UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549











FORM
10-K








x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934


For the
fiscal year ended December 31, 2009





OR





o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For the
transition period from            to





Commission File Number
333-40790











CHINA
MARINE FOOD GROUP LIMITED


(Exact
name of registrant as specified in its charter)




NEVADA
                
                87-0640467(State
      or other jurisdiction of
                
                (IRS
      Employer Identification No.)Incorporation
      or organization)




Da
Bao Industrial Zone, Shishi City


Fujian,
China


362700


(Address
of principal executive offices)





86-595-8898-7588


(Issuer's
telephone number, including area code)








Securities
registered pursuant to Section 12(b) of the Act:


COMMON
STOCK





Securities
registered pursuant to Section 12(g) of the Act:


NONE





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o Nox





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No x




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


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




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.


Large
accelerated filer  ̈     
     Accelerated filer  ̈     
      Non-accelerated filer  ̈


Smaller
Reporting Company x





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





As of
June 30, 2009, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $38,849,301 based on the closing sale
price of $3.47 as reported on the OTC Bulletin Board. As of March 15, 2010,
there were 28,393,650 shares of common stock outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





None







China
Marine Food Group Limited




FORM
10-K





For the
Year Ended December 31, 2009





TABLE
OF CONTENTS





PART
      IITEM
      1.
                        
                        Business
                        4ITEM
      1A.
                        
                        Risk
      Factors
                        35ITEM
      1B.
                        
                        Unresolved
      Staff Comments
                        48ITEM
      2.
                        
                        Properties
                        48ITEM
      3.
                        
                        Legal
      Proceedings
                        49PART
      IIITEM
      5.
                        
                        Market
      for Registrant’s Common Equity, Related Stockholder Matters and
      IssuerPurchases
      of Equity Securities
                        50ITEM
      6.
                        
                        Selected
      Financial Data
                        51ITEM
      7.
                        
                        Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        51ITEM
      7A.
                        
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        71ITEM
      8.
                        
                        Financial
      Statements and Supplementary Data
                        F-1
      – F-28ITEM
      9.
                        
                        Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure
                        78ITEM
      9A(T).
                        
                        Controls
      and Procedures
                        78ITEM
      9B.
                        
                        Other
      Information
                        79PART
      IIIITEM
      10.
                        
                        Directors
      and Executive Officers of the Registrant and Corporate
      Governance
                        79ITEM
      11.
                        
                        Executive
      Compensation
                        83ITEM
      12.
                        
                        Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                        87ITEM
      13.
                        
                        Certain
      Relationships and Related Transactions, and Director
      Independence
                        88ITEM
      14.
                        
                        Principal
      Accountant Fees and Services
                        90PART
      IVITEM
      15
                        
                        Exhibits,
      Financial Statement Schedules
                        91SIGNATURES
                        
                        
                        94




2


INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS





This
Annual Report on Form 10-K contains forward-looking statements. These statements
relate to future events or our future financial performance. These statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance,
or achievements expressed or implied by forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential" or "continue," the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially.




Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of the forward-looking
statements. We undertake no duty to update any of the forward-looking statements
after the date of this report to conform such statements to actual results or to
changes in our expectations.




Readers
are also urged to carefully review and consider the various disclosures made by
us which attempt to advise interested parties of the factors which affect our
business, including without limitation the disclosures made in PART I. ITEM 1A. “Risk
Factors” and PART 
II. ITEM 6 "Management's Discussion and Analysis or Plan of
Operation" included herein.




3


PART
I.





ITEM
      1.
            Business





Overview





Through
our direct, wholly owned subsidiary, Ocean Technology (China) Company Limited
(“Ocean Technology’) and its subsidiaries, Shishi Rixiang Marine Food Co., Ltd.
(“Rixiang”), Shishi Huabao Jixiang Water Products Co., Ltd.(“Jixiang”), Shishi
Huabao Mingxiang Foods Co., Ltd. (“Mingxiang”) and Shishi Xianglin Trading Co.,
Ltd. (“Xianglin”), we engage in the business of processing, distribution and
sale of processed seafood-based snack foods, as well as the sale of fresh and
frozen marine catch. Our objective is to establish ourselves as a leading
producer of processed seafood products in the PRC and overseas markets. In 2010,
we also became a manufacturer of algae-based soft drinks through our acquisition
of Shishi Xianghe Food Science and Technology Co., Ltd.
(“Xianghe”).





Our dried
and flavored seafood-based snack foods are predominantly sold under our
registered trademark, the “Mingxiang” brand. These products are sold to 19
exclusive distributors in seven provinces in the PRC, including Fujian,
Guangdong, Jiangsu, Shandong, Zhejiang, Liaoning and Sichuan and in turn
sub-distributed to 2,200 retail points in the PRC (including major supermarkets
and retailers such as Wal-Mart and Carrefour) throughout these provinces. Our
frozen processed seafood products are sold to both domestic and overseas
customers. Founded in 1994, China Marine has grown steadily and positioned its
"Mingxiang" brand as a category leader. We have received "Famous Brand" and
"Green Food" awards. Our marine catch is sold to overseas customers and
distributors in Fujian, Shandong and Liaoning provinces, some of whom directly
export the marine catch to South Korea and Taiwan.





Our
business premises, including our production plant, cold storage facility, office
tower and staff dormitory, are located close to Xiangzhi Port, the largest
fishing port in Fujian Province, which is one of the largest coastal provinces
in the PRC and a vital navigation hub between the East China Sea and the South
China Sea.





On
January 1, 2010, Mingxiang acquired shares representing 80% of the registered
capital stock of Xianghe.  Xianghe is a manufacturer of the branded
Hi-Power algae-based soft drinks. Xianghe has developed a network of
distributors with exclusive territories in Fujian, Zhejiang, Guangdong and Hunan
which sell Hi-Power to retail food stores, restaurants food supply dealers and
the hospitality industry. In addition to the distribution network which Xianghe
has developed, we intend to integrate the beverage product into Mingxiang’s
distribution network.





Our
principal executive offices are located at Da Bao Industrial Zone, Shishi
City,Fujian, China,362700, and our telephone
number at that location is 86-595-8898-7588.





Our
Corporate Structure





We are a
holding company organized under the laws of Nevada and Ocean Technology is a
holding company organized under the laws of Hong Kong. The other
subsidiaries are organized under the laws of the PRC. All subsidiaries are
wholly-owned except for Xianghe, the beverage company, in which we own an 80%
interest.





4










Our
Corporate History





We were
incorporated in the State of Nevada on October 1, 1999 under the name New
Paradigm Productions, Inc. to engage in the production and marketing of
meditation music and related supplies.





Starting
January 1, 2000, we commenced a private placement of our common stock in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act and Regulation D promulgated thereunder. We offered 100,000
shares of our common stock at $0.35 per share to certain accredited investors.
The offering closed in March 2000 and we raised gross proceeds in the amount of
$35,000.  Pursuant to a registration statement on Form SB-2 that was
declared effective on October 26, 2000, we sold 77,000 shares of our common
stock, raising a total of $77,000 in gross proceeds.





On
September 13, 2007, we entered into a Stock Purchase Agreement (“SPA”) with
Halter Financial Investments, L.P., a Texas limited partnership (“HFI”) pursuant
to which we agreed to sell to HFI, 1,005,200 shares of our post reverse
stock-split common stock for $400,000. After consummation of the transaction,
HFI became the holder of 1,005,200 shares of our common stock, or 87.5% of the
1,148,826 shares of our then outstanding common stock. In addition, the terms of
the SPA required us to declare and pay a special cash dividend of $0.364 per
post stock-split share to our shareholders of record as of September 12, 2007.
Stockholders holding a total of 1,077,000 shares received a special cash
dividend in the total amount of $392,028 which amount was funded with proceeds
from the stock sale. Effective on September 25, 2007, we effectuated a 7.5 to 1
reverse stock split and increased our authorized shares of common stock to
100,000,000.





5




We
discontinued our principal operations as of December 2002 and have been, until
our reverse acquisition with Ocean Technology on November 17, 2007
described below, investigating potential acquisitions or
opportunities.





Acquisition
of Ocean Technology and Related Financing





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 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%
shares of our outstanding common stock after the share exchange. In connection
with the share exchange, a majority of our shareholders of record as of November
16, 2007 approved a resolution by our board of directors to change our name from
New Paradigm Productions, Inc. to China Marine Food Group Limited. The name
change became effective on January 9, 2008 upon the filing of a Certificate of
Amendment to our Amended Articles of Incorporation with the State of Nevada on
the twentieth day following the mailing of a Definitive Information Statement to
our shareholders. 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 units consisting one share of
common stock and a warrant to purchase one-fifth of one share of our common
stock. The investors subscribed for 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. The units were offered and sold pursuant to from
registration under the Securities Act, including without limitation, Regulation
D and Regulation S promulgated under the Securities Act. Each warrant issued to
the investors has a term of three years and is exercisable at any time for a
price equal to $4.1782 in cash or on a cashless exercise basis.





In
connection with the private placement, our principal stockholder, Pengfei Liu,
entered into a make good agreement pursuant to which Mr. Liu agreed, subject to
certain conditions discussed below, to place into an escrow account, 6,199,441
shares of common stock of the Company he beneficially owns. If we had not
generated net income of $10.549 million for the fiscal year ending December 31,
2008, up to 50% of the shares held in escrow would have been transferred to the
private placement investors. If we did not generate net income of $14.268
million for the fiscal year ending December 31, 2009, the remaining shares held
in escrow would have been  transferred to the private placement investors,
on a pro rata basis.  Since the net income for 2008 and 2009 met  the
minimum net income thresholds, no transfer of the escrowed shares was made to
the private placement investors.





For
accounting purposes, the share exchange transaction was treated as a reverse
acquisition with Ocean Technology as the acquirer and China Marine Food Group
Limited as the acquired party. When we refer herein to business and financial
information for periods prior to the consummation of the reverse acquisition, we
are referring to the business and financial information of Ocean Technology on a
consolidated basis unless the context suggests otherwise.





On
January 25, 2010, we sold an aggregate of 4,615,388 shares of common stock for
an aggregate purchase price of $30,000,022 at a price of $6.50 per share
pursuant to a shelf registration statement on Form S-3.





Background
History of Ocean Technology





Prior to
the establishment of Mingxiang, Pengfei Liu, our founder, Executive Chairman and
CEO of our Company, was engaged in the trading of marine catch from 1983 to
1994, where he bought marine catch from local suppliers and sold them to seafood
traders in other regions such as Zhejiang Province.





In March
1994, Mr. Liu, through his company Shishi City Xiangzhi Dabao Seafood Processing
Factory, entered into a joint venture with Zhoushan Fishery Processing Factory
to establish Mingxiang, to engage in the processing and sale of seafood
products. Mingxiang established its place of business close to Xiangzhi (Shishi)
Port, which is one of the largest fishing ports in the Fujian Province,
occupying premises with a land area of about 3,300 sq. m. Mingxiang then
commenced business as a small enterprise processing and supplying roasted file
fish to customers in Fujian and Zhejiang Provinces.





Our
business grew steadily between 1994 and 1997. In 1997, to protect the goodwill
that had been built up for our products sold under our “Mingxiang (明祥)” brand, we
registered the “Mingxiang” brand in the PRC as a trademark. The trademark covers
marine food products such as dried fish slices, roasted shelled prawns and
shredded squid.





In 1998,
we added shredded roasted squid to our range of products and expanded our
production facilities to occupy a land area of about 8,000 sq. m. At that time,
we employed about 40 employees. We also commenced the construction of cold
storage facilities occupying a land area of about 2,000 sq. m. and with a
storage capacity of 1,000 tons.





6




In 1999,
we completed the construction of our cold storage facilities. The new cold
storage facilities increased the shelf-life of and enabled the prolonged storage
of the raw materials, works-in-progress and finished products of our processed
seafood products. With the cold storage facilities, we became less susceptible
to seasonal fluctuations in market demand and supply of raw materials and
products. This significantly increased our processed seafood production
capacity.





In 2000,
we expanded our product range to include roasted prawns. We also acquired an
additional land of about 7,300 sq. m. at our business premises to build
additional production facilities as well as office and staff dormitory
facilities.





Through a
series of equity transfers agreements from 1996, Mr. Liu and his spouse Yazuo
Qiu acquired full control of Mingxiang in 2001. With the change in shareholders’
control and the expanded scope of business to include export activities, we
obtained a new business license for Mingxiang on April 9, 2001. In the same
year, we obtained an import-export license from the Fujian Province
International Trade Cooperation Bureau. We believe we were one of the first
domestic companies in the processed seafood industry in Quanzhou City, Fujian
Province to obtain this license. This was a significant milestone in our history
as the license allowed us to export these products to foreign markets. In the
same year, we commenced the export of our processed seafood products to
Japan.





We also
established Jixiang in 2001. Jixiang is our property-holding company, and owns
the building ownership rights to all our properties save for two properties
which are owned by Mingxiang.





All our
land use rights and properties, including production plant, cold storage
facility, office tower and staff dormitory, are managed by these two property
holding companies, Mingxiang and Jixiang. In particular, Mingxiang is
responsible for the rental income related to the collection on the 33 shop
spaces at our factory in Dabao Industrial Zone. The rental contracts are based
on 1-year lease term. The operations of these two property holding companies are
solely property management.





In 2002,
our “Mingxiang” brand was recognized as a “Fujian Province Famous Brand”. In
June of the same year, we commenced our marine catch business, through the
chartering of two fishing vessels with an aggregate net tonnage of 44
tons.





In 2003,
we commenced the export of our dried processed seafood products to the Russian
market. In May 2004, Ocean Technology, a company incorporated in Hong Kong and
wholly-owned by Mr. Liu, established Rixiang, a limited liability company with a
registered capital of US$1,000,000. Rixiang carried on the main businesses of
processing and storage of marine food and marine catch. Since January 2005,
Rixiang has been the operating subsidiary of our Company.





In 2003,
we also completed the construction of additional cold storage facilities. The
new cold storage facilities increased our cold storage capacity from 1,000 tons
to 2,020 tons.





We also
started selling frozen processed seafood products, which include frozen whole
squids and fishes in 2003. Since then, our frozen processed seafood product
range has expanded to include readily consumable products, including squid rings
and slices and octopus cuts and slices.





In 2003
and 2004, the processing of our frozen seafood products involved only basic
processing (such as cleaning, washing, sorting and packing). From 2005, our
frozen processed seafood products processes shifted to more advanced processing
as we observed a growing market in processed seafood products such as squid
slice, octopus cuts, octopus slices and squid rings.




In April
2006, our subsidiary Rixiang entered into a memorandum of understanding for
research and development collaboration with the Ocean University of China in
order to further develop our product development capabilities.





In
November 2009, Mingxiang won the auction for the purchase of the 40-year use
right of a land in Shishi City, Fujian.   Covering an area of 8,691.4
sq. m., the land is located next to the fishing port and the Registrant’s
processing facilities in Shishi City. We plan to build cold storage facilities
on the land with a capacity of approximately 20,000 tons. We intend to complete
the construction in late 2010.  See “Description of Business - Production
Facilities and Process.”





In
November 2009, Mingxiang entered into a Credit or Share Purchase Option
Agreement (the “Option Agreement”) with Qiu Shang Jing, the former sole
shareholder of Xianghe. Under the Option Agreement, Mingxiang loaned
Xianghe  RMB180,500,000 (approximately $26,400,000). In consideration for
the loan, Mingxiang received the option to buy shares from Mr. Qiu representing
eighty percent (80%) of Xianghe. The purchase price payable to Mr. Qiu consisted
of RMB9,500,000 (approximately $1,400,000) payable by Mingxiang and
RMB180,500,000 (approximately $26,400,000) payable by Xianghe. On January 1,
2010, Mingxiang exercised its option to acquire eighty percent (80%) of the
registered capital stock of Xianghe.  In addition to the current
distribution network which Xianghe has developed, we intend to integrate the
beverage product into Mingxiang’s distribution network. Xianghe began operations
in June 2009.





7




We have
grown from a domestic market-oriented seafood enterprise with over 80 employees
in 2003 into a medium-sized nationwide seafood enterprise with advanced
processing facilities and equipment. As of December 31, 2009, we had 769
employees. Our employees currently include 11 research and development
staff.





OUR
PRINCIPAL PRODUCTS AND THE MARKET





We are a
seafood producer engaged in the processing, distribution and sale of processed
seafood products under our “Mingxiang” brand, as well as the sale of marine
catch. In 2010, we also became a manufacturer of algae-based soft drinks through
our acquisition of Xianghe.





Our
business philosophy may be summarized in the following phrase:





“To
achieve benefits through innovation, and to develop new markets through
branding”





Our dried
processed seafood products are predominantly sold under our registered
trademark, the “Mingxiang (明祥)” brand. These
products are sold through 19 distributors in seven provinces in the PRC such as
Fujian, Guangdong, Jiangsu, Shandong, Sichuan,  Zhejiang and Liaoning and
in turn sub-distributed to about 2,200 retail points (including major
supermarkets and retailers such as Wal-Mart and Carrefour) throughout these
provinces. In September 2009, we reached agreement with a Hong Kong-based
confectionary store chain which will use our seafood snack foods exclusively for
a private label program for chain’s planned 300 store roll-out in the PRC in
2009. Our frozen processed seafood products are sold to both domestic and
overseas customers. Our marine catch is sold to overseas customers and
distributors in Fujian, Shandong and Liaoning provinces, some of whom directly
export the marine catch to South Korea and Taiwan.





Our
business premises are located close to Xiangzhi (Shishi) Port, the largest
fishing port in Fujian province and one of the state-level fishing port centers.
We have also been designated as a state base for the quality control testing of
marine products in Fujian Province.





Our
branded “Hi-Power” algae-based soft beverage product was developed by the Yellow
Sea Fisheries Research Institute Chinese Academy of Fishery Science in
coordination with Xianghe’s founder, Qiu Shang Jing. Hi-Power beverage is
marketed as a high-protein drink, low in calories and fat. Our target market
focuses on middle class health-conscious consumers in China’s fast-growing
beverage market. We have developed a network of exclusive distributors in
Fujian, Zhejiang, Guangdong and Hunan provinces in China, which sell our
Hi-Power beverage product to retail food stores, restaurant food supply dealer
and hospitality industry in their respective distribution
territories.





Our
objective is to establish ourselves as a leading producer of processed seafood
and algae-based soft drink products in the PRC and overseas
markets.





Processed
Seafood Products





Using a
combination of Japanese traditional seafood processing methods and modern
scientific seafood processing techniques, our product development efforts during
the period under review have yielded 25 processed seafood products comprising
dried seafood products such as roasted squid, roasted file fish, roasted prawns,
shredded roasted squid, smoked eel, barbecued squid, sliced barbecued squid,
sliced roasted octopus, spicy sliced octopus, spicy baby squid, spicy sliced
squid and spicy squid head as well as frozen processed seafood products. Our
frozen processed seafood products include frozen Japanese butter fish, frozen
octopus and frozen squid rings. Our production facilities are located at Dabao
Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province, occupying a total
land area of 17,600 sq. m. This includes cold storage facilities with a total
storage capacity of 2,020 tons. We have five production lines for the processing
of our roasted file fish, roasted prawns, shredded roasted squid, roasted squid
and smoked seafood products and one production line for frozen processed seafood
products.





We have
established sales networks in various large and medium sized cities in the PRC
and our export markets, such as Japan, Philippines, Ukraine and Papua New
Guinea.. We believe our products are sold by some of our distributors to
end-consumers in South Korea and Taiwan. Our dried processed seafood products
are mainly sold in supermarkets in Fujian and Zhejiang Provinces and theirsurrounding areas, and
through our sales network through 19 distributors, each of whom have its own
sales network and are authorized by us to distribute our products exclusively in
a specific vicinity.





8




Our sales
to domestic and foreign markets for the fiscal years ended December 31, 2009,
2008 and 2007 are set out below:





Dried
Processed Seafood Products




Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007(%)
                  
                  
                  (%)
                  
                  
                  (%)PRC
      sales
                  
                  
                  100.0
                  
                  
                  
                  99.2
                  
                  
                  
                  99.3Export
      sales (1)
                  
                  
                  0.0
                  
                  
                  
                  0.8
                  
                  
                  
                  0.7





Notes:


(1)
            The
      decrease in export sales was mainly due to our increased marketing efforts
      in the PRC, which resulted in higher domestic
  sales.




Frozen
Processed Seafood Products


Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007(%)
                  
                  
                  (%)
                  
                  
                  (%)PRC
      sales (1)
                  
                  
                  0.0
                  
                  
                  
                  48.9
                  
                  
                  
                  100.0Export
      sales (2)
                  
                  
                  0.0
                  
                  
                  
                  51.1
                  
                  
                  
                  0.0





Notes:


(1) These
comprise sales to local distributors made on an ad hoc basis.


(2) These
comprise sales to foreign distributors.





Our dried
processed seafood products are predominantly sold under our registered
trademark, the “Mingxiang” brand.





A portion
of our frozen processed seafood products are consumed directly by end-consumers
with little or no additional processing. All our dried and frozen processed
seafood products are manufactured free of preservatives. We use ingredients such
as sugar, salt and spices in the production of our dried processed seafood
products. The raw materials for our processed seafood products are obtained
through fresh marine catch and not from seafood breeding farms.





We have
obtained the “Green Food” awards in respect of our roasted file fish, frozen
fish, roasted king prawns and shredded squid. We are committed to the highest
standards of quality control in the production of our processed seafood
products, as evidenced by our ISO9001, ISO14001, HACCP certification and the EU
export registration.





Our
credit-worthiness, quality and processed seafood products have received
considerable acknowledgement and favorable feedback from the public. Please
refer to the section “Awards and Certification” for further details of the
awards and certifications that we have received.





Today,
our products are exported to many countries including Japan, Philippines,
Ukraine and Papua New Guinea. We are a State-designated base for quality
assurance testing of marine products. Please see the section “Quality Assurance”
for more details.





Marine
Catch





In 2006
and 2007, we engaged in the sale of marine catch. We worked with local fishermen
and chartered six fishing vessels with an aggregate net tonnage of 256 tons, to
harvest marine catch from the East China Sea and the Taiwan Strait. Our marine
catch was harvested from the deep seas and was not bred through
aquaculture.





9




The
marine catch was sold to overseas customers and seafood traders in Fujian,
Shandong and Liaoning provinces, the PRC, some of whom directly export the
marine catch to South Korea and Taiwan. To preserve the freshness of the marine
catch sold to our customers, we constantly packed the harvested marine catch in
ice and endeavored to deliver the marine catch to our customers within the
shortest time practicable. Upon the return of the vessels to Xiangzhi (Shishi)
Port, a small proportion of the marine catch was sold to our customers at
Xiangzhi (Shishi) Port itself, and the rest was transported back to our business
premises at Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
for further sorting and packing. Thereafter, most of our marine catch was
collected by our customers at our business premises, and a small proportion was
transported to our customers at their respective destinations.





Due to
the nature of the fishing operations, the size of a customer’s order typically
depends on the volume of marine catch that the fishing vessels harvest in a
fishing trip. A customer therefore typically places an order only after
receiving information as to the volume of marine catch harvested in a fishing
trip. Our marine catch is priced based on market price, fishing yield and
seasonality. We believe these factors do not cause substantial fluctuations in
the prices of our marine catch.





Starting
from 2008, we did not charter any fishing vessels nor harvest the marine catch
ourselves. Instead, we buy the marine catch from the suppliers and then sell to
the customers on a direct basis. The marine catch is predominantly sold to
overseas customers and distributors in Fujian, Shandong and Liaoning provinces,
some of whom directly export the marine catch to South Korea and
Taiwan.





Our
Products





Our
products can be divided into three main categories, namely (1) processed seafood
products; (2) marine catch; and (3) “Hi-Power”algae-based beverage product. The
production of the processed seafood products and marine catch are undertaken by
our subsidiary, Rixiang and the production of algae-based beverage product is
undertaken by our subsidiary, Xianghe.





The
following table sets out some of our main products, as well as the main markets
in which they are sold:





Processed
      Seafood
                Products
              
              Products
      / Species
              
              Main
      Markets
                Markets
      in the PRC
              
              Foreign
      Markets(a)
      Dried processed seafood products
              
              Roasted
      file fish, shredded roasted squid, roasted squid, smoked eel, roasted
      prawn, barbecued squid, sliced barbecued squid, sliced roasted octopus,
      spicy sliced octopus, spicy baby squid, spicy sliced squid, spicy squid
      head
              
              Zhejiang
      Province
                Fujian
      Province
                Shandong
      Province
                Greater
      Shanghai Region
                Guangdong
      Province
                Sichuan
      Province
                Liaoning
      Province
              
              Japan
      and Ukraine(b)
      Frozen processed seafood products
              
              Cuttlefish,
      octopus, pomfret, shelled prawns, sliced squid
              
              Shandong
      Province (for sale in South Korea)
                
                Fujian
      Province (for sale in Taiwan)
              
              Philippines
      and Papua New GuineaMarine
      Catch
              
              Cuttlefish
      (Sepia esculenta), hairtail fish (Trichiurus japonicus), Japanese
      butter fish (Psenepis Anomala), squid (Loligo bleekeri), horse
      mackerel
              
              Fujian
      Province (for sale in Taiwan)
                
                Shandong
      Province (for sale in South Korea)
                
                Lianoing
      Province
              
              Philippines
      and Papua New Guinea“Hi-Power”
      Algae-Based Beverage Product
              
              
              
              Fujian
      Province
                Zhejiang
      Province
                Guangdong
      Province
                Hunan
      Provinces
              
              Nil





10




Processed
Seafood Products





We
purchase fresh seafood, the primary ingredient from which our dried and frozen
processed seafood products are manufactured, from fishermen and traders. Our raw
materials are stored in cold storage facilities located at our production
facilities. The production processes of our dried and frozen processed seafood
products are described in further detail under the section “Production
Facilities and Process”.





Dried Processed Seafood
Products





Roasted
      file fish
            Roasted
      squid
            Roasted
      prawn
            Smoked
      eel





The main
dried processed seafood products manufactured by us are roasted file fish,
shredded roasted squid, roasted squid, roasted prawn and smoked
eel.





The
ingredients used in the production of our dried processed seafood products are
fresh seafood (such as fish, prawns and cuttlefish), natural flavoring, sugar,
salt and spices.





Frozen Processed Seafood
Products





Pomfret
            Octopus
            Shelled
      prawns
            Sliced
      squid





Our
frozen processed seafood products comprise cuttlefish, octopus, pomfret, shelled
prawns and sliced squid. Some of our frozen seafood products (such as cuttlefish
and squid) are packaged and can be consumed without additional processing. Our
other frozen processed seafood products are intermediate products sold to our
customers for further processing before sale to the end-consumer. Our frozen
processed seafood products are mainly exported to Japan and South Korea directly
or through our customers.





Marine
Catch





The
principal species of marine catch harvested in the East China Sea and Taiwan
Strait and sold by our Company are as follows:





Cuttlefish
      (Sepia
      esculenta)Cuttlefish
      is commonly found in the East China Sea and the Taiwan Strait. Cuttlefish
      is often processed and sold as fresh sushi and
  snacks.




11




Hairtail
      Fish (Trichiurus
      japonicus)Hairtail
      fish, usually found in the East China Sea and the Taiwan Strait, is one of
      the best-selling marine catch in the PRC. It is a regular dish for home
      working and fine-dining restaurantsJapanese
      Butter Fish (Psenepis
      Anomala)Japanese
      butter fish is usually found in the East China Sea and the Taiwan Strait
      between September and November every year.


Squid
      (Loligo
      bleekeri)Squids
      are commonly found in the seas of the Taiwan Strait. Squid contains many
      nutrients such as proteins, fats, carbohydrate, calcium and phosphorus.
      Its fine taste and springy texture makes the squid a popular food with
      consumers.




“Hi-Power”
Algae-Based Beverage Product




“Hi
      Power” drink is high in protein and low in calories and
      fat.





Production
Facilities and Process





The
production of our dried and frozen processed seafood products is carried out at
our production facilities in Dabao Industrial Zone, Xiangzhi Town, Shishi City,
Fujian Province. At December 31, 2009, we own five production lines for the
manufacture of dried processed seafood products and one production line for the
manufacture of frozen processed seafood products. After the upgrade of our
production facilities in 2009, the maximum annual production capacities of our
production lines increased to about 19,000 tons of dried processed seafood
products and 1,000 tons of frozen processed seafood products. The construction
of our new facilities was completed and commenced full operation by the third
quarter end of 2009. We also own cold storage facilities with cold storage
capacity of 2,020 tons.





On
November 6, 2009, Mingxiang won the auction for the purchase of the 40-year use
right of a land in Shishi City, Fujian. Covering an area of 8,691.4 sq. m., the
land is located next to the fishing port and our processing facilities in Shishi
City. The fishing port in Shishi is one of the five largest fishing ports in the
PRC. The purchase price for the land use right is RMB 15.55 million ($2.28
million), of which 50% ($1.14 million) will be paid within 20 days and the
balance ($1.14 million) within 60 days. We plan 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 seafood catch to be processed
into seafood products. We intend to finance the total estimated $20 million in
land use right and construction costs from funds generated by operations and
expect to complete the construction in late 2010. Closing of the acquisition is
subject to execution of a formal agreement with the local land and resources
department, which agreement was executed in late 2009.





12




We place
great emphasis on quality assurance at every stage of our production process and
have clearly defined procedures to manufacture products of consistently high
quality. Please refer to the section “Quality Assurance” for more
details.





Dried Processed Seafood
Products





The key
stages of our production process for our dried processed seafood products are as
follows:











1.
            Receiving and
      storing raw and packaging materials.All raw materials undergo visual
      inspection to ensure freshness and firmness before they are accepted and
      stored. Inspection is carried out by way of random
      sampling.





Samples
are taken from each batch of raw materials and sent to the quality control
department where physical (e.g. visual inspection), chemical and micro-organism
tests are conducted. Raw materials which do not adhere to our requirements are
rejected.





Our other
ingredients such as salt, sugar and spices are sourced from suppliers within the
PRC. They are stored in warehouses or temperature-controlled facilities after
inspection and approval.





Our
packaging materials are kept in a warehouse after they have been inspected and
approved.





2.
            Ice-packing.To maintain the
      freshness of our raw materials, a portion of the raw materials is packed
      in ice and transported directly to our production facilities for
      processing, whereas the remaining raw materials are packed in ice and
      transported to our cold storage facilities for storage at minus two to two
      degrees Celsius for no longer than 24 hours, upon which they must be
      delivered to the production facilities for
    processing.





3.
            Cleaning.At the production
      facilities, the raw materials are cleaned by removing unwanted portions
      such as heads, innards and
shells.




13




4.
            Slicing.The raw materials
      are then sliced on stainless steel
  tables.





5.
            Washing and
      draining.The raw
      materials are then sent to the washing pool for washing so as to remove
      oil, blood stains, remnant innards and other stains. After washing, the
      raw materials are drained to remove excess water
      content.





6.
            Marinating
      and adding flavoring.Other ingredients such as salt,
      sugar and spices are then added in the required amounts according to our
      recipes, left to marinate for a set period and mixed at stipulated
      intervals.





7.
            Steam-drying
      / Roasting.The raw
      materials are arranged on wire mesh trays, which are stacked in trolleys
      and rolled into a heating machine. Roasting takes place under controlled
      temperatures via a roasting conveyor belt, where moisture levels are
      monitored. Depending on the product, we will slice or shred the raw
      materials after roasting.





8.
            Weighing,
      packaging and metal detection.The dried processed seafood
      products are then packed into their respective packaging materials and
      sealed. After a calibrated metal detector to ensure that the products do
      not contain any traces of metal particles. Metal contamination might have
      been inherent in the raw materials or caused by production process of
      which some stages are
automated.





9.
            Packing and
      delivery.The
      packets of dried processed seafood products are then packed into boxes,
      which are then stored in our warehouse. Our products are delivered to
      customers on a “first in, first out”
  basis.





Frozen Processed Seafood
Products





Part of
the production of our frozen processed seafood products is carried out in a
sterile sealed production unit. The key stages of our production process for our
frozen processed seafood products are as follows:











1.
            Receiving and storing raw
      materials.As with our dried processed seafood products, all the
      raw materials for our frozen processed seafood products undergo inspection
      and approval before they are accepted and stored. Inspection is carried
      out by way of random sampling. Samples are taken from each batch of raw
      materials and sent to the quality control department where physical (e.g.
      visual inspection), chemical and micro-organism tests are conducted. Raw
      materials which do not adhere to our requirements are
      rejected.





Packaging
materials are kept in a warehouse after they have been inspected and
approved.




14




2.
            Ice-packing.To maintain the
      freshness of our raw materials, a portion of the raw materials is packed
      in ice and transported directly to our production facilities for
      processing, whereas the remaining raw materials are packed in ice and
      transported to our cold storage facilities for storage at minus two to two
      degrees Celsius for no longer than 24 hours, upon which they must be
      delivered to the production facilities for processing. These raw materials
      are removed from cold storage only immediately prior to
      processing.





3.
            Cleaning and
      washing.At the
      production facilities, the raw materials are cleaned by removing unwanted
      portions such as heads, innards and
  shells.





4.
            Selection.The raw materials
      are selected based on weight for further
  processing.





5.
            Slicing and
      shaping.The raw
      materials are then cut into slices and trimmed in order to attain the
      desired dimensions.





6.
            Cleaning and
      sterilizing.The raw
      materials then undergo further cleaning and sterilizing in order to remove
      bacteria.





7.
            Grooving.Where necessary for
      some of our sliced products, grooves are made on the slices. The grooves
      enable better absorption of condiments during
      consumption.





8.
            Arranging and
      packaging.The
      slices are then placed in neat arrangements in designated
      packs.





9.
            Quick
      freezing.The slices
      are then sent for quick freezing to a temperature of minus thirty-five
      degrees Celsius.





10.
            Metal
      detection.The
      products are then passed through a metal detector to ensure they do not
      contain any metal
particles.




11.
            Packing
      and delivery.The
      products are then packed and sealed. All the packaged products are then
      stored immediately in our cold storage facilities, where they are
      delivered in a “first in, first out” basis. Our products are transported
      in refrigerated containers which must comply with required standards of
      cleanliness and hygiene. Delivery is provided by a third-party logistics
      company using refrigeration containers at below minus 18 degrees
      Celsius.




15




“Hi-Power” Algae-Based
Beverage Product





The key
stages of our production process for our “Hi-Power” algae-based beverage
products are as follows:











1.
            Procurement of raw materials.Choose and buy natural algaes as raw materials from unpolluted sea
      areas.





Samples
are taken from each batch of raw materials by way of random sampling and sent to
the quality control department where physical (e.g. visual inspection), chemical
and micro-organism tests are conducted. Raw materials which cannot meet our
requirements are rejected.





2.
            Cleaning. The algaes
      are cleaned to remove sediment and
impurities.





3.
            Stewing.The algaes are
      stewed in water at ratio of 30:70 at 80°C for 3 to 5
  hours.





4.
            Enzymolysis.Adding a certain
      amount of enzyme into stewed algae juice for enzymolysis
      at 50-60°C for 1
      to 2 hours.





5.
            Filtration and
      decolorization. After enzymolysis, the stewed algae juice
      will go through a process of filtration in the ultrafiltration machine.
      The filtered algae juice will become clear, transparent and free from
      impurities. The transparent algae juice will then be pumped into
      the resin tank for process of
  decolorization.





6.
            Blending. The processed
      algae juice should be blended with the extract of honeysuckle, bamboo
      leaves, licorice and other auxiliary materials in accordance with a
      pre-defined formula.





7.
            Heating and homogenizing. Using the tubular
      heater to heat the blended algae juice at 80-90°C for 5-10 seconds and
      then put it into the homogenizer at
20Mpa.





8.
            Filtration. Put the
      drinks into1μ
      filterfor filtration.





9.
            Canning. Washing the
      can, before canning and sealing by using the automated canning
      machine.





10.
            Sterilization.
      Sterilizing the canned drinks with a sterilizing pot. Temperature should
      be controlled at 125°C for 15
minutes.




16




11.
            Cooling.Cooling the
      drinks by using the spray cooling method at 30-40°C. Tune the production
      date and shelf life. Regular check on coding and ensure the accuracy of
      coding position. Packaging should refer to the specification of daily
      order requests.





12.
            Delivery.The drinks
      can be sold and delivered.





Awards
and Certifications





As
testimony to the quality of our products, our credit worthiness in the PRC
business community as well as our management capabilities, we have received
several awards and certification in the course of our history, as listed
below:





Year
            
            Subsidiary
            
            Award
            
            Period
            
            Awarding
      Body
            
            SignificanceNovember
      2001
            
            Mingxiang
            
            Branded
      Products (fresh roasted prawn, roasted file fish, shredded
      squid)
            
            2001
            
            2001
      China International Agriculture Expo
            
            Recognition
      of our brand and our branding effortsDecember
      2001
            
            Mingxiang
            
            National
      Brand-making Leading Enterprise
            
            -
            
            Ministry
      of Agriculture, China
            
            Recognition
      of our efforts to create our brand and increase brand-awareness of our
      productsJanuary
      2002
            
            Mingxiang
            
            Green
      Consumer Recommendation
            
            2002
      - 2003
            
            Fujian
      Consumer Committee
            
            Recognition
      of our product quality, environmental friendly products, integrity in our
      dealings with consumersApril
      2003
            
            Mingxiang
            
            Leading
      Corporation in Processing Agricultural Products (Province
      level)
            
            -
            
            Fujian
      Village Enterprise Bureau
            
            Recognition
      of our efforts and contribution in the development of processed
      agricultural productsApril
      2003
            
            Mingxiang
            
            A-Grade
      Tax Payer
            
            2004 -
      2005
            
            Quanzhou
      District Tax BureauAugust
      2003
            
            Mingxiang
            
            Quanzhou
      Contract-Abiding Creditworthy Enterprise
            
            2001
      - 2002
            
            Quanzhou
      Civil Administration
            
            Recognition
      of integrity in our operations and commercial dealingsSeptember
      2003
            
            Mingxiang
            
            Fujian
      Province Aquatic Industrialization Leading Enterprise
            
            2003
      - 2004
            
            Fujian
      Province Marine Fisheries Bureau, Fujian Department of
Finance
            
            Recognition
      of our efforts and contribution in the development of processed
      agricultural productsMay
      1, 2007
            
            Mingxiang
            
            Green
      Food – roasted file fish
            
            May
      2007 - May 2010
            
            China
      Green Food Development Centre
            
            Recognition
      of environmental awareness, non-pollution in our production
      chainMay
      1, 2007
            
            Mingxiang
            
            Green
      Food – dried shredded squid
            
            May
      2007 - May 2010
            
            China
      Green Food Development Centre
            
            Recognition
      of environmental awareness, non-pollution in our production
      chain




17




May
      1, 2007
            
            Mingxiang
            
            Green
      Food – frozen fish
            
            May
      2007 - April 2010
            
            China
      Green Food Development Centre
            
            Recognition
      of environmental awareness, non-pollution in our production
      chainMay
      1, 2007
            
            Mingxiang
            
            Green
      Food – roasted king prawn
            
            May
      2007 - May 2010
            
            China
      Green Food Development Centre
            
            Recognition
      of environmental awareness, non-pollution in our production
      chainMay
      17, 2007
            
            Rixiang
            
            Green
      Food – roasted file fish
            
            May
      2007 - May 2010
            
            China
      Green Food Development Centre
            
            Recognition
      of environmental awareness, non-pollution in our production
      chainMay
      17, 2007
            
            Rixiang
            
            Green
      Food – dried shredded squid
            
            May
      2007 - May 2010
            
            China
      Green Food Development Centre
            
            Recognition
      of environmental awareness, non-pollution in our production
      chainMay
      17, 2007
            
            Rixiang
            
            Green
      Food – roasted yellow croaker
            
            May
      2007 - May 2010
            
            China
      Green Food Development Centre
            
            Recognition
      of environmental awareness, non-pollution in our production
      chainMay
      17, 2007
            
            Rixiang
            
            Green
      Food – roasted prawn
            
            May
      2007 - May 2010
            
            China
      Green Food Development Centre
            
            Recognition
      of environmental awareness, non-pollution in our production
      chainMay
      17, 2007
            
            Rixiang
            
            Green
      Food – roasted shredded squid
            
            May
      2007 - May 2010
            
            China
      Green Food Development Centre
            
            Recognition
      of environmental awareness, non-pollution in our production
      chainMay
      17, 2007
            
            Rixiang
            
            Green
      Food – roasted fish bones
            
            May
      2007 - May 2010
            
            China
      Green Food Development Centre
            
            Recognition
      of environmental awareness, non-pollution in our production
      chainMay
      17, 2007
            
            Rixiang
            
            Green
      Food – roasted squid
            
            May
      2007 - May 2010
            
            China
      Green Food Development Centre
            
            Recognition
      of environmental awareness, non-pollution in our production
      chainMay
      17, 2007
            
            Rixiang
            
            Green
      Food – squid slices
            
            May
      2007 - May 2010
            
            China
      Green Food Development Centre
            
            Recognition
      of environmental awareness, non-pollution in our production
      chain




18




May
      17, 2007
              
              Rixiang
              
              Green
      Food – roasted searobin fillet
              
              May
      2007 - May 2010
              
              China
      Green Food Development Centre
              
              Recognition
      of environmental awareness, non-pollution in our production
      chainJanuary
      2004
              
              Mingxiang
              
              Civilized
      and Creditworthy Enterprise
              
              2002
      -2003
              
              Shishi
      City Government Civilization Bureau, Shishi City Economic Bureau, Shishi
      National Tax Bureau, Shishi District Tax Bureau
              
              Recognition
      of our regard for integrity in our operations, our creditworthiness and
      contribution to the economyJanuary
      2004
              
              Mingxiang
              
              Quanzhou
      Agricultural Industrialization Leading Enterprise
              
              January
      2004 - December 2006
              
              Quanzhou
      Department of Agriculture, Quanzhou Finance Bureau
              
              Recognition
      of our efforts and contribution in the development of processed
      agricultural productsSeptember
      2008
              
              Mingxiang
              
              Key
      Leading Enterprise (Province level)
              
              2008
      - 2009
              
              Fujian
      Province Agriculture Industrialization Leading Group
              
              Recognition
      of our efforts and contribution in the development of processed
      agricultural productsDecember
      2006
              
              Mingxiang
              
              A-Grade
      Tax Payer Credit Enterprise
              
              2004
      - 2005
              
              Quanzhou
      National Tax Bureau, Quanzhou District Tax Bureau
              
              Recognition
      of our tax creditworthinessDecember
      2004
              
              Mingxiang
              
              National
      Foodstuff Industry Excellent Leading Enterprise
              
              2003
      - 2004
              
              China
      Foodstuff Industry Association
              
              Recognition
      of quality of our productsMay
      2008
              
              Mingxiang
              
              2008
      “AAA” bank-rated Creditworthy Enterprise
              
              Valid
      until April 30, 2009
              
              China
      Agricultural Bank, Fujian Branch
              
              Recognition
      of the quality of our enterprise, economic standing, operational
      efficiency and potential for growthSeptember
                2008
              
              Mingxiang
              
              Fujian
      Province Famous Brand
              
              Valid
      for 3 years
              
              Fujian
      Province Branded Products Authentication Committee
              
              Recognition
      of our brand and our branding
efforts




19




DISTRIBUTION





Processed Seafood
Products





Sales
and Marketing





Our sales
and marketing team comprises 24 employees, headed by our Executive Chairman,
Director and CEO Mr. Pengfei Liu. The team is responsible for monitoring
domestic sales, which includes co-coordinating orders from customers as well as
distributing our products to the customers.





Distribution
Network





We have
established a wide distribution network which allows us to maintain our
competitiveness in the industry. Our products are exported to various countries,
including Japan, Philippines, Ukraine and Papua New Guinea. We believe our
products are sold by some of our distributors to end-consumers in South Korea
and Taiwan.





As of
December 31, 2009, we have 19 distributors in seven provinces in the PRC, namely
Fujian, Guangdong, Jiangsu, Shandong, Zhejiang, Sichuan and Liaoning, as
follows:





Province
                                
                                No.
      of DistributorsFujian
                                
                                6Guangdong
                                
                                1Jiangsu
                                
                                1Shandong
                                
                                2Zhejiang
                                
                                7Liaoning
                                
                                1Sichuan
                                
                                1Total
                                
                                19





These
distributors in turn sub-distribute our dried processed seafood products to over
2,200 retail points (including major supermarkets and retailers such as Wal-Mart
and Carrefour) throughout these provinces.





One of
our main considerations when appointing distributors is the purchasing and
consumer spending power in the particular region in which we intend to
distribute our products.





Before we
appoint new distributors or extend the distribution arrangement with existing
distributors to distribute our products in a particular region or country, the
potential distributor or existing distributor is subject to our stringent
selection or review process. We will only appoint distributors who are able to
meet our requirements such as sales target.





We select
each distributor based on four criteria:





a.
            Strong
      Financial Background. We require the distributor to provide us with
      its most recent audited financial statements so we may verify whether its
      financial status is strong and healthy. We further require the
      distributor to settle the bills in cash, without offering any credit
      terms, in the first year of doing business with
  us.





b.
            Strong
      Distribution Network. The distributor should have a strong,
      well-established marketing and distribution network in the corresponding
      region.





c.
            Good
      Reputation and Track Record. We only select those distributors
      with good reputations in the industry in regard to their business
      background, marketing experience and distribution network. In
      particular, the distributor should have a track record in developing and
      maintaining the brand images of the products it
    distributes.





d.
            Marketing
      Strategy. We require the distributor to implement our overall
      marketing strategy for our products and to supplement it by designing its
      own marketing plans specifically for the respective region. The
      distributor should be able to assist us in building our brand image and
      achieving a significant market share in a said period of
      time.





We
appoint different distributors for different products in different regions in
the PRC and in various overseas markets.




We
usually appoint one exclusive distributor to cover a specific county, district,
city or province. Under the distributorship agreements, our distributors are
obliged to price and sell our products in accordance with the indicative prices
which we provide, and are not permitted to arbitrarily adjust the sale price of
the products except in accordance with product promotions. The distributors must
also duly carry out market operation activities and promotional methods which
are jointly developed with us, and to bear the costs of its own advertisements
and marketing activities. The distributorship agreements also contain provisions
for the protection of our intellectual property rights.





20




In
addition to selling products under our brands, we have also begun to distribute
products under private labels. In September 2009, we reached agreement with a
Hong Kong based confectionary store chain which used our seafood snack foods
exclusively for a private label program for the chain’s planned 300 store
roll-out in China in 2009.





For our
export sales, we sell our products through sales agents or traders in the PRC or
directly to distributors in the overseas market.





Our sales
and marketing team is also responsible for marketing our products within the
PRC. The team contacts and visits our customers regularly to obtain feedback and
suggestions on our products, and to foster and build our relationships with
them. We normally sign distributorship agreements with a one-year term. Our
agreements stipulate the price range in which the distributors may sell our
products and also stipulate sales targets which our distributors have to achieve
before the agreements are renewed.





We
advertise our products regularly in supermarket brochures, and outdoor
billboards. We also participate in exhibitions in the PRC such as the China
Export Trade Fair and the China Seafood Exposition, as well as overseas
exhibitions such as those in South Korea, Japan and Boston, USA.





“Hi-Power” Algae-Based
Beverage Product





Sales
and Marketing





Our sales
and marketing team comprises 12 employees, headed by our Executive Chairman,
Director and CEO Mr. Pengfei Liu. The team is responsible for developing and
implementing the Company’s overall development and promotional strategy for our
algae-based beverage products, which includes co-coordinating orders from
customers as well as distributing our products to the customers.





Distribution
Network





Xianghe
has developed a network of distributors with exclusive territories in Fujian,
Zhejiang, Guangdong and Hunan provinces, which sell Hi-Power to retail food
stores, restaurant food supply dealers and the hospitality industry and we
intend to integrate the beverage product into Mingxiang’s distribution
network.





NEW
PRODUCTS





Peptide
and Protein Products





On April
28, 2006, our subsidiary Rixiang entered into a memorandum of understanding for
collaboration with the Ocean University of China’s Food Sciences and Engineering
Institute for the development of: (1) bioactive peptide products from leftovers
of aquatic processed products; and (2) collagen protein and collagen peptide
protein products from fish skin. For details, please see “Research and
Development”.





COMPETITION





We
operate in a competitive environment and we expect to face more intense
competition from our existing competitors and new market entrants in the future.
We believe that the principal competitive factors in our industry include, inter alia, brand awareness,
product range and quality, customer and supplier relationships, cost and quality
of raw materials, technical expertise in production and pricing. Of these
factors, we believe that product quality is the most important.





To the
best of our knowledge, our principal competitors within the PRC are the
following major seafood product manufacturers in the PRC:




Business
                
                Principal
      CompetitorsDried
      and Frozen Processed Seafood Products
                
                (1) 
      China Aquatic Zhoushan Marine Fisheries Corporation; and
                  (2) 
      Liaoning Dalian Seafood Industry Group Co., Ltd.
                  
                  Both
      in terms of their size and operations.Marine
      Catch Products
                
                (1)
      Fujian Seafood Industry Co., Ltd; and
                  (2)
      Fujian Huayang Aquatic Products Group Co., Ltd.
                  
                  Both
      in terms of their geographical proximity to our customer
    base.“Hi-Power”
      Algae-Based Beverage Product
                
                No
      direct competitor.




21




There may
be companies based in other countries which offer a similar product range as we
do but which currently operate in different markets from us. In the future, we
may face competition from these companies as we expand into their markets and
vice
versa.




Competitive
Strengths





We
believe that our competitive strengths are as follows:





1.
              We
      have a wide distribution
network





We have
established a wide distribution network which allows us to maintain our
competitiveness in the industry. We have 19 distributors in seven provinces
in the PRC such as Fujian, Guangdong, Jiangsu, Shandong, Zhejiang, Sichuan and
Liaoning. These distributors in turn sub-distribute our dried processed seafood
products to over 2,200 retail points (including major supermarkets and
retailers such as Wal-Mart and Carrefour) throughout these provinces. We also
have a strong overseas customer base in various countries including Japan,
Philippines, Ukraine and Papua New Guinea.





Besides,
Xianghe has developed a network of distributors with exclusive territories in
Fujian, Zhejiang, Guangdong and Hunan which sell Hi-Power to retail food stores,
restaurants food supply dealers and the hospitality industry. We also intend to
integrate the Hi-Power algae-based soft drinks into our distribution
network.





Please
refer to the section “Major Customers” for further details.





2.
            We
      have an established brand name and track
record





We have
been involved in the production of processed seafood products since commencing
our operations in 1994. Our “Mingxiang” brand has been conferred the “Famous
Brand” award. In addition, we have also obtained the “Green Food” award in
respect of our roasted file fish, shredded roasted squid, roasted king prawn and
frozen fish products. This attests to the established standing of our
“Mingxiang” brand and the high quality of our products. We have also received
several other awards and accreditations as described in the section “Awards and
Certifications”. We believe such accolades attest to our established reputation
in the industry.





We also
believe that our established track record in the processed seafood industry
instills confidence in our products and attracts new customers from South Korea,
Japan, Taiwan, Ukraine  and  Papua New Guinea, and potential customers
from the European Union. Our stable customer base and large distributor network
in Fujian province and Zhejiang province have enabled our Company to introduce
new products into these markets in a shorter time and gain quicker market
acceptance and recognition.





3.
            We
      develop high quality products





We use
fresh seafood as the primary ingredient for our processed seafood products. Our
superior recipes and production know-how enable us to develop and produce
products with high-quality taste and texture and which are well-received by
end-consumers.





We have
been awarded HACCP certification and have obtained the EU export registration,
which enable us to export our products to the US and the EU, respectively. In
addition, our products, namely our roasted file fish, shredded roasted squid,
roasted squid, roasted prawn and frozen fish have been certified as “Green
Food”, a recognition that the production of our products is carried out under
certain sanitary conditions with limited use of chemical additives. We believe
we are one of the first companies in the seafood industry in Fujian Province to
be awarded this certification, which is a further testament to the quality
of our products.





4.
            We
      have a strong leadership as well as a dedicated and experienced management
      and procurement team





Our
Company is led by our Executive Chairman and CEO, Pengfei Liu, who has more than
30 years of experience in the seafood industry. Mr. Liu’s drive and passion have
been instrumental in our success to-date. He has conceptualized and implemented
our strategies in the past and successfully led us in our transition from a
small and local seafood enterprise to a nationwide seafood enterprise with
advanced seafood processing facilities.





22




Mr. Liu
is ably supported by a team of experienced managers, most of whom have an
average of five to ten years’ experience in their respective fields. These
personnel support our Executive Chairman and CEO in charting and managing our
growth. We believe the members of our procurement team have a strong grasp and
good understanding of industry trends, market cycles and seasonal factors, and
have the ability to discern and procure high-quality seafood at reasonable
prices.





The
management team receives regular training in the course of our Company obtaining
and renewing our ISO and HACCP qualifications. The training, which is conducted
over 10 to 15 days every year, involves process management, quality control,
sanitary and hygiene operating procedures and standards. We believe that such
training raises our competence and environmental / sanitary awareness, and
places us in an advantageous position compared to other operators in the seafood
industry who do not undergo such training.





Besides,
Hi-Power was developed by the Yellow Sea Fisheries Research Institute Chinese
Academy of Fishery Sciences in coordination with the founder, Qiu Shang Jing,
who has been engaged in the natural algae industry for over 10 years time and he
has a profound expertise on algae products. In addition, Xianghe has an
experienced management team and its management and other employees will continue
to work at Xianghe after the acquisition.





5.
            We have established strong
      relationships with our customers /
  distributors





We have
maintained close working relationships with our customers who are reputable
distributors of processed seafood products. Our relationships with some of our
PRC customers and distributors have been established for more than ten years. In
particular, we have enjoyed good relationships with, among others, Qingdao
Haizhan Seafood Co., Ltd. (“Qingdao Haizhan”), Wenzhou Rixin Foodstuff Co., Ltd.
(“Wenzhou Rixin”), and Zhejiang Ruian Laodu Seafood Wholesale Proprietor
(“Zhejiang Ruian Laodu”), for an average of approximately 8 years.





Qingdao
Haizhan is in the business of distributing dried and frozen seafood
products. To the best of our knowledge, Qingdao Haizhan has a distribution
network of over 1,000 retailers and a sales workforce of about 60
people.





Wenzhou
Rixin is a distributor of dried seafood in Wenzhou City, Zhejiang
Province. To the best of our knowledge, Wenhou Rixin has a distribution
network of about 1,000 retailers and a sales workforce of about 60
people.





Zhejiang
Ruian Laodu is a large distributor of dried seafood in Ruian City, Zhejiang
Province. To the best of our knowledge, Zhejiang Ruian Laodu has a distribution
network of about 300 retailers and a sales workforce of about 20
people.





Regarding
the percentage of sales represented by each party listed above; please refer to
the section “Major Customers” for details.





We view
our customers as long-term business partners who are important in the strategic
growth of our operations and broadening the geographic reach of our
products.





6.
            We are strategically
      located





We are
based in Fujian Province which is situated in southeast China on the coast of
the East China Sea. Fujian is one of the nine coastal provinces in the PRC and
is a vital navigation hub between the East China Sea and the South China Sea. It
is also rich in agricultural and marine resources.





Our main
raw materials for our marine catch business come from the Taiwan Strait, which
is also where we conduct our marine catch operations. The Taiwan Strait is rich
in marine resources. Our business operations and production facilities are
located at Shishi City, Fujian Province, where Xiangzhi (Shishi) Port has been
designated as one of the national-level fishing ports. It is the largest port in
Fujian province and is one of the five largest fishing ports in the PRC in terms
of supply of marine catch and tonnage of fishing vessels. Fujian province is
rich in agricultural and marine resources, which enables our procurement of raw
materials for our processed seafood business at low cost. We believe our
strategic location gives us access to an abundant supply of fresh marine
products and hence allows us to manage our costs more effectively.





7.
            We
      have strong research and development
  capabilities





We place
strong emphasis on the quality of our products and on our ability to develop new
products. To ensure that our products are well-received by our customers and
consumers, we have carried out research and development to improve the taste,
texture and packaging of our processed seafood products. Through our research
and development efforts, we have developed new products and improved the quality
of our existing products, which have been well-received by our customers and
consumers. These products include our crispy fish-bone snacks, roasted squid and
roasted prawns, spicy sliced octopus, spicy baby squid, spicy sliced squid and
spicy squid head.





23




Our
strong product development capabilities allow us to constantly introduce new
products into the market and maintain consumer interest and loyalty in our
“Mingxiang” brand products.  We believe that our strategic collaboration
with the Ocean University of China will further strengthen our research and
development capabilities.





Besides,
Hi-Power was developed by the Yellow Sea Fisheries Research Institute Chinese
Academy of Fishery Sciences in coordination with the founder. We will leverage
the strong research and development capabilities from the Yellow Sea Fisheries
Research Institute Chinese Academy of Fishery Sciences together with the Ocean
University of China on product development going forward.





8.
            We
      are a designated National Marine Products Quality Assurance Testing
      Base





We have
been designated as a quality assurance testing base by the National Marine Foods
Quality Supervision Testing Centre and our testing base is the only assessment
base in the southern provinces of the PRC. We test the hygiene and quality of
ingredients and products according to industrial standards. Our testing base
caters to seafood processing companies from Fujian, Guangdong, Guangxi and
Zhejiang Provinces, the PRC. We believe our role in quality assurance testing
further strengthens our reputation as a producer of quality processed seafood
products.





For the
above reasons, we believe that we will be able to maintain our market position
and competitive edge over our competitors.





MAJOR
SUPPLIERS





The
following table sets out our five major suppliers of raw materials for processed
seafood products and marine catch for the years ended December 31, 2009, 2008,
and 2007:





AsaPercentageofOurPurchasesofRaw
                            Materials(%)YearendedDecember31,2009
                          
                          
                          2008
                          
                          
                          2007Shishi
      City Tianwang Seafood Products Trading Proprietor
                          
                          
                          27.8
                          
                          
                          
                          23.6
                          
                          
                          
                          21.8Shishi
      City Fugui Seafood Products Trading Proprietor
                          
                          
                          20.8
                          
                          
                          
                          20.5
                          
                          
                          
                          18.5Jinjiang
      City Shenhu Town Hongyuan Seafood Products Trading
    Proprietor
                          
                          
                          18.0
                          
                          
                          
                          17.0
                          
                          
                          
                          17.6Dalian
      Kangwei Trading Company Limited
                          
                          
                          14.4
                          
                          
                          
                          —
                          
                          
                          
                          —Shishi
      City Dongfan Seafood Products Trading Proprietor
                          
                          
                          9.3
                          
                          
                          
                          —
                          
                          
                          
                          —Dalian
      Xinghai Import & Export Co., Ltd.
                          
                          
                          —
                          
                          
                          
                          17.9
                          
                          
                          
                          —Shishi
      City Huali Seafood Products Trading Proprietor
                          
                          
                          —
                          
                          
                          
                          11.8
                          
                          
                          
                          16.4Shishi
      City Nanfu Seafood Products Wholesale Proprietor.
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          15.6TOTAL
                          
                          
                          90.3
                          
                          
                          
                          90.8
                          
                          
                          
                          89.9





Trading
in fresh fish and other seafood is mainly carried out by individual fishermen,
who ply their trade in and around various fishing ports in Shishi City, Fujian
Province. The above major suppliers are fish and seafood traders in markets in
and surrounding Shishi City, Fujian Province. We procure from these suppliers
for fresh fish and other seafood, which are used as raw materials in the
production of our processed seafood products. These suppliers also supply fresh
fish and other seafood to other companies.





24




Before
2005, we mainly sourced for supplies of fresh fish and other seafood directly
from various fishermen when their trawlers docked at the ports. For convenience
and greater savings in procurement expenses, from 2005 onwards we sourced our
supplies from major suppliers only. Therefore the percentage of our purchases
from the major suppliers has increased significantly since 2005.




Though
certain of our major suppliers accounted for more than 8% of our total purchases
individually for the fiscal years ended December 31, 2009, we believe we are
able to source our raw materials from alternative suppliers should the need
arise.





The
following table sets out our five major suppliers of purchases for the
production of algae-based beverage product for the years ended December 31,
2009:





AsaPercentageofPurchases
                    (%)YearendedDecember31,2009Fujian
      Fuzhen Metal Packaging Company Limited
                  
                  
                  61.6Qing
      Dao Ming Yue Algae Group Company Limited
                  
                  
                  14.4Zhangzhou
      Baoxian Food and Beverage Company Limited
                  
                  
                  14.2Shishi
      City Jinhong Paper Products Company Limited
                  
                  
                  6.0Damin
      Food (Zhangzhou) Company Limited
                  
                  
                  3.6TOTAL
                  
                  
                  99.8





None of
our directors, executive officers and controlling shareholders is related to or
has any interest in any of our major suppliers listed above. To the best of our
knowledge, save as disclosed above, none of our major suppliers is related to or
has any interest in one another, and none of our major suppliers is related to
or has any interest in the customers stated in the section “Major Customers”
below.





MAJOR
CUSTOMERS





The
following table sets out our major customers accounting for 5.0% or more of our
Company’s sales of processed seafood products and marine catch for the year
ended December 31, 2009, 2008 and 2007:





As a Percentage of Our Sales (%)Year ended December 31,Products
                            
                            2009
                            
                            
                            2008
                            
                            
                            2007Dalian
      Jiyang Import and Export Co., Ltd. (1)
                            
                            Marine
      catch, namely cuttlefish, squid, hairtail fish
                            
                            
                            16.9
                            
                            
                            
                            —
                            
                            
                            
                            —Wenzhou
      Rixin Foodstuff Co., Ltd. (2)
                            
                            Dried
      processed seafood products
                            
                            
                            7.3
                            
                            
                            
                            9.5
                            
                            
                            
                            9.8Wenling
      City Xingfeng Foodstuff Co., Ltd. (3)
                            
                            Dried
      processed seafood products
                            
                            
                            7.2
                            
                            
                            
                            10.4
                            
                            
                            
                            8.9Zhejiang
      Ruian Laodu Seafood Wholesale Proprietor (4)
                            
                            Dried
      and frozen processed seafood products
                            
                            
                            6.0
                            
                            
                            
                            8.7
                            
                            
                            
                            9.3Fuzhou
      Chaohui Foodstuff Company (5)
                            
                            Dried
      processed seafood products
                            
                            
                            5.8
                            
                            
                            
                            9.0
                            
                            
                            
                            7.9Shanghai
      City Yangpu Area Xianghui Seafood Products Company (6)
                            
                            Dried
      processed seafood products
                            
                            
                            5.5
                            
                            
                            
                            —
                            
                            
                            
                            —Shenzhen
      City Agricultural Products and Fenghu Specialty and Dried ProductsTown
      Rifenglong Company (7)
                            
                            Dried
      processed seafood products
                            
                            
                            5.5
                            
                            
                            
                            —
                            
                            
                            
                            —




25




As a Percentage of Our Sales (%)Year ended December 31,Products
                            
                            2009
                            
                            
                            2008
                            
                            
                            2007Jinjiang
      City Dongshun Seafood Products Trading Proprietor (8)
                            
                            Marine
      catch, namely cuttlefish, squid, hairtail fish
                            
                            
                            5.1
                            
                            
                            
                            —
                            
                            
                            
                            —Qingdao
      Haizhan Seafood Co., Ltd (9)
                            
                            Dried
      and frozen processed seafood products
                            
                            
                            —
                            
                            
                            
                            7.3
                            
                            
                            
                            9.9Shenjiamen
      Liyizhougan Seafood Products Trading Proprietor (10)
                            
                            Dried
      and frozen processed seafood products
                            
                            
                            —
                            
                            
                            
                            6.6
                            
                            
                            
                            —Zhoushan
      City Maoyuan Foodstuff Import and Export Co., Ltd. (11)
                            
                            Dried
      and frozen processed seafood products
                            
                            
                            —
                            
                            
                            
                            5.9
                            
                            
                            
                            —Zhouriyu
      Seafood Products Trading Proprietor (12)
                            
                            Dried
      and frozen processed seafood products
                            
                            
                            —
                            
                            
                            
                            5.4
                            
                            
                            
                            —TOTAL
                            
                            
                            
                            
                            59.3
                            
                            
                            
                            62.8
                            
                            
                            
                            45.8





Notes:





1)
            Dalian
      Jiyang Import and Export Co., Ltd. is a trader of goods and import of
      technology in China, and has, to the best of our knowledge, a distribution
      network of about 19 retailers and a sales workforce of about 8 people. It
      has been our customer since 2008 and our sales to Dalian Jiyang Import and
      Export Co., Ltd. increased due to the increasing of import and export
      trades..





2)
            Wenzhou
      Rixin Foodstuff Co., Ltd. is a distributor of dried seafood in Wenzhou
      City, Zhejiang Province, and has, to the best of our knowledge, a
      distribution network of about 1,000 retailers. It was one of our first
      distributors and has been our key business partner since 1994. Our sales
      to Wenzhou Rixing Foodstuff Co., Ltd. increased due to the expansion of
      its geographic distribution coverage from the city to the suburban
      areas.





3)
            Wenling
      City Xingfeng Foodstuff Co., Ltd. is a distributor of dried seafood in
      Wenling City, Zhejiang Province, and has, to the best of our knowledge, a
      distribution network of over 700 retailers. It has been our customer since
      1997. Our sales to Wenling City Xingfeng Foodstuff Co Ltd increased due to
      the expansion of their geographic distribution coverage from county to
      city-level in Wenling City, Zhejiang Province. Fuzhou Chaohui Foodstuff
      Co., Ltd. is a distributor of dried processed seafood products located in
      Fuzhou City, Fujian Province. It became one of our major customers in
      2005 and ours sales to Fuzhou Chaohui Foodstuff Co., Ltd. increased
      substantially during the past two
years.





4)
            Zhejiang
      Ruian Laodu Seafood Wholesale Proprietor is a large distributor of dried
      seafood in Ruian City, Zhejiang Province. It has been our customer since
      2005 but has increased its purchases from us due to the expansion of its
      distribution network which covers, to the best of our knowledge, 300
      retailers.





5)
            Fuzhou
      Chaohui Foodstuff Co., Ltd. is a distributor of dried processed seafood
      products located in Fuzhou City, Fujian Province. It became one of our
      major customers in 2005 and ours sales to Fuzhou Chaohui Foodstuff Co.,
      Ltd. increased substantially during the past two
  years.





6)
            Shanghai
      City Yangpu Area Xianghui Seafood Products Company is a trader of
      stereotypes packaged and non-direct import food products, has, to the best
      of our knowledge, a distribution network of about 688 retailers and a
      sales workforce of about 16 people. It has been our customer since 2007.
      Our sales to Shanghai City Yangpu Area Xianghui Seafood Products Company
      increased due to increasing market
demand.




26




7)
            Shenzhen
      City Agricultural Products and Fenghu Specialty and Dried Products Town
      Rifenglong Company is a trader of cooked and dried seafood products, has,
      to the best of our knowledge, a distribution network of about 398
      retailers and a sales workforce of about 19 people. It has been our
      customer since 2007. Our sales to Shenzhen City Agricultural Products and
      Fenghu Specialty and Dried Products Town Rifenglong Company increased due
      to increasing market demand.





8)
            Jinjiang
      City Dongshun Seafood Products Trading Proprietor is a wholesaler of
      seafood products, has, to the best of our knowledge, a distribution
      network of about 2 retailers and a sales workforce of about 9 people. It
      has been our customer since 2003. Our sales to Jinjiang City Dongshun
      Seafood Products Trading Proprietor increased due to increasing market
      demand.





9)
            Qingdao
      Haizhan Seafood Co., Ltd. deals in dried and frozen seafood products and,
      to the best of our knowledge, has a distribution network of over 1,000
      retailers. It has been our customer since 1996. The company is
      wholly-owned by another of our major customer, Qingdao Xinqinghua Seafood
      Products Company, and its associates. Our sales to Qingdao Haizhan Seafood
      Co., Ltd. have increased from 2005 to 2006 as it expanded its sales
      network to include supermarkets, which have resulted in increased orders
      from them. We believe that we will be less reliant on Qingdao Haizhan
      Seafood Co., Ltd. and Qingdao Xinqinghua Seafood Products Company for our
      sales in future, as we enter new markets and increase market penetration
      of existing markets.





10)
            Shenjiamen
      Liyizhougan Seafood Products Trading Proprietor is a distributor of dried
      and frozen seafood products in Zhoushan City, Zhejiang Province, and has,
      to the best of our knowledge, a distribution network of about 273
      retailers and a sales workforce of about 45 people. It has been our
      customer since 2000. Our sales to Shenjiamen Liyizhougan Seafood Products
      Trading Proprietor increased due to the expansion of their distribution
      network in Zhoushan City, Zhejiang Province, which have resulted in
      increased orders from them.





11)
            Zhoushan
      City Maoyuan Foodstuff Import and Export Co., Ltd. is a distributor
      of dried and frozen seafood products in Zhoushan City, Zhejiang Province,
      and has, to the best of our knowledge, a distribution network of about 51
      retailers and a sales workforce of about 18 people. It has been our
      customer since 2003. Our sales to Zhoushan City Maoyuan Foodstuff Import
      and Export Co., Ltd. increased due to the expansion of their distribution
      network in Zhoushan City, Zhejiang Province, which have resulted in
      increased orders from them.





12)
            Zhouriyu
      Seafood Products Trading Proprietor is a distributor of dried and frozen
      seafood products in Wenzhou City, Zhejiang Province, and has, to the best
      of our knowledge, a distribution network of about 132 retailers and a
      sales workforce of about 57 people. It has been our customer since 1997.
      Our sales to Zhouriyu Seafood Products Trading Proprietor increased due to
      the expansion of their distribution network in Wenzhou City, Zhejiang
      Province, which have resulted in increased orders from
    them.





The
following table sets out our major customers accounting for 5.0% or more of the
company’s sales of algae-based beverage product for the year ended December 31,
2009.





AsaPercentageofSales(%)YearendedDecember31,2009Xiamen
      Dexiang Trading Proprietor Company Limited
                      
                      
                      28.1Wenzhou
      Ruixiang Wholesale of Foods Company Limited
                      
                      
                      27.0Guangdong
      Heyi Wholesale of Foods Trading Company Limited
                      
                      
                      25.8Hunan
      Huaihua Meida Wholesale of Foods Company
                      
                      
                      19.1TOTAL
                      
                      
                      100.0





Notes:





1)
            Xiamen
      Dexiang Trading Proprietor Company Limited is a wholesaler of foods, has,
      to the best of our knowledge, a distribution network of about 51 retailers
      and a sales workforce of about 88 people. It has been our customer since
      June, 2009.





2)
            Wenzhou
      Ruixiang Wholesale of Foods Company Limited is a wholesaler of foods, has,
      to the best of our knowledge, a distribution network of about 75 retailers
      and a sales workforce of about 126 people. It has been our customer since
      June, 2009.





3)
            Guangdong
      Heyi Wholesale of Foods Trading Company Limited is a wholesaler of foods,
      has, to the best of our knowledge, a distribution network of about 62
      retailers and a sales workforce of about 103 people. It has been our
      customer since June, 2009.




27




4)
            Hunan
      Huaihua Meida Wholesale of Foods Company is a wholesaler of foods, has, to
      the best of our knowledge, a distribution network of about 39 retailers
      and a sales workforce of about 52 people. It has been our customer since
      June, 2009.





None of
our directors, executive officers and controlling shareholders is related to or
has any interest in any of our major customers listed above. To the best of our
knowledge, save as disclosed above, none of our major customers is related to or
has any interest in one another, and none of our major customers is related to
or has any interest in the suppliers stated in the section “Major Suppliers”. We
are not dependent on any one of our major customers as we are able to sell our
fresh fish and seafood range, as well as our processed dried seafood products to
other customers.





INTELLECTUAL
PROPERTY





Except as
disclosed below, we are not dependent on nor do we own any registered trademark
or patent or any other intellectual property rights:





Trademarks





Our brand
name distinguishes our products from that of our competitors and increase
consumer awareness of our products. We have currently registered the following
trademarks:




Trademark
                  
                  Class
                  
                  Place of
                    Registration
                  
                  Status / Validity
                    Period(1)
                  
                  Class
      40 covering processed seafood, agricultural foods, processed teas,
      processed herbs, chemical testing and processing
                  
                  PRC
                  
                  Registered
      / January 28, 2003 to January 27, 2013Class 29covering meat, fish, poultry and
      game; meat extracts; preserved, dried and cooked fruits and vegetables;
      jellies, jams, compotes; eggs, milk
      and milk products; edible oils and fats
                  
                  PRC
                  
                  Registered
      under the name of Mingxiang on July 8, 2009 and awaiting approval
      confirmationClass 30covering coffee, tea, cocoa, sugar,
      rice, tapioca, sago, artificialcoffee; flour and preparations made from cereals,
      bread, pastry and confectionery, ices; honey, treacle; yeast,
      baking-powder; salt, mustard; vinegar, sauces (condiments); spices;
      ice
                  
                  PRC
                  
                  Registered
      under the name of Mingxiang on July 8, 2009 and awaiting approval
      confirmationClass
      32 covering beers; mineral and aerated waters and other non-alcoholic
      drinks; fruit drinks and fruit juices; syrups and other preparations for
      making beverages
                  
                  PRC
                  
                  Registered
      under the name of Mingxiang on July 8, 2009 and awaiting approval
      confirmationClass 32coveringbeers;
      mineral and aerated waters and other non-alcoholic drinks; fruit drinks
      and fruit juices; syrups and other preparations for making beverages
                  
                  PRC
                  
                  Registered
      under the name of Mingxiang on August 27, 2009 and awaiting approval
      confirmation





28





Note:





1)
            The
      above “Mingxiang” trademark was originally registered under the name of
      “Fujian Province Shishi City Huabao Mingxiang Foods Development Co.” on
      January 14, 1997. In a Confirmation of Approval to Trademark Transfer
      dated June 14, 2001, the PRC Trademark Bureau approved the transfer of
      this trademark to Mingxiang and the trademark is now registered in
      Mingxiang’s name under a Trademark Registration Certificate No.
      930539.





We intend
to further develop our “Mingxiang” brand image in the markets where we currently
operate, and to promote it in new markets. In that regard, we intend to apply
for registration of our trademark in the overseas markets where we conduct our
sales, as we consider appropriate.





Registered
Packaging Designs





We hold
registered packaging designs in respect of the packaging of the majority of our
processed seafood products. The details are as follows:





Description of Registered Packaging Designs
            
            Place of Registration
            
            Status/Validity of PeriodPackaging
      for Sakura squid
            
            PRC
            
            10
      years from March 28, 2003Packaging
      for roasted squid
            
            PRC
            
            10
      years from April 11, 2001,





As at
December 31, 2009, we are in the process of application for roasted prawn,
roasted file fish and barbecued squid for their respective registered packaging
designs.





Save as
disclosed above, our business or profitability is not materially dependent on
any other trademarks, copyrights, registered designs, patents, grant of licenses
from third parties, new manufacturing processes and intellectual property
rights.





GOVERNMENT
REGULATIONS





The
following is a description of the material licenses and permits issued to
companies in our Company in order for us to carry out our operations, other than
those pertaining to general business registration requirements:





Hygiene
Certificates





We view
hygiene control as a critical aspect of food production operations and place
great emphasis on the hygienic preparation of our processed seafood products to
ensure they are safe for consumption. We have received the following hygiene
certificates in relation to our operations:




Subsidiary
            
            Name of 
    Certificate
            
            Description of 
      License/Permit
            
            Issuing Authority
            
            Period of 
    ValidityMingxiang
            
            Hygiene
      License
            
            Permit
      to process seafood products
            
            Shishi
      City Hygiene Bureau
            
            May
      18, 2008 to May 17, 2012Rixiang
            
            Hygiene
      License
            
            Permit
      to process seafood and agricultural products, research and processing
      biochemical products.
            
            Shishi
      City Hygience Bureau
            
            May
      18, 2008 to May 17, 2012Rixiang
            
            Certificate
      of Hygiene Registration
            
            Registration
      of conformity with hygiene standards for the export of the following food
      products: frozen processed seafood products (excluding double-shelled
      categories and dried processed seafood products)
            
            National
      Accreditation Supervision Committee
            
            May
      31, 2009 to May 31, 2012




29




Other
Licenses and Permits





Our other
licenses and permits are as follows:





Subsidiary
            
            Name of 
    Certificate
            
            Description of 
      License/Permit
            
            Issuing Authority
            
            Period of 
    ValidityMingxiang
            
            National
      Industrial Product Manufacturing License
            
            Permit
      to process seafood (dried)
            
            Fujian
      Province Quality Technology Supervisory Bureau
            
            November
      10, 2009 to November 10, 2011Rixiang
            
            National
      Industrial Product Manufacturing License
            
            Permit
      to process seafood (dried)
            
            Fujian
      Province Quality Technology Supervisory Bureau
            
            April
      16, 2007 to April 15, 2010Rixiang
            
            Customs
      Registration Certificate
            
            Permit
      to file import-export documents with China Customs
            
            China
      Customs
            
            June
      20, 2009 to June 19, 2012Mingxiang
            
            Certificate
      of Approval for Enterprises with Foreign Trade Rights in the People’s
      Republic of China
            
            To
      import-export company’s products and technologies, raw materials,
      facilities, equipment
            
            Fujian
      Foreign Trade Economic Cooperation Department
            
            Valid
      from September 4, 2000; no expiration dateRixiang
            
            EU
      Export Registration
            
            Approval
      for Rixiang to export marine products to EU
            
            European
      Commission
            
            Valid
      from October 6, 2006; no expiration
date





Save as
disclosed above, as at the date of this Form 10-K, our business or profitability
is not materially dependent on any other licenses and permits.





RESEARCH
AND DEVELOPMENT





We
believe that constant innovation in developing new processes and products that
are well-received by consumers is vital to our continued success. As of December
31, 2009, our research and development team comprised 11 personnel. The focus of
our research and development is directed towards satisfying the preferences of
consumers, with the following objectives:





1.
            To
      improve our products in the areas of safety and quality (of taste,
      texture, hygiene and packaging);





2.
            To
      develop new products;





3.
            To
      achieve full customer satisfaction;





4.
            To
      reduce costs and create value; and





5.
            To
      develop products for low-value fish types and to increase the value of
      processing by-products.





Our main
research and development activities include: (1) experimenting with various
small fish species for the production of fish mash, (2) improving the taste and
texture of our dried processed seafood products, (3) finding new uses for
leftovers such as fish heads, prawn heads and shells which would otherwise be
disposed, (4) developing natural high energy beverage using advanced
bio-engineering technology, and (5) developing new products, including marine
health products. Our research and development efforts enable us to develop
efficient production processes which lower the cost of production, yet produce
superior-quality products.





Some of
the highlights of our research and development activities are set out
below.




Product
Development





Through
our research and development activities, we have developed products which have
been well-received by consumers and improved our production processes. We have
through our research and development introduced 25 new processed seafood
products, including smoked eel, Sakura squid, sliced squid, spicy sliced
octopus, spicy baby squid, spicy sliced squid and spicy squid head. We believe
that our constant product innovation has led to our increasing reputation as a
producer of processed natural seafood products.





30




Collaboration
with Ocean University of China





On April
28, 2006, our subsidiary Rixiang entered into a memorandum of understanding for
collaboration with the Ocean University of China’s Food Sciences and Engineering
Institute. The Ocean University of China is one of the renowned institutions in
the PRC for ocean studies. The collaboration with Ocean University of China will
allow us to tap into its technical know-how, to acquire new technical knowledge
and processing techniques. In turn, we serve as a research base of the research
and development work of Ocean University of China. We believe that we will
benefit from the exchange of information and technological
know-how.





The
collaboration with Ocean University of China since April 2006 have been focused
on developing new products and by-products from raw marine catch used in the
processing of seafood products, in particular (1) the development of bioactive
peptide products from leftovers of aquatic processed products; and (2) the
development of collagen protein and collagen peptide protein products from fish
skin:





1.
            Development of bioactive
      peptide products from leftovers of processed seafood
      products





Bioactive
peptide protein found in aquatic products is used to produce angiogenesis
converting enzyme (ACE) inhibitors. ACE is a compound which increases the
pressure within blood vessels, thereby causing high blood pressure. An ACE
inhibitor helps slow the activity of the ACE. Using Bioactive peptide protein
developed ACE inhibitors avoids the harmful side effects associated with using
synthetic medicine for lowering hypertension.





2.
            Development of collagen
      protein and collagen peptide protein products from fish
      skin





This
technique involves the extraction of collagen protein from fish skin. The
collagen protein is then converted into marine biological collagen peptide
protein using a directional enzyme hydrolysis technology and velum separation
technology. Fish-skin collagen protein is mainly used as an ingredient for
cosmetic products and health food products. We note that some cosmetics
manufacturers have begun to use marine biological collagen peptide protein and
collagen protein in their products.




The Ocean
University of China would provide technical and training support in the
development of production techniques and commercialization of the above said
products. The research and development activities are conducted at our
production facilities at Dabao Industrial Zone, Xiangzhi Town, Shishi City,
Fujian Province.





Hi-Power
was developed by the Yellow Sea Fisheries Research Institute Chinese Academy of
Fishery Sciences in coordination with the founder, Qiu Shang Jing, who has been
engaged in the natural algae industry for over 10 years time and he has a
profound expertise on algae products.





Our
research and development expenses amounted to approximately $237,000, $87,000
and $33,000 for 2009, 2008 and 2007, respectively. Research and development
expenses are presented as part of general and administrative expenses in the
financial statements.





QUALITY
ASSURANCE





We
believe that the quality of our products is the key to our continued growth and
success. We place great emphasis on quality assurance and the consistent quality
of our products at all stages of our production processes. We attribute our
success to date to our commitment to and production of quality products. As
such, we believe that good quality control has been a key competitive strength
of our Company. Our aim is that our “Mingxiang” brand should continue to be
identified with tasty and high-quality processed marine seafood
products.





As a
testimony to our commitment to quality products and processes, we have been
awarded the following awards and certifications:





Subsidiary
                    
                    Award/Certification
                    
                    Awarding/Certification Body
                    
                    Validity PeriodRixiang
                    
                    Validation
      of conformity with HACCP standards(1)
      for the export of marine products to the US
                    
                    CIQ
                    
                    March
      25, 2009 to March 24, 2010Rixiang
                    
                    EU(2)
      export registration for export of our marine products to the
      EU
                    
                    European
      Commission
                    
                    No
      validity periodMingxiang
                    
                    ISO9001:2008(3)
      quality management system certification
                    
                    CNAB
      & CCIC Quality Certification Centre
                    
                    December
      9, 2009 to December 8, 2012Mingxiang
                    
                    ISO14001:2004(4) 
      environmental management system certification in respect of the processing
      of fish and prawn-type marine food products and the relevant environmental
      management
                    
                    CNAB
      & CCIC Conformity Assessment Services Co, Ltd.
                    
                    November
      27, 2008 to November 26,
2011





31




Notes:





1)
            Under
      the PRC’s Regulations on Administration of Certification of Hazard
      Analysis and Critical Control Point System (HACCP), applicants for the
      HACCP certification have to apply to CNAB-recognized certification and
      accreditation entities and comply with domestic and international sanitary
      criteria set out in various legislation including the PRC Sanitary
      Requirements for Export Food Manufacturing Enterprises and the HACCP
      System and Guidelines for its Application by the Codex Alimentarius
      Commission. CIQ, a HACCP-certification authority, will verify an
      exporter’s HACCP certification if (a) the product to be exported falls
      within one of the following categories, namely (1) canned food, (2) marine
      food products (excluding live, fresh, dry and marinated products), (3)
      meat and meat products, (4) frozen vegetables, (5) fruit or vegetable
      juice, (6) instant frozen food containing meat or marine food products; or
      (b) where such verification is required by authorities in the destination
      country. We believe that the HACCP certification enables our products to
      be more widely accepted by our domestic and international customers and
      aid to increase the export of our
products.





2)
            The
      EU certification process ensures that the product conforms to the
      appropriate provisions and relevant legislation which implements certain
      European Directives.  In the case of marine food products, the
      applicable European Directives include 91/493/EEC and
      94/356/EC.





3)
            ISO9001:2008
      is an international standard for quality management developed by the
      International Organization for Standardization.  It sets requirements
      as to how an organization should manage its processes that influence
      product quality, and evaluates an organization’s resource management,
      process management and evaluation process that ensure its products conform
      to customer and applicable regulatory
  requirements.





4)
            ISO14001:2004
      is an internationally recognized standard for environment management
      systems, including energy management, waste management and process
      improvement.





Please
refer to the section “Awards and Certifications” for further details of awards
and certifications which we have obtained in respect of our products. To attain
and maintain these accreditations, we have set up a quality control program in
accordance with ISO9001:2008 standards. We have a comprehensive document
management system in respect of our quality control system manuals, program
documents, records and related documentation, which encompasses issuance,
amendment, filing, recovery and destruction of the documents. Our quality
control measures are designed to ensure we meet the standards under Sanitation
Standard Operating Procedures (“SSOP”), Good Manufacturing Practice (“GMP”) and
HACCP quality assurance systems, production control and product quality
specifications. SSOP is an action plan that details procedures to maintain
sanitary conditions throughout a food processing facility. This includes
procedures on food handling and sanitation practices such as proper thawing
methods, prevention of contamination and certain aspects of employee and
environmental hygiene. GMP includes regulations promulgated by the U.S. Food and
Drug Administration under the authority of the Federal Food, Drug and Cosmetic
Act, which requires manufacturers, processors and packagers of drugs, medical
devices and food to take proactive steps to ensure that their products are safe,
pure and effective.





Our
quality control program requires our employees to undergo training conducted
internally in relation to our quality control policies, targets and procedures,
as well as production and processing techniques and operational
procedures.





We have
established the following quality control procedures to ensure the high standard
of quality of our processed seafood products:





In-coming





All
incoming raw materials are inspected and approved by our quality control
department. The quality control checks include hygiene, freshness and safety
checks and dimensional checks (for packaging materials) to ensure that the raw
materials conform to our health, freshness and safety standards and required
specifications. Inspection is carried out by way of random sampling. Samples are
extracted from each batch of raw materials and sent to the quality control
department, where physical and chemical tests are conducted in our
laboratory.





32




Raw
materials that pass the quality control checks are then sent for storage in the
cold storage facilities until they are required in the production
process.





In-process





At each
stage in the production process, we have quality inspectors who are responsible
for sieving out inferior products, and to do random selection of products for
testing in our laboratory. In our laboratory, these samples are tested for
micro-organisms and to ensure that they fulfill hygiene and safety standards.
Our machinery and equipment are also inspected regularly to ensure that they are
in good working condition.





Finished
products





The
finished products undergo a final round of inspection before they are sent to
the warehouse for storage to await delivery to our customers. Random samples are
selected and brought to our laboratory for testing to ensure that they fulfill
hygiene, safety and product standards. In respect of product standards, for
example, we test our dried processed products to ensure that there is adequate
but not excessive water content. Our finished products also go through a
specially calibrated metal detector to ensure that products are not contaminated
by metal particles from the production equipment.





After-sales





Our
quality control department is also responsible for after-sales service, to
address customers’ feedback or complaints.





Quality Assurance Testing
Base





In
January 2001, we were designated as a quality assurance testing base by the
National Marine Foods Quality Supervision Testing Centre. The National Marine
Foods Quality Supervision Testing Centre was established in 1986 and is based in
Qingdao City, Shandong Province. This testing body is responsible for quality
testing of the state’s designated products, research and development and grading
of marine products, including fresh, frozen, dried and pickled marine processed
products. As a designated testing base, we test the hygiene and quality of
ingredients and products according to industrial standards. Our testing base
caters to seafood processing companies from Fujian, Guangdong, Guangxi and
Zhejiang provinces, all in the PRC. We believe that we benefit in the provision
of such services, as we are kept informed of industry news and technological
developments. Currently we do not charge a fee for such services.




ENVIRONMENTAL
LAW COMPLIANCE





On
December 15, 2005, we received a Certificate of Environment Management System,
certifying that we have been assessed and are in compliance with the environment
management standard ISO14001: 2004. The scope of certification is for the
production and the relative environmental management activity of fish, shrimp
and other marine food. The registration number of the certificate is
00108E20847ROM/3502. The certificate is renewed in 2008 which is valid until
November 26, 2011.





When our
production plant was constructed, it was designed to comply with these
environmental laws by directly disposing of the use water to a nearby sewage
treatment plant for further handling. Because our production plant was built to
comply with these environmental laws, we are not required to pay for any ongoing
fees to the sewage treatment plant, nor has there been any material effects on
our capital expenditures, earnings and competitive position.





Since
China does not have additional environmental regulations dealing with climate
change that apply to our operations, we have not planned material capital
expenditures for environmental control facilities or changes in our business
practices specific to climate change.





EMPLOYEES





We set
out below the total number of our employees and the various functions which they
serve with respect to our processed seafood and marine catch products as at
December 31, 2009, 2008 and 2007, respectively.





As at December 31,Functions
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007Sales
      and Marketing
                    
                    
                    24
                    (2)
                    
                    
                    23
                    (2)
                    
                    
                    19Finance
      and Administration
                    
                    
                    37
                    (2)
                    
                    
                    35
                    (2)
                    
                    
                    20Fishing
      and Procurement (1)
                    
                    
                    4
                    
                    
                    
                    4
                    
                    
                    
                    102Production,
      Research & Development and Quality Control
                    
                    
                    704
                    (2)
                    
                    
                    549
                    (2)
                    
                    
                    493TOTAL
                    
                    
                    769
                    
                    
                    
                    611
                    
                    
                    
                    634





33




Note:





1)
            These
      figures include those fishermen who operated the fishing vessels that we
      chartered for our marine catch business in 2007, who were paid by our
      Company. Starting from 2008, we no longer charter any fishing vessels but
      simply source those raw materials from suppliers per customers’
      requests.





2)
            The
      increase in number of employees was in line with the expansion on our
      production capacities and marketing efforts during the
    years.





Almost
all of our employees are based in the PRC. Our PRC permanent employees are
unionized. We have not experienced any strikes, labor disputes or work stoppages
by our employees and believe our relationship with our employees is
good.





As of
December 31, 2009, we had 769 employees.





We set
out below the total number of employees and the various functions which they
serve with respect to the algae-based beverage product as at December 31,
2009.





Functions
                  
                  AsatDecember31,2009Sales
      and Marketing
                  
                  12Finance
      and Administration
                  
                  7Procurement
                  
                  1Production,
      Research & Development and Quality Control
                  
                  1TOTAL
                  
                  21





As of
December 31, 2009, Xianghe had 21 employees.





Staff
Training





We view
our human resource as one of our key assets and place great emphasis on staff
training that not only imparts job skills but also inculcates desirable working
attitudes.





Therefore,
our employees at all levels are required to undergo training relevant for their
positions. The training includes technical training which is conducted by both
internal and external trainers. Training aspects include quality control, export
trading procedures, permits, quality standards and compliance with quality
standards, as well as management training.




In
addition, a new employee undergoes orientation on hygiene requirements,
compliance with company policies and procedures as well as the required
technical skills before taking up his appointment.




Website Access to our SEC
Reports




You may
obtain a copy of the following reports, free of charge through the SEC’s website
at www.sec.gov as soon as reasonably practicable after electronically filing
them with, or furnishing them to, the SEC: our previous Annual Reports on Form
10-K; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K; and
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our Internet
website and the information contained therein or connected thereto are not
intended to be incorporated into this Annual Report on
Form 10-K.





The
public may also read and copy any materials filed with the SEC at the SEC's
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The Public
Reference Room may be contact at (800) SEC-0330. You may also access our other
reports via that link to the SEC website.





34




ITEM
1A.         Risk Factors





RISKS
RELATED TO OUR BUSINESS




We
are dependent on the supply of fresh seafood in our production of processed
seafood products and disruptions in the supply of fresh seafood could adversely
affect our business operations.




We use
fresh seafood as the primary ingredient in our processed seafood products. Our
processed seafood products accounted for approximately 74.8%, 90.9%
and 76.5% of our sales in the fiscal years ended December 31, 2009, 2008
and 2007, respectively. Our production of processed seafood products is largely
dependent on the continuous supply of fresh seafood, which in turn could be
affected by a large number of factors, including environmental factors, the
availability of seafood stock, weather conditions, the policies and regulations
of the governments of the relevant territories where such fishing is carried
out, the ability of the fishing companies and fishermen that supply us to
continue their operations and pressure from environmental or animal rights
groups.




Specifically,
fishing activities in waters around the PRC are restricted in certain months to
ensure sustainable aquatic resources. In particular, the PRC Ministry of
Agriculture imposes restrictions against fishing in the South China Sea in the
months of June and July. There is no assurance that the PRC government may not
impose more stringent fishing regulations, including but not limited to longer
or more frequent periods that restrict fishing. Such restrictions against
fishing or unfavorable weather conditions have a direct impact on the
availability of the raw materials required for the production of our processed
seafood products, and could lead to a shortage and/or an increase in the prices
of our raw materials. Any shortage in the supply of or increase in the prices of
the raw materials for our processed seafood products will adversely affect our
business, profitability and financial condition.




Our
profitability will be affected by fluctuations in the prices of our major raw
materials.




Our
financial performance may be affected by changes in production costs
brought about by fluctuations in the prices of our raw materials. Our major raw
materials are fresh seafood which accounted for approximately 74.4%, 77.9%
and 74.3% of our total cost of sales of processed seafood products in the
fiscal years ended December, 2009, 2008 and 2007, respectively. The prices of
our major raw materials may fluctuate due to changes in supply and demand
conditions. Any shortage in supply or upsurge in demand of our major raw
materials may lead to an increase in prices, which may adversely affect our
profitability due to increased production costs and lower profit
margins.




We
are dependent on five major customers. In the event any one of these major
customers ceases to purchase or reduce their purchases from us, and we are
unable to secure new contracts, our sales will be adversely
affected.




Our top
five major customers accounted for approximately 43.2%, 44.9% and 45.8% of our
sales in the fiscal years ended December 31, 2009, 2008 and 2007, respectively.
In the event this customer does not continue to purchase from us or reduce its
purchases from us or develop its own ability to manufacture the products that we
sell to it, and we are unable to secure new contracts or new customers that can
replace the loss of this one customer within a short time frame, our business
and profitability may be adversely affected. Please see the section “Major
Customers” for more details.




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




For the
production of our processed seafood products, we rely on our major suppliers for
a significant portion of the supply of fresh seafood. Purchases from our top
five suppliers of raw materials accounted for 90.3%, 90.8% and 89.9% of our
total purchases of raw materials in the fiscal years ended December 31, 2009,
2008 and 2007, respectively. In the event that we are unable to secure our raw
materials from these suppliers and we are unable to find alternative sources of
supply at similar or more competitive rates, our business and operations will be
adversely affected. Please see the section “Major Suppliers” for more
details.




A
significant portion of our business activities may be transacted in cash and our
internal controls in relation to cash management may not be able to address all
the risks associated with the handling of cash and cash
transactions.




Due to
the nature of our business, our procurement of raw materials is fully transacted
on a cash basis and a significant portion of our sales are transacted in cash.
Our cash payment for the procurement of raw materials accounted for the whole of
our total cost of sales for each of the fiscal years ended December 31, 2006 and
2005. Starting from 2007, we have requested our major suppliers to open bank
accounts and thus we could settle the purchases through bank
instructions. Sales transacted in cash accounted for 2.0%, 2.0% and 1.6% of
our total sales for the fiscal years ended December 31, 2009, 2008 and 2007
respectively.




35




The
internal controls in relation to cash management that we have put in place may
not be able to address all the risks associated with the handling of cash and
cash transactions. We may therefore be exposed to risks such as loss, theft,
misappropriation and forgery of the cash used in our transactions. In the event
such risks materialize, our financial position, business and results of
operations may be materially and adversely affected.




Our
profitability and continued growth is dependent on our ability to yield
commercially viable products, to enhance our product range and expand our
customer base.




The
seafood processing industry is highly competitive. The growth potential of the
seafood processing industry is dependant on population growth and consumer
preferences. therefore believe that our profitability and continued growth is
dependant on our ability to expand our customer base in existing and new markets
by introducing new products that are fast growing and profitable in the
populations that we serve, as well as our ability to develop commercially viable
products through our product development efforts. If we do not succeed in these
efforts, the growth of our sales may slow down and adversely affect our
profitability. Please refer to the section “Research and Development” for
further details of our research and development efforts.




Since
we do not have long-term contracts with our suppliers and customers there is no
guarantee that our suppliers will continue to supply us with raw materials, or
that our customers will continue to purchase our products.




We do not
have long-term contracts with our suppliers and our customers. Accordingly,
there can be no assurance that we will continue to be able to obtain sufficient
quantities of raw materials in a timely manner from our existing suppliers on
acceptable terms, or that our existing customers will continue to purchase our
products on terms that are acceptable to us or at all. In the event that we are
unable to source for new suppliers or new customers on terms that are acceptable
to us, our business and operations will be adversely affected.




We may be exposed to potential risks
relating to our internal controls over financial reporting and our ability to
have those controls attested to by our independent auditors.




As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the SEC
adopted rules requiring public companies to include a report of management on
the company’s internal controls over financial reporting in their annual
reports, including Form 10-K. We have established disclosure controls and
procedures effective for the purposes set forth in the definition thereof in
Exchange Act Rule 13a-15(e) as of December 31, 2009. Commencing by the
fiscal year ended December 31, 2010, the independent registered public
accounting firm auditing a company’s financial statements must also attest to
and report on management’s assessment of the effectiveness of the company’s
internal controls over financial reporting as well as the operating
effectiveness of the company’s internal controls.  However, there can be no
assurance that we will receive a positive attestation from our independent
auditors. In the event we are unable to receive a positive attestation from our
independent auditors with respect to our internal controls, investors and others
may lose confidence in the reliability of our financial statements. Also
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree or compliance with the policies or procedures may
deteriorate.




There
is no assurance that we will be able to execute our future plans successfully,
or that our future plans will result in commercial success.




We intend
to, inter alia and
expand our operations and production capacity in the PRC by constructing new
cold storage facilities. While the new production facilities were completed in
2009, there can be no assurance that the construction of, the new cold storage
facilities will be completed by the end of 2010 as expected. Our expansion plans
involve a number of risks, including inter alia the costs of
investment in fixed assets, costs of working capital tied up in inventories, as
well as other working capital requirements. Our expansion will also depend on
our ability to secure new customers and/or sufficient orders. Failure to secure
new customers or sufficient orders or to meet our customers’ orders would
materially and adversely affect our business and financial performance. There is
no assurance that our future plans will result in commercial success. If we are
unable to execute our expansion plans successfully, our business and financial
performance would be materially and adversely affected.




36




Changes
in consumer preferences or discretionary consumer spending could adversely
impact our results.




Our
continued growth and success depends in part on the popularity of our products.
Sales of our processed seafood products and marine catch as a percentage of our
total sales for the period under review were as follows:




Year ended December 31,Products
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007(%)
                  
                  
                  (%)
                  
                  
                  (%)Processed
      seafood products
                  
                  
                  74.8
                  
                  
                  
                  90.9
                  
                  
                  
                  76.5Marine
      catch
                  
                  
                  25.2
                  
                  
                  
                  9.1
                  
                  
                  
                  23.5




Shifts in
consumer preferences or eating habits away from processed seafood products will
materially affect our business. In addition, our continued success depends, in
general, on the economic conditions, disposable income and consumer confidence
in the countries in which we sell our products, all of which can affect
discretionary consumer spending in such countries. Adverse changes in these
factors would reduce the flow of customers and limit our pricing which will
reduce our profitability.




Our
business activities are subject to certain laws and regulations and our
operations may be affected if we should fail to have in force the requisite
licenses and permits.




We are
required to obtain various licenses and permits in order to conduct our business
of production and export of processed seafood products. These include the
Hygiene Registration Certificate, which is a requirement in order to carry on
the production of food products in the PRC, as well as the HACCP certificate and
EU export registration, which is a requirement in order to export our processed
seafood products to certain countries. Our business is also subject to
applicable laws and regulations. Please see the section “Government Regulations”
of this Form 10-K for a summary of the material laws and regulations that apply
to our Company.




Any
failure to comply with the conditions stipulated in our licenses and permits may
lead to their revocation or non-renewal. Any failure to observe the applicable
laws and regulations may lead to the termination or suspension of some or all of
our business activities or penalties being imposed on us. The occurrence of any
of these events may adversely affect our business, financial condition and
results of operations.




Our
processed seafood products may be illegally tampered with such that they are
rendered unfit for consumption and have to be recalled and
destroyed.




Our
processed seafood products are packed in plastic materials that can be
illegally tampered with. Illegal tampering of our processed seafood products
could result in such products being rendered unfit for consumption or cause them
to fail to meet customer specifications, health and/or safe handling
requirements. This may lead to a loss of customer confidence in our products;
affect our reputation, cause product recalls and/or product destruction. In
addition, we may incur substantial litigation costs and may be ordered to
compensate consumers in the event of any illness or death caused by the
consumption of an illegally tampered seafood product.




In the
event that our processed seafood products are recalled or destroyed as a result
of illegal tampering or a claim is made against us arising from the consumption
of our products, our reputation, business goodwill and sales will be adversely
affected.




Product
or raw material deterioration will lead to loss of sales, higher costs, negative
publicity, and payment of compensation to our customers and/or product liability
claims.




Our raw
materials and frozen processed seafood products, being perishable in nature, may
deteriorate due to various reasons such as malfunctioning cold storage
facilities, delivery delays or poor handling. This may lead to a delay in
production or delivery of our products, a loss in revenue, costs incurred in the
purchase of replacement raw materials and payment of compensation to our
customers. Any deterioration in our raw materials or processed seafood products
could have a material adverse effect on our business, operations and
reputation.




37




Currently,
we do not have any product liability insurance in respect of our products. We
believe that premiums for product liability insurances are high compared to the
risk of claims. In the event that the consumption of our processed seafood
products causes harm, illness or death to a consumer of our products, whether as
a result of product deterioration, spoiling, sabotage, willful action, omission
or negligence, we may be liable to complaints, lawsuits and claims from
consumers of our products which in turn could generate negative publicity and
materially and adversely affect our business, financial condition and our
operations.




Outbreak
of disease or widespread contamination in any of the raw materials that we use
in our production or any food scares may lead to a loss in consumer confidence
and reduce the demand for our processed seafood products.




One of
our competitive strengths is our established brand name and track record. We
have received several awards and certificates for our high quality products,
including the “Green Food” award. Any outbreak of disease or widespread
contamination in any of the raw materials that we use in the production of our
products or food scares in the markets in which our processed seafood products
are manufactured or sold may have an adverse impact on our business as it may
lead to a loss in consumer confidence and reduce the demand of our processed
seafood products. It may also affect our sources of supply and we may have to
look for alternative sources of supply which may be more costly, or which may
not be available. If this develops into actual events, our operations and
profitability will be adversely affected.




Any
failure to meet health and hygiene standards may result in the suspension of
licenses, accreditations or the loss of our ability to import and export our
products.




We are
subject to annual checks carried out by the General Administration of Quality
Supervision, Inspection and Quarantine of the PRC (CIQ). The CIQ’s annual check
encompasses the inspection of food preparation, production and processing
operations, as well as health checks on our employees. Failure to meet the
required standards may result in our being required to take remedial measures to
meet the health and hygiene standards, or in extreme cases, the cancellation or
suspension of the license(s) and accreditation(s) required for us to carry on
our operations. In the event that this should occur, our operations and
financial condition will be materially and adversely affected and could lead to
a loss in customer confidence in our products.




In
addition, the CIQ makes random inspections on the processed seafood products
that we export. Failure to meet the required standards of hygiene may affect our
ability to export our processed seafood products and meet our customers’ orders
on time. It may also lead to a restriction on our ability to export our
processed seafood products which will materially and adversely affect our
business, financial condition and operations.




We bear the risk of loss in shipment
of our products and have no insurance to cover such loss.




Under the
shipping terms of our standard customer contracts, we bear the risk of loss in
shipment of our products and do not insure this risk. Since management considers
the risk of loss to be minimal, with export sales representing less than 5% of
our total sales for the year ended December 31, 2009 and 2008, respectively.
Moreover, we believe that the shipping companies that we use carry adequate
insurance or are sufficiently solvent to cover any loss in shipment.
Nevertheless, there can be no assurance that we will be adequately reimbursed
upon the loss of a significant shipment of our products.




We
are dependent on our Executive Directors and Executive Officers. Any loss in
their services without suitable replacement may adversely affect our
operations.




Our
success to date has been largely due to the contribution of Pengfei Liu, our
Executive Chairman and CEO. Mr. Liu is the founder of our Company, and has
spearheaded our expansion and growth. He is responsible for our operations,
marketing, public relations, strategic planning and development of new products
and markets. Our continued success is dependent, to a large extent, on our
ability to retain his services.




The
continued success of our business is also dependent on our key management and
operational personnel. We rely on their experience in the processed seafood and
marine catch industry, product development, sales and marketing and on their
relationships with our customers and suppliers.




The loss
of the services of any of our executive directors or executive officers without
suitable replacement or the inability to attract and retain qualified personnel
will adversely affect our operations and hence, our revenue and
profits.




38




We
are dependent on our customers’ ability to maintain and expand their sales and
distribution channels. Should these distributors be unsuccessful in maintaining
and expanding their distribution channels, our results of operations will be
adversely affected.




Demand
for our products from end-consumers and our prospects depend on the retail
growth and penetration rate of our products to end-consumers. Sales of our
products are conducted mainly through distributors, over whom we have limited
control. As of December 31, 2009, our distribution network is comprised of 19
distributors located in seven provinces. These distributors sub-distribute our
dried processed seafood products to over 2,200 retail points, including major
supermarkets. We are thus dependent on the sales and distribution channels of
our distributors for broadening the geographic reach of our products. Should
these distributors be unable to maintain and expand their distribution channels,
our results of operations and financial position will be adversely
affected.




Failure
to compete effectively in a competitive environment may affect our
profitability.




We
operate in the highly competitive processed seafood industry. We believe that
our major competitors include international and domestic seafood processors.
Some of these competitors may have significantly greater financial, technical
and marketing resources, stronger brand name recognition and larger existing
customer base than we do.




We also
believe that these competitors may have the ability to respond more quickly to
new or emerging technologies or may adapt more quickly to changes in
customer requirements or may devote greater resources to the development,
promotion and sales of their products than us.




There is
no assurance that we will be able to continue competing successfully against
present and future competitors. We believe that important factors to achieving
success in our industry include maintaining customer loyalty by cultivating
long-term customer relationships, achieving consistent product renewal and
maintaining the quality of our products. If we are unable to attain these, we
may lose our customers to our competitors and this will adversely affect our
market share. Increased competition may also force us to lower our prices, thus
reducing our profit margins and affecting our financial performance and
condition. Such competition may have a material adverse effect on our business,
financial position and results of operations. Please refer to the section
captioned “Description of Business - Competition” for further details as to our
present competitors.




Any
outbreak of earthquake, tsunami, adverse weather or oceanic conditions or other
calamities may result in disruption in our operations and could adversely affect
our sales.




We are
based in Fujian Province which is situated in southeast China on the coast of
the East China Sea. Fujian is a vital navigation hub between the East China Sea
and South China Sea, and is also rich in agricultural and marine resources. Our
main raw materials for our marine catch business come from the Taiwan Straight,
which is also the place where we conduct our marine catch
operations.




In 2004,
an undersea earthquake occurred off the west coast of Sumatra Indonesia. This
earthquake triggered a series of devastating tsunamis along the costs of most
landmasses boarding the Indian Ocean. More than 225,000 people in 11 countries
were killed, and coastal communities were inundated with waves up to 100
feet.




In May
2008, there was an 8.0 magnitude scale earthquake occurred at Sichuan Province
of China. It was also known the Wenchuan earthquake, which by any name killed at
least 69,000 people, and over 374,000 injured, with 18,000 listed as missing.
The earthquake left about 4.8 million people homeless, thought the number could
be as high as 11 million. It was the deadliest earthquake to hit China since the
1976 Tangshan earthquake.




Due to
the location of our business, we may be at risk of experiencing another tsunami,
earthquake or other adverse weather or oceanic conditions. This may result in
the breakdown of our facilities, such as our cold storage facilities, which will
in turn lead to deterioration of our products with the potential for spoilage.
This could adversely affect our ability to fulfill our sales orders and
adversely affect our profitability.




Adverse
weather conditions affecting the fishing grounds where the fishing vessels
chartered by us operate such as storms, cyclones and typhoons or cataclysmic
events such as tsunamis may also decrease the volume of our fish catches or may
even hamper our fishing operations. Our operations may also be adversely
affected by major climatic disruptions such as El Nino which in the past has
caused significant decreases in seafood catches worldwide.




39




We
are in the business of processing, distributing and selling processed seafood
products and marine catch. Thus, a dramatic reduction in fish resources may
adversely affect our business.




We are in
the business of processing, distributing, and selling processed seafood
products, as well as selling marine catch. As such, 100% of our raw materials
are obtained through fishing. Due to over-fishing, the stocks of certain species
of fish may be dwindling and to counteract such over-fishing, governments may
take action that may be detrimental to our ability to conduct our operations. If
the solution proffered or imposed by the governments controlling the fishing
grounds either restrict our ability to procure seafood supply or if such action
limits the types, quantities and species of fish that we are able to
procure or catch, our operations and prospects may be adversely
affected.




We
may not be able to respond successfully to changes in the highly competitive
beverage marketplace domestically and internationally.




We
operate in the highly competitive beverage industry and face strong competition
from other general and specialty beverage companies. Our response to continued
and increased competitor and customer consolidations and marketplace competition
may result in lower than expected net pricing of our products. Our ability to
gain or maintain share of sales or gross margins may be limited by the actions
of our competitors, who may have advantages in setting their prices because of
lower costs. Competitive pressures in the markets in which we operate may cause
channel and product mix to shift away from more profitable channels and
packages.




The
beverage industry is highly competitive. The principal areas of competition are
pricing, packaging, development of new products and flavors and marketing
campaigns. Our products will compete with a wide range of drinks produced by a
relatively large number of manufacturers, any of which have substantially
greater financial, marketing and distribution resources than we do.




Important
factors affecting our ability to compete successfully include taste and flavor
of products, trade and consumer promotions, rapid and effective development of
new, unique cutting edge products, attractive and different packaging, branded
product advertising and pricing. We will also compete for distributors who will
concentrate on marketing our products over those of our competitors, provide
stable and reliable distribution and secure adequate shelf space in retail
outlets. Competitive pressures in the healthy beverage market could cause our
products to be unable to gain market share, or we could experience price
erosion, which could have a material adverse effect on our business and
results.




We
compete with major international beverage companies that operate in multiple
geographic areas, as well as numerous firms that are primarily local in
operation. Our ability to gain or maintain share of sales or gross margins in
the Chinese markets and ability to grow the business in global market may be
limited as a result of actions by competitors.




We
compete not only for customer acceptance but for maximum marketing efforts by
multi-brand licensed bottlers, brokers and distributors, many of which have a
principal affiliation with competing companies and brands. Certain large
companies such as The Coca-Cola Company and Pepsico Inc. market and/or
distribute products in that market segment.




Our
beverage business are heavily regulated by China State Food and Drug
Administration (“SFDA”)  and other government agencies for the production
and packaging of beverage products, and failure to comply these regulation may
adversely affected our beverage business.




The
production, distribution and sale in China of our beverage products are the
production, distribution and sale in the Chinese market of our products are
subject to the PRC State Food, Drug, and Cosmetic Act, state consumer protection
laws, the Occupational Safety and Health Act, various environmental statutes;
and various other state and local statutes and regulations applicable to the
production, transportation, sale, safety, packaging, advertising, labeling and
ingredients of such products. Although we expect that we will comply with all
relevant regulations and rules in our production and distribution of beverage
products, there is risk that those regulations may be violated and capital
expenditures, net income or competitive position as a result of the violation
may be adversely affected.




40




Water
scarcity and poor quality could negatively impact our beverage production costs
and capacity.




Water is
the main ingredient in substantially all of our beverage products. It is also a
limited resource in many parts of the world, facing unprecedented challenges
from overexploitation, increasing pollution and poor management. As demand for
water continues to increase in China and as the quality of available water
deteriorates, our system may incur increasing production costs or face capacity
constraints which could adversely affect our profitability or net operating
revenues in the long run.




Changes
in the nonalcoholic beverages business environment could impact our financial
results.




The
nonalcoholic beverages business environment is rapidly evolving as a result of,
among other things, changes in consumer preferences, changes in consumer
lifestyles, increased consumer information and competitive product and pricing
pressures. If we are unable to successfully adapt to this rapidly changing
environment, our net income, share of sales and volume growth could be
negatively affected.




Adverse
weather conditions could reduce the demand for our beverage
products.




The sales
of our beverage products are influenced to some extent by weather conditions in
the markets in which we operate. Unusually cold weather during the summer months
may have a temporary effect on the demand for our beverage products and
contribute to lower sales, which could have an adverse effect on our results of
operations for those periods.




We
are exposed to the credit risk of our customers which may cause us to make
larger allowances for doubtful trade receivables or incur bad debt
write-offs.




Our
customers may default on their payments to us. Although we review the credit
risk of our customers regularly, such risks will nevertheless arise from events
or circumstances that are difficult to anticipate or control, such as an
economic downturn.




Our trade
receivables turnover days were approximately 64, 34 and 27 days in 2009, 2008
and 2007, respectively. Our allowances for doubtful trade receivables as at
December 31, 2009, 2008 and 2007 were approximately $95,000, $24,000 and
$21,000, respectively; and at about 0.5% of our gross trade
receivables.




As a
result of this credit risk exposure of our customers defaulting on their
payments to us, we may have to make larger allowances for doubtful trade
receivables or incur bad debt write-offs, both of which may have an adverse
impact on our profitability.




We
may be subject to foreign exchange risk and may incur losses arising from
exchange differences upon settlement.




We sell
our dried processed seafood products, frozen processed seafood products and
marine catch mainly to local customers. Direct exports as a percentage of our
sales ranged between 0.5% to 4.9% during theperiod under review. Our sales are
denominated in RMB and US$, while our purchases are denominated in
RMB.




For the
fiscal year of 2009, 2008 and 2007, the percentages of our sales denominated in
RMB and US$ were as follows:




Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007(%)
                  
                  
                  (%)
                  
                  
                  (%)RMB
                  
                  
                  97.4
                  
                  
                  
                  95.1
                  
                  
                  
                  99.5US$
                  
                  
                  2.6
                  
                  
                  
                  4.9
                  
                  
                  
                  0.5




We may
incur losses arising from exchange differences upon settlement. To the extent
that our sales, purchases and expenses are not naturally matched in the same
currency and there are timing differences between collections and payments, we
will be exposed to any adverse fluctuations in the exchange rates between the
various foreign currencies and the RMB. Any restrictions over the conversion or
timing of conversion of foreign currencies may also expose us to adverse
fluctuations in exchange rates. As a result, our earnings may be materially and
adversely affected.




41




On July
21, 2005, the Renminbi was unpegged against the US$ and pegged against a basket
of currencies on a “managed float currency regime”. As at December 31, 2009, the
closing exchange rate was approximately US$1.00 to 6.8372. There is no assurance
that the PRC’s foreign exchange policy will not be further altered. In the event
that the PRC’s policy is altered, significant fluctuations in the exchange rates
of RMB against the US$ will arise. As a result we will be subject to significant
foreign exchange exposure and in the event that we incur foreign exchange
losses, our financial performance will be adversely affected.




We
currently do not have a formal hedging policy with respect to our foreign
exchange exposure as our foreign exchange gains and losses over the past three
fiscal years ended December 31, 2009, 2008 and 2007, respectively have been
relatively low. 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.




Please
refer to the section “Description of Business - Foreign Exchange Exposure” for
further details.




Our
products and brand name may be replicated or counterfeited which will in turn
have an adverse effect on our Company and we may be affected by intellectual
property rights disputes.




We have
registered certain trademarks in the PRC, details of which are set out in the
section “Intellectual Property” of our Form 10-K for the fiscal year ended
December 31, 2008 filed on March 23, 2009. Despite the protection of our
trademark under the intellectual property laws of the PRC, such laws may not be
adequate or effectively enforced against third parties who may violate our
proprietary rights by illegally using our trademarks or our brand name. Our
products and brand names may be replicated or counterfeited, which in turn may
adversely affect our reputation and brand image.




Policing
unauthorized use of our trademarks or brand is difficult and costly,
particularly in countries where the laws may not fully protect our proprietary
rights. There can be no assurance that our means of protecting our proprietary
rights will be adequate. Any unauthorized use of our trademarks and brand may
damage our brand, recognition and reputation. This may lead to our customers
losing confidence in our brand and products, which, in turn, may lead to a loss
in our business and hence sales.




Our
business may be adversely affected by conditions in the financial markets and
economic conditions generally.




The
United States has been in a recession since December, 2007. Business activity
across a wide range of industries and regions is greatly reduced, and many
businesses and local governments are experiencing serious difficulty in
remaining profitable due to the lack of consumer spending and the lack of
liquidity in the credit markets. Unemployment has increased significantly. Since
mid-2007, and particularly during the second half of 2008, the financial
services industry and the securities markets generally were materially and
adversely affected by significant declines in the values of nearly all asset
classes and by a serious lack of liquidity.




As a
result of this economic downturn, many lending institutions, including us, have
experienced declines in the performance of their loans, including commercial
loans, commercial real estate loans and consumer loans. Moreover, competition
among depository institutions for deposits and quality loans has increased
significantly. In addition, the values of real estate collateral supporting many
commercial loans and home mortgages have declined and may continue to decline.
Bank and bank holding company stock prices have been negatively affected, and
the ability of banks and bank holding companies to raise capital or borrow in
the debt markets has become more difficult compared to recent years. There is
also the potential for new federal or state laws and regulations regarding
lending and funding practices and liquidity standards, and bank regulatory
agencies are expected to be very aggressive in responding to concerns and trends
identified in examinations, including the expected issuance of many formal or
informal enforcement actions or orders. The impact of new legislation in
response to those developments, may negatively impact our operations by
restricting our business operations, including our ability to originate or sell
loans, and adversely impact our financial performance or our stock
price.




In
addition, further negative market developments may affect consumer confidence
levels and may cause adverse changes in payment patterns, causing increases in
delinquencies and default rates, which may impact our charge-offs and provision
for credit losses. A worsening of these conditions would likely exacerbate the
adverse effects of these difficult market conditions on us and others in the
financial services industry.




42




Overall,
during the past year, the general business environment has had an adverse effect
on our business, and there can be no assurance that the environment will improve
in the near term. Until conditions improve, we expect our business, financial
condition and results of operations to be adversely affected.




Worldwide
economic conditions may remain depressed for the foreseeable future. These
conditions make it difficult for us to accurately forecast and plan future
business activities, and could cause us to slow or reduce spending on our
research and development activities. Furthermore, during challenging economic
times, we may face issues gaining timely access to financings or capital
infusion, which could result in an impairment of our ability to continue our
business activities. We cannot predict the timing, strength or duration of any
economic slowdown or subsequent economic recovery, worldwide, in the United
States, or in our industry. These and other economic factors could have a
material adverse effect on our financial condition and operating
results.




On
January 1, 2010, we exercised an option to purchase Shishi Xianghe Food Science
and Technology Co., Ltd. (“Xianghe”), a beverage company, and entered into a new
business segment where we will need to rely on current management for the
business acquired. Xianghe is a Fujian-based manufacturer of the branded
Hi-Power algae-based soft drinks. We kept the management of Xianghe to continue
to manage Xianghe. We are dependent on the current management of Xianghe for the
continued development of the beverage business. We do not have prior experience
in the beverage business and the success of Xianghe is subject to all of the
uncertainties regarding the development of a new business. Although we are
integrating the product into Mingxiang’s distribution network, there can be no
assurance regarding the successful distribution and market acceptance of the
beverage product.





We
may be affected by global climate change or by legal, regulatory, or market
responses to such change.




The
growing political and scientific sentiment is that increased concentrations of
carbon dioxide and other greenhouse gases in the atmosphere are influencing
global weather patterns. Changing weather patterns, along with the increased
frequency or duration of extreme weather conditions, could impact the
availability or increase the cost of key raw materials that we use to produce
our products. Additionally, the sale of our products can be impacted by weather
conditions.




Concern
over climate change, including global warming, has led to legislative and
regulatory initiatives directed at limiting greenhouse gas (GHG) emissions. For
example, proposals that would impose mandatory requirements on GHG emissions
continue to be considered by policy makers in the territories that we operate.
Laws enacted that directly or indirectly affect our production, distribution,
packaging, cost of raw materials, fuel, ingredients, and water could all impact
our business and financial results.





RISKS
RELATED TO DOING BUSINESS IN CHINA




Our
operations in the PRC are subject to the laws and regulations of the PRC and any
changes in the laws or policies of the PRC may have a material impact on our
operations and financial performance.




As our
processed seafood products and marine catch businesses are carried out in the
PRC, we are subject to and have to operate within the framework of the PRC legal
system. Any changes in the laws or policies of the PRC or the implementation
thereof, for example in areas such as foreign exchange controls, tariffs, trade
barriers, taxes, export license requirements and environmental protection, may
have a material impact on our operations and financial performance.




The
corporate affairs of our companies in the PRC are governed by their articles of
association and the corporate and foreign investment laws and regulations of the
PRC. The principles of the PRC laws relating to matters such as the fiduciary
duties of directors and other corporate governance matters and foreign
investment laws in the PRC are relatively new. Hence, the enforcement of
investors or shareholders' rights under the articles of association of a PRC
company and the interpretation of the relevant laws relating to corporate
governance matters remain largely untested in the PRC.




43




Introduction
of new laws or changes to existing laws by the PRC government may adversely
affect our business if stricter regulations are imposed on the overseas business
practices of PRC companies




Our
operations are carried out through our wholly-owned subsidiaries which are
located in the PRC. As such, the laws of the PRC govern our businesses and
operations. The PRC legal system is a codified system of written laws,
regulations, circulars, administrative directives and internal guidelines. The
PRC government is still in the process of developing its legal system to
encourage foreign investment and to align itself with global practices and
standards. As the PRC economy is undergoing development at a faster rate than
the changes to its legal system, some degree of uncertainty exists in connection
with whether and how existing laws and regulations apply to certain events and
circumstances. Some of the laws and regulations and the interpretation,
implementation and enforcement of such laws and regulations are also at an
experimental stage and are subject to policy changes. Hence, precedents on the
interpretation, implementation and enforcement of certain PRC laws are limited
and court decisions in the PRC do not have binding effect on lower courts.
Accordingly, the outcome of dispute resolutions and litigation may not be as
consistent or predictable as in other more developed jurisdictions and it may be
difficult to obtain swift and equitable enforcement of the laws in the PRC, or
to obtain enforcement of a judgment by a court or another
jurisdiction.




In
particular, on August 8, 2006, six PRC regulatory bodies, including the Ministry
of Commerce (MOFCOM) and the China Securities Regulatory Commission (“CSRC”),
jointly promulgated the new “Regulations on Foreign Investors Merging with or
Acquiring Domestic Enterprises”, which took effect on September 8, 2006 (“2006
M&A Rules”). The 2006 M&A Rules regulate, inter alia, the acquisition
of PRC domestic companies by foreign investors.




On
September 21, 2006, the CSRC promulgated the “Guidelines on Domestic Enterprises
Indirectly Issuing or Listing and Trading their Stocks on Overseas Stock
Exchanges” (the “CSRC Guidelines”).




Under the
2006 M&A Rules and the CSRC Guidelines, the listing of overseas special
purpose vehicles (“SPV”) which are controlled by PRC entities or individuals are
subject to the prior approval of the CSRC.




The 2006
M&A Rules and the CSRC Guidelines do not provide any express requirement for
an SPV to retroactively obtain CSRC approval where the restructuring steps had
been completed prior to September 8, 2006.




Yuan Tai
Law Offices, our Legal Adviser on PRC Law, is of the opinion that (i) we have
obtained all the necessary governmental approvals from PRC authorities for the
restructuring of our subsidiaries prior to September 8, 2006, (ii) we do not
need to obtain CSRC approval and (iii) it is not necessary for us to comply
retroactively with the requirement of obtaining the prior approval of the CSRC
for our public listing in the U.S..




There is
no assurance that these PRC authorities will not issue further directives,
regulations, clarifications or implementation rules requiring us to obtain
further approvals in relation to our public listing in the U.S.




PRC
foreign exchange control may limit our ability to utilize our cash effectively
and affect our ability to receive dividends and other payments from our PRC
subsidiaries.




Our PRC
subsidiaries, which are foreign investment entities (“FIEs”), are subject to the
PRC rules and regulations on currency conversion. In the PRC, the State
Administration of Foreign Exchange (“SAFE”) regulates the conversion of the RMB
into foreign currencies. Currently, foreign investment enterprises (including
wholly foreign-owned enterprises) are required to apply to the SAFE for “Foreign
Exchange Registration Certificates for FIEs”. With such registration
certification (which have to be renewed annually), FIEs are allowed to open
foreign currency accounts including the “current account” and “capital account”.
Currently, transactions within the scope of the "current account" (for example,
remittance of foreign currencies for payment of dividends) can be effected
without requiring the approval of the SAFE. However, conversion of currency in
the “capital account” (for example, for capital items such as direct
investments, loans and securities) still requires the approval of the SAFE. Our
PRC operating subsidiary Rixiang has obtained the "Foreign Exchange Registration
Certificates for FIEs", which is subject to annual review.




There is
no assurance that the PRC regulatory authorities will not impose restrictions on
the convertibility of the RMB for FIEs. In 2009, 2008 and 2007, approximately
97.4%, 95.1% and 99.5% of our sales, respectively, was denominated in RMB. 
As such, any future restrictions on currency exchanges may limit our ability to
utilize funds generated in the PRC to fund any potential business activities
outside the PRC or to distribute dividends to our shareholders.




44


Our
subsidiaries, operations and significant assets are located outside the U.S.
Shareholders may not be accorded the same rights and protection that would be
accorded under the Securities Act. In addition, it could be difficult to enforce
a U.S. judgment against our Directors and officers.




Our
subsidiaries, operations and assets are mostly located in the PRC. Our
subsidiaries are therefore subject to the relevant laws in the PRC. U.S. law may
provide shareholders with certain rights and protection which may not have
corresponding or similar provisions under the laws of the PRC. As such,
investors in our common stock may or may not be accorded the same level of
shareholder rights and protection that would be accorded under the Securities
Act. In addition, all our current executive directors are non-residents of the
U.S. and the assets of these persons are mainly located outside the U.S. As
such, there may be difficulty for our shareholders to affect service of process
in the U.S., or to enforce a judgment obtained in the U.S. against any of these
persons.




We
are subject to the PRC's environmental laws and regulations and in the event
stricter rules are imposed to protect the environment, we may have to incur
higher costs to comply with such rules.




Our
production facilities in the PRC are subject to environmental laws and
regulations imposed by the PRC authorities, inter alia, in respect of air
protection, waste management and water protection. In the event stricter rules
are imposed on air protection, waste management and water protection by the PRC
authorities, we may have to incur higher costs to comply with such rules.
Accordingly, our financial performance may be adversely affected. In addition,
we require license for the discharge of pollutants for our operations, which is
subject to annual review and renewal. In the event that we fail to renew our
license with the relevant authority, our operations and financial performance
will be adversely affected.




The
outbreak of avian influenza and/or other communicable diseases, if uncontrolled,
could affect our financial performance and prospects.




The avian
influenza virus is a virus found chiefly in birds, but infections with these
viruses can occur in humans. In January of 2004, the first case of the avian
influenza was reported in Guangxi, Hunan and Hubei provinces. Later reports also
came from Anhui, Liaoning, Shanghai and Guangdong provinces. Since 2003,
there have been 37 recorded cases of the avian influenza in the
PRC.




Because
our operations are carried out through our wholly-owned subsidiaries located in
the PRC, the outbreak of avian influenza and/or other communicable diseases, if
uncontrolled, can have an adverse effect on business sentiments and environment.
In addition, if any of our employees, our customers or our suppliers, is
affected by the outbreak of communicable diseases, it can adversely affect,
among others, our operations, our customers' orders and our supply of raw
materials. Accordingly, our sales and profitability will be materially and
adversely affected.




Changes in
China’s political or economic situation could harm us and our operating
results.




Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the government could change these
economic reforms or any of the legal systems at any time. This could either
benefit or damage our operations and profitability. Some of the things that
could have this effect are:




·
            Level
      of government involvement in the
economy;




·
            Control
      of foreign exchange;




·
            Methods
      of allocating resources;




·
            Balance
      of payments position;




·
            International
      trade restrictions; and




·
            International
      conflict.




The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many ways. As
a result of these differences, we may not develop in the same way or at the same
rate as might be expected if the Chinese economy were similar to those of the
OECD member countries.


45


The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities. Government action in the future may require us
to divest ourselves of any interest we hold in Chinese properties.




China
only recently has permitted provincial and local economic autonomy and private
economic activities. The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to continue to operate in
China may be affected by changes in its laws and regulations, including those
relating to taxation, import and export tariffs, environmental regulations, land
use rights, property and other matters. We believe that our operations in China
are in material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of the jurisdictions in
which we operate may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or
interpretations.




Accordingly,
government actions in the future including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.




Future
inflation in China may inhibit our ability to conduct business in
China.




In recent
years, the Chinese economy has experienced periods of rapid expansion and highly
fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2%. These factors have led
to the adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. High inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for
our products.




Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.




The
majority of our revenues will be settled in Renminbi and U.S. dollars, and any
future restrictions on currency exchanged may limit our ability to use revenue
generated in Renminbi to fund any future business activities outside China or to
make dividend or other payments in the U.S. dollars. Although the Chinese
government introduced regulations in 1996 to allow greater convertibility of the
Renminbi for current account transactions, significant restrictions still
remain, including primarily the restriction that foreign-invested enterprises
may only buy, sell or remit foreign currencies after providing valid commercial
documents, at those banks in China authorized to conduct foreign exchange
business. In addition, conversion of Renminbi for capital account items,
including direct investment and loans, is subject to governmental approval in
China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the
convertibility of the Renminbi.




The
value of our securities will be affected by the foreign exchange rate between
U.S. dollars and Renminbi.




The value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and Renminbi, and between those currencies and other currencies in which
our sales may be denominated. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operational needs and should the Renminbi
appreciate against the U.S. dollar at that time, our financial position, the
business of the company, and the price of our common stock may be harmed.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of declaring dividends on our common stock or for other business
purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar
equivalent of our earnings from our subsidiaries in China would be
reduced.




RISKS
RELATED TO THE MARKET FOR OUR STOCK




Pengfei
Liu will have significant influence over the outcome of matters submitted to
Shareholders for approval.




Mr. Liu
currently owns approximately 41.6% of our authorized share capital. As a result,
he can exercise significant influence over all matters requiring shareholder
approval, including the appointment of our directors and the approval of
significant corporate transactions. His ownership and
control may also have the effect of delaying or preventing a future change in
control, impeding merger, consolidation, takeover or other business combination
or discourage a potential acquirer from making a tender offer.


46


Our
share price may be volatile, which can result in substantial losses for
investors who purchase our common stock.




The
market price of our common stock may be highly volatile and can fluctuate
significantly and rapidly in response to, inter alia, the following
factors, some of which are beyond our control:




·
            Variations
      in our operating results;




·
            Success
      or failure of our management team in implementing business and growth
      strategies;




·
            Gain
      or loss of an important business relationship or adverse financial
      performance by a significant customer or group of
    customers;




·
            Changes
      in securities analysts’ recommendations, perceptions or estimates of our
      financial performance;




·
            Changes
      in conditions affecting the seafood packaging and processing industry, the
      general economic conditions or stock market sentiments or other events or
      factors in the PRC;




·
            Changes
      or developments in laws, regulations or taxes in the seafood processing
      and packaging industry in the PRC;




·
            The
      temporary or permanent loss of our seafood processing and packaging
      facilities due to casualty, weather or any extended or extraordinary
      maintenance or inspection that may be
required.




·
            Changes
      in market valuations and share prices of companies with similar businesses
      that may be listed in the U.S. or anywhere else in the
    world;




·
            Additions
      or departures of key personnel;




·
            Fluctuations
      in stock market prices and volume;
or




·
            Involvement
      in litigation.




Additional
funds raised through issue of new shares for our future growth will dilute
Shareholders’ equity interests.




Although
we have identified our expansion plans as avenues to pursue growth in our
business, we may also find other opportunities to grow, including acquisitions
which cannot be predicted at this juncture. Under such circumstances, we may
seek to sell additional equity or debt securities or obtain a credit facility.
If new shares placed to new and/or existing shareholders are issued in the
future, they may be priced at a discount to the then prevailing market price of
our shares trading on the NYSE/AMEX or any other stock exchanges, in which case,
existing shareholders' equity interest will be diluted. If we fail to utilize
the new equity to generate a commensurate increase in earnings, our earnings per
share will be diluted and this could lead to a decline in our share price. Any
additional debt financing may, apart from increasing interest expense and
gearing, contain restrictive covenants with respect to dividends, future fund
raising exercises and other financial and operational matters.




Negative
publicity may adversely affect our share price.




One of
our competitive strengths is our established brand name and track record. We
have been involved in the production of processes seafood products since
commencing our operations in 1994. Our “Mingxiang” brand has been conferred the
“Famous Brand” award, and our products have received several other awards such
as the “Green Food” award. Please see “Description of Business - Competition”.
We have also established a track record in the processed seafood industry which
instills confidence in our products and attracts new customers from South Korea,
Japan, Taiwan, Russia and Ukraine, as well as potential customers from the
European Union. Negative publicity involving us, any of our directors or
executive officers may adversely affect our stock market price whether or not
such negative publicity is justified.


47


Certain
provisions of our Amended Articles of Incorporation may make it more difficult
for a third party to effect a change in control.




Our
Amended Articles of Incorporation authorizes our board of directors to issue up
to 1,000,000 shares of preferred stock. The preferred stock may be issued in one
or more series, the terms of which may be determined at the time of issuance by
our board of directors without further action by the stockholders. These terms
may include voting rights including the right to vote as a series on particular
matters, preferences as to dividends and liquidation, conversion rights,
redemption rights and sinking fund provisions. The issuance of any preferred
stock could diminish the rights of holders of our common stock, and therefore
could reduce the value of such common stock. In addition, specific rights
granted to future holders of preferred stock could be used to restrict our
ability to merge with, or sell assets to, a third party. The ability of our
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent the stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.




ITEM
      1B.
            Unresolved
      Staff Comments





Not
applicable.





ITEM
      2.
            Properties





LAND
USE RIGHTS





On
November 6, 2009, our subsidiary Mingxiang won the auction for the purchase of
the 40-year use right of a land in Shishi City, Fujian. Covering an area of
8,691.4 sq. m., the land is located next to the fishing port and the
Registrant’s processing facilities in Shishi City. The fishing port in Shishi is
one of the five largest fishing ports in the PRC. The purchase price for the
land use right is RMB 15.55 million ($2.28 million)..





As of
December 31, 2009, we owned the following land-use rights in Dabao Industrial
Zone, Xiangzhi Town, Shishi City, Fujian Province:





Certificate
                      Reference No.
                    
                    Location
                    
                    Use
                    
                    Date of Expiration
                      of  Tenure
                    
                    Land Area
                      (square meters)
                    
                    EncumbranceShi Xiang
      Guo Yong
                    
                    Dabao
      Industrial
                    
                    Industrial
                    
                    December
      31, 2052
                    
                    3,374.05
                    
                    Nil(2006)  No.
      0005
                    
                    Zone,
      XiangzhiTown,
      Shishi City,Fujian
      ProvinceShi
      Di Xiang Guo Yong
                    
                    Plot
      II,
                    
                    Industrial
                    
                    December
      31, 2052
                    
                    3,638.25
                    
                    Nil(2007)  No.
      0004
                    
                    Dabao
      IndustrialZone,
      XiangzhiTown,
      Shishi City,Fujian
      ProvinceShi
      Di Xiang Guo Yong
                    
                    Plot
      III,
                    
                    Industrial
                    
                    December
      31, 2052
                    
                    3,955.84
                    
                    Nil(2007)  No.
      0003
                    
                    Dabao
      IndustrialZone,
      XiangzhiTown,
      Shishi City,Fujian
      ProvinceShi
      Di Xiang Guo Yong
                    
                    Dabao
      Industrial
                    
                    Industrial
                    
                    December
      31, 2052
                    
                    6,721.40
                    
                    Nil.(2007)  No.
      0002
                    
                    Zone,
      XiangzhiTown,
      Shishi City,Fujian
      Province





BUILDINGS





As at
December 31, 2009, we owned the following building ownership rights in Dabao
Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province:


48





Reference No.
                  
                  Location
                  
                  Use
                  
                  Date of
                    Expiry
                    of Tenure
                  
                  Land/Floor Area
                    (square meters)
                  
                  EncumbranceShi
      Jian Fang
                    Quan
      Zheng
                    Xiang
      Zhi Zi
                    No.
      00109
                  
                  Block
      A at Plot II
                    Dabao
      Industrial
                    Zone,
      Xiangzhi Town,
                    Shishi
      City,
                  
                  Production
      and
                    packaging
                    facilities
                  
                  June
      5, 2051
                  
                  705.60/1,489.60
                  
                  NilFujian
      ProvinceShi
      Jian Fang
                    Quan
      Zheng
                    Xiang
      Zhi Zi
                    No.
      00110
                  
                  Block
      B at Plot II
                    Dabao
      Industrial
                    Zone,
      Xiangzhi Town,
                    Shishi
      City,
                  
                  Boiler
      facilities
                  
                  June
      5, 2051
                  
                  145.38/145.38
                  
                  NilFujian
      ProvinceShi
      Jian Fang
                    Quan
      Zheng
                    Xiang
      Zhi Zi
                    No.
      00111
                  
                  Block
      C at Plot II
                    Dabao
      Industrial
                    Zone,
      Xiangzhi Town,
                    Shishi
      City,
                    Fujian
      Province
                  
                  Production
      and
                    cutting/slicing
                    facilities
                  
                  June
      5, 2051
                  
                  934.46/1,991.29
                  
                  NilShi
      Jian Fang
                    Quan
      Zheng
                    Xiang
      Zhi Zi
                    No.
      00112
                  
                  Cold
      storage facility at
                    Plot
      III
                    Dabao
      Industrial
                    Zone,
      Xiangzhi Town,
                    Shishi
      City,
                    Fujian
      Province
                  
                  Cold
      Storage
                  
                  June
      5, 2051
                  
                  1,224.84/1,214.16
                  
                  NilShi
      Jian Fang
                    Quan
      Zheng
                    Xiang
      Zhi Zi
                    No.
      00114
                  
                  Block
      A at
                    Daobao
      Industrial
                    Zone,
      Xiangzhi Town,
                    Shishi
      City, Fujian
                    Province
                  
                  Staff
      dormitory
                  
                  June
      5, 2051
                  
                  1,561.17/3,413.79
                  
                  NilShi
      Jian Fang
                    Quan
      Zheng
                    Xiang
      Zhi Zi
                    No.
      00115
                  
                  Block
      B at
                    Daobao
      Industrial
                    Zone,
      Xiangzhi Town,
                    Shishi
      City, Fujian
                  
                  Office
                  
                  September
      28,2052
                  
                  942.19/3,268.41
                  
                  NilProvinceShi
      Fang Quan
                  
                  Block
      A at
                  
                  Factory
      Space
                  
                  December 31, 2052
                  
                  620.00/620.00
                  
                  NilZheng
      Xiang
                  
                  Dabao
      IndustrialZhi
      Zi
                  
                  Zone,
      Xiangzhi Town,No.
      00567
                  
                  Shishi
      City, FujianProvinceShi
      Fang Quan
                  
                  Block
      B at
                  
                  Factory
      Use
                  
                  December 31, 2052
                  
                  670.56/670.56
                  
                  NilZheng
      Xiang
                  
                  Dabao
      IndustrialZhi
      Zi
                  
                  Zone,
      Xiangzhi Town,No.
      00568
                  
                  Shishi
      City, FujianProvince




Note:





1)
            Mingxiang
      owned the building ownership rights to these two properties. Jixiang owned
      the building ownership rights to the other
  properties.





2)
            As
      at December 31, 2009, we are in the process of application for building
      ownership rights for the new production facilities and staff dormitory
      with floor areas at about 3,000 and 2,850 sq. m.,
      respectively.





ITEM
      3.
            Legal
      Proceedings





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


49





PART
II.





ITEM
5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase
of Equity Securities





MARKET
INFORMATION





Our
common stock is currently quoted on NYSE AMEX and, prior to August 14, 2009, was
quoted on OTC Bulletin Board, under the trading symbol CMFO. The CUSIP number is
16943R 106. The following table shows the high and low prices of our common
shares on the NYSE AMEX and OTC Bulletin Board for each quarter within the last
three fiscal years.





High ($)
                
                
                Low ($)Year
      Ended December 31, 2009First
      Quarter
                
                
                1.73
                
                
                
                1.10Second
      Quarter
                
                
                3.96
                
                
                
                1.62Third
      Quarter
                
                
                5.83
                
                
                
                3.40Fourth
      Quarter
                
                
                8.08
                
                
                
                4.09Year
      Ended December 31, 2008First
      Quarter
                
                
                6.00
                
                
                
                3.55Second
      Quarter
                
                
                6.00
                
                
                
                3.15Third
      Quarter
                
                
                3.35
                
                
                
                2.00Fourth
      Quarter
                
                
                2.21
                
                
                
                1.45Year
      Ended December 31, 2007First
      Quarter
                
                
                0.75
                
                
                
                0.75Second
      Quarter
                
                
                0.75
                
                
                
                0.80Third
      Quarter
                
                
                15.00
                
                
                
                0.80Fourth
      Quarter
                
                
                4.78
                
                
                
                2.55





The above
quotations for our common stock reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual
transactions.





HOLDERS





As of
March 15, 2010, there were 45 holders of record of our common
stock.





DIVIDENDS





Pursuant
to a Stock Purchase Agreement with Halter Financial Investments, L.P. dated
September 13, 2007, we paid a special cash dividend in the aggregate amount of
$392,028, or $0.364 per share, to holders of our common stock outstanding on
September 12, 2007.





Other
than the cash dividend describe above, we have never paid or declared dividends.
However, holders of our common stock are entitled to dividends if declared by
our board of directors out of funds legally available. We do not, however,
anticipate the declaration or payment of any dividends in the foreseeable
future. We intend to retain earnings, if any, to finance the development and
expansion of our business. Future dividend policy will be subject to the
discretion of our board of directors and will be contingent upon future
earnings, if any, our financial condition, capital requirements, general
business conditions and other factors. Therefore, there can be no assurance that
any dividends of any kind will ever be paid.


50


ITEM
      6.
            Selected
      Financial Data





The
following tables summarize the consolidated financial data of China Marine for
the periods presented. You should read the following financial information
together with the information under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial
statements and the related notes to these consolidated financial statements
appearing elsewhere herein. The selected consolidated statements of operations
data for the financial years ended December 31, 2009 and 2008; and the selected
consolidated balance sheet data as of December 31, 2009 and 2008 are
derived from our consolidated financial statements, which are included elsewhere
herein, and have been audited by ZPCPA Company Limited, an independent
registered public accounting firm, as indicated in their report. Whereas the
selected consolidated statements of operations data for the financial years
ended December 31, 2007 are derived from our consolidated financial statements,
which are included elsewhere herein, and have been audited by Cordovano and
Honeck LLP, an independent registered public accounting firm, as indicated in
their report.





Year
      ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007(in
      thousands)Revenue,
      net
                  
                  $
                  69,586
                  
                  
                  $
                  48,799
                  
                  
                  $
                  36,425Cost
      of revenues
                  
                  
                  (50,456
                  )
                  
                  
                  (33,607
                  )
                  
                  
                  (25,649
                  )Gross
      profit
                  
                  
                  19,130
                  
                  
                  
                  15,192
                  
                  
                  
                  10,776Depreciation
      and amortization
                  
                  
                  (80
                  )
                  
                  
                  (58
                  )
                  
                  
                  (37
                  )Sales
      and marketing expenses
                  
                  
                  (609
                  )
                  
                  
                  (608
                  )
                  
                  
                  (149
                  )General
      and administrative expenses
                  
                  
                  (2,276
                  )
                  
                  
                  (2,068
                  )
                  
                  
                  (598
                  )Other
      income
                  
                  
                  681
                  
                  
                  
                  647
                  
                  
                  
                  223Interest
      expense
                  
                  
                  (231
                  )
                  
                  
                  (319
                  )
                  
                  
                  (333
                  )Income
      before income taxes
                  
                  
                  16,615
                  
                  
                  
                  12,786
                  
                  
                  
                  9,882Income
      tax expense
                  
                  
                  (2,051
                  )
                  
                  
                  (1,663
                  )
                  
                  
                  (1,221
                  )Net
      income attributable to the Shareholders of the Company
                  
                  $
                  14,564
                  
                  
                  $
                  11,123
                  
                  
                  $
                  8,661Earnings
      per Share — basic (US$) (1)
                  
                  $
                  0.63
                  
                  
                  $
                  0.48
                  
                  
                  $
                  0.38Earnings
      per Share — diluted (US$) (2)
                  
                  $
                  0.60
                  
                  
                  $
                  0.48
                  
                  
                  $
                  0.34Weighted
      average shares outstanding - basic (1)
                  
                  
                  23,063
                  
                  
                  
                  23,011
                  
                  
                  
                  22,972Weighted
      average shares outstanding - diluted (2)
                  
                  
                  24,392
                  
                  
                  
                  23,011
                  
                  
                  
                  25,142





Note:


(1)
            Basic
      earnings per share is computed using the weighted average number of the
      ordinary shares outstanding during the
year.


(2)
            Diluted
      earnings per share is computed using the weighted average number of the
      ordinary shares and ordinary share equivalents outstanding during the year
      plus 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.





As
      at December 31,2009
                    
                    
                    2008Balance
      Sheet Data
                    
                    (in
      thousands)Cash
      and cash equivalents
                    
                    $
                    7,143
                    
                    
                    $
                    31,640Total
      current assets
                    
                    
                    56,406
                    
                    
                    
                    43,466Total
      assets
                    
                    
                    67,895
                    
                    
                    
                    51,646Short-term
      borrowings
                    
                    
                    4,139
                    
                    
                    
                    4,289Total
      current liabilities
                    
                    
                    8,047
                    
                    
                    
                    6,626Total
      stockholders’ equity
                    
                    
                    59,848
                    
                    
                    
                    45,020





ITEM 7.
            Management's Discussion and
      Analysis or Financial Condition and Results of
      Operation





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.


51


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”), which is incorporated in the PRC. We engage in the business of
processing, distribution and sale of processed seafood products, as well as the
sale of marine catch. Our objective is to establish ourselves as a leading
producer of processed seafood products in the PRC and overseas
markets.





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 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% shares of our
outstanding common stock after the share exchange. In connection with the share
exchange, a majority of our shareholders of record as of November 16, 2007
approved a resolution by our board of directors to change our name from New
Paradigm Productions, Inc. to China Marine Food Group Limited (“China Marine”).
The name change became effective on January 9, 2008 upon the filing of a
Certificate of Amendment to our Amended Articles of Incorporation with the State
of Nevada on the twentieth day following the mailing of a Definitive Information
Statement to our shareholders.





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 units consisting one share of common stock and a warrant to
purchase one-fifth of one share of our common stock. The investors subscribed
for 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. The
units were offered and sold pursuant to exemptions from registration under the
Securities Act, including without limitation, Regulation D and Regulation S
promulgated under the Securities Act. Each warrant issued to the investors has a
term of three years and is exercisable at any time for a price equal to $4.1782
in cash or on a cashless exercise basis.





Upon the
close of the reverse acquisition, Richard Crimmins, our sole director, submitted
his resignation letter pursuant to which he resigned from all offices of the
Company he holds which resignations will become effective immediately. Mr.
Pengfei Liu (“Mr. Liu”) replaced him as our Chief Executive Officer and Interim
Secretary effective on the close of the reverse acquisition. Prior to the
effective date of the reverse acquisition, Mr. Liu served at Ocean Technology as
its Chief Executive Officer.





For
accounting purposes, the share exchange transaction was treated as a reverse
acquisition with Ocean Technology as the acquirer and China Marine as the
acquired party. When we refer herein to business and financial information for
periods prior to the consummation of the reverse acquisition, we are referring
to the business and financial information of Ocean Technology on a consolidated
basis unless the context suggests otherwise.





Sales





We are a
seafood producer engaged in the processing, distribution and sale of seafood
products, as well as the sale of marine catch. Our two other subsidiaries,
Shishi Huabao Mingxiang Foods Co., Ltd. (“Mingxiang”) and Shishi Huabao Jixiang
Water Products Co., Ltd. (“Jixiang”) are property holding companies. These two
companies operate solely to manage our land use rights and properties, including
our production plant, cold storage facility, office tower and staff dormitory.
Whereas another subsidiary, Shishi Xianglin Trading Co., Ltd. (“Xianglin”), is a
dormant company.





Our dried
processed seafood products include dried prawns, dried squids, dried file fish,
roasted prawns, shredded roasted squids, roasted squids, roasted file fish,
roasted sea eels and other seafood items. Our dried processed seafood is
predominantly sold under our registered trademark, the “Mingxiang” brand name.
Our brand name has 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, who in turn distribute them to
major supermarkets and retailers throughout these provinces.





Our
frozen processed seafood products include frozen Japanese butter fish, frozen
octopus and frozen squid rings. These are sold directly to wholesalers within
the PRC and overseas, either through direct export or through export agents. Our
products are sold to overseas market such as Japan, Philippines and Papua New
Guinea.


52


Regarding
the sale of marine catch, we simply buy the raw materials from the suppliers and
then sell to the customers on a direct basis. The marine catch is predominantly
sold to overseas customers and distributors in the Fujian, Shandong and Liaoning
provinces, some of whom directly export the marine catch to South Korea and
Taiwan.





Sales of
our processed seafood products accounted for approximately 74.8%, 90.9%
and 76.5% of our total sales in year 2009, 2008 and 2007 respectively.
Sales of our marine catch accounted for approximately 25.2%, 9.1%
and 23.5% of our total sales in year 2009, 2008 and 2007 respectively.
Since the processed seafood segment has significant growth potential and the
profit margin of the processed seafood segment is much higher than that of
marine catch segment, we will continue to focus our resources on the processed
seafood segment going forward.





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





Factors
that can affect our sales are as follows:





·
            The
      level of sales is dependent on the supply of raw materials on a timely
      basis. Raw material costs accounted for approximately 74.4%, 77.9%
      and 74.3% of our total cost of sales of processed seafood products in
      year 2009, 2008 and 2007 respectively. The availability of these raw
      materials could be affected by a large number of factors, including, inter alia, the
      availability of fish stock, weather conditions, government policies and
      regulations where such fishing is carried out, the stability of supplies
      from fishermen and pressure from environmental or animal rights
      groups.





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





·
            Any
      shortage in the supply of or increase in the prices of the raw materials
      for our processed seafood products will adversely affect our
      sales.





·
            Our
      ability to maintain existing accreditations such as HACCP, ISO9001:2008,
      ISO14001:2004 and the EU Export Certification accreditations will affect
      our ability to maintain our presence in our existing market and to expand
      into new market territories.





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





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





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





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





Please
refer to the section “Risk Factors” herein for further information on other
factors that may affect our revenue.





Production
facilities and employees





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





As at
December 31, 2009, we employed 769 employees.


53


Seasonality





We do not
experience any significant seasonality in relation to sales for our processed
seafood products. However, sales are usually higher before and during the
Chinese New Year. In 2008, we also experienced a strong sales demand before the
Olympics games being held in Beijing in August. As for the trading of marine
catch, sales may be lower in June and July due to the reduced supplies as a
result of the restriction on fishing in the Taiwan Strait during these two
months. In 2009, the restricted period on fishing has been shifted to a bit
earlier from mid May to mid July as announced by the Ministry of
Agriculture.





NEW
BUSINESS DEVELOPMENT





Acquisition
of land for 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. Covering an area of 8,691.4 square meters, the
land is located next to the fishing port and our production facilities in the
same city. The purchase price for the land use right is $2.3 million which has
been fully paid and being recognized as prepayments as of December 31,
2009.





We plan
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 intend to finance
the total estimated $20.0 million in land use rights and construction
costs from funds generated by operations and expect to complete the
construction in late 2010. There were no material capital commitments in
relation to the construction costs as at the yearend date. Subsequent to full
settlement of the land cost, a formal agreement with the local land and
resources department was executed on December 30, 2009.





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





Acquisition
of branded algae-based beverage company





On
November 27, 2009, we 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 us to make a loan to Xianghe in the amount of approximately $26.4
million to be used for working capital purposes. In consideration for the loan,
we 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. We intended to fund the loan
from the currently available cash of the Group.





The
maturity date of the loan is January 26, 2010. Upon maturity of the loan, we may
select to exercise the option to purchase shares representing eighty percent
(80%) of Xianghe or require repayment of the loan. The purchase price payable to
Qiu shall consist of approximately $1.4 million payable by us and $26.4 million
payable by Xianghe.





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, we 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 us, was transferred to be the
      consideration for the purchase of the Shares of Xianghe which we shall pay
      to Qiu.





(ii)
              Approximately
      $1.4 million shall be paid by us to Qiu within 30 days after completion of
      the audit report of Xianghe for the year ended December 31,
      2009.





The
Purchase Agreement grants us 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, we and Qiu shall provide the capital into Xianghe on a pro rata
basis according to respective shareholdings.


54





We intend
to integrate the Hi-Power algae-based soft drinks into our current distribution
network. Xianghe has an experienced management team and its management and other
employees will continue to work at Xianghe after the acquisition. Xianghe
utilizes third party manufacturers to produce the beverages.





RESULTS
OF OPERATIONS





We derive
our sales from the sales of processed seafood products and marine catch, the
breakdown of our sales and gross profit by product, as well as by geographical
location of our customers for the years ended December 31, 2009, 2008 and 2007
are set out below:





Breakdown
of our past performance by principal products and geographical
regions


Sales
by product


Year
      ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007US$’000
                    
                    
                    %
                    
                    
                    US$’000
                    
                    
                    %
                    
                    
                    US$’000
                    
                    
                    %Processed
      seafood products
                    
                    
                    52,049
                    
                    
                    
                    74.8
                    
                    
                    
                    44,370
                    
                    
                    
                    90.9
                    
                    
                    
                    27,863
                    
                    
                    
                    76.5Marine
      catch
                    
                    
                    17,537
                    
                    
                    
                    25.2
                    
                    
                    
                    4,429
                    
                    
                    
                    9.1
                    
                    
                    
                    8,562
                    
                    
                    
                    23.5Total
                    
                    
                    69,586
                    
                    
                    
                    100.0
                    
                    
                    
                    48,799
                    
                    
                    
                    100.0
                    
                    
                    
                    36,425
                    
                    
                    
                    100.0





Sales
by geographical region





Year
      ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007US$’000
                    
                    
                    %
                    
                    
                    US$’000
                    
                    
                    %
                    
                    
                    US$’000
                    
                    
                    %PRCShandong
                    
                    
                    3,771
                    
                    
                    
                    5.4
                    
                    
                    
                    4,306
                    
                    
                    
                    8.8
                    
                    
                    
                    5,047
                    
                    
                    
                    13.9Zhejiang
                    
                    
                    24,360
                    
                    
                    
                    35.0
                    
                    
                    
                    22,342
                    
                    
                    
                    45.8
                    
                    
                    
                    14,131
                    
                    
                    
                    38.8Fujian
                    
                    
                    19,385
                    
                    
                    
                    27.9
                    
                    
                    
                    14,600
                    
                    
                    
                    29.9
                    
                    
                    
                    16,041
                    
                    
                    
                    44.0Guangdong/
      Shenzhen
                    
                    
                    3,852
                    
                    
                    
                    5.5
                    
                    
                    
                    1,805
                    
                    
                    
                    3.7
                    
                    
                    
                    —
                    
                    
                    
                    —Jiangsu/
      Shanghai
                    
                    
                    3,826
                    
                    
                    
                    5.5
                    
                    
                    
                    1,699
                    
                    
                    
                    3.5
                    
                    
                    
                    —
                    
                    
                    
                    —Sichuan/
      Chongqing
                    
                    
                    867
                    
                    
                    
                    1.3
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Others
      (1)
                    
                    
                    11,728
                    
                    
                    
                    16.8
                    
                    
                    
                    1,650
                    
                    
                    
                    3.4
                    
                    
                    
                    1,011
                    
                    
                    
                    2.8Total
      PRC (2)
                    
                    
                    67,789
                    
                    
                    
                    97.4
                    
                    
                    
                    46,402
                    
                    
                    
                    95.1
                    
                    
                    
                    36,230
                    
                    
                    
                    99.5Asia
      (3)
                    
                    
                    1,797
                    
                    
                    
                    2.6
                    
                    
                    
                    2,397
                    
                    
                    
                    4.9
                    
                    
                    
                    97
                    
                    
                    
                    0.2Others
      (4)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    98
                    
                    
                    
                    0.3Total
                    
                    
                    69,586
                    
                    
                    
                    100.0
                    
                    
                    
                    48,799
                    
                    
                    
                    100.0
                    
                    
                    
                    36,425
                    
                    
                    
                    100.0





Notes:





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


(2)
            Sales
      to PRC include sales to local PRC distributors who in turn sell our
      products to Taiwan, Japan and South Korea. Such sales amounted to $4.0
      million, $2.3 million and $6.1 million in year 2009, 2008 and
      2007 respectively.


(3)           Sales
to Asia mainly relate to exports to Japan, Philippines and Papua New
Guinea.


(4)
            Export
      sales to other countries include sales to
  Ukraine.





Year
2009 compared to Year 2008, and


Year
2008 compared to Year 2007





Sales





Our
revenue increased by approximately $20.8 million or 42.6% from $48.8 million in
2008 to $69.6 million in 2009. The increase in revenue was due to the continued
growth both in sales of our processed seafood products and marine catch segment.
Sales of our processed seafood products increased by $7.7 million or 17.3%,
whereas sales of our marine catch segment increased by $13.1 million or over
three-fold.


55


Comparing
results in 2007 and 2008, our revenue increased by approximately $12.4 million
or 34.0% from $36.4 million in 2007 to $48.8 million 2008. Sales of our
processed seafood products increased by $16.5 million or 59.2%, whereas sales of
our marine catch segment dropped by $4.1 million or 48.3%.





The
processed seafood products operations continued to be the growth driver for us
as our products continue to gain market acceptance, particularly in Fujian and
Zhejiang provinces. The higher sales in the processed seafood products segment
were mainly due to our continued success in the sales and marketing
efforts. We also penetrated into two new neighborhood markets, Jiangsu and
Guangdong provinces, in the second quarter of 2008 and another new inland
market, Sichuan province, in the third quarter of 2009. Accordingly, the number
of sales staff has further increased from 19 in 2007 to 24 as at
December 31, 2009.





In 2007,
we worked with local fishermen and chartered a number of fishing vessels to
harvest marine catch from the East China Sea and the Taiwan Strait. All the
harvest from our marine catch was sold to customers on a direct basis. We did
not use any of our own marine catch for the production of our processed seafood
products.





Starting
from 2008, we do not charter any fishing vessels nor harvest the marine catch
ourselves. Instead, we simply buy the marine catch from the suppliers and then
sell to the customers on a direct basis. The marine catch is predominantly sold
to overseas customers and distributors in Fujian, Shandong and Liaoning
provinces, some of whom directly export the marine catch to South Korea and
Taiwan.





Having
recognized that the processed seafood segment has significant growth potential
and attractive profit margin, we will continue to focus our resources on the
processed seafood segment going forward.





Cost
of sales





Our cost
of sales comprises the cost of our processed seafood operations and the cost of
our marine catch. The breakdown is as follows:





Year
      ended December 31,US$
      ’000
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007Processed
      seafood products
                    
                    
                    34,721
                    
                    
                    
                    29,617
                    
                    
                    
                    18,798Marine
      catch
                    
                    
                    15,735
                    
                    
                    
                    3,990
                    
                    
                    
                    6,851Total
                    
                    
                    50,456
                    
                    
                    
                    33,607
                    
                    
                    
                    25,649





Cost
of sales – Processed seafood products





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





Year
      ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007US$’000
                  
                  
                  %
                  
                  
                  US$’000
                  
                  
                  %
                  
                  
                  US$’000
                  
                  
                  %Raw
      materials
                  
                  
                  25,822
                  
                  
                  
                  74.4
                  
                  
                  
                  23,070
                  
                  
                  
                  77.9
                  
                  
                  
                  13,964
                  
                  
                  
                  74.3Packaging
      materials
                  
                  
                  4,444
                  
                  
                  
                  12.8
                  
                  
                  
                  2,982
                  
                  
                  
                  10.1
                  
                  
                  
                  1,339
                  
                  
                  
                  7.1Direct
      labor
                  
                  
                  1,987
                  
                  
                  
                  5.7
                  
                  
                  
                  1,526
                  
                  
                  
                  5.1
                  
                  
                  
                  1,507
                  
                  
                  
                  8.0Manufacturing
      overheads
                  
                  
                  2,468
                  
                  
                  
                  7.1
                  
                  
                  
                  2,039
                  
                  
                  
                  6.9
                  
                  
                  
                  1,988
                  
                  
                  
                  10.6Total
                  
                  
                  34,721
                  
                  
                  
                  100.0
                  
                  
                  
                  29,617
                  
                  
                  
                  100.0
                  
                  
                  
                  18,798
                  
                  
                  
                  100.0





Raw
materials





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





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


56


Raw
material costs accounted for approximately 74.4%, 77.9% and 74.3% of our cost of
sales in year 2009, 2008 and 2007 respectively. The percentage of raw materials
cost as a proportion of the total cost of sales is affected by the product mix
for the relevant financial year and the market price of the raw materials. We
mitigate the fluctuation in pricing by bulk purchasing and stock management. We
are able to stock up our raw materials when prices are lower, as we have our own
cold storage facility and we can also utilize other nearby facilities for
storage when needs arise. This will ensure a steady supply of raw materials for
the processing of seafood products throughout the year.





The
increase in raw material costs for the years under review was mainly due to the
increased production and sales of processed seafood products, whereas direct
labor and manufacturing overheads are relatively considered as invariable cost
factors comparing to raw materials and packaging materials.





Packaging
materials





Packaging
materials accounted for approximately 12.8%, 10.1% and 7.1% of our cost of sales
in year 2009, 2008 and 2007 respectively.





The
increase in packaging material costs for the years under review was mainly due
to the increased production and sales of processed seafood products. We
have experienced a mild price increase in packaging materials since late 2008
due to inflation and use of individual packages for some of our new products but
believe that it will not bring material impact on the overall gross profit
margin going forward because we will continue to enjoy economies of scale in
material costs along with the increase in production volume.





Direct
labor





Direct
labor costs accounted for 5.1% to 8.0% of our cost of sales for the years under
review. 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 the direct labor costs as
a percentage of costs of sales is dependent on the degree of
processing required for the end products. The increase in our production
scale over the past few years has enabled us to enjoy economies of scale and
higher productivity through job specialization and training.





The total
production headcount as at December 31, 2009 has increased to 693 from 540 as at
the end of 2008. The increase was mainly due to the increase in number of
production headcount due to increased scale of production along the
year.





Manufacturing
overheads





Manufacturing
overheads comprise depreciation, water, electricity and other fuel costs which
are used directly in the production of finished goods.





The
increase in manufacturing overheads for the years under review was mainly
due to the increased scale of production and the expansion of production
facilities along the year.





Cost
of sales - Marine catch





Year
      ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007US$’000
                  
                  
                  %
                  
                  
                  US$’000
                  
                  
                  %
                  
                  
                  US$’000
                  
                  
                  %Raw
      materials
                  
                  
                  15,287
                  
                  
                  
                  97.2
                  
                  
                  
                  3,642
                  
                  
                  
                  91.3
                  
                  
                  
                  —
                  
                  
                  
                  —Rental
      / charter hires
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  930
                  
                  
                  
                  13.6Crew
      salaries and wages
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  437
                  
                  
                  
                  6.4Bunker
      fuel
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,484
                  
                  
                  
                  50.8Repair
      & maintenance
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,154
                  
                  
                  
                  16.8Other
      expenses
                  
                  
                  448
                  
                  
                  
                  2.8
                  
                  
                  
                  348
                  
                  
                  
                  8.7
                  
                  
                  
                  846
                  
                  
                  
                  12.4Total
                  
                  
                  15,735
                  
                  
                  
                  100.0
                  
                  
                  
                  3,990
                  
                  
                  
                  100.0
                  
                  
                  
                  6,851
                  
                  
                  
                  100.0


57


Raw
materials





We buy
the marine catch from the suppliers and then sell to the customers on a direct
basis. The marine catch is predominantly sold to overseas customers and
distributors in Liaoning, Fujian and Shandong provinces, some of whom directly
export the marine catch to South Korea and Taiwan.




The
increase in raw material costs for the years under review was mainly in line
with the corresponding increased sales of trading materials.





Rental
/ charter hires





We
commenced our marine catch operation in September 2002, with the chartering of
two fishing vessels with an aggregate net tonnage of 44 tons. In December 2007,
we have a fleet of six chartered fishing vessels with an aggregate net tonnage
of 256 tons. However, taking into consideration of the significant growth
potential in the processed seafood segment and the deteriorating gross profit
margin for the sales of marine catch due to higher fuel and operating costs, we
decided to focus our resources on the processed seafood segment going forward.
In this connection, all the chartering agreements with the fishermen have been
terminated by us at the end of 2007. We are not subject to any penalties for
terminating these chartering agreements which are about to be ended in 2008 or
2009.





Starting
from 2008, we simply buy the marine catch from the suppliers and then sell to
the customers on a direct basis.





Crew
salaries and wages





We have
entered into agreements with the owners of fishing vessels, from whom we have
chartered six fishing vessels for our marine catch operations by the end of
2007. The size of the fishing crew has increased over the last few years as we
increased the number of fishing vessels. Pursuant to the agreements, we are
required to bear the salaries and wages of the fishing crew.





Bunker
fuel





Our main
cost of operations was the cost of bunker fuel for the operation of the
chartered vessels. The price of bunker fuel was dependent on world oil price
which has been increased significantly during the years under
review.





Repair
and maintenance





Repair
and maintenance costs relate to the repair of the vessels and the fishing nets
used for our marine catch operations. The vessels require regular maintenance
both during their voyages and when they are back to the port.





Other
expenses





Other
expenses mainly relate to the costs of packaging materials and ice required to
keep the freshness of the marine catch. The fishes are sorted and packed in ice
boxes and then sent directly to customers upon reaching the port.





Gross
profit by product





Year
      ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007US$’000
                    
                    
                    %
                    
                    
                    US$’000
                    
                    
                    %
                    
                    
                    US$’000
                    
                    
                    %Processed
      seafood products
                    
                    
                    17,328
                    
                    
                    
                    90.6
                    
                    
                    
                    14,753
                    
                    
                    
                    97.1
                    
                    
                    
                    9,065
                    
                    
                    
                    84.1Marine
      catch
                    
                    
                    1,802
                    
                    
                    
                    9.4
                    
                    
                    
                    439
                    
                    
                    
                    2.9
                    
                    
                    
                    1,711
                    
                    
                    
                    15.9Total
                    
                    
                    19,130
                    
                    
                    
                    100.0
                    
                    
                    
                    15,192
                    
                    
                    
                    100.0
                    
                    
                    
                    10,776
                    
                    
                    
                    100.0





58




Gross
profit margin by profit





Year
      ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007%
                  
                  
                  %
                  
                  
                  %Processed
      seafood products
                  
                  
                  33.3
                  
                  
                  
                  33.2
                  
                  
                  
                  32.5Marine
      catch
                  
                  
                  10.3
                  
                  
                  
                  9.9
                  
                  
                  
                  20.0Total
                  
                  
                  27.5
                  
                  
                  
                  31.1
                  
                  
                  
                  29.6




Gross
profit





Gross
profit grew by 25.9% or $3.9 million, from $15.2 million in 2008 to
$19.1 million in 2009. Gross profit margin dropped by 3.6 percentage point from
31.1% in 2008 to 27.5% in 2009. Gross profit margin for the processed seafood
products operations was remained stable at 33.3% comparing to 33.2% in last
year, whereas gross profit margin for the marine catch segment was improved from
9.9% to 10.3% for the same years under review.





Gross
profit grew by 41.0% or $4.4 million, from $10.8 million in 2007 to
$15.2 million in 2008. Gross profit margin improved by 1.5 percentage point from
29.6% in 2007 to 31.1% in 2008.





The
increase in gross profit margin for our processed seafood products during the
years under review was mainly due to the increase in our selling prices and the
cost savings in terms of material costs and overheads stemming from better
utilization of our facilities as we enjoy economies of scale from higher
production volume, partially offset by the inflation we experienced during the
years under review.





Starting
from 2008, we no longer charter any vessels and simply trade the marine catch to
the distributors. As a result, the gross profit margin earned from
the marine catch segment was lower comparing to the prior
year.





Having
recognized that the processed seafood segment has significant growth
potential and better profit margin comparing to the trading of marine
catch, we will continue to focus our resources on the processed seafood segment
going forward.





Sales
and marketing expenses





Our sales
and marketing expenses comprise mainly salaries of sales and marketing staff,
investor relations fees, advertisement and costs for participating in
exhibitions.





Our sales
and marketing expenses accounted for approximately 0.9%, 1.2% and 0.4% of our
total revenue in year 2009, 2008 and 2007 respectively. The increase in the
sales and marketing expenses in 2008 was mainly due to the hiring of an investor
relations firm and the increase of advertising and exhibition costs so as to
strengthen our brand position in both existing and new markets. Accordingly, the
number of sales staff has further increased from 19 in 2007 to
23 in 2008. In 2009, we continued to maintain the sales and marketing
efforts to strengthen our brand position and therefore the amount of sales and
marketing expenses were relatively stable comparing to the prior
year.





General
and administrative expenses





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





Our
general and administrative expenses accounted for approximately 3.3%, 4.2% and
1.6% of our total revenue in year 2009, 2008 and
2007 respectively.





The
increase in the general and administrative expenses from 2007 to 2008 was mainly
attributable by the higher payroll costs as a result of hiring some experienced
professional staff so as to cope with the expanding operations and distributing
the bonuses to the executive directors, the higher traveling and entertainment
expenses mainly attributable to more overseas traveling like attending road
shows, some losses on disposal or replacement of fixed assets to enhance the
overall production capacity, the higher R&D costs for development of new
products and the higher legal and professional fees after we went public in the
last quarter of 2007.





Whereas
the increase in the general and administrative expenses from 2008 to 2009 was
mainly attributable by the higher R&D costs, including staff and testing
material costs, for development of new products during the year, the higher
legal and professional fees being incurred since uplisting to AMEX, the higher
payroll costs as a result of building up a strong management team so as to cope
with the expanding operations and the increase in bad debt provision consistent
with the higher accounts receivable period end balance, which was partially
offset by the decrease in losses on disposal or replacement of fixed assets in
2009.





Other
income





Other
income relates mainly to rental income, government subsidies and interest
income.


59


Rental
income relates to the collection of rental on the 38 shop spaces at our factory
in Dabao Industrial Zone. The rental contracts are based on one year lease term.
The government subsidies mainly relate to the grants by the government for the
product development research project focused on developing consumer-ready
seafood products from low-cost seafood items and the subsidies for the loan
interests so as to support agricultural industrialization. Interest income is
earned from cash balances with banks as a result of strong operational cash
inflow and net proceeds from the private placement taken place in November
2007.





Interest
expense





Our
interest expense relates to interest costs incurred on the various short-term
bank borrowings taken by us for working capital requirements. Our interest
expense accounted for approximately 0.3%, 0.7% and 0.9% of our total
revenue in year 2009, 2008 and 2007 respectively. Interest expense in 2009
decreased significantly when comparing to the prior year which was in line with
the decline in bank borrowing rates since the last quarter of
2008.





Income
before income tax





Our
income before income tax increased by $3.8 million or 29.9%, from $12.8 million
in 2008 to $16.6 million in 2009. The increase was mainly due to the combined
effects of the increase in sales of 42.6% and deteriorated gross profit margin
by 3.6 percentage point, which was partially offset by the increase in the
general and administrative expenses, as a result of the factors described
above.





Likewise,
our income before income tax increased by $2.9 million or 29.4%, from $9.9
million in 2007 to $12.8 million in 2008. The increase was mainly due to the
increase in sales of 34.0% and improved gross profit margin by 1.5 percentage
point as a whole, which was partially offset by the increase in the selling and
distribution expenses and the general and administrative expenses, as a result
of the factors described above.





Income
tax expense





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





Prior to
January 2005, our business was carried out under Mingxiang which was
incorporated as a PRC limited liability company and thus was subject to an
Enterprise Income Tax rate of 33% of its taxable income.





According
to the Income Tax Law of the PRC for Enterprises with Foreign Investment and
Foreign Enterprises, foreign investment enterprises (“FIE”) engaged in
production established in coastal economic open zones or in the old urban
districts of cities where the special economic zones or the economic and
technological development zones are located may pay income taxes at a reduced
rate of 24%. In addition, foreign investment enterprises engaged in production
having a period of operation of not less than 10 years shall be exempted from
income tax for the first 2 profit-making years and a 50% reduction in the income
tax payable for the next 3 years.





In March
2007, the Chinese government enacted the Corporate Income Tax Law, and
promulgated related regulations, which were effective January 1, 2008. The
Corporate Income Tax Law, among other things, imposes a unified income tax rate
of 25% for both domestic and foreign invested enterprises. For enterprises
engaged in production established in coastal economic open zones or in the old
urban districts of cities where the special economic zones or the economic and
technological development zones enjoy a favorable tax rate of 24%, the income
tax rate will change to 25% with effective from January 1, 2008. However, the
new provision allows these enterprises to continue to enjoy their unexpired tax
holiday under the previous income tax laws and rules.





With
effect from January 1, 2005, Rixiang acquired the business operations of
Mingxiang, which subsequently became a property holding company. Rixiang was
incorporated as a FIE and was granted the tax incentives for FIEs, and was
exempted from income tax for 2005 and 2006. Rixiang is therefore subject to PRC
state income tax of 12% for 2007 and then 12.5% for 2008 and 2009.





Whereas
Jixiang is a property holding company and Xianglin is a dormant company, both of
them are subject to tax on their assessable income.





The lower
effective tax rates for the financial years under review were mainly due to tax
exemption granted under the tax incentives. However, such tax incentives may be
withdrawn in the future without prior notice.





Mingxiang
has recently received a notice of recognition as 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 the Company engaged in advanced food
processing technologies for the Fujian Province. As a new and high technology
company, Mingxiang is qualified for a reduced tax rate of 15% on its assessable
income through 2012.


60


REVIEW
OF FINANCIAL POSITION





Current
assets





As at
December 31, 2008, our current assets increased to $43.4 million, representing
84.2% of our total assets of $51.6 million. It comprised cash and cash
equivalents of $31.6 million, accounts receivable of $4.8 million, inventories
of $6.7 million and other receivables and prepayments of $0.3
million.





As at
December 31, 2009, our current assets amounted to $56.4 million, representing
83.1% of our total assets of $67.9 million. It comprised cash and cash
equivalents of $7.1 million, accounts receivable of $18.8 million, inventories
of $3.9 million, note receivable of $26.4 million, and other receivables
and prepayments of $0.2 million.





Decrease
in cash and cash equivalents was mainly due to increase in accounts receivable,
and the addition of fixed assets and construction in progress in 2009, which was
partially offset by the cash inflow provided by operating activities and
decrease in inventories.





Accounts
receivable were mainly represented by amounts due from distributors and
wholesalers. Our Company usually extended unsecured credit period to long
established customers up to 3 months. Since our practice is to perform constant
credit checks and pursue the past due accounts proactively, there was no
material uncollectible debts identified in the past. Increase in accounts
receivable was mainly in line with the increase in sales volume during the years
under review and the extension of credit period to our major customers so as to
cope with the current market practice.





Inventories
were mainly related to work-in-progress comprising mainly frozen prawns, frozen
fish and squids which would be used for the production and processing of dried
and frozen products. Our inventories also included some finished goods, raw
materials and packaging materials.





Note
receivable was mainly represented by the convertible loan due from the
acquisition target company of $26.4 million.





Non-current
assets





As at
December 31, 2009, our non-current assets amounted to $11.5 million and
accounted for approximately 16.9% of our total assets. Our non-current assets
comprised mainly property, plant and equipment of $8.6 million, land use rights
of $0.6 million, and prepayment for land use right of $2.3 million. In 2009, we
increased our production capacity by 100% by the third quarter end of the year
and therefore certain fixed assets have been increased accordingly.





As at
December 31, 2009, our property, plant and equipment amounting to $8.6 million
were made up mainly of buildings amounting to $6.2 million and plant and
machinery amounting to $1.9 million. Buildings related to our production plant,
cold room, office buildings and workers’ dormitories. Plant and machinery
related mainly to our production lines, freezing machines, roasting and drying
machines. The remaining $0.5 million related to office equipment and motor
vehicles.





Current
liabilities





As at
December 31, 2008, our current liabilities of $6.6 million comprised short-term
bank loans of $4.3 million, accounts payable of $0.4 million, amount due to a
shareholder of $0.2 million, income tax payable of $0.3 million and other
payables of $1.4 million.





Our
current liabilities of $8.0 million as at December 31, 2009 comprised short-term
bank loans of $4.1 million, accounts payable of $0.9 million, amount due to a
shareholder of $0.1 million, income tax payable of $0.6 million and other
payables of $2.3 million.





The
short-term bank loans were used for our working capital requirements. The
weighted average effective interest rate on the borrowing is about 5.31% per
annum in 2009.





Regarding
the accounts payable, the related turnover day was about a week due to the short
credit period allowed by the fishermen which was consistent with the market
practice.





The
amount due to a shareholder was unsecured, interest free and with no fixed terms
of repayment.


61





Stockholders’
equity





As at
December 31, 2008, our stockholders’ equity amounted to $45.0 million and
comprised additional paid-in capital of $16.8 million, statutory reserve of $4.9
million, accumulated other comprehensive income of $3.4 million and retained
earnings of $19.9 million.





Our
stockholders’ equity of $59.8 million as at December 31, 2009 comprised
additional paid-in capital of $16.9 million, statutory reserve of $5.6 million,
accumulated other comprehensive income of $3.6 million and retained earnings of
$33.7 million.





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. Under the PRC law, 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. We appropriated about 15% of our after-tax net income to
the reserve on a yearly basis.





We did
not distribute any dividends both in 2008 and 2009.





LIQUIDITY
AND CAPITAL RESOURCES





Our
operations are funded through a combination of stockholders’ equity, borrowings
and internally generated funds from our operations. Our cash and cash
equivalents as at December 31, 2009 amounted to approximately $7.1 million and
our total indebtedness which comprises short-term bank loans was $4.1
million.





A summary
of our cash flows for 2009, 2008 and 2007 is as follows:





Year
      ended December 31,US$’000
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Net
      cash provided by operating activities
                  
                  
                  5,668
                  
                  
                  
                  6,000
                  
                  
                  
                  6,701Net
      cash (used in) investing activities
                  
                  
                  (30,022
                  )
                  
                  
                  (4,179
                  )
                  
                  
                  (21
                  )Net
      cash (used in)/ provided by financing activities
                  
                  
                  (251
                  )
                  
                  
                  3,364
                  
                  
                  
                  7,959Foreign
      currency translation adjustment
                  
                  
                  108
                  
                  
                  
                  1,978
                  
                  
                  
                  656Net
      change in cash and cash equivalents
                  
                  
                  (24,497
                  )
                  
                  
                  7,163
                  
                  
                  
                  15,295Cash
      and cash equivalents at the beginning of the year
                  
                  
                  31,640
                  
                  
                  
                  24,477
                  
                  
                  
                  9,182Cash
      and cash equivalents at the end of the year
                  
                  
                  7,143
                  
                  
                  
                  31,640
                  
                  
                  
                  24,477





Year
2009





Net
cash provided by operating activities





In 2009,
our net cash provided by operating activities amounted to approximately $5.7
million. The major source of cash inflow from operating activities was from net
income of $14.6 million. Changes in operating assets and liabilities included
cash outflow resulting from increase in accounts receivable of $14.0 million as
a result of increase in sales volume and extension of credit period to major
customers. This was partially offset by cash inflow from decrease in inventories
of 2.8 million.





Net
cash used in investing activities





In 2009,
our net cash used in investing activities was approximately $30.0
million which was mainly attributable to the increase in note receivable of
$26.4 million related to the convertible loan due from the acquisition target
company, and the increase in prepayment for land use right of $2.3 million
due to the land cost for development of cold storage facilities as well as the
addition of fixed assets and the transfer from construction in progress for the
development of new processing plant and the associated machineries. In this
connection, our production capacity has been doubled by the third quarter end of
2009.





Net
cash used in financing activities





In 2009,
our cash used in financing activities was approximately $0.3 million. This
comprised a combined effect of repayment of bank loans and amount due to a
shareholder of $0.2 million and $0.1 million respectively.


62


Year
2008





Net
cash provided by operating activities





Our net
cash provided by operating activities in 2008 amounted to approximately $6.0
million, which was a decrease of $0.7 million when comparing to net cash
provided by operating activities in 2007. The decrease was mainly attributable
to the increase in the inventories of $5.5 million in 2008, partially offset by
the higher net income earned in the same year and the significant increase
of accounts receivable recorded in 2007.





We
purchased much more raw materials in 2008 and a significant portion of them
accounted for $5.3 million could be sold in the market when price goes up in the
future due to limited supplies.





Net
cash used in investing activities





In 2008,
our net cash used in investing activities was approximately $4.2
million which was attributable to the addition of fixed assets and
construction in progress at about $4.2 million in total, mainly for the
development of new processing plant, the associated machineries and staff
quarter. In this connection, our production capacity has been increased by 50%
in the fourth quarter of 2008.





Net
cash provided by financing activities





Our net
cash provided by financing activities was approximately $3.4 million in 2008,
which was a decrease of $4.6 million when comparing to net cash provided by
financing activities in 2007. The decrease was mainly due to the increase in
additional paid-in capital of $15.9 million which was raised from the
transaction of reverse acquisition and private placement taken place in November
2007, and was partially offset by the dividend being paid of $4.6 million
and net repayment of bank loans of $3.0 million in 2007.





Year
2007





Net
cash provided by operating activities





In 2007,
our net cash provided by operating activities amounted to approximately $6.7
million. The major source of cash inflow from operating activities was from net
income of $8.7 million. Changes in operating assets and liabilities included
cash outflow resulting from increase in accounts receivable of $2.9 million and
other receivables of $0.1 million. This was offset by cash inflow from cash
received from increase in accounts payable of $0.2 million, other payables of
$0.3 million and income tax payable of $0.3 million.





Net
cash used in investing activities





In 2007,
our net cash used in investing activities was approximately $21,000 which arose
from the acquisition of production and office equipment.





Net
cash provided by financing activities





In 2007,
our cash provided by financing activities was approximately $8.0 million. This
comprised mainly the increase in additional paid-in capital of $15.9 million
which was raised from the transaction of reverse acquisition and private
placement taken place in November 2007, net of offering costs of $4.0 million.
This was offset by the dividend being paid of $4.6 million, repayment of bank
loans of $3.0 million and decrease in amount due to a shareholder of $0.4
million.





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 meet up with our current operating expenditures.





Considering
our latest development plan for the construction of cold storage facilities and
the new beverage products through the acquisition of Xianghe, we raised $30.0
million in gross proceeds through a common stock offering in January 2010. The
net proceeds from offering brought our working capital level back to a strong
position where both the current operations could be carried out smoothly and we
are well positioned for potential acquisition opportunities. Please refer to the
section “New Business Development” for details of the land purchase for
development of cold storage facilities and the acquisition of the beverage
company.





After the
registered direct offering of common stock, the relative cost of capital
resources would decrease correspondingly given the increase in the equity
financing and the similar level of bank borrowings.


63


Apart
from the expansion plan discussed above and the commitments set out in the
section “Commitments and Contingencies” herein, we do not have any other
material commitments for capital and other expenditures. We believe that the
current operating activities would be able to generate adequate cash flows
supporting the daily operations. We do not have any further fund raising plan at
the moment.





CAPITAL
EXPENDITURES AND INVESTMENTS





A summary
of our capital expenditures for the last three financial years ended December
31, 2009, 2008 and 2007 is as follows:





Year
      ended December 31,US$’000
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007Land
      use rights
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Buildings
                  
                  
                  995
                  
                  
                  
                  3,496
                  
                  
                  
                  —Plant
      and machinery
                  
                  
                  316
                  
                  
                  
                  308
                  
                  
                  
                  20Office
      equipment
                  
                  
                  21
                  
                  
                  
                  22
                  
                  
                  
                  1Motor
      vehicles
                  
                  
                  16
                  
                  
                  
                  367
                  
                  
                  
                  —1,348
                  
                  
                  
                  4,193
                  
                  
                  
                  21





In
October 2008, we placed certain facilities into service and began depreciating
the plant at that time when the assets are substantially complete and ready for
their intended use. The Company reclassified approximately $1.9 million from
construction in progress to property, plant and equipment
accordingly.





In 2009,
total capital expenditures of $1.3 million were attributable to the addition of
fixed assets for the development of new processing plant and the associated
machineries. In this connection, our production capacity has been doubled by the
third quarter end of 2009.





COMMITMENTS
AND CONTINGENCIES





Operating
lease commitments





Ocean
Technology leased certain office space under a non-cancellable operating lease
agreement with a term of 3 years with fixed monthly rentals, expiring on
February 17, 2011, and generally did not contain significant renewal options.
Total rent expenses for the year ended December 31, 2009 was approximately
$77,000. Future minimum rental payments due under the non-cancelable operating
lease agreement are approximately $87,000 in total in the following two
years.





Guarantees





As of
December 31, 2009, Mingxiang is contingently liable as guarantor with respect to
the loans of $731,294 (equivalent to RMB5,000,000) and $438,776 (equivalent to
RMB3,000,000) to two unrelated third parties, Shishi Yu Ching Knitting and
Clothing Company (“Yu Ching”) and Shishi Han Jiang Hua Lian Knitting and
Clothing Factory (“Han Jiang Hua Lian”), respectively. The term of these
guarantees are commenced from July 2009 through July 2011, with a renewal
provision of 2 years. At any time from the date of guarantees, should Yu Ching
or Han Jiang Hua Lian fail to make their due debt payments, Mingxiang will be
obligated to perform under the guarantees 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 guarantees is
$1,170,070 (equivalent to RMB8,000,000).





According
to the Personal Guarantee Agreement between Mingxiang and Mr. Liu, Mr. Liu
agreed to bear all liabilities and costs to be incurred from a direct claim by
the creditor if either Yu Ching or Han Jiang Hua Lian fails to make payment 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 indemnification fair value to be insignificant.
As of December 31, 2009, the Company has not recorded any liabilities under
these guarantees.





ISSUANCE
OF COMMON STOCK





In 2009,
we issued 387,338 new shares of common stock in total to the following
parties.


64





On
November 17, 2007, we completed a private placement of our securities to certain
accredited investors who subscribed for units consisting one share of common
stock and a warrant to purchase one-fifth of one share of our common
stock.  The investors subscribed for 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 warrant issued to the investors has a
term of three years and is exercisable at any time for a price equal to $4.1782
in cash or on a cashless exercise basis. In 2009, certain accredited investors
have exercised 840,701 warrants pursuant to the cashless exercise provision of
the warrants and received 332,287 shares of common stock in total.





On July
26, 2008, the Company entered into an Employment Agreement with its CFO in which
the Company agreed to provide restricted common stock award totaling 30,000
shares at the anniversary of the agreement or at the time of successful listing
of the Company on any stock exchange other than OTCBB, whichever is earlier. The
shares of common stock were valued at $66,975 in total.





On
February 20, 2009, the Company entered into an Investor Relations Consulting
Agreement with Hayden Communications International, Inc (''HCI'') in exchange
for consulting services to the Company. The Company agreed to provide 20,000
shares of restricted common stock to HCI upon the effectiveness of a
registration statement on Form S-1. The shares of common stock were valued at
$29,000 in total.





In 2009,
the Company and its legal counsel, McLaughlin & Stern LLP (“McLaughlin”),
came into an agreement that the Company agreed to issue 5,051 shares of
restricted common stock to McLaughlin in exchange for certain legal services to
the Company. The shares of common stock were valued at $40,000 in
total.





CRITICAL
ACCOUNTING POLICIES & RECENT ACCOUNTING PRONOUNCEMENTS





l
              Basis
      of presentation





These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (“US
GAAP”).





l
              Basis
      of consolidation





The
consolidated financial statements include the financial statements of China
Marine and its subsidiaries.





All
significant intercompany balances and transactions within the Company have been
eliminated upon consolidation.





l
              Use
      of estimates





In
preparing these 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 years reported. Actual results could differ
from these estimates.





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 $7,125,721 and $31,640,307 as of December 31, 2009
and 2008, respectively.





l
              Accounts
      receivable and allowance for doubtful
accounts





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





As of
December 31, 2009 and 2008, the allowance for doubtful accounts was $94,643 and
$24,218, respectively.




65




l
              Inventories





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





As of
December 31, 2009 and 2008, 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
      valueBuildings
                    
                    30-50
      years
                    
                    
                    10
                    %Plant
      and machinery
                    
                    10-30
      years
                    
                    
                    10
                    %Office
      equipments
                    
                    8-10
      years
                    
                    
                    10
                    %Motor
      vehicles
                    
                    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
              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.





l
              Impairment
      of long-lived assets





In
accordance with the provisions of Accounting Standards Codification ("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 construction in progress held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is evaluated by a
comparison of the carrying amount of assets to estimated discounted net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed the fair value of the assets. There
has been no impairment as of December 31, 2009 and 2008.





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 collectibility is reasonably assured.





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





The
Company recognizes revenue from the sale of products upon delivery to the
customers and the transfer of title and risk of loss. The Company experienced no
product returns and has recorded no reserve for sales returns for the years
ended December 31, 2009 and 2008.


66


The
Company has distributor arrangements with certain parties for sale of its
processed seafood products. The distributor agreements do not provide
chargeback, price protection, or stock rotation rights. Accordingly, the Company
records the revenue, net of VAT incurred when products are delivered to and
received by the distributors.





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





l
              Cost
      of revenue





Cost of
revenue consists primarily of purchase cost of raw fishes, packaging materials,
direct labor, depreciation and manufacturing overheads, which are directly
attributable to the manufacture of processed seafood products and marine catch.
Shipping and handling costs, associated with the distribution of finished
products to customers, are borne by the customers.





l
              Government
      subsidy income





Subsidy
income is received at a discretionary amount as determined by the local PRC
government. Subsidy income is recognized at their fair value where there is a
reasonable assurance that the subsidy will be received and the Company will
comply with applicable conditions. Subsidy income is recognized in the
accompanying consolidated statements of operations at the period when it was
received from the local PRC government.





l
              Advertising
      costs





Advertising
costs are expensed as incurred under ASC Topic 720-35,“Advertising Costs”. The
Company incurred advertising expense of $196,461 and $151,177 for the years
ended December 31, 2009 and 2008, respectively.





l
              Research
      and development





Research
and development costs are expensed when incurred in the development of new
products or processes including significant improvements and refinements of
existing products. Such costs mainly relate to labor and material cost. The
Company incurred $236,595 and $87,327 of such costs for the years ended December
31, 2009 and 2008, respectively.





l
              Retirement
      plan costs





Contributions
to retirement schemes (which are defined contribution plans) are charged to
general and administrative expenses in the accompanying consolidated statements
of operation and comprehensive income as the related employee service is
provided.





l
              Comprehensive
      income





ASC Topic
220, “Reporting Comprehensive
Income”, establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as defined
includes all changes in equity during a period from non-owner sources.
Accumulated other comprehensive income, as presented in the accompanying
statement of changes in stockholders’ equity, consists of changes in unrealized
gains and losses on foreign currency translation. This comprehensive income is
not included in the computation of income tax expense or benefit.





l
              Income
      taxes





The
Company adopts ASC Topic 740, “Income Taxes”, regarding
accounting for uncertainty in income taxes which prescribes the recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken on a tax return. In
addition, the guidance requires the determination of whether the benefits of tax
positions will be more likely than not sustained upon audit based upon the
technical merits of the tax position. For tax positions that are determined to
be more likely than not sustained upon audit, a company recognizes the largest
amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not
determined to be more likely than not sustained upon audit, a company does not
recognize any portion of the benefit in the financial statements. The guidance
provides for de-recognition, classification, penalties and interest, accounting
in interim periods and disclosure.





For the
years ended December 31, 2009 and 2008, the Company did not have any interest
and penalties associated with tax positions. As of December 31, 2009 and 2008,
the Company did not have any significant unrecognized uncertain tax
positions.


67


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
              Net
      income per share





The
Company calculates net income per share in accordance with ASC Topic 260,“Earnings per Share.” Basic
income per share is computed by dividing the net income by the weighted average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.





l
              Foreign
      currencies translation





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





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





In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with 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 stockholders’
equity.





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


2009
                  
                  
                  2008Year-end
      rates RMB:US$1 exchange rate
                  
                  
                  6.8372
                  
                  
                  
                  6.8542Average
      yearly rates RMB:US$1 exchange rate
                  
                  
                  6.8409
                  
                  
                  
                  6.9623





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
              Related
      parties





Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operational decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.





l
              Segment
      reporting





ASC Topic
280, “SegmentReporting” 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 years ended December 31, 2009 and 2008, the Company operates
in two principal reportable segments: sale of processed seafood products and
trading of marine catch.


68


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.





l
              Financial
      instruments





Cash and
cash equivalents, accounts receivable, prepaid expenses and other current
assets, accounts payable, amount due to a stockholder, income tax payable and
accrued liabilities and other payable are carried at cost which approximates
fair value. The estimated fair value of short-term borrowing was $4.1 million
and $4.3 million as of December 31, 2009 and 2008, respectively, based on
current market prices or interest rates. Any changes in fair value of assets or
liabilities carried at fair value are recognized in other comprehensive income
for each period.





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
2009, Accounting Standards Codification (“ASC”) became the source of
authoritative U.S. GAAP recognized by the Financial Accounting Standards Board
(“FASB”) for nongovernmental entities, except for certain FASB Statements not
yet incorporated into ASC. Rules and interpretive releases of the SEC under
federal securities laws are also sources of authoritative U.S. GAAP for
registrants. The discussion below includes the applicable ASC
reference.





The
Company adopted ASC Topic 810-10, “Consolidation” (formerly SFAS
No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51”) effective January 2, 2009. Topic 810-10 changes the manner of
presentation and related disclosures for the noncontrolling interest in a
subsidiary (formerly referred to as a minority interest) and for the
deconsolidation of a subsidiary. The adoption of these sections did not have a
material impact on the Company’s consolidated financial statements.





ASC Topic
815-10, “Derivatives and
Hedging” (formerly SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”) was adopted by the Company effective
January 2, 2009. The guidance under ASC Topic 815-10 changes the manner of
presentation and related disclosures of the fair values of derivative
instruments and their gains and losses.





In April
2009, the FASB issued an update to ASC Topic 820-10, “Fair Value Measurements and
Disclosures” (“ASC 820-10) (formerly FASB Staff Position No. SFAS 157-4,
“Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly”). The
standard provides additional guidance on estimating fair value in accordance
with ASC 820-10 when the volume and level of transaction activity for an asset
or liability have significantly decreased in relation to normal market activity
for the asset or liability have significantly decreased and includes guidance on
identifying circumstances that indicate if a transaction is not orderly. The
Company adopted this pronouncement effective April 1, 2009 with no impact on its
consolidated financial statements.





In April
2009, the FASB issued FSP SFAS No. 107-1, “Disclosures about Fair Value of
Financial Instruments” (“ASC 825-10”). ASC 825-10 requires fair value of
financial instruments disclosure for interim reporting periods of publicly
traded companies as well as in annual financial statements. ASC 825-10 is
effective for interim periods ending after June 15, 2009 and was adopted by the
Company in the second quarter of 2009. There was no material impact to the
Company’s consolidated financial statements as a result of the adoption of ASC
825-10.





In April
2009, the FASB issued FSP APB No. 28-1, “Interim Financial Reporting”
(“ASC 825-10”). ASC 825-10 requires the fair value of financial instruments
disclosure in summarized financial information at interim reporting periods. ASC
825-10 is effective for interim periods ending after June 15, 2009 and was
adopted by the Company in the second quarter of 2009. There was no material
impact to the Company’s consolidated financial statements as a result of the
adoption of ASC 825-10.


69


In June
2009, the FASB finalized SFAS No. 167, “Amending FASB interpretation No.
46(R)”, which was included in ASC Topic 810-10-05 “Variable Interest Entities”.
The provisions of ASC Topic 810-10-05 amend the definition of the primary
beneficiary of a variable interest entity and will require the Company to make
an assessment each reporting period of its variable interests. The provisions of
this pronouncement are effective January 1, 2010. The Company is evaluating the
impact of the statement on its consolidated financial statements.





In July
2009, the FASB issued SFAS No. 168, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS 168 codified all previously issued
accounting pronouncements, eliminating the prior hierarchy of accounting
literature, in a single source for authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. SFAS 168, now ASC Topic 105-10
“Generally Accepted Accounting
Principles”, is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of this
pronouncement did not have an effect on the Company’s consolidated financial
statements.





In August
2009, the FASB issued an update of ASC Topic 820, “Measuring Liabilities at Fair Value”. The new guidance provides clarification that in circumstances in which
a quoted price in an active market for the identical liability is not available,
a reporting entity is required to measure fair value using prescribed
techniques. The Company adopted the new guidance in the third quarter of 2009
and it did not materially affect the Company’s financial position and results of
operations.





In
October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13,
“Revenue Recognition (Topic
605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB
Emerging Issues Task Force)” which amends ASC 605-25, “Revenue Recognition:
Multiple-Element Arrangements.” ASU No. 2009-13 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting and how to allocate consideration to each unit of
accounting in the arrangement. This ASU replaces all references to fair value as
the measurement criteria with the term selling price and establishes a hierarchy
for determining the selling price of a deliverable. ASU No. 2009-13 also
eliminates the use of the residual value method for determining the allocation
of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded
disclosures. This ASU will become effective for us for revenue arrangements
entered into or materially modified on or after April 1, 2011. Earlier
application is permitted with required transition disclosures based on the
period of adoption. The Company is currently evaluating the application date and
the impact of this standard on its consolidated financial
statements.





In
September 2009, the FASB issued certain amendments as codified in ASC 605-25,
“Revenue Recognition;
Multiple-Element Arrangements.” These amendments provide
clarification on whether multiple deliverables exist, how the arrangement should
be separated, and the consideration allocated. An entity is required to
allocate revenue in an arrangement using estimated selling prices of
deliverables in the absence of vendor-specific objective evidence or third-party
evidence of selling price. These amendments also eliminate the use of the
residual method and require an entity to allocate revenue using the relative
selling price method. The amendments significantly expand the disclosure
requirements for multiple-deliverable revenue arrangements. These
provisions are to be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010, with earlier application permitted. The Company is currently
evaluating the impact of these amendments to its consolidated financial
statements.





In
November 2009, the FASB issued ASU 2009-16, “Transfers and Servicing
(Topic 860) – Accounting
for Transfers of Financial Assets,” which formally codifies FASB
Statement No. 166, “Accounting
for Transfers of Financial Assets.” ASU 2009-16 is a revision to SFAS No.
140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,”
and requires more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transfer of financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. The provisions are
effective January 1, 2010, for a calendar year-end entity, with early
application not being permitted. Adoption of these provisions is not
expected to have a material impact on the Company’s consolidated financial
statements.





FOREIGN
EXCHANGE EXPOSURE





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





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


70





Year
      ended December 31,(%)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007SalesRMB
                  
                  
                  97.4
                  
                  
                  
                  95.1
                  
                  
                  
                  99.5US
      dollars
                  
                  
                  2.6
                  
                  
                  
                  4.9
                  
                  
                  
                  0.5Total
                  
                  
                  100.0
                  
                  
                  
                  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 December 31,
2009, the exchange rate was approximately US$1.00 to RMB6.8372. 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.





Our net
foreign exchange gains or losses for the last three financial years ended
December 31, 2009, 2008 and 2007 are as follows:





Year
      ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Net
      foreign exchange (losses)/ gains (US$’000)
                  
                  
                  (3
                  )
                  
                  
                  (19
                  )
                  
                  
                  14As
      a percentage of income before tax (%)
                  
                  
                  0.02
                  
                  
                  
                  0.15
                  
                  
                  
                  0.14





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





INFLATION





During
the periods under review, inflation did not have a material impact on our
financial performance.





Web Site Access to Our Periodic SEC
Reports





You may
read and copy any public reports we filed with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site http://www.sec.gov
that contains reports and information statements, and other information that we
filed electronically.





ITEM
      7A.
            Quantitative
      and Qualitative Disclosures about Market
Risks




Interest
Rate Risk





We are
exposed to interest rate risk primarily with respect to our short-term bank
loans. Although the interest rates are fixed at the benchmark lending
rate for the terms of the loans, the terms are typically twelve months and
interest rates are subject to change upon renewal. Interest rates for our
short-term bank loans have been decreased quite significantly from 7.47% in the
last quarter of 2008 to 5.31% in the same period of 2009. A hypothetical 1.0%
increase in the annual interest rates for all of our credit facilities at $4.1
million would decrease net income before provision for income tax by
approximately $41,000 per annum. Management monitors the banks’ interest rates
in conjunction with our cash requirements to determine the appropriate level of
debt balances relative to other sources of funds. We have not entered into any
hedging transactions in an effort to reduce our exposure to interest rate
risk.





Foreign
Exchange Risk





While our
reporting currency is the US dollar, almost all of our consolidated revenues and
consolidated costs and expenses are denominated in RMB. All of our assets are
denominated in RMB except for some cash and cash equivalents and accounts
receivables. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the
exchange rate between US dollar and RMB. If the RMB depreciates against the US
dollar, the value of our RMB revenues, earnings and assets as expressed in our
US dollar financial statements will decline. We have not entered into any
hedging transactions in an effort to reduce our exposure to foreign exchange
risk.


71


Inflation





Inflationary
factors such as increases in the costs of our products and overhead costs may
adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling and
distribution, general and administrative expenses as a percentage of net
revenues if the selling prices of our products do not increase to cope with
these increased costs.


72


ITEM 8.
            Financial Statements and
      Supplementary Data





CHINA
MARINE FOOD GROUP LIMITED





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





PageReport
      of Independent Registered Public Accounting Firm, ZYCPA Company
      Limited
                
                F-2Consolidated
      Balance Sheets
                
                F-3Consolidated
      Statements of Operations and Comprehensive Income
                
                F-4Consolidated
      Statements of Cash Flows
                
                F-5Consolidated
      Statements of Changes in Stockholders’ Equity
                
                F-6Notes
      to Consolidated Financial Statements
                
                F-7
      - F-28




F-1








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The Board
of Directors and stockholders of


China
Marine Food Group Limited





We have
audited the accompanying consolidated balance sheets of China Marine Food Group
Limited and its subsidiaries (“the Company”) as of December 31, 2009 and 2008
and the related consolidated statements of operations and comprehensive income,
cash flows and changes in stockholders’ equity for the years ended December 31,
2009 and 2008. The financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits include consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2009 and 2008 and the results of their operation and their cash flows for
the years ended December 31, 2009 and 2008 in conformity with accounting
principles generally accepted in the United States of America.





/s/ ZYCPA Company
Limited





ZYCPA
Company Limited


Certified
Public Accountants





Hong
Kong, China


March 22,
2010








F-2


CHINA
MARINE FOOD GROUP LIMITED


CONSOLIDATED
BALANCE SHEETS


AS
OF DECEMBER 31, 2009 AND 2008


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





As
      of December 31,2009
                          
                          
                          2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          7,143,232
                          
                          
                          $
                          31,640,307Accounts
      receivable, net
                          
                          
                          18,834,062
                          
                          
                          
                          4,819,434Inventories
                          
                          
                          3,876,950
                          
                          
                          
                          6,679,488Note
      receivable
                          
                          
                          26,399,696
                          
                          
                          
                          —Prepaid
      expenses and other current assets
                          
                          
                          151,653
                          
                          
                          
                          326,977Total
      current assets
                          
                          
                          56,405,593
                          
                          
                          
                          43,466,206Property,
      plant and equipment, net
                          
                          
                          8,599,977
                          
                          
                          
                          5,944,515Land
      use rights, net
                          
                          
                          615,355
                          
                          
                          
                          630,150Prepayment
      for land use right
                          
                          
                          2,274,323
                          
                          
                          
                          —Construction
      in progress
                          
                          
                          —
                          
                          
                          
                          1,604,855TOTAL
      ASSETS
                          
                          $
                          67,895,248
                          
                          
                          $
                          51,645,726LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short-term
      borrowings
                          
                          $
                          4,139,121
                          
                          
                          $
                          4,289,341Accounts
      payable, trade
                          
                          
                          885,286
                          
                          
                          
                          416,463Amount
      due to a stockholder
                          
                          
                          69,587
                          
                          
                          
                          170,091Income
      tax payable
                          
                          
                          618,664
                          
                          
                          
                          362,326Accrued
      liabilities and other payable
                          
                          
                          2,334,384
                          
                          
                          
                          1,387,427Total
      current liabilities
                          
                          
                          8,047,042
                          
                          
                          
                          6,625,648Commitments
      and contingencies (see Note 19)Stockholders’
      equity:Preferred
      stock, $0.001 par value; 1,000,000 shares authorized; 0 shares issued and
      outstanding as of December 31, 2009 and 2008
                          
                          
                          —
                          
                          
                          
                          —Common
      stock, $0.001 par value; 100,000,000 shares authorized; 23,413,639 and
      23,026,301 shares issuedand
      outstanding as of December 31, 2009 and 2008
                          
                          
                          23,414
                          
                          
                          
                          23,026Additional
      paid-in capital
                          
                          
                          16,888,532
                          
                          
                          
                          16,752,945Statutory
      reserve
                          
                          
                          5,614,517
                          
                          
                          
                          4,883,700Accumulated
      other comprehensive income
                          
                          
                          3,576,135
                          
                          
                          
                          3,448,436Retained
      earnings
                          
                          
                          33,745,608
                          
                          
                          
                          19,911,971Total
      stockholders’ equity
                          
                          
                          59,848,206
                          
                          
                          
                          45,020,078TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                          
                          $
                          67,895,248
                          
                          
                          $
                          51,645,726





See
accompanying notes to consolidated financial statements.


F-3


CHINA
MARINE FOOD GROUP LIMITED


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008


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





Years ended December 31,2009
                    
                    
                    2008Revenue,
      net
                    
                    $
                    69,585,683
                    
                    
                    $
                    48,798,804Cost of revenue
      (inclusive of depreciation and amortization)
                    
                    
                    (50,456,225
                    )
                    
                    
                    (33,606,972
                    )Gross
      profit
                    
                    
                    19,129,458
                    
                    
                    
                    15,191,832Operating
      expenses:Depreciation
      and amortization
                    
                    
                    (79,725
                    )
                    
                    
                    (58,310
                    )Sales
      and marketing
                    
                    
                    (608,685
                    )
                    
                    
                    (608,259
                    )General
      and administrative
                    
                    
                    (2,276,006
                    )
                    
                    
                    (2,067,802
                    )Total
      operating expenses
                    
                    
                    (2,964,416
                    )
                    
                    
                    (2,734,371
                    )Income
      from operations
                    
                    
                    16,165,042
                    
                    
                    
                    12,457,461Other
      income (expenses):Subsidy
      income
                    
                    
                    309,901
                    
                    
                    
                    68,225Rental
      income
                    
                    
                    82,299
                    
                    
                    
                    73,941Interest
      income
                    
                    
                    288,687
                    
                    
                    
                    505,173Interest
      expense
                    
                    
                    (230,433
                    )
                    
                    
                    (319,229
                    )Income
      before income taxes
                    
                    
                    16,615,496
                    
                    
                    
                    12,785,571Income
      tax expense
                    
                    
                    (2,051,042
                    )
                    
                    
                    (1,662,761
                    )NET
      INCOME
                    
                    $
                    14,564,454
                    
                    
                    $
                    11,122,810Other
      comprehensive income:-
      Foreign currency translation gain
                    
                    
                    127,699
                    
                    
                    
                    2,195,540COMPREHENSIVE
      INCOME
                    
                    $
                    14,692,153
                    
                    
                    $
                    13,318,350Net
      income per share – basic
                    
                    $
                    0.63
                    
                    
                    $
                    0.48Net
      income per share – diluted
                    
                    $
                    0.60
                    
                    
                    $
                    0.48Weighted
      average shares outstanding – basic
                    
                    
                    23,062,839
                    
                    
                    
                    23,010,842Weighted
      average shares outstanding – diluted
                    
                    
                    24,391,942
                    
                    
                    
                    23,010,842





See
accompanying notes to consolidated financial statements.


F-4


CHINA
MARINE FOOD GROUP LIMITED


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008


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





Years ended December 31,2009
                          
                          
                          2008Cash
      flows from operating activities:Net
      income
                          
                          $
                          14,564,454
                          
                          
                          $
                          11,122,810Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                          
                          
                          330,419
                          
                          
                          
                          237,400Loss
      on disposal of property, plant and equipment
                          
                          
                          1,386
                          
                          
                          
                          156,681Stock
      issued to an executive
                          
                          
                          66,975
                          
                          
                          
                          77,136Stock
      issued for service
                          
                          
                          69,000
                          
                          
                          
                          96,420Allowance
      for doubtful accounts
                          
                          
                          70,425
                          
                          
                          
                          3,196Changes
      in operating assets and liabilities:Accounts
      receivable
                          
                          
                          (14,085,053
                          )
                          
                          
                          (639,193
                          )Inventories
                          
                          
                          2,802,538
                          
                          
                          
                          (5,492,153
                          )Prepaid
      expenses and other current assets
                          
                          
                          175,324
                          
                          
                          
                          (161,449
                          )Accounts
      payable, trade
                          
                          
                          468,823
                          
                          
                          
                          (20,157
                          )Income
      tax payable
                          
                          
                          256,338
                          
                          
                          
                          21,232Accrued
      liabilities and other payable
                          
                          
                          946,957
                          
                          
                          
                          598,575Net
      cash provided by operating activities
                          
                          
                          5,667,586
                          
                          
                          
                          6,000,498Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                          
                          
                          (353,177
                          )
                          
                          
                          (634,069
                          )Proceeds
      from disposal of property, plant and equipment
                          
                          
                          —
                          
                          
                          
                          13,906Cash
      paid to construction in progress
                          
                          
                          (995,235
                          )
                          
                          
                          (3,558,441
                          )Cash
      paid to prepayment for land use right
                          
                          
                          (2,274,323
                          )
                          
                          
                          —Advances
      to note receivable
                          
                          
                          (26,399,696
                          )
                          
                          
                          —Net
      cash used in investing activities
                          
                          
                          (30,022,431
                          )
                          
                          
                          (4,178,604
                          )Cash
      flows from financing activities:Repayment
      of amount due to a stockholder
                          
                          
                          (100,504
                          )
                          
                          
                          (92,297
                          )Proceeds
      from short-term borrowings
                          
                          
                          4,139,121
                          
                          
                          
                          8,844,844Payment
      on short-term borrowings
                          
                          
                          (4,289,341
                          )
                          
                          
                          (5,388,690
                          )Net
      cash (used in) provided by financing activities
                          
                          
                          (250,724
                          )
                          
                          
                          3,363,857Effect
      of exchange rate changes in cash and cash equivalents
                          
                          
                          108,494
                          
                          
                          
                          1,977,909NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                          
                          
                          (24,497,075
                          )
                          
                          
                          7,163,660CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                          
                          
                          31,640,307
                          
                          
                          
                          24,476,647CASH
      AND CASH EQUIVALENTS, END OF YEAR
                          
                          $
                          7,143,232
                          
                          
                          $
                          31,640,307SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid for income taxes
                          
                          $
                          1,794,704
                          
                          
                          $
                          1,641,529Cash
      paid for interest
                          
                          $
                          230,433
                          
                          
                          $
                          319,229SUPPLEMENTAL
      DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONSTransfer
      from construction in progress to property, plant and
    equipment
                          
                          $
                          2,600,090
                          
                          
                          $
                          —





See
accompanying notes to consolidated financial statements.


F-5


CHINA
MARINE FOOD GROUP LIMITED


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008


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





Common
      stock
                              
                              
                              Additional
                                paid-in
                              
                              
                              Statutory
                              
                              
                              Accumulated
                                other
                                comprehensive
                              
                              
                              Retained
                              
                              
                              Total
                                stockholder’sNo.
      of shares
                              
                              
                              Amount
                              
                              
                              capital
                              
                              
                              reserve
                              
                              
                              income
                              
                              
                              earnings
                              
                              
                              equityBalance
      as of December 31, 2007
                              
                              
                              22,972,301
                              
                              
                              $
                              22,972
                              
                              
                              $
                              16,579,443
                              
                              
                              $
                              3,110,266
                              
                              
                              $
                              $1,252,896
                              
                              
                              $
                              10,562,595
                              
                              
                              $
                              31,528,172Stock
      issued to an executive
                              
                              
                              24,000
                              
                              
                              
                              24
                              
                              
                              
                              77,112
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              77,136Stock
      issued for service
                              
                              
                              30,000
                              
                              
                              
                              30
                              
                              
                              
                              96,390
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              96,420Net
      income for the year
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              11,122,810
                              
                              
                              
                              11,122,810Appropriation
      to statutory reserve
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,773,434
                              
                              
                              
                              —
                              
                              
                              
                              (1,773,434
                              )
                              
                              
                              —Foreign
      currency translation adjustment
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              2,195,540
                              
                              
                              
                              —
                              
                              
                              
                              2,195,540Balance
      as of December 31, 2008
                              
                              
                              23,026,301
                              
                              
                              $
                              23,026
                              
                              
                              $
                              16,752,945
                              
                              
                              $
                              4,883,700
                              
                              
                              $
                              3,448,436
                              
                              
                              $
                              19,911,971
                              
                              
                              $
                              45,020,078Stock
      issued to an executive
                              
                              
                              30,000
                              
                              
                              
                              30
                              
                              
                              
                              66,945
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              66,975Stock
      issued for service
                              
                              
                              25,051
                              
                              
                              
                              25
                              
                              
                              
                              68,975
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              69,000Exercise
      of warrants
                              
                              
                              332,287
                              
                              
                              
                              333
                              
                              
                              
                              (333
                              )
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Net
      income for the year
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              14,564,454
                              
                              
                              
                              14,564,454Appropriation
      to statutory reserve
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              730,817
                              
                              
                              
                              —
                              
                              
                              
                              (730,817
                              )
                              
                              
                              —Foreign
      currency translation adjustment
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              127,699
                              
                              
                              
                              —
                              
                              
                              
                              127,699Balance
      as of December 31, 2009
                              
                              
                              23,413,639
                              
                              
                              $
                              23,414
                              
                              
                              $
                              16,888,532
                              
                              
                              $
                              5,614,517
                              
                              
                              $
                              3,576,135
                              
                              
                              $
                              33,745,608
                              
                              
                              $
                              59,848,206





See
accompanying notes to consolidated financial statements.




F-6




CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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





1.        ORGANIZATION
AND BUSINESS BACKGROUND





China
Marine Food Group Limited (“China Marine” or “the Company”) was incorporated in
the State of Nevada on October 1, 1999 in the former name of New Paradigm
Productions, Inc. On November 16, 2007, the Company changed its current name to
“China Marine Food Group Limited”.





China
Marine, through its subsidiaries, mainly engages in the manufacture and
distribution of seafood products, including dried and frozen seafood products,
and trades with customers in domestic and overseas markets, with its principal
place of business in Shishi City, Fujian Province, China.





Recapitalization
and reorganization





On
November 17, 2007, China Marine completed a stock exchange transaction with the
stockholders of Ocean Technology (China) Company Limited (“Ocean Technology”),
whereby 15,624,034 shares of the Company’s common stock were issued to the
stockholders of Ocean Technology in exchange for 100% of their outstanding
capital stock in Ocean Technology. As a result of the stock exchange, the former
stockholders of Ocean Technology owned approximately 93.15% of the issued and
outstanding shares of common stock of the Company.





Concurrently
with the closing of the stock exchange on November 17, 2007, China Marine
completed a private placement of securities to certain accredited investors who
subscribed to units consisting of one share of common stock and one warrant to
purchase one-fifth of one share of the common stock. The investors subscribed to
an aggregate of 6,199,441 units, consisting of 6,199,441 shares of the Company’s
common stock and warrants to purchase an aggregate of 1,239,888 shares of the
common stock at $3.214 per unit. The units were offered and sold pursuant to
exemptions from registration under the Securities Act of 1933, including without
limitation, Regulation D and Regulation S promulgated under the Securities Act.
The gross cash proceeds from the private placement totaled $19,925,000 less
estimated offering expenses of $5,941,014 cash and warrant shares granted. Also
in connection with this stock exchange and private placement transactions, China
Marine granted 929,916 warrant shares to certain agents and consultants
exercisable at $4.1782 per share for a term of 3 years.





On
November 16, 2007, China Marine approved to change to its current name with a
new stock symbol "CMFO”.





Upon
completion of the stock exchange and private placement transactions, Ocean
Technology became a wholly-owned subsidiary of China Marine. The stock exchange
transaction has been 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.





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
                    heldOcean
      Technology (China) Company Limited (“Ocean Technology”) (formerly
      Nice Enterprise Trading H. K. Co., Limited)
                  
                  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
                  
                  $11,000,000
                  
                  100%Shishi
      Huabao Mingxiang Foods Co., Ltd (“Mingxiang”)
                  
                  The
      PRC, a limited liability company
                  
                  Property
      holding
                  
                  RMB30,000,000
                  
                  100%Shishi
      Huabao Jixiang Water Products Co., Ltd (“Jixiang”)
                  
                  The
      PRC, a limited liability company
                  
                  Property
      holding
                  
                  RMB4,500,000
                  
                  100%Shishi
      Xianglin Trading Co., Ltd. (“Xianglin”)
                  
                  The
      PRC, a limited liability company
                  
                  Dormant
                  
                  RMB800,000
                  
                  100%




F-7




CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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




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





2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





l
              Basis
      of presentation





These
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (“US
GAAP”).





l
              Basis
      of consolidation





The
consolidated financial statements include the financial statements of China
Marine and its subsidiaries.





All
significant intercompany balances and transactions within the Company have been
eliminated upon consolidation.





l
              Use
      of estimates





In
preparing these 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 years reported. Actual results could differ
from these estimates.





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 $7,125,721 and $31,640,307 as of December 31, 2009
and 2008, respectively.





l
              Accounts
      receivable and allowance for doubtful
accounts





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


F-8




CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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




As of
December 31, 2009 and 2008, the allowance for doubtful accounts was $94,643 and
$24,218, respectively.





l
              Inventories





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





As of
December 31, 2009 and 2008, 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 valueBuildings
                        
                        30-50
      years
                        
                        
                        10
                        %Plant
      and machinery
                        
                        10-30
      years
                        
                        
                        10
                        %Office
      equipments
                        
                        8-10
      years
                        
                        
                        10
                        %Motor
      vehicles
                        
                        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
              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.





l
              Impairment
      of long-lived assets





In
accordance with the provisions of Accounting Standards Codification ("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 construction in progress held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is evaluated by a
comparison of the carrying amount of assets to estimated discounted net cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed the fair value of the assets. There
has been no impairment as of December 31, 2009 and 2008.


F-9




CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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




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 collectibility is reasonably assured.





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





The
Company recognizes revenue from the sale of products upon delivery to the
customers and the transfer of title and risk of loss. The Company experienced no
product returns and has recorded no reserve for sales returns for the years
ended December 31, 2009 and 2008.





The
Company has distributor arrangements with certain parties for sale of its
processed seafood products. The distributor agreements do not provide
chargeback, price protection, or stock rotation rights. Accordingly, the Company
records the revenue, net of VAT incurred when products are delivered to and
received by the distributors.





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





l
              Cost
      of revenue





Cost of
revenue consists primarily of purchase cost of raw fishes, packaging materials,
direct labor, depreciation and manufacturing overheads, which are directly
attributable to the manufacture of processed seafood products and marine catch.
Shipping and handling costs, associated with the distribution of finished
products to customers, are borne by the customers.





l
              Government
      subsidy income





Subsidy
income is received at a discretionary amount as determined by the local PRC
government. Subsidy income is recognized at their fair value where there is a
reasonable assurance that the subsidy will be received and the Company will
comply with applicable conditions. Subsidy income is recognized in the
accompanying consolidated statements of operations at the period when it was
received from the local PRC government.





l
              Advertising
      costs





Advertising
costs are expensed as incurred under ASC Topic 720-35,“Advertising Costs”. The
Company incurred advertising expense of $196,461 and $151,177 for the years
ended December 31, 2009 and 2008, respectively.





l
              Research
      and development





Research
and development costs are expensed when incurred in the development of new
products or processes including significant improvements and refinements of
existing products. Such costs mainly relate to labor and material cost. The
Company incurred $236,595 and $87,327 of such costs for the years ended December
31, 2009 and 2008, respectively.





l
              Retirement
      plan costs





Contributions
to retirement schemes (which are defined contribution plans) are charged to
general and administrative expenses in the accompanying consolidated statements
of operation and comprehensive income as the related employee service is
provided.


F-10




CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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




l
              Comprehensive
      income





ASC Topic
220, “Reporting Comprehensive
Income”, establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as defined
includes all changes in equity during a period from non-owner sources.
Accumulated other comprehensive income, as presented in the accompanying
statement of changes in stockholders’ equity, consists of changes in unrealized
gains and losses on foreign currency translation. This comprehensive income is
not included in the computation of income tax expense or benefit.





l
              Income
      taxes





The
Company adopts ASC Topic 740, “Income Taxes”, regarding
accounting for uncertainty in income taxes which prescribes the recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken on a tax return. In
addition, the guidance requires the determination of whether the benefits of tax
positions will be more likely than not sustained upon audit based upon the
technical merits of the tax position. For tax positions that are determined to
be more likely than not sustained upon audit, a company recognizes the largest
amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not
determined to be more likely than not sustained upon audit, a company does not
recognize any portion of the benefit in the financial statements. The guidance
provides for de-recognition, classification, penalties and interest, accounting
in interim periods and disclosure.





For the
years ended December 31, 2009 and 2008, the Company did not have any interest
and penalties associated with tax positions. As of December 31, 2009 and 2008,
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
              Net
      income per share





The
Company calculates net income per share in accordance with ASC Topic 260,“Earnings per Share.” Basic
income per share is computed by dividing the net income by the weighted average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.





l
              Foreign
      currencies translation





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





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





In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with 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 stockholders’
equity.





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


F-11


CHINA
MARINE FOOD GROUP LIMITED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 AS
OF DECEMBER 31, 2009 AND 2008
 (Currency
expressed in United States Dollars (“US$”))


2009
                    
                    
                    2008Year-end
      rates RMB:US$1 exchange rate
                    
                    
                    6.8372
                    
                    
                    
                    6.8542Average
      yearly rates RMB:US$1 exchange rate
                    
                    
                    6.8409
                    
                    
                    
                    6.9623





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
              Related
      parties





Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operational decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.





l
              Segment
      reporting





ASC Topic
280, “SegmentReporting” 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 years ended December 31, 2009 and 2008, the Company operates
in two principal reportable segments: sale of processed seafood products and
trading of marine catch.





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.





l
              Financial
      instruments





Cash and
cash equivalents, accounts receivable, prepaid expenses and other current
assets, accounts payable, amount due to a stockholder, income tax payable and
accrued liabilities and other payable are carried at cost which approximates
fair value. The estimated fair value of short-term borrowing was $4.1 million
and $4.3 million as of December 31, 2009 and 2008, respectively, based on
current market prices or interest rates. Any changes in fair value of assets or
liabilities carried at fair value are recognized in other comprehensive income
for each period.


F-12




CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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




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
2009, Accounting Standards Codification (“ASC”) became the source of
authoritative U.S. GAAP recognized by the Financial Accounting Standards Board
(“FASB”) for nongovernmental entities, except for certain FASB Statements not
yet incorporated into ASC. Rules and interpretive releases of the SEC under
federal securities laws are also sources of authoritative U.S. GAAP for
registrants. The discussion below includes the applicable ASC
reference.





The
Company adopted ASC Topic 810-10, “Consolidation” (formerly SFAS
No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51”) effective January 2, 2009. Topic 810-10 changes the manner of
presentation and related disclosures for the noncontrolling interest in a
subsidiary (formerly referred to as a minority interest) and for the
deconsolidation of a subsidiary. The adoption of these sections did not have a
material impact on the Company’s consolidated financial statements.





ASC Topic
815-10, “Derivatives and
Hedging” (formerly SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”) was adopted by the Company effective
January 2, 2009. The guidance under ASC Topic 815-10 changes the manner of
presentation and related disclosures of the fair values of derivative
instruments and their gains and losses.





In April
2009, the FASB issued an update to ASC Topic 820-10, “Fair Value Measurements and
Disclosures” (“ASC 820-10) (formerly FASB Staff Position No. SFAS 157-4,
“Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly”). The
standard provides additional guidance on estimating fair value in accordance
with ASC 820-10 when the volume and level of transaction activity for an asset
or liability have significantly decreased in relation to normal market activity
for the asset or liability have significantly decreased and includes guidance on
identifying circumstances that indicate if a transaction is not orderly. The
Company adopted this pronouncement effective April 1, 2009 with no impact on its
consolidated financial statements.





In April
2009, the FASB issued FSP SFAS No. 107-1, “Disclosures about Fair Value of
Financial Instruments” (“ASC 825-10”). ASC 825-10 requires fair value of
financial instruments disclosure for interim reporting periods of publicly
traded companies as well as in annual financial statements. ASC 825-10 is
effective for interim periods ending after June 15, 2009 and was adopted by the
Company in the second quarter of 2009. There was no material impact to the
Company’s consolidated financial statements as a result of the adoption of ASC
825-10.





In April
2009, the FASB issued FSP APB No. 28-1, “Interim Financial Reporting”
(“ASC 825-10”). ASC 825-10 requires the fair value of financial instruments
disclosure in summarized financial information at interim reporting periods. ASC
825-10 is effective for interim periods ending after June 15, 2009 and was
adopted by the Company in the second quarter of 2009. There was no material
impact to the Company’s consolidated financial statements as a result of the
adoption of ASC 825-10.





In June
2009, the FASB finalized SFAS No. 167, “Amending FASB interpretation No.
46(R)”, which was included in ASC Topic 810-10-05 “Variable Interest Entities”.
The provisions of ASC Topic 810-10-05 amend the definition of the primary
beneficiary of a variable interest entity and will require the Company to make
an assessment each reporting period of its variable interests. The provisions of
this pronouncement are effective January 1, 2010. The Company is evaluating the
impact of the statement on its consolidated financial statements.





In July
2009, the FASB issued SFAS No. 168, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS 168 codified all previously issued
accounting pronouncements, eliminating the prior hierarchy of accounting
literature, in a single source for authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. SFAS 168, now ASC Topic 105-10
“Generally Accepted Accounting
Principles”, is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of this
pronouncement did not have an effect on the Company’s consolidated financial
statements.


F-13




CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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




In August
2009, the FASB issued an update of ASC Topic 820, “Measuring Liabilities at Fair Value”. The new guidance provides clarification that in circumstances in which
a quoted price in an active market for the identical liability is not available,
a reporting entity is required to measure fair value using prescribed
techniques. The Company adopted the new guidance in the third quarter of 2009
and it did not materially affect the Company’s financial position and results of
operations.





In
October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13,
“Revenue Recognition (Topic
605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB
Emerging Issues Task Force)” which amends ASC 605-25, “Revenue Recognition:
Multiple-Element Arrangements.” ASU No. 2009-13 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting and how to allocate consideration to each unit of
accounting in the arrangement. This ASU replaces all references to fair value as
the measurement criteria with the term selling price and establishes a hierarchy
for determining the selling price of a deliverable. ASU No. 2009-13 also
eliminates the use of the residual value method for determining the allocation
of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded
disclosures. This ASU will become effective for us for revenue arrangements
entered into or materially modified on or after April 1, 2011. Earlier
application is permitted with required transition disclosures based on the
period of adoption. The Company is currently evaluating the application date and
the impact of this standard on its consolidated financial
statements.





In
September 2009, the FASB issued certain amendments as codified in ASC 605-25,
“Revenue Recognition;
Multiple-Element Arrangements.” These amendments provide
clarification on whether multiple deliverables exist, how the arrangement should
be separated, and the consideration allocated. An entity is required to
allocate revenue in an arrangement using estimated selling prices of
deliverables in the absence of vendor-specific objective evidence or third-party
evidence of selling price. These amendments also eliminate the use of the
residual method and require an entity to allocate revenue using the relative
selling price method. The amendments significantly expand the disclosure
requirements for multiple-deliverable revenue arrangements. These
provisions are to be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010, with earlier application permitted. The Company is currently
evaluating the impact of these amendments to its consolidated financial
statements.





In
November 2009, the FASB issued ASU 2009-16, “Transfers and Servicing
(Topic 860) – Accounting
for Transfers of Financial Assets,” which formally codifies FASB
Statement No. 166, “Accounting
for Transfers of Financial Assets.” ASU 2009-16 is a revision to SFAS No.
140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,”
and requires more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transfer of financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. The provisions are
effective January 1, 2010, for a calendar year-end entity, with early
application not being permitted. Adoption of these provisions is not
expected to have a material impact on the Company’s consolidated financial
statements.





3. ACCOUNTS
RECEIVABLE





The
majority of the Company’s sales are on open credit terms and in accordance with
terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible. If
actual collections experience changes, revisions to the allowance may be
required.





Accounts
receivable consisted of the following:





As
      of December 31,2009
                      
                      
                      2008Accounts
      receivable, at cost
                      
                      $
                      18,928,705
                      
                      
                      $
                      4,843,652Less:
      allowance for doubtful accounts
                      
                      
                      (94,643
                      )
                      
                      
                      (24,218
                      )Accounts
      receivable, net
                      
                      $
                      18,834,062
                      
                      
                      $
                      4,819,434


F-14




CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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




For the
years ended December 31, 2009 and 2008, the Company provided the allowance for
doubtful accounts of $70,425 and $3,196, respectively.





4. INVENTORIES





Inventories
consisted of the following:





As
      of December 31,2009
                                    
                                    
                                    2008Raw
      materials
                                    
                                    $
                                    510,104
                                    
                                    
                                    $
                                    5,076,881Work-in-process
                                    
                                    
                                    3,018,720
                                    
                                    
                                    
                                    1,262,854Finished
      goods
                                    
                                    
                                    151,197
                                    
                                    
                                    
                                    126,300Packaging
      materials
                                    
                                    
                                    196,929
                                    
                                    
                                    
                                    213,453Total
                                    
                                    $
                                    3,876,950
                                    
                                    
                                    $
                                    6,679,488





For the
years ended December 31, 2009 and 2008, the Company recorded no allowance for
slow-moving and obsolete inventories.





5. NOTE
RECEIVABLE





On
November 27, 2009, the Company’s subsidiary, Mingxiang entered into a Credit or
Share Purchase Option Agreement (the “Agreement”) among Shishi Xianghe Food
Science and Technology Co., Ltd (“Xianghe”) and its owner, Mr. Qiu Shang Jing
(“Mr. Qiu”). Pursuant to the Agreement, Mingxiang provided a short-term loan to
Xianghe in the amount of approximately $26,400,000 (equivalent to
RMB180,500,000) for working capital purposes, which carried interest at 5% per
annum, monthly payable and matures on January 26, 2010. This loan was secured by
all of the registered capital of Xianghe owned by Mr. Qiu.





In
addition, the Agreement offered Mingxiang the option to acquire from Mr. Qiu 80%
registered capital of Xianghe at a consideration of approximately $27,800,000
(equivalent to RMB190,000,000) if Mingxiang decided that Mingxiang did not want
Xianghe to repay the loan. Should Mingxiang elect to exercise the option,
Mingxiang needs to give a written notice to Xianghe and to transfer the
$26,400,000 from Xianghe to Mr. Qiu. The remaining RMB9,500,000 (approximately
$1,400,000) consideration shall be paid to Mr. Qiu by Mingxiang within 30
days after completion of Xianghe’s audit report.





On
January 1, 2010, Mingxiang exercised the option and became an equity owner of
Xianghe.


F-15




CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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




6. PROPERTY,
PLANT AND EQUIPMENT





Property,
plant and equipment, net, consisted of the following:





As of December 31,2009
                            
                            
                            2008Buildings
                            
                            $
                            6,620,904
                            
                            
                            $
                            4,008,018Plant
      and machinery
                            
                            
                            3,484,371
                            
                            
                            
                            3,162,665Office
      equipments
                            
                            
                            65,010
                            
                            
                            
                            43,994Motor
      vehicles
                            
                            
                            578,810
                            
                            
                            
                            561,27910,749,095
                            
                            
                            
                            7,775,956Less:
      accumulated depreciation
                            
                            
                            (2,149,118
                            )
                            
                            
                            (1,831,441
                            )Property,
      plant and equipment, net
                            
                            $
                            8,599,977
                            
                            
                            $
                            5,944,515





As of
December 31, 2009 and 2008, certain property, plant and equipment with the net
book value of $2,277,824 and $2,380,187, respectively, were pledged as
securities in connection with the outstanding short-term borrowings, as
described in more details in Note 8.





Depreciation
expenses for the years ended December 31, 2009 and 2008 were $314,065 and
$221,327, respectively, which included $240,272 and $168,847 in cost of
revenue.





During
2009, construction in progress was fully completed for operational use and
transferred to property, plant and equipment accordingly.





Certain
property, plant and equipment with original costs of $988,770 and $749,260 have
become fully depreciated as of December 31, 2009 and 2008,
respectively.





7.
              LAND
      USE RIGHTS





Land use
rights consisted of the following:





As
      of December 31,2009
                      
                      
                      2008Land
      use rights, at cost
                      
                      $
                      805,937
                      
                      
                      $
                      803,938Less:
      accumulated amortization
                      
                      
                      (190,582
                      )
                      
                      
                      (173,788
                      )Land
      use rights, net
                      
                      $
                      615,355
                      
                      
                      $
                      630,150





As of
December 31, 2009 and 2008, certain land use rights with the net book value of
$401,682 and $411,088, respectively, were pledged as securities in connection
with the outstanding short-term borrowings, as described in Note 8.





Amortization
expenses for the years ended December 31, 2009 and 2008 were $16,354 and
$16,073, respectively, in which $10,422 and $10,243 were included in cost of
revenue. Estimated aggregate future amortization expense for the succeeding 5
years and thereafter as of December 31, 2009 is as follows:





Years
      ending December 31,2010
                      
                      $
                      16,3542011
                      
                      
                      16,3542012
                      
                      
                      16,3542013
                      
                      
                      16,3542014
                      
                      
                      16,354Thereafter
                      
                      
                      533,585Total
                      
                      $
                      615,355




F-16




CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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




8.     
   PREPAYMENT FOR LAND USE RIGHTS





On
November 6, 2009, the Company’s subsidiary, Mingxiang won the auction for the
purchase of the 40-year use right of a land in Shishi City, Fujian Province, the
PRC. Mingxiang executed an Auction Confirmation Letter regarding this purchase,
which was confirmed by the Company that conducted the auction. Covering an area
of 8,691.4 square meters, the land is located next to the fishing port and the
Company’s processing facilities in Shishi City. The purchase price for the land
use right is $2,274,323 (equivalent to RMB 15.55 million).





The
Company plans 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
the Company obtains fresh seafood catch to be processed into seafood products.
The Company expects to complete the construction in late 2010.





9. SHORT-TERM
BORROWINGS





Short-term
borrowings consisted of the following:





As
      of December 31,2009
                  
                  
                  2008Bank
      loans, payable to a financial institution in the PRC:Equivalent
      to RMB5,400,000, due on February 2, 2009
                  
                  
                  —
                  
                  
                  
                  787,839Equivalent
      to RMB3,000,000, due on February 17, 2009
                  
                  
                  —
                  
                  
                  
                  437,688Equivalent
      to RMB5,000,000, due on February 19, 2009
                  
                  
                  —
                  
                  
                  
                  729,479Equivalent
      to RMB4,000,000, due on February 25, 2009
                  
                  
                  —
                  
                  
                  
                  583,584Equivalent
      to RMB5,000,000, due on February 21, 2009
                  
                  
                  —
                  
                  
                  
                  729,479Equivalent
      to RMB3,000,000, due on April 7, 2009
                  
                  
                  —
                  
                  
                  
                  437,688Equivalent
      to RMB4,000,000, due on May 18, 2009
                  
                  
                  —
                  
                  
                  
                  583,584Equivalent
      to RMB5,400,000, due on February 12, 2010
                  
                  
                  789,797
                  
                  
                  
                  —Equivalent
      to RMB3,000,000, due on February 16, 2010
                  
                  
                  438,776
                  
                  
                  
                  —Equivalent
      to RMB3,900,000, due on February 18, 2010
                  
                  
                  570,409
                  
                  
                  
                  —Equivalent
      to RMB5,000,000, due on February 24, 2010
                  
                  
                  731,293
                  
                  
                  
                  —Equivalent
      to RMB4,000,000, due on February 26, 2010
                  
                  
                  585,035
                  
                  
                  
                  —Equivalent
      to RMB4,000,000, due on March 17, 2010
                  
                  
                  585,035
                  
                  
                  
                  —Equivalent
      to RMB3,000,000, due on March 26, 2010
                  
                  
                  438,776
                  
                  
                  
                  —Total
      borrowings
                  
                  $
                  4,139,121
                  
                  
                  $
                  4,289,341




F-17





CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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





The
Company’s wholly-owned subsidiary, Mingxiang obtained short-term bank loans in
the aggregate amount of $4,139,121 and $4,289,341 as of December 31, 2009 and
2008, respectively, with Agricultural Bank of China, a registered financial
institution in the PRC. The weighted average effective interest rate per annum
was 5.31% and 7.85% for 2009 and 2008, respectively, payable
quarterly.





All bank
borrowings were guaranteed by the major stockholder, Mr. Pengfei Liu (“Mr. Liu”)
and his associated, Ms. Yazuo Qiu and were secured by certain land use rights,
property, plant and equipment held by the Company’s subsidiaries, Mingxiang,
Rixiang and Jixiang with an aggregate net book value of $2,679,506 as of
December 31, 2009 (2008: $2,791,275).





10.
            AMOUNT
      DUE TO A STOCKHOLDER





As of
December 31, 2009 and 2008, the amounts of $69,587 and $170,091 represented
temporary advances for working capital purposes from a major stockholder, Mr.
Liu, which was unsecured, interest free and repayable on demand.





11.
            ACCRUED
      LIABILITIES AND OTHER PAYABLE





Accrued
liabilities and other payable consisted of the following:





As of December 31,2009
                    
                    
                    2008Value-added
      tax payable
                    
                    $
                    1,259,353
                    
                    
                    $
                    582,010Accrued
      payroll and benefits
                    
                    
                    732,958
                    
                    
                    
                    547,956Accrued
      construction cost
                    
                    
                    130,146
                    
                    
                    
                    94,549Accrued
      operating expenses
                    
                    
                    48,457
                    
                    
                    
                    76,866Accrued
      professional expenses
                    
                    
                    150,107
                    
                    
                    
                    79,457Other
      payable
                    
                    
                    13,363
                    
                    
                    
                    6,589$
                    2,334,384
                    
                    
                    $
                    1,387,427





12.
            STOCKHOLDERS’
      EQUITY





(a)
            Issuance
      of common stock





On July
26, 2008, the Company entered into an Employment Agreement with its CFO in which
the Company agreed to provide restricted common stock award totaling 30,000
shares at the anniversary of the agreement or at the time of successful listing
of the Company on any stock exchange other than OTCBB, whichever is earlier.
During 2009, the Company issued 30,000 shares of common stock to its CFO at the
fair value of $66,975.





On
February 20, 2009, the Company entered into an Investor Relations Consulting
Agreement with Hayden Communications International, Inc (''HCI'') in exchange
for consulting services to the Company. The Company agreed to provide 20,000
shares of restricted common stock to HCI upon the effectiveness of a
registration statement on Form S-1. The shares of common stock were valued at
$29,000 in total.


F-18


CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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





In 2009,
the Company and its legal counsel, McLaughlin & Stern LLP (“McLaughlin”),
came into an agreement that the Company agreed to issue 5,051 shares of
restricted common stock to McLaughlin in exchange for certain legal services to
the Company. The shares of common stock were valued at $40,000 in
total.





(b)
            Private
      placement offering





On
November 17, 2007, the Company completed a private placement of securities to
certain accredited investors who subscribed to units consisting of one share of
common stock and one warrant to purchase one-fifth of one share of the Company’s
common stock. The investors subscribed to an aggregate of 6,199,441 units,
consisting of 6,199,441 shares of common stock and warrants of the Company to
purchase an aggregate of 1,239,888 shares of the common stock at $3.214 per
unit. The units were offered and sold pursuant to exemptions from registration
under the Securities Act, including without limitation, Regulation D and
Regulation S promulgated under the Securities Act. The gross cash proceeds from
the private placement totaled $19,925,000 less estimated offering expense of
$5,941,014, which includes the fair value of warrants granted to consultants and
agents, as discussed below.





On
November 17, 2007, in connection with the securities purchase agreement, the
Company also entered into a registration rights agreement, under which it agreed
to use its commercially reasonable efforts to cause the common stock issued and
issuable upon exercise of the warrants issued to the investors, placement agent,
and consultants, to be registered for resale on an appropriate form for
registration to be filed with the SEC within 30 days following the closing. If
the registration statement is not filed within such 30 day period or does not
become effective within 180 days after closing, the Registrant is subject to a
monthly penalty of 1% of the offering amount, up to a maximum of $1,000,000.
Upon the effectiveness of the registration statement, the Registrant will also
maintain the effectiveness of the registration statement for a specified period
of time. The registration statement has declared effective on December 14, 2007,
therefore no penalty was accrued.





Additionally,
the Company’s principal stockholder and director, Mr. Liu, entered into a
Lock-Up Agreement with the investors whereby Mr. Liu agreed that he will not (i)
sell, offer to sell, contract or agree to sell, hypothecate, hedge, pledge grant
any option to purchase or otherwise dispose of or agree to dispose of, directly
or indirectly, any shares or warrants or other rights to purchase the shares or
other shares of common stock, or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the common stock, or warrants or other rights to purchase shares
of common stock, whether any such transaction is to be settled by delivery of
such securities, in cash or otherwise, during the period beginning on November
17, 2007 through and including the date which is 6 months after the closing of
the effective registration statement.





Pursuant
to a Make Good Agreement signed between Mr. Liu and the investors on November
17, 2007, Mr. Liu agreed to transfer an aggregate 6,199,441 shares of the
Company’s common stock into an escrow account, which he beneficially owned and
is subject to the automatic release upon the attainment of certain
performance-based goals. If the Company does not generate net income of $10.549
million for the fiscal year ending December 31, 2008 and $14.268 million for the
fiscal year ending December 31, 2009, the shares held in escrow will be
transferred to the private placement investors, on a pro rata basis in
accordance with the following formula: If the 2008 net income threshold is not
achieved then an amount of shares equal to (($10.549 million - 2008 adjusted net
income)/$10.549 million) multiplied by 50% of the escrowed shares will be
transferred to the private placement investors. If the 2009 net income threshold
is not achieved then an amount of shares equal to (($14.268 million - 2009
adjusted net income)/$14.268 million) multiplied by 50% of the escrowed shares
will be transferred to the private placement investors. In the event that the
net income for 2008 and 2009 meet the minimum net income thresholds for those
respective years, then no transfer of the escrowed shares shall be made to the
private placement investors and the shares will then be returned to Mr. Liu.
Management has determined that the thresholds for the year ended December 31,
2008 and 2009 have been met.


F-19


CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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





(c)
            Warrants
      granted, accounted for under the fair value
  method





In
connection with the private placement offering, on November 17, 2007, the
Company granted to consultants and agents warrants to purchase an aggregate of
929,916 shares of the Company’s common stock at an exercise price of $4.1782 per
share or on a cashless exercise basis. The warrants vested immediately and will
expire on November 16, 2010. The market price of the stock was $4.1782 per share
on the grant date. The Company valued the warrants at $2.0873 per share, or
$1,941,014, using the Black-Scholes option-pricing model under ASC 718-20 and
was recorded as offering expense in additional paid-in capital in the fiscal
year 2007.





During
the year ended December 31, 2009, certain warrant holders exercised 840,701
warrants on a cashless exercise basis to purchase 332,287 shares of the
Company’s common stock.





A summary
of warrant activity for the years ended December 31, 2009 and 2008 is as
follows:





Number of
                              warrants
                            
                            
                            Weighted
                              average
                              exercise price
                            
                            
                            Remaining
                              contractual
                              term (year)
                            
                            
                            Aggregate
                              intrinsic valueOutstanding
      and exercisable as of January 1, 2008
                            
                            
                            2,169,804
                            
                            
                            
                            4.1782
                            
                            
                            
                            2.87
                            
                            
                            
                            —Granted
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Exercised
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Forfeited
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Expired
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Outstanding
      and exercisable as of December 31, 2008
                            
                            
                            2,169,804
                            
                            
                            $
                            4.1782
                            
                            
                            
                            1.87
                            
                            
                            
                            —Granted
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Exercised
                            
                            
                            (840,701
                            )
                            
                            
                            4.1782
                            
                            
                            
                            —
                            
                            
                            
                            —Forfeited
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Expired
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Outstanding
      and exercisable as of December 31, 2009
                            
                            
                            1,329,103
                            
                            
                            $
                            4.1782
                            
                            
                            
                            0.88
                            
                            
                            
                            —





(d)
            Distribution
      of dividends





The
Company did not declare any dividends for the years ended December 31, 2008 and
2009.





As of
December 31, 2009, the number of authorized shares and outstanding shares of the
Company’s common stock was 100,000,000 shares and 23,413,639 shares,
respectively.





13.
            NET
      INCOME PER SHARE





Basic net
income per share is computed using the weighted average number of the ordinary
shares outstanding during the year. Diluted net income per share is computed
using the weighted average number of ordinary shares and ordinary share
equivalents outstanding during the year.


F-20


CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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





The
following table sets forth the computation of basic and diluted net income per
share for the years ended December 31, 2009 and 2008:





Years ended December 31,2009
                    
                    
                    2008Basis
      and diluted net income per share calculationNumerator:-
      Net income in computing basic and diluted net income per
    share
                    
                    $
                    14,564,454
                    
                    
                    $
                    11,122,810Denominator:-
      Weighted average ordinary shares outstanding
                    
                    
                    23,062,839
                    
                    
                    
                    23,010,842-
      Warrant shares outstanding
                    
                    
                    1,329,103
                    
                    
                    
                    —Shares
      used in computing basic and diluted net income per share
                    
                    
                    24,391,942
                    
                    
                    
                    23,010,842Basic
      net income per share
                    
                    $
                    0.63
                    
                    
                    $
                    0.48Diluted
      net income per share
                    
                    $
                    0.60
                    
                    
                    $
                    0.48





For the
year ended December 31, 2008, warrants exercisable to 2,169,804 shares of common
stock were excluded from the diluted earnings per share calculation as the
exercise price of the warrants was higher than the average market price of the
stock during the period, thereby making the warrants anti-dilutive under the
treasury method.





14.
            INCOME
      TAXES





For the
years ended December 31, 2009 and 2008, the local (“United States of America”)
and foreign components of income (loss) before income taxes were comprised of
the following:





Years ended December 31,2009
                    
                    
                    2008Tax
      jurisdiction from:–
      Local
                    
                    $
                    (4,623
                    )
                    
                    $
                    (6,703
                    )–
      Foreign
                    
                    
                    16,620,119
                    
                    
                    
                    12,792,274Income
      before income taxes
                    
                    $
                    16,615,496
                    
                    
                    $
                    12,785,571





The
provision for income taxes consisted of the following:





Years ended December 31,2009
                    
                    
                    2008Current:–
      Local
                    
                    $
                    —
                    
                    
                    $
                    —–
      Foreign
                    
                    
                    2,051,042
                    
                    
                    
                    1,662,761Deferred:–
      Local
                    
                    
                    —
                    
                    
                    
                    —–
      Foreign
                    
                    
                    —
                    
                    
                    
                    —Income
      tax expense
                    
                    $
                    2,051,042
                    
                    
                    $
                    1,662,761





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:


F-21


CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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





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, 2009, China Marine incurred $11,326 of net operating losses
carryforwards available for federal tax purposes that may be used to offset
future taxable income and will begin to expire in 2028, if unutilized. The
Company has provided for a full valuation allowance against the deferred tax
assets of $3,907 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 years ended
December 31, 2009 and 2008, respectively. For the year ended December 31, 2009,
Ocean Technology incurred an operating loss of $139,051 for income tax purposes.
The Company has provided for a full valuation allowance against the deferred tax
assets of $67,165 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, 2009 and 2008. Rixiang, Jixiang, Mingxiang and
Xianglin are subject to the Corporate Income Tax governed by the Income Tax Law
of the People’s Republic of China, at a statutory rate of 25%.





Xianglin
is approved as a domestic enterprise. Rixiang, Jixiang and Mingxiang are
approved as a foreign investment enterprise and entitled to, starting from the
first profitable year, a two-year exemption from corporate income tax and a
50%-reduction in its preferential corporate income tax rate of 24% for the
following three years ("Tax Holiday"). Such Tax Holiday of Jixiang and Mingxiang
were expired in prior years and Rixiang continues to enjoy the Tax Holiday
expiring through fiscal year 2009.





On March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT Law, among
other things, imposes a unified income tax rate of 25% for both domestic and
foreign invested enterprises with effect from January 1, 2008. Hence, Rixiang
will continue to enjoy to the unexpired Tax Holiday of 50%-reduction on the
unified income tax through 2009, subject to a transitional policy under the
Corporate Income Tax Law. Jixiang, Mingxiang and Xianglin are subject to the
unified income rate of 25% on the taxable income.





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 qualifies for a reduced tax rate of
15% on the company's income through 2012.





The
reconciliation of income tax rate to the effective income tax rate based on
income before income taxes for PRC operation for the years ended December 31,
2009 and 2008 is as follows:





Years ended December 31,2009
                  
                  
                  2008Income
      before income taxes
                  
                  $
                  16,759,164
                  
                  
                  $
                  13,019,994Statutory
      income tax rate
                  
                  
                  25
                  %
                  
                  
                  25
                  %Income
      taxes at statutory rate
                  
                  
                  4,189,791
                  
                  
                  
                  3,254,998Tax
      effect on utilization of net operating loss carryforwards
                  
                  
                  (89,216
                  )
                  
                  
                  —Tax
      effect on net operating loss from PRC subsidiaries
                  
                  
                  1,523
                  
                  
                  
                  70,524Tax
      effect on non-taxable items
                  
                  
                  (14
                  )
                  
                  
                  —Tax
      effect from Tax Holiday
                  
                  
                  (2,051,042
                  )
                  
                  
                  (1,662,761
                  )Income
      taxes at effective rate
                  
                  $
                  2,051,042
                  
                  
                  $
                  1,662,761


F-22


CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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





As of
December 31, 2009, the PRC operation incurred $1,180,210 of net operating losses
carryforward available for income tax purposes that may be used to offset future
taxable income and will begin to expire in 5 years from the year of incurrence,
if unutilized. The Company has provided for a full valuation allowance against
the deferred tax assets of $295,053 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
following table sets forth the significant components of the aggregate net
deferred tax assets of the Company as of December 31, 2009 and
2008:





As of December 31,2009
                    
                    
                    2008Deferred
      tax assets:Net
      operating loss carryforwards from:–
      Local
                    
                    $
                    3,907
                    
                    
                    $
                    2,312–
      Hong Kong
                    
                    
                    67,165
                    
                    
                    
                    44,221–
      PRC
                    
                    
                    295,053
                    
                    
                    
                    380,698366,125
                    
                    
                    
                    427,231Less:
      valuation allowance
                    
                    
                    (366,125
                    )
                    
                    
                    (427,231
                    )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 $366,125 and $427,231
as of December 31, 2009 and 2008, respectively. During 2009, the valuation
allowance decreased by $61,106, primarily relating to net operating loss
carryforwards.





15.
            CHINA
      CONTRIBUTION PLAN





Under the
PRC Law, full-time employees of the Company’s subsidiaries in the PRC, Rixiang,
Jixiang and Mingxiang 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 $545,068 and $364,184 for the years ended December 31, 2009 and 2008,
respectively.





16.
            STATUTORY
      RESERVE





Under the
PRC Law, the Company’s subsidiaries in the PRC, Rixiang, Jixiang, Mingxiang 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.


F-23


CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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





For the
years ended December 31, 2009, and 2008, Rixiang contributed $730,817 and
$1,773,434 to statutory reserve, respectively. Jixiang, Mingxiang and Xianglin
made no appropriation to the statutory reserve since they did not generate
after-tax net income during these periods.





17.
            SEGMENT
      REPORTING, GEOGRAPHICAL INFORMATION





(a)
            Business
      information





The
Company’s chief operating decision maker has been identified as chairman, Mr.
Liu, who reviews consolidated results when making decisions about allocating
resources and assessing performance of the Company. Based on this assessment,
the Company has determined that it has two operating and reporting segments for
the years ended December 31, 2009 and 2008 which are sale of processed seafood
products and trading of marine catch.





The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 2). The Company had no
inter-segment sales for the years ended December 31, 2009 and 2008.





Summarized
financial information concerning the Company’s reportable segments is shown in
the following table for the years ended December 31, 2009 and 2008:





Year ended December 31, 2009Processed seafood
                      products
                    
                    
                    Marine catch
                    
                    
                    TotalRevenue,
      net
                    
                    $
                    52,049,023
                    
                    
                    $
                    17,536,660
                    
                    
                    $
                    69,585,683Cost
      of revenue
                    
                    
                    (34,721,649
                    )
                    
                    
                    (15,734,576
                    )
                    
                    
                    (50,456,225
                    )Gross
      profit
                    
                    $
                    17,327,374
                    
                    
                    $
                    1,802,084
                    
                    
                    $
                    19,129,458Expenditure
      for long-lived assets
                    
                    $
                    1,348,412
                    
                    
                    $
                    —
                    
                    
                    $
                    1,348,412





Year ended December 31, 2008Processed seafood
                      products
                    
                    
                    Marine catch
                    
                    
                    TotalRevenue,
      net
                    
                    $
                    44,370,010
                    
                    
                    $
                    4,428,794
                    
                    
                    $
                    48,798,804Cost
      of revenue
                    
                    
                    (29,617,071
                    )
                    
                    
                    (3,989,901
                    )
                    
                    
                    (33,606,972
                    )Gross
      profit
                    
                    $
                    14,752,939
                    
                    
                    $
                    438,893
                    
                    
                    $
                    15,191,832Expenditure
      for long-lived assets
                    
                    $
                    4,192,510
                    
                    
                    $
                    —
                    
                    
                    $
                    4,192,510





(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:





Years ended December 31,2009
                    
                    
                    2008Revenue,
      net:The
      PRC
                    
                    $
                    67,788,576
                    
                    
                    $
                    46,401,415Asia
                    
                    
                    1,797,107
                    
                    
                    
                    2,397,389Total
      revenue, net
                    
                    $
                    69,585,683
                    
                    
                    $
                    48,798,804





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


F-24


CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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





18.
            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, 2009 and 2008 and their outstanding balances at year-end dates.




Year ended December 31, 2009
                                    
                                    
                                    December 31, 2009Customers
                                    
                                    Revenue
                                    
                                    
                                    Percentage
                                      of total
                                      revenue
                                    
                                    
                                    Accounts
                                      receivable, netCustomer
      A
                                    
                                    $
                                    11,726,167
                                    
                                    
                                    
                                    17
                                    %
                                    
                                    $
                                    6,799,701
 
 Year ended December 31, 2008
                                    
                                    
                                    December 31, 2008Customers
                                    
                                    Revenue
                                    
                                    
                                    Percentage
                                      of total
                                      revenue
                                    
                                    
                                    Accounts
                                      receivable, netCustomer
      B
                                    
                                    $
                                    5,088,870
                                    
                                    
                                    
                                    10
                                    %
                                    
                                    $
                                    469,639





(b)
            Major
      vendors





The
following is a table summarizing the purchases of raw materials from vendors
that individually represents greater than 10% of the total purchases for the
years ended December 31, 2009 and 2008 and their outstanding balances as at
year-end dates.





Year ended December 31, 2009
                              
                              
                              December 31, 2009Vendors
                              
                              Purchases
                              
                              
                              Percentage
                                of raw
                                materials
                                purchases
                              
                              
                              Accounts
                                payable, tradeVendor
      A
                              
                              $
                              10,745,846
                              
                              
                              
                              28
                              %
                              
                              $
                              18,183Vendor
      B
                              
                              
                              8,026,950
                              
                              
                              
                              21
                              %
                              
                              
                              —Vendor
      C
                              
                              
                              6,953,216
                              
                              
                              
                              18
                              %
                              
                              
                              11,813Vendor
      D
                              
                              
                              5,545,993
                              
                              
                              
                              14
                              %
                              
                              
                              —Total
                              
                              $
                              31,272,005
                              
                              
                              
                              81
                              %
                              
                              $
                              29,996


F-25


CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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





Year ended December 31, 2008
                            
                            
                            December 31, 2008Vendors
                            
                            Purchases
                            
                            
                            Percentage
                              of raw
                              materials
                              purchases
                            
                            
                            Accounts
                              payable, tradeVendor
      A
                            
                            $
                            7,481,338
                            
                            
                            
                            22
                            %
                            
                            $
                            40,069Vendor
      B
                            
                            
                            6,488,740
                            
                            
                            
                            19
                            %
                            
                            
                            15,535Vendor
      E
                            
                            
                            5,664,055
                            
                            
                            
                            17
                            %
                            
                            
                            —Vendor
      C
                            
                            
                            5,389,778
                            
                            
                            
                            16
                            %
                            
                            
                            —Vendor
      F
                            
                            
                            3,752,759
                            
                            
                            
                            11
                            %
                            
                            
                            27,398Total
                            
                            $
                            28,776,670
                            
                            
                            
                            85
                            %
                            
                            $
                            83,002





(c)
            Credit
      risk





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





(d)
            Interest
      rate risk





As the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.





The
Company’s interest-rate risk arises from bank borrowings. Borrowings issued at
variable rates expose the Company to cash flow interest rate risk. The Company
manages interest rate risk by varying the issuance and maturity dates variable
rate debt, limiting the amount of variable rate debt, and continually monitoring
the effects of market changes in interest rates. As of December 31, 2009, all of
borrowings were at variable rates. The interest rates and terms of repayment of
bank borrowings are disclosed in Note 8.





(e)
            Exchange
      rate risk





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





(f)
            Economic
      and political risks





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


F-26


CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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





19.
            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, 2011, and generally did not contain significant renewal options.
Total rent expenses for the years ended December 31, 2009 and 2008 was $77,145
and $76,882, respectively. Future minimum rental payments due under the
non-cancelable operating lease agreement are as follows:





Years
      ending December 31:2010
                
                $
                77,1452011
                
                
                10,332Total
                
                $
                87,477





(b)
            Guarantees





As of
December 31, 2009, Mingxiang is contingently liable as guarantor with respect to
the loans of $731,294 (equivalent to RMB5,000,000) and $438,776 (equivalent to
RMB3,000,000) to two unrelated third parties, Shishi Yu Ching Knitting and
Clothing Company (“Yu Ching”) and Shishi Han Jiang Hua Lian Knitting and
Clothing Factory (“Han Jiang Hua Lian”), respectively. The term of these
guarantees are commenced from July 2009 through July 2011, with a renewal
provision of 2 years. At any time from the date of guarantees, should Yu Ching
or Han Jiang Hua Lian fail to make their due debt payments, Mingxiang will be
obligated to perform under the guarantees 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 guarantees is
$1,170,070 (equivalent to RMB8,000,000).





According
to the Personal Guarantee Agreement between Mingxiang and Mr. Liu, Mr. Liu
agreed to bear all liabilities and costs to be incurred from a direct claim by
the creditor if either Yu Ching or Han Jiang Hua Lian fails to make payment 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 indemnification fair value to be insignificant.
As of December 31, 2009, the Company has not recorded any liabilities under
these guarantees.





20.
            COMPARATIVE
      FIGURES





Certain
amounts in the prior periods presented have been reclassified to conform to the
current period financial statement presentation.





21.
            SUBSEQUENT
      EVENTS





(a)
            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. 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. China Marine intended to fund the loan from the currently available
cash of the Group.


F-27


CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


AS
OF DECEMBER 31, 2009 AND 2008


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





The
maturity date of the loan is January 26, 2010. Upon maturity of the loan, the
Company may select to exercise the option to purchase shares representing eighty
percent (80%) of Xianghe or require repayment of the loan. The purchase price
payable to Qiu shall consist of approximately $1.4 million payable by the
Company and $26.4 million payable by Xianghe.





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:





(iii)
              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.





(iv)
              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.





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 intends to integrate the Hi-Power algae-based soft drinks into its
current distribution network. Xianghe has an experienced management team and its
management and other employees will continue to work at Xianghe after the
acquisition. Xianghe utilizes third party manufacturers to produce the
beverages.





(b)
            Completion
      of $30,000,000 financing through registered direct offering of common
      stock





On
January 25, 2010, the Company has closed the financing to sell 4,615,388 shares
of common stock at a price of $6.50 per share. Net proceeds, after underwriting
discounts and commissions and before offering expenses payable by the Company,
are approximately $28,500,000. The Company intends to use the net proceeds from
this offering for working capital and general corporate purposes. The shares
were sold under the Company's previously filed shelf registration statement that
was declared effective by the Securities and Exchange Commission on December 23,
2009. Global Hunter Securities LLC and Brean Murray Carret & Co., LLC acted
as co-lead placement agents and joint book-running managers in the
transaction.


F-28


ITEM
8:    Supplementary Data: Unaudited Pro Forma Financial
Information





The
following unaudited pro forma condensed consolidated balance sheet as of
December 31, 2009 and the unaudited pro forma condensed consolidated statement
of operations are derived from the historical financial statements of the
Company and Xianghe and have been prepared to give effect to the Company’s
acquisition of Xianghe on January 1, 2010. The unaudited pro forma condensed
consolidated balance sheet is presented as if the acquisition had occurred as of
the balance sheet date. The unaudited pro forma condensed consolidated statement
of operations is presented as if the acquisition had occurred on January 1,
2010.





The
acquisition has been accounted for under the purchase method of accounting which
requires the total purchase price to be allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The excess purchase
price of over the amounts assigned to tangible or intangible assets acquired and
liabilities assumed is recognized as goodwill.





The
following unaudited pro forma condensed consolidated financial statements have
been prepared for illustrative purposes only and do not purport to reflect the
results the combined company may achieve in future periods or the historical
results that would have been obtained. These unaudited pro forma condensed
consolidated financial statements, including the notes hereto, should be read in
conjunction with (i) the historical consolidated financial statements for the
Company included in its Form 10-K filed on March 22, 2010 and (ii) the
historical financial statements of Xianghe included in the Company’s Form 8-K/A
dated March 16, 2010.


73


CHINA
MARINE FOOD GROUP LIMITED


UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET


AS
OF DECEMBER 31, 2009


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





The Company
                                  
                                  
                                  Xianghe
                                  
                                  
                                  Pro forma
                                    adjustment
                                  
                                  
                                  Pro forma
                                    consolidatedASSETSCurrent
      assets:Cash
      and cash equivalents
                                  
                                  $
                                  7,143,232
                                  
                                  
                                  $
                                  435,933
                                  
                                  
                                  
                                  
                                  
                                  $
                                  7,579,165Accounts
      receivable, net
                                  
                                  
                                  18,834,062
                                  
                                  
                                  
                                  1,391,457
                                  
                                  
                                  
                                  
                                  
                                  
                                  20,225,519Inventories
                                  
                                  
                                  3,876,950
                                  
                                  
                                  
                                  10,871
                                  
                                  
                                  
                                  
                                  
                                  
                                  3,887,821Note
      receivable
                                  
                                  
                                  26,399,696
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (26,399,696
                                  )A
                                  
                                  
                                  —Amount
      due from an owner
                                  
                                  
                                  —
                                  
                                  
                                  
                                  1,442,623
                                  
                                  
                                  
                                  (1,400,304
                                  )A
                                  
                                  
                                  42,319Prepaid
      expenses and other current assets
                                  
                                  
                                  151,653
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  151,653Total
      current assets
                                  
                                  
                                  56,405,593
                                  
                                  
                                  
                                  3,280,884
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  31,886,477Non-current
      assets:Goodwill
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  2,391,866
                                  A
                                  
                                  
                                  2,391,866Property,
      plant and equipment, net
                                  
                                  
                                  8,599,977
                                  
                                  
                                  
                                  395
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  8,600,372Intangible
      asset, net
                                  
                                  
                                  —
                                  
                                  
                                  
                                  8,596
                                  
                                  
                                  
                                  23,471,410
                                  A
                                  
                                  
                                  23,480,006Prepayment
      for land use right
                                  
                                  
                                  2,274,323
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,274,323Land
      use rights, net
                                  
                                  
                                  615,355
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  615,355TOTAL
      ASSETS
                                  
                                  $
                                  67,895,248
                                  
                                  
                                  $
                                  3,289,875
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  69,248,399LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short-term
      borrowings
                                  
                                  $
                                  4,139,121
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  4,139,121Accounts
      payable, trade
                                  
                                  
                                  885,286
                                  
                                  
                                  
                                  402,982
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,288,268Amount
      due to a stockholder/an owner
                                  
                                  
                                  69,587
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  69,587Income
      tax payable
                                  
                                  
                                  618,664
                                  
                                  
                                  
                                  225,180
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  843,844Accrued
      liabilities and other payable
                                  
                                  
                                  2,334,384
                                  
                                  
                                  
                                  240,808
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,575,192Total
      current liabilities
                                  
                                  
                                  8,047,042
                                  
                                  
                                  
                                  868,970
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  8,916,012Stockholders’
      equity:Preferred
      stock
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  —Common
      stock
                                  
                                  
                                  23,414
                                  
                                  
                                  
                                  733,483
                                  
                                  
                                  
                                  (733,483
                                  )B
                                  
                                  
                                  23,414Additional
      paid-in capital
                                  
                                  
                                  16,888,532
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  16,888,532Statutory
      reserve
                                  
                                  
                                  5,614,517
                                  
                                  
                                  
                                  253,364
                                  
                                  
                                  
                                  (253,364
                                  )B
                                  
                                  
                                  5,614,517Accumulated
      other comprehensive income
                                  
                                  
                                  3,576,135
                                  
                                  
                                  
                                  (1,670
                                  )
                                  
                                  
                                  1,670
                                  B
                                  
                                  
                                  3,576,135Retained
      earnings
                                  
                                  
                                  33,745,608
                                  
                                  
                                  
                                  1,435,728
                                  
                                  
                                  
                                  (1,435,728
                                  )B
                                  
                                  
                                  33,745,608Total
      stockholders’ equity
                                  
                                  
                                  59,848,206
                                  
                                  
                                  
                                  2,420,905
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  59,848,206Non-controlling
      interest
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  484,181
                                  B
                                  
                                  
                                  484,181TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                  
                                  $
                                  67,895,248
                                  
                                  
                                  $
                                  3,289,875
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  69,248,399


74


CHINA
MARINE FOOD GROUP LIMITED


UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED


STATEMENT
OF OPERATIONS


FOR
THE YEAR ENDED DECEMBER 31, 2009


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





The Company
                                                  
                                                  
                                                  Xianghe #1
                                                  
                                                  
                                                  Pro forma
                                                    adjustments
                                                  
                                                  
                                                  Pro forma
                                                    consolidatedRevenue,
      net
                                                  
                                                  $
                                                  69,585,683
                                                  
                                                  
                                                  $
                                                  7,568,657
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  77,154,340Cost
      of revenue
                                                  
                                                  
                                                  (50,456,225
                                                  )
                                                  
                                                  
                                                  (4,530,736
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (54,986,961
                                                  )Gross
      profit
                                                  
                                                  
                                                  19,129,458
                                                  
                                                  
                                                  
                                                  3,037,921
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  22,167,379Operating
      expenses:Depreciation
      and amortization
                                                  
                                                  
                                                  (79,725
                                                  )
                                                  
                                                  
                                                  (418
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (80,143
                                                  )Sales
      and distribution
                                                  
                                                  
                                                  (608,685
                                                  )
                                                  
                                                  
                                                  (632,290
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (1,240,975
                                                  )General
      and administrative
                                                  
                                                  
                                                  (2,276,006
                                                  )
                                                  
                                                  
                                                  (83,770
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (2,359,776
                                                  )Total
      operating expenses
                                                  
                                                  
                                                  (2,964,416
                                                  )
                                                  
                                                  
                                                  (716,478
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (3,680,894
                                                  )Income
      from operations
                                                  
                                                  
                                                  16,165,042
                                                  
                                                  
                                                  
                                                  2,321,443
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  18,486,485Other
      income (expenses):Subsidy
      income
                                                  
                                                  
                                                  309,901
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  309,901Rental
      income
                                                  
                                                  
                                                  82,299
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  82,299Interest
      income
                                                  
                                                  
                                                  288,687
                                                  
                                                  
                                                  
                                                  823
                                                  
                                                  
                                                  
                                                  (70,010
                                                  )C
                                                  
                                                  
                                                  219,500Interest
      expense
                                                  
                                                  
                                                  (230,433
                                                  )
                                                  
                                                  
                                                  (70,010
                                                  )
                                                  
                                                  
                                                  70,010
                                                  C
                                                  
                                                  
                                                  (230,433
                                                  )Total
      other expenses
                                                  
                                                  
                                                  450,454
                                                  
                                                  
                                                  
                                                  (69,187
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  381,267Income
      before income taxes
                                                  
                                                  
                                                  16,615,496
                                                  
                                                  
                                                  
                                                  2,252,256
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  18,867,752Income
      tax expense
                                                  
                                                  
                                                  (2,051,042
                                                  )
                                                  
                                                  
                                                  (563,164
                                                  )
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (2,614,206
                                                  )Non-controlling
      interest
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  (337,818
                                                  )C
                                                  
                                                  
                                                  (337,818
                                                  )NET
      INCOME
                                                  
                                                  $
                                                  14,564,454
                                                  
                                                  
                                                  $
                                                  1,689,092
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  $
                                                  15,915,728Per
      share information:Net
      income per share–
      Basic
                                                  
                                                  $
                                                  0.63
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  
                                                  D
                                                  
                                                  $
                                                  0.69–
      Diluted
                                                  
                                                  $
                                                  0.60
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  
                                                  D
                                                  
                                                  $
                                                  0.65Weighted
      average shares outstanding–
      Basic
                                                  
                                                  
                                                  23,062,839
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  23,062,839–
      Diluted
                                                  
                                                  
                                                  24,391,942
                                                  
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  24,391,942





Notes:


#1   Representing
with the operating result for the period from July 28, 2009 (Inception) to
December 31, 2009.





#2   The
pro forma condensed consolidated statement of operations for the year ended
December 31, 2008 is not required as Xianghe was not in existence during 2008
fiscal year.


75


CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION


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





NOTE
      1
            BASIS
      OF PRESENTATION





The
unaudited pro forma condensed consolidated balance sheet assumes that the
purchase took place on January 1, 2010 and certain assets and liabilities of
Xianghe were acquired and assumed by the Company. Such financial statement
combines the historical consolidated balance sheet of the Company and Xianghe at
December 31, 2009. The unaudited pro forma condensed consolidated statement of
operations assume that the purchase took place on December 31, 2009, and combine
the historical consolidated statement of operations of the Company and Xianghe
for the year ended December 31, 2009.





There
were no significant transactions on a combined basis between the acquired entity
and the Company during the periods presented.





The
following unaudited pro forma condensed consolidated financial information was
prepared using the purchase method of accounting as required by Accounting
Standards Codification Topic 805, “Business Combinations”. The
purchase price has been allocated to the assets acquired and liabilities assumed
based upon management’s preliminary estimate of their respective fair values as
of the date of acquisition. Any differences between the fair value of the
consideration issued and the fair value of the assets and liabilities acquired
will be recorded as goodwill.





NOTE
      2
            PRO
      FORMA ADJUSTMENTS





These
unaudited pro forma condensed consolidated financial statements reflect the
following pro forma adjustments:





·
            Adjustment
      (A)





The
following table summarizes the historical 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
                      
                      $
                      435,933Accounts
      receivable, net
                      
                      
                      1,391,457Inventories
                      
                      
                      10,871Amount
      due from an owner
                      
                      
                      1,442,623Property,
      plant and equipment, net
                      
                      
                      395Intangible
      assets, net
                      
                      
                      8,596Total
      assets acquired
                      
                      
                      3,289,875Less:
      liabilities assumedAccounts
      payable, trade
                      
                      
                      402,982Amount
      due to an owner
                      
                      
                      —Income
      tax payable
                      
                      
                      225,180Accrued
      liabilities and other payable
                      
                      
                      240,808Total
      liabilities assumed
                      
                      
                      868,970Less:
      non-controlling interest
                      
                      
                      484,181Net
      assets acquired
                      
                      
                      1,936,724Algae-based
      drink know-how *
                      
                      
                      23,471,410Goodwill
                      
                      
                      2,391,866Purchase
      price consideration
                      
                      $
                      27,800,000





Pursuant
to the Share Purchase Agreement (the “Agreement”), the aggregate purchase price
is approximately $27,800,000 (equivalent to RMB190,000,000), in which
approximately $26,400,000 is payable by Xianghe upon the conversion of its
short-term loan and approximately $1,400,000 is payable by the Company’s
subsidiary, Mingxiang.





Algae-based
drink know-know is acquired at its fair value, based upon the independent
valuation report.


76


CHINA
MARINE FOOD GROUP LIMITED


NOTES
TO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION


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





·
            Adjustment
      (B)





To
reflect (1) the elimination of the stockholders' equity accounts of Xianghe, (2)
the equity component of the purchase price, and (3) the purchase price
allocation as reflected above in Adjustment (A).





·
            Adjustment
      (C)





To
reflect (1) the elimination of interest expense and interest income on
short-term loan from Mingxiang to Xianghe and (2) to record net income
attributable to non-controlling interest.





·
            Adjustment
      (D)





Pro forma
basic income per common share is computed by dividing the pro forma net income
applicable to common stockholders by the pro forma weighted average number of
common shares assumed to be outstanding during the periods of computation. Pro
forma diluted income per common share is computed using the pro forma weighted
average number of common shares and, if dilutive, potential common shares
outstanding during the periods.


77





ITEM 9.
            Changes In and Disagreements with
      Accountants on Accounting and Financial
  Disclosure





On
January 27, 2009, we dismissed Cordovano and Honeck LLP (“CHLLP”) as its
independent registered public accounting firm. The decision to dismiss CHLLP was
approved by our Board of Directors.





The
reports of CHLLP on our balance sheet as of December 31, 2007 and the related
statement of operations, stockholders’ equity and cash flows for the year ended
December 31, 2007, did not contain an adverse opinion or a disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope or
accounting principle.





During
the fiscal year ended December 31, 2007 and each of the quarters ended March 31,
2008, June 30, 2008 and September 30, 2008, there were no disagreements with
CHLLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of CHLLP, would have caused it to make reference to the subject
matter of the disagreement in connection with their reports on the Company’s
balance sheets as of December 31, 2007 and the related statements of operations,
stockholders’ equity and cash flows for each of the quarters in the year ended
December 31, 2007.





During
the fiscal year ended December 31, 2007 and each of the quarters ended March 31,
2008, June 30, 2008 and September 30, 2008, there were no reportable events as
defined in Item 304(a)(1)(v) of Regulation S-K.





We
furnished a copy of the above disclosures to CHLLP and requested that CHLLP
furnish the Company with a letter addressed to the Securities and Exchange
Commission stating whether or not CHLLP agrees with the above statements. A copy
of such letter dated January 27, 2009 is attached as Exhibit 16.1 to this
Current Report on Form 8-K filed on February 3, 2009





Concurrently,
we engaged ZYCPA Company Limited (“ZYCPA”) as its new independent registered
public accounting firm to audit our financial statements for the year ended
December 31, 2008. During our two most recent fiscal years, ZYCPA has been
engaged as an independent accountant to audit our significant subsidiaries
located in Hong Kong and the People’s Republic of China.





Prior to
ZYCPA’s engagement, we did not consult with ZYCPA regarding any matters
described in Item 304(a)(2)(i) or Item 304(a)(2)(ii) of
Regulation S-K.





On
January 23, 2008, concurrent with the decision to dismiss ZYCPA as its
independent auditor, the board of directors unanimously voted to engage CHLLP as
its new independent auditor. ZYCPA is the affiliated firm of CHLLP in
Asia.





We
furnished a copy of this disclosure to ZYCPA and requested ZYCPA furnish us with
a letter addressed to the SEC stating whether it agrees with the statements made
by us herein in response to Item 304(1) of Regulation S-K and, if not, stating
the reason in which it does not agree. A copy of this letter was filed by us as
Exhibit 16 to our current report on Form 8-K, filed on January 31,
2008.





On
January 27, 2009, concurrent with the decision to dismiss CHLLP, as its
independent auditor, the Board of Directors unanimously voted to engage ZYCPA as
its new independent auditor. ZYCPA is the affiliated firm of CHLLP in
Asia.





We
furnished a copy of this disclosure to CHLLP and requested CHLLP furnish us with
a letter address to the SEC stating whether it agrees with the statements made
by us herein in response to Item 304(1) of Regulation S-K and, if not, stating
the reason in which it does not agree. A copy of this letter was filed by
us as Exhibit 16 to our current report on Form 8-K filed on February 2,
2009.





During
the two most recent financial years ended December 31, 2009 and 2008 to the date
of this statement, there were no disagreements with CHLLP and ZYCPA or any
matter of accounting principals or practices, financial disclosures, or auditing
scope or procedure. There were no reportable events, as described in Item
304(a)(1)(v) of Regulation S-K, during our two most recent financial years ended
December 31, 2007 and 2008 to the date of this statement.





ITEM
9A(T).
            Controls and
      Procedures





Evaluation
of Disclosure Controls and Procedures





Based on
their evaluation as of December 31, 2009, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended) were effective to ensure that the information required to be
disclosed by us in this Annual Report on Form 10-K was recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
instructions for Form 10-K.


78





Management’s
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended). Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2009.





Our
internal control over financial reporting is a process designed by or under the
supervision of our principal executive and principal financial officers to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our internal control over
financial reporting includes policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect transactions and dispositions of assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures are being made only in accordance
with authorizations of management and the directors of the Company; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on our financial statements.





In making
this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in ‘Internal
Control – Integrated Framework’. Our management has concluded that, as of
December 31, 2009, our internal control over financial reporting is effective
based on these criteria.





This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.





There
were no changes in our internal controls over financial reporting during the
year ended December 31, 2009 that have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting. On January 1, 2010, Mingxiang acquired shares representing 80% of the
registered capital stock of Xianghe. Its operations have been excluded from our
review of the internal controls under Section 404 of the Sarbanes-Oxley Act
of 2002. We are integrating Xianghe’s operations, including internal controls
and processes, and extending our Section 404 compliance program to Xianghe’s
operations.





Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within China Marine Food Group Limited have been
detected.




ITEM 9B.
            Other
      Information





None


PART
III.




ITEM 10.
            Directors and Executive Officers
      of the Registrant, and Corporate
  Governance




DIRECTORS
AND OFFICERS





The
following sets forth the name and position of each of our current executive
officers and directors.





DirectorsName
            
            Age
            
            Position
      heldPengfei
      LIU
            
            54
            
            CEO,
      Secretary and DirectorMarco
      Hon Wai KU
            
            36
            
            Chief
      Financial OfficerWeipeng
      LIU
            
            33
            
            DirectorXiaochuan
      LI
            
            65
            
            Independent
      DirectorChanghu
      XUE
            
            45
            
            Independent
      DirectorHonkau
      WAN
            
            36
            
            Independent
      Director


79





None of
the Directors and Executive Officers is related to each other or the Substantial
Shareholder.





Pengfei Liuis our CEO,
Secretary and Director. He is the founder of our Company, and has been
spearheading the expansion and growth of our Company. Mr. Liu is responsible for
our operations, marketing, public relations, strategic planning and development
of new products and markets and overall running of our Company.





From 1975
to 1981, Mr. Liu served as a seaman with the Zhejiang East Ocean Navy. From 1981
to 1993, he worked as a trader in seafood. In 1994, Mr. Liu established
Mingxiang. In October 2003, Mr. Liu was elected as member of the executive
committee of the China Aquatic Products Processing and Marketing Association
(CAPPMA). In December 2003, Mr. Liu was appointed committee member of the Shishi
Committee (Fujian Province) of the Chinese People’s Political Consultative
Conference. In January 2005, Mr. Liu was elected vice-chairman of the executive
committee of Quanzhou Food Products Industry Association. In December 2005, Mr.
Liu was appointed as a member of the executive committee of the China Chamber of
International Commerce, Shishi Chamber of Commerce. In August 2006, Mr. Liu was
appointed executive member of the general meeting of the Fujian Aquatic Products
Processing and Marketing Association (FAPPMA). Mr. Liu is not a member of the
board of directors for any public company or any investment company, neither has
he been a member of the board of directors for such companies for the past five
years.The Board
believes that Mr. Liu has the experience, qualifications, attributes and skills
necessary to serve on the Board because of his over 30 years of experience in
the seafood industry, his having provided leadership and strategic direction to
the Company as its founder and his unparalleled knowledge of the Company and its
business.





Marco Hon Wai Kuis our Chief
Financial Officer and joined our Company in July 2007. He is responsible for the
corporate finance function of our Company and oversees matters relating to
accounting, financial administration and the compliance and reporting
obligations of our Company. Mr. Ku obtained a bachelor’s degree in Finance from
the Hong Kong University of Science and Technology in 1996, and is currently a
Fellow Member of the Hong Kong Institute of Certified Public
Accountants.





Prior to
joining us, from 1996 to 2000, Mr. Ku was with KPMG, where he last held the
position as Assistant Manager. From August 2000 to February 2003, he was
the Manager - Corporate Services in Logistics Information Network Enterprise
(HK) Limited, a subsidiary of Hutchison Port Holdings Ltd., where he later
worked as Manager - Management Accounting from March 2003 to September 2004.
From October 2004 to September 2005, he worked as a Financial Controller for
Hongkong.com Company Limited (a Hong Kong listed company within the China.com
Group). And from October 2005 to April 2007, he co-founded KISS Catering Group,
which is a food and beverage business in Beijing. Mr. Ku is not a director of
any public company or any investment company, neither has he been a member of
the board of directors for such companies for the past five years.





Weipeng Liu is our Director,
who is also employed to oversee the construction, operation and maintenance of
our equipment and production facilities in the capacity of Manager of
Operations. After graduating with a degree in mechanical design and
manufacturing and automation from Fuzhou University in 1997, Mr. Liu joined our
Company as Mingxiang and Rixiang’s facilities manager. He was appointed to serve
as a director of Rixiang in October 2006.Mr. Liu is not a
director of any public company or any investment company, neither has he been a
member of the board of directors for such companies for the past five
years.The Board
believes that Mr. Liu has the experience, qualifications, attributes and skills
necessary to serve on the Board because of his over 10 years of experience with
the Company and his knowledge of our equipment and production
facilities.





Xiaochuan Li has been the
Director of the Division for Test of the Safety and Quality of Aquatic Products
in the Yellow Sea Fisheries Research Institute of the Chinese Academy of Fishery
Sciences since 1978, where he is responsible for the marine products processing
technology research and carrying out coordination in terms of both quality and
quantity examination and formulating related standards. From 1987 to 2005, Mr.
Li was the Center Director of the National Center for Quality Supervision and
Test of Aquatic Products. During his tenure, Mr. Li was responsible for
overseeing the daily operation of the laboratory and inspection center. Mr. Li
is not a director of any public company or any investment company, neither has
he been a member of the board of directors for such companies for the past five
years.


80


The Board
believes that Mr. Li has the experience, qualifications, attributes and skills
necessary to serve on the Board because of his over 30 years of experience with
the seafood industry, his management skills as the Director of the Division for
Test of the Safety and Quality of Aquatic Products in the Yellow Sea Fisheries
Research Institute of the Chinese Academy of Fishery Sciences and for his
experience in testing and quality control of seafood products.





Changhu Xue is a professor of
Aquatic Product Processing and Preserving Engineering at the Ocean University of
China. Mr. Xue is a Council Member of China Society of Fisheries and the
Chairman of the Fish Processing and Comprehensive Utilization Sub-committee of
the China Society of Fisheries. He is also the Chief Secretary of the Steering
Committee for Light Industry and Food Education in the Ministry of Education for
the People’s Republic of China. Mr. Xue’s major focus of research has been in
aquatic product processing and fisheries chemistry. Mr. Xue has completed over
20 state and provincial research projects including the research schemes in the
National Natural Science Foundation of China and has published over 100 papers
and articles in academic journals. In 1990, Mr. Xue was the first recipient of a
doctoral degree in Agriculture and Aquatic Products in China. Mr. Xue has
obtained 8 patent certificates and 2 technological achievements awarded by the
provincial authority. Mr. Xue is not a director of any public company or any
investment company, neither has he been a member of the board of directors for
such companies for the past five years.The Board believes that
Mr. Xue has the experience, qualifications, attributes and skills necessary to
serve on the Board because of his extensive academic knowledge of the seafood
industry and research accomplishments.





Honkau Wan has practiced as a
certified public accountant (“CPA”) since 2003. His firm provides professional
auditing, consultancy and secretarial services to his clients on a variety of
industries. From 2000 to 2002, Mr. Wan served in a multi-national company as an
internal auditor, where he participated in evaluating the internal control
systems of the group companies and made recommendations to the management. The
multi-national company was involved in the following industries: financial
institutions, property development, airline and security broker in Hong Kong,
China, United States and other Asia Pacific countries. From 1996 to 1999, Mr.
Wan was with KPMG auditing financial institutions. Mr. Wan received a BBA in
Accounting, with Honors, from the Hong Kong Polytechnic University in 1996. Mr.
Wan is not a director of any public company or any investment company, neither
has he been a member of the board of directors for such companies for the past
five years.The
Board believes that Mr. Wan has the experience, qualifications, attributes and
skills necessary to serve on the Board because of his over 15 years of relevant
experience in finance and accounting.




There are
no agreements or understandings for any of our executive officers or directors
to resign at the request of another person, and no officer or director is acting
on behalf of nor will any of them act at the direction of any other
person.





SIGNIFICANT
EMPLOYEES





Other
than the officers described above, we do not expect any other individuals to
make a significant contribution to our business.





FAMILY
RELATIONSHIPS





There are
no family relationships among our officers, directors, persons nominated for
such positions, or significant shareholders.





INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS





None of
our directors, executive officers, or control persons have been involved in any
of the following events during the past ten years:





l
            Any bankruptcy petition filed by
      or against any business of which such person was a general partner or
      executive officer either at the time of bankruptcy or within two years
      prior to that time; or





l
            Any conviction in a criminal
      proceeding or being subject to a pending criminal proceeding (excluding
      traffic violations and other minor offenses);
  or





l
            Being subject to any order,
      judgment, or decree, not subsequently reversed, suspended or vacated, of
      any court of competent jurisdiction, permanently or temporarily enjoining,
      barring, suspending or otherwise limiting his involvement in any type of
      business, securities or banking activities;
  or





l
            Being found by a court of
      competent jurisdiction (in a civil violation), the SEC or the Commodity
      Future Trading Commission to have violated a federal or state securities
      or commodities law, and the judgment has not been reversed, suspended, or
      vacated; or


81


l
            Being
      the subject of, or a party to, any Federal or State judicial or
      administrative order, judgment, decree, or finding, not subsequently
      reversed, suspended or vacated, relating to an alleged violation of: any
      Federal or State securities or commodities law or regulation; or any law
      or regulation respecting financial institutions or insurance companies
      including, but not limited to, a temporary or permanent injunction, order
      of disgorgement or restitution, civil money penalty or temporary or
      permanent cease-and-desist order, or removal or prohibition order; or any
      law or regulation prohibiting mail or wire fraud or fraud in connection
      with any business entity. This violation does not apply to any settlement
      of a civil proceeding among private litigants;
  or





l
            Being
      the subject of, or a party to, any sanction or order, not subsequently
      reversed, suspended or vacated, of any self-regulatory organization (as
      defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))),
      any registered entity (as defined in Section 1(a)(29) of the Commodity
      Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange,
      association, entity or organization that has disciplinary authority over
      its members or persons associated with a
member.





BOARD
COMMITTEES





The Board
of Directors is composed of five directors: Mr. Pengfei Liu, Mr. Weipeng Liu,
Mr. Xiaochuan Li, Mr. Changhu Xue and Mr. Honkau Wan. All board action requires
the approval of a majority of directors in attendance at a meeting at which a
quorum is present.





On June 18, 2009, the Company
established an Audit Committee of the Board with the responsibility for
assisting the Board in fulfilling its oversight role regarding the Company’s
financial reporting process, its system of internal control and its compliance
with applicable laws, regulations and company policies. Honkau Wan,
Xiaochuan Li, and Changhu Xue were elected to be members of the Audit Committee
and shall serve the Committee until their successors are duly elected and
qualified. On June 18,
2009, the Company also established a Governance Committee and a Compensation
Committee, and elected Xiaochuan Li and Changhu Xue as members to each of the
Committee.




The Audit
Committee is primarily responsible for reviewing the services performed by our
independent auditors, evaluating our accounting policies and our system of
internal controls. The Company’s Board of Directors has determined that the
registrant has one audit committee financial expert, Honkau Wan, serving on its
Audit Committee. Honkau Wan has been CPA since 2003 and understands the
generally accepted accounting principles and financial statements. He is
considered as independent director as defined in the listing standards
applicable to the Registrant. His relevant experiences are disclosed in the
above content in Item 10 of this Form 10-K.




The
Nominating Committee is primarily responsible for nominating directors and
setting policies and procedures for the nomination of directors. The
Corporate Governance Committee is also responsible for overseeing the
creation and implementation of our corporate governance policies and
procedures. The Company does not have procedures by which security holders
may recommend nominees to the Company’s Board of Directors.





The
Compensation Committee is primarily responsible for reviewing and approving our
salary and benefit policies (including equity plans), including
compensation of executive officers.





CODE
OF ETHICS





We
adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of
2002 on January 24, 2008. On August 10, 2009, we amended our Standards of
Business Conduct and Finance Code of Professional Conduct. The amended Standards
of Business and Finance Code of Professional Conduct apply to our officers,
directors and employees. The principal change to the Finance Code of
Professional Conduct was to make it applicable to all employees and not only
employees in the finance department to comply with the rules of the NYSE/AMEX.
The principal change to the Standard of Business Conduct was to provide
guidelines to employees to report any suspected or known violations of the
Finance Code of Professional Conduct, the Standards of Business Conduct, or
other China Marine policies.





All
employees will:


·
            Act
      with honesty and integrity, avoiding actual or apparent conflicts of
      interest in their personal and professional
  relationships.





·
            Provide
      shareholders with information that is accurate, complete, objective, fair,
      relevant, timely, and understandable, including information in our filings
      with and other submissions to the U.S. Securities and Exchange Commission
      and other public bodies.


82


·
            Comply
      with rules and regulations of federal, state, provincial and local
      governments, and of other appropriate private and public regulatory
      agencies.





·
            Action
      in good faith, responsibly, with due care, competence, and diligence,
      without misrepresenting material facts or allowing one’s independent
      judgment to be subordinated.





·
            Respect
      the confidentiality of information acquired in the course of one’s work
      except when authorized or otherwise legally obligated to
      disclose.





·
            Not
      use confidential information acquired in the course of one’s work for
      personal advantage.





·
            Share
      knowledge and maintain professional skills importance and relevancy to
      shareholders’ needs.





·
            Proactively
      promote and be an example of ethical behavior as a responsible individual
      among peers, in the working environment and the
  community.





·
            Exercise
      responsible use, control, and stewardship over all China Marine assets and
      resources that are employed by or entrusted to
  us.





·
            Not
      coerce, manipulate, mislead, or unduly influence any authorized audit or
      interfere with any auditor engaged in the performance of an internal or
      independent audit of China Marine’s system of internal controls, financial
      statements, or accounting books and
records.





This
Finance Code of Professional Conduct embodies principles which we are expected
to adhere to and advocate. These principles of ethical business conduct
encompass rules regarding both individual and peer responsibilities, as well as
responsibilities to China Marine shareholders and the public. The CEO, CFO, and
all employees are expected to abide by this Code. Any violations of the China
Marine’s Finance Code of Professional Conduct may result in disciplinary action,
up to and including termination of employment.





ITEM
11.           Executive
Compensation





COMPENSATION
DISCUSSION AND ANALYSIS





Background
and Compensation Philosophy





Our
Compensation Committee consists of Xiaochuan Li and Changhu Xue, both
independent directors.  The Compensation Committee and, prior to its
establishment in June 2009, our Board of Directors determined the compensation
to be paid to our executive officers based on our financial and operating
performance and prospects, the level of compensation paid to similarly situated
executives in comparably sized companies, such as HQ Sustainable Maritime
Industries, Inc., Zhongpin Inc. and American Dairy, Inc., and contributions made
by the officers’ to our success. Each of the named officers will be
measured by a series of performance criteria by the board of directors, or the
compensation committee, on a yearly basis. Such criteria will be set forth
based on certain objective parameters such as job characteristics, required
professionalism, management skills, interpersonal skills, related experience,
personal performance and overall corporate performance.





Our Board
of Directors and Compensation Committee have not adopted or established a formal
policy or procedure for determining the amount of compensation paid to our
executive officers. The Compensation Committee makes an independent evaluation
of appropriate compensation to key employees, with input from management. The
Compensation Committee has oversight of executive compensation plans, policies
and programs.





Our
compensation program for our executive officers and all other employees is
designed such that it will not incentivize unnecessary risk-taking. The base
salary component of our compensation program is a fixed amount and does not
depend on performance. Our cash incentive program takes into account multiple
metrics, thus diversifying the risk associated with any single performance
metric, and we believe it does not incentivize our executive officers to focus
exclusively on short-term outcomes. Our equity awards are subject to vesting to
align the long-term interests of our executive officers with those of our
stockholders.


83


Elements
of Compensation





We
provide our executive officers with a base salary and certain bonuses to
compensate them for services rendered during the year. Our policy of
compensating our executives with a cash salary has served us well. Because
of our history of attracting and retaining executive talent, we do not believe
it is necessary at this time to provide our executives equity incentives, or
other benefits in order for us to continue to be successful, apart from the
common stock award granted to Mr. Ku as described below.





Base
Salary





The base
salary paid to Mr. Pengfei Liu, Mr. Shaobin Yang and Mr. Marco Ku during 2007
was $22,000, $18,000 and $32,000, respectively. In 2008, the base salary
paid to Mr. Liu, Mr. Yang and Mr. Ku was increased to approximately $138,000,
$65,000 and $118,000, respectively. The 2009 annual compensation for Mr.
Pengfei Liu, Mr. Marco Hon Wai Ku and Mr. Weipeng Liu is $140,000, $140,000 and
$44,000, respectively. All such amounts were paid in cash. The value
of base salary reflects each executive’s skill set and the market value of that
skill set in the sole discretion of our Board of Directors and/or our executive
officers. The compensation paid to our each independent directors Xiaochuan Li,
Changhu Xue, and Honkau Wan in the year of 2009 are $8,800, $8,800, and $7,700,
respectively.





Discretionary
Bonus





We have
determined and provided our executive officers with discretionary bonuses at the
end of each fiscal year. Our Compensation Committee will review the necessity of
such scheme on a yearly basis based on our financial and operating performance
and prospects, the level of compensation paid to similarly situated executives
in comparably sized companies and contributions made by the officers’ to our
success.  Since the PBT for the year ended December 31, 2009 was
$16,703,071, Pengfei Liu and Weipeng Liu would be eligible to receive a
discretionary bonus for 2009 in an amount of $131,000 and $27,000,
respectively.





Equity
Incentives





We have
not established an equity based incentive program and have not granted stock
based awards as a component of compensation, apart from the common stock award
of approximately 30,000 shares awarded to Mr. Ku upon the completion of his
third year’s service for the Company. In the future, we may adopt and establish
an equity incentive plan pursuant to which awards may be granted if our
Compensation Committee determines that it is in the best interests of our
stockholders and the Company to do so.





Retirement
Benefits





Our
executive officers are not presently entitled to company-sponsored retirement
benefits.





Perquisites





We have
not provided our executive officers with any material perquisites and other
personal benefits and, therefore, we do not view perquisites as a significant or
necessary element of our executive’s compensation.





Deferred
Compensation





We do not
provide our executives the opportunity to defer receipt of annual
compensation.





The
following table sets forth information for the period indicated with respect to
the persons who served as our CEO, CFO and other most highly compensated
executive officers who served on our board of directors.


84


SUMMARY
COMPENSATION TABLE





Name
      and
                                                        Position
                                                      
                                                      Year
                                                      
                                                      Salary
                                                        ($)
                                                      
                                                      Bonus
                                                        ($)
                                                      
                                                      Stock
                                                        Awards
                                                        ($)
                                                      
                                                      Option
                                                        Awards
                                                        ($)
                                                      
                                                      Non-Equity
                                                        Incentive
      Plan
                                                        Compensation
                                                        ($)
                                                      
                                                      Nonqualified
                                                        Deferred
                                                        Compensation
                                                        Earnings
      ($)
                                                      
                                                      All
      Other
                                                        Compensation
                                                        ($)
                                                      
                                                      Total ($)Pengfei
      Liu, CEO
                                                      
                                                      2007
                                                      
                                                      
                                                      22,000
                                                      
                                                      
                                                      26,000
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      48,0002008
                                                      
                                                      
                                                      138,000
                                                      
                                                      
                                                      98,000
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      236,0002009
                                                      
                                                      
                                                      140,000
                                                      
                                                      
                                                      131,000
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      271,000Shaobin
      Yang, Deputy CEO (1)
                                                      
                                                      2007
                                                      
                                                      
                                                      18,000
                                                      
                                                      
                                                      16,000
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      34,0002008
                                                      
                                                      
                                                      65,000
                                                      
                                                      
                                                      33,000
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      98,000Marco
      Hon Wai Ku, CFO (2)
                                                      
                                                      2007
                                                      
                                                      
                                                      32,000
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      32,0002008
                                                      
                                                      
                                                      118,000
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      34,000
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      152,0002009
                                                      
                                                      
                                                      140,000
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      105,000
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      245,000Weipeng
      Liu, Director
                                                      
                                                      2007
                                                      
                                                      
                                                      11,000
                                                      
                                                      
                                                      11,000
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      22,0002008
                                                      
                                                      
                                                      43,000
                                                      
                                                      
                                                      20,000
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      63,0002009
                                                      
                                                      
                                                      44,000
                                                      
                                                      
                                                      27,000
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      71,000





(1)   Mr. Yang resigned from the Company on
December 28, 2008.


(2)   Mr.
Ku joined the Company in July 2007.





On
November 17, 2007, we entered into a reverse acquisition transaction with Ocean
Technology that was structured as a share exchange and in connection with that
transaction; Mr. Liu became the Chief Executive Officer (“CEO”). Prior to
the effective date of the reverse acquisition, Mr. Liu served at Ocean
Technology as the CEO. The annual, long term and other compensation shown
in this table include the amount Mr. Liu received from Ocean Technology prior to
the consummation of the reverse acquisition.





SERVICE
AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS





On
November 17, 2007, we entered into separate service agreements (“Service
Agreements”) with our executive directors, namely, Pengfei Liu, Shaobin Yang and
Weipeng Liu, on substantially similar terms, which will remain effective until
December 31, 2010. On December 28, 2008, the Company received the
resignation of Shaobin Yang as our Executive Director and Deputy Chief Executive
Officer. Mr. Yang resigned for personal reasons and had no disagreements
with the Company, its Board of Directors or management. After December 31, 2010,
each of the Service Agreements will continue for a further term of three years
unless otherwise terminated by the respective parties to the Service Agreement
giving not less than six months’ notice in writing to the counterparty to such
agreement. Each of the Service Agreements may be terminated if any of the
executive directors commits a breach of his Service Agreement, such as being
convicted of any offence involving fraud or dishonesty or being adjudicated
bankrupt. There are no benefits payable to an executive director upon
termination of his Service Agreement. The Service Agreement covers the
terms of employment, such as salary and bonus.  A copy of each of the
Service Agreements for each of our three directors was filed as Exhibits 10.5,
10.6 and 10.7 of the Form 8-K filed on November 23, 2007 with the
Commission.





We also
have entered into a service agreement with Marco Hon Wai Ku who joined the
Company as our chief financial officer in July 2007. The service agreement
with Mr. Ku is renewable on a year-to-year basis and may be terminated by either
party giving not less than two months’ notice in writing to the other. The
service agreement was renewed in July 2009 for an additional one year
term.  The service agreement may also be terminated if Mr. Ku commits
a breach of the agreement, such as being convicted of any offence involving
fraud or dishonesty or being adjudicated bankrupt. The service agreement
covers the terms of employment, such as salary and bonus. Under the service
agreement, Mr. Ku has also agreed not to enter into businesses that will compete
with us for a period of six months after the termination of the service
agreement.  Mr. Ku will be paid annual cash compensation, including
his travel and housing allowance, of approximately $140,000, and will receive a
common stock award of 30,000 shares upon the completion of his third year’s
service for the Company.





We also
have entered into Independent Director Agreements (the “Agreements”) with
Xiaochuan Li, Changhu Xue and Honkau Wan (“Director” or “Directors”). The
Agreements shall terminate on the date of the Director’s removal or resignation
with each 12-month period ending on the anniversary date of the Director’s
appointment constituting a Service Year. Compensation for Xiaochuan Li and
Changhu Xue shall be RMB60,000 and Honkau Wan should be HK$60,000 per Service
Year, respectively. Further, the Company will reimburse the Directors for
expenses incurred in good faith in the performance of the Director’s duties for
the Company.





We will
bear all travelling and travel-related expenses, entertainment expenses and
other out-of-pocket expenses reasonably incurred by our executive directors in
the process of discharging their respective duties on our behalf.





85


The
following table sets forth the total compensation paid to each independent Board
member in 2009.


Director
Compensation For 2009


Fees
      Earnedor
      paid
                  
                  
                  StockName
                  
                  in Cash
                  
                  
                  Awards
                  
                  
                  TotalXiaochuan
      LI
                  
                  $
                  8,776
                  (1)
                  
                  $
                  0
                  
                  
                  $
                  8,776Changhu
      XUE
                  
                  $
                  8,776
                  (1)
                  
                  $
                  0
                  
                  
                  $
                  8,776Honkau
      WAN
                  
                  $
                  7,692
                  (2)
                  
                  $
                  0
                  
                  
                  $
                  7,692TOTAL
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  25,244





(1)
 This amount is based on the exchange rate as of December 31, 2009 of US$1
equal to RMB6.8372.





(2)
 This amount is based on the exchange rate of US$1 equal to
HK$7.80.





Director
Compensation For 2008


Fees
      Earnedor
      paid
                  
                  
                  StockName
                  
                  in Cash
                  
                  
                  Awards
                  
                  
                  TotalXiaochuan
      LI
                  
                  $
                  8,754
                  (1)
                  
                  $
                  0
                  
                  
                  $
                  8,754Changhu
      XUE
                  
                  $
                  8,754
                  (1)
                  
                  $
                  0
                  
                  
                  $
                  8,754Honkau
      WAN
                  
                  $
                  7,692
                  (2)
                  
                  $
                  0
                  
                  
                  $
                  7,692TOTAL
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  25,200





(1)  This
amount is based on the exchange rate as of December 31, 2008 of US$1 equal to
RMB6.8542.





(2)  This
amount is based on the exchange rate of US$1 equal to HK$7.80.





Except as
disclosed herein, we have no other existing or proposed service agreement with
any of our directors.





BONUSES
AND DEFERRED COMPENSATION





In
addition, we will pay to each of Pengfei Liu and Weipeng Liu an incentive bonus
based on our PBT, where “PBT” refers to the audited combined profit from our
operations and before income tax and before any dividend distribution (excluding
non-recurring exceptional items and extraordinary items) and before minority
interests for the relevant financial year.





The
amount of incentive bonus that Pengfei Liu is expected to receive in each
financial year will be determined as follows:





PBT
                            
                            Rate
      of Incentive BonusPengfei
      LiuWhere
      the PBT is between US $ 10,684,000 and US $ 13,356,000
                            
                            0.75%
      of the PBTWhere
      the PBT is US $ 13,356,000 or more but not more than US $
      16,027,000
                            
                            0.75%
      of the PBT for the first US $ 13,356,000 of PBT; and
                              1.0%
      on the amount over US $ 13,356,000Where
      the PBT is US $ 16,027,000 and above
                            
                            0.75%
      of the PBT for the first US $ 13,356,000 of PBT;
                              1.0%
      on the US $ 2,671,000 after the first US $ 13,356,000 of  PBT;
      and
                              1.5%
      on the amount over US $
16,027,000




The
amount of incentive bonus that Weipeng Liu is expected to receive in each
financial year will be determined as follows:





PBT
                      
                      Rate
      of Incentive BonusWeipeng
      LiuWhere
      the PBT is between US $ 10,684,000 and US $ 13,356,000
                      
                      0.15%
      of the PBTWhere
      the PBT is above US $ 13,356,000
                      
                      0.15%
      of the PBT for the first US $ 13,356,000 of PBT; and
                        0.25%
      on the amount over US $
13,356,000


86


The
incentive bonuses will be paid in the first quarter of the year following the
year of assessment. The first assessment year for incentive bonuses will be
year 2008.





This
particular performance metric was chosen by the board of directors because they
believed that such scheme would help in measuring the rewards provided to the
senior executives and the directors in an open, fair, and measurable manner
given the bonuses were tied in with the performance of the group. A
progressive basis was selected because the senior executives and the directors
could be highly motivated under the said scheme and we believe this should
improve long-term stockholder value over time. This particular performance
metric was arbitrarily determined by the board of directors after considering
our historical business performance and the expected returns which could be
possibly achieved if the business strategies and development plans could be
implemented and well managed by the management. This performance metric
will be consistently reviewed by the Compensation Committee.





We do not
have any deferred compensation or retirement plans.





OPTION
GRANTS IN THE LAST FISCAL YEAR





We did
not grant any options or stock appreciation rights to our named executive
officers or directors in the fiscal year 2009. As of December 31, 2009,
none of our executive officers or directors owned any of our derivative
securities.





INDEMNIFICATION
OF DIRECTORS AND EXECUTIVE OFFICERS





Our
bylaws provide for the indemnification of our present and prior directors and
officers or any person who may have served at our request as a director or
officer of another corporation in which we own shares of capital stock or of
which we are a creditor, against expenses actually and necessarily incurred by
them in connection with the defense of any actions, suits or proceedings in
which they, or any of them, are made parties, or a party, by reason of being or
having been director(s) or officer(s) of us or of such other corporation, in the
absence of negligence or misconduct in the performance of their duties. This
indemnification policy could result in substantial expenditure by us, which we
may be unable to recoup.


Insofar
as indemnification by us for liabilities arising under the Securities Exchange
Act of 1934 may be permitted to our directors, officers and controlling persons
pursuant to provisions of the Amended Articles of Incorporation and Bylaws, or
otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy and is, therefore, unenforceable. In
the event that a claim for indemnification by such director, officer or
controlling person of us is in the successful defense of any action, suit or
proceeding is asserted by such director, officer or controlling person in
connection with the securities being offered, we will, unless in the opinion of
our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.





At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.




ITEM
12.              
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters




The
following tables set forth information regarding beneficial ownership
of  28,393,650 outstanding shares of common stock as of February 23,
2010 (i) by each person who is known to us to beneficially own more than 5% of
our common stock; (ii) by each of our officers and directors; and (iii) by all
of our officers and directors as a group. Beneficial ownership is determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934 and does
not necessarily bear on the economic incidents of ownership or the rights to
transfer the shares described below. Unless otherwise indicated each stockholder
has sole voting power and dispositive power with respect to the indicated
shares.





Unless
otherwise specified, the address of each of the persons set forth below is in
care of Da Bao Industrial Zone, Shishi City, Fujian, China, 362700.




87




Title of Class
                                            
                                            Name & Address of
                                              Beneficial Owner
                                            
                                            Office, If
                                              Applicable
                                            
                                            Amount and
                                              Nature of Beneficial
                                              Ownership
                                            
                                            
                                            Percent of ClassCommon Stock
      $0.001 par value
                                            
                                            Pengfei
      Liu
                                            
                                            CEO
                                            
                                            
                                            11,806,537
                                            (1)
                                            
                                            
                                            41.6
                                            %Dabao
      Industrial Zone,Shishi
      City, FujianProvince,
      ChinaCommon
      Stock $0.001 par value
                                            
                                            Marco
      Hon Wai Ku
                                            
                                            CFO
                                            
                                            
                                            54,000
                                            
                                            
                                            
                                            0.2
                                            %Dabao
      Industrial Zone,Shishi
      City, FujianProvince,
      ChinaCommon
      Stock $0.001 par value
                                            
                                            Jayhawk
      Private Equity Fund, LP (2)
                                            
                                            
                                            
                                            
                                            1,892,822
                                            
                                            
                                            
                                            6.6
                                            %5410
      West 61st
      Place, Suite 100Mission,
      KS 66205Common
      Stock $.001 par value
                                            
                                            All
      officers and directors as a group
                                            
                                            
                                            
                                            
                                            11,860,537
                                            
                                            
                                            
                                            41.8
                                            %





(1)
            Of
      these 11,806,537 common stock shares, 3,099,721 common stock shares have
      been placed into an escrow account pursuant to a make good agreement
      entered into by Mr. Pengfei Liu in connection with the Securities Purchase
      Agreement.





(2)
            Includes
      shares of common stock and shares issuable upon exercise of warrants owned
      by the two affiliated entities Jayhawk Private Equity Fund, LP and Jayhawk
      Private Equity Co-Invest Fund, LP. Jayhawk Private Equity Fund, LP is the
      beneifical owner of 1,341,069 shares of common stock and 398,603 shares
      issuable upon exercise of warrants, and Jayhawk Private Equity Co-Invest
      Fund, LP is the beneficial owner of 84,529 shares of common stock and
      68,621 shares issuable upon exercise of warrants,
      respectively.





CHANGES
OF CONTROL





There are
currently no arrangements which would result in a change in
control.





ITEM
13.            Certain Relationships and Related
Transactions





INTERESTED
PERSON TRANSACTIONS





Except as
disclosed herein, we have not entered into any related transaction with any
of our directors, executive officers or controlling shareholder or their
affiliates.





The
transactions discussed in this section were not available to third parties.
Pengfei Liu was the only beneficial owner of Xianglin, Jixiang, Mingxiang and
Rixiang when each of the transactions took place. This is why Pengfei Liu and
his wife, Yazuo Qiu, would provide financing for the companies in advance and
provide guarantees without any consideration.





Past
Interested Person Transactions





Details
of the material interested person transactions for the fiscal years ended
December 31, 2009, 2008 and 2007 are set forth below:





Year of
                        Transaction
                      
                      Acquirer
                      
                      Acquiree
                      
                      Nature/Amount of Property
                        Acquired or to be Acquired
                      
                      Terms of Transaction2007
                      
                      Ocean
      Technology
                      
                      Pengfei
      Liu, CEO and Controlling Shareholder
                      
                      $262,000
      advance.
                      
                      Advance
      was unsecured, repayable on demand and interest-free.2008
                      
                      Ocean
      Technology
                      
                      Pengfei
      Liu, CEO and Controlling Shareholder
                      
                      $170,000
      advance.
                      
                      Advance
      was unsecured, repayable on demand and interest-free.2009
                      
                      Ocean
      Technology
                      
                      Pengfei
      Liu, CEO and Controlling Shareholder
                      
                      $70,000
      advance.
                      
                      Advance
      was unsecured, repayable on demand and interest-free.


88


From time
to time, we have extended advances to Pengfei Liu. The amounts advanced to
Pengfei Liu were interest-free, unsecured and had no fixed terms of
repayment. All advances to Pengfei Liu have been fully repaid as at October
31, 2005. Pengfei Liu had also, from time to time, extended advances to us
for working capital purposes.





Present
Interested Person Transactions





a)       
    Provision of guarantees by Pengfei Liu and Yazuo
Qiu





As at
December 31, 2009, the guarantees provided by these directors and their
respective associates to secure bank facilities from the Agricultural Bank of
China, Shishi Branch, are as follows:





Party to which banking
                facilities are granted
              
              Loan Amount (US$’000)
              
              Outstanding Loan Amount
                (US$’000)
              
              GuaranteesMingxiang
              
              790
              
              790
              
              Guaranteed
      by Pengfei Liu and Yazuo QiuMingxiang
              
              439
              
              439
              
              Guaranteed
      by Pengfei Liu and Yazuo QiuMingxiang
              
              570
              
              570
              
              Guaranteed
      by Pengfei Liu and Yazuo QiuMingxiang
              
              731
              
              731
              
              Guaranteed
      by Pengfei Liu and Yazuo QiuMingxiang
              
              585
              
              585
              
              Guaranteed
      by Pengfei Liu and Yazuo QiuMingxiang
              
              585
              
              585
              
              Guaranteed
      by Pengfei Liu and Yazuo QiuMingxiang
              
              439
              
              439
              
              Guaranteed
      by Pengfei Liu and Yazuo Qiu





The
facilities provided by the Agricultural Bank of China, Shishi Branch, were used
to finance our working capital requirements.





As at
December 31, 2009, the total outstanding loan amounts held by us were
approximately $4.1 million, and the full amounts are guaranteed by Pengfei Liu
and Yazuo Qiu. The effective interest rate on these short-term loans is
approximately 5.31%  per annum. No consideration was provided to
Pengfei Liu and Yazuo Qiu in exchange for their guarantees.





As of
December 31, 2009, Mingxiang is contingently liable as guarantor with respect to
the loans of $731,294 (equivalent to RMB5,000,000) and $438,776 (equivalent to
RMB3,000,000) to two unrelated third parties, Shishi Yu Ching Knitting and
Clothing Company (“Yu Ching”) and Shishi Han Jiang Hua Lian Knitting and
Clothing Factory (“Han Jiang Hua Lian”), respectively. The term of these
guarantees are commenced from July 2009 through July 2011, with a renewal
provision of 2 years. At any time from the date of guarantees, should Yu Ching
or Han Jiang Hua Lian fail to make their due debt payments, Mingxiang will be
obligated to perform under the guarantees 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 guarantees is
$1,170,070 (equivalent to RMB8,000,000).





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





89




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 indemnification fair value to be insignificant.
As of December 31, 2009, the Company has not recorded any liabilities under
these guarantees.





REVIEW,
APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS





All
ongoing and future transactions between us and any of our officers and directors
and their respective affiliates, including loans by our officers and directors,
will be on terms believed by us to be no less favorable than are available from
unaffiliated third parties. Such transactions or loans, including any
forgiveness of loans, will require prior approval by the Corporate Governance
and Nominating Committee (whose members are “independent” directors) and by a
majority of our disinterested “independent” directors (to the extent we have
any) or the members of our board who do not have an interest in the transaction,
in either case who had access, at our expense, to our attorneys or independent
legal counsel. We will not enter into any such transaction unless our
disinterested (“independent”) directors determine that the terms of such
transaction are no less favorable to us than those that would be available to us
with respect to such a transaction from unaffiliated third parties. We will not
enter into a business combination or invest alongside any of our directors,
officers, any affiliate of ours or of any of our directors or officers or a
portfolio company of any affiliate of our directors or officers.





POTENTIAL
CONFLICTS OF INTERESTS





Save as
disclosed below and under the section “Interested Person Transactions”, during
the past three financial years:





a)
            None of our directors, executive
      officers or controlling shareholder or their affiliates have had any
      interest, direct or indirect, in any material transaction to which we are
      a party.





b)
            None of our directors, executive
      officers or controlling shareholder or their affiliates has had any
      interest, direct or indirect, in any company that carries the same
      business or similar trade which competes materially and directly with our
      existing business.





c)
            None of our directors, executive
      officers or controlling shareholder or their affiliates has had any
      interest, direct or indirect, in any enterprise or company that is our
      major customer or supplier of goods or
  services.





d)
            None of our directors, executive
      officers or controlling shareholder or their affiliates has had any
      interest, direct or indirect, in any material transaction we have
      undertaken within the last three
years.





ITEM
14.            Principal Accountant Fees and
Services





The
following is a summary of the fees billed to us by ZYCPA Company, the Company’s
current auditors; Century Faith Consultants Limited, which prepared internal
control report to the Company; Gervais McCannon Tyler & Associates, P.C.,
the Company’s current taxation advisors; Cordovano and Honeck LLP, the Company’s
former auditors (for the period November 17, 2008 to January 26,
2009):





Services  (US$’000)
                  
                  2009
                  
                  
                  2008Audit
      Fees
                  
                  $
                  124
                  
                  
                  $
                  110Audit
      Related Fees
                  
                  
                  1
                  
                  
                  
                  4Tax
      Fees
                  
                  
                  5
                  
                  
                  
                  7All
      Other Fees
                  
                  
                  —
                  
                  
                  
                  —TOTAL
                  
                  $
                  130
                  
                  
                  $
                  121




Audit
fees consist of the aggregate fees billed for services rendered for the audit of
our annual financial statements, the reviews of the financial statements
included in our Forms 10-Q and for any other services that are normally provided
by our independent auditors in connection with our statutory and regulatory
filings or engagements.





Audit
related fees consist of the aggregate fees billed for professional services
rendered for assurance and related services that reasonably related to the
performance of the audit or review of our financial statements that were not
otherwise included in audit fees.


90


Tax fees
consist of the aggregate fees billed for professional services rendered for tax
compliance, tax advice and tax planning. These services include assistance
regarding federal, state and local tax compliance and consultation in connection
with various transactions and acquisitions.




All other
fees consist of the aggregate fees billed for products and services provided by
our independent auditors and not otherwise included in audit fees, audit related
fees or tax fees.





PART
IV.





ITEM
15.              Exhibits, Financial Statement
Schedules




(a)
Financial Statements





The
financial statements are set forth under Item 8 of this Annual Report on
Form 10-K. Financial statement schedules have been omitted since they are either
not required, not applicable, or the information is otherwise
included.





(b)
Exhibits





2.1
              Share
      Exchange Agreement, dated November 17, 2007 by and among the Registrant,
      Ocean Technology and its stockholders. (Filed with the Commission on Form
      8-K dated November 23, 2007 as Exhibit 2.1)3.1
              Amended
      Articles of Incorporation of the Registrant as filed with the Secretary of
      State of Nevada, as amended to date. (Filed with the Commission on Form
      8-K dated November 23, 2007 as Exhibit 3.1)3.2
              Amended
      and Restated Bylaws of the Registrant. (Filed with the Commission on Form
      8-K dated November 23, 2007 as Exhibit 3.2)4.1
              Form
      of Registration Rights Agreement dated November 17, 2007. (Filed with the
      Commission on Form 8-K dated November 23, 2007 as Exhibit
    4.1)4.2
              Form
      of Common Stock Purchase Warrant issued to Investors dated November 17,
      2007. (Filed with the Commission on Form 8-K dated November 23, 2007 as
      Exhibit 4.2)4.3
              Form
      of Common Stock Purchase Warrant issued to Sterne Agee & Leach, Inc.
      and its designee. (Filed with the Commission on Form 8-K/A dated November
      30, 2007 as Exhibit 4.3)4.4
              Form
      of Common Stock Purchase Warrant issued to Yorkshire Capital Limited and
      its designee. (Filed with the Commission on Form 8-K/Adated November 30,
      2007 as Exhibit 4.4)10.1
              Form
      of Securities Purchase Agreement dated November 17, 2007. (Filed with the
      Commission on Form 8-K/A on November 30, 2007 as Exhibit
    10.1)10.2
              Closing
      Escrow Agreement dated November 17, 2007, by and among the Registrant,
      Sterne Agee & Leach, Inc. and Thelen Reid Brown Raysman & Steiner,
      LLP. (Filed with the Commission on Form 8-K dated November 23, 2007 as
      Exhibit 10.3)10.3
              Employment
      Contract dated November 17, 2007, between the Registrant and Pengfei Liu.
      (Filed with the Commission on Form 8-K dated November 23, 2007 as Exhibit
      10.5)10.4
              Employment
      Contract dated November 17, 2007, between the Registrant and Shaobin Yang.
      (Filed with the Commission on Form 8-K dated November 23, 2007 as Exhibit
      10.7)10.5
              Employment
      Contract dated November 17, 2007, between the Registrant and Weipeng Liu.
      (Filed with the Commission on Form 8-K dated November 23, 2007 as Exhibit
      10.6)10.6
              Employment
      Contract dated July 26, 2007, between Ocean Technology and Marco Hon Wai
      Ku. (Filed with the Commission on Form 8-K dated November 23, 2007 as
      Exhibit 10.8)10.7
              Consulting
      Agreement dated January 1, 2007 between Yorkshire Capital Ltd. and Ocean
      Technology (China) Company Limited (Filed with the Commission on Form 8-K
      dated November 23, 2007 as Exhibit
10.9)


91





10.8
              Common
      Stock Purchase Agreement dated September 13, 2007, by and between New
      Paradigm Productions, Inc. and Halter Financial Investments, L.P. (Filed
      with the Commission on Form 8-K dated September 14, 2007 as Exhibit
      10.1)10.9
              Loan
      Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
      Subranch Agricultural Bank of China dated October 26, 2006. (Filed with
      the Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as
      Exhibit 10.9)10.10
              Loan
      Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
      Subranch Agricultural Bank of China dated April 18, 2007. (Filed with the
      Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
      10.9)10.11
              Loan
      Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
      Subranch Agricultural Bank of China dated April 29, 2007. (Filed with the
      Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
      10.9)10.12
              Loan
      Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
      Subranch Agricultural Bank of China dated June 3, 2007. (Filed with the
      Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
      10.9)10.13
              Loan
      Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
      Subranch Agricultural Bank of China dated June 13, 2007. (Filed with the
      Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
      10.9)10.14
              Loan
      Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
      Subranch Agricultural Bank of China dated July 2, 2007. (Filed with the
      Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
      10.9)10.15
              Loan
      Contract by and between Huabao Mingxiang Foods Co., Ltd. And Shishi
      Subranch Agricultural Bank of China dated August 21, 2007. (Filed with the
      Commission on Form S-1 (Amendment No. 2) dated March 13, 2008 as Exhibit
      10.9)10.16
              Make
      Good Escrow Agreement dated November 17, 2007, by and among the
      Registrant, Sterne Agee & Leach, Inc., Mr. Pengfei Liu, and Interwest
      Transfer Company, Inc. (Filed with the Commission on Form 8-K dated
      November 23, 2007 as Exhibit 10.2)10.17
              Lock-up
      Agreement dated November 17, 2007, by and among the Registrant and Mr.
      Pengfei Liu. (Filed with the Commission on Form 8-K dated November 23,
      2007 as Exhibit 10.4)10.18
              Investor
      Relations Consulting Agreement, by and between the Registrant and Hayden
      Communications International, Inc. dated February 20, 2008. (Filed with
      the Commission on Form 8-K dated March 21, 2008 as Exhibit
      10.1)10.19
              Employment
      Supplementary Agreement between Ocean Technology (China) Company Limited,
      and Marco Hon Wai Ku dated July 26, 200910.20
              Executed
      Auction Confirmation Letter dated November 6, 2009 by Shishi Huabao
      Mingxiang Foods Co., Ltd and Fujian Jiafu Auction Firm Limited Liability
      Company. (Filed with the Commission on Form 8-K dated November 12,
      2009)


92





10.21
              Credit
      or Share Purchase Option Agreement amongst Shishi Huabao Mingxiang Food
      Co., Ltd., Qiu Shang Jing and Shishi Xianghe Food Science and Technology
      Co., Ltd. November 27, 2009. (Filed with the Commission on Form 8-K dated
      December 2, 2009).10.22
              Share
      Purchase Agreement dated January 1, 2010 amongst Shishi Huabao Mingxiang
      Foods Co., Ltd. Qiu Shang Jing and Shishi Xianghe Food Science and
      Technology Co., Ltd. (Filed with the Commission on Form 8-K dated January
      5, 2010).10.23
              Form
      of Securities Purchase Agreement between the Company and each Purchaser
      dated as of January 20, 2010 (Filed with the Commission on Form 8-K dated
      January 20, 2010).10.24
              Form
      of Escrow Agreement between the Company, Global Hunter Securities LLC,
      Brean Murray, Carret & Co. LLC, Sichenzia Ross Friedman Ference LLP
      and certain purchasers dated as of January 20, 2010. (Filed with the
      Commission on Form 8-K dated January 20, 2010).10.25
              Placement
      Agent Agreement between the Company, Global Hunter Securities and Brean
      Murray, Carret & Co., LLC dated as of January 15,
      2010.  (Filed with the Commission on Form 8-K dated January 20,
      2010).10.26
              Financing
      Consultancy Engagement Letter between the Company and World Global
      Investments Hong Kong Limited dated October 18, 2009. (Filed with the
      Commission on Form 8-K dated January 20, 2010).14.1
              Business
      Code of Conduct (Filed with the Commission on Form 8-K dated January 24,
      2008 as Exhibit 14.1 and Form 8-K dated August 17, 2009 as Exhibit
      5.05.1)14.2
              Financial
      Code of Conduct (Filed with the Commission on Form 8-K dated January 24,
      2008 as Exhibit 14.2 and Form 8-K dated August 17, 2009 as Exhibit
      5.05.2)14.3
              Amendments
      to the By-Laws (Filed with the Commission on Form 8-K dated August 17,
      2009 as Exhibit 5.03)14.4
              Charter
      for the Audit Committee (Filed with the Commission on Form 8-K dated
      August 17, 2009 as Exhibit 5.05.1)14.5
              Charter
      for the Corporate Governance and Nominating Committee (Filed with the
      Commission on Form 8-K dated August 17, 2009 as Exhibit
      5.05.2)14.6
              Charter
      for the Compensation Committee (Filed with the Commission on Form 8-K
      dated August 17, 2009 as Exhibit 5.05.3)21
              Subsidiaries
      List (Filed with the Commission on Form 10-K dated March 23, 2009 as
      Exhibit 21)24
              Power
      of Attorney (Filed with the Commission on Form 10-K dated March 23, 2009
      as Exhibit 24))31.1
              Certification
      of Chief Executive Officer pursuant to 13a-14 and 15d-14 of the Exchange
      Act (filed herewith)31.2
              Certification
      of Chief Financial Officer pursuant to 13a-14 and 15d-14 of the Exchange
      Act (filed herewith)32.1
              Certificate
      pursuant to 18 U.S.C. ss. 1350 for Pengfei Liu, Chief Executive Officer
      (filed herewith)32.2
              Certificate
      pursuant to 18 U.S.C. ss. 1350 for Marco Hon Wai Ku , Chief Financial
      Officer (filed herewith)99.1
              Press
      release dated January 20, 2010 by the Company (Filed with the Commission
      on Form 8-K dated January 20,
2010).


93


SIGNATURES




In
accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.





CHINA
      MARINE FOOD GROUP LIMITED/s/
      Pengfei LiuDated:
      March 22, 2010
                  Pengfei
      Liu, Chief Executive Officer(Principal
      executive officer)/s/
      Marco Hon Wai KuMarco
      Hon Wai Ku, Chief Financial OfficerDated:
      March 22, 2010
                  (Principal
      financial officer and principal accounting
  officer)


94