1.
ORGANIZATION AND BUSINESS BACKGROUND
China Marine Food Group Limited (“China
Marine” or “the Company”), formerly known as New Paradigm Productions, Inc., was incorporated in the State of
Nevada on October 1, 1999. The Company is headquartered and the principal operations are in Shishi City, Fujian Province, People
Republic of China (“PRC”). The Company, through its subsidiaries, manufactures and distributes processed seafood products
and algae-based beverage products. The Company also trades marine catch sporadically throughout the year based on opportunities.
The Company’s customers are located in domestic provinces in the PRC and overseas markets.
The
Company is publicly traded on the AMEX under the symbol “CMFO” and can be found on the worldwide web at
www.china-marine.cn
.
Recapitalization and reorganization
On November 17, 2007, China Marine completed
a stock exchange transaction with the shareholders of Ocean Technology (China) Company Limited (“Ocean Technology”),
whereby 15,624,034 shares of the Company’s common stock were issued to the shareholders of Ocean Technology in exchange for
100% of their outstanding capital stock in Ocean Technology. As a result of the stock exchange, the former shareholders of Ocean
Technology owned approximately 93.15% of the issued and outstanding shares of common stock of the Company.
Ocean Technology became a wholly-owned
subsidiary of China Marine. The stock exchange transaction was accounted for as a reverse acquisition and recapitalization of China
Marine whereby Ocean Technology is deemed to be the accounting acquirer (legal acquiree) and China Marine to be the accounting
acquiree (legal acquirer). The accompanying consolidated financial statements are in substance those of Ocean Technology, with
the assets and liabilities, and revenues and expenses, of China Marine being included effective from the date of stock exchange
transaction. China Marine is deemed to be a continuation of the business of Ocean Technology.
As of December 31, 2011, China Marine’s
majority-owned subsidiaries were as follows
Business history of subsidiaries
Name
|
|
Place of incorporation
and kind of
legal entity
|
|
Principal activities
and place of operation
|
|
Particulars of issued/
registered share
capital
|
|
Effective interest
Held
|
|
|
|
|
|
|
|
|
|
Ocean Technology (China) Company Limited (“Ocean Technology”)
|
|
Hong Kong, a limited liability company
|
|
Investment holding in Hong Kong
|
|
10,000 issued shares of HK$1 each
|
|
100%
|
|
|
|
|
|
|
|
|
|
Shishi Rixiang Marine Foods Co., Ltd.
(“Rixiang”)
|
|
The PRC, a limited liability company
|
|
Trading and distribution of
marine products in the PRC and overseas
|
|
$33,000,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
Shishi Huabao Mingxiang Foods Co., Ltd (“Mingxiang”)
|
|
The PRC, a limited liability company
|
|
Trading and distribution of marine products in the PRC and overseas;
Sales and distribution of algae-based beverage products
|
|
RMB50,000,000
|
|
100%
|
Shishi Huabao Jixiang Water Products Co., Ltd (“Jixiang”)
|
|
The PRC, a limited liability company
|
|
Property holding
|
|
RMB4,500,000
|
|
100%
|
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
Name
|
|
Place of incorporation
and kind of
legal entity
|
|
Principal activities
and place of operation
|
|
Particulars of issued/
registered share
capital
|
|
Effective interest
Held
|
|
|
|
|
|
|
|
|
|
Shishi Xianghe Food Science and Technology Co., Ltd. (“Xianghe”)
|
|
The PRC, a limited liability company
|
|
Sale and distribution of algae-based beverage products
|
|
RMB5,000,000
|
|
80%
|
|
|
|
|
|
|
|
|
|
Shishi Xianglin Trading Co., Ltd. (“Xianglin”)
|
|
The PRC, a limited liability company
|
|
Dormant
|
|
RMB800,000
|
|
100%
|
|
|
|
|
|
|
|
|
|
China Marine and its subsidiaries are hereinafter
referred to as “the Company”.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
l
Basis of consolidation
These accompanying consolidated financial
statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US
GAAP”). The audited consolidated financial statements include the financial statements of China Marine and its subsidiaries.
All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.
l
Non-controlling interest
Non-controlling interests in our subsidiaries
are recorded in accordance with the provisions of Accounting Standard Codification (“ASC”) 810, “Consolidation”,
and are reported as a component of our equity, separate from the parent’s equity. Purchase or sale of equity interests that
do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the non-controlling
interests are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest
retained, If any, will be reported at fair value with any gain or loss recognized in earnings.
Under
ASC 810-10-45-21, losses attributable to the parent and the non-controlling interest in a subsidiary may exceed their interests
in the subsidiary’s equity. The excess, and any further losses attributable to the parent and the non-controlling interest,
shall be attributed to those interests. That is, the non-controlling interest shall continue to be attributed its share of losses
even if that attribution results in a deficit non-controlling interest balance.
l
Use of estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and also requires disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates
made by management include revenue recognition estimates, valuation of equity instruments and allowance for doubtful accounts.
l
Cash and cash equivalents
Cash and cash equivalents are carried at
cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments
with an original maturity of three months or less as of the purchase date of such investments.
The Company maintains cash and cash equivalent
balances at a financial institution in the PRC, which are insured by the People’s Bank of China. The Company had cash concentration
risk of $538,132 and $14,364,156 as of December 31, 2011 and 2010, respectively, which amounts exclude Ocean Technology.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
l
Accounts receivable and allowance for doubtful accounts
Accounts receivable are recorded at the
invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing
basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s
financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered
necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
l
Inventories
Inventories consist of frozen products
from marine catch, processed seafood products, algae-based beverage products and materials used in the manufacture of the Company’s
products. Inventories are stated at the lower of cost or net realizable value, with cost being determined on a weighted average
basis.
Costs include purchased cost of raw materials, direct labor and manufacturing overhead costs.
The Company periodically reviews historical sales activity to determine excess, slow moving items and
potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory
allowances based on excess and obsolete inventories determined principally by customer demand.
As of December 31, 2011 and
2010, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.
l
Property, plant and equipment
Property, plant and equipment are stated
at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line
basis over the following expected useful lives from the date on which they become fully operational and after taking into account
their estimated residual values:
|
Depreciable life
|
|
Residual value
|
Buildings
|
30-50 years
|
|
10%
|
Plant and machinery
|
5-30 years
|
|
10%
|
Motor vehicles
|
8-10 years
|
|
10%
|
Office equipments
|
5 years
|
|
10%
|
Expenditure for repairs and maintenance
is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts
and any resulting gain or loss is recognized in the results of operations.
l
Construction in progress
Construction in progress is stated at cost,
which includes the cost of construction, acquisition of plant and equipment and other direct costs attributable to the construction.
Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized
interest is incurred during the period of construction.
l
Land use rights
All lands in the PRC are owned by the PRC
government. The government in the PRC, according to the relevant PRC law, may sell the right to use the land for a specified period
of time. Thus, all of the Company’s land purchases in the PRC are considered to be leasehold land and are stated at cost
less accumulated amortization and any recognized impairment loss. Amortization is provided over the term of the land use right
agreements on a straight-line basis, which is 50 years and they will expire in 2052.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
l
Goodwill and intangible assets
Goodwill and intangible assets were the
result of the acquisition of Xianghe. Goodwill represents the cost of the acquired algae-based drink business in excess of the
fair value of identifiable tangible and intangible net assets purchased. Intangible assets include trademarks and algae-based beverage
know-how and are recorded at cost less accumulated amortization and any recognized impairment loss. The algae-based beverage know-how
is amortized over its estimated useful life of 10 years on a straight-line basis, which coincides with the timing provided from
the PRC protection guidelines for our product. For the year ended December 31, 2011, the Company engaged an independent valuation
expert to assist in determining the fair value of the identifiable tangible and intangible net assets of the acquired business.
The Company
evaluates the valuation of its goodwill according to the provisions of Accounting Standards Codification (“ASC”) 350
to determine if the current value of goodwill has been impaired. The Company has also adopted Accounting Standard Update (ASU) No. 2011-08,
Intangibles-Goodwill and Other (Topic 350).
With ASU No. 2011-08, an entity is given the option to make a qualitative
evaluation of goodwill impairment to determine whether it should calculate the fair value of its reporting unit. The Company made
its qualitative evaluation of its goodwill considering, among other things, the general macroeconomic conditions, industry and
market considerations, cost factors, overall financial performance and other relevant entity-specific events. Based on this qualitative
evaluation, the Company concluded that it was more likely than not that its goodwill was not impaired and it wasn’t required
to calculate the fair value of its reporting unit as of December 31, 2011.
Goodwill of a reporting unit will be tested for
impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value
of the reporting unit below its carrying amount. We performed our annual goodwill impairment during the fourth quarter of each
calendar year.
In accordance with ASC Topic 360-10-5,
“
Impairment or Disposal of Long-Lived Assets
”, the Company engaged a third party valuation firm to review the
Company’s algae-based intangible assets for impairment. The Company performed its annual impairment test for its intangible
assets during the fourth quarter of each calendar year. The intangible assets balance related to the algae-based drink business
reporting unit.
The test involved the assessment of the fair market value of the Company’s intangible
assets, using a form of the income approach known as the excess earnings method and concludes that a discount rate of 21.5% is
considered appropriate for valuing the Company. The market and cost approaches were not applied due to the lack of information
deemed to be reliably indicative of value using either approach. The result of the assessment of the Company’s intangible
assets indicated that its fair values exceeded its carrying amounts.
In particular, the Company provided a forecasted
discounted cash flows analysis for the reporting unit based on discrete fifteen-year financial forecasts developed by management
for planning purposes. Cash flows beyond the fifteen-year discrete forecasts were estimated using a terminal value calculation,
which incorporated historical and forecasted financial trends for the reporting unit and considered long-term earnings growth rates
for publicly traded peer companies.
The key assumptions used in determining
the fair value of the reporting unit are:
|
-
|
The financial projections were prepared by the Management
with due care and consideration reflecting the reasonable estimate of future relevant events.
|
|
-
|
All information provided by the Management is true,
accurate and complete.
|
|
-
|
There will be no major changes in the existing political,
legal, fiscal and economic conditions in countries in which the Company will carry on its business.
|
|
-
|
There will be no major changes in the current taxation
law in countries in which the Company operates.
|
|
-
|
Future exchange rates and interest rates will not differ
materially from those prevailing market expectations.
|
|
-
|
The availability of finance will not be a constraint
on the future growth of the Company’s operation.
|
|
-
|
The Company will retain and have competent management,
key personnel, and technical staff to support its ongoing operation.
|
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
|
-
|
Industry trends and market conditions for related industries
will not deviate significantly from economic forecasts.
|
|
-
|
The forecasted average annual growth rate of revenue
is 3% to 70% from 2012 to 2026. This reflects the following assumptions:
|
|
1)
|
Increased market penetration into six provinces;
|
|
2)
|
Increased demand in China for health related drinks;
and
|
|
3)
|
A long term growth rate into perpetuity has been determined
to be 3% with reference to the birth rate, market penetration and other related factors.
|
|
-
|
Cost of goods sold is forecasted to grow by 3% to 72%
from 2012 to 2026.
|
|
-
|
The discount rate applied to the cash flows is based
on the weighted average cost of capital (“WACC”) of the Company. WACC is the weighted average of the estimated rate
of return required by equity and debt holders for an investment of this type. Our analysis concluded that a
discount
rate of 21.5% is considered appropriate for valuing the Company.
|
|
-
|
Publicly available information regarding our market
capitalization was also considered in assessing the reasonableness of the cumulative fair values of our reporting units estimated
using the excess earnings method.
|
Based upon the valuation report prepared
by an independent valuation expert, it is concluded that the fair value of the intangible asset as of December 31, 2011, is reasonably
stated by the amount of $21,173,433. During the years ended December 31, 2011 and 2010, we determined that there had been
no impairment of intangible assets.
l
Impairment of long-lived assets
In accordance with the provisions of ASC
Topic 360-10-5, “
Impairment or Disposal of Long-Lived Assets
”, all long-lived assets such as property, plant
and equipment, land use rights and intangible assets held and used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated
by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed the fair value of the assets. There has been no impairment as of December 31, 2011 and
2010.
l
Revenue recognition
In accordance with the ASC Topic 605,
“Revenue
Recognition”
, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has
occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured.
The Company
derives revenues from the processing, distribution and sale of processed seafood
products, sale of marine catch, and the
sale and distribution of algae-based beverage products. The
Company recognizes its revenues net of value-added
taxes (“VAT”). The Company is subject to VAT which is levied on the majority of the products at the rate ranging from
13% to 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input
VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.
The Company recognizes revenue from the
sale of processed seafood products and algae-based beverage products upon receipt of the delivery confirmation provided by the
distributor’s carrier and the title and risk of loss of the product has transferred to the distributor. The distributor agreements
do not provide chargeback,
price protection, or stock rotation rights. The Company recognizes revenue
from marine catch when title has transferred to the buyer.
The Company experienced no product returns and recorded no reserve
for sales returns for the years ended December 31, 2011 and 2010.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
The Company offers sales incentives to
customers based on yearly sales targets. These are non-cash incentives and are solely used for promotional activities purposes.
These amounts are accrued as sales and marketing expenses during the same month revenue is recognized.
Rental income
from operating leases on real estate properties is recognized on a straight-line basis over the lease period.
l
Advertising costs
Advertising costs are expensed as incurred
under ASC Topic 720-35,
“Advertising Costs”
. The Company incurred advertising expense of $3,234,492 and $1,069,402
for the years ended December 31, 2011 and 2010, respectively.
l
Comprehensive income or loss
ASC Topic 220,
“Comprehensive
Income”,
establishes standards for reporting and display of comprehensive income or loss, its components and accumulated
balances. Comprehensive income or loss as defined includes all changes in equity during a period from non-owner sources. Accumulated
other comprehensive income or loss, as presented in the accompanying statement of changes in shareholders’ equity, consists
of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation
of income tax expense or benefit.
l
Income taxes
The provision for income taxes is determined
in accordance with the provisions of ASC Topic 740, “
Income Taxes
” (“ASC 740”). Under this method,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities
are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model
for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken
or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements
when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must
initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
For the years ended December 31, 2011 and
2010, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2011 and 2010, the
Company did not have any significant unrecognized uncertain tax positions.
The Company conducts major businesses in
the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that
are subject to examination by the foreign tax authority.
l
Earnings per share
The Company calculates earnings per share
in accordance with ASC Topic 260,
“Earnings per Share.”
Basic earnings per share is computed by dividing the
net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares
were dilutive.
l
Foreign currencies translation
Transactions denominated in currencies
other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of
the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into
the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are
recorded in the consolidated statement of operations and comprehensive income.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
The reporting currency of the Company is
the United States Dollars ("US$"). The Company's subsidiaries in the PRC maintain their books and records in its local
currency, the Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment
in which these entities operate.
In general, for consolidation purposes,
assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with
ASC Topic 830-30, “
Translation of Financial Statement”
, using the exchange rate on the balance sheet date. Revenues
and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial
statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement
of changes in shareholders’ equity.
Translation of amounts from RMB into US$1
has been made at the following exchange rates for the respective years:
|
|
2011
|
|
|
2010
|
|
Year-end exchange rates RMB:US$1
|
|
|
6.3523
|
|
|
|
6.5918
|
|
Average yearly exchange rates RMB:US$1
|
|
|
6.4544
|
|
|
|
6.7788
|
|
The RMB is not freely convertible into foreign currency and
all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts
could have been, or could be, converted into US$ at the rates used in translation.
l
Stock-based compensation
The Company adopts
ASC
Topic 718-20,
"Compensation - Stock Compensation"
("ASC 718-20"),
using the fair value method.
Under ASC 718-20,
stock-based compensation cost is measured at the grant date based on the fair value
of the award or using the Black-Scholes pricing model and is recognized as expense over the appropriate service period.
l
Segment reporting
ASC Topic 280,
“Segment Reporting”
establishes standards for reporting information about operating segments on a basis consistent
with the Company’s internal organization structure as well as information about geographical areas, business segments and
major customers in financial statements. For the year ended December 31, 2011, the Company operates in three principal reportable
segments: sale of processed seafood products, trading of marine catch and sale of algae-based beverage products in the PRC.
l
Fair value measurement
ASC Topic 820-10, “
Fair Value
Measurements and Disclosures
” ("ASC 820-10") establishes a new framework for measuring fair value and expands
related disclosures. Broadly, ASC 820-10 framework requires fair value to be determined based on the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants. ASC 820-10 establishes a three-level valuation hierarchy based
upon observable and non-observable inputs.
These tiers include: Level 1, defined as observable inputs
such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.
For financial assets and liabilities, fair
value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market
participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements
involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent
with what market participants would use in a hypothetical transaction that occurs at the measurement date.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
l
Financial instruments
Cash and cash equivalents, accounts receivable,
prepaid expenses and other current assets, accounts payable, amount due to a shareholder, income tax payable and accrued liabilities
and other payables are carried at cost which approximates fair value. The estimated fair value of short-term borrowing was $
2.5
million and $nil million as of December 31, 2011 and 2010, respectively, based on current market prices or interest rates.
l
Recent accounting pronouncements
The Company has reviewed all recently issued,
but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected
to cause a material impact on its financial condition or the results of its operations.
During December 2011, the Financial
Accounting Standards Board (“FASB”) issued ASU
2011-11, “Disclosures about Offsetting Assets and Liabilities.” The amendments in ASU 2011-11 require an entity to
disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect
of those arrangements on its financial position. The adoption of ASU 2011-11 results in changes to presentation and disclosure
only and is not expected to have an impact on our consolidated results of operations and financial condition.
During September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment.” The amendments in ASU
2011-08 are intended to reduce the cost and complexity associated with goodwill impairment tests required under the
Accounting Standard Codification Topic 350 Intangibles – Goodwill and Other. The update permits an entity to first
assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less
than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test
described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The
amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning
after December 15, 2011. The Company elected to early adopt ASU 2011-08, which resulted in the elimination of the
additional requirements under Topic 350.
During June 2011, the FASB issued ASU 2011-05,
“Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to report other comprehensive income and
its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive
income, the components of net income and the components of other comprehensive income either in a single continuous statement or
in two separate but consecutive statements. Effective December 31, 2011, the Company elected to early adopt ASU No. 2011-05. The
Company's early adoption of this new guidance only resulted in a change in how the Company presents the components of comprehensive
income, which is currently presented within the consolidated statements of operations and comprehensive (loss) income.
During May 2011, the FASB issued ASU No. 2011-04,
“Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial
Reporting Standards (“IFRS”).” This pronouncement was issued to provide a consistent definition of fair value
and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes
certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements.
This pronouncement is effective for reporting periods beginning on or after December 15, 2011. The adoption of ASU 2011-04
is not expected to have a significant impact to our consolidated financial position or results of operations.
During January 2010, the FASB issued ASU
No. 2010-6 to improve the disclosure and transparency of fair value measurements. These amendments clarify the level of disaggregation
required, and the necessary disclosures about the valuation techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements. We adopted this ASU beginning January 1, 2011 and it did not have a significant
impact on our consolidated financial position or results of operations.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
3.
ACQUISITION OF BRANDED ALGAE-BASED BEVERAGE COMPANY
On November
27, 2009, the Company entered into a Credit or Share Purchase Option Agreement (the “Option Agreement”) with Qiu Shang
Jing (“Qiu”) and Shishi Xianghe Food Science and Technology Co., Ltd. (“Xianghe”). The Option Agreement
provided the Company to make a loan to Xianghe in the amount of approximately $26.4 million to be used for working capital purposes
,
of which the maturity date was January 26, 2010
. In consideration for the loan, the Company received
the option to buy shares representing eighty percent (80%) of Xianghe from its sole shareholder, Qiu. The interest rate on the
loan is 5.0% per annum. Qiu agreed to pledge all of his shares in Xianghe to guarantee the performance by Xianghe under the Option
Agreement. The Company funded the loan from the currently available cash.
Xianghe is a Fujian based manufacturer
of the branded Hi-Power algae-based soft drinks. Hi-Power was developed by the Yellow Sea Fisheries Research Institute Chinese
Academy of Fishery Sciences in coordination with the founder, Qiu. Hi-Power is marketed as a high-protein content drink, low in
calories and fat, which provides the consumers a combination of immune system benefits, improved digestion and reductions in hyperglycemia
and hypertension. Hi-Power’s target market focuses on health-conscious consumers in China’s fast-growing beverage market.
Xianghe has developed a network of distributors in Fujian, Zhejiang, Guangdong and Hunan which sell Hi-Power to retail food stores,
restaurants food supply dealers and the hospitality industry.
On January 1, 2010, the Company exercised
the option to acquire shares representing eighty percent (80%) of the registered capital stock (the “Shares”) of Xianghe
pursuant to the terms of a Share Purchase Agreement (the “Purchase Agreement”). The Shares were purchased from Qiu
and the purchase price for the Shares was approximately $27.8 million, paid as follows:
|
(i)
|
Approximately $26.4 million, which Xianghe owed to
the Company, was transferred to be the consideration for the purchase of the Shares of Xianghe which the Company shall pay to
Qiu.
|
|
(ii)
|
Approximately $1.4 million shall be paid by the Company
to Qiu within 30 days after completion of the audit report of Xianghe for the year ended December 31, 2009, which was then fully
settled.
|
The Purchase Agreement grants the Company
a right of first refusal to purchase the 20% of the registered capital stock of Xianghe retained by Qiu for a maximum price of
approximately $7.0 million if Qiu intends to sell his shares. The Purchase Agreement also provides that if Xianghe has any funding
requirement from the shareholders, the Company and Qiu shall provide the capital into Xianghe on a pro rata basis according to
respective shareholdings.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
The following table summarizes the fair
value of the assets acquired and liabilities assumed at the date of acquisition. The allocation of the purchase price consideration
is presented as below:
|
|
|
|
Acquired assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
435,933
|
|
Accounts receivable, net
|
|
|
1,391,457
|
|
Inventories
|
|
|
10,871
|
|
Amount due from an owner
|
|
|
1,442,623
|
|
Property, plant and equipment, net
|
|
|
395
|
|
Intangible assets, net
|
|
|
8,596
|
|
|
|
|
|
|
Total assets acquired
|
|
|
3,289,875
|
|
|
|
|
|
|
Less: liabilities assumed
|
|
|
|
|
Accounts payable, trade
|
|
|
402,982
|
|
Income tax payable
|
|
|
225,180
|
|
Accrued liabilities and other payables
|
|
|
240,808
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
868,970
|
|
|
|
|
|
|
Less: non-controlling interests
|
|
|
484,181
|
|
|
|
|
|
|
Net assets acquired
|
|
|
1,936,724
|
|
Algae-based drink know-how
|
|
|
23,471,410
|
|
Goodwill
|
|
|
2,391,866
|
|
|
|
|
|
|
Purchase price consideration
|
|
$
|
27,800,000
|
|
Pursuant to the Purchase Agreement, the
aggregate purchase price was approximately $27,800,000 (equivalent to RMB190,000,000), in which approximately $26,400,000 was payable
by Xianghe upon the conversion of its short-term loan and approximately $1,400,000 was payable by the Company’s subsidiary,
Mingxiang. Algae-based drink know-know acquired from the business combination was determined at its fair value, based upon the
independent valuation report.
At the closing date of business acquisition
on January 1, 2010, Mingxiang entered into a business transfer agreement with Qiu. Pursuant to the business transfer agreement,
Qiu agreed to transfer the algae-based soft drinks business from Xianghe to Mingxiang as part of the business restructuring of
Xianghe. It was also agreed that Qiu would not share any of the results of the algae-based soft drinks business operated under
Mingxiang in the future. As a result, Mingxiang fully integrated the business operation of algae-based soft drinks from Xianghe
and allowed 100% of the operating results generated from the algae-based soft drinks business, subject to the precedent condition.
Upon the completion of the business acquisition and business transfer, Xianghe became a dormant company.
In connection with the business transfer,
it was also agreed between both parties that Xianghe still assumed $83,260 in revenue and $2,459 in net income which mainly came
from the algae-based soft drinks business during the transitional period in January 2010 and as a result, $570 in net income was
attributed to the non-controlling interests as of the year end of 2010. Non-controlling interests from the business combination
mainly represented the 20% share of pre-acquisition equity in Xianghe as of December 31, 2009 in the consolidated balance sheet.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
4.
ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Account receivable, at cost
|
|
$
|
68,988,621
|
|
|
$
|
48,774,411
|
|
Less: allowance for doubtful accounts
|
|
|
(344,943
|
)
|
|
|
(243,872
|
)
|
Account receivable, net
|
|
$
|
68,643,678
|
|
|
$
|
48,530,539
|
|
As of December 31, 2011 and 2010, the allowance
for doubtful accounts was $344,943 and $243,872, respectively.
Increase in accounts receivable was mainly
due to the block sales of marine catch trading in the fourth quarter of 2011.
Changes in the allowance for doubtful accounts
are as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
243,872
|
|
|
$
|
94,643
|
|
Provision for doubtful accounts
|
|
|
101,071
|
|
|
|
149,229
|
|
Amounts written off
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
344,943
|
|
|
$
|
243,872
|
|
5.
INVENTORIES
Inventories consisted of the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
3,982,617
|
|
|
$
|
282,075
|
|
Work-in-process
|
|
|
3,941,723
|
|
|
|
8,946,405
|
|
Finished goods
|
|
|
804,880
|
|
|
|
542,880
|
|
Packaging materials
|
|
|
157,014
|
|
|
|
221,510
|
|
Total
|
|
$
|
8,886,234
|
|
|
$
|
9,992,870
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2011 and
2010, the Company recorded no allowance for slow-moving and obsolete inventories.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
6.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted
of the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
9,335,450
|
|
|
$
|
6,867,388
|
|
Plant and machinery
|
|
|
3,992,725
|
|
|
|
3,631,616
|
|
Office equipments
|
|
|
127,048
|
|
|
|
103,099
|
|
Motor vehicles
|
|
|
713,327
|
|
|
|
787,685
|
|
|
|
|
14,168,550
|
|
|
|
11,389,788
|
|
Less: accumulated depreciation
|
|
|
(2,969,306
|
)
|
|
|
(2,588,521
|
)
|
Property, plant and equipment, net
|
|
$
|
11,199,244
|
|
|
$
|
8,801,267
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended
December 31, 2011 and 2010 were $447,174 and $349,234, respectively, which included $289,133 and $261,378 in cost of revenue.
Certain property, plant and equipment
with original costs of $1,050,947 and $1,027,588 have become fully depreciated as of December 31, 2011 and 2010, respectively.
7.
LAND USE RIGHTS
Land use rights consisted of the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Land use rights, at cost
|
|
$
|
3,390,052
|
|
|
$
|
3,266,881
|
|
Less: accumulated amortization
|
|
|
(366,483
|
)
|
|
|
(275,422
|
)
|
Land use rights, net
|
|
$
|
3,023,569
|
|
|
$
|
2,991,459
|
|
As of December 31, 2011 and 2010, certain
land use rights with the net book value of $409,898 and $nil, respectively, were pledged as securities in connection with the outstanding
short-term borrowings, as described in Note 7.
Amortization expense for the years ended
December 31, 2011 and 2010 were $79,404 and $75,604, respectively, in which $11,047 and $10,518 were included in cost of revenue.
Estimated aggregate future amortization expense for the succeeding 5 years and thereafter as of December 31, 2011 is as follows:
Years ending December 31,
|
|
|
|
2012
|
|
$
|
79,404
|
|
2013
|
|
|
79,404
|
|
2014
|
|
|
79,404
|
|
2015
|
|
|
79,404
|
|
2016
|
|
|
79,404
|
|
Thereafter
|
|
|
2,626,549
|
|
Total
|
|
$
|
3,023,569
|
|
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
8.
CONSTRUCTION IN PROGRESS
In 2010, Mingxiang entered into an agreement
with an independent third party in relation to the construction of an additional floor at the existing staff quarter. Total construction
costs are approximately $2.2 million. The construction was completed in the first quarter of 2011 and transferred to property,
plant and equipment accordingly.
In 2010, Mingxiang entered into an agreement
with an independent third party in relation to the construction of an algae extraction equipment line. Total equipment costs are
approximately $0.2 million. The equipment was completed in the first quarter of 2011 and transferred to property, plant and equipment
accordingly.
During 2010, Mingxiang entered into an
agreement with an independent third party (the “Third Party Contractor”) in relation to the construction of a cold
storage facility. A supplementary agreement was then entered into between Mingxiang and the Third Party Contractor in September
2011 related to additional gross areas, machineries and equipment required for the facility. The construction is expected to be
completed in the first half of 2012. Total estimated construction costs are approximately $24.2 million. As of December 31, 2011,
the Company recorded approximately $22.9 million as construction in progress.
9.
INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Intangible assets, at cost
|
|
$
|
25,281,788
|
|
|
$
|
24,363,224
|
|
Less: accumulated amortization
|
|
|
(5,056,568
|
)
|
|
|
(2,436,631
|
)
|
Intangible assets, net
|
|
$
|
20,225,220
|
|
|
$
|
21,926,593
|
|
Amortization expense for the years ended
December 31, 2011 and 2010 were $2,488,205 and $2,369,116, respectively. Using the current exchange rate, the estimated annual
amortization expense is $2,528,069 for each of the five succeeding years.
10.
SHORT-TERM BORROWINGS
The Company’s wholly-owned subsidiary,
Mingxiang, obtained short-term bank loans in the aggregate amount of $2
,
550
,
257 and $nil as of December 31, 2011
and 2010, respectively, from the Agricultural Bank of China, a registered financial institution in the PRC.
The
weighted average effective interest rate per annum was 5.49% and 5.31% for 2011 and 2010, respectively, payable quarterly
.
Interest expenses for the years ended December 31, 2011 and 2010 were $11,483 and $40,032, respectively and none of the interest
incurred was capitalized.
11.
AMOUNT DUE TO A STOCKHOLER
As of December 31, 2011 and 2010, the amounts
of $50
,
361 and $261,789 represented temporary advances for working capital purposes from a major shareholder and CEO, Mr.
Liu, which were unsecured, interest free and repayable on demand.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
12.
ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables
consisted of the following:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Value-added tax payable
|
|
$
|
948,107
|
|
|
$
|
3,174,961
|
|
Accrued payroll and benefits
|
|
|
967,450
|
|
|
|
960,811
|
|
Accrued operating expenses
|
|
|
1,209,821
|
|
|
|
535,749
|
|
Accrued professional expenses
|
|
|
295,833
|
|
|
|
186,404
|
|
Other payables
|
|
|
3,077
|
|
|
|
769
|
|
|
|
$
|
3,424,288
|
|
|
$
|
4,858,694
|
|
13.
SHAREHOLDERS’ EQUITY
(a)
Compensatory stock awards
On April 1, 2011, the Company granted compensatory
stock awards totaling 700,000 common shares to certain of its officers, directors and employees. These stock awards vested
in full on the date of the grant but are subject to forfeiture in full if the grantee ceases to be employed by the Company for
any reason within one year from the date of the grant, pursuant to stock award agreements between the Company and grantees dated
April 1, 2011.
Based on the closing stock price of the
grant date, the fair value of these stock awards are estimated to be approximately $2.7 million, which will be recognized as compensation
expense, using the straight-line method, over the service period of one year from April 1, 2011 to March 31, 2012.
For the year ended December 31, 2011, the
recognized stock-based compensation expenses and related tax benefits were
$
2,034,197
and $305,130, respectively.
The unrecognized stock-based compensation
expense as of December 31, 2011 is $611,803, and the remaining expected term for this expense to be recognized is 3 months.
(b) Issuance of common stock
On February 15, 2011, the Company entered
into an Investor Relations Consulting Agreement with Hayden Communications International, Inc (“HCI”) to provide consulting
services for the Company. In connection with such service, the Company agreed to issue 20,000 shares of restricted common stock
to HCI. The shares of common stock were valued at $51,800 or $2.59 per share and issued on July 14, 2011.
(c) Distribution of dividends
The Company did not declare any dividends
for the years ended December 31, 2011 and 2010.
As of December 31, 2011, the number of
authorized and outstanding shares of the Company’s common stock was 100,000,000 shares and 29,697,976 shares, respectively.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
14.
NON-CONTROLLING INTERESTS
Non-controlling interests consisted of
the following:
|
|
December 31, 2011
|
|
|
|
|
|
|
20% share of equity interest in Xianghe
|
|
$
|
508,057
|
|
Less: advance to a non-controlling shareholder of a subsidiary
|
|
|
(151,503
|
)
|
Net amount
|
|
$
|
356,554
|
|
Advance to a non-controlling shareholder
of the Company’s subsidiary, Xianghe, was unsecured, interest free and repayable on demand.
15.
INCOME TAXES
For the years ended December 31, 2011 and
2010, the local (“United States of America”) and foreign components of income (loss) before income taxes were comprised
of the following:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Tax jurisdiction from:
|
|
|
|
|
|
|
|
|
– Local
|
|
$
|
(4,021
|
)
|
|
$
|
(6,518
|
)
|
– Foreign
|
|
|
10,616,352
|
|
|
|
25,601,207
|
|
Income before income taxes
|
|
$
|
10,612,331
|
|
|
$
|
25,594,689
|
|
The provision for income taxes consisted
of the following:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Current:
|
|
|
|
|
|
|
|
|
– Local
|
|
$
|
-
|
|
|
$
|
-
|
|
– Foreign
|
|
|
2,048,956
|
|
|
|
4,455,167
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
– Local
|
|
|
-
|
|
|
|
-
|
|
– Foreign
|
|
|
-
|
|
|
|
-
|
|
Income tax expense
|
|
$
|
2,048,956
|
|
|
$
|
4,455,167
|
|
The effective tax rate in the years presented
is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company
has subsidiaries that operate in various countries: Hong Kong and the PRC that are subject to tax in the jurisdictions in which
they operate, as follows:
United States of America
China Marine is registered in the State
of Nevada and is subjected to United States of America tax law.
As of December 31, 2011, China Marine incurred
$21,865 of net operating loss carryforwards available for federal tax purposes that may be used to offset future taxable income
and will begin to expire in 2028, if unutilized. The Company has provided for a full valuation allowance against the deferred tax
assets of $7,543 on the expected future tax benefits from the net operating loss carryforwards as the management believes it is
more likely than not that these assets will not be realized in the future.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
Hong Kong
The Company’s subsidiary, Ocean Technology,
is subject to Hong Kong Profits Tax at the statutory rate of 16.5% on its assessable income for the periods ended December 31,
2011 and 2010, respectively. As of December 31, 2011, Ocean Technology incurred $694,371 of net operating loss carryforwards available
for income tax purposes. The Company has provided for a full valuation allowance against the deferred tax assets of $114,571 on
the expected future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not
that these assets will not be realized in the future.
The PRC
The Company generated all of its net income
from subsidiaries operating in the PRC for the years ended December 31, 2011 and 2010. Rixiang, Jixiang, Mingxiang, Xianghe and
Xianglin are subject to the Corporate Income Tax governed by the Income Tax Law of the People’s Republic of China, at a unified
income tax rate of 25%.
On October 15, 2009, Mingxiang has received
a notice of recognition as an enterprise of new and high technology, which was jointly issued by the Science and Technology Department
of Fujian, the Finance Department of Fujian, the State Tax Bureau of Fujian and the Local Taxation Bureau of Fujian, for a company
engaged in advanced food processing technologies for the Fujian Province. As a new and high technology company, Mingxiang is qualified
for a reduced income tax rate of 15% on its income before tax for a period of three years, expiring in 2012.
The reconciliation of income tax rate to
the effective income tax rate for the years ended December 31, 2011 and 2010 is as follows:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Income before income taxes from PRC subsidiaries
|
|
$
|
10,762,969
|
|
|
$
|
25,741,908
|
|
Statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Income tax expense at statutory tax rate
|
|
|
2,690,742
|
|
|
|
6,435,477
|
|
|
|
|
|
|
|
|
|
|
Tax effect on utilization of net operating losses carryforwards
|
|
|
-
|
|
|
|
-
|
|
Tax effect from Tax Holiday
|
|
|
(1,319,986
|
)
|
|
|
(2,579,429
|
)
|
Tax effect on net operating losses from PRC subsidiaries
|
|
|
2,081
|
|
|
|
430
|
|
Tax effect on non-taxable income
|
|
|
18,438
|
|
|
|
(4
|
)
|
Tax effect on non-deductible expenses
|
|
|
657,681
|
|
|
|
598,693
|
|
Income taxes at effective rate
|
|
$
|
2,048,956
|
|
|
$
|
4,455,167
|
|
As of December 31, 2011, the PRC operation
incurred $119,728 of net operating loss carryforwards available for income tax purposes that may be used to offset future taxable
income and will begin to expire in 5 years from the year of incurrence, if unutilized. The Company has provided for a full valuation
allowance against the deferred tax assets of $29,932 on the expected future tax benefits from the net operating loss carryforwards
as the management believes it is more likely than not that these assets will not be realized in the future. The entities in the
PRC do not file a consolidated return, so only the entity that generated the losses can utilize them.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
The following table sets forth the significant
components of the aggregate net deferred tax assets of the Company as of December 31, 2011 and 2010:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards from
|
|
|
|
|
|
|
|
|
– Local
|
|
$
|
7,543
|
|
|
$
|
6,156
|
|
– Hong Kong
|
|
|
114,571
|
|
|
|
90,380
|
|
– PRC
|
|
|
29,932
|
|
|
|
28,235
|
|
|
|
|
152,046
|
|
|
|
124,771
|
|
Less: valuation allowance
|
|
|
(152,046
|
)
|
|
|
(124,771
|
)
|
Deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Management believes that it is more likely
than not that the net deferred assets will not be fully realizable in the future. Accordingly, the Company provided for a full
valuation allowance against its net deferred tax assets of $152,046 and $124,771 as of December 31, 2011 and 2010, respectively.
During 2011, the valuation allowance increased by $27,275, primarily relating to net operating loss carryforwards.
Tax Holiday
Income before income tax expense was $10,612,331
and $25,594,689 for the years ended December 31, 2011 and 2010 and was mainly attributed to subsidiaries with operations in China.
Income tax related to China income for the years ended December 31, 2011 and 2010 was $2,048,956 and $4,455,167. The combined pro
forma effects of the income tax expense exemptions and reductions available to us are as follows:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Amount of tax holiday effect
|
|
$
|
1,319,986
|
|
|
$
|
2,579,429
|
|
Tax holiday effect on basic earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.09
|
|
Tax holiday effect on diluted earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.09
|
|
16.
CHINA CONTRIBUTION PLAN
Under the PRC Law, full-time employees
of the Company’s subsidiaries in the PRC, Rixiang, Jixiang, Mingxiang and Xianghe are entitled to staff welfare benefits
including medical care, welfare subsidies, unemployment insurance and pension benefits through a China government-mandated multi-employer
defined contribution plan. The Company is required to accrue for these benefits based on certain percentages of the employees’
salaries. The total contributions made for such employee benefits were $778,644 and $727,067 for the years ended December 31, 2011
and 2010, respectively.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
17.
EARNINGS PER SHARES
Reconciliation from basic earnings
per share to diluted earnings per share
:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Earnings for the years
|
|
$
|
8,563,615
|
|
|
$
|
21,138,952
|
|
|
|
|
|
|
|
|
|
|
Determination of shares:
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
29,514,744
|
|
|
|
28,301,949
|
|
Assumed exercise of warrants
|
|
|
-
|
|
|
|
669,131
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
29,514,744
|
|
|
|
28,971,080
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.75
|
|
Diluted earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.73
|
|
18.
STATUTORY RESERVE
Under the PRC Law, the Company’s
subsidiaries in the PRC, Rixiang, Jixiang, Mingxiang, Xianghe and Xianglin are required to make appropriation at the end of each
fiscal year to the statutory reserve based on after-tax net earnings and determined in accordance with generally accepted accounting
principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory reserve should
be at least 10% of the after-tax net income until the reserve is equal to 50% of the registered capital. The statutory reserve
is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable
other than in liquidation.
For the years ended December 31, 2011,
and 2010, Rixiang contributed $5,967 and $267,589 to statutory reserve, respectively, whereas Mingxiang contributed $426,969 and
$3,381,135. Jixiang, Xianghe and Xianglin made no appropriation to the statutory reserve since they did not generate after-tax
net income during these periods.
19.
SEGMENT REPORTING, GEOGRAPHICAL INFORMATION
(a)
Business information
The Company’s chief operating decision
maker has been identified as chairman, Mr. Liu, who reviews consolidated results when making decisions about allocating resources
and assessing performance of the Company. Based on this assessment, the Company has determined that it has three operating and
reporting segments for the years ended December 31, 2011 and 2010 which are processed seafood products, marine catch and algae-based
beverage products.
The accounting policies of the segments
are the same as those described in the summary of significant accounting policies (see Note 2). The Company had no inter-segment
sales for the years ended December 31, 2011 and 2010.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
Summarized financial information concerning
the Company’s reportable segments is shown in the following table for the years ended December 31, 2011 and 2010:
|
|
Year Ended December 31, 2011
|
|
|
|
Processed seafood
|
|
|
|
|
|
Algae-based beverage
|
|
|
|
|
|
|
products
|
|
|
Marine catch
|
|
|
products
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
58,967,200
|
|
|
$
|
55,304,114
|
|
|
$
|
29,676,358
|
|
|
$
|
143,947,672
|
|
Cost of revenue
|
|
|
(41,411,880
|
)
|
|
|
(53,057,915
|
)
|
|
|
(17,753,910
|
)
|
|
|
(112,223,705
|
)
|
Gross profit
|
|
$
|
17,555,320
|
|
|
$
|
2,246,199
|
|
|
$
|
11,922,448
|
|
|
$
|
31,723,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-lived assets
|
|
$
|
11,004,949
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,004,949
|
|
|
|
Year Ended December 31, 2011
|
|
|
|
Processed seafood
|
|
|
|
|
|
Algae-based beverage
|
|
|
|
|
|
|
products
|
|
|
Marine catch
|
|
|
products
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
70,466,645
|
|
|
$
|
26,194,480
|
|
|
$
|
26,018,510
|
|
|
$
|
122,679,635
|
|
Cost of revenue
|
|
|
(46,140,571
|
)
|
|
|
(23,730,303
|
)
|
|
|
(15,348,486
|
)
|
|
|
(85,219,360
|
)
|
Gross profit
|
|
$
|
24,326,074
|
|
|
$
|
2,464,177
|
|
|
$
|
10,670,024
|
|
|
$
|
37,460,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure for long-lived assets
|
|
$
|
13,711,967
|
|
|
$
|
-
|
|
|
$
|
8,991
|
|
|
$
|
13,720,958
|
|
Expenditure for long-lived assets incurred
for the years ended December 31, 2011 and 2010 mainly relates to the construction of a cold storage facility which will be used
for both processed seafood products and marine catch segments.
(b)
Geographic information
The Company’s operations are located
in two main geographical areas. The Company’s sales by geographical market are analyzed as follows:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
Revenue, net:
|
|
|
|
|
|
|
|
|
The PRC
|
|
$
|
14 3,801,671
|
|
|
$
|
122,205,967
|
|
Asia
|
|
|
146,001
|
|
|
|
473,668
|
|
|
|
|
|
|
|
|
|
|
Total revenue, net
|
|
$
|
143,947,672
|
|
|
$
|
122,679,635
|
|
All the Company’s long-lived assets
are located in the PRC in both periods.
20.
CONCENTRATIONS OF RISK
The Company is exposed to the following
concentrations of risk:
(a) Major customers
The following is a table summarizing the
revenue from customers that individually represents greater than 10% of the total revenue for the years ended December 31, 2011
and 2010 and their outstanding balances as at year-end dates.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
|
|
Year Ended December 31, 2011
|
|
Customer
|
|
Revenue
|
|
|
Percentage
of total revenue
|
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
36,353,325
|
|
|
|
25
|
%
|
|
$
|
32,468,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
36,353,325
|
|
|
|
25
|
%
|
|
$
|
32,468,863
|
|
|
|
Year Ended December 31, 2010
|
|
Customer
|
|
Revenue
|
|
|
Percentage
of total revenue
|
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
Customer B
|
|
$
|
15,334,932
|
|
|
|
13
|
%
|
|
$
|
12,188,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
15,334,932
|
|
|
|
13
|
%
|
|
$
|
12,188,262
|
|
(b) Major vendors
The following is a table summarizing the
purchases of raw materials from vendor that individually represents more than 10% of the total purchases for the years ended December
31, 2011 and 2010 and their outstanding balances as at year-end dates.
|
|
Year Ended December 31, 2011
|
|
Vendors
|
|
Purchases
|
|
|
Percentage
of total purchases
|
|
|
Accounts payable, trade
|
|
|
|
|
|
|
|
|
|
|
|
Vendor A
|
|
$
|
32,753,228
|
|
|
|
38
|
%
|
|
$
|
-
|
|
Vendor B
|
|
|
14,771,657
|
|
|
|
17
|
%
|
|
|
-
|
|
Vendor C
|
|
|
12,291,558
|
|
|
|
14
|
%
|
|
|
29,989
|
|
Vendor D
|
|
|
9,447,849
|
|
|
|
11
|
%
|
|
|
16,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
69,264,292
|
|
|
|
80
|
%
|
|
$
|
46,789
|
|
|
|
Year Ended
Decemb er 31, 2010
|
|
Vendors
|
|
Purchases
|
|
|
Percentage
of total purchases
|
|
|
Accounts payable, trade
|
|
|
|
|
|
|
|
|
|
|
|
Vendor C
|
|
$
|
13,682,806
|
|
|
|
21
|
%
|
|
$
|
89,885
|
|
Vendor D
|
|
|
12,622,622
|
|
|
|
19
|
%
|
|
|
19,296
|
|
Vendor E
|
|
|
12,335,243
|
|
|
|
19
|
%
|
|
|
-
|
|
Vendor B
|
|
|
8,864,852
|
|
|
|
13
|
%
|
|
|
-
|
|
Vendor F
|
|
|
6,876,567
|
|
|
|
10
|
%
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
54,382,090
|
|
|
|
82
|
%
|
|
$
|
109,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
(c) Credit risk
Financial instruments that are potentially
subject to credit risk consist principally of trade receivables. The Company believes the concentration of credit risk in its trade
receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company
does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical trends and other information.
(d) Exchange rate risk
The reporting currency of the Company is
US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities
are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations
may be affected by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates against US$, the value of the
RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivatives or other
financial instruments that expose to substantial exchange rate risk.
(e) Economic and political risks
Substantially all of the Company’s
products are processed in the PRC. The Company’s operations are subject to various political, economic, and other risks and
uncertainties inherent in the PRC and not typically associated with companies in North America and Western Europe. Among other
risks, the Company’s operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and
embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political
conditions and governmental regulations in the PRC.
21.
COMMITMENTS AND CONTINGENCIES
(a)
Operating lease commitments
The Company
leased certain office space under a non-cancellable operating lease agreement with a term of 3 years with fixed monthly rentals,
expiring on February 17, 2014, and generally not containing significant renewal options. Total rent expenses for the years
ended December 31, 2011 and 2010
was $79,618 and $77,145, respectively. Future minimum rental payments
due under the non-cancelable operating lease agreement are as follows:
Years ending December 31:
|
|
|
|
|
2012
|
|
$
|
80,000
|
|
2013
|
|
|
80,000
|
|
2014
|
|
|
10,714
|
|
|
|
|
|
|
Total
|
|
$
|
170,714
|
|
(b)Capital commitments
In 2010, Mingxiang entered into an agreement
with an independent third party (the “Third Party Contractor”) in relation to the construction of a cold storage facility.
A supplementary agreement was then entered into between Mingxiang and the Third Party Contractor in September 2011 related to additional
gross areas, machineries and equipment required for the facility. The construction is expected to be completed by the first quarter
end of 2012. Total estimated construction costs are approximately $24.2 million. As of December 31, 2011, the Company recorded
approximately $22.9 million as construction in progress.
CHINA MARINE FOOD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011 AND 2010
(Currency expressed in United
States Dollars (“US$”))
(c)
Guarantees
As of December 31, 2011, Mingxiang was
contingently liable as guarantor with respect to the loan of $472,270 (equivalent to RMB 3,000,000) to an unrelated third party,
Shishi Han Jiang Hua Lian Knitting and Clothing Factory (“Han Jiang Hua Lian”). The term of this guarantee is for the
period from November 2008 through December 2017. Pursuant to the loan agreement, Han Jiang Hua Lian will repay the loan by installments
and be fully settled by December 31, 2017. Should Han Jiang Hua Lian fail to make its debt payments due at any time from the date
of guarantee, Mingxiang will be obligated to perform under the guarantee by primarily making the required payments, including late
fees and penalties. The maximum potential amount of future payments that the Mingxiang is required to make under the guarantee
is $472,270 (equivalent to RMB 3,000,000).
As of December 31, 2010, Mingxiang was
contingently liable as guarantor with respect to the loans of $787,116 (equivalent to RMB 5,000,000) to an unrelated third party,
Shishi Yu Ching Knitting and Clothing Company (“Yu Ching”). The term of this guarantee is for the period from January,
2009 through January, 2011. During 2011, Yu Ching repaid the principal amount of the loan in the amount of $787,116 (equivalent
to RMB 5,000,000) but left the amount of loan interest unsettled due to a disagreement between Yu Ching and the creditor in relation
to the calculation of the loan interest. Should Yu Ching fail to make its loan interest payments due at any time from the date
of guarantee, Mingxiang will be obligated to perform under the guarantee by primarily making the required payments, including late
fees and penalties.
According to the Personal Guarantee Agreement
between Mingxiang and Mr. Liu, Mr. Liu agreed to bear all liabilities and costs incurred from a direct claim by the creditor if
either Han Jiang Hua Lian or Yu Ching fails to make payments to the creditor upon due dates.
In accordance with ASC 460-10 “Guarantees”,
a guarantor must recognize a liability for the fair value of the obligations it assumes under certain guarantees. Mingxiang did
not receive any consideration for the guarantee and has determined the fair value of the indemnification to be insignificant. As
of December 31, 2011, the Company has not recorded any liabilities under these guarantees.
22.
SUBSEQUENT EVENT
In accordance with ASC 855 “Subsequent
Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued, we have evaluated all events or transactions that occurred after December 31,
2011 up through the date we issued the condensed consolidated financial statements. During this period, we did not have any material
recognizable subsequent events.