SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
Commission file number: 001-22473
HQ SUSTAINABLE MARITIME INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
| | |
| Delaware | | 62-1407522 |
| (State of incorporation) | | (I.R.S. Employer Identification No.) |
1511 Third Avenue, Suite 788,
Seattle, Washington 98101
(Address of principal executive offices)
(206) 621-9888
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title Of Each Class | | Name of Exchange on which registered |
| Common Stock, Par Value $0.001 Per Share | | American Stock Exchange |
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 x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | |
| Large accelerated filer | | ¨ | | Accelerated filer | | x |
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| Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | | Smaller reporting company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. Yes ¨ No x
The aggregate market value of voting stock held by non-affiliates of the registrant on December 31, 2008 was approximately $69,140,000
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At of December 31, 2008, there were 12,085,846 shares of Common Stock, $0.001 par value per share issued and outstanding and 100,000 Series A preferred stock, $0.001 par value per share, issued outstanding.
Table of Contents
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Forward Looking Statements — Cautionary Language
Certain statements made in these documents and in other written or oral statements made by HQ Sustainable Maritime Industries, Inc or on HQ Sustainable Maritime Industries, Inc’s behalf are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). A forward-looking statement is a statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words like: “believe”, “anticipate”, “expect”, “estimate”, “project”, “will”, “shall” and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, trends in our businesses, prospective products, future performance or financial results. HQ Sustainable Maritime Industries, Inc. claims the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results contained in the forward-looking statements. Risks and uncertainties that may cause actual results to vary materially, some of which are described in this filing. The risks included herein are not exhaustive. This annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other documents filed with the SEC include additional factors which could impact HQ Sustainable Maritime Industries, Inc.’s business and financial performance. Moreover, HQ Sustainable Maritime Industries, Inc. operates in a rapidly changing and competitive environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors. Further, it is not possible to assess the impact of all risk factors on HQ Sustainable Maritime Industries, Inc.’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, HQ Sustainable Maritime Industries, Inc. disclaims any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of the report.
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As used in this annual report, “we”, “us”, “our”, “HQS”, the “Group”, “Company” or “our company” refers to HQ Sustainable Maritime Industries, Inc. and all of its subsidiaries and affiliated companies including Hainan Quebec Ocean Fishing Co. Ltd. or “HQOF” and Jiahua Marine Bio-Product Company Limited or “Jiahua Marine”.
History
Our company was initially incorporated on September 21, 1989 under the laws of the State of Nevada. On March 17, 2004, Process Equipment, Inc., Process Equipment Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of Process Equipment, Inc., or PEAC, and Jade Profit Investment Limited, or Jade, a British Virgin Islands limited liability corporation, entered into an agreement and plan of merger with us. Pursuant to that agreement, Process Equipment, Inc., through PEAC, acquired Jade, and 84.42 percent ownership in Jade’s subsidiary Hainan Quebec Ocean Fishing Co. Ltd, a People’s Republic of China, limited liability corporation, which we refer to as HQOF. As a result of that transaction, HQOF became our main operating subsidiary . In April of 2004, pursuant to the above agreement and plan of merger, the board of directors of Process Equipment, Inc. and a majority of the stockholders approved a name change and change of domicile of that company to Delaware via a merger with the newly formed wholly-owned Delaware subsidiary, HQS. The name change, change of domicile and merger became effective on May 19, 2004, with HQS being the surviving entity in the merger and acquiring all the assets and liabilities of Process Equipment, Inc. On August 17, 2004, we entered into a Purchase Agreement with Sino-Sult Canada (S.S.C.) Limited, a Canadian limited liability corporation (“SSC”), whereby we acquired Sealink Wealth Limited (“Sealink”), SSC’s wholly owned subsidiary incorporated in the British Virgin Islands. Sealink is the sole owner of Hainan Jiahua Marine Bio-Products Co. Ltd., a limited liability company existing in China (“Jiahua Marine”) which is primarily engaged in the production and sales of marine bio-products and healthcare products in the PRC, as described in more detail in this current report.
On April 16, 2004, HQ Sustainable Maritime Marketing Inc. (“HQS Marketing”) was formed and registered in USA, as a wholly-owned subsidiary of HQS. That subsidiary develops and markets our products in the United States.
On June 15, 2004, HQ Sustainable Maritime Marketing (Canada) Inc (“HQS Canada”) was formed in Canada and is wholly owned by HQS. HQS Canada commenced operations in June 2004, and performs business development, sales, and marketing in the Canadian market.
On May 6, 2005, Phoenix Global Creations Limited (“Phoenix”) was formed in British Virgin Islands as a wholly owned subsidiary of HQS. Phoenix was established as an investment holding company and is the parent company of Highest Quality Aquaculture Feed Products Co. Ltd.
On September 20, 2005, HQ Sustainable Maritime Industries (Hong Kong) Limited (“HQS HK”) was formed in Hong Kong and is wholly owned by HQS indirectly. The subsidiary is primarily engaged in the sales of healthcare products in Hong Kong.
On October 1, 2005, Highest Quality Aquaculture Feed Products Co. Ltd (“Feed Mill”) was formed in Hainan, PRC and is wholly owned by HQS indirectly. The construction of the Feed Mill began in 2008 and will produce extruded feed for tilapia. All related expenses and capital investments related to the new plant were transacted through the Feed Mill Company. The new Feed Mill is expected to start processing feed in first quarter 2009. The Feed Mill is a wholly owned subsidiary of Phoenix.
On November 29, 2007, Kingly Sun International Ltd (“Kingly Sun”) was formed in British Virgin Islands and is a wholly owned subsidiary of HQS. Kingly Sun was established as an investment holding company. It has been dormant during the year since its incorporation.
On November 29, 2007, Liberal Sky Holdings Ltd (“Liberal Sky”) was formed in British Virgin Islands and is a wholly owned subsidiary of HQS. Liberal Sky was established as an investment holding company. It has been dormant during the year since its incorporation.
On November 29, 2007, Unique Solutions Holdings Ltd (“Unique Solutions”) was formed in British Virgin Islands and is a wholly owned subsidiary of HQS. Unique Solutions was established as an investment holding company. It has been dormant during the year since its incorporation.
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On June 10, 2008, Hainan Hongrui Fish Farming Co. Ltd was set up in the PRC and is wholly owned by Kingly Sun. The subsidiary has been dormant during the year since its incorporation.
On October 17, 2008, Hainan Jiabao Aquaculture Co. Ltd was set up in the PRC and is wholly owned by HQOF. The subsidiary has been dormant during the year since it incorporation.
Our headquarter office is located at 1511 Third Avenue, Suite 788, Seattle, Washington, and our telephone number is (206) 621–9888. The URL for our website is http://www.hqfish.com.
General Overview
We are a multi-national company with our headquarters and primary sales offices based in Seattle, WA. We are a vertically integrated aquatic product producer, processor, and farmer (e.g. through cooperative arrangements with pond farmers) with operations in the PRC of toxin free tilapia, other aquatic products, and marine bio and healthcare products. We use state-of-the-art and environment-friendly technologies in our production, processing, and cooperative farm operations. Our facilities are currently certified according to the HACCP standards, currently assigned an EU code required for exporting aquatic products to the EU, and are currently certified in accordance with the ACC standards. Our products are sold principally to customers in North America, Europe and Asia.
Established in 1999, our aquatic farming and processing operations are in Hainan Province, an island in the South China Sea which is situated within the most desirable latitude for raising tilapia. Hainan Province in southern China is designated by the Chinese government as a green province, where only environmentally friendly agri-food related industry and tourism are permitted. We purchase and process farm bred and farm raised tilapia through cooperative supply arrangements with local farmers and cooperatives. Our supply cooperatives, under our guidance, use feed formulated by us to optimize the natural toxin-free growth of farm raised tilapia. Starting in 2009 we will supply the farmers and cooperatives the feed formulation from our feed processing mill. Our tilapia products have achieved such a high level of toxin-free purity that we market these products as toxin free and natural tilapia. In addition, we purchase and process ocean-caught aquatic products through cooperative supply arrangements with the local fisherman for our marine bio healthcare products.
In August 2004, the company acquired Jiahua Marine, which develops, produces and sells marine bio and healthcare products in China. The principal products of Jiahua Marine are manufactured from fish by-products (tilapia and shark) that include shark cartilage capsules and shark liver oil products which are distributed exclusively in China. The products undergo substantial independent laboratory testing in China administered by the Ministry of Health in China and have resulted in a PRC National Certification for these products. These products have various perceived medicinal and health benefits. As part of the HQS’s vertical integration plan of tilapia, Jiahua Marine has introduced new bio and healthcare products made from tilapia in 2009.
From our headquarter office in Seattle, WA we have marketed and branded our high-quality toxin-free, tilapia products under the name TILOVEYA®. In early 2009 we will introduce a new family of frozen tilapia meals under the brand name of “Lillian’s Healthy Gourmet”. This new family of products will include an organic, natural and regular line of frozen tilapia meals.
Industry Overview
Aquaculture Industry
Aquaculture is the farming of aquatic animals or plants. Aquaculture is also the world’s fastest growing segment in the food production system and has been for the past two decades. According to a recent study by the FAO published on March 2, 2009 world fisheries production reached a new high of 143.6 million metric tonnes in 2006. The contribution of aquaculture to the world fisheries production in 2006 was 51.7 million tonnes of fish, which is 36 percent of world fisheries production up from 3.6 percent in 1970. Global aquaculture accounted for 6 percent of the fish available for human consumption in 1970. In 2006 global aquaculture accounted for 47 percent of the fish available for human consumption according to the FAO. The FAO report also describes that over half of the global aquaculture in 2006 was freshwater finfish. Based on the FAO’s projections, it is estimated that in order to maintain the current level of per capita consumption, global aquaculture production will need to reach in excess of 80 million tonnes of fish by 2050.
As the availability of sites for aquaculture is becoming increasingly limited and the ability to develop non-agricultural land is restricted, the competition to develop additional aquaculture production systems is intensifying. As the intensification for aquaculture production systems increases, the demand for institutional support, services and skilled persons is anticipated to increase, along with
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the demand for more knowledge-based aquaculture education and training as aquaculture becomes more important worldwide. China remains the largest producer of aquaculture products throughout the world with reported fisheries producing approximately 41.3 million tonnes in 2004. Within the global aquaculture industry, China accounted for 71.0 percent of the world’s supply of fish for direct human consumption and 29.9 percent of the total production by live weight in 2002.
Tilapia Industry
In 2005, according to the American Tilapia Association, tilapia production was second in volume to carp, and it is projected that tilapia will become the most important aquaculture crop in this century, potentially reaching $5.0 billion in global sales by 2010. Commercial production of tilapia has become popular in many countries around the world. Touted as the “new white fish” to replace the depleted ocean stocks of cod, Pollock, and hake, world tilapia production continues to rise and at least 100 countries currently raise tilapia, with the PRC being the largest producer. The American Tilapia Association further reports that world production of tilapia products reached approximately 2.5 million metric tonnes in 2007, of which China produced the dominant share of 45.0 percent.
One of the major outlets for Chinese-produced tilapia has been, and should continue to be, the United States. The following chart reflects the increase in per-capita consumption of tilapia in pounds in the United States in relation to other traditional types of seafood.
The following chart reflects the increase in imported tilapia to the United States during the periods indicated.
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Separately, according to theInternational Trade Report produced in 2005 by the United States Department of Agriculture, or the USDA,“… U.S. per-capita seafood consumption has remained around 15 billion pounds through the late 1980s and 1990s; it is expected to increase as farm-raised products become cheaper. Currently, the United States consumes nearly 12 billion pounds of fish a year. By 2025, demand for seafood is projected to grow by another 4.4 billion pounds (2 million metric tonnes) above what is consumed today. In addition, it is estimated that by 2020, 50 percent of the U.S. seafood supply will come from aquaculture. Presently, more than 70 percent of the seafood consumed in the United States is imported, and at least 40 percent of that is farm-raised. Major changes in U.S. population, along with shifting demographics and economic growth, will alter the U.S. seafood market over the next decade, affecting the selection of products consumed. It is expected that fresh and frozen fish products will account for a growing share of overall seafood consumption, with shrimp remaining at the top. By 2020, shrimp, salmon, tilapia, and catfish will be the top four seafood products consumed…”
According to Globefish.org, during the past ten years, tilapia captured by fisheries have stabilized at 0.6 million metric tonnes, while their aquaculture production has grown from 0.55 million metric tonnes to 2.0 million metric tonnes. Tilapia is one of the top five seafood imports in the world. In 2005, more than $2.4 billion of tilapia was sold worldwide according to the FAO Fishstat 2007. The United States is the world’s largest consumer of tilapia after China. In 2007 the United States imported 437 thousand metric tonnes of tilapia, in 2005, tilapia moved up to the fourth-ranked most popular seafood after farm-raised shrimp, tuna and Atlantic salmon in terms of aquaculture products imported into the United States. In terms of volume, frozen whole round fish ranks first, followed by frozen fillets and, lastly, fresh fillets.
Health Benefits as the Driving Force for Growth in Tilapia Industry
The growing consumer demand for seafood is largely evolving from a new public awareness regarding its health and nutritional benefits. The USDA “pyramid” guidelines continue to support frequent fish consumption, and the USDA recently completed a highly technical nutritional analysis report about tilapia for the general public. The USDA’s Agriculture Research Service Lab reports that tilapia is moderate in polyunsaturated fatty acid (0.387 g/100g raw, 0.600 g/100g cooked), moderate in omega 3 fatty acids (0.141g/100g raw, 0.220g/100g cooked) and low in mercury (0.010 parts per million, which we refer to as PPM), which is considered to be non-detectable. With the increased awareness of the health concerns surrounding mercury, tilapia’s low mercury levels (0.010 PPM) distinguish tilapia favorably from other types of fish with higher mercury levels, such as swordfish (0.976 PPM), mackerel (0.730 PPM) and yellow fin tuna (0.325 PPM).
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Over-the-Counter Marine Bio and Healthcare Products
As in the United States, because of the aging population, China is demographically attractive for healthcare companies. Of the 1.3 billion people in China currently, less than 8 percent of China’s population is 65 or older. However, by 2050 that proportion is expected to rise to 24 percent. It is expected as well that Chinese will benefit from double-digit annual growth in disposable incomes during this period. This will lead to increasing use of western therapeutics and “Over the counter” remedies. In addition, the market place is highly fragmented and a clear vision -like the one presented by HQS can benefit from this evolving situation. There are more than 4,000 manufacturers in China, but most of them lack scale and access to capital. From 2009 to 2011, $124 billion was allocated to healthcare expenditure in China. HQS has benefited from regulatory consolidation in the recent imposition of higher standards (GMP standards imposed in 2007) and will continue to be a leader in its emphasis on the highest quality standards.
The marine bio and healthcare products industry in China is also sizable, with approximately $6 billion in sales, which still constitutes only 3 percent of the world market. Currently, overall sales of these products in China have fallen slightly as compared to the previous year, as consumers gravitate toward branded products meeting international standards of excellence and proven benefit for consumers, and away from the less known brands and traditional remedies.
In general, sales of marine bio and healthcare products are made through retail and direct sales channels. Direct sales in China are relatively new, and restrictions on direct sales imposed on large foreign companies have been implemented in China, which has allowed for a growth in sales for domestic direct sales companies. These restrictions require foreign direct sellers to manufacture their products and to capitalize their businesses in China. Several companies have met these requirements, and growth in this sector is expected to be strong in the next few years.
We believe that nutraceutical supplements in the feed industry is a sector that has strong growth potential, as the importance of aquaculture and aquaculture feeds increases. We manufacture actualized feeds, which involves choosing additives to be included in the feed, such as vitamin E, that promote health in fish, thus reducing the need for curative measures such as antibiotics. Once embedded in the flesh of the fish, vitamin E increases the shelf life of the fish and also introduces an additional source of vitamin E to its consumers. Other similar nutraceutical supplements can also be used.
Our Products
Tilapia
Tilapia is currently farmed throughout many countries around the world because this fish is disease-resistant, reproduces easily, eats a wide variety of feeds and tolerates a variety of poor water quality even water with low dissolved oxygen levels. Although there are many species of tilapia, only a few species are farmed for human consumption. The most common species that is farmed commercially is the black, or Nile, tilapia that is grown in ponds, cages or rice fields.
In response to increasing demand for tilapia, we export from our subsidiary in the PRC varying quantities of tilapia in different forms to the United States, Europe, Asia and other regions. In 2007 we launched a marketing and distribution initiative in the United States and Europe with our TILOVEYA® brand tilapia. We continue to promote our TILOVEYA® brand with several leading distributors and retailers in Europe and the United States. We also entered into an exclusive agreement with the Beijing division of Newly Weds® Foods, Inc. to introduce an innovative line of battered and breaded flavored TILOVEYA® fillet for the Chinese consumer. In addition, we co-developed a process and natural flavoring giving tilapia the taste, texture and aroma of fresh ocean-caught fish. We will process such products without the drawbacks of ocean-caught product such as ocean waste and, ecological management. The tilapia products sold by us are mainly in the following forms: whole round frozen, gutted and scaled, boneless-skinless tilapia fillets, block frozen tilapia fillets and, more recently, we began selling boneless-skin-on tilapia fillets.
In 2008 we developed a family of frozen tilapia meal products under the brand name of “Lillian’s Healthy Gourmet”. The family of products will have three lines focusing on organic, natural and regular frozen meals. These meals will be processed by a variety of manufacturing facilities in North America including Marsan Foods located in Toronto, Canada. Marsan is the top Canadian processor of Private Label entrées and branded Healthcare products. We will begin to sale the products under the “Lillian’s Healthy Gourmet” brand to distributors and retail chains in the first part of 2009.
Our principal operating subsidiary with respect to our seafood products is Hainan Quebec Ocean Fishing Co. Ltd., a company organized in the PRC (“HQOF”).
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Marine Bio and Healthcare Products
Since the August 2004 acquisition of our wholly-owned subsidiary, Hainan Jiahua Marine BioProducts Co. Ltd. (Jiahua Marine), a Chinese limited liability company, we have also been engaged in the development, production, and sales of marine bio and healthcare products in the PRC. We acquired Jiahua Marine pursuant to a purchase agreement with Sino-Sult Canada Limited (SSC), a Canadian limited liability company, and Sealink Wealth Limited (Sealink), a British Virgin Islands limited liability company, a wholly-owned subsidiary of SSC and the then sole shareholder of Jiahua Marine.
The principal products of Jiahua Marine are manufactured from fish by-products (tilapia and non-endangered shark) that include shark cartilage capsules and shark liver oil products which are distributed exclusively in China. The products undergo substantial independent laboratory testing in China administered by the Ministry of Health in China and have resulted in a PRC National Certification for these products. These products have various perceived medicinal and health benefits. As part of the HQS’s vertical integration plan of tilapia, Jiahua Marine has introduced new bio and healthcare products made from tilapia in 2008.
These products have proven medicinal and health benefits that include:(1) increasing the efficacy of the immune system, correcting blood acidity, (2) reducing fatigue, (3) improving absorption of oxygen into the blood, (4) activating the anti-cancer cells (a major component of the innate immune system), (5) strengthening of bones, and (6) increasing subcutaneous moisture which has anti-wrinkle qualities. All of our healthcare products have undergone stringent independent laboratory testing in China. These tests are administered by the Ministry of Health in China. As part of this process, several laboratories are selected at random from a pool of top university laboratories to conduct tests which must confirm the results and claims of the applicant company. The applicant company can make claims about the health benefits of its products only after such stringent, independent validation of its claims by selected laboratories have been verified. Our claims in respect of our healthcare products have been rigorously tested and proven in China through the above process. Clinical trials and laboratory testing in China by selected university laboratories have resulted in a PRC National Certification of Excellence.
These products are currently sold throughout China, are naturally derived from ocean-harvested by-products and are winners of Science and Technology Progress Awards in China.
Jiahua Marine has its own research and development team which is responsible for developing new products made from Tilapia and other fish by-products.
Shark cartilage–This product is highly alkalescent, it contains chondroitin sulfate and calcium and impacts the human body positively in the following ways:
| | • | | increases efficiency of immune system and activates NK cells associated with combating cancer, as sharks are cancer free; and |
| | • | | reduces blood acidity, thus improving: |
Shark liver oil–This product is rich in squalene and other nutrients, to which we add vitamins D and E, and impacts the human body positively in the following ways:
| | • | | improves absorption of oxygen in the body; |
| | • | | eliminates fatigue; and |
| | • | | Improves health, through the high levels of omega 3 oils. |
As part of the HQS’s vertical integration plan of tilapia, Jiahua Marine has introduced and will continue to introduce new bio and healthcare products made from tilapia in 2009. The products introduced thus far include; (1) Shalitong Capsules which are made from the amino acids of Tilapia and help in the digestive functions of the body; (2) Xueyuan Capsules vitamin supplement including collagen polypeptides and vitamins; (3) Yubaobaokang Capsules which contain iron supplements and increase appetite; and (4) Cephalin Capsules made with Tilapia brain extract improves brain function and memory functions and helps resist the aging process of the brain.
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In addition to the marine bio and healthcare products that we currently produce, we started the manufacturing of nutraceuticals generated from palm oil, or other natural or organic matters to enrich feed formulations for tilapia and shrimp farmed in the Hainan area. The enriched feed will have a longer shelf life, and we expect that the benefits of the enriched feed will pass to the end users of our tilapia products, the ultimate customers. These ingredients help improve general health, growth, feed conversion and meat quality of fish and shrimp. Our marine bio and healthcare products processing plant is located in the Wenchang City of Hainan Province and has two production lines, a powder-product line and an oil-product line. These production lines are suited for the manufacture of nutraceutical components. The plant is equipped with a specific gravity molecular separator and accessory equipment for the manufacture of nutraceutical products that serve as feed additives in the production of feed, including tilapia and shrimp feed.
Shrimp
Our principal shrimp product is the white shrimp. Our shrimp is exported to various countries in the following forms: head-on shell-on shrimps, headless shell on shrimps, peeled tail-on shrimps, peeled and deveined shrimps, peeled and undeveined shrimps. All orders can be packaged in accordance with the requirements of the buyer, either block or individually quick frozen.
Our Principal Competitive Strengths
We believe we have the following principal competitive strengths:
| | • | | Quality Toxin Free Tilapia Products.We produce toxin free tilapia products and have developed a farming system that avoids the use of antibiotics, hormones and other potentially toxic chemicals. Our tilapia is raised in ponds of pure rain water collected for aquaculture. Two other species of fish are introduced into the ponds to maintain the pond’s health naturally. One of the species is a bottom feeder that cleans up all the waste at the bottom of the ponds (carp), and the other species is a predator fish that eliminates all of the unhealthy fish (snakehead). We formulate feed without fishmeal and produce feed supplements in our healthcare products processing plant to enrich this feed. It is our policy to raise toxin free tilapia to distinguish our company from other tilapia producers. The latitude and the pristine environment of the Hainan providence of China has provided us with the optimal conditions for toxin free aquaculture production. |
| | • | | Vertically Integrated Operations. The completion of our own feed mill in early 2009 (construction was started in 2007) is an important additional step towards our goal of complete vertical integration of our operations. Thus, allowing us to further control and monitor the quality of our aquaculture products, as well as control our costs. The local farmers that we have cooperative arrangements with use our production methods and allow us to constantly monitor the production process for highly consistent production that results in high quality products at the time of harvest. |
| | • | | Environmental and Quality AssurancesWe are the leader in environmental and quality assurances of aquaculture products. We have adopted and implemented stringent quality control measures and procedures throughout the production process, in order to comply with the various environmental and quality standards, such as the HACCP and the EU import standards. We are also certified in accordance with the ACC standards and positioning ourselves for completely organic production certification of our tilapia products in accordance with market demands. We use state-of-the-art technologies in our farming, feed formulation and processing operations. We have adopted modern and environmentally friendly and responsible technology in our production and processing of tilapia, shrimp, and marine bio and healthcare products, which we believe have been recognized through the certifications our plants possess. |
| | • | | Strategic Location in Hainan Province, China. Our processing facilities are geographically well-positioned in Hainan Province to leverage favorable climatic conditions, abundant water supply and pristine environment, and a readily available source of labor for our processing plant. We are also located near a Seaport near the city of Wenchang, and our processing facilities are conveniently located near the farmers from whom we obtain our supply of tilapia and shrimp |
| | • | | International and Domestic Sales and Marketing Efforts.Our Seattle office allows us to differentiate our TILOVEYA® brand and marketing initiative of our toxin free tilapia products. Following the success of the TILOVEYA® brand, we will introduce in 2009 a family of frozen tilapia meal products under the brand name of “Lillian’s Healthy Gourmet”. The family of products will have three lines focusing on organic, natural and regular frozen meals. The “Lillian’s Healthy Gourmet” brand will help us continue to establish our products as the toxin free tilapia products of choice both domestically and internationally. Sales from both the Seattle and China offices complement our multi-national sales efforts to become the world leader in toxin free tilapia products. |
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| | • | | An Established Track Record and Brand Name in the Industry.We have an established track record and recognized brand name in the industry and have received numerous awards and certifications confirming the success of the company in distinguishing itself from its competition. |
| | • | | Competitive Cost Structure.We benefit from competitive cost structures due to the lower labor costs in China as compared to other companies of similar products. |
Our Growth Strategies
Our objective is to become the world leader in vertically integrated production, processing and raising of toxin-free tilapia products. This includes the use of tilapia bi-products to increase our marine bio and healthcare products, with a primary focus on increasing our own seafood products. To achieve this goal, we intend to implement the following strategies:
| | • | | We will complete a new large-scale feed mill in early 2009, to supply our existing and anticipated new cooperative fish farmers with our fish food formula. The new feed mill will help to increase our aquatic profit margin and to guarantee our product quality and further vertically integrate our operations; |
| | • | | We intend to achieve completely organic production of our tilapia products and to pursue organic certification of our farms as market demand dictates; |
| | • | | We plan to expand direct and retail sales of our health products in China and internationally and to add other products we currently have in the development pipeline; |
| | • | | We plan to expand our development of health products by using the by-products of tilapia, which will help increase the overall aquatic products’ gross margins; |
| | • | | We plan to expand our cooperative farming arrangements to increase the availability of tilapia to meet anticipated growth in demand; |
| | • | | We plan to construct our own tilapia farmed ponds to improve growth time and quality of our product and further vertically integrate our operations; |
| | • | | We plan to continue to expand our production and processing facilities in China to satisfy the anticipated growing demand for our products; |
| | • | | Our Seattle office allows us to increase awareness of the importance of our toxin free products and to benefit from more direct sales. The Seattle office also allows us to expand our distribution options in North America and Europe by broadening the variety of products we offer to cater to the demands of our customers; and |
| | • | | We plan to expand our product offering to include our family of frozen tilapia meals. We will also continue our branding and marketing initiatives in North America and Europe to introduce our new family of products to major retail and food service chains. Our new family of products like the TILOVEYA® brand will focuses on branding our products as the toxin-free solution for aquaculture products. |
Manufacturing and Production
Marine Bio and Healthcare Products
Our plant for processing marine bio and healthcare products consists of two production lines: a powder-product line and an oil-product line. The production lines are equipped with a complete set of imported and domestic made devices, including a vacuum frozen dryer for bio-products, a molecular distillation device, a micro-disintegrator, a packing machine and test instruments. Our raw material treatment workshops (e.g. work area) includes an extraction workshop, a freezing and drying workshop, a powder distillation workshop, and a finished product workshop for our powder line. Our pre-treatment workshops include a cooling and filtration workshop, a molecular distillation workshop, a supplemental items workshop and a capsule workshop for our oil line.
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This plant is equipped with a molecular distillation device, which produces a variety of refined oil products including vitamin E used for human consumption and as a supplement to tilapia and other feeds. These vitamins are processed from natural products, such as palm oil. This plant has been certified in accordance with the China National Health Inspection program as a “Chinese Good Manufacturing Practice” (GMP) by the Hainan Provincial Health Bureau. We believe that our nutraceutical business is closely connected to our planned expansion including the completion of our own feed mill described below. Actualized feed additives provide health benefits to the fish, such as increasing health and avoiding the use of curative measures involving antibiotics. The consumers of these fish products in turn benefit from increased shelf life of the fish products, and from the additional sources of vitamin E resulting from the consumption of our products.
Aquaculture Products
Our plant for processing aquatic products is a Canadian designed facility located in Hainan, China. We operate six processing lines, which consist of two filleting lines, two whole round fish processing lines (principally tilapia which is gutted, scaled and gilled), and two block processing lines . This processing plant is capable of processing an average of approximately 30,000 metric tonnes (additional capacity of 10,000 metric tonnes was completed in August of 2008) per year of whole round fish (principally, tilapia), 10,000 metric tonnes per year of fillet tilapia and 3,000 metric tonnes per year of all forms of shrimp. Such capacity may become inadequate to meet our projected demand from our existing customers and the national retail food service chains targeted by us. Based on our projected need for expansion, we will complete in 2009 a large scale feed mill, to supply our existing and anticipated new cooperative fish farmers with our fish food formula. See “Construction of Feed Mill and Processing Plant.” We have completed taste trials with several national retail food service chains, and, we expect to phase in deliveries in the second half of 2009 . The scale of production is a critical factor for such chains, and we expect that expanded production will enable us to enter into larger supply arrangements with several chains.
Construction of Feed Mill and Processing Plant
In order to maintain the high quality of our products, we have constructed our own feed mill that will begin operations in early 2009 for the production of extruded (floating) feed formulations. This type of feed is the most efficient feed for our farming operations. In early 2009 we will begin producing the feed, free of antibiotics and fishmeal, and use feed additives manufactured in our nutraceutical plant. The feed formulations will be prepared with the benefit of the latest technologies to assure a minimum of toxicity. The feed will be enriched using omega 3 rich algae and vitamin E, as well as naturally sourced amino acids, which provide actualized benefits to the fish and the consumers thereof. The floating feed formulations will reduce waste in the aquaculture reservoirs, thus reducing the requirement for chemicals to stabilize reservoir health. The feed mill will allow us to continue our vertically integrated production strategy, ensuring quality control throughout the entire production and processing cycle. We plan to partner with other parties, as appropriate, to produce the optimum formulation of feed. Presently, there is no high quality floating feed production in Hainan. This expanded production will satisfy our own demand from our cooperative farmers, as well as to manufacture feed for other farmed operations in Hainan such as shrimp and other farmed species. Upon completion in 2009, the plant will manufacture some 100,000 metric tonnes annually of feed.
We expect that the new processing plant will provide for value added production, allowing us to make fish blocks as well as the fillets and whole round products that we currently manufacture.
Distribution Channels
At the present time, we distribute our seafood products principally in the United States and Europe, and we sell all of our marine bio and healthcare products exclusively in the PRC. Through our Seattle office, we are able to work directly with wholesale and retail buyers. The programs established with retail distributors are rather different than with wholesalers. Retailers require product introduction and marketing support and pay differently than wholesalers. The latter generally take delivery of product ex-plant and pay through a letter of credit, while the former take delivery in the United States and pay on negotiated terms.
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The Seattle office is charged with maintaining existing accounts and introducing our toxin free tilapia products to a new target market of retail and food service industry purchasers. We plan to introduce our family of products branded “Lillian’s Healthy Gourmet” throughout North America in 2009. We are currently selling our toxin free tilapia products to the European market through distributors and retailers. We are actively seeking to expand our distributor network in Europe for our TILOVEYA® brand.
Currently, all of our marine bio and healthcare products are sold in the PRC. Through our subsidiary Jiahua Marine, we currently sell a range of healthcare products under the brand name “Jiahua” in the PRC.
Our China sales are principally marketed through our offices in Wenchang to customers that include domestic supermarkets, airlines, hotels and local distributors. Direct sales of healthcare products target tourists in various popular destinations in China, such as Sanya, Beihai and the Three Gorges project. Seminars are organized for these tourists that usually result in the purchase of our products. These products are also sold in various chain stores, over the internet, and through mail order sales throughout China.
Commencing in 2003, our subsidiary Jiahua Marine has been pursuing a sales strategy which we believe will lead to strong growth in the current and future years. As part of this strategy, a unique direct marketing campaign has been introduced in conjunction with large scale tours organized throughout China in prime tourist destinations—Sanya, Beihai (China’s premiere tropical leisure vacation centers) and the Three Gorges project. These tours are captive audiences learning about the health advantages of the products during an outing associated with their leisure activities. In addition, since 2003, sales have begun in Hualian Supermarket Co. Ltd. (one of the largest specialty chains in China with over 1,200 outlets, the first publicly listed supermarket retailer in China), as well as in health product and pharmaceutical outlets throughout China. Our five largest customers accounted for 38.6 percent of our consolidated sales for the year ended December 31, 2008. They account individually for approximately 9.1 percent, 8.4 percent, 7.8 percent, 6.8 percent and 6.5 percent of consolidated sales in 2008. In the future, we may continue to have several significant customers, the loss of any of which could have an adverse material effect on us. See also “Risk Factors—A Few Customers Account for a Significant Portion of our Business.”
Advertising and Marketing
Our sales and marketing team consists of ten members that are under the overall supervision of Mr. Harry Wang Hua, our Chief Operating Officer. Our sales and marketing team is responsible for establishing our sales and distribution networks both domestically and internationally, promoting our image and product awareness and maintaining our customer relationships. As part of his duties, Mr. Harry Wang Hua leads our plant management teams for both marine bio and healthcare products and aquaculture products. The Seattle personnel are responsible for increasing awareness and focus of our branding and marketing initiative, the rollout of our toxin free TILOVEYA® brand, and the rollout of our family of products under the “Lillian’s Healthy Gourmet” brand.
We believe that our principal operating subsidiary, HQOF, is the only vertically integrated PRC based producer present at the international seafood shows (e.g.,Brussels Seafood Show and Boston Seafood Expo). Participation in these industry events enables us to establish high level and immediate contacts with potential buyers. Buyer preferences and our response to these preferences, as well as prices and response to quality and quantity concerns, can be promptly addressed without the usual screening and middleman costs. We plan to aggressively market our products throughout North America, Europe and Asia through such shows.
In February 2006, we established our corporate headquarters, marketing and sales office in Seattle, Washington, thus creating a strong presence in the U.S. market. This office allows us to increase awareness of the importance of our toxin free product focus and to reap the benefits of more direct sales, increasing our overall sales, market penetration and profitability. We expect to also be able to broaden the scope of our products to cater to additional seafood purchasing requirements.
Sustainable Farming
The concept of sustainable development has been popularized by the 1987 World Commission on Environment and Development. It defined “sustainable development” as meeting the needs of the present generation, without compromising the needs of future generations. The idea of sustainability has caught up with aquaculture partly because of pressure from environmental groups. In 1998, the Holmenkollen Guidelines for Sustainable Aquaculture were formulated. These guidelines recommended, among other things, that new technologies and management procedures should be utilized so that the quality and quantity of aquaculture products is improved and the risk of adverse effects on the environment and on the livelihood of other people, including future generations, is reduced. The guidelines also recommended (1) strict compliance with the internationally agreed food safety, environmental safety and ethical criteria if genetically modified organisms or hormones are utilized in the production, as well as (2) giving priority to the
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development of integrated fish farming and of sources for animal feed other than fish protein and fish lipid. We fully endorse the idea of sustainable farming and implement it in our operations through our cooperative supply arrangements.
Organic Farming
We believe that organic farming may be considered to be the next step after sustainable farming. Organic farming is a trend towards simple and moderate farming methods that are inherently sustainable. Organic farming advocates against the use of hormones and certain drugs, genetically modified organisms, very intensive culture systems, use of fish meal from the fish meal industry and oils from animals. As the market demand for sustainable and environmentally sustainable practices increases, the aquaculture industry is in the process of adjusting to such demand by starting to offer organic products. Further, we believe that many companies are finding that the use of waste streams from aquaculture can be used as a nutrient source for the culture of other aquatic flora and fauna, as well as land based agriculture.
We believe that operating costs for organic culture should be lower than intensive farming, with the feed remaining the key operating cost. We have determined that organic production of tilapia is technically possible in Hainan Province. Further, our preliminary evaluation of farm production economics (such as feed costs, feed conversion ratios, growth rates and yields) as they relate to expected market demand indicates that we could engage in organic farming profitably. Therefore, we will finish the construction of a large-scale feed mill in early 2009 and pursue organic certification of our farms and commence organic tilapia production.
We anticipate that, following our construction of a large scale feed mill and processing plant, our tilapia products will meet organic standards as defined by The US Department of Agriculture.
In January of 2008 the Company received the Certification attesting to the organic standards for its tilapia production, processing, labeling, marketing and management system. Certification came after an initial annual audit conducted by Beijing Continental Hengtong Certification Co., Ltd. (CHTC), a certifier authorized by The China National Accreditation Service for Conformity (CNAS) and the Certification and Accreditation Administration of the PRC (CNCA).
Our Cooperative Supply Arrangements
We purchase and process farm-bred and ocean caught aquatic products through cooperative supply arrangements with local fishermen and cooperatives. Our farmed tilapia products come from approximately 1,647 pond acres of farms situated in the Wenchang area of Hainan. These farms are grouped through cooperatives to supply us with the highest quality tilapia in accordance with the sustainable farming standards described above.
We strive to implement the principles underlying sustainable farming and elements of organic farming in our cooperative supply arrangements with local fishermen and cooperatives, from which we purchase and process farm-bred and ocean caught aquatic products. Under our related cooperatives, or collaboration agreements, the farmers or holders of the concession retain their proprietary status, while agreeing to operate under planned and scheduled practices put forward by our company as cooperative partner of the concessions. The farmers are trained to our standards for deploying appropriate feeds and using poly-culture techniques, while we monitor compliance with these standards on an on-going basis. The farmers are also required to agree to treat waste water responsibly as a nutrient rich fertilizer for the vegetable fields maintained by neighboring farmers.
We typically have between five and ten cooperative supply agreements, which number may vary from time to time. We believe that these cooperative supply arrangements provide mutual benefits to the parties involved, as they help increase revenues of the local farmers, while ensuring a stable supply of quality raw tilapia to us.
Trademarks and Patents
We have the following patents on our products: Chinese Patent Number 460000X340-2001—Shark Cartilage; Chinese Patent Number 460000X131-2001—Shark Cartilage; Chinese Patent Number 460000X338-2001—Shark Liver Oil; and Patent Number 460000X342-2001—Shark Liver Oil. These patents are for a 20 year period and will expire in 2021. Two products are produced from refined shark cartilage and two from shark liver, both harvested from non-endangered shark species.
We consider our service marks, trademarks, trade secrets, patents and similar intellectual property to be critical to our success. We rely on trademark, patent and trade secret law, as well as confidentiality and license agreements with our employees, customers, partners and others to protect our proprietary rights. We have received patent protection and applied for trademark protection for our
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products in the PRC. We have also applied for trademark protection in the U.S., as described below, in connection with our branding of toxin free tilapia. Effective trademark, service mark, patent and trade secret protection may not be available in every country in which we sell or may in the future sell our products, and our competitors may independently develop formulations and processes that are substantially equivalent or superior to our own.
TILOVEYA®
In May 2006, we introduced our new toxin free tilapia brand TILOVEYA® at the European Seafood Exposition in Brussels, the largest seafood show in the world. This brand is designed to celebrate the health benefits of our tilapia produced in Hainan Province, China. Our freshwater tilapia products are made without hormones, antibiotics and free of levels of heavy metals and other toxins associated with ocean sourced products. We have filed with the United States Patent and Trademark Office the following applications for trademark registrations in connection with our branding of toxin free tilapia:
| | • | | Registration Number 3313536 for the TILOVEYA® mark; |
| | • | | Registration Number 3304756 for the TILOVEYA® Logo; and |
Lillian’s Healthy Gourmet®
In August of 2008, we developed the concept of a family of products under the brand of “Lillian’s Healthy Gourmet”. This family of products is based on the concept of our toxin free tilapia products produced in Hainan Province, China. Individuals should be able to eat a convenient healthy seafood meal at a reasonable price, while maintaining their demanding life style. This family of products brand “Lillian’s Healthy Gourmet” is designed to meet the need for a convenient healthy seafood meal at a reasonable price. We have filed with the United States Patent and Trademark Office for trademark registrations in connection with our branding of the Lillian’s Healthy Gourmet family of products and these filings are pending approval from the authorities.
Competition
In general, the aquaculture industry is intensely competitive and highly fragmented. The PRC aquaculture industry is further open to competition from local and overseas operators engaged in aquaculture and from other captured fish producers. We compete with various companies, many of which are developing or can be expected to develop products similar to ours. For example, 8th Sea—The Organic Seafood Company currently produces and processes tilapia fillets in Brazil’s Parana state. Our main aquaculture products (tilapia and shrimp) are also facing competition from some other domestic aquaculture producers. Some of the domestic aquaculture processing companies in Hainan Province have obtained certifications similar to those we possess. However, we believe that the competition from such producers is minimal because, to the best of our knowledge, there are no competitors in Hainan Province that have a similar operating scale and production capacity, or that have developed the vertically integrated business model under which we operate.
Many of our competitors are more established than we are, and have significantly greater financial, technical, marketing and other resources than we presently possess. Some of our competitors have greater name recognition and a larger customer base. These competitors may be able to respond more quickly to new or changing opportunities and customer requirements, and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive pricing policies. We intend to create greater brand awareness for our brand name(s) so that we can successfully compete with our competitors. We cannot assure you that we will be able to compete effectively or successfully with current or future competitors, or that the competitive pressures we face will not harm our business.
With respect to potential new competitors, although there are no formal barriers to entry for engaging in similar aquaculture processing production and activities in the PRC, we believe that the high infrastructure costs associated with developing and constructing processing plants and facilities does pose a barrier to potential competitors. Fish farms are tied directly to a processing plant and a new processing plant must either enlist new farms or build its own. Furthermore, measures addressing environmental considerations, such as water quality and waste water processing requirements, are costly to deploy on a greenfield site and are not readily available to all new companies. Accordingly, potential competitors have to mobilize extensive resources in order to maintain a presence similar to ours.
Government Regulation
Our company complies with various national, provincial and local environmental protection laws and regulations, as well as certifications and inspections relating to the quality control of our production and the environmental and social impact of our
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operations. In addition to statutory and regulatory compliance, we actively ensure the environmental sustainability of our operations. Also, all of our healthcare products have met stringent independent testing by selected university laboratories in China. Our costs of compliance with applicable environmental laws are minimal. Penalties would be levied upon us if we fail to adhere to and maintain our compliance with the applicable environmental regulations in the PRC. Such failure has not occurred in the past, and we generally do not anticipate that it may occur in the future, although no assurance can be given in this regard.
HACCP Standards
Our facilities are certified in accordance with the Hazard Analysis Critical Control Points, or HACCP, standards for exporting aquatic products to the United States. The HACCP standards are developed by the FDA pursuant to the FDA’s HACCP regulation, Title 21, Code of Federal Regulations, part 123, and are used by the FDA to help ensure food safety and control sanitary standards.
These standards focus on monitoring the quality of production and sanitation measures in processing plants for food products, and also take into account the environmental and social impact of the operations of the certified company. Compliance with the HACCP procedures is mandatory, and the successful implementation of these procedures depends on the design and performance of facilities and equipment, and excellent quality control and hygiene practices. HACCP conducts sample laboratory testing on our processed aquatic products to ensure no forbidden substances are present in them. Laboratory testing of our processed aquatic products was initiated by the HACCP in compliance with strict quarantine guidelines imposed by domestic export control government agencies and foreign import control government agencies.
In addition, our facilities continuously pass USDC inspection in conformity with the USDC Global Seafood Inspection Program (voluntary).
ACC Standards
We have completed the process of certification of our processing plant in China in relation to shrimp and Tilapia processing in accordance with the Aquaculture Certification Counsel, Inc., or the ACC standards. The ACC standards are considered “super HACCP” standards, as they also take into account various environmental and social issues. ACC certification is required by many large retailers in the United States.
The ACC is a U.S.-based, non-governmental body established to certify social, environmental and food safety standards at aquaculture facilities throughout the world. The ACC uses a certification system that combines site inspections and effluent sampling with sanitary controls, therapeutic controls and traceability. Part of the ACC’s mission is to help educate the aquaculture public regarding the benefits of applying best aquaculture practices and the advancing scientific technology that directs them. The ACC believes that, by implementing such standards, seafood producers can better meet the demands of the growing global market for safe, wholesome seafood produced in an environmentally and socially responsible manner. The ACC offers a primarily “process,” rather than “product”, certification, with an orientation toward seafood buyers. Successful participation in the ACC program is visually represented by limited use of a “Best Aquaculture Practices” certification mark. The ACC currently certifies only shrimp hatcheries, farms and processing plants.
Assignment of EU Code
Our facilities have been assigned a European Union (EU), approval registration, referred to as an EU Code, required for exporting aquatic products to the EU. This requirement applies to production both inside and outside of the EU, and defines the applicable standards of the EEC for handling, processing, storing and transporting fish. Our aquatic products processing plant in China must meet or exceed these standards every year, in order to maintain the assigned EU Code. The assignment of the EU Code to us, and our ability to maintain it on an annual basis, evidence the fact that our products meet the EU importable food standards set by the relevant inspection agencies.
Product Liability Insurance
We have purchased general commercial liability insurance, which provides adequate aggregate product liability insurance based on industry standards. However, there is a possibility that our customers, or the ultimate buyers of our products, may have adverse reactions to the tilapia and other aquatic products or marine bio and healthcare products that we process and sell. Any such adverse reaction may result in actual or potential product liability claims against us, which may not be covered by our insurance or, if covered, may be significantly higher than the insurance amount. Such actual or potential product liability claims may have an adverse effect on our reputation and profitability.
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Government Regulation in China
Aquaculture producers in the PRC have to comply with the environmental protection laws and regulations promulgated by the national and local governments of the PRC. Such rules and regulations include, among others, Environmental Protection Law of the PRC, Ocean Environmental Protection Law of the PRC, Regulations on Administration over Dumping of Wastes in the Ocean of the PRC, Ocean Aquatic Industry Administration Regulation, Fishing License Administration Regulation, Regulations on Administration of Hygiene Registration of Exported Food Manufacturers, and Regulations on Administration of Quality Control of Food Processors.
In addition, HACCP and sanitary programs in China in accordance with the FDA’s HACCP standards are verified by the China Inspection and Quarantine Office, or CIQ, which is a branch of the State Administration for Entry-Exit Inspection and Quarantine of the PRC and, in our case, also by the Hainan Entry-Exit Inspection and Quarantine Bureau of the PRC. In addition, the CIQ evaluates the compliance by our processing plant with the EU standards described above under “—Assignment of EU Code.” As a result of such review, our aquatic products processing plant in China has received a CIQ certificate. The CIQ certificate must be renewed on an annual basis.
Our Work with the Hainan Province
We have enjoyed close collaboration with the local government as we conduct our operations in the Hainan Province. We have continued to expand our operations in that area and to foster close ties with the local government through the construction of our large scale feed mill, which will be completed in early 2009. See “Business—Manufacturing and Production—Construction of Feed Mill.” The success of our operations in the PRC depends in part on the continued investment by Hainan Province in the development of the local aquaculture industry. While there can be no assurances that such investment will continue, we believe that it should continue for the following reasons. The central government of China has limited Hainan Province to two areas of economic activity, agri-food and tourism. The resulting focus of the Hainan Province on the agri-food and tourism sectors creates a strong potential synergy with private sector companies intent on further development of these sectors. Part of the attraction for investors is the low tax rate in Hainan. In addition, foreign companies setting up new ventures in Hainan do not pay any tax for the two first years of profitable operations, then pays 7.5 percent for the following three years and 15 percent thereafter. For this reason, we plan to continue to structure and conduct our operations in China through the use of separate subsidiaries, held by foreign holding companies which are separate and distinct from holding companies already incorporated. In turn, these holding companies are held by HQS. Under these arrangements, we are not considered involved in joint ventures, but rather in wholly owned foreign enterprises, under the local law. Government support for such ventures meeting local needs is positive, and we believe our operations have already demonstrated our ability to channel this support in the manner favorable to our business and Hainan. We believe that not having a joint venture with the local government is the best way to minimize the potential for government interference and to maximize government support, and we plan to continue to conduct our business in China accordingly.
Furthermore, on March 17, 2007, a new PRC Enterprise Income Tax Law (EIT) was promulgated and introduced a new uniform tax regime in the PRC. The EIT became effective on January 1, 2008. That new Law provides, amongst other issues, that income derived from processing of fishery products and processing of agricultural products will be exempt from the EIT tax rate. Starting in 2008, our existing fish processing unit and our feed mill plant which is under construction will both benefit from a “0” percent tax rate. With regards to our nutraceutical unit, the income tax rate, under the new law, will increase by approximately 2 percent yearly until it reaches a maximum of 25 percent in 2012.
Employees
Through our subsidiaries, we currently employ approximately 600 employees, all of whom are full-time employees. They are located predominantly in the PRC. Of our key employees, Harry Wang Hua, He Jian Bo and Wang Fu Hai are located in China and are fully dedicated to our China operations. In addition, Lillian Wang Li, Norbert Sporns, and William Sujian contribute to both our China operations and our U.S. operations, depending on the needs of our business over time.
In addition, during the high season, we hire up to 100 part-time employees. We typically pay our local employees much higher wages than the required minimum wages, in order to attract and retain key employees. We have employment agreements with many of our full-time employees. None of our employees are covered by a collective bargaining agreement, and we believe our employee relations are good.
Properties
We own two processing plants located in Wenchang, Hainan Province, the PRC, and the related manufacturing equipment, office equipment and motor vehicles. We use one plant to process the seafood products we produce, and the other plant to process our marine bio and healthcare products. We are in the process of building a new feed mill which we expect to be completed in the first half of 2009.
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In addition, we currently lease corporate premises for our United States headquarters located in Seattle, Washington, consisting of approximately 4,170 square feet, from Doncaster Investments NV, Inc. The term of the related lease is sixty months, which term commenced on December 1, 2005 and will end in December 1, 2010. Our base rental payment under the lease is $6,950 per month for 2009 and 2010.
Our properties are in good condition and are sufficient to meet our needs at this time. We do not plan to obtain additional space in the foreseeable future for the above cited plants but we intend to build or acquire additional processing facilities in the near future.
An investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Annual Report on Form 10-K, before investing in our common stock. If any of the events anticipated by the risks described below occur, our results of operations and financial condition could be adversely affected which could result in a decline in the market price of our common stock, causing you to lose all or part of your investment.
Risks Relating To Our Business
We rely on cooperative suppliers and any adverse changes in these relationships may adversely affect us.
We have developed a network of aquaculture farmers in Hainan Province for the supply of tilapia and shrimp by entering into cooperative supply agreements. Pursuant to the cooperative supply agreements, we are assured the necessary supply of aquatic products that meet our quality standards. The continuance and smooth operations of these cooperative networks are essential in controlling our costs, meeting quality standards and the timely fulfillment of our customer orders. Any adverse change to our cooperative network, including any early termination or non-renewal of any supply agreement or any failure of suppliers to fulfill their obligations under the supply agreements, could have a material adverse effect on our business model, operations and competitiveness.
We may require additional capital in the future, which may not be available on favorable terms or at all.
Our future capital requirements will depend on many factors, including industry and market conditions, our ability to successfully implement our new branding and marketing initiative and expansion of our production capabilities. We anticipate that we may need to raise additional funds in order to grow our business and implement our business strategy. We anticipate that any such additional funds would be raised through equity or debt financings. In addition, we may enter into a revolving credit facility or a term loan facility with one or more syndicates of lenders. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. Even if we are able to raise capital through equity or debt financings, as to which there can be no assurance, the interest of existing stockholders in our company may be diluted, and the securities we issue may have rights, preferences and privileges that are senior to those of our common stock or may otherwise materially and adversely affect the holdings or rights of our existing stockholders. If we cannot obtain adequate capital, we may not be able to fully implement our business strategy, and our business, results of operations and financial condition would be adversely affected. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” In addition, we have and will continue to raise additional capital through private placements or registered offerings, in which broker-dealers will be engaged. The activities of such broker-dealers are highly regulated and we cannot assure that the activities of such broker-dealers will not violate relevant regulations and generate liabilities despite our expectation otherwise.
We depend on the availability of additional human resources for future growth.
We are currently experiencing a period of significant growth in our sales volume. We believe that continued expansion is essential for us to remain competitive and to capitalize on the growth potential of our business. Such expansion may place a significant strain on our management and operations and financial resources. As our operations continue to grow, we will have to continually improve our management, operational and financial systems, procedures and controls, and other resources infrastructure, and expand our workforce. There can be no assurance that our existing or future management, operating and financial systems, procedures and controls will be adequate to support our operations, or that we will be able to recruit, retain and motivate our personnel. Further, there can be no assurance that we will be able to establish, develop or maintain the business relationships beneficial to our operations, or to do so or to implement any of the above activities in a timely manner. Failure to manage our growth effectively could have a material adverse effect on our business and the results of our operations and financial condition.
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We depend on our key management personnel, and the loss of any of their services could materially adversely affect us.
Our operations are dependent upon the experience and expertise of a small number of key management personnel, which includes Lillian Wang Li, our Chairman of the Board, Norbert Sporns, our Chief Executive Officer and President, and Harry Wang Hua, our Chief Operating Officer. Lillian Wang Li and Harry Wang Hua are brother and sister, and Ms. Wang Li is married to Norbert Sporns. Although we have begun the process of obtaining the life insurance on Ms. Wang Li and Mr. Sporns, of which we are the beneficiary, the loss of the services of any of them for any reason would have a material adverse effect on our business, and the results of our operations and financial condition, or could delay or prevent us from fully implementing our business strategy.
A few of our customers account for a significant portion of our business.
We have derived, and over the near term we expect to continue to derive, a significant portion of our sales from a limited number of customers. For example, our five largest customers accounted for a total of 38.6 percent of our consolidated sales for the year ended December 31, 2008, and they are all related to the aquaculture product segment. At December 31, 2008, approximately 46.3 percent of our trade receivables was from transactions with these five largest customers. The loss of any of these customers or non-payment of outstanding amounts due to the company could materially and adversely affect our business in terms of results of operations, financial position and liquidity.
We may be unable to continue to take advantage of the seasonal pricing fluctuation in sales of our products, and we may be adversely affected by the seasonal fluctuation in the prices we earn for our products.
We have experienced seasonal fluctuation in the prices we earn for our products, generally in the range of 15 to 20 percent. Pricing fluctuation occurs during the winter season when fish farms in the northern part of the PRC suspend production due to cold weather conditions. These weather related disruptions in supply permit us to increase the sales prices of our tilapia products. However, there can be no assurance that such premium pricing, benefiting our profitability, can be maintained in the future. Other factors, such as an increase in the cost of feed, might adversely impact on the cost of fish and lessen our margins and profitability.
Any adverse changes in the supply of our tilapia and other raw materials, including contamination or disease or increased costs of raw materials, may adversely affect our operations or reduce our margins or profits.
We are dependent on the availability of raw materials from Hainan Province and the oceans in that region. The supply of these raw materials can be adversely affected by any material change in the climatic or environmental conditions in and around Hainan Province. In addition, if there is contamination resulting from disease, pollution or other foreign substances, our supply of raw materials could be jeopardized or disrupted. The shortage or lack of raw materials and any consequential change in their cost would, in turn, have a material adverse effect on the cost on our operations and margins and our ability to provide products to our customers.
We may be adversely affected by the fluctuation in raw material prices and selling prices of our products.
In the winter of 2008 there was a winter freeze in mainland China that was exceptionally cold. This winter freeze killed a significant amount of the farmed tilapia in mainland China driving up the market price for live tilapia. At the same time oil futures and commodity future reached near record highs driving up the price of raw materials for our cooperative farmers. Thus, at different points in early 2008 the costs of raw material had risen faster than the market price of finished products causing a negative impact on various companies’ gross margins. We think it is highly unlikely that the above mentioned weather and market conditions will happen again, but there is no assurance that these market conditions will not occur again causing significant future price fluctuations or pricing control like occurred in 2008. The products and raw materials we use may experience price volatility caused by events such as market fluctuations or changes in governmental programs. The market price of these raw materials may also experience significant upward adjustment, if, for instance, there is a material under-supply or over-demand in the market. These price changes may ultimately result in increases in the selling prices of our products, and may, in turn, adversely affect our sales volume, revenue and operating profit.
We could be adversely affected by the occurrence of natural disasters in Hainan Province.
From time to time, Hainan Province experiences typhoons, particularly from June through September of any given year. Natural disasters could impede operations, damage infrastructure necessary to our operations or adversely affect the logistical services to and from Hainan Province. The occurrence of natural disasters in Hainan Province could adversely affect our business, the results of our operations, prospects and financial condition, even though we currently have insurance against damages caused by natural disasters, including typhoons, accidents or similar events.
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Intense competition from existing and new entities may adversely affect our revenues and profitability.
In general, the aquaculture industry is intensely competitive and highly fragmented. We compete with various companies, many of which are developing or can be expected to develop products similar to ours. For example, 8th Sea—The Organic Seafood Company, currently produces and processes tilapia fillets in Brazil’s Parana state. Many of our competitors are more established than we are and have significantly greater financial, technical, marketing and other resources than we presently possess. Some of our competitors have greater name recognition and a larger customer base. These competitors may be able to respond more quickly to new or changing opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive pricing policies. We intend to create greater awareness for our brand names so that we can successfully compete with our competitors. We cannot assure you that we will be able to compete effectively or successfully with current or future competitors or that the competitive pressures we face will not harm our business.
Our operating subsidiary must comply with environmental protection laws that could adversely affect our profitability.
We are required to comply with the environmental protection laws and regulations promulgated by the national and local governments of the PRC. Some of these regulations govern the level of fees payable to government entities providing environmental protection services and the prescribed standards relating to the discharge of effluent, or liquid waste. Yearly inspections of waste treatment systems require the payment of a license fee which could become a penalty fee if standards are not maintained. Currently, our plant treats all of its effluent completely to level one, which is consistent with releasing potable water back to the environment, and there is currently no charge being levied. Although our production technologies allow us to efficiently control the level of pollution resulting from our production process, and notwithstanding the fact that we have received evidence of compliance with environmental protection requirements from government authorities, due to the nature of our business, effluent wastes are unavoidably generated in the aquaculture production processes. If we fail to comply with any of these environmental laws and regulations in the PRC, depending on the types and seriousness of the violation, we may be subject to, among other things, warning from relevant authorities, imposition of fines, specific performance and/or criminal liability, forfeiture of profits made, being ordered to close down our business operations and suspension of relevant permits.
Our operations, revenue and profitability could be adversely affected by changes in laws and regulations in the countries where we do business.
The governments of countries into which we sell our products, including the United States, Canada and the European Union, from time to time, consider regulatory proposals relating to raw materials, food safety and markets, and environmental regulations, which, if adopted, could lead to disruptions in distribution of our products and increase our operational costs, which, in turn, could affect our profitability. To the extent that we increase our product prices as a result of such changes, our sales volume and revenues may be adversely affected.
Furthermore, these governments may change import regulations or impose additional taxes or duties on certain Chinese imports from time to time. For example, in 2004, the United States government imposed heavy tariffs of more than 100 percent on certain Chinese shrimp exporters. Similar regulations and fees or new regulatory developments may have a material adverse impact on our operations, revenue and profitability.
There could be changes in the policies of the PRC government that may adversely affect our business.
The aquaculture industry in the PRC is subject to policies implemented by the PRC government. The PRC government may, for instance, impose control over aspects of our business such as distribution of raw materials, product pricing and sales. On the other hand, the PRC government may also make available subsidies or preferential treatment, which could be in the form of tax benefits or favorable financing arrangements.
If the raw materials used by us or our products become subject to any form of government control, then depending on the nature and extent of the control and our ability to make corresponding adjustments, there could be a material adverse effect on our business and operating results.
Separately, our business and operating results also could be adversely affected by changes in policies of the Chinese government such as: changes in laws, regulations or the interpretation thereof; confiscatory taxation; restrictions on currency conversion, imports
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on sources of supplies; or the expropriation or nationalization of private enterprises. Although the Chinese government has been pursuing economic reform policies for approximately two decades to liberalize the economy and introduce free market aspects, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting China’s political, economic and social life.
Certain political and economic considerations relating to PRC could adversely affect our company.
The PRC is passing from a planned economy to a market economy. The Chinese government has confirmed that economic development will follow a model of market economy under socialism. While the PRC government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the PRC economy is still operating under five-year plans and annual state plans adopted by the government that set down national economic development goals. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the economy. Many of the economic reforms are unprecedented or experimental for the PRC government, and are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development. Our operating results may be adversely affected by changes in the PRC’s economic and social conditions as well as by changes in the policies of the PRC government, which we may not be able to foresee, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the rate or method of taxation, and imposition of additional restrictions on currency conversion.
The recent nature and uncertain application of many PRC laws applicable to us create an uncertain environment for business operations and they could have a negative effect on us.
The PRC legal system is a civil law system. Unlike the common law system, such as the legal system used in the United States, the civil law system is based on written statutes in which decided legal cases have little value as precedents. In 1979, the PRC began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in the PRC and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our business and business prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.
If relations between the United States and China worsen, our stock price may decrease and we may have difficulty accessing the U.S. capital markets.
At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China could adversely affect the market price of our common stock and our ability to access U.S. capital markets.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. Currently, the Renminbi is not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans and corporate debt obligations denominated in foreign currencies.
The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
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The fluctuation of the Renminbi may materially and adversely affect your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations.
Conversely, if we decide to convert our Renminbi into U.S. dollars for business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be reduced. Any significant devaluation of Renminbi may reduce our operation costs in U.S. dollars but may also reduce our earnings in U.S. dollars. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.
Commencing from July 21, 2005, China has adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. The exchange rate of the US dollar against the RMB was adjusted from approximately RMB 8.28 per US dollar to approximately RMB 8.11 per US dollar on July 21, 2005. Since then, the PBOC administers and regulates the exchange rate of US dollar against RMB taking into account demand and supply of RMB, as well as domestic and foreign economic and financial conditions.
In addition, there can be no assurance that we will be able to obtain sufficient foreign exchange to pay dividends or satisfy other foreign exchange requirements in the future and we currently do not intend to pay dividends.
It may be difficult to effect service of process and enforcement of legal judgments upon our company and our officers and directors because some of them reside outside the United States.
As our operations are presently based in China and some of our key directors and officers reside outside the United States, service of process on our key directors and officers may be difficult to effect within the United States. Also, substantially all of our assets are located outside the United States and any judgment obtained in the United States against us may not be enforceable outside the United States. We have appointed Norbert Sporns, our Chief Executive Officer and President, as our agent to receive service of process in any action against our company in the United States.
Risks Relating to our Common Stock
There are a large number of shares underlying our secured convertible notes and warrants that may be available for future sale and the sale of these shares may depress the market price of our common stock.
As of December 31, 2008, we had 12,085,846 shares of common stock issued and outstanding. As of the same date, there were 1,000,000 shares of our common stock issuable upon conversion of the convertible notes we issued in November 2006. In addition, we currently have outstanding Class A warrants to purchase up to 43,750 shares of our common stock, Class B warrants to purchase up to 114,583 shares of our common stock, Class C warrants to purchase up to 79,825 shares of our common stock, Class D warrants to purchase up to 141,200 shares of our common stock, and stock purchase warrants to purchase up to 30,000 shares of our common stock issued in connection with the November 2006 financing.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
We own two processing plants located in Wenchang, Hainan Province, the PRC, and the related manufacturing equipment, office equipment and motor vehicles. We use one plant to process the seafood products we produce, and the other plant to process our marine bio and healthcare products. We are currently in the process of building a new feed plant that is planned to be in operation in first half of 2009.
In addition, we currently lease corporate premises for our United States headquarters located in Seattle, Washington, consisting of approximately 4,170 square feet from Doncaster Investments NV, Inc. The term of the related lease is sixty months, which term commenced on December 1, 2005, to end December 1, 2010 Our base rental payment under the lease is $6,950 per month for 2009 and 2010.
Our properties are in good condition and are sufficient to meet our needs at this time. We do not plan to obtain additional space in the foreseeable future for the above-cited plants but we intend to build additional processing facilities in the near future.
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We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
There were no matters submitted to the vote of securities holders during the year ended December 31, 2008 except as follows:
On October 24, 2008, we held our annual meeting of stockholders in which a majority of the stockholders elected the current Board of Directors to hold office until the next Company’s Annual Meeting of Stockholders or until his or her successor is duly elected and qualified and ratified the appointment of Schwartz Levitsky Feldman LLP, as the Company’s independent certified public accountant.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Shares of our common stock commenced trading on May 17, 2007, on the American Stock Exchange (AMEX) under the symbol “HQS.”
For the periods indicated, the following table sets forth the high and low bid prices per share of common stock, as reported by the OTC Bulletin Board until May 16, 2007, and the high and low closing price of our common stock since May 17, 2007 when our common stock commenced trading on AMEX. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions. The prices set forth below have been adjusted for the reverse stock split of our common stock.
| | | | | | | | | | | | |
| | | 2008 | | 2007 |
| | | High | | Low | | High | | Low |
First Quarter | | $ | 14.20 | | $ | 9.04 | | $ | 7.74 | | $ | 4.00 |
Second Quarter | | | 15.40 | | | 9.51 | | | 13.00 | | | 6.30 |
Third Quarter | | | 16.45 | | | 3.85 | | | 10.45 | | | 8.25 |
Fourth Quarter | | | 8.24 | | | 3.29 | | | 10.55 | | | 7.40 |
On December 31, 2008, the closing bid price of our common stock was $7.83
Holders of Record
As of December 31, 2008, we had approximately 1,100 holders of record of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.
Recent sales of unregistered securities
On February 21, 2008, we issued 2,526 shares to our three independent non-executive directors to satisfy our obligations to pay each such director an annual bonus in shares of our common stock pursuant to our independent non-executive director agreements with them. All of these shares were issued pursuant to the exemption provided by Section 4 (2) under the Securities Act for a transaction not involving a public offering.
On March 12, 2008, we issued 6,046 shares of our Common Stock to Lucky Ventures Limited in consideration of financial consulting services rendered to us by that company. All of these shares were issued pursuant to the exemption provided by Section 4 (2) under the Securities Act for a transaction not involving a public offering.
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On March 18, 2008, we issued 300,000 shares of our Common Stock to two investors, namely The Tail Wind Fund Ltd and Solomon Strategic Holdings, Inc in relation to a waiver agreement related to payment of penalties and interests on the notes issued to those two investors in November 2006. All of these shares were issued pursuant to the exemption provided by Section 4 (2) under the Securities Act for a transaction not involving a public offering.
During the three months period ending June 30, 2008, we issued an aggregate of 190,401 shares to our investors as a result of exercise of warrants. Of that number of common shares issued, 79,399 shares were issued in connection with the American Arbitration Association decision.
On August 25, 2008, we issued 45,432 common shares as a result of exercise of warrants to Tail Wind Fund Limited, one of our investors.
On September 5, 2008 we issued a total of 6,468 shares to our four independent non-executive directors, Fred Bild, Daniel Too, Joseph I. Emas, and Andrew Intrater to satisfy our obligations to pay each such director an annual bonus in shares of our common stock pursuant to our independent non-executive director agreements with them. All of these shares were issued pursuant to the exemption provided by Section 4 (2) under the Securities Act for a transaction not involving a public offering.
Transfer agent
Our transfer agent is American Stock Transfer and Trust Company. Its address is 59 Maiden Lane, Plaza Level, New York, New York 10038.
Dividends
We may never pay any dividends to our shareholders. We did not declare any dividends for the year ended December 31, 2008. Our Board of Directors does not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the Board of Directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the Board of Directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Equity Compensation Plan Information
On December 2004, our Board of Directors ratified grants of non-qualified stock options to purchase shares of our common stock under our Stock Option Plan to some of our executive officers and directors, as well as to several of our employees. Each of these new stock options has up to a ten-year term, is subject to the terms and conditions of the Plan, and is priced at $5.60 which represents the fair market value as of the initial grant date of November 23, 2004.
Specifically, in 2004, Norbert Sporns, our Chief Executive Officer, President and director, received 25,000 stock options. Lillian Wang, the Chairman of our Board of Directors, received 25,000 stock options. Harry Wang, our Chief Operating Officer, director and brother of Ms. Wang, received 25,000 stock options; and Fusheng Wang, our director in 2004, Honorary Chairman and father of Ms. Wang, received 50,000 stock options. Together, Norbert Sporns, Harry Wang and Lillian Wang also indirectly control the majority of capital stock of HQS. The stock options granted to each of them, as well as to Fusheng Wang, were fully vested when granted. In addition, our Chief Financial Officer, Jean-Pierre Dallaire, received 10,000 stock options. Mr. Dallaire’s options were vested in 2004 immediately as to 50% of the grant, with the remaining 50% vesting as follows: 1/3 on June 16, 2005, 1/3 on June 16, 2006, and the remaining 1/3 on June 16, 2007.
Further, at the same date, our Board of Directors ratified grants of stock options to thirteen other employees of HQS. These stock options were vested immediately as to 50% of each individual grant, with the remaining 50% vesting as follows: 1/3 on June 16, 2005, 1/3 on June 16, 2006, and the remaining 1/3 on June 16, 2007. In the case of one of the employees, the stock options were fully vested when granted.
Our Board of Directors believes that these stock option grants will help our company to continue to attract, retain and motivate our employees, directors and executive officers. In connection with these grants, our Board of Directors reserved 250,000 shares for issuance under the Plan. In addition, pursuant to the provisions of the Plan, our Board of Directors delegated the full power and authority to administer the Plan, in accordance with its terms, to our Compensation Committee presently consisting of Fred Bild, an independent director, and Daniel Too, also an independent director of HQS.
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The following table provides information about option awards under our Stock Option Plan as of December 31, 2008.
| | | | | | | |
Plan Category | | Number of securities to be
issued upon exercise of
outstanding options | | Weighted-
average exercise
price of
outstanding
options | | Number of securities
remaining available for
future issuance under employee
compensation plans (excluding
securities reflected in first column) |
Equity compensation plans previously approved by security holders | | 53,750 | | $ | 5.60 | | NIL |
Equity compensation plans not approved by security holders | | | | | | | |
Total | | 53,750 | | $ | 5.60 | | NIL |
The Company did not repurchase any equity securities in the fourth quarter of 2008.
| ITEM 6. | SELECTED FINANCIAL DATA |
The following tables set forth, for the periods indicated, selected consolidated financial and other data. You should read the selected consolidated financial and other data below in conjunction with our consolidated financial statements and related notes and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included within this Form 10-K. We have derived the following selected financial data from our audited consolidated financial statements for the years ended December 31, 2008, 2007, 2006, 2005 and 2004.
| | | | | | | | | | | | | | | | |
Statement of operation data: | | 2008 | | 2007 | | 2006 | | 2005 | | 2004 | |
Sales | | $ | 67,723,283 | | $ | 54,970,211 | | $ | 39,095,403 | | $ | 27,553,030 | | $ | 21,191,492 | |
Cost of sales | | | 39,525,933 | | | 29,426,918 | | | 21,917,345 | | | 16,002,911 | | | 16,082,992 | |
Gross profit | | | 28,197,350 | | | 25,543,293 | | | 17,178,058 | | | 11,550,119 | | | 5,108,500 | |
| | | | | |
Income from operations | | | 15,048,886 | | | 12,850,000 | | | 7,042,230 | | | 4,582,933 | | | 459,479 | |
Income before taxes | | | 12,954,028 | | | 7,035,374 | | | 1,841,932 | | | 3,895,092 | | | (229,590 | ) |
Net income attributable to shareholders | | | 10,040,688 | | | 4,486,562 | | | 873,964 | | | 3,254,098 | | | (383,943 | ) |
| | | | | |
Balance Sheet data: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | 54,920,548 | | | 46,959,908 | | | 11,389,375 | | | 5,140,159 | | | 4,551,505 | |
Working capital | | | 72,203,260 | | | 61,550,488 | | | 22,063,084 | | | 8,434,344 | | | 1,471,961 | |
Total assets | | | 100,186,273 | | | 84,326,866 | | | 41,852,480 | | | 24,416,680 | | | 20,925,662 | |
Total liabilities | | | 11,913,245 | | | 15,551,203 | | | 12,246,745 | | | 6,555,210 | | | 9,314,238 | |
Shareholders’ equity | | | 88,273,028 | | | 68,775,663 | | | 29,605,735 | | | 17,861,470 | | | 11,611,424 | |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K.
General overview
We are a leader in toxin free vertically integrated aquaculture and aquatic product processing, with processing facilities located in Hainan, PRC. We market our products in Asia, America and Europe. We have two processing plants in Hainan, one that processes aquatic products providing toxin-free tilapia and other aquatic products, and the other processes marine bio and healthcare products. We seek to expand our operations through providing additional processing facilities (e.g. the construction of our third facility in early 2009, which will process extruded feed) in China and marketing efforts throughout North America and Europe.
Recently, we announced that we had entered into a conditional agreement with the government of Tayang Town in the Province of Hainan, PRC, in order to work with the cooperative farms which are capable of producing some 20,000 tonnes of live weight tilapia. We expect this agreement to result in doubling the farming capacity available to us.
In addition, you should consider the following information as you read the below results of operations discussion and our financial statements and related notes included elsewhere in this prospectus. From the first quarter of 2004, following our reverse merger with Process Equipment, Inc., we have been operating under the name of HQS. At that time, we owned 84.4 percent of HQOF, currently our principal operating subsidiary that processes our seafood products; in August 2004 we acquired the remaining ownership interest that we did not already own in HQOF. The fiscal year-end of Process Equipment was changed from April 30, to December 31 following the reverse merger. In August 2004, we acquired a 100 percent interest in our current subsidiary Jiahua Marine which operates a marine bio and healthcare plant, including nutraceuticals, in Hainan Province, China. In the first half of 2005, our aquatic processing plant stopped production in order to add production lines and increase its production capacity to properly meet forecasted incremental demand, which affected some of our operating results during that period.
Our business operations consist of two segments, the marine bio and healthcare product segment and the aquaculture product segment. Since the acquisition of Jiahua Marine, which represents the marine bio and healthcare product segment, those product sales have represented a significant contribution to the net income of the company and currently are higher profit margin products than our aquaculture products. The company expects the sales and contribution to net income to continue during the next year in similar proportions. However, as the marketing efforts increase in connection with the aquaculture product segment and the investment in the feed mill plant and equipment for new processing capacity of extruded feed is completed next year, the company expects that the aquaculture product segment will begin to contribute a greater portion of income and a higher profit margin in 2009 and beyond.
The following Management’s Discussion and Analysis (“MD&A”) is intended to provide the readers with an insight of the Group. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes (“Notes”).
Our principal executive office is located at 1511, Third Avenue, Suite 788, Seattle, Washington, and our telephone number is (206) 621 9888. The URL for our website ishttp://www.hqfish.com.
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Critical accounting policies and estimates
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is calculated on the weighted average basis and includes all costs to acquire and other costs incurred in bringing the inventories to their present location and condition. We evaluate the net realizable value of its inventories on a regular basis and record a provision for loss to reduce the computed weighted average cost if it exceeds the net realizable value.
Income taxes
Taxes are calculated in accordance with taxation principles currently effective in the PRC. The Company accounts for income taxes under the provision of Statements of Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. We account for income taxes using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
Related parties
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.
Revenue recognition
The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer, including factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable, and collectibility is probable. The Company recognizes sales when the merchandise is shipped, title has passed to the customers and collectibility is reasonably assured.
Concentration of credit risk
Financial instruments that potentially subject our company to significant concentrations of credit risk consist primarily of trade accounts receivable. We perform ongoing credit evaluations with respect to the financial condition of our creditors, but do not require collateral. In order to determine the value of our accounts receivable, we record a provision for doubtful accounts to cover probable credit losses. Our management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectability of outstanding accounts receivable.
Recent developments
Results of Operations—Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Total sales for the year ended December 31, 2008 increased by $12,753,072, or 23 percent compared to the same period of 2007. The aquaculture product segment’s sales increased by $9,121,963, or 25 percent while the health and bio-products segment’s sales increased by $3,631,109 or 19 percent. Income from operations for the year ended December 31, 2008 increased by 17 percent when
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compared to 2007; that improvement was due mostly to the higher sales and gross profit of 2008 originating from both of our segments. A net income of $10,040,688 was generated in 2008, increasing from $4,486,562 in 2007, an increase of 124 percent in 2008. That significant increase in 2008 is attributable to the increased sales and gross profit of 2008 from both our segments, coupled to a reduction of financing costs in 2008 and no income taxes from our aquaculture products segment since January 2008. Financing costs have decreased by $3,194,383 or 55 percent to $2,662,734 as compared to $5,857,117 for 2007. Financing costs will continue to decrease in 2009 as the maturity of the promissory notes, triggering the warrants amortization costs (non-cash) and the related amortization of the embedded conversion option (also non-cash), will occur in November 2009. Those financing costs are recognized as such in accordance with FAS 123R and EITF 00-27.
Segments
Manufacturing and selling of aquatic products
Hainan Quebec Ocean Fishing Co. Ltd (HQOF), is engaged in the processing and selling of aquatic products. The revenue contributed by this segment was $45,370,400 and $36,248,437 for the years ended December 31, 2008 and 2007, respectively, an improvement of 25 percent. In 2008, the production capacity of our fish processing plant was increased by 50 percent, effective from the third quarter of the year. The related gross profit ratio of this segment was 25 percent and 27 percent for the years ended December 31, 2008 and 2007 respectively. The second half of 2008 showed a recovery in the percentage of gross profit as the first half gross profit margins were hurt significantly by the international markets not recognizing the difficult position of the tilapia industry in that period. This segment contributed $9,963,357 and $6,299,304 to net income for the year ended December 31, 2008 and 2007 respectively. The significant increase in sales and related gross profit of this segment in 2008, added to a bad debt recovery and no income taxes since January 2008 led to such favorable improvement in the profitability in 2008 compared to 2007.
Manufacturing and selling of health and bio-product
Our other manufacturing subsidiary, Jiahua Marine, is engaged in the manufacturing and selling of marine bio and healthcare products. During the years ended December 31, 2008 and 2007, Jiahua Marine realized sales of $22,352,883 and $18,721,774 respectively, an increase of 19 percent. The gross profit ratio from this segment was 75 percent and 84 percent for the years ended December 31, 2008 and 2007 respectively. That reduction in gross profit experienced in 2008 was the result of a different sales mix, added to development costs incurred in relation to new products to be marketed in 2009, and finally to market penetration costs incurred from the second half of 2008 The major expense of this segment was advertising, representing 20 percent and 28 percent of revenue for the year ended December 31, 2008 and 2007 respectively. The net income contributed by this segment was $8,999,699 and $7,984,935 for the years ended December 31, 2008 and 2007 respectively, an increase of 13 percent in the year in 2008.
Operations
Sales. For the year ended December 31, 2008, sales increased by $12,753,072 or 23 percent to $67,723,283 from $54,970,211. That significant increase in sales was the result of better performances of both segments in 2008: sales from the aquaculture product segment increased by $9,121,963, or 25 percent while sales from the health and bio product segment increased by $3,631,109, or 19 percent in 2008, compared to 2007. In 2008, the production capacity of our fish processing plant was increased by 50 percent, effective from the third quarter of the year.
Cost of Sales. Cost of sales increased by $10,099,015 or 34 percent to $39,525,933 from $29,426,918 for the year ended December 31, 2008, as compared to the year ended December 31, 2007. The overall gross profit margin decreased from 46 percent for the year ended December 31, 2007 to 42 percent for the year ended December 31, 2008, mostly due to the margin decrease in the health and bio-product segment related to product mix, development costs of new products to be marketed in 2009 and market penetration costs incurred in 2008.
Selling and distribution expenses. Selling and distribution expenses increased by $709,597 or 84 percent from $841,263 to $1,550,860 for the year ended December 31, 2008, as compared to 2007. The increase was the result of higher sales volumes realized in the current year from both our segments, including higher transportation costs.
Marketing and advertising expenses. Marketing and advertising expenses decreased by $735,921 or 14 percent from $5,162,299 to $4,426,378 for the year ended December 31, 2008, as compared to 2007. The reduction in those expenses is mostly due to the winding down of publicity programs for those products that have successfully penetrated the targeted markets and that have raised consumer awareness about our products. In 2008, we continued to maintain a high level of advertising in order to sustain our market share in this highly competitive market as is consistent with industry practices.
25
General and administrative expenses. For the year ended December 31, 2008, general and administrative expenses increased by $1,405,632 or 29 percent to $6,205,993, as compared to 2007. The major part of the increase was the result of additional costs related to Sarbanes Oxley’s documentation and audit requirements of section 404, increased franchise tax from State of Delaware, branding-related expenses, traveling, investors’ relations and other U.S. head office expenses.
Depreciation and amortization. Depreciation and amortization increased by $239,172 to $1,456,456 for the year ended December 31, 2008, mainly as a result of acquisition of fixed assets in 2008 triggering new depreciation charges.
(Recovery of)/Provision for doubtful accounts.Recovery of doubtful accounts amounted to $491,223 for the year ended December 31, 2008 compared to a provision of $672,086 for the year ended 2007. The 2008 recovery originated from the aquaculture segment where the statistical estimate provided in 2007 reversed in 2008.
Income from operations. Income from operations increased to $15,048,886 in financial year 2008, compared to $12,850,000 in 2007, an improvement of 17 percent. That improvement in 2008 is mostly the result of increased sales and related gross profit from both our segments in 2008 as described above, added to bad debt recovery and offset by increased selling, marketing and general and administrative expenses.
Finance costs. Finance costs decreased to $2,662,734 from $5,857,117 for the year ended December 31, 2008 as compared to the previous year, a reduction of $3,194,383 or 55 percent. Included in the 2008 finance costs are the non-recurring costs recognized in relation to the final judgment on the Westminster Securities and John O’Shea claims against the Company and settled in the first half of 2008. In addition, also included in the first half of 2008 non-recurring finance costs are the penalties and interests on late filing of the registration statement relating to the underlying shares on the convertible notes issued in November 2006. Finally, the carrying interests on the promissory notes issued in 2006 added to the continued combination of amortization of the future conversion of warrants (non–cash) attributed to investors on those notes of $10,225,000 issued in 2006, and to the amortization of the embedded conversion option (also non–cash) related to the same notes. Those non-cash financing costs were recognized in accordance with FAS 123R and EITF 00-27. Such amortization will be repeated, on a pro-rata basis, until maturity of the underlying notes. Finance costs will continue to decrease in 2009 as the maturity of the promissory notes will occur in November 2009.
Other income.Other income amounted to $567,876 in 2008 compared to $42,491 in 2007. The 2008 balance was mostly the result of a non-recurring gain on disposal of fixed assets of approximately $495,000 during the last quarter of 2008.
Income before income taxes. Income before income taxes increased by $5,918,654 to $12,954,028 for the year ended December 31, 2008, from $7,035,374 in 2007. That significant increase is the result of increased income from operations as described above coupled with a reduction in finance costs.
Current income tax. Current income taxes decreased by $453,836 to $2,094,976 from $2,548,812 for the year ended December 31, 2008 and December 31, 2007 respectively. Income taxes were lower in 2008 due to the application of the new PRC Enterprise Income Tax Law (EIT) which became effective on January 1, 2008. That new Law provides, amongst other issues, that income derived from processing of fishery products is now exempted from income tax while it stood at 15 percent in 2007. Furthermore, with regards to our nutraceutical unit, the income tax rate increased to 18 percent in 2008 from 15 percent in 2007; for that segment, the income tax rate will gradually increase to a maximum of 25 percent by 2012.
Deferred income tax.Deferred income taxes increased from NIL in 2007 to $818,364 for year ended December 31, 2008. The increase was the result of a non-recurring write-off of deferred taxation representing an expense of approximately $818,000 related to the sale of fixed assets. Otherwise, there was no deferred income tax recognized in both financial years as there was no other material timing differences to justify recognition of such deferred tax expenses.
Net income attributable to shareholders. Net income attributable to shareholders increased significantly from $4,486,562 for the year ended December 31, 2007, to $10,040,688 for the year ended December 31, 2008. That increase of 124 percent in net income was the result of increased sales and gross profit from both segments in 2008, added to a reduction in finance costs and income taxes as described above.
26
Liquidity and Capital Resources
Our cash and cash equivalents increased by $7,960,640 during the financial year of 2008, to $54,920,548. As at December 31, 2008, working capital was $72,203,260 compared to $61,550,488 at December 31, 2007. The funds generated by the operating activities during 2008 were used mainly to support the increase in our receivable and inventory levels, to decrease our payables and increase in our investment in the new feed plant under construction.
Total assets increased by $15,859,407 to $100,186,273 at December 31, 2008, from $84,326,866 as of December 31, 2007. Shareholders’ equity increased by $19,497,365, or 28 percent, to $88,273,028 as at December 31, 2008, from $68,775,663 as of December 31, 2007.
To date, we have financed our operations through the combination of our operating revenues, equity and debt financing (in connection with which we have at times incurred significant costs), short–term bank loans, and the use of shares of our common stock issued as payment for services rendered to us by third parties. In the past, we issued shares of our common stock and warrants in private placement transactions to help finance our operations, and to pay for professional services (such as financial consulting, market development, legal services and public relations services). We recognized these services on our books as operating or deferred expenses and amortized over their estimated useful life. The number of shares we issued for these purposes were determined as of the dates of invoices relating to such services, and the shares were valued at their market prices on those respective dates. In addition, as required by PRC laws, we establish yearly reserves shown in the shareholders’ equity section of our balance sheet. Those reserves, which are created by a transfer from the retained earnings account, limit our capacity to pay dividends to shareholders until the retained earnings become positive. As we are in an expansion phase, we do not intend to pay dividends to shareholders in the foreseeable future. To date, we have not paid any dividends.
We also completed a financing in January 2006, in which we issued to a group of twenty one investors, in a private placement, (1) convertible secured promissory notes bearing interest at 8 percent per year which matured on January 25, 2008, in the aggregate principal amount of $5,225,000; (2) Class A warrants, with each warrant giving the right to the holder to purchase one share of our common stock at the exercise price of $6.00 until January 2009; and (3) Class B warrants, with each warrant giving the right to the holder to purchase one share of our common stock at the exercise price of $6.00 until January 2011. The net proceeds of this financing to us were $4,702,500, after deducting commissions and other costs of this transaction equal to $522,500. At December 31, 2008, that financing was totally reimbursed.
In addition, we also completed a financing in November 2006, in which we issued to two investors, in a private placement, (1) convertible promissory notes bearing interest at 6.5 percent and maturing in November 1, 2009, in the principal aggregate amount of $5,000,000 with the conversion price of $5.00 per share and (2) warrants registered in the name of each investor to purchase an aggregate of up to 200,000 of our common stock, with each warrant giving the right to the holder to purchase one share of our common stock at the exercise price of $5.00 until the fifth anniversary of the effective date of the reverse stock split effectuated in January 2007. At December 31, 2008, 170,000 such warrants were exercised, leaving a balance of 30,000 unexercised warrants. The net proceeds of this financing to us were $4,932,500, after deducting commissions and other costs of this transaction equal to $67,500. The notes are due on November 1, 2009.
In December 2007, we completed a follow-on offering by issuing 3,450,000 new shares of Common Stock to two underwriters (including the over-allotment of 450,000 shares) for a total gross consideration of $26,910,000 (corresponding to a net proceed of approximately $23,800,000). The Company intends to use this financing for the purpose of completing its new feed plant expected to be in operation in the first half of 2009, to build a new processing plant expected to be in operation in 2010 and to use the balance for general working capital purpose.
We are currently in the process of examining various financing opportunities to obtain additional liquidities to help finance our operations, as well as support our additional cash requirements related to volume increases that we anticipate might occur in the future, specifically in the inventory and receivables build–up. No assurances can be given that additional debt or equity financing we may require will be available to us or, even if available, that such financing will be on terms favorable to us.
At present, about 38 percent of our consolidated sales are derived from our five largest clients, and our results of operations therefore depend on a small number of clients (39 percent in 2007). As part of our short and medium–term business plan, including our recent efforts to raise funds to support the anticipated expansion of our operations, we intend to invest in our infrastructure to construct a new processing plant and our own feed mill. We expect that this will allow us to meet forecasted incremental demand for our products in the United States and Europe. As a result, we plan to develop and serve new clients, which should reduce our dependence on individual clients to more acceptable levels.
27
In order to ensure sufficient funds to meet our future needs for capital, management believes that we will continue to evaluate opportunities to raise financing through some combination of commercial bank borrowings, the private or public sale of equity, or issuance of debt securities from time to time. However, future equity or debt financing may not be available to us at all, or if available, may not be on terms acceptable to us. If we are unable to obtain financing in the future, we will continue to develop our business on a reduced scale based on our existing capital resources.
The ratio of current assets to current liabilities increased to 7.06 times ($84,116,505/$11,913,245) at December 31, 2008, from 6.2 times ($73,448,339/$11,897,851) at December 31, 2007.
Contractual Obligations
We have various contractual obligations that are recorded as liabilities in our consolidated financial statements. Other items, such as purchase commitments, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed. For example, we are contractually committed to make certain minimum lease payments for the use of property and equipment under operating lease agreements and arrangements we classify as capital leases.
The following table summarizes (in millions) our significant contractual obligations and commercial commitments at December 31, 2008 and the future periods in which such obligations and commitments are expected to be settled in cash. In addition, the table reflects the timing of principal payments on outstanding borrowings. This table does not reflect regular recurring trade payables incurred in the normal course of business and generally due within 30 days of service. Additional details regarding these obligations are provided in notes to the consolidated financial statements also included herein, as referenced in the table:
| | | | | | | | | | | | | | | |
| | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Total |
Notes payable & other borrowings | | $ | 5,000,000 | | | | | | | | | | | $ | 5,000,000 |
Operating leases | | $ | 124,432 | | $ | 165,464 | | $ | 82,064 | | $ | 430,832 | | $ | 802,792 |
Purchase and other commitments | | $ | 3,195,890 | | | | | | | | | | | $ | 3,195,890 |
Total | | $ | 8,320,322 | | $ | 165,464 | | $ | 82,064 | | $ | 430,832 | | $ | 8,998,682 |
Off-Balance Sheet Transactions
We have no off-balance sheet arrangements or transactions with unconsolidated, special purpose entities.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We do not hold any derivative instruments and do not engage in any hedging activities. Because most of our purchases and sales are made in RMB, any exchange rate change affecting the value of the RMB relative to the U.S. dollar could have an effect on our financial results as reported in U.S. dollars. If the RMB were to depreciate against the U.S. dollar, amounts reported in U.S. dollars would be correspondingly reduced. If the RMB were to appreciate against the U.S. dollar, amounts reported in U.S. dollars would be correspondingly increased.
28
| ITEM 8. | CONSOLIDATED FINANCIAL STATEMENT AND SUPPLEMENTARY DATA |
29
MANAGEMENT REPORT
Management is responsible for the preparation and integrity of the Consolidated Financial Statements appearing in this Annual Report. The Consolidated Financial Statements were prepared in conformity with accounting principles generally accepted in the United States and include amounts based on management’s estimates and judgments.
Management is also responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-l5(f) promulgated under the Securities Exchange Act of 1934. We maintain a system of internal controls that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the Consolidated Financial Statements in accordance with generally accepted accounting principles, as well as to safeguard assets from unauthorized use or disposition.
Our control environment is the foundation for our system of internal control over financial reporting and is embodied in our Code of Conduct. Our internal control over financial reporting includes written policies and procedures that:
| | • | | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; |
| | • | | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; |
| | • | | provide reasonable assurance that receipts and expenditures of the Company are made in accordance with the appropriate authorization of management and the directors of the Company; and |
| | • | | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements. Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and remedial actions to correct deficiencies as they are identified. |
Management evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. Management based such assessment upon the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Although there are inherent limitations in the effectiveness of any system of internal controls over financial reporting, based on our evaluation, we have concluded that our internal controls over financial reporting were effective as of December 31, 2008.
Schwartz Levitsky Feldman LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Report and, as part of their audit, has issued their report, included herein in Item 8, on the effectiveness of our internal control over financial reporting.
| | |
| Norbert Sporns | | Jean- Pierre Dallaire |
| President and Chief Executive Officer | | Chief Financial Officer |
30
Schwartz Levitsky Feldman llp
CHARTERED ACCOUNTANTS
LICENSED PUBLIC ACCOUNTANTS
TORONTO • MONTREAL
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders of
HQ Sustainable Maritime Industries, Inc.
We have audited HQ Sustainable Maritime Industries, Inc’s (the “Company”) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
31
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as at December 31, 2008 and the related consolidated statement of income and comprehensive income, cash flows and changes in shareholders’ equity for the year ended December 31, 2008 and our report dated March 2, 2009 expressed an unqualified opinion thereon
| | | | |
| /s/ Schwartz Levitsky Feldman LLp | | | | |
| | |
| Toronto, Ontario, Canada | | | | Chartered Accountants |
| March 2, 2009 | | | | Licensed Public Accountants |
32
Schwartz Levitsky Feldman llp
CHARTERED ACCOUNTANTS
LICENSED PUBLIC ACCOUNTANTS
TORONTO • MONTREAL
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
HQ Sustainable Maritime Industries, Inc.
We have audited the accompanying consolidated balance sheet of HQ Sustainable Maritime Industries, Inc. (the “Company”) as at December 31, 2008 and the related consolidated statements of income and comprehensive income, cash flows and changes in shareholders’ equity for the year ended December 31, 2008. These consolidated financial statements are the responsibility of the management of HQ Sustainable Maritime Industries, Inc. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2008 and the results of its income and comprehensive income and its cash flows for the year ended December 31, 2008 in conformity with generally accepted accounting principles in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 2, 2009, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
The consolidated financial statements of HQ Sustainable Maritime Industries, Inc. and Subsidiaries as of December 31, 2007 were audited by other auditors whose report dated March 27, 2008 expressed an opinion without qualification on those consolidated financial statements.
| | | | |
| /s/ Schwartz Levitsky Feldman LLp | | | | |
| | |
| Toronto, Ontario, Canada | | | | Chartered Accountants |
| March 2, 2009 | | | | Licensed Public Accountants |
33
HQ SUSTAINABLE MARITIME INDUSTRIES, INC
(INCORPORATED IN THE STATE OF DELAWARE
WITH LIMITED LIABILITY)
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
| | | | | | |
| | | 2008 | | 2007 |
ASSETS | | | | | | |
CURRENT ASSETS: | | | | | | |
Cash and cash equivalents | | $ | 54,920,548 | | $ | 46,959,908 |
Trade receivables, net of provisions | | | 27,689,410 | | | 25,234,502 |
Inventories | | | 1,041,628 | | | 877,716 |
Prepayments | | | 464,919 | | | 350,116 |
Future income taxes | | | — | | | 26,097 |
| | | | | | |
| | |
TOTAL CURRENT ASSETS | | | 84,116,505 | | | 73,448,339 |
| | | | | | |
| | |
PROPERTY, PLANT AND EQUIPMENT, NET | | | 8,315,593 | | | 7,716,615 |
CONSTRUCTION IN PROGRESS | | | 6,622,501 | | | 949,728 |
INTANGIBLE ASSETS | | | 1,112,904 | | | 1,254,002 |
| | | | | | |
| | |
| | | 16,050,998 | | | 9,920,345 |
| | |
OTHER ASSETS | | | | | | |
Deferred taxes | | | — | | | 873,865 |
Deferred expenses | | | 18,770 | | | 84,317 |
| | | | | | |
| | |
| | | 18,770 | | | 958,182 |
| | | | | | |
| | |
TOTAL ASSETS | | $ | 100,186,273 | | $ | 84,326,866 |
| | | | | | |
The accompanying notes are an integral part of the consolidated financial statements
34
HQ SUSTAINABLE MARITIME INDUSTRIES, INC
(INCORPORATED IN THE STATE OF DELAWARE
WITH LIMITED LIABILITY)
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
| | | | | | |
| | | 2008 | | 2007 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
CURRENT LIABILITIES: | | | | | | |
Accounts payable and accrued liabilities | | $ | 5,787,514 | | $ | 8,935,928 |
Taxes payable | | | 823,382 | | | 956,289 |
Due to directors | | | 698,429 | | | 1,544,350 |
Current portion of promissory notes | | | 4,603,920 | | | 461,284 |
| | | | | | |
| | |
TOTAL CURRENT LIABILITIES | | | 11,913,245 | | | 11,897,851 |
| | |
OTHER LIABILITIES | | | | | | |
Convertible promissory notes, net of discount | | | — | | | 3,653,352 |
| | | | | | |
| | |
TOTAL LIABILITIES | | | 11,913,245 | | | 15,551,203 |
SHAREHOLDERS’ EQUITY | | | | | | |
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 100,000 shares issued and outstanding | | | 100 | | | 100 |
Common stock, $0.001 par value, 200,000,000 shares authorized, 12,085,846 and 11,511,317 shares issued and outstanding as of December 31, 2008 and December 31, 2007 respectively | | | 12,086 | | | 11,511 |
Additional paid-in capital | | | 61,572,410 | | | 57,142,204 |
Accumulated other comprehensive income | | | 9,615,956 | | | 4,590,060 |
Retained earnings | | | 10,510,961 | | | 2,373,825 |
Appropriation of retained earnings (reserves) | | | 6,561,515 | | | 4,657,963 |
| | | | | | |
| | |
TOTAL SHAREHOLDERS’ EQUITY | | | 88,273,028 | | | 68,775,663 |
| | | | | | |
| | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 100,186,273 | | $ | 84,326,866 |
| | | | | | |
The accompanying notes are an integral part of the consolidated financial statements
35
HQ SUSTAINABLE MARITIME INDUSTRIES, INC
(INCORPORATED IN THE STATE OF DELAWARE
WITH LIMITED LIABILITY)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
| | | | | | | | |
| | | 2008 | | | 2007 | |
Sales | | $ | 67,723,283 | | | $ | 54,970,211 | |
Cost of sales | | | 39,525,933 | | | | 29,426,918 | |
| | | | | | | | |
| | |
Gross profit | | | 28,197,350 | | | | 25,543,293 | |
Selling and distribution expenses | | | 1,550,860 | | | | 841,263 | |
Marketing and advertising | | | 4,426,378 | | | | 5,162,299 | |
General and administrative expenses | | | 6,205,993 | | | | 4,800,361 | |
Depreciation and amortization | | | 1,456,456 | | | | 1,217,284 | |
(Recovery of)/doubtful accounts | | | (491,223 | ) | | | 672,086 | |
| | | | | | | | |
| | |
Income from operations | | | 15,048,886 | | | | 12,850,000 | |
Finance costs | | | 2,662,734 | | | | 5,857,117 | |
Other income | | | (567,876 | ) | | | (42,491 | ) |
| | | | | | | | |
| | |
Income before income taxes | | | 12,954,028 | | | | 7,035,374 | |
Income taxes | | | | | | | | |
Current | | | 2,094,976 | | | | 2,548,812 | |
Deferred | | | 818,364 | | | | — | |
| | | | | | | | |
| | |
Net income attributable to shareholders | | | 10,040,688 | | | | 4,486,562 | |
| | |
OTHER COMPREHENSIVE INCOME | | | | | | | | |
Foreign currency translation income | | | 5,025,896 | | | | 2,977,694 | |
| | | | | | | | |
| | |
COMPREHENSIVE INCOME | | $ | 15,066,584 | | | $ | 7,464,256 | |
| | | | | | | | |
| | |
NET INCOME PER SHARE | | | | | | | | |
Basic | | $ | 0.843 | | | $ | 0.587 | |
| | | | | | | | |
| | |
Diluted | | $ | 0.785 | | | $ | 0.543 | |
| | | | | | | | |
| | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | | | | | | | | |
Basic | | | 11,905,739 | | | | 7,635,124 | |
| | | | | | | | |
| | |
Diluted | | | 13,198,438 | | | | 8,989,469 | |
| | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements
36
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE
WITH LIMITED LIABILITY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
| | | | | | | | | | | | | |
| | | Common Stock | | Preferred Stock | | Additional
paid in
Capital |
| | | Share | | Par Value | | Share | | Par Value | |
Balance at January 1, 2007 | | 6,416,856 | | $ | 6,417 | | 100,000 | | $ | 100 | | $ | 25,441,626 |
| | | | | | | | | | | | | |
| | | | | |
Issuance of common stock and warrants | | 5,094,461 | | | 5,094 | | — | | | — | | | 31,700,578 |
Net income for the year | | — | | | — | | — | | | — | | | — |
Transfer to reserve | | — | | | — | | — | | | — | | | — |
Transfer to reserve | | — | | | — | | — | | | — | | | — |
| | | | | | | | | | | | | |
| | | | | |
Balance at December 31, 2007 | | 11,511,317 | | $ | 11,511 | | 100,000 | | $ | 100 | | $ | 57,142,204 |
| | | | | | | | | | | | | |
| | | | | |
Issuance of common stock and warrants | | 574,529 | | | 575 | | — | | | — | | | 4,430,206 |
Net income for the year | | — | | | — | | — | | | — | | | — |
Transfer to reserve | | — | | | — | | — | | | — | | | — |
| | | | | | | | | | | | | |
| | | | | |
Balance at December 31, 2008 | | 12,085,846 | | $ | 12,086 | | 100,000 | | $ | 100 | | $ | 61,572,410 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Appropriation of
retained earnings
(reserves) | | Accumulated
other
comprehensive
income | | Retained
earnings
(deficit) | | | Total |
Balance at January 1, 2007 | | $ | 3,229,072 | | $ | 1,612,366 | | $ | (683,846 | ) | | $ | 29,605,735 |
| | | | | | | | | | | | | |
| | | | |
Issuance of common stock and warrants | | | — | | | — | | | — | | | | 31,705,672 |
Net income for the year | | | — | | | — | | | 4,486,562 | | | | 4,486,562 |
Transfer to reserve | | | 1,428,891 | | | — | | | (1,428,891 | ) | | | — |
Foreign currency translation adjustment | | | — | | | 2,977,694 | | | — | | | | 2,977,694 |
| | | | | | | | | | | | | |
| | | | |
Balance at December 31, 2007 | | $ | 4,657,963 | | $ | 4,590,060 | | $ | 2,373,825 | | | $ | 68,775,663 |
| | | | | | | | | | | | | |
| | | | |
Issuance of common stock and warrants | | | — | | | — | | | — | | | | 4,430,781 |
Net income for the year | | | — | | | — | | | 10,040,688 | | | | 10,040,688 |
Transfer to reserve | | | 1,903,552 | | | — | | | (1,903,552 | ) | | | — |
Foreign currency translation adjustment | | | — | | | 5,025,896 | | | — | | | | 5,025,896 |
| | | | | | | | | | | | | |
| | | | |
Balance at December 31, 2008 | | $ | 6,561,515 | | $ | 9,615,956 | | $ | 10,510,961 | | | $ | 88,273,028 |
| | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements
37
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE
WITH LIMITED LIABILITY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
| | | | | | | | |
| | | 2008 | | | 2007 | |
OPERATING ACTIVITIES | | | | | | | | |
Net income | | $ | 10,040,688 | | | $ | 4,486,562 | |
Non-cash items: | | | | | | | | |
Depreciation and amortization | | | 1,456,456 | | | | 1,217,284 | |
| | |
(Gain)/loss on disposal of fixed assets | | | (491,253 | ) | | | 53,603 | |
| | |
Write off of fixed assets | | | — | | | | 41,637 | |
Financial and other non cash services | | | 3,032,822 | | | | 5,164,795 | |
Deferred income taxes | | | 818,362 | | | | — | |
| | |
Change in non-cash working capital items: | | | | | | | | |
Inventories | | | (76,042 | ) | | | (168,858 | ) |
Trade receivables, net of provisions | | | (656,094 | ) | | | (7,276,981 | ) |
Prepayments | | | (44,576 | ) | | | 34,577 | |
| | |
Accounts payable and accrued expenses | | | (1,329,388 | ) | | | 5,113,418 | |
| | |
Taxes payable | | | (166,708 | ) | | | 624,860 | |
| | | | | | | | |
| | |
Cash flow generated from operating activities | | | 12,584,269 | | | | 9,290,897 | |
| | | | | | | | |
| | |
INVESTING ACTIVITIES | | | | | | | | |
Acquisition of property, plant and equipment-net | | | (1,310,683 | ) | | | (745,546 | ) |
| | |
Sale proceeds of disposal of fixed assets | | | 495,449 | | | | — | |
| | |
Construction in progress | | | (5,398,904 | ) | | | (634,905 | ) |
| | | | | | | | |
| | |
Cash flow used in investing activities | | | (6,214,138 | ) | | | (1,380,451 | ) |
| | | | | | | | |
| | |
FINANCING ACTIVITIES | | | | | | | | |
Cash proceeds from issuance of common stock | | | 137,536 | | | | 28,570,475 | |
| | |
(Due to) directors | | | (845,921 | ) | | | (153,915 | ) |
Repayment to related parties | | | — | | | | (198,553 | ) |
| | |
Bank loan payments | | | — | | | | (1,255,203 | ) |
| | | | | | | | |
| | |
Cash flow (used in)/generated from financing activities | | | (708,385 | ) | | | 26,962,804 | |
| | | | | | | | |
| | |
NET CHANGE IN CASH AND CASH EQUIVALENTS | | | 5,661,746 | | | | 34,873,250 | |
| | | | | | | | |
| | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | | | 2,298,894 | | | | 697,283 | |
Cash and cash equivalents, beginning of year | | | 46,959,908 | | | | 11,389,375 | |
| | | | | | | | |
Cash and cash equivalents, end of year | | | 54,920,548 | | | | 46,959,908 | |
| | | | | | | | |
| | |
SUPPLEMENTARY CASH FLOWS DISCLOSURES | | | | | | | | |
Interest paid | | | — | | | | — | |
| | | | | | | | |
| | |
Taxes paid | | | 2,263,701 | | | | 1,155,429 | |
| | | | | | | | |
| | |
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | |
Common shares issued for services | | | 4,425,432 | | | | 173,000 | |
| | | | | | | | |
| | |
Reclassification of Construction in Progress to Land Use Rights | | | — | | | | 964,002 | |
| | | | | | | | |
38
HQ SUSTAINABLE MARITIME INDUSTRIES, INC
NOTES FOR THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Our company was initially incorporated on September 21, 1989 under the laws of the State of Nevada. On March 17, 2004, Process Equipment, Inc., Process Equipment Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of Process Equipment, Inc., or PEAC, and Jade Profit Investment Limited, or Jade, a British Virgin Islands limited liability corporation, entered into an agreement and plan of merger with us. Pursuant to that agreement, Process Equipment, Inc., through PEAC, acquired Jade, and 84.42 percent ownership in Jade’s subsidiary Hainan Quebec Ocean Fishing Co. Ltd, a People’s Republic of China, limited liability corporation, which we refer to as HQOF. As a result of that transaction, HQOF became our main operating subsidiary . In April of 2004, pursuant to the above agreement and plan of merger, the board of directors of Process Equipment, Inc. and a majority of the stockholders approved a name change and change of domicile of that company to Delaware via a merger with the newly formed wholly-owned Delaware subsidiary, HQS. The name change, change of domicile and merger became effective on May 19, 2004, with HQS being the surviving entity in the merger and acquiring all the assets and liabilities of Process Equipment, Inc. On August 17, 2004, we entered into a Purchase Agreement with Sino-Sult Canada (S.S.C.) Limited, a Canadian limited liability corporation (“SSC”), whereby we acquired Sealink Wealth Limited (“Sealink”), SSC’s wholly owned subsidiary incorporated in the British Virgin Islands. Sealink is the sole owner of Hainan Jiahua Marine Bio-Products Co. Ltd., a limited liability company existing in China (“Jiahua Marine”) which is primarily engaged in the production and sales of marine bio-products and healthcare products in the PRC, as described in more detail in this current report.
Further, as previously disclosed in the above current report, effective August 17, 2004, HQS caused Jade Profit Investment Limited, its wholly-owned subsidiary, to acquire the minority equity interest equal to 15.58 percent that Jade did not already own in Hainan Quebec Ocean Fishing Company Limited, HQS’s principal operating subsidiary. This purchase was effected by Jade pursuant to the Purchase Agreement, dated as of August 17, 2004, between Jade and Hainan Fuyuan Investment Company Limited, the holder of the minority equity interest of HQOF being acquired by Jade. Jade has previously obtained all requisite governmental approvals in the PRC in order to consummate this transaction.
The Group is principally engaged in the vertically integrated business of aquaculture through cooperative supply agreements, ocean product harvesting, and processing and sales of farm-bred and ocean harvested aquatic products. The principal products of HQOF are cross-bred hybrid of tilapia and white-legged shrimp, which are exported, directly and indirectly, to the United States, Canada, Japan and European countries. The major market is for export.
The Group is also engaged in the production and sales of marine bio-products and healthcare products in the PRC. The principal products of Jiahua Marine Bio-Product Company Limited (100 percent held subsidiary of Sealink) are Shark Cartilage Capsule, Shark Liver Oil and Shark Liver (Soft gel). The major market is domestic in the PRC.
NOTE 2 – BASIS OF PRESENTATION
The consolidated financial statements include the accounts of HQS and all its subsidiaries (“The Group”). All material inter-company accounts and transactions have been eliminated. The consolidated financial statements are prepared in accordance with generally accepted accounting principles used in the United States of America.
39
NOTE 3 – ACCOUNTING POLICIES
A. CASH AND CASH EQUIVALENTS
The Group considers cash and cash equivalents to include cash on hand and demand deposits with banks with an original maturity of three months or less.
B. INVENTORIES
Inventories are stated at the lower of cost and net realizable value. Cost is calculated on the weighted average basis and includes all costs to acquire and other costs incurred in bringing the inventories to their present location and condition. The Company evaluates the net realizable value of its inventories on a regular basis and records a provision for loss to reduce the computed weighted average cost if it exceeds the net realizable value.
C. Construction in progress
Construction in progress represents buildings under construction and plant and equipment pending installation as of December 31, 2008 and 2007, and is stated at cost. Cost includes construction of buildings, acquisitions and installation of equipment, and interest charges arising from borrowings used to finance assets during the period of construction or installation and testing. No provision for depreciation is made on assets under construction until such time as the relevant assets are completed and ready for their intended commercial use.
D. Long-live Assets
The Company has adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”. Property, plant and equipment and intangible assets are reviewed periodically for impairment losses whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If required, an impairment loss is recognized as the difference between the carrying value and the fair value of the assets.
In January 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, impairment of long-lived assets is monitored on a continuing basis, and is assessed based on the undiscounted cash flows generated by the underlying assets. In the event that the carrying amount of long-lived assets exceeds the undiscounted future cash flows, then the carrying amount of such assets is adjusted to their fair value.
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. The percentages applied are:
| | |
Buildings and leasehold improvement | | 10 – 40 years |
Plant and machinery | | 5 – 10 years |
Motor vehicles | | 5 – years |
Office equipment and furnishings | | 5 – years |
F. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash, receivables, accounts payable and accrued expenses and debt, approximates their fair value at December 31, 2008 and 2007 due to the relatively short-term nature of these instruments.
G. INCOME TAXES
Taxes are calculated in accordance with taxation principles currently effective in the PRC. The Company accounts for income taxes using the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
40
H. GOVERNMENT SUBSIDIES
Subsidies from the government are recognized at their fair values when received or there is reasonable assurance that they will be received, and all attached conditions are complied with.
I. RELATED PARTIES
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. The Company conducts business with several related parties in the ordinary course of business. All transactions have been recorded at fair market value of the goods or services exchanged.
41
J. FOREIGN CURRENCY TRANSLATION
We follow SFAS No. 52, “Foreign Currency Translation”, for both the translation and re-measurement of balance sheet and income statement items into U.S. dollars. Resulting translation adjustments are reported as a separate component of accumulated comprehensive income (loss) in stockholders’ equity.
The Group maintains its books and accounting records in Renminbi (“RMB”), the PRC’s currency, being the functional currency. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date. Any translation gains (losses) are recorded in exchange reserve as a component of shareholders’ equity. Income and expenditures are translated at the average exchange rate of the year
| | | | |
| | | 2008 | | 2007 |
Year-end RMB : US$ exchange rate | | 6.8240 | | 7.3046 |
Average RMB : US$ exchange rate | | 7.0643 | | 7.5603 |
On January 1, 1994, the PRC government introduced a single rate of exchange as quoted daily by the People’s Bank of China (the “Unified Exchange Rate”). The quotation of the exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the Bank of China or other institutions requires submitting a payment application form together with supplier’s invoices, shipping documents and signed contracts.
Commencing from July 21, 2005, China has adopted a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. The exchange rate of the US dollar against the RMB was adjusted from approximately RMB 8.28 per US dollar to approximately RMB 8.11 per US dollar on July 21, 2005. Since then, the PBOC administers and regulates the exchange rate of US dollar against RMB taking into account demand and supply of RMB, as well as domestic and foreign economic and financial conditions.
K. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results when ultimately realized could differ from those estimates.
L. REVENUE RECOGNITION
The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer, including factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed and determinable, and collectibility is probable. The Company recognizes sales when the merchandise is shipped, title has passed to the customers and collectibility is reasonably assured.
M. EMPLOYEES’ BENEFITS
Mandatory contributions are made to the Government’s health, retirement benefit and unemployment schemes at the statutory rates in force during the period, based on gross salary payments. The cost of these payments is charged to the statement of income in the same period as the related salary cost.
42
N. SEGMENTS
No geographical segment analysis is provided for the years ended December 31, 2008 and 2007 as less than 10 percent of consolidated revenues and less than 10 percent of consolidated income from operations is attributable to the segment other than the Mainland China.
Business Segment for the year ended December 31, 2008
| | | | | | | | | | | | | | | | |
| | | Aquaculture
Product | | | Health and
Bio-product | | | Unallocated
Items | | | Consolidation | |
Sales to external customers | | $ | 45,370,400 | | | $ | 22,352,883 | | | $ | — | | | $ | 67,723,283 | |
| | | | | | | | | | | | | | | | |
| | | | |
Selling and distribution expenses | | | 872,589 | | | | 678,271 | | | | — | | | | 1,550,860 | |
Marketing and advertising | | | — | | | | 4,426,378 | | | | — | | | | 4,426,378 | |
General and administrative expenses | | | 855,546 | | | | 562,794 | | | | 4,787,653 | | | | 6,205,993 | |
Depreciation and amortization | | | 761,923 | | | | 437,045 | | | | 257,488 | | | | 1,456,456 | |
(Recovery of)/doubtful accounts | | | (498,681 | ) | | | 7,458 | | | | — | | | | (491,223 | ) |
Finance costs | | | (40,667 | ) | | | (152,747 | ) | | | 2,856,148 | | | | 2,662,734 | |
Income/(loss) before income taxes | | | 10,320,298 | | | | 10,785,850 | | | | (8,152,120 | ) | | | 12,954,028 | |
Income taxes | | | 864,279 | | | | 2,049,061 | | | | — | | | | 2,913,340 | |
Net Income/(loss) for the year | | $ | 9,456,019 | | | $ | 8,736,789 | | | $ | (8,152,120 | ) | | $ | 10,040,688 | |
| | | | | | | | | | | | | | | | |
| | | | |
Segment assets | | $ | 49,054,644 | | | $ | 36,026,012 | | | $ | 15,105,617 | | | $ | 100,186,273 | |
| | | | | | | | | | | | | | | | |
| | | | |
Segment liabilities | | $ | 2,541,594 | | | $ | 2,271,766 | | | $ | 7,099,885 | | | $ | 11,913,245 | |
| | | | | | | | | | | | | | | | |
Business Segment for the year ended December 31, 2007
| | | | | | | | | | | | | |
| | | Aquaculture
Product | | Health and
Bio-product | | Unallocated
Items | | | Consolidation |
Sales to external customers | | $ | 36,248,437 | | $ | 18,721,774 | | $ | — | | | $ | 54,970,211 |
| | | | | | | | | | | | | |
| | | | |
Selling and distribution expenses | | | 371,939 | | | 469,324 | | | — | | | | 841,263 |
Marketing and advertising | | | — | | | 5,162,299 | | | — | | | | 5,162,299 |
General and administrative expenses | | | 856,068 | | | 237,655 | | | 3,706,638 | | | | 4,800,361 |
Depreciation and amortization | | | 645,152 | | | 355,667 | | | 216,465 | | | | 1,217,284 |
Doubtful accounts | | | 664,873 | | | 5,644 | | | 1,569 | | | | 672,086 |
Finance costs | | | 1,717 | | | 112,937 | | | 5,742,463 | | | | 5,857,117 |
Income/(loss) before income taxes | | | 7,478,613 | | | 9,380,535 | | | (9,823,774 | ) | | | 7,035,374 |
Income taxes | | | 1,179,309 | | | 1,395,600 | | | (26,097 | ) | | | 2,548,812 |
Net Income/(loss) for the year | | $ | 6,299,304 | | $ | 7,984,935 | | $ | (9,797,677 | ) | | $ | 4,486,562 |
| | | | | | | | | | | | | |
| | | | |
Segment assets | | $ | 34,238,892 | | $ | 25,076,495 | | $ | 25,011,479 | | | $ | 84,326,866 |
| | | | | | | | | | | | | |
| | | | |
Segment liabilities | | $ | 4,208,988 | | $ | 1,965,657 | | $ | 9,376,558 | | | $ | 15,551,203 |
| | | | | | | | | | | | | |
O. COMPREHENSIVE INCOME
The Group has adopted the provisions of Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”). SFAS No. 130 establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general-purpose financial statements. SFAS No. 130 defines comprehensive income to include all changes in equity except those resulting from investments by owners and distributions to owners, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable securities.
43
P. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations with respect to the financial condition of its customers, but does not require collateral. In order to determine the value of the Company’s accounts receivable, the Company records a provision for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectability of outstanding accounts receivable.
Q. SHIPPING AND HANDLING COSTS
Shipping and handling costs are classified as cost of sales and are expensed as incurred.
R. ADVERTISING COSTS
Advertising costs are expensed as incurred.
S. NET INCOME PER COMMON SHARE
Net income per common share is computed in accordance with SFAS No. 128, “Earnings Per Share”. Basic earnings per common share is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding for each period. Diluted earnings per common share is calculated by adjusting the weighted-average shares outstanding assuming conversion of all potentially dilutive convertible securities.
T. DEFERRED EXPENSES
Deferred expenses represent the unamortized portion of finders’ fees related to the convertible promissory notes issued in November 2006.
U. INTANGIBLE ASSETS
Intangible assets are recognized if it is probable that the future economic benefits attributable to the assets will flow to the Company, and if the cost of the assets can be measured reliably. After initial recognition, intangible assets are measured at cost less any impairment losses. Intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives.
44
V. RECENT PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115”. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. This Statement applies to all entities, including not-for-profit organizations. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. As such, the Company has currently chosen not to elect the fair value option as permitted by SFAS No.159, which provides entities the option to measure many financial instruments and certain other items at fair value.
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 141(R), “Business Combinations”. SFAS 141(R) establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, an any non controlling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS 141(R) on its consolidated financial statements but does not expect it to have a material effect.
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS 160 establishes an accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2009. The Company is currently evaluating the impact of SFAS 160 on its consolidated financial statements but does not expect it to have a material effect.
In March, 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhances disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently assessing the impact of FAS 161.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S.GAAP for non-governmental entities. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted accounting Principles. “The Company does not expect SFAS 162 to have a material effect on its consolidated financial statements.
In May, 2008, the FASB issued Statement of Financial Accounting Standards No. 163 (“SFAS 163”), “Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60”. SFAS 163 prescribes accounting for insures of financial obligations, bringing consistency to recognizing and recording premiums and to loss recognition. SFAS 163 also requires expanded disclosures about financial guarantee insurance contracts. Except for some disclosures, SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of SFAS 163 will not have an impact on the results of operations or financial position of the Company.
45
The Company believes that the above standards would not have a material impact on its financial position, results of operations or cash flows.
NOTE 4 – TRADE RECEIVABLES
The Group’s trade receivables at December 31, 2008 and 2007 are summarized as follows:
| | | | | | |
| | | 2008 | | 2007 |
Trade receivables | | $ | 27,175,264 | | $ | 25,383,330 |
Other receivables | | | 813,271 | | | 523,730 |
| | | | | | |
| | | 27,988,535 | | | 25,907,060 |
Less: Provision for doubtful accounts | | | 299,125 | | | 672,558 |
| | | | | | |
| | |
Balance at end of year | | $ | 27,689,410 | | $ | 25,234,502 |
| | | | | | |
The activity in the Group’s provision for doubtful accounts during the year ended December 31, 2008 and 2007 is summarized as follows:
| | | | | | | | |
| | | 2008 | | | 2007 | |
Balance at beginning of year | | $ | 672,558 | | | $ | 59,866 | |
Add/(less): Provision / (recovery) during the year | | | (491,223 | ) | | | 672,086 | |
Exchange difference transfer to exchange reserve | | | 117,790 | | | | (59,394 | ) |
| | | | | | | | |
Balance at end of year | | $ | 299,125 | | | $ | 672,558 | |
| | | | | | | | |
46
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
| | | | | | |
| | | 2008 | | 2007 |
Cost: | | | | | | |
Buildings and leasehold improvement | | $ | 3,705,261 | | $ | 3,465,219 |
Plant and machinery | | | 11,451,662 | | | 9,583,421 |
Motor vehicles | | | 217,901 | | | 130,212 |
Office equipment and furnishings | | | 308,691 | | | 254,120 |
| | | | | | |
| | | 15,683,515 | | | 13,432,972 |
| | |
Less: Accumulated depreciation: | | | | | | |
| | |
Buildings and leasehold improvement | | | 691,039 | | | 560,107 |
Plant and machinery | | | 6,455,502 | | | 4,968,053 |
Motor vehicles | | | 53,403 | | | 55,914 |
Office equipment and furnishings | | | 167,978 | | | 132,283 |
| | | | | | |
| | | 7,367,922 | | | 5,716,357 |
| | | | | | |
Property, plant and equipment, net | | $ | 8,315,593 | | $ | 7,716,615 |
| | | | | | |
Depreciation expenses relating to property, plant and equipment was $1,248,342 and $1,034,084 for the year ended December 31, 2008 and 2007, respectively.
NOTE 6 – INVENTORIES
The inventories at December 31, 2008 and December 31, 2007 are summarized as follows:
| | | | | | |
| | | 2008 | | 2007 |
Raw materials | | $ | 183,232 | | $ | 288,656 |
Work-in-progress | | | 156,416 | | | 106,756 |
Finished goods | | | 701,980 | | | 482,304 |
| | | | | | |
| | $ | 1,041,628 | | $ | 877,716 |
| | | | | | |
NOTE 7 – PREPAYMENTS
The Group’s prepayment at December 31, 2008 and 2007 are summarized as follows:
| | | | | | |
| | | 2008 | | 2007 |
Advances to suppliers | | $ | 322,392 | | $ | 301,180 |
Prepaid expenses | | | 142,527 | | | 48,936 |
| | | | | | |
| | $ | 464,919 | | $ | 350,116 |
| | | | | | |
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NOTE 8 – INTANGIBLE ASSETS
At December 31, 2008 and 2007, the Group’s intangible assets are comprised of the following:
| | | | | | |
| | | 2008 | | 2007 |
Land use rights, at cost | | $ | 1,031,895 | | $ | 964,002 |
Sales network, at cost | | | 550,000 | | | 550,000 |
| | | | | | |
Intangible assets, at cost | | | 1,581,895 | | | 1,514,002 |
Less: Accumulated amortization, land use rights | | | 25,791 | | | — |
Less: Accumulated amortization, sales network | | | 443,200 | | | 260,000 |
| | | | | | |
Intangible assets, net | | $ | 1,112,904 | | $ | 1,254,002 |
| | | | | | |
LAND USE RIGHTS:
According to the Law in China, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over the lease term of 48 years. Since the related building will be completed in 2009 and operations will start in 2009, amortization will commence only in that year. The estimated amortization for each of the next five years will be approximately $25,800.
SALES NETWORK:
In 2006, the Company entered into an agreement with an unrelated third party by which it was agreed to purchase a sales network in order for us to develop the American market for our branded seafood products. The cost of the network, established at $550,000, is amortized on a 36 months period, starting in August 2006. The amortization of 2006 amounted to $76,800. The amortization of 2007 and 2008 amounted to $183,200. The amortization for 2009 will amount to $106,800.
NOTE 9 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 2008 and 2007 are summarized as follows:
| | | | | | |
| | | 2008 | | 2007 |
Accounts payables | | $ | 1,005,921 | | $ | 1,226,797 |
Other payables | | | 2,735,484 | | | 4,275,774 |
Accrued liabilities | | | 2,046,109 | | | 3,433,357 |
| | | | | | |
| | $ | 5,787,514 | | $ | 8,935,928 |
| | | | | | |
NOTE 10 – RELATED PARTY TRANSACTIONS
The net amounts due to related parties at December 31, 2008 and December 31, 2007 are non-interest bearing and are without terms of maturity. They consist mainly of net advances from shareholders of the Company and are shown in the current liabilities as management expects those advances to be repaid during the next year. The amounts due to directors of $698,429 was repaid subsequent to year-end.
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NOTE 11 – CONVERTIBLE PROMISSORY NOTES AND WARRANTS
Effective January 25, 2006, the Company closed on a financing transaction with a group of private investors for an amount of $5,225,000. After deducting commissions and other costs of the offering of $522,500, the Company received net proceeds of $4,702,500. The Notes matured January 25, 2008. The Notes were convertible into shares of the Company’s Common Stock at a per share conversion price at the rate of $6.00 per share of Common Stock. The Company followed EITF 00–27, the issue 98–5 model in recording the convertible notes and warrants in its financial statements. The Notes were accruing interest on the principal amount at a rate per annum of eight percent (8 percent) from January 25, 2006 payable in arrears, subject to the terms and conditions of the Notes, together with principal amount payments, up to January 25, 2008.
One Class A Warrant and one Class B Warrant were issued for each two shares of Common Stock which would be issued on the Closing Date assuming the complete conversion of the Note issued on the Closing Date at the rate of $6.00 per share of Common Stock. The exercise price to acquire a share of Common Stock upon exercise of a Class A or B Warrant shall be $6.00 . The Class A Warrants shall be exercisable until January 25, 2009 (three (3) years after the closing of the financing). The Class B Warrants shall be exercisable until January 25, 2011 (five (5) years after the closing of the financing). The Company also issued certain Finders’ Warrants to purchase 87,083 shares of Common Stock similar to and carrying the same rights as the Class B Warrants issuable to the Investors.
The offer and sale of the securities above were effected in reliance on the exemptions for sales of securities not involving a public offering, as set forth in Rule 506 promulgated under the Securities Act of 1933, as amended (the “Securities Act”) and in Section 4(2) and Section 4(6) of the Securities Act and/or Rule 506 of Regulation D.
The Company evaluated the convertible debt and warrants under the guide EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and potentially settled in, a Company’s Own Stock”, with regards to the control over the form of ultimate settlement of the instruments. The Company classified the warrants as equity under the guide EITF 00-19. The related registration statement became effective on June 15, 2006.
Furthermore, effective November 8, 2006, the Company completed another financing transaction with a group of private investors for an amount of $5,000,000, bearing interest at 6.5 percent per annum. The financing consisted of two components: (a) promissory notes of the Company, in the principal aggregate amount of $5,000,000 due November 1, 2009 and (b) warrants registered in the name of each Investor to purchase an aggregate of up to 200,000 shares of our Common Stock. The Notes are convertible into shares of the Company’s $0.001 par value Common Stock at a conversion price of $5.00 per share. The Warrants expire on the fifth (5th ) anniversary of the effective date of the reverse stock split. In 2008, 170,000 such warrants were exercised leaving a balance of 30,000 unexercised at December 31, 2008.The exercise price to acquire a share of Common Stock is equal to the Conversion Price under the Notes, currently at the rate of $5.00 per share of Common Stock.
49
NOTE 12 – INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
The Company’s subsidiaries registered in the PRC are subject to state and local income taxes within the PRC at the applicable tax rates on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign enterprises. On March 17, 2007, a new PRC Enterprise Income Tax Law (EIT) was promulgated and introduced a new uniform tax regime in the PRC. The EIT became effective on January 1, 2008. That new Law provides, amongst other issues, that income derived from processing of fishery products and processing of agricultural products will be exempt from the EIT tax rate. Starting in 2008, HQOF benefits from a “0” percent tax rate. Jiahua Marine was subject to a tax rate under the new law, which increased by 3 percent in 2008 and will increase gradually until it reaches a maximum of 25 percent in 2012.
The reconciliation of the effective income tax rate of the Company to the statutory income tax rate in the PRC for 2008 is as follows:
| | | | |
| | | HQOF | | Jiahua Marine |
Statutory tax rate | | 0 percent | | 18 percent |
Tax holidays and concessions | | — | | — |
| | | | |
Effective tax rate | | 0 percent | | 18 percent |
| | | | |
Income taxes are calculated on a separate entity basis. Currently there is no tax benefit or burden recorded for the United States.
NOTE 13 – DEFERRED TAX
Deferred tax assets as at December 31, 2008 and 2007 comprise the following:
| | | | | | | |
| | | 2008 | | | 2007 |
Balance at January 1 | | $ | 873,865 | | | $ | 817,577 |
Deferred tax written off for the year | | | (935,409 | ) | | | — |
Exchange difference transfer to exchange reserve | | | 61,544 | | | | 56,288 |
| | | | | | | |
Balance at December 31 | | $ | — | | | $ | 873,865 |
| | | | | | | |
Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to crystallize in the foreseeable future.
50
NOTE 14 – APPROPRIATION OF RETAINED EARNINGS (RESERVES)
The reserves are comprised of the following:
| | | | | | |
| | | 2008 | | 2007 |
Statutory surplus reserve | | $ | 5,460,527 | | $ | 3,556,975 |
Public welfare reserve | | | 1,064,042 | | | 1,064,042 |
Capital reserve | | | 36,946 | | | 36,946 |
| | | | | | |
| | $ | 6,561,515 | | $ | 4,657,963 |
| | | | | | |
The reserves are disclosed separately in the statement of changes in equity as appropriation of retained earnings. Pursuant to the relevant laws and regulations of Wholly Owned Foreign Enterprises, the profits of the companies, which are based on their PRC statutory financial statements, are available for distribution in the form of cash dividends after they have satisfied all the PRC tax liabilities, provided for losses of previous years, and made appropriations to reserves, as determined by the board of directors in accordance with the PRC accounting standards and regulations.
As stipulated by the relevant laws and regulations for enterprises operating in the PRC, HQOF and Jiahua Marine (both wholly-owned foreign enterprises) are required to make annual appropriations to two reserves, consisting of the statutory surplus reserve and public welfare reserve. In accordance with the relevant PRC regulations and the articles of association of the respective companies, the companies are required to allocate a certain percentage of their net income, as determined in accordance with the PRC accounting standards applicable to the companies, to the statutory surplus reserve until such reserve reaches 50 percent of the registered capital of the companies.
Net income as reported in the US GAAP financial statements differs from that reported in the PRC statutory financial statements. In accordance with the relevant laws and regulations in the PRC, profits available for distribution are based on the statutory financial statements. If HQOF has foreign currency available after meeting its operational needs, HQOF may make its profit distributions in foreign currency to the extent foreign currency is available. Otherwise, it is necessary to obtain approval and convert such distributions at an authorized bank.
51
NOTE 15 – EMPLOYEE STOCK OPTION PLAN
In December 2004, our board of directors ratified grants of non-qualified stock options to purchase shares of our common stock under our Stock Option Plan to some of our executive officers and directors, who qualify as employees for valuation purposes, as well as to several of our employees. The following number of share options and related values are shown after giving effect to the reverse stock split that occurred in January 2007. Each of these new stock options have up to a ten-year term, are subject to the terms and conditions of the Plan, and have an exercise price of $5.60. Specifically, Norbert Sporns, our Chief Executive Officer, President and director, received 25,000 stock options; Lillian Wang, the Chairman of our board of directors, received 25,000 stock options; Harry Wang, our Chief Operating Officer, director and brother of Ms. Wang, received 25,000 stock options; and Fusheng Wang, director (who resigned in 2006) and Honorary Chairman and father of Ms. Wang, received 50,000 stock options. Together, Norbert Sporns, Harry Wang and Lillian Wang also indirectly control the majority of capital stock of HQS. The stock options granted to each of them, as well as to Fusheng Wang, were fully vested when granted. In addition, our Chief Financial Officer, Jean-Pierre Dallaire, received 10,000 stock options. Mr. Dallaire’s options were vested in 2004 as to 50 percent of the grant, with the remaining 50 percent vesting as follows: 1/3 on June 16, 2005, 1/3 on June 16, 2006, and the remaining 1/3 on June 16, 2007. Further, at the same date, our board of directors ratified grants of stock options to thirteen other employees of HQS. These stock options were vested then as to 50 percent of each individual grant, with the remaining 50 percent vesting as follows: 1/3 on June 16, 2005, 1/3 on June 16, 2006, and the remaining 1/3 on June 16, 2007. In the case of one of the employees, the stock options were fully vested when granted.
Our board of directors believes that these stock option grants will help our company to continue to attract, retain and motivate our employees, directors and executive officers. In connection with these grants, our board of directors reserved 250,000 shares for issuance under the Plan. In addition, pursuant to the provisions of the Plan, our board of directors delegated the full power and authority to administer the Plan, in accordance with its terms, to our Compensation Committee presently consisting of Fred Bild, an independent director, and Daniel Too, also an independent director of HQS.
Information concerning the plan incentive and non-qualified stock options is as follows:
| | | | | |
| | | Options | | Exercise Price Per Share |
December 31, 2006 (Vested) | | 198,334 | | $ | 5.60 |
Options vested in 2007 | | 16,666 | | $ | 5.60 |
Options cancelled/forfeited | | — | | | |
Options exercised in 2007 | | 151,250 | | $ | 5.60 |
December 31, 2007 (Vested) | | 63,750 | | $ | 5.60 |
Options vested in 2008 | | — | | $ | 5.60 |
Options canceled/forfeited in 2008 | | — | | | |
Options exercised in 2008 | | 10,000 | | $ | 5.60 |
December 31, 2008 (Vested) | | 53,750 | | $ | 5.60 |
The table below summarizes information with respect to stock options outstanding as of December 31, 2008:
| | | | | | | | | |
Exercise Price | | Options Outstanding | | Remaining
Contractual Life | | Options
Exercisable | | Exercise Price of
Exercisable Options |
$ 5.60 | | 53,750 | | Up to June 2014 | | 53,750 | | $ | 5.60 |
The aggregate intrinsic value of the options outstanding as at December 31, 2008 is $119,862. Since no options were granted in 2007 and 2008, the weighted average fair value of options granted under the plan during fiscal years 2007 and 2008 was $NIL and $NIL, respectively.
The Company has ceased to follow Accounting Principles Board Opinion (APBO) No. 25 and related interpretations in accounting for its stock-based compensation made to its employees. APBO No. 25 requires no recognition of compensation expense for most of the stock-based compensation arrangements provided by the Company, namely, broad-based employee stock purchase plans and option grants where the exercise price is equal to or less than the market value at the date of grant. However, APBO No. 25 requires recognition of compensation expense for variable award plans over the vesting periods of such plans, based upon the then-current market values of the underlying stock. In contrast, Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123”, requires recognition of compensation expense for grants of
52
stock, stock options, and other equity instruments, over the vesting periods of such grants, based on the estimated grant-date fair values of those grants. The Company generally uses the straight-line method of amortization for stock-based compensation.
NOTE 16 – SIGNIFICANT CONCENTRATION
The Group grants credit to its customers, generally on an open account basis. The Group’s five largest customers accounted for 38.6 percent of the consolidated sales for the year ended December 31, 2008 and they are all related to the aquaculture product segment. At December 31, 2008, approximately 46.3 percent of trade receivables were from trade transactions with the aforementioned five largest customers.
For the year ended December 31, 2007, the Group’s five largest customers accounted for 38.6 percent of the consolidated sales for the year. At December 31, 2007, approximately 35.4 percent of trade receivables were from trade transactions with the aforementioned five largest customers.
NOTE 17 – WARRANTIES
The Group did not incur any warranty costs for both years ended December 31, 2008 and 2007.
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NOTE 18 – COMMITMENTS AND CONTINGENCIES
A. CAPITAL COMMITMENTS
As of December 31, 2008, there were capital commitments amounting to $3,195,890, which were mainly related to the construction work of the feed mill.
B. LEASE COMMITMENTS
The Company has entered into operating leases, for rental of office space and other services, which expire on different dates. The minimum future payments under these commitments for the next five years are as follows:
| | | |
2009 | | $ | 124,432 |
2010 | | | 124,432 |
2011 | | | 41,032 |
2012 | | | 41,032 |
2013 | | | 41,032 |
Thereafter | | | 430,832 |
| | | |
Total | | $ | 802,792 |
C. LEGAL PROCEEDINGS
We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
NOTE 19 – CAPITAL STRUCTURE
Common stock consists of authorized shares of 200,000,000 with a par value of $0.001 per share. Common stock issued and outstanding as of December 31, 2008 and 2007 was 12,085,846 and 11,511,317, respectively.
Preferred stock consists of authorized shares of 10,000,000 with a par value of $0.001 per share. Preferred shares amounting to 100,000 have been designated as Series A preferred stock. The Series A preferred stock is entitled to superior voting rights and is also convertible into common shares.
During the years ended December 31, 2008 and 2007, the Company issued 574,529 and 5,094,461 common shares for net proceeds of $6,658,567 and $32,866,506, respectively. The amounts recorded in the accompanying financial statements are net of costs incurred in raising capital.
54
NOTE 20 – EARNINGS PER SHARE
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed by adjusting the weighted average common shares outstanding assuming conversion of all potentially dilutive convertible securities
The following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per share (EPS) computation at December 31, 2008.
| | | | | | |
| | | 2008 |
| | | Income
(Numerator) | | Shares
(Denominator) | | Per Share
Amount |
Basic EPS | | | | | | |
Net income available to common shareholders | | 10,040,688 | | 11,905,739 | | 0.843 |
Effect of dilutive securities stock options issued to employees and investors | | 325,000 | | 1,292,689 | | — |
| | | | | | |
| | | |
Diluted EPS | | | | | | |
Net income available to common stockholders plus assumed conversions | | 10,365,688 | | 13,198,438 | | 0.785 |
| | | | | | |
NOTE 21 – CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Group faces a number of risks and challenges since its operations are in the PRC. The Group’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. The Group’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
NOTE 22 – SUBSEQUENT EVENT
On February 2, 2009, the Board of Directors approved the 2009 Stock Option Plan which will attribute 971,000 shares to employees of the Company. There was consequently a similar amount of shares reserved for issuance under that 2009 stock option plan. No grants are attributed yet and consequently no financial impact was recognized in the financial statements for the year ended December 31, 2008.
55
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that as of the end of such period such disclosure controls and procedures were effective to provide reasonable assurance that they were reasonably designed to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission and (ii) is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during the fourth quarter of 2008 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting is set forth in Part II, Item 8 of this Annual Report on Form 10-K.
| ITEM 9B. | OTHER INFORMATION |
None.
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PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE. |
Executive Officers, Directors and Key Employees
Our executive officers and directors, and their ages and positions as of December 31, 2008 are as follows:
| | | | |
| Name | | Age | | Position |
Lillian Wang Li | | 52 | | Chairman of the Board of Directors and Secretary and Director |
Norbert Sporns | | 55 | | Chief Executive Officer, President and Director |
Harry Wang Hua | | 46 | | Chief Operating Officer and Director |
Jean-Pierre Dallaire | | 57 | | Chief Financial Officer and Financial Controller |
Trond Ringstad | | 41 | | Executive Vice-President Sales and Distribution |
Andrew Intrater | | 46 | | Independent non-executive Director |
Fred Bild | | 73 | | Independent non-executive Director |
Joseph I. Emas | | 54 | | Independent non-executive Director |
Daniel Too | | 57 | | Independent non-executive Director |
Our other key employees and their ages and positions as of December 31, 2008 are as follows:
| | | | |
| Name | | Age | | Position |
William Sujian | | 39 | | International Sales and Compliance Officer |
He Jian Bo | | 41 | | Manager Finance Department |
Biographies
Lillian Wang Li—Chairman of Board of Directors and Secretary—Ms. Wang Li is one of our founders, and has served as our Secretary and Chairman of our board of directors since March 2004, when we effected the reverse merger with Process Equipment, Inc. Prior to joining HQS, between June 1994 and March 2004, she worked for SSC where her responsibilities included project development and financing, particularly in relation to China projects using Western technologies. She is responsible for the general administration, strategic planning and financial management of HQS. She has over twenty five years of experience in management of China and Canadian businesses, particularly with respect to financial matters.
Norbert Sporns—Chief Executive Officer, President and Director—Mr. Sporns is one of our founders, and has served as our Chief Executive Officer and President and as a director since March 2004. Prior to joining HQS, between June 1994 and March 2004, he worked for SSC, where he was instrumental in completing Western sourced funding for China projects, as well as interfacing with Western technology providers managing Western supply and systems deployment in China. Mr. Sporns is also the Chief Executive Officer of Red Coral Group Limited from February 2003 to date. He has extensive experience in project development and investment consultancy.
Harry Wang Hua—Chief Operating Officer and Director—Mr. Wang Hua is one of our founders, and has served as our Chief Operating Officer and as a director since March 2004. He is responsible for the establishment of the production facilities and their operation at HQS. Mr. Wang also leads our plant management teams and our sales teams. Mr. Wang has over fifteen years of experience in managing startup companies in China and in Canada and also has expertise in training middle managers in China in accordance with Western management standards. Prior to joining HQS, between June 1994 and March 2004, he was a director of SSC, where his primary task was to identify China projects for where Western technologies and funding were available. Mr. Wang Hua is also a director of Red Coral Group Limited from June 1994 to date.
Jean-Pierre Dallaire—Chief Financial Officer and Financial Controller—Mr. Dallaire is our Chief Financial Officer and Financial Controller. Prior to joining HQS in September 2004, he worked for SSC from June 2000 to September 2004, in the position of the Chief Financial Officer. Prior to that, Mr. Dallaire worked for Canada’s largest engineering company, SNC Lavalin Group, where he was responsible for cash flow projections and financial supervision of projects.
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Trond Ringstad—Executive Vice-President, Sales and Distribution—Mr. Ringstad joined us in June 2006 as our Executive Vice-President Sales and Distribution. He leads our sales and marketing activities from our headquarters in Seattle, Washington. Prior to joining us, from February 2004 through July 2006, he was President and the owner of Pacific Supreme Seafoods. Prior to that, Mr. Ringstad was Vice President Sales and Marketing for Royal Supreme Foods, a seafood importer and sales company, from May 2001 to February 2004. He has over ten years of seafood sales experience and has been a pioneer in selling tilapia in the United States.
Fred Bild—Independent non-executive Director—Mr. Bild has been our director since June 2004. He is currently a Visiting Professor at the University of Montreal where he has taught since January 1995. For over thirty-six years, Mr. Bild has served as a Canadian diplomat in Ottawa and in various functions at embassies abroad including Cultural Attaché (Tokyo), Economic Counselor and Deputy Chief of Mission (Paris) and Canadian Ambassador to Thailand, China and Mongolia.
Daniel Too—Independent non-executive Director—Mr. Too has been our director since September 2004. He has extensive business experience in Asia and possesses a deep understanding of the business difficulties associated with working in China. He had been the Managing Director of Delta Elevator Far East and until recently Mr. Too also serves as Director of Voker Chemical Paint Limited.
Joseph I. Emas—Independent non-executive Director—Mr. Emas has been a director since May 18, 2007. Mr. Emas is licensed to practice law in Florida, New Jersey and New York and has served as our general counsel since August 17, 2005. Since 2001, Mr. Emas has been the senior partner of Joseph I. Emas, P.A. Mr. Emas specializes in securities regulation, corporate finance, mergers and acquisitions and corporate law. Mr. Emas received his Honors BA at University of Toronto, Bachelor of Administrative Studies, with distinction, at York University in Toronto, his JD, cum laude from Nova Southeastern Shepard Broad Law School and his L.L.M. in Securities Regulation at Georgetown University Law Center. Mr. Emas was an Adjunct Professor of Law at Nova Southeastern Shepard Broad Law School. Mr. Emas received the William Smith Award, Pro Bono Advocate for Children in 2000 and the 2006 Child Advocacy Award in Florida and is the author of “Update of Juvenile Jurisdiction Florida Practice in Juvenile Law.” Mr. Emas was been a member of the Juvenile Court Rules Committee for the State of Florida from 1999 through 2006, and currently sits on the Florida Child Advocacy Committee.
Andrew Intrater—Independent non-executive Director— Mr. Intrater has been a director since June 1, 2007. Mr. Intrater is the Chairman and CEO of Columbus Acquisition Corp. and the Chief Executive Officer of Columbus Nova, a private investment firm with offices in New York, Los Angeles, Charlotte and Moscow where he has held this position since Columbus Nova’s inception in January 2000. Columbus Nova manages in excess of $2 billion of investor capital and debt in a variety of credit and private equity businesses. Mr. Intrater also serves as the Senior Managing Partner of Columbus Nova’s investment business, including Columbus Nova Capital and Columbus Nova Opportunity Fund, and is a former Director of Renova Group of companies. Columbus Nova is the U.S.-based affiliate of the Renova Group, one of the largest Russian strategic investors in the metallurgical, oil, machine engineering, mining, chemical, construction, housing & utilities and financial sectors, with net assets of over $9 billion. From 1985 to 2000, Mr. Intrater served as President and Chief Operating Officer of Oryx Technology Corp., and its predecessor, ATI, a leading manufacturer of semi-conductor testing equipment, based in Silicon Valley. Mr. Intrater serves as Chairman of the board of directors of Moscow Cablecom Corp., a company listed on the Nasdaq Global Market. Mr. Intrater is also a member of the board of directors of Oryx Technology Corp., Clareos, Inc. and Ethertouch, Ltd. Mr. Intrater received a B.S. from Rutgers University.
William Sujian—International Sales and Compliance Officer—Mr. Sujian joined HQS in July 2004, and is currently our International Sales and Compliance Officer. He has over 12 years of experience in international trade and project development. He is familiar with both Western and Asian business practices. His functions include the supervision of the China based sales team and supervision of compliance with our code of ethics and business conduct. Prior to 2002, Mr. Sujian worked for SSC in the position of the General Manager for China.
58
He Jian Bo—Manager Finance Department—Mr. Jian Bo joined us in July 2002. He is currently the Manager of the Finance Department of HQS. Prior to joining us, he worked for several years for PricewaterhouseCoopers and was responsible for the restructuring of companies in China.
See “Certain Relationships and Related Transactions—Family Relationships” for a description of family relationships among certain of our executive officers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who beneficially own more than 10% of any class of our equity securities, who collectively we generally refer to as insiders, to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of common stock and other equity securities of the company. Our insiders are required by SEC regulation to furnish us with copies of all Section 16(a) reports they file. Based solely upon a review of the copies of the forms furnished to us, we believe that the following insiders made late filings for the 2008 fiscal year and prior years.
| | • | | Jean-Pierre Dallaire timely filed a Form 5 to report one late transaction and his status as an insider. |
| | • | | Andrew Intrater timely filed a Form 5 to report one late transaction and his status as an insider. |
| | • | | Trond Ringstad filed one late filing to report his status as an insider. |
| | • | | Daniel Too filed two late filing to report five late transactions and his status as an insider. |
In addition, based on information we received from certain insiders, we believe that certain insiders will file late filings in the near future to report late transactions for the 2008 fiscal year and prior years. These late filings will be disclosed in our Proxy Statement for the 2009 Annual Meeting of Stockholders and the Form 10-K for the fiscal year ended December 31, 2009.
Compensation of Directors
Our bylaws provide that, unless otherwise restricted by our certificate of incorporation, our board of directors has the authority to fix the compensation of directors. The directors may be paid their expenses, if any, related to attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as our director. Our bylaws further provide that no such payment will preclude any director from serving our company in any other capacity and receiving compensation therefore. Further, members of special or standing committees may be given compensation for attending committee meetings.
In addition, effective in 2004, our non-employee directors, Messrs. Bild and Too, have entered into independent non-executive director agreement with us. The non-executive director agreement between Mr. Bild and us became effective in June 2004 while the agreement with Mr. Too became effective on September 2, 2004. Under these agreements, each non-employee director agreed to serve as our non-executive independent director commencing in 2004, until the next meeting of our shareholders, unless terminated earlier, provided, however, that during such term of service the directors may also hold officer and non-executive director positions at other entities not affiliated with us. In consideration of the directors’ services under these agreements, during their respective terms, we agreed to pay each director pro rata quarterly portions of a total annual cash fee of $15,000. Such base annual fee is increased annually, on January 1 of each calendar year, by not less than ten percent (10 percent). Our board of directors, in its discretion, may approve an increase of such annual base fee in excess of ten percent (10 percent). During the respective terms of these agreements, we also agreed to pay each director an annual bonus of not less than $15,000 payable in shares of our common stock. We also agreed to reimburse any reasonable expenses paid or incurred by each non-employee director in connection with the performance of his duties and responsibilities for us.
Furthermore, in 2008, our two other non-employee directors, Messrs. Intrater and Emas have entered into independent non-executive agreement with us. The non-executive director agreement between Messrs. Intrater, Emas and us became effective in August 2008. Under these agreements, each of those two non-employee director agreed to serve as our non-executive independent director commencing in 2008, until the next meeting of our shareholders, unless terminated earlier, provided, however, that during such term of service the directors may also hold officer and non-executive director positions at other entities not affiliated with us. In consideration of the directors’ services under these agreements, during their respective terms, we agreed to pay each director pro rata quarterly portions of a total annual cash fee of $30,000 for Mr. Intrater ant $20,000 for Mr. Emas. Such base annual fee is increased annually, on January 1 of each calendar year, by not less than ten percent (10 percent). Our board of directors, in its discretion, may approve an increase of such annual base fee in excess of ten percent (10 percent).
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During the respective terms of these agreements, we also agreed to pay each director an annual bonus of not less than $20,000 payable in shares of our common stock. We also agreed to reimburse any reasonable expenses paid or incurred by each non-employee director in connection with the performance of his duties and responsibilities for us.
Board Committees and Independence
All of our directors serve until the next annual meeting of shareholders and until their successors are elected by the holders of our common stock, or until their earlier death, retirement, resignation or removal. Our bylaws set the authorized number of directors at not less than one or more than nine, with the actual number fixed by our board of directors. Currently, our board of directors consists of seven members. Our bylaws authorized the board of directors to designate from among its members one or more committees and alternate members thereof, as they deem desirable, each consisting of one or more of the directors, with such powers and authority (to the extent permitted by law and these bylaws) as may be provided in such resolution.
Our board of directors has established two committees to date, an audit committee and a compensation committee. The audit committee consists of Messrs. Andrew Intrater, Fred Bild and Daniel Too, and the compensation committee consists of Messrs. Fred Bild and Daniel Too. Our board of directors has determined that each of these directors is “independent” within the meaning of the applicable rules and regulations of the SEC and the American Stock Exchange.
In addition, we believe one of our independent directors, Mr. Andrew Intrater, qualifies as an “audit committee financial expert” as the term is defined by the applicable SEC rules and regulations and American Stock Exchange listing standards, which we believe is consistent with his experience. In the course of his career, Mr. Intrater serves as the Senior Managing Partner at Columbus Nova’s investment business and is the Chief Executive Officer of Columbus Nova, a private investment firm. At the time of the listing of our common stock on the American Stock Exchange, we were required to certify to the American Stock Exchange that our audit committee has, and will continue to have, at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individual’s financial sophistication.
Audit Committee
The audit committee assists our board of directors in its oversight of the company’s accounting and financial reporting processes and the audits of the company’s financial statements, including (i) the quality and integrity of the company’s financial statements, (ii) the company’s compliance with legal and regulatory requirements, (iii) the independent auditors’ qualifications and independence and (iv) the performance of the company’s internal audit functions and independent auditors, as well as other matters which may come before it as directed by the board of directors. Further, the audit committee, to the extent it deems necessary or appropriate, among its several other responsibilities, shall:
| | • | | be responsible for the appointment, compensation, retention, termination and oversight of the work of any independent auditor engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company; |
| | • | | discuss the annual audited financial statements and the quarterly unaudited financial statements with management and the independent auditor prior to their filing with the SEC in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q; |
| | • | | review with the company’s financial management on a periodic basis (a) issues regarding accounting principles and financial statement presentations, including any significant changes in the company’s selection or application of accounting principles, and (b) the effect of any regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the company; |
| | • | | monitor the Company’s policies for compliance with federal, state, local and foreign laws and regulations and the Company’s policies on corporate conduct; |
| | • | | maintain open, continuing and direct communication between the board of directors, the Committee and both the company’s independent auditors and its internal auditors; and |
| | • | | Monitor our compliance with legal and regulatory requirements, with the authority to initiate any special investigations of conflicts of interest, and compliance with federal, state and local laws and regulations, including the Foreign Corrupt Practices Act. |
Mr. Intrater is the chairman of our audit committee, and the other members are Messrs. Bild and Too.
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Compensation Committee
The compensation committee aids our board of directors of directors in meeting its responsibilities relating to the compensation of the company’s executive officers and to administer all incentive compensation plans and equity-based plans of the company, including the plans under which company securities may be acquired by directors, executive officers, employees and consultants. Further, the compensation committee, to the extent it deems necessary or appropriate, among its several other responsibilities, shall:
| • | | review periodically the company’s philosophy regarding executive compensation to (i) ensure the attraction and retention of corporate officers; (ii) ensure the motivation of corporate officers to achieve the Company’s business objectives, and (iii) align the interests of key management with the long-term interests of the Company’s shareholders; |
| • | | review and approve corporate goals and objectives relating to Chief Executive Officer compensation and other executive officers of the company; |
| • | | make recommendations to the board of directors regarding compensation for non-employee directors, and review periodically non-employee director compensation in relation to other comparable companies and in light of such factors as the Committee may deem appropriate; and |
| • | | Review periodically reports from management regarding funding of the company’s pension, retirement, long-term disability and other management welfare and benefit plans. |
Mr. Too is the chairman of our compensation committee, and the other member is Mr. Bild.
Code of Ethics
We have adopted a code of ethics that applies to all of our executive officers, directors and employees. Code of ethics codifies the business and ethical principles that govern all aspects of our business. This document will be made available in print, free of charge, to any shareholder requesting a copy in writing from our Secretary at our U.S. headquarters in Seattle, Washington. A copy of our code of ethics is available on our website at www.hqfish.com, under “Investor Relations—Corporate Governance—Code of Ethics.”
| ITEM 11. | EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
Executive Compensation Philosophy
Our compensation program is designed to attract, retain and motivate highly qualified executives and drive sustainable growth. We compensate our executives named in the summary compensation table, which we refer to as “named executive officers or NEOs,” through a combination of base salary, incentive, and discretionary cash bonuses. This compensation program is designed to be competitive with comparable companies and to align executive compensation with the long-term interests of our owner. Base salary and incentive compensation (cash bonuses) are designed to reward current performance. Incentive compensation is earned on the basis of achieving Company and operating level performance objectives, personal performance objectives, and the executive’s adherence to our core values.
Elements of Our Compensation
The compensation framework for our named executive officers consists of the following three key elements:
| • | | Annual cash bonuses and other special cash bonuses, as warranted; and |
| • | | Long-term incentives (including the annual grant of stock options and/or restricted stock units) |
In addition to these key elements of compensation, our compensation framework includes limited fringe benefits, perquisites, severance and other benefits
Base Salaries
Our named executive officers receive a majority of their overall cash compensation as base salary. Generally, base salaries have not been based upon specific measures of corporate performance, but are determined upon the recommendations of the chief executive officer, based upon his determination of each employee’s individual performance, position and responsibilities, and contributions to both our financial performance and ethical culture. We generally seek to position base salary at the market median of the peer group.
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Annual Bonuses
Annual cash bonuses, if any, to our named executive officers are intended to reward company-wide performance and, to a lesser extent, individual performance during the year
Long-Term Incentives
The Committee believes that the grant of non-cash, long-term compensation, primarily in the form of long-term incentive awards, to our named executive officers is appropriate to attract, motivate and retain such individuals, and enhance stockholder value through the use of non-cash, equity incentive compensation opportunities. The Committee believes that our best interests will be advanced by enabling our named executive officers, who are responsible for our management, growth and success, to receive compensation in the form of long-term incentive awards. Since long-term awards will increase in value in conjunction with an increase in the value of our common stock, the awards are designed to provide our named executive officers with an incentive to remain with us.
Prohibition Against Speculative Transactions
Our Code of Business Conduct and Ethics, which applies to all of our employees and directors, prohibits speculative transactions in our stock such as short sales, puts, calls or other similar options to buy or sell our stock.
Guidelines For Trades By Insiders
We maintain policies that govern trading in our stock by officers and directors required to report under Section 16 of the Exchange Act, as well as certain other employees who regularly have access to material non-public information about us. These policies include pre-approval requirements for all trades and periodic trading “black-out” periods designed with reference to our quarterly financial reporting schedule. We also require pre-approval of all trading plans adopted pursuant to Rule 10b5-1 promulgated under the Exchange Act. To mitigate the potential for abuse, no trades are allowed under a plan within 30 days after adoption. We discourage termination or amendment of plans by prohibiting trades under new or amended plans within 90 days following a plan termination or amendment.
Conclusion
The foregoing discussion describes the compensation objectives and policies which were utilized with respect to our named executive officers during 2008 and our intended compensation framework for 2008. In the future, as the Compensation Committee continues to review each element of the executive compensation program with respect to our named executive officers, the objectives of our executive compensation program, as well as the methods which the Compensation Committee utilizes to determine both the types and amounts of compensation to award to our named executive officers, may change.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
Fred Bild
Daniel Too
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The following table sets forth for the years ended December 31, 2008, 2007 and 2006 the compensation awarded to, paid to, or earned by, our Chief Executive Officer and our three other most highly compensated executive officers whose total compensation during the last fiscal year exceeded $100,000.
Executive Compensation Tables
2008 SUMMARY COMPENSATION TABLE
| | | | | | | | | | | | | | | | | | |
Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Stock
Awards
($) | | Option
Awards
($) | | Non-Equity
Incentive
Plan
Compensation
($) | | Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($) | | All Other
Compensation
($) | | Total
($) |
Norbert Sporns
Chief Executive Officer | | 2008
20072006 | | 219,615
199,650
181,500 | | 73,205
66,550
60,500 | | | | | | | | | | 33,210
31,800
26,340 | | 326,030
298,000
268,340 |
| | | | | | | | | |
Lillian Wang Li
Chairman of the Board | | 2008
20072006 | | 219.615
199,650
181,500 | | 146,410
133,100
121,000 | | | | | | | | | | 33,210
31,800
26,340 | | 399,235
364,550
328,840 |
| | | | | | | | | |
Harry Wang Hua
Chief Operating Officer | | 2008
20072006 | | 146,410
133,100
121,000 | | 146,410
133,100
121,000 | | | | | | | | | | —
— — | | 292,820
266,200
242,000 |
| | | | | | | | | |
Jean-Pierre Dallaire
Principal Financial Officer/Principal Accounting Officer | | 2008
20072006 | | 146,410
133,100121,100 | | 36,492
33,275
30,250 | | | | | | | | | | 47,330
35,76027,315 | | 230,232
202,565178,565 |
| | | | | | | | | |
| | | | — | | —
— — | | | | | | | | | | —
— — | | |
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2008 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
| | | | | | | | | | | | | | | | | | |
| | | Option Awards | | Stock Awards |
| | | Number of
Securities
Underlying
Unexercised
Options
(#) | | Number of
Securities
Underlying
Unexercised
Options
(#) | | Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#) | | Option
Exercise
Price
($) | | Option
Expiration
Date | | Number of
Shares or
Units of
Stock That
Have Not
Vested
(#) | | Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($) | | Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units
or Other
Rights That
Have Not
Vested
(#) | | Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($) |
Name | | Exercisable | | Unexercisable | | | | | | | | | | | | | | |
Norbert Sporns
Chief Executive Officer | | | | — | | — | | 5.60 | | 06/2014 | | — | | — | | — | | — |
| | | | | | | | | |
Lillian Wang Li
Chairman of the Board of Directors | | | | — | | — | | 5.60 | | 06/2014 | | — | | — | | — | | — |
| | | | | | | | | |
Harry Wang Hua
Chief Operating Officer | | | | — | | — | | 5.60 | | 06/2014 | | — | | — | | — | | — |
| | | | | | | | | |
Jean-Pierre Dallaire
Principal Financial Officer/Principal Accounting Officer | | | | — | | — | | 5.60 | | 06/2014 | | — | | — | | — | | — |
| | | | | | | | | |
| | — | | — | | — | | — | | — | | — | | — | | — | | — |
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2008 OPTION EXERCISES AND STOCK VESTED TABLE
| | | | | | | | |
| | | Option Awards | | Stock Awards |
Name | | Number of
Shares
Acquired on Exercise
(#) | | Value
Realized
on Exercise
($) | | Number of
Shares
Acquired on Vesting
(#) | | Value
Realized
on Vesting
($) |
Norbert Sporns
Chief Executive Officer | | | | NIL | | — | | — |
| | | | |
Lillian Wang Li
Chairman of the Board of Directors | | | | NIL | | — | | — |
| | | | |
Harry Wang Hua
Chief Operating Officer | | | | | | — | | — |
| | | | |
Jean-Pierre Dallaire
Principal Financial Officer/Principal Accounting Officer | | 10,000 | | 6,918 | | — | | — |
| | | | |
| | — | | — | | — | | — |
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2008 PENSION BENEFITS TABLE
| | | | | | | | |
Name | | Plan
Name | | Number of
Years
Credited
Service
(#) | | Present
Value
of Accumulated
Benefit
($) | | Payments During
Last
Fiscal Year
($) |
Norbert Sporns
Chief Executive Officer | | — | | — | | — | | — |
| | | | |
Lillian Wang Li
Chairman of the Board of Directors | | — | | — | | — | | — |
| | | | |
Harry Wang Hua
Chief Operating Officer | | — | | — | | — | | — |
| | | | |
Jean-Pierre Dallaire
Principal Financial Officer/Principal Accounting Officer | | — | | — | | — | | — |
| | | | |
| | — | | — | | — | | — |
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2008 NONQUALIFIED DEFERRED COMPENSATION TABLE
| | | | | | | | | | |
Name | | Executive Contributions
in Last Fiscal Year
($) | | Registrant
Contributions in
Last
Fiscal Year
($) | | Aggregate Earnings
in Last Fiscal
Year
($) | | Aggregate
Withdrawals /
Distributions
($) | | Aggregate Balance
at Last Fiscal
Year-End
($) |
Norbert Sporns
Chief Executive Officer | | — | | — | | 292,820 | | 822,270 | | NIL |
| | | | | |
Lillian Wang Li
Chairman of the Board of Directors | | — | | — | | 366,025 | | 1,113,774 | | NIL |
| | | | | |
Harry Wang Hua
Chief Operating Officer | | — | | — | | 292,820 | | NIL | | 1,133,540 |
| | | | | |
Jean-Pierre Dallaire
Principal Financial Officer/Principal Accounting Officer | | — | | — | | 182,902 | | 265,328 | | 16,468 |
| | | | | |
| | — | | — | | | | | | — |
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2008 DIRECTOR COMPENSATION TABLE
| | | | | | | | | | | | | | |
Name | | Fees Earned
or
Paid in Cash
($) | | Stock Awards
($) | | Option Awards
($) | | Non-Equity
Incentive
Plan
Compensation
($) | | Change
in Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($) | | All Other
Compensation
($) | | Total
($) |
Norbert Sporns | | — | | — | | — | | — | | — | | 33,210 | | 33,210 |
| | | | | | | |
Lillian Wang Li | | — | | — | | — | | — | | — | | 33,210 | | 33,210 |
| | | | | | | |
Harry Wang Hua | | — | | — | | — | | — | | — | | — | | — |
| | | | | | | |
Fred Bild | | 28,280 | | 15,000 | | — | | — | | — | | — | | 43,280 |
| | | | | | | |
Daniel Too | | 28,280 | | 15,000 | | — | | — | | — | | — | | 43,280 |
| | | | | | | |
Andrew Intrater | | 45,000 | | 20,000 | | — | | — | | — | | — | | 65,000 |
| | | | | | | |
Joseph I Emas | | 30,000 | | 20,000 | | — | | — | | — | | — | | 50,000 |
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2008 ALL OTHER COMPENSATION TABLE
| | | | | | | | | | | | | | | | |
Name | | Year | | Perquisites
and Other
Personal
Benefits
($) | | Tax
Reimbursements
($) | | Insurance
Premiums
($) | | Company
Contributions
to Retirement
and
401(k) Plans
($) | | Severance
Payments /
Accruals
($) | | Change
in Control
Payments /
Accruals
($) | | Total
($) |
Norbert Sporns
Chief Executive Officer | | 2008
2007 | | 33,210
31,800 | | —
— | | —
— | | —
— | | —
— | | —
— | | 33,210
31,800 |
| | | | | | | | |
Lillian Wang Li
Chairman of the Board | | 2008
2007 | | 33,210
31,800 | | —
— | | —
— | | —
— | | —
— | | —
— | | 33,210
31,800 |
| | | | | | | | |
Harry Wang Hua
Chief Operating Officer | | 2008
2007 | | —
— | | —
— | | —
— | | —
— | | —
— | | —
— | | —
— |
| | | | | | | | |
Jean-Pierre Dallaire
Principal Financial Officer/Principal Accounting Officer | | 2008
2007 | | 41,690
35,760 | | —
— | | 5,640
6,400 | | —
— | | —
— | | —
— | | 47,330
42,610 |
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2008 PERQUISITES TABLE
| | | | | | | | | | | | |
Name | | Year | | Personal Use of
Company
Car/Parking | | Financial Planning/
Legal Fees | | Club Dues | | Executive
Relocation | | Total Perquisites
and
Other Personal
Benefits |
Norbert Sporns
Chief Executive Officer | | 2008
2007 | | —
— | | —
— | | —
— | | —
— | | —
— |
| | | | | | |
Lillian Wang Li
Chairman of the Board | | 2008
2007 | | —
— — | | —
— — | | —
— — | | —
— — | | —
— — |
| | | | | | |
Harry Wang Hua
Chief Operating Officer | | 2008
2007 | | | | | | —
— | | —
— | | —
— |
| | | | | | |
Jean-Pierre Dallaire
Principal Financial Officer/Principal Accounting Officer | | 2008
2007 | | — — | | — — | | — — | | — — | | — — |
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2008 POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
| | | | | | | | | | | | | | |
Name | | Benefit | | Before
Change in
Control
Termination
w/o Cause or
for
Good Reason | | After Change
in
Control
Termination
w/o Cause or
for Good
Reason | | Voluntary
Termination | | Death | | Disability | | Change in
Control |
Norbert Sporns
Chief Executive Officer | | Basic salary
Bonus | | 219,615
73,205 | | | | | | | | | | 1,572,112
524,035 |
| | | | | | | |
Lillian Wang Li
Chairman of the Board | | Basic salary
Bonus | | 219,615
146,410 | | | | | | | | | | 1,572,112
1,048,070 |
| | | | | | | |
Harry Wang Hua
Chief Operating Officer | | Basic salary
Bonus | | 146,410
146,410 | | | | | | | | | | 1,048,070
1,048,070 |
| | | | | | | |
Jean-Pierre Dallaire
Principal Financial Officer/Principal Accounting Officer | | Basic salary
Bonus | | 146,410
36,492 | | | | | | | | | | 107,367
26,761 |
Director Compensation
Unless otherwise restricted by the certificate of incorporation, the members of board of directors have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated amount as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation thereafter. Members of special or standing committees may be allowed, like, for example, compensation for attending committee meetings. The annual remuneration of our independent non-executive directors Fred Bild, and Daniel Too was $15,000 plus an annual bonus to them of not less than $15,000 payable in shares of our common stock. Andrew Intrater is remunerated on the basis of $30,000 per year in cash plus an annual bonus of $20,000 payable in shares of our common stock while Joseph Emas is remunerated on the basis of $20,000 in cash per year plus an annual bonus of $20,000 payable in shares of our common stock.
Audit Committee Financial Expert
As stated above, we appointed four independent non-executive directors to our Board of Directors. We consider one of our independent directors, Mr. Andrew Intrater to be an audit committee financial expert within the meaning of the applicable Securities and Exchange Commission rules and regulations.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Messrs. Bild and Too. None of the members of the Compensation Committee is a current or former officer or employee of the Company or any of our subsidiaries. There are no compensation committee interlocks or insider participation in compensation decisions that are required to be disclosed in this Annual Report on Form 10-K.
Employment Agreements
The following information summarizes the employment agreements we entered into with Lillian Wang Li, our Chairman and Secretary, Harry Wang Hua, our Chief Operating Officer, Norbert Sporns, our Chief Executive Officer and President, Jean-Pierre Dallaire, our Chief Financial Officer and Financial Controller, and Trond Ringstad, our Executive Vice-President Sales and Distribution.
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Lillian Wang Li. Under Ms. Wang’s employment agreement, she has agreed to serve as the Chairman of our board of directors and Secretary. Her term of service under this agreement commenced on April 1, 2004 and continues for a term of five (5) years. The agreement provides for a base salary of $150,000 for the first year of the term and an annual increase of at least 10 percent thereafter. The agreement also provides Ms. Wang with an annual bonus of at least $100,000, and this amount may be increased subject to the decision of our board of directors. The agreement also provides for a grant of options to purchase shares of our common stock. The options include an option to purchase an aggregate of twenty percent (20 percent) of the then fully diluted shares of our common voting stock made available under our 2004 Stock Incentive Plan, and, at the beginning of each calendar quarter, an option to purchase an aggregate of five percent (5 percent) of the then fully diluted shares of our common voting stock made available under our 2004 Stock Incentive Plan. No shares of common stock were made available for option grants since the initial grants in 2004, and therefore no option grants were made to Ms. Wang. We and Ms. Wang have an understanding that she would waive any right she might have to receive any options during year 2005 and through the present date under our 2004 Stock Incentive Plan. Each option grant must be evidenced by an option agreement substantially identical to the form included in the employment agreement. The options granted under the employment agreement will have an exercise price of the fair market value per share of our common voting stock on the date the option is granted. We can terminate Ms. Wang’s employment with cause, or without cause upon at least ninety days’ written notice. In the event Ms. Wang’s employment is terminated without cause, she will be eligible to receive (1) monthly payments at her then applicable monthly base salary for the rest of her term from the date of termination of her employment; (2) an annual bonus of $50,000 for the rest of her term from the date of termination of her employment; (3) the value of any earned, but unused vacation days; (4) continued coverage under our company’s benefits plan; and (5) severance in an amount equal to her annual base salary in effect immediately prior to her last date of employment.
Harry Wang Hua. Under Mr. Wang’s employment agreement, he has agreed to serve as our Chief Operating Officer. His term of service under this agreement commenced on April 1, 2004 and continues for a term of five (5) years. The agreement also provides for a base salary of $100,000 for the first year of the term and an annual increase of at least 10 percent thereafter. The agreement also provides Mr. Wang with an annual bonus of at least $100,000, and this amount may be increased subject to the decision of our board of directors. The agreement also provides for the grant of options to purchase shares of our common stock. The options include an option to purchase an aggregate of twenty percent (20 percent) of the then fully diluted shares of our common voting stock made available under our 2004 Stock Incentive Plan, and, at the beginning of each calendar quarter, an option to purchase an aggregate of five percent (5 percent) of the then fully diluted shares of our company’s common voting stock made available under the 2004 Stock Incentive Plan. No shares of common stock were made available for option grants since the initial grants in 2004, and therefore no option grants were made to Mr. Wang. We and Mr. Wang have an understanding that he would waive any right he might have to receive any options during year 2005 and through the present date under our 2004 Stock Incentive Plan. Each option grant must be evidenced by an option agreement substantially identical to the form included in the employment agreement. The options granted under the employment agreement will have an exercise price of the fair market value per share of our common voting stock on the date the option is granted. We can terminate Mr. Wang’s employment with cause, or without cause upon at least ninety days’ written notice. In the event Mr. Wang’s employment is terminated without cause, he will be eligible to receive (1) monthly payments at his then applicable monthly base salary for the rest of his term from the date of termination of his employment; (2) an annual bonus of $50,000 for the rest of his term from the date of termination of his employment; (3) the value of any earned, but unused vacation days; (4) continued coverage under our company’s benefits plan; and (5) severance in an amount equal to his annual base salary in effect immediately prior to his last date of employment.
Norbert Sporns. Under Mr. Sporns’ employment agreement, he has agreed to serve as our Chief Executive Officer and President. His term of service under this agreement commenced on April 1, 2004 and continues for a term of five (5) years. The agreement also provides for a base salary of $150,000 for the first year of the term and an annual increase of at least 10 percent thereafter. The agreement also provides Mr. Sporns with an annual bonus of at least $50,000, and this amount may be increased subject to the decision of our board of directors. The agreement also provides for the grant of options to purchase shares of our common stock. The options include an option to purchase an aggregate of twenty percent (20 percent) of the then fully diluted shares of our common voting stock made available under our 2004 Stock Incentive Plan, and, at the beginning of each calendar quarter, an option to purchase an aggregate of five percent (5 percent) of the then fully diluted shares of our company’s common voting stock made available under our 2004 Stock Incentive Plan. No shares of common stock were made available for option grants since the initial grants in 2004, and therefore no option grants were made to Mr. Sporns. We and Mr. Sporns have an understanding that he would waive any right she might have to receive any options during year 2005 and through the present date under our 2004 Stock Incentive Plan. Each option grant must be evidenced by an option agreement substantially identical to the form included in the employment agreement. The options granted under the employment agreement will have an exercise price of the fair market value per
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share of our common voting stock on the date the option is granted. We can terminate Mr. Sporns’ employment with cause, or without cause upon at least ninety days’ written notice. In the event Mr. Sporns’ employment is terminated without cause, he will be eligible to receive (1) monthly payments at his then applicable monthly base salary for the rest of his term from the date of termination of his employment; (2) an annual bonus of $50,000 for the rest of his term from the date of termination of his employment; (3) the value of any earned, but unused vacation days; (4) continued coverage under our company’s benefits plan; and (5) severance in an amount equal to his annual base salary in effect immediately prior to his last date of employment.
Jean-Pierre Dallaire. Under Mr. Dallaire’s employment agreement, he has agreed to serve as our Chief Financial Officer and Financial Controller. His term of service under this agreement commenced on September 1, 2004 and continues for a term of five (5) years. The agreement provides for a base salary of $100,000 for the first year of the term and an annual increase of at least 10 percent thereafter. The agreement also provides Mr. Dallaire with an annual bonus of at least $25,000, and this amount may be increased subject to the decision of our board of directors. The agreement also provides for the grant of options to purchase shares of our common stock. The options include an option to purchase an aggregate of ten percent (10 percent) of the then fully diluted shares of our common voting stock made available under our 2004 Stock Incentive Plan, and, at the beginning of each calendar quarter, an option to purchase an aggregate of two and one-half percent (2.5 percent) of the then fully diluted shares of our company’s common voting stock made available under our 2004 Stock Incentive Plan. No shares of common stock were made available for option grants since the initial grants in 2004, and therefore no option grants were made to Mr. Dallaire. Each option grant must be evidenced by an option agreement substantially identical to the form included in the employment agreement. The options granted under the employment agreement will have an exercise price of the fair market value per share of our common voting stock on the date the option is granted. We can terminate Mr. Dallaire’s employment with cause, or without cause upon at least ninety days’ written notice. In the event Mr. Dallaire’s employment is terminated without cause, he will be eligible to receive (1) monthly payments at his then applicable monthly base salary for the rest of his term from the date of termination of his employment; (2) an annual bonus of $25,000 for the rest of his term from the date of termination of his employment; (3) the value of any earned, but unused vacation days; (4) continued coverage under our company’s benefits plan; and (5) severance in an amount equal to his annual base salary in effect immediately prior to his last date of employment.
Trond Ringstad. Under Mr. Ringstad’s employment agreement, he has agreed to serve as our Executive Vice-President Sales and Distribution. His term of service under this agreement commenced on June 28, 2006 and continues for a term of three (3) years. The agreement provides for a base salary of $150,000 for the first year of the term and an annual adjustment, whereby Mr. Ringstad’s base salary will increase by no more than 150 percent and no less than 50 percent of his base salary if the volume of sales generated by our Seattle sales office for the year immediately following his employment exceeds $15,000,000. An adjustment in Mr. Ringstad’s base salary will be paid in 50 percent cash and 50 percent restricted shares of our common stock. The agreement also provides Mr. Ringstad with an annual bonus at the discretion of our board of directors. We can terminate Mr. Ringstad’s employment with cause, or without cause upon at least a thirty day written notice. In the event that Mr. Ringstad’s employment is terminated without cause, he will be eligible to receive (1) any earned but unpaid base salary through his last date of employment; (2) the value of any earned, but unused vacation days; (3) continued coverage under our company’s benefits plan; and (4) an amount equal to six months of his annual base salary in effect immediately prior to his last date of employment.
Stock Incentive Plan
The purpose of our 2004 Stock Incentive Plan is to encourage and enable employees, directors and other persons upon whose judgment, initiative and efforts we largely depend upon, to acquire a proprietary interest in our company. Under the Stock Incentive Plan, our board of directors, or a stock option committee appointed by the board of directors, may grant stock options to purchase up to 250,000 shares of our common stock (subject to adjustment due to certain recapitalizations, reorganizations or other corporate events) to our key employees (including officers), directors and consultants. To date, all of the options available under the 2004 Stock Incentive Plan have been granted, and our ability to grant additional options will be subject to first obtaining board and Shareholder approvals. The per share exercise price of options granted under our 2004 Stock Incentive Plan will be not less than 100 percent of the fair market value per share of common stock on the date the options are granted. Our board of directors or a committee thereof administering the 2004 Stock Incentive Plan has discretion to determine what portions of any awards shall be granted as incentive stock options or ISO’s, stock appreciation rights, or SAR’s, and non-statutory options, and is generally empowered to interpret the 2004 Stock Incentive Plan; to prescribe rules and regulations relating thereto; to determine the terms of the option agreements; to amend the option agreements with the consent of the optionee; to determine the key employees and directors to whom options are to
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be granted; and to determine the number of shares subject to each option and the exercise price thereof. If any option expires, terminates or is cancelled without having been exercised, the shares subject to the option will again be available for issuance under the Stock Incentive Plan.
Our board of directors did not approve, and therefore, we did not make, any options/SAR grants during the fiscal year ended December 31, 2008.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
On December 2004, our Board of Directors ratified grants of non-qualified stock options to purchase shares of our common stock under our Stock Option Plan to some of our executive officers and directors, as well as to several of our employees. Each of these new stock options has up to a ten-year term, is subject to the terms and conditions of the Plan, and is priced at $5.60 which represents the fair market value as of the initial grant date of November 23, 2004.
Specifically, in 2004, Norbert Sporns, our Chief Executive Officer, President and director, received 25,000 stock options. Lillian Wang, the Chairman of our Board of Directors, received 25,000 stock options. Harry Wang, our Chief Operating Officer, director and brother of Ms. Wang, received 25,000 stock options; and Fusheng Wang, our director in 2004, Honorary Chairman and father of Ms. Wang, received 50,000 stock options. Together, Norbert Sporns, Harry Wang and Lillian Wang also indirectly control the majority of capital stock of HQS. The stock options granted to each of them, as well as to Fusheng Wang, were fully vested when granted. In addition, our Chief Financial Officer, Jean-Pierre Dallaire, received 10,000 stock options. Mr. Dallaire’s options were vested in 2004 immediately as to 50 percent of the grant , with the remaining 50 percent vesting as follows: 1/3 on June 16, 2005, 1/3 on June 16, 2006, and the remaining 1/3 on June 16, 2007.
Further, at the same date, our Board of Directors ratified grants of stock options to thirteen other employees of HQS. These stock options were vested immediately as to 50 percent of each individual grant, with the remaining 50 percent vesting as follows: 1/3 on June 16, 2005, 1/3 on June 16, 2006, and the remaining 1/3 on June 16, 2007. In the case of one of the employees, the stock options were fully vested when granted.
Our Board of Directors believes that these stock option grants will help our company to continue to attract, retain and motivate our employees, directors and executive officers. In connection with these grants, our Board of Directors reserved 250,000 shares for issuance under the Plan. In addition, pursuant to the provisions of the Plan, our Board of Directors delegated the full power and authority to administer the Plan, in accordance with its terms, to our Compensation Committee presently consisting of Fred Bild, an independent director, and Daniel Too, also an independent director of HQS.
The following table sets forth certain information regarding beneficial ownership of common stock as of December 31, 2008, by:
| | • | | each person known to us to own beneficially more than 5 percent, in the aggregate, of the outstanding shares of our common stock |
| | • | | each of our chief executive officer and our other two most highly compensated executive officers; and |
| | • | | all executive officers and directors as a group |
The number of shares beneficially owned and the percent of shares outstanding are based on 12,085,846 shares outstanding as of December 31, 2008. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Except as otherwise noted below, the address of each of the shareholders in the table is c/o HQ Sustainable Maritime Industries, Inc., 1511 Third Avenue, Suite 788, Seattle, Washington.
| | | | |
Beneficial Owner | | Shares of Common Stock Number | | Beneficially Owned Percent |
Norbert Sporns (1) | | 796,761 | | 6.6 percent |
| | |
Lillian Wang Li (1) | | 828,918 | | 6.9 percent |
| | |
Harry Wang Hua (1) | | 1,639,993 | | 13.6 percent |
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| | | | |
| | |
Andrew Intrader(2) | | 2,878 | | Less than 1 percent |
| | |
Fred Bild | | 2,541 | | Less than 1 percent |
| | |
Daniel Too | | 9,151 | | Less than 1 percent |
| | |
Joseph I. Emas | | 15,878 | | Less than 1 percent |
| | |
All such directors and executive officers as a group (7 persons) | | 3,296,120 | | 27.3 percent |
| | |
Five Percent Shareholders (Other than Directors and named executive officers | | | | |
River Road Asset Management, LLC (3) | | 784,103 | | 6.5 percent |
| | |
Hound Partners, LLC, Hound Performance, LLC and Jonathan Auerbach (4) | | 785,915 | | 6.5 percent |
| | |
The Tail Wind Fund Ltd. (5) | | 1,001,252 | | 7.7 percent |
| (1) | Beneficially owns the shares indicated, which are owned of record by Red Coral Group Limited and Sino-Sult Canada (S.S.C.) Limited. Each of Mr. Sporns, Ms. Wang and Mr. Wang own respectively 24 percent, 25 percent and 51 percent of the issued capital of Red Coral Group Limited and Sino-Sult Canada (S.S.C.) Limited and share voting and investment power over the shares held by Red Coral Group Limited and Sino-Sult Canada (S.S.C.) Limited. |
| (2) | The address of this stockholder is c/o Renova U.S. Management LLC, 153 E. 53rd Street, 58th Floor, New York, New York 10022. |
| (3) | Based on a Schedule 13G/A filed by River Road Asset Management, LLC with the SEC on February 17, 2009. The address of the indicated holder is 462 S. 4th Street, Suite 1600, Louisville, KY 40202. |
| (4) | Based on a Schedule 13G/A jointly filed by Hound Partners, LLC, Hound Performance, LLC and Jonathan Auerbach with the SEC on February 13, 2009. The address of the indicated holders is 101 Park Avenue, 48th Floor, New York, New York 10178. |
| (5) | Based on a Schedule 13G/A filed by The Tail Wind Fund Ltd. (“Tail Wind”) with the SEC on February 13, 2009. The address of the indicated holder is Windermere House, 404 East Bay Street, P.O. Box SS-5539 British Virgin Isles. Includes (i) 151,252 shares of common stock currently held by Tail Wind and (ii) 850,000 shares of common stock issuable upon conversion of $4,250,000 in principal amount of the issuer’s 6.5% Convertible Notes due November 1, 2009. |
Changes in Control
We know of no plans or arrangements that will result in a change of control at our company.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
In the last three fiscal years, none of our present directors, officers or principal shareholders, nor any family member of the foregoing, nor, to the best of our information and belief, any of our former directors, senior officers or principal shareholders, nor any family member of such former directors, officers or principal shareholders, has or had any material interest, direct or indirect, in any transaction, or in any proposed transaction which has materially affected or will materially affect us, except as follows:
Family Relationships
Lillian Wang Li and Harry Wang Hua are brother and sister and Lillian Wang Li is married to Norbert Sporns.
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Director Independence
Our board of directors has adopted independence standards consistent with the current listing standards of American Stock Exchange to assist the board of directors in determining which of its members is independent. Our board of directors has determined that each of Fred Bild, Daniel Too, Joseph I. Emas, and Andrew Intrater satisfies our independence standards and further determined that each of them is independent within the meaning of American Stock Exchange’s listing standards. Our audit committee consists of Messrs. Andrew Intrater, Fred Bild and Daniel Too, and the compensation committee consists of Messrs. Fred Bild and Daniel Too. Our board of directors has determined that each of these directors is “independent” within the meaning of the applicable rules and regulations of the SEC and the American Stock Exchange.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Our auditors Schwartz, Levitsky, Feldman., LLP, billed us aggregate fees in the amount of approximately $240,000 for year ended December 31, 2008 while Rotenberg billed us $155,000 for the financial year ended December 31, 2007. These amounts were billed for professional services our auditors provided for the audit of our annual financial statements and SOX 404 internal controls over financial reporting, review of our securities offerings and other services typically provided by an accountant in connection with statutory and regulatory filings or engagements for those financial years.
Schwartz Levitsky Feldman billed us aggregate fees in the amount of $60,000 for year ended December 31, 2008 while Rotenberg billed us $105,000 for the financial year ended December 31, 2007, and for assurance and related services that were reasonably related to the performance of the reviews of our financial statements.
Schwartz Levitsky Feldman and Rotenberg billed us aggregate fees in the amount of $0 for the financial years ended December 31, 2008 and December 31, 2007, for tax compliance, tax advice, and tax planning.
Schwartz Levitsky Feldman and Rotenberg billed us aggregate fees in the amount of $0 for the financial years ended December 31, 2008 and December 31, 2007, and for all other fees.
All audit-related services, tax services and other non-audit services were pre-approved by the Audit Committee, which concluded that the provision of such services by Schwartz Levitsky Feldman was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. The Audit Committee’s Outside Auditor Independence Policy provides for pre-approval of audit, audit-related and tax services specifically described by the committee on an annual basis and, in addition, individual engagements anticipated to exceed pre-established thresholds must be separately approved. The policy authorizes the committee to delegate to one or more of its members pre-approval authority with respect to permitted services.
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PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| | |
Exhibit No. | | Description |
3.1(a) | | Certificate of Incorporation of HQ Sustainable Maritime Industries, Inc., as amended (incorporated by reference to Exhibit 2 to the Schedule 14C of Process Equipment, Inc. (SEC file No. 0-18980), filed with the SEC on April 28, 2004). |
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3.1(b) | | Certificate of Amendment of Certificate of Incorporation, dated December 28, 2006, of HQ Sustainable Maritime Industries, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on April 20, 2007). |
| |
3.2 | | By-laws of HQ Sustainable Maritime Industries, Inc. (incorporated by reference to Exhibit 3 to the Schedule 14C of Process Equipment, Inc. (SEC file No. 0-18980), filed with the SEC on April 28, 2004). |
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4.1 | | Form of Rights and Preferences of Preferred Stock (incorporated by reference to Form 14C (SEC File Number 0-18980), filed with the SEC on October 3, 2005). |
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4.2 | | Form of Subscription Agreement between HQ Sustainable Maritime Industries, Inc. and Certain Investors, exhibits attached (incorporated by reference to Exhibit 4.1 to Form 8-K (SEC File Number 0-18980), filed with the SEC on January 26, 2006). |
| |
4.3 | | Form of Stock Purchase Agreement by and among Process Equipment, Inc. and certain Investors, dated April 21, 2004 (incorporated by reference to Exhibit 10.19 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006). |
| |
4.4 | | Form of Registration Rights Agreement by and among Process Equipment, Inc. and certain Investors, dated April 21, 2004 (incorporated by reference to Exhibit 10.20 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006). |
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4.5 | | Form of Class C Warrant (incorporated by reference to Exhibit 10.21 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006). |
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4.6 | | Form of Class D Warrant (incorporated by reference to Exhibit 10.22 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006). |
| |
10.1 | | Employment Agreement, effective as of April 1, 2004, between HQ Sustainable Maritime Industries, Inc. and Harry Wang (incorporated by reference to Exhibit 10.1 to Form 10-QSB (SEC File Number 0-18980), filed with the SEC on August 13, 2004). |
| |
10.2 | | Amendment No. 1 to Employment Agreement, dated July, 2005, between HQ Sustainable Maritime Industries, Inc. and Harry Wang (incorporated by reference to Exhibit 10.16 to Form 10-KSB (SEC File Number 18980), filed with the SEC on April 11, 2005). |
| |
10.3 | | Employment Agreement, effective as of April 1, 2004, between HQ Sustainable Maritime Industries, Inc. and Lillian Wang Li (incorporated by reference to Exhibit 10.2 to Form 10-QSB (SEC File Number 0-18980), filed with the SEC on August 13, 2004). |
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10.4 | | Amendment No. 1 to Employment Agreement, dated July, 2005, between HQ Sustainable Maritime Industries, Inc. and Lillian Wang Li (incorporated by reference to Exhibit 10.15 to Form 10-KSB (SEC File Number 18980), filed with the SEC on April 11, 2005). |
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| | |
10.5 | | Employment Agreement, effective as of April 1, 2004, between HQ Sustainable Maritime Industries, Inc. and Norbert Sporns (incorporated by reference to Exhibit 10.3 to Form 10-QSB (SEC File Number 0-18980), filed with the SEC on August 13, 2004). |
| |
10.6 | | Amendment No. 1 to Employment Agreement, dated July, 2005, between HQ Sustainable Maritime Industries, Inc. and Norbert Sporns (incorporated by reference to Exhibit 10.14 to Form 10-KSB (SEC File Number 18980), filed with the SEC on April 11, 2005). |
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10.7 | | Employment Agreement, dated as of September 1, 2004, between HQ Sustainable Maritime Industries Inc. and Jean-Pierre Dallaire (incorporated by reference to Exhibit 10.3 to Form 10-QSB (Commission file No. 0-18980), filed with the Commission on November 15, 2004). |
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10.8 | | Employment Agreement, dated as of June 28, 2006, between HQ Sustainable Maritime Industries Inc. and Trond Ringstad (incorporated by reference to Exhibit 10.13 Form SB-2 (Commission file No. 333-139454), filed with the Commission on December 18, 2006). |
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10.9 | | Independent Non-Executive Director Agreement, dated as of June 15, 2004, between HQ Sustainable Maritime Industries Inc. and Fred Bild (incorporated by reference to Exhibit 10.4 to Form 10-QSB (SEC file No. 0-18980), filed with the SEC on August 13, 2004). |
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10.10 | | Independent Non-Executive Director Agreement, dated as of June 15, 2004, between HQ Sustainable Maritime Industries Inc. and Jacques Vallée (incorporated by reference to the Report on Form 10-QSB (SEC file No. 0-18980), filed with the SEC on August 13, 2004). |
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10.11 | | Independent Non-Executive Director Agreement, dated as of September 2, 2004, between HQ Sustainable Maritime Industries Inc. and Daniel Too (incorporated by reference to Exhibit 10.2 to Form 10-QSB (SEC file No. 0-18980), filed with the SEC on November 15, 2004). |
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10.12 | | Form of Stock Option Grant Notice (incorporated by reference to Exhibit 10.1 to Form 8-K (SEC File Number 0-18980), filed with the SEC on December 3, 2004). |
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10.13 | | Form of Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K (SEC File Number 0-18980), filed with the SEC on December 3, 2004). |
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10.14 | | Form of Exercise Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K (SEC File Number 0-18980), filed with the SEC on December 3, 2004). |
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10.15 | | Agreement, dated as of November 4, 2004, between HQ Sustainable Maritime Industries, Inc. and Sino-Sult Canada (S.S.C.) Limited (incorporated by reference to Exhibit 10.1 to Form 10-QSB (SEC file No. 0-18980), filed with the SEC on November 15, 2004). |
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10.16 | | Form of Purchase Agreement between HQ Sustainable Maritime Industries, Inc. and Certain Investors dated November 8, 2006 (incorporated by reference to Exhibit 4.1 to Form 8-K (SEC File Number 18980), filed with the SEC on November 13, 2006). |
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10.17 | | Form of Underwriters’ Purchase Option between HQ Sustainable Maritime Industries, Inc. and Several Underwriters (incorporated by reference to Exhibit 10.24 to Amendment No. 2 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on May 24, 2007). |
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10.18 | | Melbourne Tower Lease, dated November 22, 2005, between Doncaster Investments NV, Inc. and HQ Sustainable Maritime Industries, Inc (incorporated by reference to Exhibit 10.18 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006). |
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| | |
10.19 | | Waiver and Amendment Agreement between HQ Sustainable Maritime Industries, Inc. and Certain Investors, dated February 22, 2008 (incorporated by reference to Exhibit 10.24 to Amendment No. 5 to Form S-3 (SEC File Number 333-143453), filed with the SEC on May 8, 2008). |
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10.20 | | Contract for Land Use Rights Transfer between Hainan Hengtian Industry Co., Ltd and Hainan Yu Bao Feedstuff Co., Ltd. dated October 18, 2006 (incorporated by reference to Exhibit 10.25 to Amendment No. 2 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on May 24, 2007). |
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10.21 | | Contract for Land Attachment Transfer between Hainan Hengtian Industry Co., Ltd and Hainan Yu Bao Feedstuff Co., Ltd. dated December 20, 2006 (incorporated by reference to Exhibit 10.26 to Amendment No. 2 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on May 24, 2007). |
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10.22 | | 2009 Stock Option Plan* |
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21.1 | | Subsidiaries of HQ Sustainable Maritime Industries, Inc.* |
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31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes–Oxley Act.* |
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31.2 | | Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes–Oxley Act.* |
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32.1 | | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes–Oxley Act.* |
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32.2 | | Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes–Oxley Act.* |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
| |
| By: | | /s/ Norbert Sporns |
| Name: | | Norbert Sporns |
| Title: | | Chief Executive Officer and President |
|
| March 12, 2009 |
| |
| By: | | /s/ Jean–Pierre Dallaire |
| Name: | | Jean–Pierre Dallaire |
| Title: | | Principal Accounting Officer |
|
| March 12, 2009 |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
| | | | |
SIGNATURE | | TITLE | | DATE |
| | |
/s/ Norbert Sporns | | Chief Executive Officer, President and Director | | March 12, 2009 |
| Norbert Sporns | | (Principal Executive Officer) | | |
| | |
/s/ Lillian Wang | | Secretary, Chairman of the Board of Directors, and Director | | March 12, 2009 |
| Lillian Wang | | | |
| | |
/s/ Harry Wang | | Chief Operating Officer and Director | | March 12, 2009 |
| Harry Wang | | | | |
| | |
/s/ Andrew Intrater | | Independent Non-Executive Director | | March 12, 2009 |
| Andrew Intrater | | | | |
| | |
/s/ Fred Bild | | Independent Non-Executive Director | | March 12, 2009 |
| Fred Bild | | | | |
| | |
/s/ Daniel Too | | Independent Non-Executive Director | | March 12, 2009 |
| Daniel Too | | | | |
| | |
/s/ Jean-Pierre Dallaire | | Chief Financial Officer and Financial Controller | | March 12, 2009 |
| Jean-Pierre Dallaire | | (Principal Accounting Officer) | | |
| | |
/s/ Joseph I. Emas | | Independent Non-Executive Director | | March 12, 2009 |
| Joseph I. Emas | | | | |
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EXHIBIT INDEX
| | |
Exhibit No. | | Description |
3.1(a) | | Certificate of Incorporation of HQ Sustainable Maritime Industries, Inc., as amended (incorporated by reference to Exhibit 2 to the Schedule 14C of Process Equipment, Inc. (SEC file No. 0-18980), filed with the SEC on April 28, 2004). |
| |
3.1(b) | | Certificate of Amendment of Certificate of Incorporation, dated December 28, 2006, of HQ Sustainable Maritime Industries, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on April 20, 2007). |
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3.2 | | By-laws of HQ Sustainable Maritime Industries, Inc. (incorporated by reference to Exhibit 3 to the Schedule 14C of Process Equipment, Inc. (SEC file No. 0-18980), filed with the SEC on April 28, 2004). |
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4.1 | | Form of Rights and Preferences of Preferred Stock (incorporated by reference to Form 14C (SEC File Number 0-18980), filed with the SEC on October 3, 2005). |
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4.2 | | Form of Subscription Agreement between HQ Sustainable Maritime Industries, Inc. and Certain Investors, exhibits attached (incorporated by reference to Exhibit 4.1 to Form 8-K (SEC File Number 0-18980), filed with the SEC on January 26, 2006). |
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4.3 | | Form of Stock Purchase Agreement by and among Process Equipment, Inc. and certain Investors, dated April 21, 2004 (incorporated by reference to Exhibit 10.19 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006). |
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4.4 | | Form of Registration Rights Agreement by and among Process Equipment, Inc. and certain Investors, dated April 21, 2004 (incorporated by reference to Exhibit 10.20 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006). |
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4.5 | | Form of Class C Warrant (incorporated by reference to Exhibit 10.21 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006). |
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4.6 | | Form of Class D Warrant (incorporated by reference to Exhibit 10.22 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006). |
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10.1 | | Employment Agreement, effective as of April 1, 2004, between HQ Sustainable Maritime Industries, Inc. and Harry Wang (incorporated by reference to Exhibit 10.1 to Form 10-QSB (SEC File Number 0-18980), filed with the SEC on August 13, 2004). |
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10.2 | | Amendment No. 1 to Employment Agreement, dated July, 2005, between HQ Sustainable Maritime Industries, Inc. and Harry Wang (incorporated by reference to Exhibit 10.16 to Form 10-KSB (SEC File Number 18980), filed with the SEC on April 11, 2005). |
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10.3 | | Employment Agreement, effective as of April 1, 2004, between HQ Sustainable Maritime Industries, Inc. and Lillian Wang Li (incorporated by reference to Exhibit 10.2 to Form 10-QSB (SEC File Number 0-18980), filed with the SEC on August 13, 2004). |
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10.4 | | Amendment No. 1 to Employment Agreement, dated July, 2005, between HQ Sustainable Maritime Industries, Inc. and Lillian Wang Li (incorporated by reference to Exhibit 10.15 to Form 10-KSB (SEC File Number 18980), filed with the SEC on April 11, 2005). |
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10.5 | | Employment Agreement, effective as of April 1, 2004, between HQ Sustainable Maritime Industries, Inc. and Norbert Sporns (incorporated by reference to Exhibit 10.3 to Form 10-QSB (SEC File Number 0-18980), filed with the SEC on August 13, 2004). |
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10.6 | | Amendment No. 1 to Employment Agreement, dated July, 2005, between HQ Sustainable Maritime Industries, Inc. and Norbert Sporns (incorporated by reference to Exhibit 10.14 to Form 10-KSB (SEC File Number 18980), filed with the SEC on April 11, 2005). |
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10.7 | | Employment Agreement, dated as of September 1, 2004, between HQ Sustainable Maritime Industries Inc. and Jean-Pierre Dallaire (incorporated by reference to Exhibit 10.3 to Form 10-QSB (Commission file No. 0-18980), filed with the Commission on November 15, 2004). |
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10.8 | | Employment Agreement, dated as of June 28, 2006, between HQ Sustainable Maritime Industries Inc. and Trond Ringstad (incorporated by reference to Exhibit 10.13 Form SB-2 (Commission file No. 333-139454), filed with the Commission on December 18, 2006). |
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10.9 | | Independent Non-Executive Director Agreement, dated as of June 15, 2004, between HQ Sustainable Maritime Industries Inc. and Fred Bild (incorporated by reference to Exhibit 10.4 to Form 10-QSB (SEC file No. 0-18980), filed with the SEC on August 13, 2004). |
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10.10 | | Independent Non-Executive Director Agreement, dated as of June 15, 2004, between HQ Sustainable Maritime Industries Inc. and Jacques Vallée (incorporated by reference to the Report on Form 10-QSB (SEC file No. 0-18980), filed with the SEC on August 13, 2004). |
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10.11 | | Independent Non-Executive Director Agreement, dated as of September 2, 2004, between HQ Sustainable Maritime Industries Inc. and Daniel Too (incorporated by reference to Exhibit 10.2 to Form 10-QSB (SEC file No. 0-18980), filed with the SEC on November 15, 2004). |
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10.12 | | Form of Stock Option Grant Notice (incorporated by reference to Exhibit 10.1 to Form 8-K (SEC File Number 0-18980), filed with the SEC on December 3, 2004). |
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10.13 | | Form of Option Agreement (incorporated by reference to Exhibit 10.2 to Form 8-K (SEC File Number 0-18980), filed with the SEC on December 3, 2004). |
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10.14 | | Form of Exercise Agreement (incorporated by reference to Exhibit 10.3 to Form 8-K (SEC File Number 0-18980), filed with the SEC on December 3, 2004). |
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10.15 | | Agreement, dated as of November 4, 2004, between HQ Sustainable Maritime Industries, Inc. and Sino-Sult Canada (S.S.C.) Limited (incorporated by reference to Exhibit 10.1 to Form 10-QSB (SEC file No. 0-18980), filed with the SEC on November 15, 2004). |
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10.16 | | Form of Purchase Agreement between HQ Sustainable Maritime Industries, Inc. and Certain Investors dated November 8, 2006 (incorporated by reference to Exhibit 4.1 to Form 8-K (SEC File Number 18980), filed with the SEC on November 13, 2006). |
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10.17 | | Form of Underwriters’ Purchase Option between HQ Sustainable Maritime Industries, Inc. and Several Underwriters (incorporated by reference to Exhibit 10.24 to Amendment No. 2 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on May 24, 2007). |
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10.18 | | Melbourne Tower Lease, dated November 22, 2005, between Doncaster Investments NV, Inc. and HQ Sustainable Maritime Industries, Inc (incorporated by reference to Exhibit 10.18 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on December 18, 2006). |
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10.19 | | Waiver and Amendment Agreement between HQ Sustainable Maritime Industries, Inc. and Certain Investors, dated February 22, 2008 (incorporated by reference to Exhibit 10.24 to Amendment No. 5 to Form S-3 (SEC File Number 333-143453), filed with the SEC on May 8, 2008). |
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10.20 | | Contract for Land Use Rights Transfer between Hainan Hengtian Industry Co., Ltd and Hainan Yu Bao Feedstuff Co., Ltd. dated October 18, 2006 (incorporated by reference to Exhibit 10.25 to Amendment No. 2 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on May 24, 2007). |
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10.21 | | Contract for Land Attachment Transfer between Hainan Hengtian Industry Co., Ltd and Hainan Yu Bao Feedstuff Co., Ltd. dated December 20, 2006 (incorporated by reference to Exhibit 10.26 to Amendment No. 2 to Form SB-2 (SEC File Number 333-139454), filed with the SEC on May 24, 2007). |
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10.22 | | 2009 Stock Option Plan* |
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21.1 | | Subsidiaries of HQ Sustainable Maritime Industries, Inc.* |
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31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes–Oxley Act.* |
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31.2 | | Certification of Principal Accounting Officer Pursuant to Section 302 of the Sarbanes–Oxley Act.* |
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32.1 | | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes–Oxley Act.* |
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32.2 | | Certification of Principal Accounting Officer Pursuant to Section 906 of the Sarbanes–Oxley Act.* |
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