10-K 1 v109058_10k.htm
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, 2007

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

cmfa

CHINA MARINE FOOD GROUP LIMITED
(Exact name of registrant as specified in its charter)
 
NEVADA
 
87-0640467
(State or other jurisdiction of
Incorporation or organization)
 
(IRS Employer Identification No.)
 
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 No x 

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 ࿠ 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.    Yes x     No ¨ 

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 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 December 31, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $53,850,351.92 based on the closing sale price as reported on the Over-the-Counter Bulletin Board. As of March 24, 2008, there were 22,972,301 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None
 

 
China Marine Food Group Limited
 
FORM 10-K

For the Year Ended December 31, 2007

TABLE OF CONTENTS

PART I
 
 
   
ITEM 1.
 
Business
 
5
ITEM 1A.
 
Risk Factors
 
30
ITEM 1B.
 
Unresolved Staff Comments
 
40
ITEM 2.
 
Properties
 
41
ITEM 3.
 
Legal Proceedings
 
42
ITEM 4.
 
Submission of Matters to a Vote of Security Holders
 
42
         
PART II
 
 
   
ITEM 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
   
   
Purchases of Equity Securities
 
42
ITEM 6.
 
Selected Financial Data
 
43
ITEM 7.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
44
ITEM 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
 
60
ITEM 8.
 
Financial Statements and Supplementary Data
 
62
ITEM 9.
 
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
 
87
ITEM 9A.
 
Controls and Procedures
 
87
ITEM 9B.
 
Other Information
 
88
 
 
 
   
PART III
 
 
   
ITEM 10.
 
Directors and Executive Officers of the Registrant
 
89
ITEM 11.
 
Executive Compensation
 
91
ITEM 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
95
ITEM 13.
 
Certain Relationships and Related Transactions
 
96
ITEM 14.
 
Principal Accountant Fees and Services
 
98
 
 
     
 PART IV
 
     
ITEM 15
 
Exhibits, Financial Statement Schedules
 
98
         
SIGNATURES
     
100
 
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

BUSINESS DEVELOPMENT & ORGANIZATION WITHIN LAST FIVE YEARS

Overview

We are a holding company whose primary business operations are conducted through our direct, wholly owned subsidiary, Nice Enterprise Trading H.K. Co., Ltd. (“Nice Enterprise”), and its subsidiaries - Shishi Rixiang Marine Food Co., Ltd. (“Rixiang”), Shishi Huabao Jixiang Water Products Co., Ltd. (“Jixiang”) and Shishi Huabao Mingxiang Foods Co., Ltd. (“Mingxiang”). 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.

Our Corporate Structure

structure

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 $.35 per share to certain accredited investors. The offering closed in March 2000 and we raised gross proceeds in the amount of $35,000. As a result of the offering, our issued and outstanding common stock increased from 900,000 shares to 1,000,000 shares.

On July 5, 2000, we filed a registration statement on Form SB-2 with the Securities and Exchange Commission or the SEC under the Securities Act, to register shares of our common stock (Registration Statement No. 333-40790). The registration statement was declared effective on October 26, 2000. We sold 77,000 shares of our common stock pursuant to registration statement, raising a total of $77,000 in gross proceeds. As a result of the offering, our issued and outstanding common stock increased to 1,077,000 shares.

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.
 
4


Upon the closing of the HFI transaction, Jody St. Clair resigned as our sole director and executive officer and in anticipation of her resignation, she appointed Richard Crimmins as our sole director, President, Secretary-Treasurer, Chief Executive Officer, Chief Operating Officer and Chief Financial Officer.

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

Acquisition of Nice Enterprise and Related Financing

On November 17, 2007, we completed a reverse acquisition transaction with Nice Enterprise through a share exchange with Nice Enterprise’s former stockholders. Pursuant to the share exchange agreement, the shareholders of Nice Enterprise exchanged 100% of their outstanding capital stock in Nice Enterprise 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 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.

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 do 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.

Additionally, 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. 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 Nice Enterprise as its Chief Executive Officer.

On January 11, 2008 we filed a request with the National Association of Securities Dealers (NASD) to change its name and symbol. Our new trading symbol is CMFO. The change of name and new symbol became effective on January 22, 2008.

For accounting purposes, the share exchange transaction was treated as a reverse acquisition with Nice Enterprise as the acquirer and China Marine Food Group Limited as the acquired party.

Background History of Nice Enterprise

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, Pengfei 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.
 
5


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.

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 shareholder’s 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 recognised 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, Nice Enterprise Trading H.K. Co., Ltd., a company incorporated in Hong Kong and wholly-owned by Pengfei 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.

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, and more than 600 employees in 2007. Our employees currently include 8 research and development staff. We also retain two marine products specialists from Japan to provide consultancy services.

6


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.

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 to over 30 distributors in various provinces in the PRC such as Fujian, Guangdong, Jiangsu, Shandong and Zhejiang and in turn sub-distributed to about 1,200 retail points (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. Our marine catch is sold to customers in Fujian and Shandong Provinces, some of whom directly export the marine catch to Japan, 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 centres. We have also been designated as a state base for the quality control testing of marine products in Fujian Province.

Our objective is to establish ourselves as a leading producer of processed seafood 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 18 processed seafood products comprising dried seafood products such as roasted squid, roasted file fish, roasted prawns, shredded roasted squid and smoked eel 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.

We have established sales networks in various large and medium sized cities in the PRC and our export markets, such as Japan and Russia. We believe our products are sold by some of our distributors to end-consumers in South Korea, Taiwan and Ukraine. Our dried processed seafood products are mainly sold in supermarkets in Fujian and Zhejiang Provinces and their surrounding areas, and through our sales network of over 30 distributors, each of whom has its own sales network and is authorized by us to distribute our products exclusively in a specific vicinity.
 
Our sales to domestic and foreign markets for the fiscal years ended December 31, 2007, 2006 and 2005 are set out below:

   
Year ended December 31,
 
Dried Processed Seafood Products
 
2007
 
2006
 
2005
 
   
(%)
 
(%)
 
(%)
 
PRC sales
   
99.3
   
98.8
   
93.2
 
                     
Export sales (1)
   
0.7
   
1.2
   
6.8
 
                     
 
Notes:
(1) The decrease in export sales was mainly due to our increased marketing efforts in the PRC, which resulted in higher domestic sales.
 
   
Year ended December 31,
 
Frozen Processed Seafood Products
 
2007
 
2006
 
2005
 
   
(%)
 
(%)
 
(%)
 
PRC sales (1)
   
100.0
   
97.3
   
96.4
 
                     
Export sales (2)
   
0.0
   
2.7
   
3.6
 

Notes:
 
(1) These comprise sales to local distributors made on an ad hoc basis.
 
(2) These comprise sales to foreign distributors.
 
7


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” on Page 16 for further details of the awards and certifications that we have received.

Today, our products are exported to many countries including Japan, Russia and Ukraine. We are a State-designated base for quality assurance testing of marine products. Please see the section “Quality Assurance” on Page 28 for more details.

Marine Catch

We engage in the sale of marine catch. We work with local fishermen and charter 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 is harvested from the deep seas and is not bred through aquaculture.

The vessels are usually chartered for three-year periods, and the charter rates are dependent on the size of the vessels. Typically, the annual rental of our vessels ranges from approximately $104,000 to $156,000. Such rentals are paid quarterly in cash and within ten days from the commencement of the rental period. During the term of the agreements, we bear the costs of fuel, fishing equipment and facilities, wages of the crew and other expenses, whilst the vessel owners are responsible for ensuring the seaworthiness of the vessels and the validity of the permits and licenses for the undertaking of fishing operations.

The marine catch is sold to seafood traders in Fujian and Shandong Provinces, the PRC, some of whom directly export the marine catch to Japan, South Korea, and Taiwan. To preserve the freshness of the marine catch sold to our customers, we constantly pack the harvested marine catch in ice and endeavor 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 is sold to our customers at Xiangzhi (Shishi) Port itself, and the rest is 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 is collected by our customers at our business premises, and a small proportion is transported to our customers at their respective destinations. Please refer to the section “Production Facilities and Processes” on Page 12 for further details as to the fishing operations conducted for the sale of our marine catch.

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 are of the view that these factors do not cause substantial fluctuations in the prices of our marine catch.

Our Products

Our products can be divided into two main categories, namely (1) processed seafood products; and (2) marine catch. All of our production is undertaken by our subsidiary, Rixiang.

8

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

Processed Seafood
 
 
 
Main Markets
 
 
Products
 
Products / Species
 
Markets in the PRC
 
Foreign Markets
(a) Dried processed seafood products
 
Roasted file fish, shredded roasted squid, roasted squid, smoked eel, roasted prawn, Jingdu roasted fish
 
Hangzhou, Ningbo, Taizhou, Wenzhou and Ruian Cities in Zhejiang Province
 
Japan, Russia and Ukraine
             
        Shishi, Quanzhou, Xiamen, Fuzhou and Zhangzhou Cities in Fujian Province    
             
       
Qingdao City, Shandong Province
   
             
(b) Frozen processed seafood products
 
Cuttlefish, octopus, pomfret, shelled prawns,sliced squid
 
Qingdao City, Shandong Province (for sale in South Korea)
 
Japan
             
       
Shishi City, Fujian Province (for sale in Taiwan)
   
             
Marine Catch
 
Cuttlefish (Sepia esculenta), hairtail fish (Trichiurus japonicus), Japanese butter fish (Psenepis Anomala), squid (Loligo bleekeri)
 
Shishi City, Fujian Province (for sale in Taiwan)
 
 
-
             
       
Qingdao City, Shandong Province (for sale in South Korea and Japan)
   

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” on Page 12.

Dried Processed Seafood Products

seafood1
 
seafood2
 
seafood3
 
seafood4
 
 
 
 
 
 
 
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, smoked eel and roasted prawn.

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.

9

 
Frozen Processed Seafood Products

seafood5
 
seafood6
 
seafood7
 
seafood8
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)
   
     
seafood9
 
Cuttlefish is commonly found in the East China Sea and the Taiwan Strait. Cuttlefish is often processed and sold as fresh sushi and snacks.
     
Hairtail Fish (Trichiurus japonicus)
   
     
seafood10
 
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 restaurants
     
Japanese Butter Fish (Psenepis Anomala)
 
seafood11
 
Japanese butter fish is usually found in the East China Sea and the Taiwan Strait between September and November every year.
     
Squid (Loligo bleekeri)
 
seafood12
 
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.

10

 
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. As at December 31, 2007, 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. Maximum annual production capacities of our production lines are about 4,300 tons of dried processed seafood products and 360 tons of frozen processed seafood. We also own cold storage facilities with cold storage capacity of 2,020 tons.
 
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” on Page 28 for more details.

Dried Processed Seafood Products

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

11


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

 
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 flavouring. 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:

chart1

 
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.
 
12

 
 
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.

Marine Catch

We currently charter six fishing vessels with an aggregate net tonnage of 256 tons to harvest marine catch from the East China Sea and the Taiwan Strait. The harvestation is carried out by the owners of the chartered fishing vessels and their employees. Each fishing vessel is manned by approximately 16 persons on average.
 
13


The key stages of the harvestation, sorting, transportation and process in respect of our marine catch are as follows:
 
 chart2
 
 
1.
Preparations. Prior to setting off for the fishing grounds, the fishermen procure sufficient fuel, fishing equipment and facilities, emergency facilities, ice, food and grocery supplies for the entire duration of the fishing voyage, which typically lasts between three to five days. Detailed checks are conducted on the fishing vessels to ensure their safety and sea-worthiness, and on the fishing equipment to ensure that they are in a good condition. The fishermen also consult the most recent weather reports issued by provincial and state-level meteorological stations to check whether the weather conditions are suitable for fishing.

 
2.
Embarkation and Harvestation of Marine Catch. After the preparatory work is completed, the fishing vessels embark on the fishing voyage and depart for fishing grounds located at the East China Sea and the Taiwan Strait. The fishermen decide on the specific locations of the fishing grounds based on their experience and local knowledge after observing weather conditions, water temperature and direction of the tide.

Upon arrival at the fishing grounds, the fishermen commence the harvestation of marine catch. The harvestation is conducted in cycles and repeated until the fishermen decide to cease harvestation and return to port.

A typical harvestation cycle for each fishing vessel lasts around ½ hour (for cuttlefish) and between 1 to 1½ hours (for other types of marine catch) and comprises the following steps:

 
a.
Fishing net with net mouth of approximately 150 to 200 metres in circumference, depending on the size of the fishing vessel, is cast into the sea. The depth depends on the species of marine catch sought to be harvested. For cuttlefish, the net is typically lowered to a depth of approximately 100 meters below sea level, whereas for the other marine catch species the net is typically lowered to the seabed, at a depth of approximately 300 to 500 metres below sea level.

 
b.
The fishing vessels harvesting cuttlefish are fitted with light bulbs which are lit in order to attract the cuttlefish to swim up to a level suitable for harvestation. Three of the fishing vessels are currently designated for the harvestation of cuttlefish and therefore fitted with the light bulbs.
 
c.
For the types of marine catch other than cuttlefish, the fishing net is then towed by the fishing vessel around the fishing ground.

 
d.
After fishing for ½ hour (for cuttlefish) or towing for between 1 to 1½ hours (for the other types of marine catch), the fishing net is raised and the harvested marine catch is brought on board the fishing vessel, sorted and packed in ice.
 
14

 
 
e.
When the fishing net is cleared of marine catch, the fishing vessel is ready to commence the next harvestation cycle. As described above, the choice of fishing ground depends on the experience and local knowledge of the fishermen after taking into account weather conditions, water temperature and tide direction.
 
 
3.
Preliminary Sorting and Ice-Packing. Upon the completion of each harvestation cycle, the harvested marine catch is stored in insulated containers and constantly packed in ice in order to preserve its freshness.

 
4.
Return to Port. Upon completion of the last harvestation cycle, the fishing vessels commence their return to Xiangzhi (Shishi) Port at Shishi City, Fujian Province. When the fishing vessels are within approximately five to ten nautical miles from Xiangzhi (Shishi) Port, the captains of the fishing vessels will contact our Manager (Fishing and Procurement) to report the estimated volume of each species of marine catch harvested. Our Manager (Fishing and Procurement) then contacts our customers to inform them of the volume of marine catch harvested, to negotiate prices, and to arrange the logistics of collection / delivery. This reduces the time between harvestation and collection / delivery and ensures that the marine catch is sold fresh to our customers.

 
5.
Unloading and Transportation. Upon arrival at Xiangzhi (Shishi) Port, the marine catch is unloaded on to shore. Most of the marine catch is transported using our temperature-insulated trucks to our business premises at Dabao Industrial Zone, Shishi City Fujian Province, which is five to ten minutes by road from Xiangzhi (Shishi) Port. A small proportion of marine catch, which had been sorted and packed while on board the fishing vessels, is sold to customers at Xiangzhi (Shishi) Port.

 
6.
Sorting and Packing. At our business premises, the marine catch is sorted according to species and size. The sorted marine catch is then weighed, packed in ice and stored in styrofoam boxes for collection by or delivery to customers (as the case may be). For the marine catch which is not immediately (i.e. within three hours) collected by or delivered to our customers, the boxes are stored at our cold storage facilities at a temperature of minus five degrees Celsius to preserve the freshness of the marine catch.

 
7.
Collection / Delivery. Most of our marine catch is collected by our customers from our business premises. A small proportion of marine catch is delivered to our customers.

Marine catch for the Taiwan market is transported by road using temperature-insulated trucks to our customers at Quanzhou, Yongning and Dongshan Ports in Fujian Province. The distance between these ports and our business premises at Dabao Industrial Zone, Shishi City, Fujian Province ranges from approximately 30 minutes to 3 hours by road. From these ports, the marine catch is shipped to Taiwan. Based on the foregoing, the time taken between the fishing vessels’ return to port and the delivery of the marine catch to our customers at these ports is typically three to eight hours.

Marine catch for the South Korea market is loaded on to temperature-controlled containers, at temperatures of between minus five to minus ten degrees Celsius, and transported by road to our customer at Qingdao City, Shandong Province. From Qingdao City, Shandong Province, the marine catch is subsequently shipped to South Korea. Based on the foregoing, the time taken between the fishing vessels’ return to port and the delivery of the marine catch to our customer at Qingdao City, Shandong Province is typically 23 to 28 hours.

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
 
Significance
                     
November 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 efforts
                     
December 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 products
                     
January 2002
 
Mingxiang
 
Green Consumer Recommendation
 
2002 - 2003
 
Fujian Consumer Committee
 
Recognition of our product quality, environmental friendly products, integrity in our dealings with consumers
 
15

 
Year
 
Subsidiary
 
Award
 
Period
 
Awarding Body
 
Significance
                     
April 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 products
                     
April 2003
 
Mingxiang
 
A-Grade Tax Payer
 
2003 - 2004
 
Quanzhou District Tax Bureau
   
                     
August 2003
 
Mingxiang
 
Quanzhou Contract-Abiding Creditworthy Enterprise
 
2001 - 2002
 
Quanzhou Civil Administration
 
Recognition of integrity in our operations and commercial dealings
                     
September 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 products
                     
May 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 chain
                     
May 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
                     
May 1, 2007
 
Mingxiang
 
Green Food - frozen fish
 
May 2007 - May 2010
 
China Green Food Development Centre
 
Recognition of environmental awareness, non-pollution in our production chain
                     
May 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 chain
                     
May 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 chain
                     
May 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 chain
 
16

 
Year
 
Subsidiary
 
Award
 
Period
 
Awarding Body
 
Significance
                     
May 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 chain
                     
May 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 chain
                     
May 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 chain
                     
May 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 chain
                     
May 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 chain
                     
May 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
                     
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 chain
                     
January 2004
 
Mingxiang
 
Civilised 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 economy
                     
January 2004
 
Mingxiang
 
Quanzhou Agricultural Industrialization Leading Enterprise
 
For January 2004 - December 2006
 
Quanzhou Department of Agriculture, Quanzhou Finance Bureau
 
Recognition of our efforts and contribution in the development of processed agricultural products
 
17

 
Year
 
Subsidiary
 
Award
 
Period
 
Awarding Body
 
Significance
                     
September 2006
 
Mingxiang
 
Key Leading Enterprise (Province level)
 
2006 - 2007
 
Fujian Province Agriculture Industrialization Leading Group
 
Recognition of our efforts and contribution in the development of processed agricultural products
                     
December 2006
 
Mingxiang
 
A-Grade Tax Payer Credit Enterprise
 
2004 - 2005
 
Quanzhou National Tax Bureau, Quanzhou District Tax Bureau
 
Recognition of our tax creditworthiness
                     
December 2004
 
Mingxiang
 
National Foodstuff Industry Excellent Leading Enterprise
 
2003 - 2004
 
China Foodstuff Industry Association
 
Recognition of quality of our products
                     
June 2005
 
Mingxiang
 
2004 “AAA” bank-rated Creditworthy Enterprise
 
2005-2006
 
China Agricultural Bank, Fujian Branch
 
Recognition of the quality of our enterprise, economic standing, operational efficiency and potential for growth
                     
August 2, 2005
 
Mingxiang
 
Fujian Province Famous Brand
 
Valid for 3 years
 
Fujian Province Branded Products Authentication Committee
 
Recognition of our brand and our branding efforts

DISTRIBUTION

Sales and Marketing

Our sales and marketing team comprises 19 employees, headed by our Executive Chairman, Director and CEO 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, Russia and Ukraine. We believe our products are sold by some of our distributors to end-consumers in South Korea, Taiwan and USA.

As of December 31, 2007, we have 34 distributors in five provinces in the PRC, namely Fujian, Guangdong, Jiangsu, Shandong and Zhejiang, as follows:

Province
 
No. of Distributors
 
Fujian
 
20
 
Guangdong
 
1
 
Jiangsu
 
1
 
Shandong
 
2
 
Zhejiang
 
10
 
 
 
 
 
Total
 
34
 

These distributors in turn sub-distribute our dried processed seafood products to about 1,200 retail points (including major supermarkets and retailers such as Wal-Mart and Carrefour) throughout these provinces.

18


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 the 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.

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.

NEW 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.
 
19

 
To the best of our knowledge, our principal competitors within the PRC are the following major seafood product manufacturers in the PRC:
 
Business
 
Principal Competitors
Dried 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
     
Sale of Marine Catch
 
(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

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 over 30 distributors in various provinces in the PRC such as Fujian, Guangdong, Jiangsu, Shandong and Zhejiang. These distributors in turn sub-distribute our dried processed seafood products to about 1,200 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 Ukraine, Japan and Russia. These include, amongst others, established companies such as JCR Corporation of Japan and Fleish Russia Company of Russia. Please refer to the section “Major Customers” on Page 23 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” on Page 16. 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, Russia and Ukraine, 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.

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.
 
20


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.

 
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” on Page 23 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.

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.
 
21

 
 
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 2007, 2006 and 2005:
 
     
As a Percentage of Our Purchases of Raw Materials (%)
Year ended December 31,
 
     
2007
   
2006
   
2005
 
Shishi City Tianwang Seafood Products Trading Proprietor
   
21.8
   
14.3
   
12.2
 
Jinjiang City Shenhu Town Hongyuan Seafood Products Trading Proprietor
   
17.6
   
7.9
   
10.9
 
Shishi City Nanfu Seafood Products Wholesale Proprietor
   
15.6
   
18.6
   
17.9
 
Shishi City Fugui Seafood Products Trading Proprietor
   
18.5
   
11.7
   
10.7
 
Shishi City Huali Seafood Products Trading Proprietor
   
16.4
   
10.0
   
13.4
 
TOTAL
   
89.9
   
62.5
   
65.1
 

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 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.

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 the five major suppliers, Therefore the percentage of our purchases from the above 5 major suppliers increased significantly in 2005.
 
Though certain of our major suppliers accounted for more than 10% of our total purchases for the fiscal year ended December 31, 2007, we believe we are able to source our raw materials from alternative suppliers should the need arise.

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 in 2007, 2006 and 2005: 
 
       
Year ended December 31,
 
   
Products
 
2007
 
2006
 
2005
 
                   
Qingdao Haizhan Seafood Co., Ltd.(1)
   
Dried and frozen processed seafood products
   
9.9
   
14.3
   
9.8
 
     
 
                   
Wenzhou Rixin Foodstuff Co., Ltd. (2)
   
Dried processed seafood products
   
9.8
   
14.0
   
10.8
 
     
 
                   
Zhejiang Ruian Laodu Seafood Wholesale Proprietor (3)
   
Dried and frozen processed seafood products
   
9.3
   
7.9
   
5.1
 
     
 
                   
Wenling City Xingfeng Foodstuff Co., Ltd. (4)
   
Dried processed seafood products
   
8.9
   
9.7
   
7.0
 
Fuzhou Chaohui Foodstuff Company(5)
   
Dried processed seafood products
   
7.9
   
5.3
   
2.7
 
     
 
                   
Qingdao Xinqinghua Seafood Products Company (6)
   
Marine catch, namely cuttlefish, squid, hairtail fish
   
3.9
   
11.0
   
19.6
 
     
 
                   
Shenhu Town Dongshun Seafood Products Trading Proprietor (7)
   
Marine catch, namely cuttlefish, squid, hairtail fish
   
4.3
   
4.7
   
5.8
 
     
 
                   
Shishi City Junxu Seafood Products Trading Proprietor (8)
   
Marine catch, namely cuttlefish, squid, hairtail fish
   
4.3
   
7.5
   
11.4
 
     
 
                   
Shihuazhou Marine Products Wholesale Proprietor (9)
   
Marine catch, namely cuttlefish, squid, hairtail fish
   
4.1
   
7.8
   
12.5
 
TOTAL
   
 
   
62.4
   
82.2
   
84.7
 

Notes:

 
1)
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.
 
22

 
 
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)
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.

 
4)
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.

 
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)
Qingdao Xinqinghua Seafood Products Company is a trader of fresh seafood in Qingdao City, Shandong Province. It sources and purchases supplies for Korean fishery companies and has been our customer since 1996.

 
7)
Shenhu Town Dongshun Seafood Products Trading Proprietor is a trader of fresh seafood in Quanzhou City, Fujian Province. It sources and purchases supplies for Taiwanese fishery companies in the seafood business, and has been our customer since 2002. The percentage of our sales to Zhusheng Chen has been decreasing due to a larger percentage increase in our total sales.

 
8)
Shishi City Junxu Seafood Products Trading Proprietor is a trader of fresh seafood in Quanzhou City, Fujian Province. It sources and purchases supplies for Taiwanese fishery companies in the seafood business, and has been our customer since 2002.

 
9)
Shihuazhou Marine Products Wholesale Proprietor is a trader of fresh seafood in Quanzhou City, Fujian Province. It sources and purchases supplies for Taiwanese fishery companies in the seafood business, and has been our customer since 2002.

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” on Page 23. 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.
 
23


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 (1)
 
Class
 
Place of Registration
 
Status / Validity Period
 trademark
 
Class 40 covering processed seafood, agricultural foods, processed teas, processed herbs, chemical testing and processing
 
PRC
 
Registered / January 28, 2003 to January 27, 2013

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 Period
Packaging for Sakura squid
 
PRC
 
10 years from March 28, 2003
Packaging for roasted squid
 
PRC
 
10 years from April 11, 2001
Packaging for “Fisherman’s Dainty” Products
 
PRC
 
10 years from September 7, 1998
Packaging for roasted king prawn
 
PRC
 
10 years from May 12, 1998
Packaging for yellow croaker
 
PRC
 
10 years from May 12, 1998

Save as disclosed above, as at the date of this Form 10-K, 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 Validity
Mingxiang
 
Hygiene License
 
Permit to process seafood products
 
Shishi City Hygiene Bureau
 
March 13, 2006 to March 12, 2008 [Renewal application accepted and awaiting issuance of formal license]
                 
Rixiang
 
Hygiene License
 
Permit to process seafood and agricultural products, research and processing biochemical products.
 
Shishi City Hygience Bureau
 
March 13, 2006 to March 12, 2008  [Renewal application accepted and awaiting issuance of formal license]
                 
Rixiang
 
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, 2006 to May 31, 2009
 
24

 
Other Licenses and Permits

Our other licenses and permits are as follows:

 
Subsidiary
 
Name of Certificate
 
Description of License/Permit
 
Issuing Authority
 
Period of Validity
Mingxiang
 
National Industrial Product Manufacturing License
 
Permit to process seafood (dried)
 
Fujian Province Quality Technology Supervisory Bureau
 
November 10, 2005 to November 10, 2008
Rixiang
 
Customs Registration Certificate
 
Permit to file import-export documents with China Customs
 
China Customs
 
Dated December 14, 2004 until July 14, 2009
Mingxiang
 
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 date
Rixiang
 
EU Export Registration
 
Approval for Rixiang to export marine products to EU
 
European Commission
 
Valid from October 6, 2006; no expiration date

A fishing license is required for each fishing vessel that conducts marine catches at sea. Under the charter agreements entered into between our subsidiary Rixiang and the owners of the fishing vessels, the latter is responsible for obtaining and maintaining the requisite fishing licenses.

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 at December 31, 2007, our research and development team comprises eight 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;
 
25

 
 
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, and (4) 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. For the period under review, we have through our research and development introduced 18 new processed seafood products, including smoked eel, Sakura squid, and sliced squid. We believe that our constant product innovation has led to our increasing reputation as a producer of processed natural seafood products.

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 angiotensin 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.

Our research and development expenses amounted to approximately $33,000, $98,000 and $20,000 for 2007, 2006 and 2005 respectively. The increase in research and development expenses in 2006 was due mainly to fees paid to the Ocean University of China following the formalization of the collaboration as mentioned above. Research and development expenses are presented as part of general and administrative expenses in the financial statements.

As part of our strategy to expand and develop our business, we plan to further expand our research and development team to about ten personnel in 2008. We intend to (1) set aside $0.8 million for research and development expenses, (2) collaborate with the Ocean University of China on one or two specialized research topics each year and (3) commercialize the products of our research and development efforts.
 
26


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 Period
Rixiang
 
Validation of conformity with HACCP standards(1) for the export of marine products to the US
 
CIQ
 
November 13, 2007 to November 13, 2008
             
Rixiang
 
EU(2) export registration for export of our marine products to the EU
 
European Commission
 
No validity period
             
Mingxiang
 
ISO9001:2000(3) quality management system certification
 
CNAB $ CCIC Quality Certification Centre
 
December 5, 2006 to December 4, 2009
             
Mingxiang
 
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.
 
December 15, 2005 to December 14, 2008

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-recognised 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)
ISO9001:2000 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” on Page 16 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 ISO9001:2000 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.
 
27


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.

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 04005E10367ROM. The certificate is valid until December 14, 2008.

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.
 
28

 
EMPLOYEES

We set out below the total number of our employees and the various functions which they serve as at December 31, 2007, 2006 and 2005 respectively. 
 
     
As at December 31,
 
Functions
   
2007
   
2006
   
2005
 
Sales and Marketing
   
19
   
16
   
9
 
Finance and Administration
   
20
   
17
   
13
 
Fishing and Procurement (1)
   
102(2
)
 
135
   
114
 
Production, Research & Development, and Quality Control
   
493
   
492
   
353
 
TOTAL
   
634
   
660
   
489
 

Note:

 
1)
These figures include those fishermen who operate the fishing vessels that we charter for our marine catch business, who are paid by our Company.

 
2)
The decrease in number of employees was mainly due to the reduction in number of chartered vessels from nine (9) in 2006 to six (6) as at December 31, 2007.

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.

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 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 Proxy Statements for our Annual Stockholder Meetings are also available through our Internet website. 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.
 
ITEM 1A. Risk Factors
 

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, 76.5%, 60.3% and 47.2% of our sales in the fiscal years ended December 31, 2007, 2006 and 2005 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.
 
29


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 78.4%, 74.2% and 64.6% of our total cost of sales of processed seafood products in the fiscal years ended December 31, 2007, 2006 and 2005 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 45.8%, 56.9% and 64.1% of our sales in the fiscal years ended December 31, 2007, 2006 and 2005 respectively. In the event these and other major customers do not continue to purchase from us or reduce their purchases from us or develop their own ability to manufacture the products that we sell to them, and we are unable to secure new contracts or new customers that can replace the loss of these customers within a short time frame, our business and profitability will be affected. Please see the section “Major Customers” on Page 23 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 approximately 89.9%, 62.5% and 65.1% of our total purchases of raw materials in the fiscal years ended December 31, 2007, 2006 and 2005 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” on Page 23 for more details.

A significant portion of our business activities is 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, 2005 and 2004. 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 1.6%, 42.9% and 25.8% of our total sales for the fiscal years ended December 31, 2007, 2006 and 2005 respectively.

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” on Page 26 for further details of our research and development efforts.
 
30


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. In addition, 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. We were not subject to these requirements for the fiscal year ended December 31, 2006; accordingly, we have not evaluated our internal control systems in order to allow our management to report on, and our independent auditors to attest to, our internal controls as required by these requirements of SOX 404. Under current law, we will be subject to these requirements beginning with our annual report for the fiscal year ending December 31, 2007. We can provide no assurance that we will comply with all of the requirements imposed thereby. There can be no assurance that we will receive a positive attestation from our independent auditors. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or 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.

We currently lack an independent board of directors, which may result in the approval of transactions and policies without independent review.

We currently do not have any independent directors on our board. However, we intend to appoint at least two within ninety days.

In the absence of a majority of independent directors, our executive officers could establish policies and enter into transactions without independent review and approval thereof, subject to certain restrictions under our Articles of Incorporation. In addition, although we intend to establish audit and compensation committees which will consist entirely of outside directors, until those committees are established, transactions and compensation policies could be approved without independent review. These and other transactions could present the potential for a conflict of interest between our Company and its stockholders generally and the controlling officers, stockholders or directors.

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 and expanding our production facilities. 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.

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 marine catch and processed seafood products as a percentage of our total sales for the period under review were as follows:

   
Year ended December 31,
 
Products
 
2007
 
2006
 
2005
 
   
(%)
 
(%)
 
(%)
 
Marine catch
   
23.5
   
39.7
   
52.8
 
                     
Processed seafood products
   
76.5
   
60.3
   
47.2
 
 
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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. Please see the section “Other Licenses and Permits” on Page 26 for further details. 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.

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.
 
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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.

Our chartering agreements with owners of fishing vessels may be prematurely terminated, making it difficult for us to carry out our business operations.

We have currently entered into agreements to charter six fishing vessels for our marine catch operations. Under these agreements, the owners of the fishing vessels are obliged and required, among other conditions, to procure and maintain the fishing licenses required to conduct the fishing of marine catch. Although our agreements are for various periods expiring between end 2007 and end 2009, there is a risk that these agreements may be prematurely terminated, for example, if the vessel owners fail to provide us with seaworthy vessels or fail to procure and maintain valid fishing licenses. There is also a risk that these owners will not renew or extend our chartering agreements upon expiry. If we are unable to enter into new chartering agreements on similar terms and on a timely basis, such premature termination or failure to renew or extend the agreements may have an adverse effect on the financial performance and prospects of our marine catch business.

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 1% of our total sales. 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 such as our Deputy CEO and Executive Director, Shaobin Yang, and our other executive officers. 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.
 
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, 2007, our distribution network is comprised of 34 distributors located in five provinces. These distributors sub-distribute our dried processed seafood products to about 1,200 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.
 
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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 “Competition” in this Form 10-K 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.

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.

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 the practice of 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 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 27, 33 and 57 days in 2007, 2006 and 2005 respectively. Our allowances for doubtful trade receivables as at December 31, 2007, 2006, and 2005 were approximately $21,000, $6,000 and $22,000 respectively, and in the range of 0.5% to 0.6% 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 4.2% during the period under review. Our sales are denominated in RMB and US$, while our purchases are denominated in RMB.
 
34

 
For the period under review, the percentages of our sales denominated in RMB and US$ were as follows:

   
Year ended December 31,
 
   
2007
 
2006
 
2005
 
   
(%)
 
(%)
 
(%)
 
RMB
   
99.5
   
99.1
   
95.8
 
                     
US$
   
0.5
   
0.9
   
4.2
 

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.

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, 2007, the closing exchange rate was approximately US$1.00 to RMB7.3141. There is no assurance that the PRC’s foreign exchange policy will not be further altered. In the event that the PRC’s policy is altered, significant fluctuations in the exchange rates of RMB against the US$ 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, 2007, 2006 and 2005 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 “Foreign Exchange Exposure” of this Form 10-K 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” on Page 25. 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.

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.
 
35

 
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-owed 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 2007 and 2006, approximately 99.5% and 99.1% 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.
 
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 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.
 
36

 
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 will be 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. As of August 2006, there have been 88 recorded outbreaks 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.

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.
 
37

 
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 50.96% of our authorized share capital. As a result, he will be able to 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.

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;
 
38

 
 
·
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 OTC Bulletin Board 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 “Competition” on Page 20. 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.
 
Our common stock is quoted on the OTC Bulletin Board which may have an unfavorable impact on our stock price and liquidity.

Our common stock is quoted on the OTC Bulletin Board under the symbol CMFO. The OTC Bulletin Board is a significantly more limited market than the New York Stock Exchange or NASDAQ system. The quotation of our shares on the OTC Bulletin Board may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.
 
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

On January 11, 2008, we received a letter from the Securities & Exchange Commission (“SEC”) in regards to comments of the Form S-1 filed with the Commission on December 14, 2007. We made appropriate amendments pursuant to the letter from the SEC dated January 11, 2008 and filed with the Commission Form S-1 (Amendment No. 1) on February 5, 2008.

On February 28, 2008, we received a letter from the SEC in regards to comments of the Form S-1 (Amendment No. 1) filed with the Commission on February 5, 2008. We made the appropriate amendments pursuant to the letter from the SEC dated February 28, 2008 and filed with the Commission Form S-1 (Amendment No. 2) on March 14, 2008.
 
39

 
ITEM 2.  Properties
LAND USE RIGHTS

As at December 31, 2007, 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)
 
Encumbrance
ShiXiangGuoYong (2006) No. 0005
 
Plot 0005 (2006), Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
 
Industrial
 
December 31, 2052
 
3,374.05
 
Nil
                     
SiXiangGuoYong (2001) No. 0006
 
Plot 0006 (2001), Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
 
Industrial
 
March 11, 2052
 
3,638.25
 
Nil
                   
 
ShiXiangGuoYong (2001) No. 0007
 
Plot 0007, Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
 
Industrial
 
December 31, 2052
 
3,960.32
 
Nil
                     
ShiXiangGuoYong (2002) No. 0009
 
Plot 0009, Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
 
Industrial
 
December 2, 2052
 
6,723.08
 
Nil.

BUILDINGS

As at December 31, 2007, we owned the following building ownership rights in Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province:

Reference No.
 
Location
 
Use
 
Date of Expiry of Tenure
 
Land/Floor Area (square meters)
 
Encumbrance
ShiXiang (2001) No.0016
 
Block A at Plot 0006 (2001), Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
 
Production and packaging facilities
 
June 5, 2051
 
705.60/1,489.60
 
Nil
                     
ShiXiang (2001) No. 0017
 
Block B at Plot 0006 (2001), Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
 
Boiler facilities
 
June 5, 2051
 
145.38/145.38
 
Nil
                     
ShiXiang (2001) No. 0018
 
Block C at Plot 0006 (2001), Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
 
Production and cutting/slicing facilities
 
June 5, 2051
 
934.46/1,991.29
 
Nil
                     
ShiXiang (2001) No. 0019
 
Cold storage facility at Plot 007(2001), Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
 
Cold Storage
 
June 5, 2051
 
1,224.84/1,289.29
 
Nil
                     
ShiXiang (2001) no. 0020 (1)
 
Block A at Plot 0009 (2002), Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
 
Staff dormitory
 
June 5, 2051
 
1,561.17/3,347.54
 
Nil
                     
ShiFangQuan
ZhengXiangZhi
No. 00018(1)
 
Block B at Plot 0009 (2002), Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
 
Office
 
September 28, 2052
 
942.19/3,268.41
 
Nil
                     
ShiFangQuan
Zheng
XiangZhi
No. 00567
 
Block A at Plot 0005 (2006), Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
 
Factory Space
 
December 31, 2052
 
620.00/620.00
 
Nil
                     
ShiFangQuan
Zheng
XiangZhi
No. 00568
 
Block B at Plot 0005 (2006), Dabao Industrial Zone, Xiangzhi Town, Shishi City, Fujian Province
 
Factory Use
 
December 31, 2052
 
670.56/670.56
 
Nil
 
40

 
Note:

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

ITEM 3.  Legal Proceedings
 

ITEM 4.  Submission of Matters to a Vote of Security Holders
 

On November 17, 2007, the Majority Controlling Shareholder approved a Joint Written Consent of the Sole Director and Majority Stockholder to Action Taken Without A Meeting (“Consent”) to enter into a Share Exchange Agreement (“Agreement”) with Nice Enterprise Trading H.K. Co., Limited (“Nice Enterprise”) and Nice Enterprise’s Shareholders. Furthermore, the Consent stated that we had accepted the resignation of Richard Crimmins from the Board of Director and that Pengfei Liu, Shaobin Yang and Weipeng Liu have been appointed to the Board of Directors of the Company effective as of the Closing Date referenced in the Agreement. Finally, the Consent approved the name change of our Company from New Paradigm Productions, Inc. to China Marine Food Group Limited which was filed on Form 8-K with the Commission on November 23, 2007.

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 quoted on OTC Bulletin Board, under the trading symbol CMFO. The CUSIP number is 16943R 106. The market for our stock is highly volatile. We cannot assure you that there will be a market in the future for our common stock. The OTC Bulletin Board securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTC Bulletin Board securities transactions are conducted through a telephone and computer network connection dealers in stocks. OTC Bulletin Board Stocks are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.

The following table shows the high and low prices of our common shares on the OTC Bulletin Board for each quarter within the last two fiscal years.

 
 
High
 
Low
 
Fiscal 2007
 
 
 
 
 
First Quarter
 
$
0.75
 
$
0.75
 
Second Quarter
 
$
0.75
 
$
0.80
 
Third Quarter
 
$
15.00
 
$
0.80
 
Fourth Quarter
 
$
4.78
 
$
2.55
 
 
         
Fiscal 2006
         
First Quarter
 
$
0.75
 
$
0.75
 
Second Quarter
 
$
0.75
 
$
0.80
 
Third Quarter
 
$
0.80
 
$
0.80
 
Fourth Quarter
 
$
0.80
 
$
0.80
 
 
41

 
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 24, 2008, there were 85 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 at the moment. 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.

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, 2007; and the selected consolidated balance sheet data as of December 31, 2007 are derived from our consolidated financial statements, which are included elsewhere herein, and have been audited by Cordovano and Honeck, LLP (“C & H”), 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, 2006 and 2005; and the selected consolidated balance sheet data as of December 31, 2006 are derived from our consolidated financial statements, which are included elsewhere herein, and have been audited by Zhong Yi (Hong Kong) C.P.A. Company Limited, an independent registered public accounting firm, as indicated in their report.
  
     
Year ended December 31,
 
     
2007
   
2006
   
2005
 
     
(in thousands)
 
Revenue
 
$
36,425
 
$
27,442
 
$
14,939
 
Cost of sales
   
(25,649
)
 
(19,730
)
 
(11,198
)
Gross profit
   
10,776
   
7,712
   
3,741
 
Depreciation and amortization
   
(37
)
 
(32
)
 
(26
)
Selling and distribution expenses
   
(149
)
 
(94
)
 
(57
)
General and administrative expenses
   
(598
)
 
(388
)
 
(208
)
Other income
   
223
   
110
   
128
 
Interest expense
   
(333
)
 
(272
)
 
(215
)
Income before income tax
   
9,882
   
7,036
   
3,363
 
Income tax expense
   
(1,221
)
 
-
   
(14
)
Net income attributable to the Shareholders
of the Company
 
$
8,661
 
$
7,036
 
$
3,349
 
 
             
Earnings per Share — basic (US$) (1)
 
$
0.377
 
$
0.450
 
$
0.214
 
 
             
Earnings per Share — diluted (US$) (2)
 
$
0.344
 
$
0.450
 
$
0.214
 
                     
Weighted average shares outstanding - basic (1)
   
22,972
   
15,624
   
15,624
 
 
             
Weighted average shares outstanding - diluted (2)
   
25,142
   
15,624
   
15,624
 

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 warrants issued during the year.

42

 
     
As at December 31, 
 
     
2007
   
2006 
 
     
(in thousands)
 
Balance Sheet Data:
       
Cash and cash equivalents
 
$
24,477
 
$
9,182
 
Total current assets
   
30,013
   
11,643
 
Total assets
   
34,130
   
15,430
 
Short-term borrowings
   
772
   
3,793
 
Total current liabilities
   
2,602
   
5,115
 
Total stockholders’ equity
   
31,528
   
10,315
 

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.

OVERVIEW

We are a holding company whose primary business operations are conducted through our direct, wholly owned subsidiary, Nice Enterprise, 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 Nice Enterprise through a share exchange with Nice Enterprise’s former stockholders.

Pursuant to the share exchange agreement, the shareholders of Nice Enterprise exchanged 100% of their outstanding capital stock in Nice Enterprise 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. 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 Nice Enterprise as its Chief Executive Officer.

For accounting purposes, the share exchange transaction was treated as a reverse acquisition with Nice Enterprise 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 Nice Enterprise on a consolidated basis unless the context suggests otherwise.
 
43


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.

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 Province and Zhejiang Province, 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, South Korea, Taiwan, Russia, Ukraine and USA.

Our marine catch mainly consists of four main species, namely squid, hairtail fish, Japanese butter fish and cuttlefish. We work with local fishermen and charter a number of fishing vessels to harvest marine catch from the East China Sea and the Taiwan Strait. The marine catch is sold to customers in the Fujian and Shandong Provinces, some of whom directly export the marine catch to Japan, South Korea and Taiwan.

All the harvest from our marine catch is sold to customers on a direct basis. We do not use any of our own marine catch for the production of our processed seafood products. Instead, the raw materials for our processed seafood products are solely purchased from independent fishermen in nearby markets for further processing.
 
Sales of our processed seafood products accounted for approximately 76.5%, 60.3% and 47.2% of our total sales in year 2007, 2006 and 2005 respectively. Sales of our marine catch accounted for approximately 23.5%, 39.7% and 52.8% of our total sales in year 2007, 2006 and 2005 respectively. Having recognized that the processed seafood segment has significant growth potential, and that the gross profit margin for the sales of marine catch may deteriorate due to higher fuel and operating costs, we will continue to focus our resources on the processed seafood segment.

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 our ability to produce and harvest on a timely basis. Raw material costs accounted for approximately 78.4%, 74.2% and 64.6% of our total cost of sales of processed seafood products in year 2007, 2006 and 2005 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, ISO9001:2000, ISO14001:2004 and the EU Export Certification accreditations will affect our ability to maintain our presence in our existing market and to expand into new market territories.

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

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

 
·
Our ability to maintain existing business relationships and to secure new customers, which may be affected by the general economic or political conditions in our local and overseas markets.
 
44

 
 
·
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, 2007, we employed 634 employees.

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. As for the sales of our marine catch, in particular, hairtail fish, cuttlefish and Japanese butter fish, 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.
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
 
2007
 
2006
 
2005
 
Processed seafood products
   
18,798
   
11,364
   
5,451
 
Marine catch
   
6,851
   
8,366
   
5,747
 
Total
   
25,649
   
19,730
   
11,198
 

Cost of sales - Processed seafood products

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

   
Year ended December 31,
 
   
2007
 
2006
 
2005
 
   
US$’000
 
% 
 
US$’000
 
%
 
US$’000
 
%
 
Raw materials
   
14,734
   
78.4
   
8,438
   
74.2
   
3,522
   
64.6
 
Direct labor
   
1,507
   
8.0
   
1,312
   
11.6
   
700
   
12.8
 
Manufacturing overheads
   
2,557
   
13.6
   
1,614
   
14.2
   
1,229
   
22.6
 
Total
   
18,798
   
100.0
   
11,364
   
100.0
   
5,451
   
100.0
 

Raw materials

Raw materials comprise mainly seafood such as fish, prawns and 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 the 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.

Raw material costs accounted for approximately 78.4%, 74.2% and 64.6% of our cost of sales in year 2007, 2006 and 2005 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. This will ensure a steady supply of raw materials for the processing of seafood products throughout the year.
 
45

The increase in raw material costs from 2005 to 2006 and from 2006 to 2007 was due to the increased production and sales of processed seafood products.

Direct labor

Direct labor costs accounted for 8.0% to 12.8% 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 the production volume, the 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 headcount as at December 31, 2007 has increased to 634 from 254 in the beginning of 2005. The increase was mainly due to an increase in the production headcount, from 135 in the beginning of 2005 to 493 as at December 31, 2007, arising from the increase in the scale of the production operations for our processed seafood products.

Manufacturing overheads

Manufacturing overheads comprise depreciation, water and electricity and packaging materials which are used directly in the packaging of finished goods.

Cost of sales - Marine catch 
 
   
 Year ended December 31,
 
     
2007
   
2006
   
2005
 
     
US$’000
   
%
   
US$’000
   
%
   
US$’000
   
%
 
Rental / charter hires
   
930
   
13.6
   
1,085
   
13.0
   
1,043
   
18.2
 
Crew salaries and wages
   
437
   
6.4
   
378
   
4.5
   
300
   
5.2
 
Bunker fuel
   
3,484
   
50.8
   
4,532
   
54.2
   
3,301
   
57.4
 
Repair & maintenance
   
1,154
   
16.8
   
1,213
   
14.5
   
545
   
9.5
 
Other expenses
   
846
   
12.4
   
1,158
   
13.8
   
558
   
9.7
 
Total
   
6,851
   
100.0
   
8,366
   
100.0
   
5,747
   
100.0
 

Rental / charter hires

We commenced our marine catch operation in June 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.

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 is the cost of bunker fuel for the operation of the chartered vessels. The price of bunker fuel is dependent on world oil prices. The unit cost of bunker fuel has increased from $0.47 - 0.52 per litre in year 2005, to $0.70 - 0.95 per litre in year 2007. The increase in fuel prices is consistent with the increase in world oil prices. In addition, the fishing vessels made more voyages from 2005 to 2006, as evidenced by the increase in revenue from our marine catch. The reduction in bunker fuel cost from 2006 to 2007 was mainly due to a decrease in the number of chartered fishing vessels from 10 in 2006 to 9 in the first six months of 2007 which was further reduced to 6 in July 2007.
 
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Repair and maintenance and other expenses

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. Included under other expenses mainly include the costs of 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.

Selling and distribution expenses

Our selling and distribution expenses comprise mainly salaries of sales and marketing staff, costs in participating in exhibitions, freight charges, advertisement and product and hygiene inspection costs by the General Administration of Quality Supervision, Inspection and Quarantine of the PRC, Health and Food Safety Authority, Quality and Technical Supervision Board. Our selling and distribution expenses accounted for approximately 0.4%, 0.3% and 0.4% of our total revenue in year 2007, 2006 and 2005 respectively.

General and administrative expenses

Our administrative expenses comprise mainly salaries and staff benefits for employees, provision for doubtful debt, traveling and entertainment expenses. Our administrative expenses accounted for approximately 1.6%, 1.4% and 1.4% of our total revenue in year 2007, 2006 and 2005 respectively.
Other income

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

Rental income related to the collection of rental on the 33 shop spaces at our factory in Dabao Industrial Zone. The rental contracts are based on 1-year lease term. The government subsidies relate to grants by the government for research and development projects undertaken and for accreditations like HACCP & ISO certification and Green Food certification undertaken by us.

Interest expense

Our interest expense related to interest costs incurred on the various short-term bank borrowings taken by us for working capital requirements. Our interest expense accounted for approximately 0.9%, 1.0% and 1.4% of our total revenue in year 2007, 2006 and 2005 respectively.

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 subjected 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 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 24.0%. 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 50.0% reduction in the income tax payable for the next 3 years.

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. For 2007, 2008 and 2009, Rixiang will be subject to PRC state income tax of 12%.
 
Jixiang is also a property holding company and is not subject to tax.

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

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, 2007, 2006 and 2005 is set out below:
 
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Breakdown of our past performance by principal products and geographical regions

Sales by product

   
Year ended December 31,
 
   
2007
 
2006
 
2005
 
   
US$’000
  %  
US$’000
  %  
US$’000
  %  
Processed seafood products
   
27,863
   
76.5
   
16,551
   
60.3
   
7,046
   
47.2
 
Marine catch
   
8,562
   
23.5
   
10,891
   
39.7
   
7,893
   
52.8
 
Total
   
36,425
   
100.0
   
27,442
   
100.0
   
14,939
   
100.0
 

Sales by geographical region

   
Year ended December 31,
 
   
2007
 
2006
 
2005
 
   
US$’000
  %  
US$’000
  %  
US$’000
  %  
PRC
                         
Shandong
   
5,047
   
13.9
   
6,613
   
24.1
   
4,224
   
28.3
 
Zhejiang
   
14,131
   
38.8
   
9,129
   
33.3
   
3,458
   
23.1
 
Fujian
   
16,041
   
44.0
   
11,025
   
40.2
   
6,408
   
42.9
 
Others
   
1,011
   
2.8
   
425
   
1.5
   
217
   
1.5
 
Total PRC (1)
   
36,230
   
99.5
   
27,192
   
99.1</