|
Prepaid expenses and other current assets
|
|
|
(4,786,483
|
)
|
|
|
(2,409,978
|
)
|
Accounts payable, trade
|
|
|
2,144,145
|
|
|
|
(182,884
|
)
|
Income tax payable
|
|
|
(174,525
|
)
|
|
|
(536,996
|
)
|
Accrued liabilities and other payables
|
|
|
790,401
|
|
|
|
(1,497,187
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(4,101,140
|
)
|
|
|
22,470,679
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(172,991
|
)
|
|
|
(26,045
|
)
|
Cash paid to construction in progress
|
|
|
(1,974,826
|
)
|
|
|
(8,213,324
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,147,817
|
)
|
|
|
(8,239,369
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment of amount due to a shareholder
|
|
|
(3,746
|
)
|
|
|
(211,714
|
)
|
Proceeds from short-term borrowings
|
|
|
8,750,099
|
|
|
|
-
|
|
Repayment on short-term borrowings
|
|
|
(2,570,327
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
6,176,026
|
|
|
|
(211,714
|
)
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(72,931
|
)
|
|
|
14,019,596
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes in cash and cash equivalents
|
|
|
490,979
|
|
|
|
1,740,730
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
586,914
|
|
|
|
15,556,772
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
1,004,962
|
|
|
$
|
31,317,098
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
382,245
|
|
|
$
|
2,219,707
|
|
Cash paid for interest
|
|
$
|
283,443
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
|
|
|
|
|
|
|
|
|
Transfer from construction in progress to property, plant and equipment
|
|
$
|
24,897,969
|
|
|
$
|
1,807,283
|
|
See accompanying notes to condensed consolidated
financial statements.
CHINA MARINE FOOD GROUP LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
|
|
China Marine
Food Group Limited shareholders’ equity
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
Additional
paid-in
|
|
|
Statutory
|
|
|
Accumulated
other
comprehensive
|
|
|
Retained
|
|
|
Non-
controlling
|
|
|
Total
shareholders’
|
|
|
|
No. of shares
|
|
|
Amount
|
|
|
capital
|
|
|
reserve
|
|
|
income
|
|
|
earnings
|
|
|
interests
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
29,697,976
|
|
|
$
|
29,698
|
|
|
$
|
50,074,952
|
|
|
$
|
9,696,177
|
|
|
$
|
11,897,382
|
|
|
$
|
58,053,435
|
|
|
$
|
356,554
|
|
|
$
|
130,108,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for service
|
|
|
25,000
|
|
|
|
25
|
|
|
|
22,725
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,750
|
|
Net loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,183,452
|
)
|
|
|
(145
|
)
|
|
|
(6,183,597
|
)
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
692,375
|
|
|
|
-
|
|
|
|
-
|
|
|
|
692,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2012
|
|
|
29,722,976
|
|
|
$
|
29,723
|
|
|
$
|
50,097,677
|
|
|
$
|
9,696,177
|
|
|
$
|
12,589,757
|
|
|
$
|
51,869,983
|
|
|
$
|
356,409
|
|
|
$
|
124,639,726
|
|
See accompanying notes to condensed consolidated
financial statements.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(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 September 30, 2012 are not necessarily indicative of the results
to be expected for the entire fiscal year ending December 31, 2012 or for any future periods.
These unaudited condensed consolidated
financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial
statements and notes thereto included in the Annual Report on the Form 10-K/A for the year ended December 31, 2011. The condensed
consolidated balance sheet as of December 31, 2011 has been derived from audited financial statements.
|
NOTE - 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
Republic of China (“PRC”). The Company, through its subsidiaries, manufactures and distributes processed seafood products
and algae-based beverage products. The Company also trades marine catch sporadically throughout the year based on opportunities.
The Company’s customers are located in domestic provinces in the PRC and overseas markets. The Company is publicly traded
on the AMEX under the symbol “CMFO” and can be found on the worldwide web at
www.china-marine.cn
.
China Marine and its subsidiaries are hereinafter
referred to as “the Company”.
|
NOTE - 3
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The accompanying condensed consolidated
financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere
in the accompanying condensed consolidated financial statements and notes.
In preparing these condensed consolidated
financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in
the balance sheets and revenues and expenses during the periods reported. Actual results may differ from these estimates.
The unaudited condensed consolidated financial
statements include the financial statements of China Marine and its subsidiaries. All significant inter-company balances and transactions
within the Company have been eliminated upon consolidation. 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.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
|
·
|
Cash and cash equivalents
|
Cash and cash equivalents are carried at
cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments
with an original maturity of three months or less as of the purchase date of such investments.
The Company maintains cash and cash equivalent
balances at a financial institution in the PRC, which are insured by the People’s Bank of China. The Company had cash concentration
risk of $1,004,708 and $538,132 as of September 30, 2012 and December 31, 2011, respectively, which amounts exclude Ocean Technology.
|
·
|
Accounts receivable and allowance for doubtful accounts
|
Accounts receivable are recorded at the
invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing
basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s
financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered
necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
Inventories 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 September 30, 2012 and December 31,
2011, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.
|
·
|
Property, plant and equipment
|
Property, plant and equipment are stated
at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line
basis over the following expected useful lives from the date on which they become fully operational and after taking into account
their estimated residual values:
|
|
Depreciable life
|
|
Residual value
|
Buildings
|
|
30-50 years
|
|
10%
|
Plant and machinery
|
|
5-30 years
|
|
10%
|
Motor vehicles
|
|
8-10 years
|
|
10%
|
Office equipments
|
|
5 years
|
|
10%
|
Expenditure for repairs and maintenance
is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts
and any resulting gain or loss is recognized in the results of operations.
Depreciation expense for the three and
nine months ended September 30, 2012 and 2011 were $210,472, $435,372 and $113,978, $332,708, respectively, which included $169,377,
$312,045 and $73,254, $215,264 in cost of revenue.
Certain property, plant and equipment
with original costs of $1,339,711 have become fully depreciated as of September 30, 2012.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
|
·
|
Construction in progress
|
Construction in progress is stated at cost,
which includes the cost of construction, acquisition of plant and equipment and other direct costs attributable to the construction.
Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized
interest is incurred during the period of construction.
|
·
|
Goodwill and intangible assets
|
Goodwill and intangible assets were the
result of the acquisition of Xianghe. 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. For the year ended December 31, 2011, the Company engaged an independent valuation expert to assist in determining
the fair value of the identifiable tangible and intangible net assets of the acquired business.
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, 2011, the
Company engaged an independent valuation expert to value the Company’s intangible asset balance related to the algae-based
drink business reporting unit. The result of the assessment of the Company’s intangible assets indicated that its fair values
exceeded its carrying amounts and that there had been no impairment of intangible assets.
For the nine months ended September 30,
2012, the algae-based drink revenues were lower-than-expected and the algae-based drink selling expenses were higher than expected
compared to the forecasts on an annualized basis. The Company considered if these results were a triggering event (as defined under
ASC 360-10-35-21) causing the Company to perform an intangible asset impairment analysis. The Company has significantly improved
revenues during the second and the third quarters of 2012 compared to the disappointing results obtained during the first quarter
of 2012. However, the Company incurred significant selling and marketing expenses for the nine months ended September 30, 2012
to support this revenue growth, which resulted in a significant operating loss for the algae-based drink business. As a result,
the Company is performing an updated valuation of its drink business using updated forecasted results. Preliminary estimated results
prepared by the Company indicate a fair market value which approximates the carrying value as of September 30, 2012 and do not
indicate a probable impairment loss to the intangible assets. The Company will engage an independent valuation expert during the
fourth quarter of 2012 to perform a full valuation of the algae-based drink business reporting unit. If the final valuation results
indicate that an intangible asset impairment is necessary, this impairment will be recorded during the fourth quarter of 2012.
The Company evaluates the valuation of
its goodwill according to the provisions of Accounting Standards Codification (“ASC”) 350 to determine if the current
value of goodwill has been impaired. The Company early adopted Accounting Standard Update (ASU) No. 2011-08,
Intangibles-Goodwill
and Other (Topic 350)
during the year ended December 31, 2011. Goodwill is tested annually for impairment and the Company has
selected the first day of its fourth quarter as its annual impairment testing date. 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 above, the Company experienced results significantly below
forecasted expectations for its algae-based drink business during the nine months ended September 30, 2012. The Company considers
these results as a triggering event.
In accordance with ASC 350-20-35-18, if
an 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 Company’s valuation of the drink business, the Company recorded a goodwill impairment
loss of $2.6 million during the quarter ended September 30, 2012.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
Amortization expense for the three and
nine months ended September 30, 2012 and 2011 were $635,247, $1,909,230 and $626,974, $1,856,307, respectively. Using the current
exchange rate, the estimated annual amortization expense is $2,541,392 for each of the five succeeding years.
Changes in the carrying amount of goodwill
are as follows:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,553,757
|
|
|
$
|
2,460,971
|
|
Goodwill impairment
|
|
|
(2,571,488
|
)
|
|
|
-
|
|
Effect of foreign currency translation
|
|
|
17,731
|
|
|
|
92,786
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
2,553,757
|
|
|
·
|
Impairment of long-lived assets
|
In accordance with the provisions of ASC
Topic 360-10-5, “
Impairment or Disposal of Long-Lived Assets
”, all long-lived assets such as property, plant
and equipment, land use rights and intangible assets held and used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated
by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed the fair value of the assets. There has been no impairment as of September 30, 2012 and
December 31, 2011.
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.
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. The Company experienced no material product returns and recorded no reserve for sales
returns for the period ended September 30, 2012 and December 31, 2011.
The Company offers sales incentives to
customers based on yearly sales targets. These are non-cash incentives and are solely used for promotional activities purposes.
These amounts of $883,313 are accrued as sales and marketing expenses as of September 30, 2012 during the same month revenue is
recognized.
Rental income from operating leases on
real estate properties is recognized on a straight-line basis over the lease period.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
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 September 30, 2012
and December 31, 2011, the Company did not have any interest and penalties associated with tax positions. As of September 30, 2012
and December 31, 2011, the Company did not have any significant unrecognized uncertain tax positions.
The Company conducts major businesses in
the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that
are subject to examination by the foreign tax authority.
|
·
|
Foreign currencies translation
|
Transactions denominated in currencies
other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of
the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into
the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are
recorded in the consolidated statement of operations and comprehensive income.
The reporting currency of the Company is
the United States Dollars ("US$"). The Company's subsidiaries in the PRC maintain their books and records in its local
currency, the Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment
in which these entities operate.
In general, for consolidation purposes,
assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with
ASC Topic 830-30, “
Translation of Financial Statement”
, using the exchange rate on the balance sheet date. Revenues
and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial
statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement
of changes in shareholders’ equity.
Translation of amounts from RMB into US$1
has been made at the following exchange rates for the respective period:
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Period-end exchange rates RMB:US$1
|
|
|
6.3190
|
|
|
|
6.3885
|
|
Average exchange rates RMB:US$1 for three months period ended
|
|
|
6.3200
|
|
|
|
6.4034
|
|
Average exchange rates RMB:US$1 for nine months period ended
|
|
|
6.3085
|
|
|
|
6.4884
|
|
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
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.
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.
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
September
30, 2012 was $
8
,
735
,
559
and $46,615, respectively, which are identical to their carrying values.
The Company does not have any
assets or liabilities that are measured on a recurring basis at fair value.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
The Company uses the discounted cash flow
approach when determining fair values of its non-recurring fair value measurements. Certain unobservable units for these assets
are offered quotes, lack of marketability, long-term revenue growth rates and discounts rates. For Level 3 measurements, significant
increases or decreases in either of those inputs in isolation could result in a significantly lower or higher fair value measurement.
In general, a change in the long-term growth rate of our algae-based drink business could negatively affect the fair value of our
goodwill and intangible assets.
|
·
|
Recent accounting pronouncements
|
The Company has reviewed all recently issued,
but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected
to cause a material impact on its financial condition or the results of its operations.
On July 27, 2012, the FASB issued ASU 2012-02,
Intangibles - Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities
with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely
than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an
indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise,
it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment,
if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal
years beginning after September 15, 2012. Early adoption is permitted. The Company is expected to adopt this ASU no later than
January 1, 2013. The Company has not yet determined the effect this ASU will have on the Company's annual impairment testing of
intangibles.
|
NOTE - 4
|
ACCOUNTS RECEIVABLE, NET
|
Accounts receivable consisted of the following:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Account receivable, at cost
|
|
$
|
25,720,683
|
|
|
$
|
68,988,621
|
|
Less: allowance for doubtful accounts
|
|
|
(128,603
|
)
|
|
|
(344,943
|
)
|
Account receivable, net
|
|
$
|
25,592,080
|
|
|
$
|
68,643,678
|
|
Changes in the allowance for doubtful accounts
are as follows:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
344,943
|
|
|
$
|
243,872
|
|
(Reversal of) Provision for doubtful accounts
|
|
|
(216,340
|
)
|
|
|
101,071
|
|
Amounts written off
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
128,603
|
|
|
$
|
344,943
|
|
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
Inventories consisted of the following:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
49,525,395
|
|
|
$
|
3,982,617
|
|
Work-in-process
|
|
|
3,084,999
|
|
|
|
3,941,723
|
|
Finished goods
|
|
|
74,815
|
|
|
|
804,880
|
|
Packaging materials
|
|
|
143,472
|
|
|
|
157,014
|
|
Total
|
|
$
|
52,828,681
|
|
|
$
|
8,886,234
|
|
For the period ended September 30, 2012
and December 31, 2011, the Company recorded no allowance for slow-moving and obsolete inventories.
|
NOTE - 6
|
SHORT-TERM BORROWINGS
|
The Company’s wholly-owned subsidiary,
Mingxiang, obtained short-term bank loans in the aggregate amount of $8,735,559 and $2,550,257 as of September 30, 2012 and December
31, 2011, respectively, from the Agricultural Bank of China and the China Construction Bank, registered financial institutions
in the PRC. The short-term loans are due by January, February, April and May, 2013, respectively. The weighted average effective
interest rate per annum was 6.59% and 5.49% for the period ended September 30, 2012 and December 31, 2011, respectively, payable
quarterly. Interest expenses for the three and nine months ended September 30, 2012 and 2011 were $142,322, $283,443 and $nil,
$nil, respectively and none of the interest incurred was capitalized.
|
NOTE - 7
|
AMOUNT DUE TO A STOCKHOLDER
|
As of September 30, 2012 and December 31,
2011, the amounts of $46
,
615 and $50,361 represented temporary advances for working capital purposes from a major shareholder
and CEO, Mr. Liu, which were unsecured, interest free and repayable on demand.
|
NOTE - 8
|
NON-CONTROLLING INTERESTS
|
Non-controlling interests consisted of
the following:
|
|
September 30, 2012
|
|
|
|
|
|
20% share of equity interest in Xianghe
|
|
$
|
508,711
|
|
Less: advance to a non-controlling shareholder of a subsidiary
|
|
|
(152,302
|
)
|
|
|
|
|
|
Net amount
|
|
$
|
356,409
|
|
Advance to a non-controlling shareholder
of the Company’s subsidiary, Xianghe, was unsecured, interest free and repayable on demand.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
For the period ended September 30, 2012
and 2011, the local (“United States of America”) and foreign components of (loss) income before income taxes were comprised
of the following:
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Tax jurisdiction from:
|
|
|
|
|
|
|
|
|
– Local
|
|
$
|
-
|
|
|
$
|
-
|
|
– Foreign
|
|
|
(5,975,877
|
)
|
|
|
9,119,541
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
$
|
(5,975,877
|
)
|
|
$
|
9,119,541
|
|
The provision for income taxes consisted
of the following:
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
|
|
– Local
|
|
$
|
-
|
|
|
$
|
-
|
|
– Foreign
|
|
|
207,720
|
|
|
|
1,682,711
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
– Local
|
|
|
-
|
|
|
|
-
|
|
– Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
207,720
|
|
|
$
|
1,682,711
|
|
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 September 30, 2012, China Marine
incurred $26,409 of net operating loss carryforwards available for federal tax purposes that may be used to offset future taxable
income and will begin to expire in 2028, if unutilized. The Company has provided for a full valuation allowance against the deferred
tax assets of $9,111 on the expected future tax benefits from the net operating loss carryforwards as the management believes it
is more likely than not that these assets will not be realized in the future.
Hong Kong
The Company’s subsidiary, Ocean Technology,
is subject to Hong Kong Profits Tax at the statutory rate of 16.5% on its assessable income for the period ended September 30,
2012 and 2011, respectively. As of September 30, 2012, Ocean Technology incurred $805,907 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 $132,975 on
the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not
that these assets will not be realized in the future.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
The PRC
The Company generated all of its net income
from subsidiaries operating in the PRC for the period ended September 30, 2012 and 2011. Rixiang, Jixiang, Mingxiang, Xianghe and
Xianglin are subject to the Corporate Income Tax governed by the Income Tax Law of the People’s Republic of China, at a unified
income tax rate of 25%.
On October 15, 2009, Mingxiang has received
a notice of recognition as an enterprise of new and high technology, which was jointly issued by the Science and Technology Department
of Fujian, the Finance Department of Fujian, the State Tax Bureau of Fujian and the Local Taxation Bureau of Fujian, for a company
engaged in advanced food processing technologies for the Fujian Province. As a new and high technology company, Mingxiang is qualified
for a reduced income tax rate of 15% on its income before tax for a period of three years, expiring in 2012.
The reconciliation of income tax rate to
the effective income tax rate for the period ended September 30, 2012 and 2011 is as follows:
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes from PRC subsidiaries
|
|
$
|
(5,858,641
|
)
|
|
$
|
9,228,116
|
|
Statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Income tax expense at statutory tax rate
|
|
|
(1,464,660
|
)
|
|
|
2,307,029
|
|
|
|
|
|
|
|
|
|
|
Tax effect from tax holiday
|
|
|
131,094
|
|
|
|
(1,104,031
|
)
|
Tax effect on net operating losses from PRC subsidiaries
|
|
|
406,071
|
|
|
|
1,483
|
|
Tax effect on non-taxable income
|
|
|
15,665
|
|
|
|
(9,965
|
)
|
Tax effect on non-deductible expenses
|
|
|
1,119,550
|
|
|
|
488,195
|
|
|
|
|
|
|
|
|
|
|
Income taxes at effective rate
|
|
$
|
207,720
|
|
|
$
|
1,682,711
|
|
As of September 30, 2012, the PRC operation
incurred $125,050 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 $31,263 on the expected future tax benefits from the net operating loss carryforwards
as the management believes it is more likely than not that these assets will not be realized in the future. The entities in the
PRC do not file a consolidated return, so only the entity that generated the losses can utilize them.
Tax Holiday
(Loss) income before income tax expense
was ($
5,975,877
) and $9,119,541 for the period ended September 30, 2012 and 2011
and was mainly attributed to subsidiaries with operations in China. Income tax related to China income for the period ended September
30, 2012 and 2011 was $207,720 and $1,682,711. The combined pro forma effects of the income tax expense exemptions and reductions
available to us are as follows:
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Amount of tax holiday effect
|
|
$
|
(131,094
|
)
|
|
$
|
1,104,031
|
|
Tax holiday effect on basic (losses) earnings per share
|
|
$
|
(0.004
|
)
|
|
$
|
0.037
|
|
Tax holiday effect on diluted (losses) earnings per share
|
|
$
|
(0.004
|
)
|
|
$
|
0.037
|
|
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
|
NOTE - 10
|
SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
|
The Company’s chief operating decision
maker has been identified as chairman, Mr. Liu, who reviews consolidated results when making decisions about allocating resources
and assessing performance of the Company. Based on this assessment, the Company has determined that it has three operating and
reporting segments for the period ended September 30, 2012 and 2011 which are processed seafood products, marine catch and algae-based
beverage products.
The accounting policies of the segments
are the same as those described in the summary of significant accounting policies (see Note 3). The Company had no inter-segment
sales for the period ended September 30, 2012 and 2011.
Summarized financial information concerning
the Company’s reportable segments is shown in the following tables for the three and nine months ended September 30, 2012
and 2011:
|
|
Three Months Ended September 30, 2012
|
|
|
|
Processed seafood
products
|
|
|
Marine catch
|
|
|
Algae-based
beverage products
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
14,974,488
|
|
|
$
|
2,004,746
|
|
|
$
|
13,781,445
|
|
|
$
|
30,760,679
|
|
Cost of revenue
|
|
|
(10,434,366
|
)
|
|
|
(1,919,388
|
)
|
|
|
(8,459,448
|
)
|
|
|
(20,813,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
4,540,122
|
|
|
$
|
85,358
|
|
|
$
|
5,321,997
|
|
|
$
|
9,947,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-lived assets
|
|
$
|
1,016,259
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,016,259
|
|
|
|
Three Months Ended September 30, 2011
|
|
|
|
Processed seafood
products
|
|
|
Marine catch
|
|
|
Algae-based
beverage products
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
14,440,645
|
|
|
$
|
8,033,004
|
|
|
$
|
8,444,457
|
|
|
$
|
30,918,106
|
|
Cost of revenue
|
|
|
(10,468,698
|
)
|
|
|
(7,599,621
|
)
|
|
|
(5,153,109
|
)
|
|
|
(23,221,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
3,971,947
|
|
|
$
|
433,383
|
|
|
$
|
3,291,348
|
|
|
$
|
7,696,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-lived assets
|
|
$
|
3,290,384
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,290,384
|
|
|
|
Nine Months Ended September 30, 2012
|
|
|
|
Processed seafood
products
|
|
|
Marine catch
|
|
|
Algae-based
beverage products
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
35,534,875
|
|
|
$
|
40,338,847
|
|
|
$
|
31,255,077
|
|
|
$
|
107,128,799
|
|
Cost of revenue
|
|
|
(25,335,659
|
)
|
|
|
(39,005,493
|
)
|
|
|
(19,265,702
|
)
|
|
|
(83,606,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
10,199,216
|
|
|
$
|
1,333,354
|
|
|
$
|
11,989,375
|
|
|
$
|
23,521,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-lived assets
|
|
$
|
2,147,817
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,147,817
|
|
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
|
|
Nine Months Ended September 30, 2011
|
|
|
|
Processed seafood
products
|
|
|
Marine catch
|
|
|
Algae-based
beverage products
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
47,732,721
|
|
|
$
|
8,108,980
|
|
|
$
|
23,802,183
|
|
|
$
|
79,643,884
|
|
Cost of revenue
|
|
|
(33,355,105
|
)
|
|
|
(7,646,971
|
)
|
|
|
(14,181,468
|
)
|
|
|
(55,183,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
14,377,616
|
|
|
$
|
462,009
|
|
|
$
|
9,620,715
|
|
|
$
|
24,460,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-lived assets
|
|
$
|
8,239,369
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,239,369
|
|
Expenditure for long-lived assets incurred
for the period ended September 30, 2012 and 2011 mainly relates to the construction of a cold storage facility which is used for
both processed seafood products and marine catch segments.
|
(b)
|
Geographic information
|
The Company’s operations are located
in two main geographical areas. The Company’s sales by geographical market are analyzed as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Revenue, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The PRC
|
|
$
|
29,020,393
|
|
|
$
|
30,918,106
|
|
|
$
|
104,342,551
|
|
|
$
|
79,567,908
|
|
Asia
|
|
|
1,740,286
|
|
|
|
-
|
|
|
|
2,786,248
|
|
|
|
75,976
|
|
Total revenue, net
|
|
$
|
30,760,679
|
|
|
$
|
30,918,106
|
|
|
$
|
107,128,799
|
|
|
$
|
79,643,884
|
|
All the Company’s long-lived assets
are located in the PRC in both periods.
|
NOTE - 11
|
CONCENTRATIONS OF RISK
|
The Company is exposed to the following
concentrations of risk:
The following is a table summarizing the
revenue from customers that individually represent greater than 10% of the total revenue for the nine months ended September 30,
2012 and their outstanding balances as at period-end dates.
|
|
Nine Months Ended September 30, 2012
|
|
Customer
|
|
Revenue
|
|
|
Percentage
of total revenue
|
|
|
Accounts
receivable, net
|
|
|
Percentage of total
accounts
receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
22,269,866
|
|
|
|
21
|
%
|
|
$
|
-
|
|
|
|
-
|
|
Customer B
|
|
|
17,915,168
|
|
|
|
17
|
%
|
|
|
1,030,593
|
|
|
|
4
|
%
|
Customer C
|
|
|
12,720,000
|
|
|
|
12
|
%
|
|
|
6,999,979
|
|
|
|
27
|
%
|
Customer D
|
|
|
12,255,096
|
|
|
|
11
|
%
|
|
|
4,505,566
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
65,160,130
|
|
|
|
61
|
%
|
|
$
|
12,536,138
|
|
|
|
49
|
%
|
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
For the nine months ended September 30,
2011, one customer represented more than 10% of the Company’s total revenue. This customer accounted for 10% of the Company’s
revenue amounting to $8,032,033, with $9,218,126 of accounts receivable which represented 34% of total accounts receivable, net.
The following is a table summarizing the
purchases from vendor that individually represent more than 10% of the total purchases for the period ended September 30, 2012
and their outstanding balances as at period-end dates.
|
|
Nine Months Ended September 30, 2012
|
|
Vendors
|
|
Purchases
|
|
|
Percentage
of total purchases
|
|
|
Accounts
payable, trade
|
|
|
Percentage of total
accounts payable,
trade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor A
|
|
$
|
47,611,631
|
|
|
|
46
|
%
|
|
$
|
-
|
|
|
|
-
|
|
Vendor B
|
|
|
17,934,864
|
|
|
|
17
|
%
|
|
|
29,781
|
|
|
|
1
|
%
|
Vendor C
|
|
|
15,850,878
|
|
|
|
15
|
%
|
|
|
153,171
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
81,397,373
|
|
|
|
78
|
%
|
|
$
|
182,952
|
|
|
|
4
|
%
|
The following is a table summarizing the
purchases from vendor that individually represent more than 10% of the total purchases for the period ended September 30, 2011
and their outstanding balances as at period-end dates.
|
|
Nine Months Ended September 30, 2011
|
|
Vendors
|
|
Purchases
|
|
|
Percentage
of total purchases
|
|
|
Accounts
payable, trade
|
|
|
Percentage of total
accounts payable,
trade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor D
|
|
$
|
14,694,252
|
|
|
|
35
|
%
|
|
$
|
-
|
|
|
|
-
|
|
Vendor C
|
|
|
8,374,456
|
|
|
|
20
|
%
|
|
|
112,944
|
|
|
|
3
|
%
|
Vendor B
|
|
|
6,049,934
|
|
|
|
15
|
%
|
|
|
98,619
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
29,118,642
|
|
|
|
70
|
%
|
|
$
|
211,563
|
|
|
|
6
|
%
|
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.
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.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
|
(e)
|
Economic and political risks
|
Substantially all of the Company’s
products are processed in the PRC. The Company’s operations are subject to various political, economic, and other risks and
uncertainties inherent in the PRC and not typically associated with companies in North America and Western Europe. Among other
risks, the Company’s operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and
embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political
conditions and governmental regulations in the PRC.
|
NOTE – 12
|
COMMITMENTS
AND CONTINGENCIES
|
|
(a)
|
Operating lease commitments
|
Ocean Technology leased certain office
space under a non-cancellable operating lease agreement with a term of 3 years with fixed monthly rentals expiring on February
17, 2014, and generally not containing significant renewal options. Total rent expenses for the nine months ended September 30,
2012 and 2011 was $60,000 and $59,618, respectively. Future minimum rental payments due under the non-cancelable operating lease
agreement are approximately $111,000 in total in the following two years.
In 2010, Mingxiang entered into an agreement
with an independent third party (the “Third Party Contractor”) in relation to the construction of a cold storage facility.
A supplementary agreement was entered into between Mingxiang and the Third Party Contractor in September 2011 related to additional
gross areas, machineries and equipment required for the facility. The construction was completed and commenced operations in July,
2012. Total construction costs are expected to be approximately $25.0 million. As of September 30, 2012, the Company has paid approximately
$24.2 million in this connection. The aggregated retention payments related to the Third Party Contractor are approximately $0.8
million as of September 30, 2012.
As of September 30, 2012, Mingxiang was
contingently liable as guarantor with respect to the loan of $474,759 (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 $474,759 (equivalent to RMB 3,000,000).
As of December 31, 2010, Mingxiang was
contingently liable as guarantor with respect to the loans of $791,264 (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 $791,264 (equivalent
to RMB 5,000,000) but left the amount of loan interest unsettled due to a disagreement between Yu Ching and the creditor in relation
to the calculation of the loan interest. Should Yu Ching fail to make its loan interest payments due at any time from the date
of guarantee, Mingxiang will be obligated to perform under the guarantee by primarily making the required payments, including late
fees and penalties. As of September 30, 2012, Yu Ching has not repaid the interest portion of the debt.
According to the Personal Guarantee Agreement
between Mingxiang and Mr. Liu, CEO, Mr. Liu agreed to bear all liabilities and costs incurred from a direct claim by the creditor
if either Han Jiang Hua Lian or Yu Ching fails to make payments to the creditor upon due dates.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2012
(Currency expressed in United States
Dollars (“US$”))
(Unaudited)
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 September 30, 2012, the Company has not recorded any liabilities
under these guarantees.
|
NOTE – 13
|
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 September 30,
2012 up through the date we issued the condensed consolidated financial statements. During the period, we did not have any material
recognizable subsequent event.
2. Management's
Discussion and Analysis of Financial Condition and Results of Operation
The following review concerns the nine
months ended September 30, 2012 and 2011, which should be read in conjunction with the financial statements and notes thereto presented
in the Form 10-Q.
Forward Looking Statements
The information in this discussion contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements
regarding our capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical
facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology
such as "may", "will", "should", "expect", "plan", "intend", "anticipate",
"believe", "estimate", "predict", "potential" or "continue", the negative of
such terms or other comparable terminology. Actual events or results may differ materially. We disclaim any obligation to publicly
update these statements, or disclose any difference between its actual results and those reflected in these statements. The information
constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
OVERVIEW
We are a holding company whose primary
business operations are conducted through our direct, wholly owned subsidiary, Ocean Technology (China) Company Limited (“Ocean
Technology”), and its subsidiaries, Shishi Rixiang Marine Foods Co., Ltd. (“Rixiang”) and Shishi Huabao Mingxiang
Foods Co., Ltd. (“Mingxiang”), Shishi Huabao Jixiang Water Products Co., Ltd. (“Jixiang”), and Shishi Xianglin
Trading Co., Ltd. (“Xianglin”), which are incorporated in the PRC. We engage in the business of processing, distribution
and sale of processed seafood products and algae-based beverage products, as well as the trading of marine catch. Our objective
is to establish ourselves as a leading producer of processed seafood products and algae-based beverage products in the PRC and
overseas markets.
Reverse acquisition and private placement
On November 17, 2007, we completed a reverse
acquisition transaction with Ocean Technology through a share exchange with Ocean Technology’s former
stockholders.
Pursuant
to the Share Exchange Agreement, the former shareholders
of Ocean Technology
exchanged
100% of
their
outstanding capital
stock
in
Ocean Technology
for approximately 15,624,034 shares of our common stock, or
approximately
93.15% of
our
outstanding
shares of
common stock
after the share exchange.
Concurrently with the closing of the
reverse
acquisition on November 17, 2007
,
we completed a private placement
of
our securities
to certain accredited investors
who subscribed for an aggregate
of
6,199,441
shares of our common stock and warrants to purchase an aggregate of
1,239,888 shares of
our
common stock
at
$3.214 per
unit, each unit consisting of one share of common stock and a warrant to purchase
one-fifth of one share of our common stock
.
Each warrant issued to the investors
had a term of three years and all unexercised warrants expired in November 2010.
Sales
We are a seafood producer engaged in the
processing, distribution and sale of seafood products and algae-based beverage products, as well as the trading of marine catch.
In 2010, we became a manufacturer of algae-based soft drinks through our acquisition of an 80% interest in Xianghe, which is also
an operating subsidiary of Ocean Technology.
All rental income, which is relatively
immaterial compared to our principal revenues from sale of processed seafood products, beverage products and trading of marine
catch, is recognized as "Other Income" in our financial statements. In particular, Mingxiang and Rixiang are responsible
for the rental income related to the collection on the 31 and 6 shop spaces, respectively, at our factory in Dabao Industrial Zone.
Majority of these rental contracts are based on a one-year lease term and only 1 rental contract is based on a four-year lease
term.
Our dried processed seafood products include
dried prawns, dried squids, dried file fish, roasted prawns, shredded roasted squids, roasted squids, roasted file fish and other
seafood items. The raw materials for our processed seafood products are solely purchased from independent fishermen in nearby markets
for further processing. Our dried processed seafood is predominantly sold under our registered trademark, the “Mingxiang”
brand name. Our brand name has been awarded the “Fujian Famous Brand” award by the Fujian Commerce Authority. Our dried
processed seafood products are mainly sold to distributors in Fujian and Zhejiang provinces, as well other nearby provinces, who
in turn distribute them to major supermarkets and retailers throughout these provinces.
For marine catch, we buy the marine catch
from the suppliers and then sell to either trading companies or distributors on a direct basis as opportunistic purchases and sales
according to the seasonality of respective seafood species. The marine catch is predominantly sold to distributors in Liaoning,
Fujian and Shandong provinces, and overseas customers in the Philippines and Indonesia. The completion of the new cold storage
facility in July 2012 helps to improve the capacity of conducting marine catch trading business in Fujian and also reduce storage
and freezing costs. The facility is currently providing ice making services to the port area and 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 48.6% and 46.7% of our total sales in the third quarter of 2012 and 2011, respectively. Trading of
our marine catch accounted for approximately 6.6% and 26.0% of our total sales in the third quarter of 2012 and 2011, respectively.
Sales of our algae-based beverage products accounted for approximately 44.8% and 27.3% of our total sales in the third quarter
of 2012 and 2011, respectively. We expect the sales of our algae-based beverage products will remain strong in the coming years
given our continuous expansion into untapped areas and contribution over the related sales and marketing campaigns since our acquisition
at the beginning of 2010.
A detailed breakdown of our sales by major
geographical markets is set out in the section “Results of Operations” herein.
Factors that can affect our sales are as
follows:
|
·
|
The level of sales is dependent on the supply of raw materials on a timely basis. Raw material
costs accounted for approximately 74.6% and 73.0% of our total cost of revenue of processed seafood products in the third quarter
of 2012 and 2011, respectively. The availability of these raw materials could be affected by a large number of factors, including,
inter alia
, the availability of fish stock, weather conditions, water contamination, government policies and regulations
where such fishing is carried out, the stability of supplies from fishermen and pressure from environmental or animal rights groups.
|
|
·
|
Specifically,
fishing activities in
waters around the PRC
are restricted in June
and July each year to
ensure sustainable aquatic
resources. As such,
some of our suppliers
such as fishermen are
restricted from fishing
during this period due
to the restrictions
against fishing along
the Taiwan Strait imposed
by the PRC’s Ministry
of Agriculture. There
is no assurance that
the PRC government may
not impose more stringent
fishing regulations,
including but not limited
to longer or more frequent
periods that restrict
fishing.
|
|
·
|
Any
shortage or contamination
in the supply of or
increase in the prices
of the raw materials
for our processed seafood
and algae-based beverage
products will adversely
affect our sales and
profit margins.
|
|
·
|
In
March 2011, the northern
region of Japan experienced
a severe earthquake
followed by a tsunami.
The earthquake and tsunami
caused extensive and
severe structural damage
in Japan, including
heavy damage to roads
and railways as well
as fires in many areas,
and a dam collapse and
damage to several nuclear
reactors. Although to
date the damage caused
by the earthquake and
tsunami have not damaged
our access to raw materials,
there can be no assurance
that such access may
not be affected. Even
though government officials
and health experts in
Japan and China stated
the doses of nuclear
radiation leaks are
low and not a threat
to human health unless
the tainted products
are consumed in
abnormally
excessive quantities
,
concern of seafood contamination
adversely affected our
sales of seafood and
algae-based beverage
products as a result
of consumers’
perception of food safety
in relation to the nuclear
radiation leaks in Japan.
|
|
·
|
In
May 2011, inspectors
of the government of
Taiwan detected dangerous
levels of industrial
plasticizers in sports
drinks and soft drinks,
used to substitute for
palm oil as clouding
agents in drinks, with
levels far in excess
of the daily allowed
intake. One plasticizer,
known as DEHP, is a
possible carcinogen,
and thought capable
of wreaking havoc with
children’s reproductive
organs. Since then,
the plasticizers have
been found in a range
of foods and drinks.
China, Hong Kong, South
Korea and the Philippines
have recalled beverage
bottles suspected of
contamination imported
from Taiwan. The beverage
products sector in the
East Asia region was
adversely affected by
the food scandal, and
new legislation with
higher food safety standard
of beverage products
may be implemented in
the PRC. The DEHP crisis
may affect our beverage
products business as
a result of any failure
to comply with the new
standard or adverse
changes in the beverage
products sector.
|
|
·
|
Our
ability to maintain
existing accreditations
such as HACCP, ISO9001:2000,
ISO14001:2004 and the
EU Export Certification
accreditations will
affect our ability to
maintain our presence
in our existing market
and to expand into new
market territories.
|
|
·
|
Our
ability to price our
products competitively
against existing competitors
and new market entrants
by achieving economies
of scale.
|
|
·
|
Our
ability to build on
our established track
record and reputation
as a supplier of high
quality processed seafood
products and capability
to deliver products
in a timely manner.
|
|
·
|
Our
ability to maintain
existing business relationships
and to secure new customers,
which may be affected
by the general economic
or political conditions
in our local and overseas
markets.
|
|
·
|
Our
ability to introduce
new products to capture
a wider group of consumers
and to cater to different
and changing consumers’
preferences.
|
|
·
|
Our
ability to expand our
drink business through
marketing campaigns
and penetration into
new areas.
|
|
·
|
Our
ability to respond successfully
to changes in the highly
competitive beverage
marketplace domestically
and internationally.
|
Please refer to the section “Risk
Factors” herein and discussed in our Annual Report on Form 10-K/A for the year ended December 31, 2011 for further
information on other factors that may affect our revenue.
Production facilities and employees
Our production facilities are located
at Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province, in the PRC. We have four production lines for the processing
of dried processed seafood products: roasted file fish, roasted prawns, shredded roasted squid and roasted squids, and one production
line for the processing of frozen seafood products.
As at September
30, 2012,
we employed 579
employees.
Seasonality
We do not experience any significant seasonality
in relation to sales for our processed seafood and algae-based beverage products. However, sales for our processed seafood products
are usually higher before and during the Chinese New Year and lower during summer time. Sales for our algae-based beverage products
are expected to be higher before and during the Chinese New Year and during the summer.
NEW BUSINESS DEVELOPMENT
Development of cold storage facilities
On November 6, 2009, we won the auction
for the purchase of the 40-year use right of a land in Shishi City, Fujian. In September 2010, we entered into an agreement with
a third party contractor to build cold storage facilities on the land with a capacity of approximately 20,000 tons, to take advantage
of its proximity to the port where we obtain fresh marine catch to be processed into seafood products. We 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 $25.0 million of construction in progress to property, plant and equipment after
commencement of operations.
We intend to provide high standard, modernized
cold storage, freezing and ice making services to the port area through the exclusive cold storage facilities. We are currently
utilizing certain cold storage spaces on our own which do not only help to reduce storage costs but also are expected to improve
margins for our current seafood segments as a result of bulk purchases at favorable prices.
RESULTS OF OPERATIONS
We derive our sales from the sales of
processed seafood products, marine catch and algae-based beverage products. The breakdown of our sales and gross profit by product,
as well as by geographical location of our customers for the three and nine months ended September 30, 2012 and 2011 are set out
below:
Breakdown of our past performance by
principal products and geographical region
Sales by product
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processed seafood products
|
|
|
14,975
|
|
|
|
48.6
|
|
|
|
14,441
|
|
|
|
46.7
|
|
|
|
35,535
|
|
|
|
33.2
|
|
|
|
47,733
|
|
|
|
59.9
|
|
Marine catch
|
|
|
2,005
|
|
|
|
6.6
|
|
|
|
8,033
|
|
|
|
26.0
|
|
|
|
40,339
|
|
|
|
37.6
|
|
|
|
8,109
|
|
|
|
10.2
|
|
Algae-based beverage products
|
|
|
13,781
|
|
|
|
44.8
|
|
|
|
8,444
|
|
|
|
27.3
|
|
|
|
31,255
|
|
|
|
29.2
|
|
|
|
23,802
|
|
|
|
29.9
|
|
Total
|
|
|
30,761
|
|
|
|
100.0
|
|
|
|
30,918
|
|
|
|
100.0
|
|
|
|
107,129
|
|
|
|
100.0
|
|
|
|
79,644
|
|
|
|
100.0
|
|
Sales by geographical region
|
|
Three Months Ended September 30, 2012
|
|
|
|
Processed
seafood products
|
|
|
Marine catch
|
|
|
Algae-based
beverage products
|
|
|
Total
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
PRC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong
|
|
|
1,353
|
|
|
|
9.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,353
|
|
|
|
4.4
|
|
Zhejiang
|
|
|
4,275
|
|
|
|
28.5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,207
|
|
|
|
23.3
|
|
|
|
7,482
|
|
|
|
24.3
|
|
Fujian
|
|
|
8,695
|
|
|
|
58.1
|
|
|
|
265
|
|
|
|
13.2
|
|
|
|
10,574
|
|
|
|
76.7
|
|
|
|
19,534
|
|
|
|
63.5
|
|
Guangdong/ Shenzhen
|
|
|
652
|
|
|
|
4.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
652
|
|
|
|
2.1
|
|
Jiangsu/ Shanghai
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total PRC
|
|
|
14,975
|
|
|
|
100.0
|
|
|
|
265
|
|
|
|
13.2
|
|
|
|
13,781
|
|
|
|
100.0
|
|
|
|
29,021
|
|
|
|
94.3
|
|
Asia (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
1,740
|
|
|
|
86.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,740
|
|
|
|
5.7
|
|
Total
|
|
|
14,975
|
|
|
|
100.0
|
|
|
|
2,005
|
|
|
|
100.0
|
|
|
|
13,781
|
|
|
|
100.0
|
|
|
|
30,761
|
|
|
|
100.0
|
|
|
|
Three Months Ended September 30, 2011
|
|
|
|
Processed
seafood products
|
|
|
Marine catch
|
|
|
Algae-based
beverage products
|
|
|
Total
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
PRC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong
|
|
|
1,324
|
|
|
|
9.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,324
|
|
|
|
4.3
|
|
Zhejiang
|
|
|
5,839
|
|
|
|
40.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,838
|
|
|
|
21.8
|
|
|
|
7,677
|
|
|
|
24.8
|
|
Fujian
|
|
|
6,636
|
|
|
|
46.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,606
|
|
|
|
78.2
|
|
|
|
13,242
|
|
|
|
42.8
|
|
Guangdong/ Shenzhen
|
|
|
642
|
|
|
|
4.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
642
|
|
|
|
2.1
|
|
Others (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
8,033
|
|
|
|
100.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,033
|
|
|
|
26.0
|
|
Total PRC
|
|
|
14,441
|
|
|
|
100.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,444
|
|
|
|
100.0
|
|
|
|
30,918
|
|
|
|
100.0
|
|
Asia
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
14,441
|
|
|
|
100.0
|
|
|
|
8,033
|
|
|
|
100.0
|
|
|
|
8,444
|
|
|
|
100.0
|
|
|
|
30,918
|
|
|
|
100.0
|
|
|
|
Nine Months Ended September 30, 2012
|
|
|
|
Processed seafood
products
|
|
|
Marine catch
|
|
|
Algae-based
beverage products
|
|
|
Total
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
PRC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong
|
|
|
3,087
|
|
|
|
8.7
|
|
|
|
14,842
|
|
|
|
36.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,929
|
|
|
|
16.7
|
|
Zhejiang
|
|
|
11,650
|
|
|
|
32.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,324
|
|
|
|
20.2
|
|
|
|
17,974
|
|
|
|
16.8
|
|
Fujian
|
|
|
19,038
|
|
|
|
53.5
|
|
|
|
421
|
|
|
|
1.0
|
|
|
|
24,931
|
|
|
|
79.8
|
|
|
|
44,390
|
|
|
|
41.5
|
|
Guangdong/ Shenzhen
|
|
|
1,760
|
|
|
|
5.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,760
|
|
|
|
1.6
|
|
Jiangsu/ Shanghai
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Others (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
22,290
|
|
|
|
55.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,290
|
|
|
|
20.8
|
|
Total PRC
|
|
|
35,535
|
|
|
|
100.0
|
|
|
|
37,553
|
|
|
|
93.1
|
|
|
|
31,255
|
|
|
|
100.0
|
|
|
|
104,343
|
|
|
|
97.4
|
|
Asia (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,786
|
|
|
|
6.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,786
|
|
|
|
2.6
|
|
Total
|
|
|
35,535
|
|
|
|
100.0
|
|
|
|
40,339
|
|
|
|
100.0
|
|
|
|
31,255
|
|
|
|
100.0
|
|
|
|
107,129
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2011
|
|
|
|
Processed seafood
products
|
|
|
Marine catch
|
|
|
Algae-based
beverage products
|
|
|
Total
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
PRC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong
|
|
|
4,122
|
|
|
|
8.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,122
|
|
|
|
5.2
|
|
Zhejiang
|
|
|
20,135
|
|
|
|
42.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,807
|
|
|
|
11.8
|
|
|
|
22,942
|
|
|
|
28.8
|
|
Fujian
|
|
|
20,200
|
|
|
|
42.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,995
|
|
|
|
88.2
|
|
|
|
41,195
|
|
|
|
51.7
|
|
Guangdong/ Shenzhen
|
|
|
2,182
|
|
|
|
4.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,182
|
|
|
|
2.7
|
|
Jiangsu/ Shanghai
|
|
|
1,090
|
|
|
|
2.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,090
|
|
|
|
1.4
|
|
Others (1)
|
|
|
4
|
|
|
|
0.0
|
|
|
|
8,033
|
|
|
|
99.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,037
|
|
|
|
10.1
|
|
Total PRC
|
|
|
47,733
|
|
|
|
100.0
|
|
|
|
8,033
|
|
|
|
99.1
|
|
|
|
23,802
|
|
|
|
100.0
|
|
|
|
79,568
|
|
|
|
99.9
|
|
Asia (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
76
|
|
|
|
0.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
76
|
|
|
|
0.1
|
|
Total
|
|
|
47,733
|
|
|
|
100.0
|
|
|
|
8,109
|
|
|
|
100.0
|
|
|
|
23,802
|
|
|
|
100.0
|
|
|
|
79,644
|
|
|
|
100.0
|
|
|
(1)
|
Sales to PRC Others mainly relate
to the trading of marine catch transacted in Liaoning province.
|
|
(2)
|
Sales to Asia relate to exports to
the Philippines.
|
Three months ended September 30, 2012 compared to three
months ended September
30, 2011, and nine months ended September 30, 2012 compared to nine months ended September 30, 2011
Sales
Our revenue decreased by approximately
$0.1 million or 0.5% from $30.9 million for the three months ended September 30, 2011 to $30.8 million for the same period ended
September 30, 2012. The decrease in revenue was mainly attributed to the decrease in sales of our marine catch, largely offset
by the increase in sales of our algae-based beverage products. Sales of our processed seafood products increased by $0.5 million
or 3.7% year over year to $15.0 million, whereas sales of algae-based beverage products increased by $5.3 million or 63.2% to
$13.8 million for the same periods under review. Our marine catch segment realized sales of $2.0 million for the three months
ended September 30, 2012, compared to $8.0 million for the same period in last year.
Our revenue during the nine months ended
September 30, 2012 increased to $107.1 million by approximately $27.5 million or 34.5% compared to $79.6 million we realized during
the nine months ended September 30, 2011. Sales of our processed seafood products decreased by $12.2 million or 25.6%, whereas
sales of our marine catch segment increased by $32.2 million. Sales of our algae-based beverage products increased by $7.5 million
or 31.3% to $31.3 million during the nine months ended September 30, 2012.
As a result of consumers’ perception
of food safety in relation to the nuclear radiation leaks in Japan which occurred in March 2011, sales of processed seafood products
have been significantly and adversely affected since the third quarter of 2011 and appear to be recovering in terms of revenues
quarter over quarter during the first nine months of 2012. While we are confident that the seafood we use to produce our processed
seafood products is safe, it is unclear how long it will take for consumer confidence in seafood products to normalize.
Calendar year ended December 31, 2012
is the third year in which we recognize sales of our algae-based beverage products since the acquisition of Xianghe on January
1, 2010. In 2010, our distribution network for the beverage segment was mainly Fujian province. After gaining experience in Fujian,
we expanded our distribution into Zhejiang province in the third quarter of 2011. The growth from Fujian and Zhejiang has been
adversely affected by the public concern over the plasticizer contamination in the beverage industry, as well as the lower-than-expected
temperatures in the southern regions of China during the summer of 2011. As a result of our continuous contribution to the related
sales and marketing campaigns, sales of our algae-based beverage products for the third quarter of 2012 increased by $5.3 million
or 63.2% to $13.8 million compared to the third quarter of 2011. Given our expansion plan into additional untapped areas of the
domestic market and our increased marketing expenditures, we expect the sales of our beverage segment to remain strong in the
coming years. Accordingly, the number of sales staff has increased significantly since January 1, 2010 from 23 to 93, as of September
30, 2012.
Trading of marine catch is deemed as opportunistic
purchases and sales of frozen seafood materials and therefore the sales volume fluctuates significantly from period to period.
We intend to buy marine catch in blocks from suppliers when their supplies are high and sell the stocks to customers when market
prices go up. Usually the inventory cycle will be less than a year. Though the profit margin from the trading segment is relatively
lower compared to that of both processed seafood and algae-based beverage products, the trading segment is a good source of revenue
and profit given our expertise in the seafood industry and surplus cash in hand.
Cost of revenue
Our cost of revenue comprises the cost
of our processed seafood and algae-based beverage products operations, as well as the cost of our marine catch. The breakdown
is as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processed seafood products
|
|
|
10,434
|
|
|
|
50.1
|
|
|
|
10,468
|
|
|
|
45.1
|
|
|
|
25,336
|
|
|
|
30.3
|
|
|
|
33,355
|
|
|
|
60.4
|
|
Marine catch
|
|
|
1,919
|
|
|
|
9.3
|
|
|
|
7,600
|
|
|
|
32.7
|
|
|
|
39,005
|
|
|
|
46.7
|
|
|
|
7,648
|
|
|
|
13.9
|
|
Algae-based beverage products
|
|
|
8,460
|
|
|
|
40.6
|
|
|
|
5,153
|
|
|
|
22.2
|
|
|
|
19,266
|
|
|
|
23.0
|
|
|
|
14,181
|
|
|
|
25.7
|
|
Total
|
|
|
20,813
|
|
|
|
100.0
|
|
|
|
23,221
|
|
|
|
100.0
|
|
|
|
83,607
|
|
|
|
100.0
|
|
|
|
55,184
|
|
|
|
100.0
|
|
Cost of revenue - Processed seafood
products
Our cost of revenue comprises mainly raw
materials, packaging materials, direct labor and manufacturing overhead. The following table sets out details of our cost of revenue:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
7,784
|
|
|
|
74.6
|
|
|
|
7,642
|
|
|
|
73.0
|
|
|
|
18,633
|
|
|
|
73.5
|
|
|
|
24,350
|
|
|
|
73.0
|
|
Packaging materials
|
|
|
1,155
|
|
|
|
11.1
|
|
|
|
1,205
|
|
|
|
11.5
|
|
|
|
2,798
|
|
|
|
11.1
|
|
|
|
4,024
|
|
|
|
12.1
|
|
Direct labor
|
|
|
647
|
|
|
|
6.2
|
|
|
|
789
|
|
|
|
7.5
|
|
|
|
1,796
|
|
|
|
7.1
|
|
|
|
2,307
|
|
|
|
6.9
|
|
Manufacturing overhead
|
|
|
848
|
|
|
|
8.1
|
|
|
|
832
|
|
|
|
8.0
|
|
|
|
2,109
|
|
|
|
8.3
|
|
|
|
2,674
|
|
|
|
8.0
|
|
Total
|
|
|
10,434
|
|
|
|
100.0
|
|
|
|
10,468
|
|
|
|
100.0
|
|
|
|
25,336
|
|
|
|
100.0
|
|
|
|
33,355
|
|
|
|
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 last
year, there was an upward pressure on the prices of our raw materials, including small-sized seafood materials, as a result of
fiercer competition with the breeding farms where the small-sized seafood materials are used as feeds.
Raw material costs accounted for approximately
73.5% and 73.0% of our cost of revenue for the nine months ended September 30, 2012 and 2011, respectively. The decrease in raw
material costs for the periods under review was mainly due to our decreased production and sales of processed seafood products,
whereas direct labor and manufacturing overhead are relatively considered as invariable cost factors comparing to raw materials
and packaging materials.
The percentage of raw materials cost as
a proportion of the total cost of revenue is affected by the product mix of the relevant financial year and the market price of
the raw materials. We mitigate the fluctuation in market prices of raw materials by bulk purchasing and stock management. We are
able to stock up our raw materials when prices are lower, as we have our own cold storage 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
11.1% and 12.1% of our cost of revenue for the nine months ended September 30, 2012 and 2011, respectively. The decrease was primarily
because the rate of increase in direct labor costs and manufacturing overhead was higher than that in packaging costs for the
periods under review. The decrease in packaging material costs for the periods under review was mainly due to the decreased production
and sales of processed seafood products.
Direct labor
Direct labor costs accounted for approximately
7.1% and 6.9% of our cost of revenue for the nine months ended September 30, 2012 and 2011, respectively. Direct labor includes
mainly salaries and wages paid to employees who are involved in the production process. Direct labor costs are dependent on factors
such as production volume, number of employees, wage rate and applicable government regulations (including minimum wage requirements,
statutory welfare and insurance fund contributions). The fluctuation in direct labor costs as a percentage of costs of sales is
dependent on the degree of processing required for the end products.
The total headcount for the processed
seafood segment as at September 30, 2012 has decreased to 251 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 third quarter of 2012 was mainly due to the
reduction in headcount, partially offset by the increased wage rates during the first nine months of 2012 to cope with the market
standard.
Manufacturing overhead
Manufacturing overhead comprises depreciation,
water, electricity and other fuel costs which are used directly in the production of finished goods. The decrease in manufacturing
overhead for the periods under review was mainly due to the decreased production and sales of processed seafood products.
Cost of revenue - Marine catch
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
1,540
|
|
|
|
80.3
|
|
|
|
7,516
|
|
|
|
98.9
|
|
|
|
38,450
|
|
|
|
98.6
|
|
|
|
7,553
|
|
|
|
98.8
|
|
Other expenses
|
|
|
379
|
|
|
|
19.7
|
|
|
|
84
|
|
|
|
1.1
|
|
|
|
555
|
|
|
|
1.4
|
|
|
|
95
|
|
|
|
1.2
|
|
Total
|
|
|
1,919
|
|
|
|
100.0
|
|
|
|
7,600
|
|
|
|
100.0
|
|
|
|
39,005
|
|
|
|
100.0
|
|
|
|
7,648
|
|
|
|
100.0
|
|
Raw materials
We buy the marine catch from the suppliers
and then sell to the customers on a direct basis. The marine catch is predominantly sold to distributors in Liaoning, Fujian and
Shandong provinces, and overseas customers in the Philippines. The cost of the raw material is based on the market price at the
time of purchase.
The increase in raw materials cost for
the periods under review was in line with the increased sales of trading materials.
Other expenses
Other expenses mainly relate to the costs
of packaging materials and ice required to keep the marine catch fresh, and also the associated costs of ice making services.
Cost of revenue - Algae-based beverage
products
Our cost of revenue comprises mainly raw
materials, packaging materials and manufacturing overhead. The following table sets out details of our cost of revenue:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
1,257
|
|
|
|
14.9
|
|
|
|
718
|
|
|
|
13.9
|
|
|
|
2,829
|
|
|
|
14.7
|
|
|
|
2,058
|
|
|
|
14.5
|
|
Packaging materials
|
|
|
5,697
|
|
|
|
67.3
|
|
|
|
3,538
|
|
|
|
68.7
|
|
|
|
13,020
|
|
|
|
67.5
|
|
|
|
9,665
|
|
|
|
68.2
|
|
Manufacturing overhead
|
|
|
1,506
|
|
|
|
17.8
|
|
|
|
897
|
|
|
|
17.4
|
|
|
|
3,417
|
|
|
|
17.8
|
|
|
|
2,458
|
|
|
|
17.3
|
|
Total
|
|
|
8,460
|
|
|
|
100.0
|
|
|
|
5,153
|
|
|
|
100.0
|
|
|
|
19,266
|
|
|
|
100.0
|
|
|
|
14,181
|
|
|
|
100.0
|
|
Raw materials
Raw materials comprise mainly the algae
extracts and other beverage ingredients such as sugar and herbal powder. The costs of these raw materials are dependent on the
prevailing market prices, which are relatively stable as there is a stable and abundant supply from the existing market.
Raw material costs accounted for approximately
14.7% and 14.5% of our cost of revenue for the nine months ended September 30, 2012 and 2011, respectively. The percentage of
raw materials cost as a proportion of the total cost of revenue is affected by changes in ingredient mix from time to time and
the market price of the raw materials. The increase in raw materials cost for the periods under review was in line with the increased
sales of our algae-based beverage products.
Packaging materials
Packaging materials comprise iron and
aluminium foils, which are used to produce the cans, and paper boxes. The costs of these raw materials are dependent on the prevailing
market prices with a stable and abundant supply from the existing market.
Packaging materials accounted for approximately
67.5% and 68.2% of our cost of revenue for the nine months ended September 30, 2012 and 2011, respectively. The increase in packaging
materials cost for the periods under review was in line with the increased sales of our algae-based beverage products.
Manufacturing overhead
We utilize two third party manufacturers
to produce our algae-based beverage products. Manufacturing costs are charged based on the production volume. We will use a number
of manufacturers going forward so as to mitigate the concentration risks.
Gross profit by product
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
2012
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
US$’000
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processed seafood products
|
|
|
4,541
|
|
|
|
45.6
|
|
|
|
3,973
|
|
|
|
51.6
|
|
|
|
10,199
|
|
|
|
43.3
|
|
|
|
14,378
|
|
|
|
58.8
|
|
Marine catch
|
|
|
86
|
|
|
|
0.9
|
|
|
|
433
|
|
|
|
5.6
|
|
|
|
1,334
|
|
|
|
5.7
|
|
|
|
461
|
|
|
|
1.9
|
|
Algae-based beverage products
|
|
|
5,321
|
|
|
|
53.5
|
|
|
|
3,291
|
|
|
|
42.8
|
|
|
|
11,989
|
|
|
|
51.0
|
|
|
|
9,621
|
|
|
|
39.3
|
|
Total
|
|
|
9,948
|
|
|
|
100.0
|
|
|
|
7,697
|
|
|
|
100.0
|
|
|
|
23,522
|
|
|
|
100.0
|
|
|
|
24,460
|
|
|
|
100.0
|
|
Gross profit margin by profit
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
%
|
|
Processed seafood products
|
|
|
30.3
|
|
|
|
27.4
|
|
|
|
28.7
|
|
|
|
30.1
|
|
Marine catch
|
|
|
4.2
|
|
|
|
5.4
|
|
|
|
3.3
|
|
|
|
5.7
|
|
Algae-based beverage products
|
|
|
38.6
|
|
|
|
39.0
|
|
|
|
38.4
|
|
|
|
40.4
|
|
Total
|
|
|
32.3
|
|
|
|
24.8
|
|
|
|
22.0
|
|
|
|
30.7
|
|
Gross profit
Gross profit increased by 29.2% or $2.2
million, from $7.7 million for the three months ended September 30, 2011 to $9.9 million for the same period in 2012. Overall
gross profit margin increased by 7.5% from 24.8% for the three months ended September 30, 2011 to 32.3% for the same period in
2012. The increase in gross profit margin for the three months ended September 30, 2012 compared to the same period in the prior
year is highly related to the profit margin for our marine catch which is significantly lower than our other lines of business.
When we have a substantial marine catch sale like we did during the three months ended September 30, 2011, our overall gross profit
margin will decrease. Gross profit margin for the processed seafood products operations increased from 27.4% for the three months
ended September 30, 2011 to 30.3% for the same period in 2012 which was mainly due to the reduced headcount as a result of decreased
scale of production and the change in the product mix, by which more products are sold with less packaging costs. Marine catch
sales are 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. Gross profit margin for
the algae-based beverage segment decreased from 39.0% to 38.6% for the same periods under review mainly due to the increased costs
of raw materials, packaging materials and manufacturing overhead.
Whereas gross profit dropped by 3.8% or
$0.9 million, to $23.5 million for the nine months ended September 30, 2012 comparing to the same period in 2011. Overall gross
profit margin for the nine months ended September 30, 2012 dropped from 30.7% to 22.0% for the same period in 2011. Gross profit
margin for the processed seafood products operations decreased from 30.1% to 28.7%, which was mainly due to the decreased scale
of production and the increased costs of raw materials and manufacturing overhead. Gross profit margin for the algae-based beverage
segment was decreased from 40.4% to 38.4% for the same periods under review with similar reasons as explained above.
Depreciation and amortization
Depreciation and amortization accounted
for approximately 1.9% and 2.5% of our total revenue for the nine months ended September 30, 2012 and 2011, respectively. Depreciation
and amortization was mainly related to the amortization of intangible assets associated with the acquisition of the beverage business
declared effective at the beginning of 2010. The algae-based beverage know-how is amortized over its estimated useful life of
10 years, on a straight-line basis, at a yearly amortization charge of approximately $2.5 million.
Sales and marketing expenses
Our sales and marketing expenses comprise
mainly salaries of sales and marketing staff, investor relations fees, advertising and promotional costs.
Our sales and marketing expenses accounted
for approximately 20.3% and 12.8% of our total revenue for the nine months ended September 30, 2012 and 2011, respectively. The
increase in the sales and marketing expenses was mainly due to the increase of advertising and promotional costs to strengthen
brand position and improve market awareness in both existing and new markets and cope with the marketing strategies associated
with the beverage products. We have spent approximately $8.0 million in advertising
campaigns
including TV commercials and $12.0 million in promotional costs including
subsidized
products for promotional purposes, free gifts and other direct marketing events
during the nine months ended September
30, 2012 to raise awareness of our processed seafood and algae-based beverage products. Accordingly, the number of sales staff
has increased from 47 in 2010 to 132 as at September 30, 2012, of which 93 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 approximately $2.4 million for the nine months ended September 30, 2012 compared to $2.0 million for the nine months
ended September 30, 2011 and accounted for approximately 2.3% and 2.5% of our total revenue for the nine months ended September
30, 2012 and 2011, respectively. The increase in the general and administrative expenses was mainly due to increased legal and
professional fees and provision for bonus during the period ended September 30, 2012.
Stock-based compensation
On April 1, 2011, the Company granted
compensatory stock awards totaling 700,000 common shares to certain of its officers, directors and employees. Based
on the closing stock price of the grant date, the fair value of these stock awards are estimated to be approximately $2.7 million,
which is recognized as compensation expense, using the straight-line method, over the service period of one year from April 1,
2011 to March 31, 2012.
Goodwill impairment
A goodwill impairment loss of $2.6 million
was recorded during the quarter ended September 30, 2012 based on the preliminary results of the Company’s valuation of
the drink business. Preliminary estimated results prepared by the Company indicate a fair market value which approximates the
carrying value as of September 30, 2012 and do not indicate a probable impairment loss to the intangible assets. The Company will
engage an independent valuation expert during the fourth quarter of 2012 to perform a full valuation of the algae-based drink
business reporting unit.
Please refer to Note 3 of the accompanying
financial statements for further details of goodwill and intangible assets.
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 1 rental contract is based on a four-year lease term. Interest income is earned from cash balances with banks
as a result of operational cash inflow.
Interest expense
Our interest expense relates to interest
costs incurred on the various short-term bank borrowings taken by us for working capital requirements. Our interest expense accounted
for approximately 0.3% of our total revenue for the nine months ended September 30, 2012. During the last twelve months, a short-term
loan of $8.7 million was drawn down for working capital needs and to maintain the effectiveness of the facility lines with the
banks.
Income before income tax
Our income before income tax decreased
by $15.1 million or 165.5%, from $9.1 million in income for the nine months ended September 30, 2011 to a $6.0 million loss for
the same period in 2012. The decrease was mainly due to the combination of the decrease in overall gross profit of approximately
$0.9 million, the increase in the sales and marketing expenses of approximately $11.5 million and a goodwill impairment loss of
approximately $2.6 million, as a result of the factors described above.
Income tax expense
Our profit is subject to the prevailing
tax rate applicable to the respective jurisdictions in which we operate.
Rixiang, Jixiang, Mingxiang, Xianghe and
Xianglin are subject to the Corporate Income Tax governed by the Income Tax Law of the People’s Republic of China, at a
unified income tax rate of 25%.
Mingxiang received a notice of recognition
as an enterprise of new and high technology in 2009, which was jointly issued by the Science and Technology Department of Fujian,
the Finance Department of Fujian, the State Tax Bureau of Fujian and the Local Taxation Bureau of Fujian for the Company engaged
in advanced food processing technologies for Fujian province. As a new and high technology company, Mingxiang is qualified for
a reduced tax rate of 15% on its assessable income for the period of three years, through 2012.
Income tax expenses for the nine months
ended September 30, 2012 and 2011 and were approximately $0.2 million and $1.7 million, respectively. The effective tax rates
were -3.5% and 18.5%, respectively, for the periods under review.
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 September 30, 2012 amounted to approximately $1.0 million, with short-term loans of $8.7 million being drawn down during the
last twelve months.
A summary of our cash flows for the nine
months ended September 30, 2012 and 2011 is as follows:
|
|
Nine Months Ended September
30,
|
|
US$’000
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(4,101
|
)
|
|
|
22,471
|
|
Net cash used in investing activities
|
|
|
(2,148
|
)
|
|
|
(8,239
|
)
|
Net cash provided by (used in) financing activities
|
|
|
6,176
|
|
|
|
(212
|
)
|
Net change in cash and cash equivalents
|
|
|
(73
|
)
|
|
|
14,020
|
|
Foreign currency translation adjustment
|
|
|
491
|
|
|
|
1,740
|
|
Cash and cash equivalents at the beginning of the period
|
|
|
587
|
|
|
|
15,557
|
|
Cash and cash equivalents at the end of the period
|
|
|
1,005
|
|
|
|
31,317
|
|
Net cash (used in) provided by operating
activities
Our net cash used in operating activities
for the nine months ended September 30, 2012 amounted to approximately $4.1 million, which was a decrease of $26.6 million compared
to net cash provided by operating activities for the same period in 2011. The decrease was mainly attributable to the net operating
loss during the nine months ended September 30, 2012 and the difference in the increase in inventories of approximately $43.9
million and $6.9 million for the nine months ended September 30, 2012 and 2011, respectively, partially offset by the difference
in the decrease in accounts receivable of approximately $43.1 million and $21.6 million for the same periods under review. Inventories
were mainly composed of trading materials as of September 30, 2012.
As of September 30, 2012, our cash and
cash equivalents increased to $1.0 million from $0.6 million at December 31, 2011 mainly as a result of additional sales, the
collection of outstanding accounts receivable and additional borrowing of short-term loans, partially offset by the increase in
trading materials. Our accounts receivable decreased to $25.6 million at September 30, 2012 from $68.6 million at December 31,
2011.
Net cash used in investing activities
For the nine months ended September 30,
2012, our net cash used in investing activities was approximately $2.1 million which was mainly attributable to the additional
costs for the construction of the cold storage facilities.
Net cash provided by (used in) financing
activities
Our net cash provided by financing activities
was approximately $6.2 million for the nine months ended September 30, 2012, which was mainly attributable to the net borrowing
of short-terms bank loans.
For the nine months ended September 30,
2011, our net cash used in financing activities was approximately $0.2 million, which was mainly attributable to the repayment
of amount due to a shareholder.
Capital resources
We believe that after taking into account
of our cash position, available bank facilities and cash generated from operating activities, we have adequate working capital
to satisfy our current operating expenditures for the next twelve months. From time to time, we may identify new expansion opportunities
for which there will be a need to use cash. We manage our cash based on thorough consideration of our corporate strategy as well
as the macro economic situation. Factors we take into account when managing our cash include interest rates, foreign currency
fluctuation as well as the flexibility in executing our acquisition and operational strategies.
We have built cold storage facilities
adjacent to the fishing port with a capacity of approximately 20,000 tons, to take advantage of its proximity to the port where
we obtain fresh marine catch to be processed into seafood products. We 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 September 30, 2012. The aggregated retention payments related to
the Third Party Contractor are approximately $0.8 million as of September 30, 2012.
During the last twelve months, our wholly-owned
subsidiary, Mingxiang, obtained short-term bank loans, which loans totaled $8.7 million as of September 30, 2012. The loans were
drawn down for working capital needs and to maintain the effectiveness of the facility lines with the banks. The short-term loans
are due by January, February, April and May 2013, respectively, and we have the right to roll over the loans. The weighted average
effective interest rate per annum was 6.59% for the period ended September 30, 2012, payable quarterly. Interest expenses for
the three and nine months ended September 30, 2012 were $142,322 and $283,443, respectively and none of the interest incurred
was capitalized.
Apart from the expansion plan and short-term
bank loans discussed above and the commitments set out in the section of “Commitments and Contingencies” herein, we
do not have any other material commitments for capital expenditures and other expenditures. We believe that the current operating
activities would be able to generate adequate cash flows supporting the daily operations for the next twelve months.
COMMITMENTS
AND CONTINGENCIES
Operating lease commitments
Ocean Technology leased certain office
space under a non-cancellable operating lease agreement with a term of 3 years with fixed monthly rentals expiring on February
17, 2014, and generally not containing significant renewal options. Total rent expenses for the nine months ended September 30,
2012 and 2011 was $60,000 and $59,618, respectively. Future minimum rental payments due under the non-cancelable operating lease
agreement are approximately $111,000 in total in the following two years.
Capital commitments
In 2010, Mingxiang entered into an agreement
with an independent third party (the “Third Party Contractor”) in relation to the construction of a cold storage facility.
A supplementary agreement was entered into between Mingxiang and the Third Party Contractor in September 2011 related to additional
gross areas, machineries and equipment required for the facility. The construction was completed and commenced operations in July,
2012. Total construction costs are expected to be approximately $25.0 million. As of September 30, 2012, the Company has paid
approximately $24.2 million in this connection. The aggregated retention payments related to the Third Party Contractor are approximately
$0.8 million as of September 30, 2012.
Guarantees
As of September 30, 2012, Mingxiang was
contingently liable as guarantor with respect to the loan of $474,759 (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 $474,759 (equivalent to RMB 3,000,000).
As of December 31, 2010, Mingxiang was
contingently liable as guarantor with respect to the loans of $791,264 (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 $791,264 (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 September 30, 2012, 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 September 30, 2012, the Company has not recorded any liabilities
under these guarantees.
ISSUANCE
OF COMMON STOCK
On November 18, 2011, the Company entered
into an Investor Relations Consulting Agreement with MZHCI LLC (“MZHCI”) to provide consulting services for the Company.
In connection with such service, the Company agreed to issue 25,000 shares of common stock to MZHCI. The shares of common stock
were valued at $22,750 or $0.91 per share and issued on July 27, 2012.
CRITICAL
ACCOUNTING POLICIES and estimates
This section should be read together with
the Summary of Significant Accounting Policies included as Note 2 to the consolidated financial statements included in our Annual
Report on Form 10-K/A for the year ended December 31, 2011.
Recent
accounting pronouncements
The Company has reviewed all recently
issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may
be expected to cause a material impact on its financial condition or the results of its operations. Please refer to Note 3 of
the accompanying financial statements for further details of recent accounting pronouncements.
FOREIGN EXCHANGE EXPOSURE
Our sales are denominated in RMB and US
dollars whilst our purchases and operating expenses are mostly denominated in RMB. As such, we may be exposed to any significant
transactional foreign exchange exposure for our operations. However, to the extent that we may enter into transactions in currencies
other than RMB in the future, particularly as we penetrate into overseas markets, our financial results may be subject to fluctuations
among those foreign currencies and RMB.
The percentage of our sales denominated
in RMB and US dollars are as follows:
|
|
Nine Months Ended September
30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
RMB
|
|
|
97.4
|
|
|
|
99.9
|
|
US dollars
|
|
|
2.6
|
|
|
|
0.1
|
|
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 September
30, 2012, the exchange rate was approximately US$1.00 to RMB6.3190. 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 o
ur 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 o
ur
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.