UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HQ SUSTAINABLE MARITIME INDUSTRIES, INC.
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(Name of small business issuer in its charter)
Delaware 3550 62-1407522
(State or jurisdiction of (Primary Std. Industrial (IRS Employer
Incorporation or organization) Classification Code Number) ID Number)
Wall Street Center, 14 Wall Street, 20th Floor, New York, New York 10005
Tel. (212) 618-1712
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(Address and telephone number of principal executive offices)
Wall Street Center, 14 Wall Street, 20th Floor, New York, New York 10005
Tel. (212) 618-1712
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(Address of principal place of business or intended principal place of business)
Norbert Sporns
HQ Sustainable Maritime Industries, Inc.
Wall Street Center, 14 Wall Street , 20th Floor
New York, New York 10005
(Name, address and telephone number of agent for service)
(All communications to)
Joseph I. Emas, Esq.
Attorney-at-Law
(305) 531-1174 Telephone (305) 531-1274 Facsimile
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [X] 333-119643
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount Maximum Maximum
Title of Securities to to be Offering Price Aggregate Amount of
be Registered Registered per Share(1) Offering Price(1) Fee(5)
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Common Stock, $0.001
par value: 20,046,292 (2) $0.17 $3,407,870. $401.11 (5)
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Common Stock, $0.001
par value underlying
Class C Warrants: 3,344,000 (3) $0.17 $568,480 $66.91 (5)
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Common Stock, $0.001
par value underlying
Class D Warrants: 3,344,000 (4) $0.17 $568,480 $66.91 (5)
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TOTAL 26,734,292 $ $ $534.93 (5)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and based upon the average of the bid and
asked prices of the common stock on the OTC Bulletin Board on July 1,
2005, which was $0.17 per share.
(2) Represents originally (i) 11,721,367 shares issued by us pursuant to
two private placements in April 2004 of Units, with each Unit
consisting of shares of common stock, Series C and Series D common
stock purchase warrants; (ii) 500,000 shares we agreed to issue to a
holder of a promissory note of our subsidiary, in exchange for
cancellation thereof and release of any related claims; (iii) 520,685
shares we agreed to issue to Westminster Securities Corp. or its
designees, for this firm's services as our financial advisor in
connection with our recent reverse merger; (iv) 760,000 shares
issuable as part of 3.8 Units, which Westminster or its designees have
the right to receive pursuant to a warrant ("Agent Warrant") which we
agreed to issue thereto, for Westminster's services as our placement
agent, in the event the Agent Warrant is exercised as provided
therein; and (v) 8,000,000 shares held by an existing shareholder. For
more information, see "Selling Shareholders-- Private Placements" and
"--Additional Securities We Are Registering."
(3) Represents originally (i) 3,040,000 shares issuable upon the exercise
of Series C common stock purchase warrants issued as part of Units
sold in the private placements described above; and (ii) 304,000
shares issuable upon the exercise of Series C common stock purchase
warrants included in the Units issuable pursuant to the Agent Warrant.
(4) Represents originally (i) 3,040,000 shares issuable upon the exercise
of Series D common stock purchase warrants issued as part of Units
sold in the private placements described above; and (ii) 304,000
shares issuable upon the exercise of Series D common stock purchase
warrants included in the Units issuable pursuant to the Agent Warrant.
(5) Previously paid.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effectiveness date until the registrant shall
file a further amendment which specifically states that this registration
statement shall hereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8 (a),
may determine.
The Registrant files this post-effective amendment to update the financial
statements presented.
PROSPECTUS
HQ Sustainable Maritime Industries, Inc.
The Resale of 26,734,292 Shares of Common Stock
We are registering 26,734,292 shares of our common stock on behalf of the
selling shareholders identified under the heading "Selling Shareholders" in this
prospectus.
The selling shareholders may sell the stock from time to time in the
over-the-counter market at the prevailing market price or in negotiated
transactions.
We are not selling any shares of common stock in this offering and therefore
will not receive any proceeds from the resale of our common stock pursuant to
this offering. We will receive proceeds from the sale of shares of common stock
underlying warrants held by some of the selling shareholders, which shares are
also being registered hereby, if the selling shareholders exercise those
warrants or options through a cash exercise, as well as if the Agent Warrant,
further described herein, is exercised.
Our common stock is quoted on the OTC Bulletin Board of the National Association
of Securities Dealers, Inc. under the symbol "HQSM.OB." On July 1, 2005, the
average of the bid and asked prices of our common stock was $0.17 per share.
Investing in our common stock involves a high degree of risk. You should invest
in our common stock only if you can afford to lose your entire investment. For a
discussion of some of the risks involved, see "Risk Factors" beginning on page 6
of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is July 11, 2005.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements
include statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans, and (e) our anticipated needs for
working capital. Forward-looking statements, which involve assumptions and
describe our future plans, strategies, and expectations, are generally
identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend," or "project" or the negative of
these words or other variations on these words or comparable terminology. This
information may involve known and unknown risks, uncertainties, and other
factors that may cause our actual results, performance, or achievements to be
materially different from the future results, performance, or achievements
expressed or implied by any forward-looking statements. These statements may be
found under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in this prospectus generally.
Actual events or results may differ materially from those discussed in
forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this prospectus generally. This prospectus contains market data related to our
business. This data has been included in articles published by independent
industry sources. Although we believe these sources are reliable, we have not
independently verified this market data. This market data includes projections
that are based on a number of assumptions. If any one or more of these
assumptions turns out to be incorrect, actual results may differ materially from
the projections based on these assumptions. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this filing will in fact occur. In addition to the information
expressly required to be included in this filing, we will provide such further
material information, if any, as may be necessary to make the required
statements, in light of the circumstances under which they are made, not
misleading. Each forward-looking statement should be read in context with, and
with an understanding of, the various other disclosures concerning our company
and our business made elsewhere in this prospectus as well as other public
reports which may be filed with the United States Securities and Exchange
Commission (the "SEC"). You should not place undue reliance on any
forward-looking statement as a prediction of actual results or developments. We
are not obligated to update or revise any forward-looking statement contained in
this prospectus to reflect new events or circumstances, unless and to the extent
required by applicable law.
INSIDE FRONT COVER OF PROSPECTUS
Until 90 days after this Registration Statement is declared effective or
September 11, 2005, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as underwriters and with respect to their sold allotments
or subscriptions.
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The following table of contents has been designed to help you find important
information contained in this prospectus. We have included subheadings to aid
you in searching for particular information to which you might want to return.
You should, however, read the entire prospectus carefully.
TABLE OF CONTENTS
PROSPECTUS SUMMARY ...............3 CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS ............63
RISK FACTORS .....................6
MARKET INFORMATION ..............63
USE OF PROCEEDS .................18
DIVIDEND POLICY .................64
SELLING SHAREHOLDERS ............19
PRINCIPAL SHAREHOLDERS ..........64
PLAN OF DISTRIBUTION ............25
DESCRIPTION OF SECURITIES .......65
BUSINESS ........................27
INDEMNIFICATION OF OFFICERS,
MANAGEMENT ......................43 DIRECTORS AND OTHERS ............66
MANAGEMENT'S DISCUSSION AND TRANSFER AGENT ..................66
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF LEGAL MATTERS ...................66
OPERATIONS ......................50
EXPERTS .........................67
ADDITIONAL INFORMATION ..........67
INDEMNIFICATION OF OFFICERS
AND DIRECORTS ...................68
RECENT SALES OF UNREGISTERED
SECURITIES ......................69
EXHIBITS ........................71
FINANCIAL STATEMENTS ...........F-1
PROSPECTUS SUMMARY
This prospectus summary contains information about our company, our finances and
our products that we believe is most important. This summary is qualified in its
entirety by the more detailed information on these and other topics appearing
elsewhere in this prospectus, including the information under the heading "Risk
Factors" and the information contained in the financial statements. This summary
is not complete and does not contain all of the information you should consider
before investing in our common stock. You should read the entire prospectus
carefully for a complete understanding of our business. Federal and state
securities laws require that we include in this prospectus all the important
information that you will need to make an investment decision.
Unless otherwise indicated, all share and per share data in this prospectus (1)
do not give effect to shares issuable upon exercise of outstanding options and
warrants ; and (2) do not give effect to shares reserved for issuance under our
2004 Stock Incentive Plan described in more detail under "Management--Stock
Option Plan." Certain financial information included in this prospectus has been
derived from data originally prepared in Renminbi (RMB), the currency of the
People's Republic of China. For purposes of this prospectus, a conversion rate
of US$1.00 to RMB8.30 was utilized. There is no assurance that RMB amounts could
have been or could be converted into US dollars at that rate.
As used in this prospectus, "we", "us", "our", "HQSM" or "our company" refers to
HQ Sustainable Maritime Industries, Inc. and all of its subsidiaries and
affiliated companies.
About Our Company
HQ Sustainable Maritime Industries, Inc. ("HQSM") was initially incorporated as
Sharon Capital Corporation, or Sharon, on September 21, 1989 under the laws of
the State of Nevada. Sharon was a "blind pool/blank check" corporation organized
for the purpose of purchasing, merging with or acquiring a business or assets
from another company. In July 1990, Sharon was changed to PEI, Inc., which was
subsequently changed to Process Equipment, Inc. in November 1990. 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.
Pursuant to that agreement, Process Equipment, Inc., through PEAC, acquired
Jade, and 84.42% 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,
HQSM. The name change, change of domicile and merger became effective on May 19,
2004, with HQSM being the surviving entity in the merger and acquiring all the
assets and liabilities of Process Equipment, Inc. On August 17, 2004, we have
3
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. That purchase agreement has been filed as an exhibit to
our current report on Form 8K filed with the Commission on August 18, 2004.
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 the above current report.
Also as previously disclosed, in the same current report, SSC is owned by three
of our current directors and executive officers who are also, together, indirect
beneficial owners of the majority of our capital stock.
Further, as previously disclosed in the above current report, effective August
17, 2004, HQSM caused Jade Profit Investment Limited, its wholly-owned
subsidiary, to acquire the minority equity interest equal to 15.58% that Jade
did not already own in HQOF, HQSM'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.
HQSM and its subsidiaries, collectively referred to in this report as the Group,
is principally engaged in the vertically integrated business of aquaculture
through co-operative 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
exporting, directly and indirectly, to the United States, Canada, Japan and
European countries. The major market is for export.
The Group has also engaged in the production and sales of marine bio-products
and healthcare products in the PRC. The principal products of Hainan Jiahua
Marine Bio-Product Company Limited (wholly-owned subsidiary of Sealink) are
Shark Cartilage Capsule, Shark Liver Oil and Shark Liver (Soft gel). The major
market for these products is the PRC. Our principal executive office is located
at Wall Street Center, 14 Wall Street, 20th Floor, New York, New York 10005, and
our telephone number is (212) 618-1712. The URL for our website is
http://www.hqfish.com.
About Our Products
We have a series of tilapia, shrimp and other harvestable products mainly in the
following forms:
o Tilapia: whole round frozen tilapia; gutted and scaled tilapia;
boneless-skinless tilapia fillet;
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o Shrimp: head-on, shell-on; headless, shell-on; peeled, tail-on; peeled and
deveined; peeled and undeveined principally white leg shrimp and ocean caught
and ocean farmed shrimp (for instance, tiger shrimp); and
o Harvestable Products: ribbonfish, mackerel, bream, squid and prawns.
Additional Securities We Are Registering
We are also registering 520,685 shares of our common stock that we agreed to
issue in a private placement to Westminster, for its services as our financial
advisor in connection with our recent reverse merger with Process Equipment.
Further, we are registering 500,000 shares we agreed to issue to Lui Hung Yen, a
holder of a promissory note in the princIpal amount of $256,410 approximately of
Jade, our subsidiary, in exchange for cancellation thereof and release of any
related claims by this person against us or Jade.
Finally, we are also registering 8,000,000 shares of our common stock on behalf
of our existing shareholder, Red Coral Group Limited, which are beneficially
owned by some of our directors and executive officers, Norbert Sporns, Lillian
Wang Li and Harry Wang , who intend to use the proceeds from the sale of the
shares to purchase additional shares from certain shareholders to increase their
stake in our company. In this prospectus, we refer to the Investors, Gokbilgin,
Rui, Kao, four designees of Westminster, Yen and Red Coral collectively as the
selling shareholders.
THE OFFERING
This offering is comprised entirely of shares of our common stock held by our
selling shareholders, our common stock issuable from the conversion of
debentures held by our Selling Shareholders and our common stock issuable from
the exercise of warrants held by our Selling Shareholders. Our Selling
Shareholders are offering 26,734,292 shares of our common stock. The proceeds we
receive from the exercise of the warrants will be utilized for general business
purposes and to fund our acquisition strategy. We will not receive any proceeds
from the sale of the underlying common stock currently held by the Selling
Shareholders.
Although we have agreed to pay all offering expenses, we will not receive any
proceeds from the sale of the shares by the Selling Shareholders.
5
RISK FACTORS
In addition to the other information included in this Post-Effective Amendment
to Form SB-2, we are subject to various risk factors. An investment in our
common stock being offered for resale by the selling shareholders is very risky.
You should carefully consider the risk factors described below, together with
all other information in this prospectus before making an investment decision.
Additional risks and uncertainties not presently foreseeable to us may also
impair our business operations. If any of the following risks actually occurs,
our business, financial condition or operating results could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
Risks Relating To Our Company
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We have no long-term agreements with customers or distributors; should they
discontinue to do business with us, our business and profitability may be
adversely affected.
Currently, most of our immediate customers are distributors who resell our
products to other customers. Our sales arrangement with these distributors are
generally short-term in nature and we have not formed or engaged in any agency
or distributorship arrangements with such distributors. In the event that some
of these distributors cease to purchase our products, our business and
profitability may be adversely affected. Even if we are able to procure agency
or distributorship arrangements, there is no guarantee that such arrangements
will be exclusive in procuring the domestic and/or export sales of our products.
We rely on co-operative suppliers and any adverse changes in these relationships
may adversely affect us.
We have developed a co-operative network in Hainan Province for the supply of
tilapia and shrimp by entering into co-operative supply agreements with various
co-operative suppliers, who are aquaculture farmers in Hainan Province. Pursuant
to the co-operative supply agreements, HQOF is assured the necessary supply of
aquatic products from its cooperative suppliers. The continuance and smooth
operations of this co-operative network are essential in ensuring cost
efficiency and the timely fulfillment of our customer orders. Any adverse change
to the co-operative network, including any early termination or non-renewal of
any material supply agreement or any failure of the suppliers to fulfill the
obligations under the supply agreement, may result in a material adverse effect
on our business model, operation and competitiveness.
6
If we are not able to implement our strategies in achieving our business
objectives, our business operations and financial performance may be adversely
affected.
Our business plan is based on circumstances currently prevailing and the bases
and assumptions that certain circumstances will or will not occur, as well as
the inherent risks and uncertainties involved in various stages of development.
However, there is no assurance that we will be successful in implementing our
strategies or that our strategies, even if implemented, will lead to the
successful achievement of our objectives. If we are not able to successfully
implement our strategies, our business operations and financial performance may
be adversely affected.
We depend on the availability of additional resources for future growth.
We are currently experiencing a period of significant growth in terms of sales
volume. We believe that our 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 operational and
financial resources. As the scale of our operations grows, we will have to
continually improve our management, operational and financial systems,
procedures and controls, and expand our workforce. The expansion of our business
operations may also involve co-operation, or development of new relationships,
with third parties, such as customers and suppliers. There can be no assurance
that our existing or future management, operational 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. There can also be no
assurance that we will be able to establish, develop or maintain the business
relationships beneficial to our operations. Failure to manage growth effectively
could have a material adverse effect on our business and the results of our
operations and financial condition.
We depend on 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. Our future results will depend significantly upon
the efforts of these persons, in particular, Mr. Harry Wang, Ms. Lillian Wang Li
and Mr. Norbert Sporns. The loss of the service of any of them for any reason
could have a material adverse effect on the business, and the results of our
operation and financial condition.
We depend on supply of raw materials, and any adverse changes in such supply or
the costs of raw materials may adversely affect our operations.
We currently obtain all of our raw materials from various aquaculture farms in
Hainan Province and are, therefore, dependent on a stable and reliable supply of
such raw materials in the region. The supply of these raw materials can be
adversely affected by any material change in the climatic or environmental
conditions in the Hainan province, which may, in turn, have a material adverse
effect on the cost of our raw materials and on our operations.
7
We do not maintain any product liability insurance, and we could therefore be
adversely affected by product liability claims against us.
During the past four years, we have not purchased or maintained any liability
insurance for our tilapia or shrimp products. We believe that there are valid
reasons for not purchasing this liability insurance. However, our tilapia and
shrimp products are sold in the PRC domestic market as well as exported to
locations in the United States, Canada, Japan and some European countries. There
is a possibility that our customers, or the ultimate buyers of our products, may
have adverse reactions to the tilapia and shrimp products that we process and
sell. Any adverse reaction may result in actual or potential product liability
claims to the Group. Accordingly, any significant product liability claim may
have an adverse effect on our reputation and profitability.
We may never pay any dividends to our shareholders.
We did not declare any dividends for the year ended December 31, 2004. 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.
Risks Relating To The Aquaculture Industry
Our operating subsidiary must comply with environmental protection laws, which
could adversely affect our profitability.
The Company is 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. Currently the plant treats all of its
waste effluent completely to level one (that is, consistent with releasing
potable water back to the environment), and there is currently no charge being
levied. In addition, these regulations further empower local governments to
impose penalties on those companies which fail to comply with the prescribed
standards. If we, through the Company, 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 profit made, being ordered to close down our
business operations and suspension of relevant permits.
8
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.
The national and the local governments may promulgate new regulations that may
require us to pay environmental protection fees or require us to upgrade our
environmental protection facilities. These regulations may impose additional
costs and may adversely affect our profitability.
We could be adversely affected by the occurrence of natural disasters in Hainan
Province.
From time to time, Hainan Province, like other South China Sea destinations,
experiences typhoons, particularly during the third quarter of any calendar
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. We do not currently have any insurance against damage caused by
natural disasters, accidents or other similar events, nor do we have insurance
covering losses due to resulting business interruption. Should such losses
occur, our operations, revenue and profitability might be adversely affected.
We may be adversely affected by the fluctuation in raw material prices and
selling prices of our products.
The raw materials we use are aquaculture stocks and commodities that may
experience price volatility caused by events such as market fluctuations or
changes in governmental aquaculture programs. 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.
Neither our products nor the raw materials required have, in general,
experienced any significant price fluctuations in the past, but there is no
assurance that the raw materials we require will not be subject to any
significant price fluctuations or pricing control in the future. 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.
Should this happen, our business and the results of our operations could be
adversely affected.
9
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 our exporting countries, including the United States, Japan
and other overseas markets, such as Europe and Canada, may, from time to time,
consider regulatory proposals relating to raw materials, food safety and market,
and environmental regulation, which, if adopted, could lead to disruptions in
supply of our products and/or increases in 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 certain regulations or impose
additional taxes or duties on certain Chinese imports from time to time. Such
regulations, if effected, may have a material adverse impact on our operations,
revenue and/or our profitability.
We could be adversely affected by contamination and disease resulting from our
purchases of raw materials from third parties.
We ceased our aquaculture farming operations in January 2003. Since that time,
we have been purchasing raw materials from contracted large-scale local
suppliers. If any contamination or outbreak of disease occurs, our supply of raw
materials may be jeopardized or disrupted, which, in turn, could adversely
affect our operations, revenue and/or profitability.
We may be unable to continue to take advantage of the seasonal pricing
fluctuation in sales of our products.
We have been experiencing seasonal fluctuation in sales in terms of pricing.
Pricing fluctuation occurs during the winter season when fish farms in northern
PRC suspend production due to cold weather conditions. With the lack of supply
from these farms in northern PRC, aquaculture products from other parts of the
PRC could customarily be sold at a premium during the winter season. However,
there can be no assurance that such premium or pricing could be maintained in
the future.
Our inability to successfully compete with our competitors in the aquaculture
industry may adversely affect us.
The aquaculture industry is open to competition from local and overseas
operators engaged in similar businesses and products to ours. There is no
assurance that we can consistently be successful in maintaining a competitive
advantage against our competitors. Any increase in competition may have an
adverse effect on both the sales and the pricing of our aquaculture products,
which, in turn, will have an adverse effect on our performance, profitability
and cash flow.
10
During late 2004, the USA government imposed heavy tariffs of more than 100
percent to some Chinese shrimp exporters. This action was intended to avoid the
dumping of Chinese exporters and goods.
The decisions were seen as a victory by the domestic shrimp industry, which has
suffered in recent years as cheap shrimp imports from Latin America and Asia
have increased supplies and dropped prices in the United States.
Foreign exporters and American importers argue that imported shrimp, which are
farm-raised rather than netted as most U.S. shrimp are, are simply produced more
efficiently. American shrimpers say their competitors are cheating by dumping
their product and selling it below cost to drive U.S. producers out of business.
Last December, the alliance, which represents shrimpers in eight Southern
states, petitioned the Commerce Department to investigate possible dumping of
shrimp from China, Vietnam, Brazil, Ecuador, India and Thailand. Dumping is
illegal in the United States and is punished with tariffs to put law-abiding
companies on equal footing.
In July 2004, the Commerce Department issued preliminary anti-dumping tariff
determinations for the six countries, which last year provided 90 percent of the
shrimp consumed in the United States. While the U.S. shrimp industry and its
lawyers accurately predicted the Chinese tariffs last summer, the Vietnamese
tariffs were far below the roughly 90 percent rate they expected.
Risks Relating To The Health and Bio-product Industry
- -----------------------------------------------------
We may have difficulty defending our intellectual property from infringement
Since effective trademark, patent and trade secret protection may be unavailable
in every country in which we do or plan to do business, protection of our
intellectual property rights is uncertain and we may be unable to prevent others
from developing similar products or using our marks. We regard our service
marks, trademarks, trade secrets, patents and similar intellectual property as
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
trademark and patent protection for our products in the People's Republic of
China. While presently we sell our products mainly in China and Eastern Europe,
we intend to enter the markets in the United States and possibly other
countries. However, 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 due to our foreign currency constraint. Therefore, the
measures we take to protect our proprietary rights may be inadequate and we
cannot give you any assurance that our competitors will not independently
develop formulations and processes that are substantially equivalent or superior
to our own. We intend to take necessary actions toward protecting our
intellectual property rights upon the resolution of our foreign currency
constraints.
11
Intense competition from existing and new entities may adversely affect our
revenues and profitability
We compete with companies, many of whom are developing or can be expected to
develop products similar to ours. Our market is a large market with many
competitors. 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 so that we can successfully compete
with our competitors. We cannot assure you that we will be able to compete
effectively with current or future competitors or that the competitive pressures
we face will not harm our business.
The products and the processes we use could expose us to substantial liability
Product liability could arise from claims by users of our products or of
products manufactured by processes we developed, or from manufacturers or others
selling our products, either directly or as a component of other products. To
date, we have not experienced any problems associated with claims by users of
our products. For this reason, we do not have any insurance coverage for these
risks at this time. Depending on our experience, we may decide to seek this type
of insurance coverage. When, and if, we acquire product liability insurance, we
cannot give you any assurance that it will be adequate to protect us or that the
insurance coverage will continue to be available to us on reasonable terms.
Unexpected Changes in the regulatory environment may negatively impact our
business.
The regulatory environment involving our products is subject to changes that may
be introduced either by the relevant governmental regulatory agencies or by
virtue of new regulation. Such changes may have a positive or negative impact on
the sale of our products. Such regulatory environment also covers any existing
or potential trade barriers in the form of import tariff and taxes that may make
it difficult for us to import our products to certain countries, which would
limit our international expansion.
We may suffer from political and economic instability in countries where we
operate
We are currently operating mainly in China, however, we expect to begin selling
our products in other countries in the future. Political and economic
instability in the countries in which we presently operate and may operate in
the future may negatively affect our sales, revenues and business operations.
12
We may experience currency fluctuation and longer exchange rate payment cycles
The local currencies in the countries in which we operate may fluctuate in value
in relation to other currencies. Such fluctuations may affect the costs of our
products sold and the value of our local currency profits. While we are not
conducting any meaningful operations in countries other than China at the
present time, we may expand to other countries and may then have an increased
risk of exposure of our business to currency fluctuation.
Risks Relating To The PRC
- -------------------------
There could be changes in government policies that may adversely affect our
business
The aquatic products industry in the PRC is subject to policies implemented by
the PRC government from time to time. The PRC government may, for instance,
impose control over aspects such as raw material distribution, product pricing
and sales. On the other hand, the PRC government may also make available
subsidies or preferential treatments (such as in the form of tax benefits or
favorable financing arrangements).
If the raw materials used by us or our products should become subject to any
form of government control, then depending on the nature and extent of such
control and our ability to make corresponding adjustments, there could be a
material adverse effect on our business and operating results.
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. 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. 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 carried out by the PRC government are unprecedented
or experimental, 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, 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.
13
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, 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.
Potential effects related to the PRC's WTO accession could have a material
adverse affect our company.
The PRC became a member of the WTO in December 2001. Pursuant to the bilateral
agreement entered into between the PRC and the United States on December 11,
1999, the PRC agreed to lower tariffs on imports by an average of approximately
17% and to eliminate quotas and other quantitative restrictions on food product
imports within two to five years. There is no assurance that such increased
competition will not have any material adverse effect on our business or
profitability.
Currency conversion and exchange rate volatility could adversely affect our
company
The PRC government imposes control over the conversion of Renminbi into foreign
currencies. Under the current unified floating exchange rate system, the
People's Bank of China publishes an exchange rate, which we refer to as the PBOC
exchange rate, based on the previous day's dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC exchange rate according to market
conditions.
Pursuant to the Foreign Exchange Control Regulations of the PRC issued by the
State Council which came into effect on April 1, 1996, and the Regulations on
the Administration of Foreign Exchange Settlement, Sale and Payment of the PRC
which came into effect on July 1, 1996, regarding foreign exchange control,
conversion of Renminbi into foreign exchange by Foreign Investment Enterprises,
or FIEs, for use on current account items, including the distribution of
dividends and profits to foreign investors, is permissible. FIEs are permitted
14
to convert their after-tax dividends and profits to foreign exchange and remit
such foreign exchange to their foreign exchange bank accounts in the PRC.
Conversion of Renminbi into foreign currencies for capital account items,
including direct investment, loans, and security investment, is still under
certain restrictions. On January 14, 1997, the State Council amended the Foreign
Exchange Control Regulations and added, among other things, an important
provision, which provides that the PRC government shall not impose restrictions
on recurring international payments and transfers under current account items.
Enterprises in the PRC (including FIEs) which require foreign exchange for
transactions relating to current account items, may, without approval of the
State Administration of Foreign Exchange, or SAFE, effect payment from their
foreign exchange account or convert and pay at the designated foreign exchange
banks by providing valid receipts and proofs.
Convertibility of foreign exchange in respect of capital account items, such as
direct investment and capital contribution, is still subject to certain
restrictions, and prior approval from the SAFE or its relevant branches must be
sought.
Since 1994, the exchange rate for Renminbi against the United States dollars has
remained relatively stable, most of the time in the region of approximately
MB8.28 to US$1.00. However, there can be no assurance that Renminbi will not be
subject to devaluation. We may not be able to hedge effectively against Renminbi
devaluation, so there can be no assurance that future movements in the exchange
rate of Renminbi and other currencies will not have an adverse effect on our
financial condition.
HQOF and Jiahua Marine, our principle operating subsidiaries, are a FIEs to
which the Foreign Exchange Control Regulations are applicable. 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.
Our dependence upon Chinese production facilities and raw material suppliers
could affect our company.
All of our processing facilities are located in the PRC and all the raw
materials we require are located in the PRC. Therefore, our operations and
performance are subject to changes in the economic and political environment in
the PRC and to the risks inherent in maintaining operations outside the United
States.
Risks Relating To The Offering
This prospectus contains forward-looking statements that are subject to risks,
uncertainties, and assumptions; our actual results may differ materially from
those anticipated in the forward-looking statements.
This prospectus contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These include statements about
our expectations, beliefs, intentions or strategies for the future, which we
15
indicate by words or phrases such as "anticipate," "expect," "intend," "plan,"
"will," "we believe," "our company believes," "management believes" and similar
language. The forward-looking statements are based on our current expectations
and are subject to certain risks, uncertainties and assumptions, including those
set forth in the discussion under "Management's Discussion and Analysis." Our
actual results may differ materially from results anticipated in these
forward-looking statements. We base the forward-looking statements on
information currently available to us, and we assume no obligation to update or
revise them, whether as a result of new information, future events or otherwise.
In addition, our historical financial performance is not necessarily indicative
of the results that may be expected in the future and we believe that such
comparisons cannot be relied upon as indicators of future performance.
The market price for shares of our common stock could be volatile, and you may
be unable to resell your shares in the stock market.
The market price for the shares of our common stock may fluctuate in response to
a number of factors, some of which are beyond our control. Investors may be
unable to resell their shares in the stock market due to variations in turnover,
trading volume or other market conditions.
There could be future dilution of shareholders' interest in our company.
We may need to raise additional funds in the future to finance new developments
or expand existing operations. If we raise additional funds through the issuance
of new equity or equity-linked securities, other than on a pro rata basis to our
existing stockholders, the percentage ownership of the existing shareholders may
be reduced. Existing shareholders may experience subsequent dilution and/or such
newly issued securities may have rights, preferences and privileges senior to
those of the existing shareholders.
We have not independently verified the accuracy of certain facts and statistics
provided in this prospectus.
Certain information and statistics in this prospectus such as statistics
relating to the PRC aquaculture and seafood industry in the PRC as well as other
countries are derived from various public and private publications. While we
have taken reasonable care to ensure that the facts and statistics are
accurately reproduced from such sources, we have not independently verified the
information and do not guaranty that it is accurate, complete or up-to-date, and
therefore, we make no representation as to the accuracy of such facts and
statistics. Accordingly, such information should not be unduly relied upon.
We cannot guaranty the existence of an established public trading market.
Although our common stock trades on the NASD OTC Bulletin Board, a regular
trading market for our securities may not be sustained in the future. The NASD
has enacted recent changes that limit quotations on the OTC Bulletin Board to
securities of issuers that are current in their reports filed with the
16
Securities and Exchange Commission. We cannot determine the effect of these rule
changes and other proposed changes on the OTC Bulletin Board at this time. The
OTC Bulletin Board is an inter-dealer, over-the-counter market that provides
significantly less liquidity than the NASD's automated quotation system (the
"NASDAQ Stock Market"). Quotes for stocks included on the OTC Bulletin Board are
not listed in the financial sections of newspapers as are those for the NASDAQ
Stock Market. Therefore, prices for securities traded solely on the OTC Bulletin
Board may be difficult to obtain and holders of common stock may be unable to
resell their securities at or near their original offering price or at any
price. Market prices for our common stock will be influenced by a number of
factors, including:
o the issuance of new equity securities pursuant to an offering;
o changes in interest rates;
o competitive developments, including announcements by competitors of new
products or services or significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
o variations in quarterly operating results;
o change in financial estimates by securities analysts;
o the depth and liquidity of the market for our common stock;
o investor perceptions of our company and the aquaculture industry generally;
and
o general economic and other national conditions.
Our common stock could be considered a "penny stock."
Our common stock could be considered to be a "penny stock" if it meets one or
more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section
15(g) of the Securities Exchange Act of 1934, as amended. These include but are
not limited to the following: (i) the stock trades at a price less than $5.00
per share; (ii) it is NOT traded on a "recognized" national exchange; (iii) it
is NOT quoted on the NASDAQ Stock Market, or even if so, has a price less than
$5.00 per share; or (iv) it is issued by a company with net tangible assets less
than $2.0 million, if in business more than a continuous three years, or with
average revenues of less than $6.0 million for the past three years. The
principal result or effect of being designated a "penny stock" is that
securities broker-dealers cannot recommend the stock but must trade in it on an
unsolicited basis.
17
Broker-dealer requirements may affect the trading and liquidity of shares of our
common stock.
Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated thereunder by the SEC require broker-dealers dealing in penny stocks
to provide potential investors with a document disclosing the risks of penny
stocks and to obtain a manually signed and dated written receipt of the document
before effecting any transaction in a penny stock for the investor's account.
Potential investors in our common stock are urged to obtain and read such
disclosure carefully before purchasing any shares that are deemed to be "penny
stock." Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve
the account of any investor for transactions in such stocks before selling any
penny stock to that investor. This procedure requires the broker-dealer to (i)
obtain from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.
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 company and
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. To mitigate these difficulties, 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.
USE OF PROCEEDS
We will not receive any proceeds from the resale of our common stock pursuant to
this offering. We may, however, receive proceeds if any of the selling
shareholders exercise their warrants through a cash exercise. We may also
receive proceeds if those selling shareholders who are Westminster's designees
pay us for up to the total of 3.8 Units, at $34,000 per Unit, issuable pursuant
to the Agent Warrant which we agreed to issue in consideration of Westminster
serving as our placement agent recently. For more information, see "Selling
Shareholders" below. Any proceeds that we may so receive will be used for
general corporate purposes, including funding our working capital needs.
18
SELLING SHAREHOLDERS
The selling shareholders may from time to time offer and sell pursuant
to this prospectus any or all of the shares of our common stock set forth below.
When we refer to "selling shareholders" in this prospectus, we mean those
persons listed in the table below, and the pledgees, donees, permitted
transferees, assignees, successors and others who later come to hold any of the
selling shareholders' interests in shares of our common stock other than through
a public sale.
The table below sets forth, as of the date of this prospectus, the name
of each selling shareholder for whom we are registering shares for resale to the
public, and the number of shares of common stock that each selling shareholder
may offer pursuant to this prospectus. The common stock being offered by the
selling shareholders was acquired from us either in our reverse merger with
Process Equipment in 2004, which is described elsewhere in this prospectus, or
in private placements of our common stock that were completed in April 2004. The
shares of common stock offered by the selling shareholders were issued pursuant
to exemptions from the registration requirements of the Securities Act. The
selling shareholders that acquired our stock in private placements completed in
April 2004 represented to us that they were accredited investors and were
acquiring our common stock for investment and with no present intention of
distributing the common stock. We have agreed to file a registration statement
covering the common stock received by the selling shareholders. We have filed
with the Securities and Exchange Commission, under the Securities Act, a
registration statement on Form SB-2 with respect to the resale of the common
stock from time to time by the selling shareholders, and this prospectus forms a
part of the registration statement on Form SB-2. Except as noted below, none of
the selling shareholders has, or within the past three years has had, any
material relationship with us or any of our predecessors or affiliates.
Based on the information provided to us by each selling shareholder and
as of the date the same was provided to us, assuming that the selling
shareholders sell all of our shares of common stock beneficially owned by them
that have been registered by us and do not acquire any additional shares during
the offering, each selling shareholder will not own any shares other than those
appearing in the column entitled "Percentage of Common Stock owned after the
Offering." We cannot advise you as to whether the selling shareholders will in
fact sell any or all of such shares of common stock. In addition, the selling
shareholders may have sold, transferred or otherwise disposed of, or may sell,
transfer or otherwise dispose of, at any time and from time to time, the shares
of our common stock in transactions exempt from the registration requirements of
the Securities Act after the date on which they provided the information set
forth on the table below.
19
Selling Shareholder Number of Number of Number of Total Total number Percentage
shares of shares of shares of number of of securities of Common
Common Common Common securities being Stock
Stock owned Stock Stock owned prior registered owned after
prior to the issuable issuable to the the
Offering upon the upon the Offering Offering
exercise of exercise of (2)(3)
Series C Series D
Warrants Warrants
@ $0.42 @ $0.84
per share per share
(1) (1)
- ---------------------- ----------- ---------- ----------- ----------- ----------- ---------
Du Rui 854,700 0 0 854,700 854,700 *
Altay Gokbilgin 792,560 0 0 792,560 792,560 *
Wei-Ya Kao 2,266,667 0 0 2,266,667 2,266,667 *
Lui Hung Yen 500,000 0 0 500,000 500,000 *
Barron Partners 3,068,500 1,480,000 1,480,000 6,028,500 6,028,500 *
LP(4)
DAS Consulting
LLC PSP, Pershing 1,000,000 400,000 400,000 1,800,000 1,800,000 *
LLC as Custodian,
FBO Deborah
Salerno
IRA FBO John P.
O'Shea, Pershing 1,300,000 520,000 520,000 2,340,000 2,340,000 *
LLC as
Custodian(5)(10)
SEP FBO Daniel
Luskind, Pershing 100,000 40,000 40,000 180,000 180,000 *
LLC as
Custodian(5)(10)
John P. 630,000 152,000 152,000 934,000 934,000 *
O'Shea(5)(6)(10)
Daniel Luskind 315,580 76,000 76,000 476,580 467,580 *
(5)(7)(10)
Marika 20,685 0 0 20,685 20,685 *
Xirouhakis(5)(8)(10)
John B. Marsala 163,000 80,000 80,000 323,000 323,000 *
Henry S. Krauss(5) 415,000 116,000 116,000 647,000 647,000 *
(9)(10)
RES Limited(11) 319,500 240,000 240,000 799,500 799,500 *
Frank L. Kramer 100,000 80,000 80,000 260,000 260,000 *
20
Northern Valley 200,000 80,000 80,000 360,000 360,000 *
Partners, LLC(12)
Joseph A. Smith 100 80,000 80,000 160,100 160,100 *
Red Coral Group 41,189,258 0 0 41,189,258 8,000,000 33.2%
Limited (13)
Total 53,235,550 3,344,000 3,344,000 59,923,550 26,734,292 26.0%
* Less than 1%
(1) Assumes no price adjustment to exercise price.
(2) Assumes that each named selling shareholder sells all of the shares of
common stock it holds (including the shares it will hold pursuant to the
exercise of warrants, as applicable) that are covered by this prospectus and
neither acquires nor disposes of any other shares, or right to purchase other
shares, subsequent to the date as of which we obtained information regarding its
holdings. Because the selling shareholders are not obligated to sell all or any
portion of the shares of our common stock shown as offered by them, we cannot
estimate the actual number of shares of common stock (or actual percentage of
the class of common stock) that will be held by any selling shareholder upon
completion of the offering.
(3) Calculated based on Rule 13d-3(d)(i) of the Exchange Act of 1934, as
amended, using 100,261,523 shares of common stock outstanding as of June 30,
2005.
(4) Andrew Barron Worden, Managing Partner of the selling shareholder, has sole
voting and investment power over the securities that this selling shareholder
beneficially owns.
(5) Each of John O'Shea, Daniel Luskind and Henry S. Krauss is an officer of
Westminster, our placement agent in a recent private placement of our common
stock to some selling shareholders, as well as our financial advisor in
connection with our recent reverse merger. Marika Xirouhakis is an employee of
Westminster.
(6) Securities originally being registered on behalf of this selling shareholder
consist of (a) 250,000 shares we agreed to issue to Westminster or its designees
for Westminster's services as our financial advisor in the reverse merger; (b)
380,000 shares included in the Units issuable pursuant to the Agent Warrant,
representing the portion thereof allocated by Westminster to this selling
shareholder (subject to the holder's payment of $34,000 per Unit to us); and (c)
152,000 shares underlying Class C warrants and 152,000 shares underlying Class D
warrants, all included in the same Units , which shares are issuable to the
selling shareholder in the event he exercises his portion of the Agent Warrant
and these Series C and Series D warrants.
(7) Securities originally being registered on behalf of this selling shareholder
consist of (a) 125,000 shares we agreed to issue to Westminster or its designees
for Westminster's services as our financial advisor in the reverse merger; (b)
190,000 shares included in the Units issuable pursuant to the Agent Warrant,
21
representing the portion thereof allocated by Westminster to this selling
shareholder (subject to the holder's payment of $34,000 per Unit to us); and (c)
76,000 shares underlying Class C warrants and 76,000 shares underlying Class D
warrants, all included in the same Units, which shares are issuable to the
selling shareholder in the event he exercises his portion of the Agent Warrant
and these Series C and Series D warrants.
(8) Shares originally being registered on behalf of this selling shareholder
consist of 20,685 shares we agreed to issue to Westminster or its designees for
Westminster's services as our financial advisor in the reverse merger.
(9) Securities originally being registered on behalf of this selling shareholder
consist of (b) 107,000 shares previously owned and/or acquired in our private
placement in April 2004; (b) 125,000 shares we agreed to issue to Westminster or
its designees for Westminster's services as our financial advisor in the reverse
merger; (c) 190,000 shares included in the Units issuable pursuant to the Agent
Warrant, representing the portion thereof allocated by Westminster to this
selling shareholder (subject to the holder's payment of $34,000 per Unit to us);
and (d) 76,000 shares underlying Class C warrants and 76,000 shares underlying
Class D warrants, all included in the same Units, which shares are issuable to
the selling shareholder in the event he exercises his portion of the Agent
Warrant and these Series C and Series D warrants.
(10) Each of these selling shareholders is an affiliate of a broker-dealer,
purchased the shares in the ordinary course of business (and/or as compensation
to Westminster or its designees) and, at the time of the purchase, did not have
any agreement or understanding, directly or indirectly, with any person to
distribute the shares.
(11) Evelyn J. Cann, the President of the selling shareholder, and M. Scott
Godet, the Secretary of the selling shareholder, share voting and investment
power over the securities beneficially owned by this selling shareholder.
(12) Michael Potter, the President of the selling shareholder, has sole voting
and investment power over the securities beneficially owned by this selling
shareholder.
(13) Red Coral Group Limited is the shareholder of record. The shares are
beneficially owned by Norbert Sporns, our Chief Executive Officer, President and
director, Harry Wang, our Chief Operating Officer and director, and Lillian Wang
Li, our Chairman of the Board of Directors, each of whom own, respectively, 24%,
51% and 25% of the issued capital of Red Coral and all of whom share voting and
investment power over the shares held by Red Coral.
22
Our Private Placements
First Private Placement
Exemption from Registration. We issued Units, each consisting of shares of our
common stock, Series C and Series D common stock purchase warrants to the
Investors in accordance with and in reliance upon the exemption from securities
registration afforded by Rule 506 under Regulation D promulgated by the SEC
under the Securities Act and/or Section 4(2) of the Securities Act.
Purchase Price. The purchase price paid by each Investor was $34,000 per Unit
(the "Purchase Price"), payable in United States Dollars. If, within the 24
months following the earlier of (i) April 30, 2004 or (ii) upon satisfaction of
all conditions precedent to our company's and the Investors' obligations, unless
extended by mutual consent by our company and Investors until May 15, 2004 (the
"Final Closing") we complete a sale of a convertible note or notes, shares of
common stock, or shares of preferred stock, or warrants, rights or options to
purchase common stock (other than pursuant to an employee stock option plan or
directors' stock option plan) at a price per share of common stock, or with a
conversion or exercise right to acquire common stock at a price per share of
common stock, that is less than the Purchase Price (as adjusted for any stock
splits, stock dividends, or the like subsequent to the Final Closing)
(collectively, the "Subsequent Purchase Price"), we must make a post-closing
adjustment in the Purchase Price so that the effective price per share paid by
the Investors is reduced to the Subsequent Purchase Price as applied to the
Investors' then current holdings. Within five business days following the
closing of the subsequent sale, we must pay to the Investors the product of the
number of shares owned by Investors on the date of the subsequent sale times the
difference between the Purchase Price and the Subsequent Purchase Price. Payment
shall be made in cash or issuance of the notes, preferred stock, common stock,
unit offering or financing that causes triggering the price adjustment, at the
option of each individual Investor.
Number of Shares Being Registered in Connection with the Main Purchase
Agreement. The Main Purchase Agreement includes a registration rights agreement
as an exhibit thereto. Pursuant to the registration rights agreement, we are
required to initially file with the Commission a registration statement which
registers the number of shares and shares underlying warrants that were
purchased by the Investors, that is, an aggregate of 7,600,000 shares of common
stock. The registration statement of which this prospectus is a part also
includes 6,080,000 shares of common stock issuable pursuant to the exercise of
Series C and Series D warrants, granted to the Investors as described below.
Warrants Issued in Connection With The Main Purchase Agreement. Upon the
execution of the Main Purchase Agreement, we issued to the Investors (i)
four-tenths (0.4) of a Class C Warrant and (ii) four-tenths (0.4) of a Class D
Warrant for every share of common stock purchased under the Main Purchase
Agreement. The exercise price of the Class C warrants is $0.42 per share, and
23
the exercise price of the Class D warrants is $0.84 per share (as adjusted for
each warrant from time to time as provided therein). Pursuant to these warrants,
the Investors are entitled, collectively, to purchase 6,080,000 shares of common
stock. The effectiveness of the registration statement of which this prospectus
is a part is a condition to the Investors' obligation to purchase our common
stock under the Main Purchase Agreement. The warrants expire April 23, 2009
(five (5) years from the date of issuance) or eighteen months from the
effectiveness of the registration statement of which this prospectus is a part,
whichever is later, with a cashless exercise provision. Under the terms of the
warrants, the holders thereof agree not to elect for a period of one (1) year a
cashless exercise of the warrants. The holders also agree not to elect a
cashless exercise so long as there is an effective registration statement for
shares underlying the respective warrants.
Investors Right of Indemnification. We have agreed to indemnify the Investors
from all claims, demands, losses, costs, expenses, obligations, liabilities or
other damages, including interest, penalties and reasonable attorney's fees,
that it shall incur or suffer, which arise out of, result from or relate to any
breach of the Main Purchase Agreement or failure by us to perform with respect
to any of its representations, warranties or covenants contained in the Main
Purchase Agreement or any exhibit or other instrument furnished or to be
furnished under the Main Purchase Agreement.
Securities Being Registered on Behalf of the Placement Agent. As described
above, Westminster acted as our placement agent in connection with the above
private placement. In consideration of these services, we agreed to grant to
Westminster or its designees the Agent Warrant representing the right to
purchase up to the total of 3.8 Units, at $34,000 per Unit. We also agreed to
register hereunder the shares of common stock issuable pursuant to the Agent
Warrant, as well as the shares of common stock underlying the Series C and
Series D warrants included in the Agent Warrant. Westminster subsequently
allocated the Agent Warrant and/or the securities covered thereby to three of
its officers and one of its employees. We are therefore registering, on behalf
of four designees of Westminster, a total of 760,000 shares of our common stock
included in the Units issuable pursuant to the exercise of the Agent Warrant,
and a total of 608,000 shares of our common stock underlying the Class C and
Class D warrants that are also part of the Units (subject to the holder's
exercise of such warrants).
Second Private Placement
We entered into three additional stock purchase agreements in April 2004.
Pursuant to these Additional Purchase Agreements, we sold shares of our common
stock, in a private placement, to three additional persons: Gokbilgin, Du Rui
and Wei-Ya Kao. Under the Additional Purchase Agreements, Gokbilgin, Rui and Kao
have certain rights to include the shares of common stock purchased by them in
certain registration statements to be filed by us in the future. The
registration statement of which this prospectus is a part includes the shares
held by these three shareholders.
24
Additional Securities We Are Registering
In addition, we are registering 520,685 shares of our common stock that we
agreed to issue in a private placement to Westminster, for its services as our
financial advisor in connection with our recent reverse merger. Further, we are
registering 500,000 shares we agreed to issue to Lui Hung Yen, a holder of a
promissory note of Jade, our subsidiary, in exchange for cancellation thereof
and release of any related claims by this person against us or Jade.
Finally, we are also registering 8,000,000 shares of our common stock on behalf
of our existing shareholder, Red Coral, which are beneficially owned by some of
our directors and executive officers, Norbert Sporns, Lillian Wang Li and Harry
Wang , who intend to use the proceeds from the sale of the shares to purchase
additional shares from certain shareholders to increase their stake in our
company.
PLAN OF DISTRIBUTION
We are registering the common stock covered by this prospectus on behalf of the
selling shareholders. Each selling shareholder is free to offer and sell his or
her shares of our common stock at such times, in such manner and at such prices
as he or she may determine. The selling shareholders have advised us that the
sale or distribution of our common stock owned by the selling shareholders may
be effected in transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of our
common stock, or a combination of such methods of sale. The sales will be at
market prices prevailing at the time of sale or at negotiated prices. Such
transactions may or may not involve brokers or dealers. The selling shareholders
have advised us that they have not entered into agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
shares. The selling shareholders do not have an underwriter or coordinating
broker acting in connection with the proposed sale of our common stock. There is
no over-allotment option and no shares will be sold by us.
The selling shareholders may sell their shares directly to purchasers or to or
through broker-dealers, which may act as agents or principals. These
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling shareholders. They may also receive compensation
from the purchasers of our common stock for whom such broker-dealers may act as
agents or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
Selling shareholders and any broker-dealer that acts in connection with the sale
of shares of our common stock hereunder may be deemed to be "underwriters"
within the meaning of Section 2(a)(11) of the Securities Act. Any commissions
received by such broker-dealers and any profit on the resale of the shares of
25
our common stock sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act. The selling
shareholders may agree to indemnify any agent, dealer or broker-dealer that
participates in transactions involving sales of our common stock against certain
liabilities, including liabilities arising under the Securities Act.
Because each of selling shareholders may be deemed to be an "underwriter" within
the meaning of Section 2(a)(11) of the Securities Act, the selling shareholders
will be subject to prospectus delivery requirements of the Securities Act.
We have informed the selling shareholders that the anti-manipulation rules of
the Commission, including Regulation M promulgated under the Securities Exchange
Act, may apply to their sales in the market.
Regulation M may limit the timing of purchases and sales of any of the shares of
our common stock by the selling shareholders and any other person distributing
our common stock. The anti-manipulation rules under the Securities Exchange Act
may apply to sales of shares of our common stock in the market and to the
activities of the selling shareholders and their affiliates. Furthermore,
Regulation M of the Securities Exchange Act may restrict the ability of any
person engaged in the distribution of shares of our common stock to engage in
market-making activities with respect to the particular shares of common stock
being distributed for a period of up to five business days prior to the
commencement of such distribution. All of the foregoing may affect the
marketability of our common stock and the ability of any person or entity to
engage in market-making activities with respect to our common stock.
Rules 101 and 102 of Regulation M under the Securities Exchange Act, among other
things, generally prohibit certain participants in a distribution from bidding
for or purchasing for an account in which the participant has a beneficial
interest, any of the securities that are the subject of the distribution. Rule
104 of Regulation M governs bids and purchases made to stabilize the price of a
security in connection with a distribution of the security.
The selling shareholders also may resell all, or a portion, of the common shares
in open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of such Rule.
The selling stockholders will pay all commissions, transfer taxes and other
expenses associated with their sales. The shares offered hereby are being
registered pursuant to our contractual obligations, and we have agreed to pay
the expenses of the preparation of this prospectus.
26
BUSINESS
As used in this prospectus "we", "us", "our", "HQSM", 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 Hainan Jiahua Marine Bio-Product Company Limited or "Jiahua
Marine".
History
Our company was initially incorporated as Sharon Capital Corporation, or Sharon,
on September 21, 1989 under the laws of the State of Nevada. Sharon was a "blind
pool/blank check" corporation organized for the purpose of purchasing, merging
with or acquiring a business or assets from another company. In July 1990,
Sharon was changed to PEI, Inc., which was subsequently changed to Process
Equipment, Inc. in November 1990. 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. Pursuant to that agreement,
Process Equipment, Inc., through PEAC, acquired Jade, and 84.42% 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, HQSM. The name
change, change of domicile and merger became effective on May 19, 2004, with
HQSM being the surviving entity in the merger and acquiring all the assets and
liabilities of Process Equipment, Inc.
On May 19, 2004, in order to effect a reincorporation from Nevada to Delaware,
Process Equipment, Inc., a Nevada corporation, was merged with and into HQ
Sustainable Maritime Industries, Inc., a Delaware corporation. Prior to the
effective time of the reincorporation, HQ Sustainable Maritime Industries, Inc.
had been a wholly-owned subsidiary corporation of Process Equipment, Inc.
organized for the purposes of effecting the reincorporation. At the effective
time of the reincorporation, HQ Sustainable Maritime Industries, Inc. became the
surviving entity of the merger pursuant to which the reincorporation was
completed, as well as the registrant for reporting purposes under the federal
securities laws. The merged entity is governed by the Delaware General
Corporation Law and the certificate of incorporation and bylaws of HQ
Sustainable Maritime Industries, Inc.
The reincorporation was completed pursuant to an Agreement and Plan of Merger
dated as of May 19, 2004, by and between Process Equipment, Inc. and HQ
Sustainable Maritime Industries, Inc., and was approved by the holders of
27
approximately 73% of the issued and outstanding common stock of Process
Equipment, Inc. by written consent in lieu of a special meeting of the
stockholders of Process Equipment, Inc. (all as more fully described in the
Information Statement).
At the effective time of the reincorporation, the directors and executive
officers of Process Equipment, Inc. became the directors and executive officers
of HQ Sustainable Maritime Industries, Inc. HQ Sustainable Maritime Industries,
Inc.'s business, mailing address, principal executive offices and telephone
number are the same as those of Process Equipment, Inc.
At the effective time of the reincorporation, each outstanding share of common
stock, par value $.001 per share of Process Equipment, Inc. was automatically
converted into one share of common stock, par value $.001 per share of HQ
Sustainable Maritime Industries, Inc. Outstanding options and warrants to
purchase shares of Process Equipment, Inc. were automatically converted into
options and warrants to purchase the same number of shares of HQ Sustainable
Maritime Industries, Inc. Each employee stock plan and any other employee
benefit plan to which Process Equipment, Inc. was a party were assumed by HQ
Sustainable Maritime Industries, Inc. and, to the extent any such plans provided
for the issuance or purchase of Process Equipment, Inc. common stock, such plans
now provide for the issuance or purchase of HQ Sustainable Maritime Industries,
Inc. common stock.
It was not and is not necessary for stockholders to exchange their existing
Process Equipment stock certificates for new certificates bearing the name of HQ
Sustainable Maritime Industries, Inc. Shares of Process Equipment, Inc. common
stock, traded under the symbol "PEQM.OB" on the OTC Bulletin Board prior to
reincorporation, continue to be traded on the OTC Bulletin Board under the
symbol "HQSM.OB" as HQ Sustainable Maritime Industries, Inc. common stock. The
OTC Bulletin Board and HQ Sustainable Maritime Industries, Inc.'s transfer agent
will consider the existing Process Equipment, Inc. stock certificates as
constituting "good delivery" in post-reincorporation transactions involving HQ
Sustainable Maritime Industries, Inc.'s common stock. In addition, the merged
company was also assigned a new CUSIP number. The new CUSIP number is 40426A 10
9.
The foregoing description of the reincorporation is not intended to be complete
and is qualified in its entirety by the complete text, including exhibits, of
the Information Statement.
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. That purchase agreement was filed as
an exhibit to our current report on Form 8-K filed with the Commission on August
18, 2004. 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
28
healthcare products in the PRC, as described in more detail in the above current
report. Also as previously disclosed, in the same current report, SSC is owned
by three of our current directors and executive officers who are also, together,
indirect beneficial owners of the majority of our capital stock. The
consideration of the acquisition is $20 million in terms of 12,698,078 shares
(equivalent to $8,888,655), $11,011,345 promissory note convertible to
15,732,493 Class A shares and $100,000 promissory note convertible to 100,000
Series A preferred stock with par value at $0.001 per share. Both promissory
notes accrue interest at the rate of 5% per annum. 12,698,078 shares were issued
to SSC on August 17, 2004 after the Purchase Agreement was signed. $11,011,345
of promissory notes were converted to 15,732,493 Class A shares on November 18,
2004.
Further, as previously disclosed in the above current report, effective from
August 17, 2004, HQSM caused Jade Profit Investment Limited, its wholly-owned
subsidiary, to acquire the minority equity interest equal to 15.58% that Jade
did not already own in Hainan Quebec Ocean Fishing Company Limited, HQSM'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
consideration of $5,695,145 was fully paid in cash on October 31, 2004.
On April 16, 2004, HQ Sustainable Maritime Marketing Inc. ("HQSM Marketing") was
formed and registered in USA, wholly owned by HQSM. This new subsidiary was
dormant during the year.
On June 15, 2004, HQ Sustainable Maritime Marketing (Canada) Inc ("HQSM Canada")
was formed in Canada and is wholly owned by HQSM. HQSM Canada commenced
operations in June 2004, and performs business development, sales and marketing
in the Canadian market.
Our principal executive office is located at Wall Street Center, 14 Wall Street,
20th Floor, New York, New York 10005, and our telephone number is (212)
618-1712. The URL for our website is http://www.hqfish.com.
Business
The Group is principally engaged in the vertically integrated business of
aquaculture through co-operative supply arrangements, ocean product harvesting,
and processing and sales of farm-bred and ocean harvested aquatic products, as
well as the production and sale of marine bio-products and healthcare products.
The Group is committed to providing a variety of high quality aquatic products
and health products through an integrated operation that covers value added key
areas along the production chain from a bio-secure and stable supply of tilapia
and shrimp under stringently monitored conditions, processed in accordance with
internationally recognized standards of hygiene. Since the Group acquired
Sealink Wealth Limited ("Sealink" hereafter), The Group has also engaged in the
production and sale of marine bio-products and healthcare products in the PRC.
29
The principal products of Hainan Jiahua Marine Bio-Product Company Limited (100%
owned subsidiary of Sealink) are Shark Cartilage Capsule, Shark Liver Oil and
Shark Liver (Soft gel). The major market is in the PRC.
The Group has developed a co-operative supply network in Hainan Province, China
(for aquaculture product), which allows it to guarantee quality and quantity of
products for processing without engaging directly in farming operations and
having to deal with the associated capital costs and risks. The Group, through
the co-operative supply agreements, is active in the transfer of technology to
its suppliers and the constant monitoring of quality.
Manufacturing
Aquaculture Products
The Group's aquatic products processing plant is a Canadian designed facility
and is located in Hainan, the PRC. Prior to May 2004, the Group had two
production lines in aggregate and they are located in the same processing plant
in Hainan. From January to May, 2004 the plant was expanded to six production
lines. These six lines include two filleting lines, two whole round fish
processing lines (principally Tilapia which is gutted, scaled and gilled) and
two shrimp processing lines. The facility is capable of processing an average of
approximately 10,000 tons per year of whole round fish (principally Tilapia),
3,000 tons per year of fillet and 3,000 tons per year of shrimp. The plant
operates in two shifts for a total of 17 hours.
The Group's products have been awarded HACCP Certification for exporting aquatic
products to the US and Japan. HACCP is used by the US Food and Drug
Administration in controlling food safety and sanitary hazards. It is a
preventive system previously used by astronauts, focusing on preventing hazards
that could cause food-borne illnesses by applying science based controls, from
raw materials to finished products. The successful implementation of a HACCP
plan is dependent upon the design and performance of facilities and equipment,
combined with excellent quality control and hygiene practices, which can
minimize the occurrence of a hazard in a finished product.
Apart from the HACCP Certification, the Group has also been assigned an EU Code
for exporting aquatic products to the EU. The EU has designated only two
producers in Hainan Province. The code is highly coveted since very few new
attributions of code are being accepted. This increases the value of export to
the EU since buyers routinely pay more than their US counterparts. The Directors
believe the awards of the HACCP Certification and the assignment of the EU Code
have enabled the Group to export to the US and the EU respectively. The HACCP
Certification and EU Code assignment signify the Group's attainment of stringent
hygiene standards and enable the Group to better market and export its processed
aquatic products to overseas clients in the US and the EU.
30
The Group's products are also acknowledged as eco-friendly by the Canadian
International Development Agency (CIDA). CIDA is an agency of the Canadian
Government that maintains programs of direct government to government aid for
developing countries and also has programs which support private investment in
developing countries which meet stringent environmental and social criteria. It
provided early stages development support through the transfer of technology to
aquaculture operations, fish processing and ocean harvesting operations. A
pre-condition to the receipt of this support was the preparation of detailed
environmental and social (gender) impact studies. It is these studies which
amount to an environmental and Fair Trade appreciation of the activities of HQ
and can be described as an eco-friendly certification. This illustrates that the
Group has met or exceeded certain standards of environmental protection and that
the Group has conducted its business in a sustainable and socially responsible
fashion with high regard for the environment and place of women in the
communities in which it operates.
The Group conducts sample laboratory testing on the Group's processed aquatic
products to ensure no forbidden substances are present in them. The laboratory
testing was initiated by the Group in compliance with strict quarantine
guidelines imposed by domestic export control government agencies and foreign
import control government agencies.
Health and Bio-products
Our production workshops consist of two production lines: the powder line and
the oil line. We have raw material treatment workshops, such as an extraction
workshop, a freezing and drying workshop, a powder distillation workshop and a
finished product workshop in powder line. We also have pre-treatment workshops,
such as a cooling and filtration workshop, a molecular distillation workshop, a
supplemental stuff workshop and a capsule workshop in oil 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, etc.
The Products
The following are a brief description of our products.
Tilapia Products
Tilapia are native to Africa, but have been introduced in many countries around
the world. They are disease-resistant, reproduce easily, eat a wide variety of
foods and tolerate poor water quality with low dissolved oxygen levels. Most
will grow in brackish water and some will adapt to full strength sea water.
These characteristics make tilapia suitable for culture in most developing
countries. They are most often grown in ponds, cages and rice fields.
31
There are many tilapia species but only a few are cultured widely around the
world today. There are three common species which are reared commercially in
ponds from Japan, the Philippines down to Thailand and Indonesia, namely the
black or Nile tilapia (Oreochromis niloticus), the red tilapia (Oreochromis
mossambicus) and the blue tilapia (Oreochromis aureus), usually in the form of a
new hybrid based on the original strains.
Black or Nile Tilapia
The fry eat zooplankton and the adults eat zooplankton, phytoplankton, insects,
other bottom organisms and manufactured food. The optimum temperature to culture
black tilapia is 25 to 30 degrees centigrade and black tilapia can tolerate low
temperature of 11 degrees centigrade. Black tilapia can grow well in water up to
20 parts per thousand salinity.
Red Tilapia
The fry eat zooplankton and the adults eat zooplankton, phytoplankton and
manufactured food. The optimum temperature to culture red tilapia is 25 to 30
degrees centigrade and red tilapia can tolerate low temperature of 10 to 12
degrees centigrade. Red tilapia can grow well in full strength sea water.
Tilapia Market
In the 1960s and 1970s, tilapia culture was geared towards the production of
food for local consumption and for the diversification of rural activities
related to agriculture and animal husbandry. During the past 20 years,
commercially viable techniques have been developed to control overcrowding in
the different production systems, thereby permitting faster and more uniform
growth to larger sizes. Commercial production has become popular in many
countries around the world.
Tilapia aquaculture has grown impressively during the 1990s, and forecasts
indicate that the industry will continue to expand significantly in the years to
come. US is the world's largest consumer of tilapia. In 2004, more than 175
million USD of Tilapia was sold in the United States representing almost 250,000
metric tons of live weight (See American Tilapia Association (See
http://ag.arizona.edu/azaqua/ata.html). Due to limited resources in domestic US
tilapia production, tilapia imports to the US are expected to increase. Imported
tilapia already accounts for around 90% of total consumption of tilapia in the
US. We believe that the largest demand for tilapia in the world will continue to
be the US.
32
TABLE 6
Top ten species groups in aquaculture production: quantity and growth
Species group 2000 2002 Share of 2002 APR
total
(tonnes) (percent)
Top ten species groups in terms of quantity
Carps and other cyprinids 15 451 646 16 692 147 41.9 3.9
Oysters 3 997 394 4 317 380 10.8 3.9
Miscellaneous marine molluscs 2 864 199 3 739 702 9.4 14.3
Clams, cockles, arkshells 2 633 441 3 430 820 8.6 14.1
Salmons, trouts, smelts 1 545 149 1 799 383 4.5 7.9
Tilapias and other cichlids 1 274 389 1 505 804 3.8 8.7
Mussels 1 370 953 1 444 734 3.6 2.7
Miscellaneous marine molluscs 1 591 813 1 348 327 3.4 -8.0
Shrimps, prawns 1 143 774 1 292 476 3.2 6.3
Scallops, pectens 1 154 470 1 226 568 3.1 3.1
Top ten species groups in terms of growth
Cods, hakes, haddocks 169 1 445 192.4
Misc. demersal fishes 8 701 15 302 32.6
Misc. marine crustaceans 34 202 52 377 23.7
Flounders, halibuts, soles 26 309 38 909 21.6
Tunas, bonitos, billfishes 6 447 9 445 21.0
Freshwater crustaceans 411 458 591 983 19.9
Crabs, sea-spiders 140 235 194 131 17.7
Freshwater molluscs 10 220 13 414 14.6
Misc. freshwater fishes 2 864 199 3 739 702 14.3
Clams, cockles, arkshells 2 633 441 3 430 820 14.1
Note: Data exclude aquatic plants. APR refers to the average annual percentage
growth rate for 2000-2002.
(Source State of The World Fisheries and Aquaculture (FAO) 2004 Report Part 1
table 6 See http://www.fao.org/sof/sofia/index_en.htm)
In the US, consumption of tilapia has risen in the recent years. Tilapia now
ranks third after farm-raised shrimp and Atlantic salmon in terms of aquaculture
products imported into the US. In terms of volume, frozen whole round fish ranks
first, followed by frozen fillets, and lastly fresh fillets. Frozen whole round
fish and fillets originate primarily from Asia, and fresh fillets primarily from
Central America and the Caribbean.
Recently, with the increase in production of tilapia in the PRC and the growing
demand of tilapia in the international market, the export of tilapia from the
PRC has also increased. We believe that tilapia has great potential for market
growth.
Fresh Water Shrimp Products
Shrimp is a favorite seafood all over the world. The giant tiger prawn or black
tiger shrimp (Penaeus monodon) accounts for more than half of all farmed shrimp
and dominates production in Thailand, Indonesia, India and the Philippines. In
the PRC, the fleshy prawn or Chinese white shrimp (Penaeus chinensis) is
dominant, whereas in Latin America it is the white leg shrimp (Litopenaeus
Vannamei) which is the leading species. The Indian prawn (Penaeus indicus) is
also farmed in Asia.
33
White Leg Shrimp in the PRC
Aquaculture of shrimp is rapidly developing in the PRC. White leg shrimp with
its scientific name of Litopenaeus vannamei, is one of the world's most
important farmed products. It is found throughout Central and South America and
along the coast of the Pacific Ocean. With the introduction of parent white leg
shrimp into the PRC and the success in raising seedlings, total production of
white leg shrimp increased to 300,000 tonnes in 2000.
Health products
The acquisition of Jiahua Marine provides HQ with the capacity to manufacture
nutraceuticals to enrich feed formulations for tilapia and shrimp farmed in the
Hainan area. These ingredients are directed at improving general health, growth,
feed conversion and meat quality of fish and shrimp. Such products boost the
immune system of shrimp to ward off common viruses and deliver various
functional food nutrients to humans through the fish and shrimp they eat. HQ is
working with leading technology providers throughout the world, in particular in
the United States, to deliver these new nutraceutical additives to the fish and
shrimp farming industry.
Jiahua Marine is also engaged in the production and sales of marine bio-products
and healthcare products in the PRC. It currently operates two activities, a
marine bio-products factory and research and development activity. The marine
bio-products factory is located in Wenchang City of Hainan Province, with a
ground floor area of 16,667 square meters and a construction area of
approximately 8,000 square meters. It operates two production lines: the
powder-product line and the oil-product line.
Jiahua Marine's second activity is related to research and development in
association with Marine Organism Research Institute, which is headed by a group
of experts specializing in the research and development of products derived from
marine organisms in China. Clinical trials and laboratory testing on Jiahua
Marine's various healthcare products have resulted in National Certification.
These products currently sold throughout China, are naturally derived from
ocean-harvested byproducts and are winners of Science and Technology Progress
Awards in China. Jiahua Marine also has established a long-term relationship
with the Qingdao University of Oceanography for production-research and
training.
Jiahua Marine production lines are ideally suited for the manufacture of
nutraceutical components. The plant is equipped with specific gravity molecular
separator and accessory equipment for the manufacture of nutraceutical products
that can serve as feed additives in the production of feed, including tilapia
and shrimp feed.
34
Jiahua Marine products provide leading ocean-sourced raw materials processed at
its own plant. Patented, laboratory and clinically tested products have resulted
from years of research and development administered through a partnership with
Qingtao Ocean University and its Marine Bioengineering Research Institute. Two
products are produced from refined shark cartilage and two from shark liver
(harvested from non-endangered shark species). These products are more fully
described below:
* Patent Number 460000X340-2001 -- Shark cartilage is highly alkalescent;
it contains chondroitin sulfate and calcium and impacts the human body
positively in the following ways:
-- Increases efficiency of immune system, activates NK cells
associated with combating cancer (sharks are cancer free);
-- Reduces blood acidity improving
-- Blood pressure
-- Apoplexy
-- Heart disease
-- Fertility
-- Osteoporosis
* Patent Number 460000X131-2001 -- Shark cartilage also contains
glycosaminoglycan, Amino Acids, and collagen proteins which have been
specially processed for absorption into the skin and impacts the human
body positively in the following ways:
-- Increases subcutaneous water content
-- Reduces wrinkles
-- Slows the visible effects of aging
* Patent Number 460000X338-2001 -- Shark Liver oil 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 which is
particularly important for the brain which consumes 23% of the
oxygen used in the body
-- Eliminates fatigue
-- Improves health
* Patent Number 460000X342-2001 -- Shark liver oil contains 100 times
more Alkoxy-Glyceryl (AKGS) than mothers milk. It is also rich in omega
3 oils recommended for nursing mothers, and impacts the human body
positively in the following ways:
-- Improves resistance to disease;
-- Improves phosphate for brain cell production
35
The above products have been shown to be effective.
In 2003, Jiahua Marine commenced a sales strategy, which it believes will lead
to strong growth in the current and future years. 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 the health advantages of the products
during an outing associated with their leisure activities. In addition, in 2003
sales have begun in Hualian Supermarket Co. Ltd., (one of the largest specialty
chains in China with well over 1200 outlets and sales of US$2 billion, the first
publicly listed supermarket retailer in China) as well as in health product and
pharmaceutical outlets throughout China.
In March 2005, the Group finalized with American River Nutrition Inc. (ARN) an
agreement providing HQSM with leading nutraceutical technology for its health
products and nutraceutically enriched aquaculture feed products business. The
Agreement also sets the stage for distribution of Health products produced by
HQSM in the United States as well as introducing ARN nutraceuticals into China
through HQSM's marketing network there.
ARN has cutting edge technology to develop unique nutraceuticals for aquaculture
feeds. These ingredients are directed at improving general health, growth, feed
conversion and meat quality of fish and shrimp. ARN is currently developing a
product that can boost the immune system of shrimp to ward off common viruses.
The impact of access to these new technologies will be a significant boost in
developing proprietary technology within the company and an expected significant
boost in sales and profitability. Furthermore, the agreement will begin the
process of selling HQSM health products in the United States as well as the sale
of ARN products through HQSM's distribution network in China. The relevant
health products markets in both countries represent a multi-billion dollar
business and is expected to lead to the development and sale of many more such
products for these markets. Currently HQSM produces and sells shark liver oil
and shark cartilage products and sells these through a unique direct sales and
retail sales system in China. Currently ARN produces and sells its
patent-protected DeltaGold(R) vitamin E, primarily in the USA and Canada.
ARN will work with HQSM to develop and validate relevant technologies and
coordinate the application of nutraceutical feed ingredients in feed products
for Tilapia and Shrimp particularly developing Nutraceutical feed additives in
HQSM's Nutraceutical plant that are health oriented and environmentally sound.
Marketing
Our sales and marketing team consists of nine members and is under the
supervision of Mr. Harry Wang, our Chief Operating Officer. The 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.
36
We believe that HQOF, one of our principal operating subsidiaries, is the only
vertically integrated PRC-based producer present at the International Seafood
Shows. This enables HQOF 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 immediately
addressed without the usual screening and middleman costs.
We have located the following as potential and prospective markets that we
intend to focus upon for expansion:
North America
The North American market for tilapia and shrimp is significant and is growing.
Competition from producers across the globe, ranging from Bangladesh to Chile,
is intense. Minimum quality is presumed as a pre-requisite and consumers tend to
be less educated as to the benefits of higher quality in this region. We plan to
continue to export to this market where our products are generally well
received.
People's Republic of China
Given the enormous demand and potential in the PRC market, we also consider it a
prospective market. The advantageous climatic conditions found in Hainan
Province allow year-round production, which differentiates it from other areas
in the PRC. With the PRC's accession to the WTO and the continued development of
our distribution network, opportunities should arise for us to establish
strategic linkages with foreign producers and suppliers seeking access to the
ever changing and modernizing Chinese market. We will consolidate this position
by being a producer of quality product and this strategy should also allow us to
decide and select strategic partners in the PRC in the future.
All health and bio-products of the group are sold in this geographic region. A
North American marketing initiative has been commenced by the signing of a
marketing and distribution agreement with American River Nutrition in March of
2005. The first step in this process is the re-testing of the products by
American laboratories to reproduce Chinese results and to make additional tests
to support more claims regarding the products.
Competition
Our company is principally engaged in the vertically integrated business of
aquaculture through co-operative supply agreements, ocean product harvesting and
processing and sales of farm-bred and ocean harvested aquatic products. The
co-operative supply agreements entered into between HQOF and selected tilapia
and shrimp farmers in Hainan Province secure the supply, quality and price of
raw materials for our Production. Through such arrangement, we believe that we
have a competitive advantage over our competitors in Hainan Province.
37
The PRC aquaculture industry is open to competition from local and overseas
operators engaged in aquaculture and from other captured fish producers. Our
major 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 also obtain the same HACCP Certification
and EU Code assignment that we possess, which certifies that their products are
also in compliance to certain standards. However, we believe that the
competition from such producers is minimal because, to the best of our
knowledge, there is no competitor in Hainan Province that has a similar
operating scale and production capacity, or that has developed the vertically
integrated business model under which we operate.
Although there is no formal entry barrier 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. Accordingly,
competitors have to mobilize extensive resources in order to maintain a presence
similar to ours.
We believe that we are geographically well-positioned to capitalize on the
significant potentials of seafood markets both overseas and within the PRC. As
buying power increases in Asia, and developed countries gravitate towards
fishery products, seafood producers are under great pressure to respond to
increasing demands. We further believe that the following factors contribute to
our principal strengths and competitive advantages:
Integrated operations. We run a vertically integrated operation that covers key
areas along the production chain including sourcing, co-operative supply farming
and distribution. Co-operative supply agreements have been secured with several
producers who benefit from our extensive technology development program. Through
intensive monitoring and quality control of fish fry, pond environment and feed
supply, we are able to assure the supply of quality aquaculture products.
International and domestic sales and marketing efforts. We have a distribution
network for our export sales and domestic sales that is developed and maintained
through our marketing offices in Beijing and Shanghai, through our international
direct and indirect marketing efforts, and also by virtue of our presence and
participation at international seafood shows.
Strategic location of co-operative supply and production base. We are
geographically well-positioned in Hainan Province to leverage on the year-round
favorable climatic conditions, abundant water supply and pristine environment.
Such strategic location is a key attribute to the success of our co-operative
suppliers of locally farmed tilapia and shrimp, particularly white leg shrimp.
38
Co-operative supply and vertical integration. We have assured supply, quality
and price of raw materials for production through long term arrangements with
leading local suppliers of shrimp and tilapia. We actively monitor aquaculture
quality and provide technological support to our suppliers, which allows us to
concentrate our resources and minimize risks. Through intensive monitoring and
control of the growth of fish fry, shrimp larvae, pond environment and feed
supply, we are able to assure the supply of quality aquaculture products and to
enhance product differentiation.
An established track record and brand name in the industry. Since our inception,
we have established a track record of supplying high quality aquatic products to
our overseas and local customers.
Good quality control. Safe and hygienic processing of aquatic products is of
paramount importance, as any failure to carry out the processing of harvested
fish correctly could render the product unsuitable for human consumption. We
adopt and implement stringent quality control measures and procedures throughout
our production process. Our processing plant in Hainan Province has obtained
HACCP and EU Code assignment.
Low labor cost. We are operating in a labor intensive industry. Due to the lower
labor costs in China, we are able to achieve lower operating cost advantage when
compared to our competitors in North America and elsewhere.
Local government support. The policy of Hainan Provincial Government is to
encourage increased investment in aquaculture and increased export of farmed
aquatic products. In December 2001, HQOF, our main operating subsidiary, was
recognized as a "Leading Agriculture Enterprise" by Hainan Provincial
Government, and in April 2001 HQOF was recognized as a New and High Tech
Enterprise of Hainan Province. These recognitions will be a great asset when we
participate in annual trade shows including the International Boston Seafood
Show and European Seafood Exposition.
Reduction of production cost due to the benefit of economy of scale. Expansion
of facilities and current sales volumes allows our company to benefit from
significant economies of scale. Our research and quality control staff have been
able to monitor an increased number of operations without the need of further
hiring. Large buyers are able to sole source instead of having to group supply
from various producers, allowing long term supply agreements.
Awards we have received. In December 2001, the Company was recognized as a
"Leading Agriculture Enterprise" by Hainan Provincial Government, and in April
2001, the Company was awarded the "New/high tech Enterprise of Hainan Province"
by Hainan Provincial Technology Authorities. In January 2003, the Company was
awarded the Industrial Enterprise of the Province. In 2002, The Company was
named a Leading Agriculture Enterprise for both Hainan Province and Wenchang.
Our board of directors believes that these accreditations reflect our
achievements and contribution to the development of the PRC aquaculture
industry. In March 2005, the Company was awarded the prestigious China
Excellence Award, for health product excellence and advancement of China
business practices, by the China Association of Entrepreneur Foreign Investment
(CAEFI), a branch of the China Ministry of Commerce of the People's Republic of
China.
39
Production certification. We also have received HACCP Certification and EU Code
assignment, which demonstrates our commitment to providing a variety of high
quality aquatic products under stringent hygiene standards.
International management expertise. We have successfully achieved a vertically
integrated operation that enables us to capitalize on opportunities in the
domestic and international fishery markets. Such achievement can be attributed
to our founders and senior management who have contributed their international
management expertise and technical know-how to our development.
Government Regulation
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.
Our company complies with various national, provincial and local environmental
protection laws and regulations. In addition to statutory and regulatory
compliance, we actively ensure the environmental sustainability of our
operations. Our costs of compliance with applicable environmental laws are
minimal, since the design of the plan includes a state-of-the-art settling and
filtration system which is inexpensive to maintain. Penalties would be levied
upon us if we fail to adhere to and maintain this standard. 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.
Patents and Trade Secrets
The Company presently has the following patents on its products.
* Patent Number 460000X340-2001 -- Shark cartilage is highly alkalescent;
it contains chondroitin sulfate and calcium and impacts the human body
positively in the following ways:
-- Increases efficiency of immune system, activates NK cells
associated with combating cancer (sharks are cancer free);
40
-- Reduces blood acidity improving
-- Blood pressure
-- Apoplexy
-- Heart disease
-- Fertility
-- Osteoporosis
* Patent Number 460000X131-2001 -- Shark cartilage also contains
glycosaminoglycan, Amino Acids, and collagen proteins which have been
specially processed for absorption into the skin and impacts the human
body positively in the following ways:
-- Increases subcutaneous water content
-- Reduces wrinkles
-- Slows the visible effects of aging
* Patent Number 460000X338-2001 -- Shark Liver oil 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 which is
particularly important for the brain which consumes 23% of the
oxygen used in the body
-- Eliminates fatigue
-- Improves health
* Patent Number 460000X342-2001 -- Shark liver oil contains 100 times
more Alkoxy-Glyceryl (AKGS) than mothers milk. It is also rich in omega
3 oils recommended for nursing mothers, and impacts the human body
positively in the following ways:
-- Improves resistance to disease;
-- Improves phosphate for brain cell production.
Intellectual Property
We currently market our products under the label HQ, our own brand.
Government Regulation
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
41
Administration Regulation, Regulations on Administration of Hygiene Registration
of Exported Food Manufacturers and Regulations on Administration of Quality
Control of Food Processors. See also a description of our compliance with the
applicable US Food and Drug Administration requirements relating to food safety
and sanitary hazards under "Business--Aquatic Products Processing Facility."
Our company complies with various national, provincial and local environmental
protection laws and regulations. In addition to statutory and regulatory
compliance, we actively ensure the environmental sustainability of our
operations. Our costs of compliance with applicable environmental laws are
minimal, since the design of the plant includes a state-of-the-art settling and
filtration system which is inexpensive to maintain. Penalties would be levied
upon us if we fail to adhere to and maintain this standard. 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.
Litigation
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.
Our Facilities
Our products processing plant is located at Chinglan Town, Wenchange City, 70
miles away from Haikou City in the PRC. This property is under a long-term lease
with a department of local government. We believe that this facility is
adequately covered by insurance.
Our Employees
Through Hainan Quebec, our principal operating subsidiary, we currently employ
approximately 434 employees, all of whom are full-time employees. They are
located predominantly in Haikou, PRC, with the rest of them located in WenChang,
PRC. We have employment contracts with many of our employees. None of our
employees are covered by a collective bargaining agreement, and we believe our
employee relations are good.
42
Management
The following table sets forth the names and ages of our current directors and
executive officers, their principal offices and positions and the date each such
person became our director or executive officer. The executive officers are all
full time employees of HQSM.
The directors and executive officers of HQSM are as follows:
NAME AGE POSITION DATE OF APPOINTMENT DATE OF RESIGN
- --------------- --- ------------------------------------ --------------------------- -----------------
Lillian Wang Li 47 Director/Chairman of Board of March 25, 2004 as director;
Directors/ Secretary officer April 13, 2004 as executive
Harry Wang Hua 41 Director/Chief Operating Officer March 25, 2004
Norbert Sporns 50 Director/Chief Executive Officer/
President March 25, 2004
Jacques Vallee 52 Independent Non-executive Director June 15, 2004
Fred Bild 67 Independent Non-executive Director June 15, 2004
Jean-Pierre Dallaire 53 Financial Controller April 13, 2004
Chief Financial Officer September 1, 2004
He Jian Bo 37 Manager Finance Dept. April 13, 2004
Wang Fu Hai 60 Chief Production Controller April 13, 2004
Fusheng Wang 71 Honorary Chairman and Director August 17, 2004
Daniel Too 52 Independent Non-executive Director September 2, 2004
Our directors are generally elected until the next annual meeting of
shareholders and until their successors are elected and qualified, or until
their earlier resignation or removal. We have recently appointed Fred Bild,
Jacques Vallee and Daniel Too as independent non-executive directors, effective
as of June 15, 2004, June 15, 2004 and September 2, 2004, respectively, pursuant
to Independent Non-Executive Director Agreements we entered into with each of
them. In consideration for their services, we agreed to pay each of Fred Bild,
Daniel Too and Jacques Vallee an annual salary of $15,000 and an annual bonus of
not less than $15,000 payable in shares of our common stock.
Our officers are generally elected annually by the board of directors and hold
office for a term of one year and until a successor is elected and qualified, or
until their earlier resignation or removal. All officers identified above serve
at the discretion of our board of directors.
Family Relationships
Lillian Wang Li and Harry Wang Hua are brother and sister and Ms. Wang is
married to Norbert Sporns.
Set forth below are the brief descriptions of the background and experience of
each of our officers and directors:
Lillian Wang Li - Chairman of Board of Directors and Secretary
43
Lillian Wang Li, age 47, is one of the founders of HQSM and is the chairman of
our board of directors. She is responsible for the general administration,
strategic planning and financial management of HQSM. Ms. Wang graduated from the
Beijing University majoring in European and Chinese Literature and holds a
certificate in business administration from Concordia University, Canada. She
has over twenty-five years experience in management of China and Canadian
businesses, particularly with respect to financial matters.
Harry Wang Hua - Director and Chief Operating
Officer Harry Wang Hua, age 41, is one of the founders of HQSM, and is our
director and chief operating officer. He is responsible for the establishment of
the production facilities and their operation in HQSM. He attended the Beijing
Industrial University majoring in civil engineering. Mr. Wang has over fifteen
years' experience in managing startup companies in China and in Canada and in
training middle managers in China to Western standards.
Norbert Sporns - Director, Chief Executive Officer and President
Norbert Sporns, age 51, is one of the founders of HQSM, and is our director,
chief executive officer and president. He has extensive experience in project
development and investment consultancy. He graduated from the University of
British Columbia, Canada, majoring in Philosophy. He also holds a Bachelor of
Civil Law degree and a Bachelor of English Common Law degree from McGill
University and a Certificate of Tax Law, a Certificate in Condominium Law and a
Diploma of Notarial Law from the University of Montreal. Mr. Sporns joined HQSM
in 1997.
Jacques Vallee -Independent Non-executive Director
Jacques Vallee, age 52, is an independent non-executive director. He is
currently in charge of Business Development and Financing with the Altitude
Consulting Group. In addition to an M.B.A. from the University of Sherbrooke and
an advanced Certificate in Business Administration from the University de Quebec
a Trois Rivieres, Mr. Vallee also holds a post-graduate level Advertising
Management Diploma from the Ecole des Hautes Etudes Commerciales, Montreal. He
has over 30 years of management experience at such notable Canadian institutions
as the Bank of Montreal, La Federation des Caisses Populaires Desjardins de
Richelieu-Yamaska, Le Fonds de Solidarite des Travailleurs du Quebec and
Altitude Consulting Group.
Fred Bild - Independent Non-executive Director
Fred Bild, age 67, is currently Visiting Professor at the University of
Montreal's Centre of East Asian Studies and is a private consultant on political
and economic relations with China and East Asia. Professor Bild received a B.A.
in Philosophy and Sociology from Sir George Williams University, a Diploma in
44
International Law from University College, London, and a Diplome de Stage from
the Ecole National d'Administration in Paris. Over the past nearly forty years,
Mr. Bild has served the Canadian Embassy in various functions including Cultural
Attache (Tokyo), Economic Counsel and Deputy Chief (Paris) and Ambassador to
Thailand and China.
Daniel Too - Independent Non-executive Director
Mr. Too, age 52, graduate of Hong Kong University and Polytechnic, has extensive
business experience in Asia and brings a keen understanding of the business
difficulties associated with working in China. He is currently the Managing
Director of Delta Elevator Far East and serves as Director of Voker Chemical
Paint Limited. He has been named to the compensation committee with another
Independent Non-Executive Director, Mr. Fred Bild, and the CEO, Norbert Sporns.
Jean-Pierre Dallaire - Financial Controller and Chief Financial Officer
Jean-Pierre Dallaire, age 53, is the financial controller and CFO of HQSM. He
has experience with Canada's largest engineering company where he was
responsible for cash flow projections and project financial supervision. He
holds a Master degree in Administration (Accounting) from the University of
Sherbrooke, Canada. He joined HQSM in 2000.
He Jian Bo - Manager Finance Department
He Jian Bo, age 37, is the manager of the finance department of HQSM. He holds a
Bachelor's and a Master degree in Economics from the Southwestern University of
Finance and Economics, the PRC. He joined HQSM in 1999.
Wang Fu Hai - Director and Chief Accounting and Finance Officer
Wang Fu Hai, age 60, is the Chief Production Controller and Engineer of HQSM. He
graduated from Post College in 1966. He was the manager of Project Department
Hainan Jiahua Ocean Organism Co., Ltd. He has solid experience in production
coordination and control. He joined HQSM in 1997.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our directors, executive officers and
persons who own more than 10% of a required class of our equity securities, to
file with the SEC initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of our company. Officers,
directors and greater than 10% shareholders are required by SEC regulation to
furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based upon a review of the copies of such reports furnished to
us and based upon written representations that no other reports were required,
all Section 16(a) filing requirements applicable to our officers, directors and
greater than 10% beneficial owners were complied with during the fiscal year
ended December 31, 2004 and subsequently.
45
Code of Ethics
In July 2004, our board of directors adopted a code of ethics that applies to
all of our officers and employees, including our principal executive officer,
principal financial officer, principal accounting officer and controller. The
code of ethics will establish standards and guidelines to assist our directors,
officers and employees in complying with both our corporate policies and with
the law. It has been posted at our website: www.hqfish.com
Director Compensation
The following table sets forth certain information concerning the compensation
of our chief executive officer and our two other most highly compensated
executive officers who earned at least $100,000 during the eight months ended
December 31, 2004:
Name and
Principal Position Annual Compensation Long-Term Compensation
- ------------------ ------------------- ----------------------
Norbert Sporns $150,000 500,000 Options
(Chief Executive Officer)
Lillian Wang Li
(Chairman of Board) $187,500 500,000 Options
Harry Wang Hua
(Chief Operating Officer) $150,000 500,000 Options
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 salary 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.
Please also refer to the above description of our compensation arrangements with
each of our three non-executive independent directors under "--Directors and
Executive Officers."
46
Audit Committee Financial Expert
As stated above, we recently appointed three independent non-executive directors
to our board of directors. We consider one of our independent directors, Mr.
Jacques Vallee, to be an audit committee financial expert within the meaning of
the applicable Securities and Exchange Commission rules and regulations.
Employment Agreements
In April 2004, we entered into employment agreements with our top executive
officers to secure their commitment to continued service to our company.
Lillian Wang Li's employment agreement has a term of five (5) years, commencing
on April 1, 2004, and provides for a base salary of $150,000 for the first year
of the term and an annual increase of 10%. 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 the grant of options to purchase shares of our common stock. The options
include an option to purchase an aggregate of twenty percent (20%) of the then
fully diluted shares of our common voting stock made available under the stock
option plan, and, at the beginning of each calendar quarter, an option to
purchase an aggregate of five percent (5%) of the then fully diluted shares of
our company's common voting stock made available under the stock option plan.
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 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's employment agreement has a term of five (5) years, commencing on
April 1, 2004, and provides for a base salary of $100,000 for the first year of
the term and an annual increase of 10%. 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%) of the then
fully diluted shares of our common voting stock made available under the stock
option plan, and, at the beginning of each calendar quarter, an option to
purchase an aggregate of five percent (5%) of the then fully diluted shares of
our company's common voting stock made available under the stock option plan.
The options granted under the employment agreement will have an exercise price
47
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 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' employment agreement has a term of five (5) years, commencing on
April 1, 2004, and provides for a base salary of $150,000 for the first year of
the term and an annual increase of 10%. 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%) of the then
fully diluted shares of our common voting stock made available under the stock
option plan, and, at the beginning of each calendar quarter, an option to
purchase an aggregate of five percent (5%) of the then fully diluted shares of
our company's common voting stock made available under the stock option plan.
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. Sporns' employment with cause, or
without cause upon at least ninety 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.
Stock Incentive Plan
On April 14, 2004, our board of directors formally adopted the Process
Equipment, Inc. 2004 Stock Incentive Plan (the "Plan"). The holders of a
majority of our outstanding common stock have given their consent to approve the
adoption of this Plan. The purpose of the Plan is to increase our ability to
attract and retain talented employees, consultants and directors and thereby
enhance our growth and profitability. Under the Plan, options to purchase common
stock, including "incentive stock options", within the meaning of Section 422 of
the United States Internal Revenue Code of 1986, as amended, restricted stock
awards, non-qualified stock options and other equity-based compensation, may be
awarded to directors, officers, employees, consultants or other agents.
48
The board of directors or a committee of independent directors appointed by the
board of directors administers the Plan and selects those employees and others
who are eligible to participate. The total number of stock reserved and
available for grant and issuance pursuant to the Plan will be the lesser of (i)
8% of common stock outstanding (determined on a fully diluted basis exclusive of
common stock issued or issuable pursuant to options and other awards granted
under the Plan) or (ii) 8,000,000 shares of common stock.
As of the date of this prospectus, no options for shares of our common stock
have been granted under the Plan. However, our board of directors has recently
authorized the grants of options exercisable for an aggregate of 5,000,000
shares pursuant to the Plan.
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Following is a brief overview of factors our management considers important when
evaluating our financial condition and operating performance. The following is
management's discussion and analysis of certain significant factors which 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.
General Overview
The following Management's Discussion and Analysis ("MD&A") is intended to help
the reader understand our group. MD&A is provided as a supplement to, and should
be read in conjunction with, our financial statements and the accompanying notes
("Notes").
On April 28, 2004, we filed an Information Statement pursuant to Section 14(c)
of the Securities Exchange Act of 1934 relating to the name change from Process
Equipment, Inc. to "HQ Sustainable Maritime Industries, Inc.", effective April
16, 2004 by virtue of the reincorporation, which is also described in the
Information Statement, of Process Equipment, Inc. by a merger with and into a
newly-formed wholly-owned Delaware subsidiary to be known as HQ Sustainable
Maritime Industries, Inc. The merger was completed pursuant to an agreement and
plan of merger dated as of May 19, 2004, which has been reported on a Current
Report on Form 8-K filed on May 24, 2004. This Information Statement also
related to the adoption of our 2004 Stock Incentive Plan and reported that the
holders of the majority of our outstanding common stock have given their consent
to approve the adoption of the Plan.
Effective May 1, 2004, the fiscal year of the Group changed from April 30 to
December 31.
On May 18, 2004, we filed a Current Report on Form 8-K reporting the change in
our certifying accountant from Baum & Company to Rotenberg & Co., LLP. That
report also clarified the implementation of the change in fiscal year that was
previously addressed in the Form 8-K filed March 17, 2004.
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On August 17, 2004, we filed a Current Report on Form 8-K reporting that HQSM
acquired a subsidiary Sealink Wealth Limited together with its subsidiary Hainan
Jiahua Marine Bio-product Company Limited ("Jiahua Marine"). In addition, the
Company also caused Jade Profit Investment Limited, our wholly-owned subsidiary,
to acquire the minority equity interest equal to 15.58% that Jade does not
already own in HQ Ocean Fishing Company Limited.
Thereafter, our principal activity became manufacturing and selling aquatic and
health products.
Critical Accounting Policies And Estimates
The Company prepares its 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. 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 or net realizable value. Cost is
calculated on the moving-average basis and includes all costs to acquire and
other costs incurred in bringing the inventories to their present location and
condition. The Group evaluates the net realizable value of its inventories on a
regular basis and records a provision for loss to reduce the computed
moving-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 Group 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 in 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.
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Revenue Recognition
In accordance with the provisions of Staff Accounting Bulletin No. 103, revenue
is recognized when merchandise is shipped and title passes to the customer and
collectibility is reasonably assured.
The Group does not always receive revenue for shipping and handling to
customers. Shipping and handling expenses incurred by the Group for the eight
months ended December 31, 2004 and 2003, respectively, are included in selling
and administrative expenses in the accompanying consolidated statements of
income.
Concentration of Credit Risk
Financial instruments that potentially subject the Group to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Group performs ongoing credit evaluations with respect to the financial
condition of its creditors, but does not require collateral. In order to
determine the value of the Group's accounts receivable, the Group 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 collectibility of outstanding accounts
receivable.
Recent Developments
Effective May 1, 2004, we changed our fiscal year end from April 30 to December
31.
On August 17, 2004, we entered into a Purchase Agreement ("Nutraceutical
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. The Nutraceutical Purchase Agreement was filed as an exhibit to our
Current Report on Form 8-K filed with the Commission on August 18, 2004. 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. SSC is owned by Harry Wang Hua (51%), Lillian Wang Li (25%), and
Norbert Sporns (24%) (collectively, the "SSC Owners"). Lillian Wang Li and Harry
Wang Hua are brother and sister. Lillian Wang Li is married to Norbert Sporns.
The SSC Owners are current directors and executive officers of HQSM, as well as,
collectively, indirect beneficial owners of the majority of its capital stock.
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Under the terms of the Purchase Agreement, HQSM agreed to purchase SSC's entire
interest in Sealink, thus acquiring all of Sealink's interest in Jiahua Marine,
in exchange for a total purchase price of $20,000,000. This amount represents
approximately a 15% discount on the value of Sealink, based on an independent
valuation equal to RMB 198.2 million (approximately US$23.8 million, based on
currency exchange rate of 8.30 RMB = 1 US$), which was carried out by Vigers
Appraisal & Consulting Limited. The Vigers Appraisal and Consulting Limited
report was filed as an exhibit to our Current Report filed on Form 8-K on August
18, 2004. Consideration was paid by HQSM in the following manner: $8,888,655 in
the form of 12,698,078 shares of HQSM's common stock, $0.001 par value per
share, up to but not exceeding 19.9% of the outstanding shares of HQSM's common
stock, on a fully-diluted basis, to be delivered to SSC at closing, and (ii) the
remaining balance of $11,111,345 to be payable in the form of a convertible
promissory note issued by HQSM to SSC. The note will accrue interest at the rate
of 5% per annum and is convertible into: first, $100,000 for 100,000 shares of
HQSM's Series A preferred stock, $0.001 par value per share, the proposed terms
of which are described below and are fully subject to receipt of all necessary
shareholder consents and approvals, and thereafter, the remaining principal
amount of the note equal to $11,011,345 into 15,730,493 shares of HQSM's common
stock.
Subject to receipt of all necessary shareholder consents and approvals, under
the proposed terms of the certificate of designation for the Series A preferred
stock of HQSM, a form of which is included as an exhibit to the Purchase
Agreement, the board of directors of HQSM designated 100,000 shares of HQSM's
capital stock as its Series A preferred stock. As currently proposed, the holder
of each share of the Series A preferred stock would have the right to the voting
power equal to that of one thousand shares of HQSM's common stock, and with
respect to such vote, each such holder would have full voting rights and powers
equal to the voting rights and powers of the holders of common stock. In
addition, a vote or consent of a majority of the holders of the Series A
preferred stock is proposed to be required for the following corporate actions
of HQSM: (1) authorize, create or issue, or increase the authorized number of
shares of any class or series of capital stock ranking prior to or on parity
with the Series A preferred stock; (2) authorize, create or issue any class or
series of common stock other than common stock; (3) authorize any
reclassification of the Series A preferred stock; (4) authorize, create or issue
any securities convertible into or exercisable for capital stock prohibited by
(1) or (2) above; (5) amend the terms of the Series A preferred stock; or (6)
enter into any disposal, merger or reorganization involving 20% of the total
capitalization of HQSM. In addition, it is proposed that holders of the Series A
preferred stock would have the right to convert it into common stock as provided
in the certificate of designation for the Series A preferred stock.
HQSM believes that its acquisition of Sealink and Jiahua Marine will give it
access to nutraceutically enriched shrimp and tilapia feed, allowing it to farm
and market, through its cooperative farms, nutraceutically enriched products.
The processes used by Jiahua Marine are natural and can be part of an organic
certified tilapia and shrimp product production strategy.
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In addition, effective August 17, 2004, we also caused Jade Profit Investment
Limited, our wholly-owned subsidiary, to acquire the minority equity interest
equal to 15.58% that Jade does not already own in Hainan Quebec Ocean Fishing
Company Limited, our (then) 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. That Agreement has
been filed as an exhibit to this report. Jade has previously obtained all the
requisite governmental approvals in the PRC in order to consummate this
transaction.
The Company conducts its operations through two wholly owned subsidiaries,
Hainan Quebec Ocean Fishing Company Limited ("HQOF") and Hainan Jiahua Marine
Bio-product Company Limited ("Jiahua Marine").
HQOF was incorporated in Hainan Province of the People's Republic of China
("China" or the "PRC") on December 28, 1997, and has an approved operating
period through December 27, 2022. HQOF manufactures aquatic products. HQOF sells
its products primarily in the PRC and North America. HQOF's sales are to both
import and export company, retail seller and under its own brand name. HQOF's
facilities are located in Wenchang, Hainan Province, PRC.
Jiahua Marine was incorporated in Hainan Province of the China on December 17,
1999, and has an approved operating period through December 26, 2019. Jiahua
Marine manufactures health and bio-products. Jiahua Marine sells its products
primarily in the PRC. Jiahua Marine's sales are to both retail seller and under
its own brand. Jiahua Marine's facilities are located in Wenchang, Hainan
Province, PRC.
Both HQOF and Jiahua Marine face a number of risks and challenges since its
operations are located in the PRC. The Company's consolidated results of
operations and financial condition may be adversely affected by changes in,
among other factors, the political and social conditions in the PRC, and by
changes in the government policies with respect to laws and regulations,
anti-inflationary measures, currency exchange rates, currency conversion and
remittance abroad, and rates and methods of taxation.
For this transitional discussion (the prior fiscal year ended on April 30, 2004)
and for comparative and analytical purposes, the following section is based on
an audited Eight Months Results ended December 31, 2004 and 2003 respectively.
Results of Operations - Eight months Ended December 31, 2004 Compared to Eight
Months Ended December 31, 2003
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Segments. During the eight months ended December 31, 2004, we acquired an
operating subsidiary, Hainan Jiahua Marine Bio-product Company Limited ("Jiahua
Marine"), which engages in the manufacturing and selling of health and bio
products. This new business segment contributed $3,242,288 to the total turnover
of the Group since it was acquired. The gross profit ratio for the new segment
was around 83% and the major expense for this segment was advertising, which was
about 52% of the turnover. The net income contributed by this segment was
$1,005,557 from August 17, 2004, the date of acquisition.
The original principal activity of the Group remained to be manufacturing and
selling of aquatic products. The turnover contributed by this segment was
$17,539,976 and $10,780,448 for the eight months ended December 31, 2004 and
2003, respectively. The gross profit ratio of this segment was 14% and 31% for
the eight months ended December 31, 2004 and 2003. This segment contributed net
profit of $2,811,434 and $490,522 for the eight months ended December 31, 2004
and 2003, respectively.
Sales. Total sales for the eight months ended December 31, 2004 and 2003 was
$20,782,264 as compared to $10,780,448 representing an increase of 92%. The
aquatic factory was under major renovation from January through May 2004 and
consequently, productions ceased during that period. That growth in 2004
compared to 2003 was due to increased activities in the aquatic product segment
(62.7% or $6,759,528) and the recently acquired health and bio-product segment
(30% or $3,242,288) from August 17, 2004. After production resumed in June 2004
and the sales and marketing functions were back to normal in July 2004, we
lowered the gross profit ratio to attract more customers to push up the turnover
we lost during the renovation period from January to May 2004.
Cost of Sales. Cost of sales for the eight months ended December 31, 2004 and
2003 was $15,637,756 or 75% of total turnover and $7,456,045 or 69% of total
turnover, respectively. The gross profit margin for aquatic products decreased
in 2004 as the supply from local fishermen dropped significantly due to frequent
bad weather in Hainan Province leading to higher supply costs.
Gross Profit. A gross profit of $5,144,508 and $3,324,403, an increase of 54%,
was recorded for the eight months ended, 2004 and 2003, respectively,
corresponding to a margin of 25% and 31% for December 31, 2004 and 2003,
respectively. In 2004, the gross profit originated from the two operating
entities, HQOF for eight months and Jiahua Marine from August 17, 2004.
Furthermore, the effect of the renovations made in 2004 brought back the regular
level of activities of the fish processing plant in July 2004 only. Although the
fish processing gross profit was reduced in 2004 compared to 2003 for reasons of
limited supply from fishermen due to bad weather and marketing policy to attract
more customers, that reduction was compensated by the gross profit from the
health and bio-products acquired in August 2004.
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Selling and Distribution Expenses. The selling and distribution expenses for the
eight months ended December 31, 2004 and 2003 were $331,379 and $474,231,
respectively. Selling and distributing expenses represented approximately 1.6%
and 4.4% of sales for the eight months ended December 31, 2004 and 2003,
respectively. The overall decrease in selling and distributing expenses during
2004 resulted primarily from a decrease in transportation expenses from $344,402
in 2003 to $169,868 in 2004. The decrease in transportation expenses resulted
primarily from an increase in domestic sales whereby transportation expenses are
paid directly by the customers.
Advertising. The advertising expenses was $1,674,988 or 8.06% of the turnover
for the eight months ended December 31, 2004 compared to zero for the eight
months ended December 31, 2003. All of the advertising expenses incurred during
the period were due to the health and bio-product activity acquired in August
2004, which is an essential expenses in this particular segment.
General and Administrative Expenses. The general and administrative expenses for
the eight months ended December 31, 2004 and 2003 were $1,871,275 or 9% of the
turnover and $672,681 or 6% of the turnover, respectively. The major cause of
the increase in 2004 resulted from expenses incurred in connection with our
becoming listed as a public company. Such costs which were not incurred in 2003.
Depreciation for the eight months ended December 31, 2004 and 2003 was $509,300
and $210,411, respectively. The increase was due to HQOF acquiring additional
assets during the current period and additional assets purchased through the
acquisition of Jiahua Marine in mid-August 2004.
Provision for Bad and Doubtful Debts. Provision for bad and doubtful debts for
trade receivables for the eight months ended December 31, 2004 and 2003 was zero
and $800,264, respectively. Since the production ceased for reconstruction and
expansion of production facilities from January to May 2004, the operating
entity could not supply goods to its customers. During the shutdown period, the
company experienced slow collection of its receivables from its customers.
According to the provision policies previously adopted, we previously considered
whether a further provision for bad debts was required. However, when the
factory resumed operations and became normal in July 2004, all the outstanding
debts were fully recovered by the end of 2004 and the trade receivables as at
December 31, 2004 were current. Therefore, no further provision for bad debts is
required for the current period.
Income from Operations. Income from operations showed a profit of $757,566 and
$1,166,816 for the eight months ended December 31, 2004 and 2003, respectively.
The main reasons for that reduction were higher general and administrative
expenses in 2004 as well as new advertising costs as described above.
Finance Costs. Finance costs for the eight months ended December 31, 2004 and
2003 was $400,064 and $304,344, respectively. The increase was mainly due to
financing costs related to the purchase of Jiahua Marine in August ($142,158)
and incremental cash required to finance increased activities in the second half
of the year.
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Other Income. Other income for the eight months ended December 31, 2004 and 2003
was $2,340,895 and $94,984. The increase was mainly from a large recovery of bad
debts in the current period which had been provided for in previous fiscal
years.
Other Expenses. Other expenses decreased from $188,296 for the eight months
ended December 31, 2003 to $139,525 for the eight months ended December 31,
2004, a decrease of $48,711. Other expenses mainly included losses on disposal
of fixed assets.
Income Before Income Taxes. Income before income taxes increased by $1,789,712
from $769,160 for the eight months ended December 31, 2003 to $2,558,872 for the
eight months ended December 31, 2004. This increase resulted from higher gross
profits and recovery of bad debts recorded in the current period, offsetting
increased general administrative and marketing costs incurred, as described
above.
Income Taxes. Current income tax for both periods was zero as the Group had no
assessable profit earned for PRC taxation purposes and our deferred income tax
for the eight months ended December 31, 2004 and 2003 was $193,819 and $120,511,
respectively. Deferred taxes increased due to the timing difference from
provision for bad debts which was eliminated subsequent to the recovery of bad
debts during the eight months ended December 31, 2004.
Net Income Before Minority Interest. Net income before minority interest was
$2,365,053 and $648,649 for the eight months ended December 31, 2004 and 2003,
respectively. The increase resulted from higher gross profits and recovery of
bad debts recorded in the current period, offsetting increased general
administrative and marketing costs incurred, as described above.
Minority Interests. Minority interest was $235,006 and $158,127 for the eight
months ended December 31, 2004 and 2003, respectively. The company acquired the
remaining minority interests in August 2004. Prior to that date, the minority
interest accounted for 15.58% of the net profit of the aquatic product segment
of HQOF.
Net Income Attributable to Shareholders. The net income attributable to
shareholders was $2,130,047 and $490,522 for the eight months ended December 31,
2004 and 2003, respectively. The increase is attributable to a 93% growth in
turnover of the aquatic product segment in 2004 and the additional sales of the
newly acquired health and bio-product segment. The resulting additional gross
profit added to the recovery of bad debts in 2004 was partially offset by new
marketing costs in the health and bio-products segment and new overhead costs
incurred as a newly listed public company.
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Liquidity and Capital Resources
The Group has in recent years financed its operations primarily with operating
revenues. The Group anticipates that revenues from its operations will be
sufficient to satisfy the Group's cash requirements for operations during the
foreseeable future, except to the extent that increasing orders and sales may
require temporary borrowings to finance such expansion and related costs of
employee compensation and inventory build-up. No assurance can be given,
however, that additional debt or equity financing will not be required or will
be available if required.
The current ratio decreased from 1.30 (8,660,583/$6,656,441) at April 30, 2004
to 1.16 times (10,686,199/$9,214,238) at December 31, 2004. The decrease was
mainly due to the purchase of the minority interest in HQOF in August 2004 for a
cash consideration of $5,695,145.
Cash Flow
Period-to-period fluctuations in various cash-flow category line items were the
result of several factors, including the decrease in net income and gross
margins that resulted during the period of construction of our factory, which
took place during the current period. Since the conclusion of the construction,
the Group's operation has returned to normal and management believes the
operation production will grow.
Fluctuations in cash-flow category line items such as period over period
increase in accounts receivable, accounts payable and accrued expenses are
subject to period-to-period timing differences.
Because of the size and schedule requirements of particular projects undertaken
by the company, a significant time lag may occur between inventory build-up
related outlays and revenue recognition related to these projects. Due to the
variability of the timing of these cash flows as compared with the date used for
reporting purposes, significant fluctuations of individual line item cash flows
period-over-period are apparent.
Management does not believe these fluctuations are consequential to the
substantive performance or financial condition of the company. Management does
not believe that these fluctuations are indicative of any material trend with
regard to the substantive performance or financial condition of the company.
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Results of Operations - Three Months Ended March 31, 2005 as Compared to Three
Months Ended March 31, 2004
One of the subsidiaries of HQSM, Jiahua Marine, was engaged in manufacturing and
selling health and bio-product. During the three months ended March 31, 2005,
Jiahua Marine contributed $1,924,391 to the total turnover of the Group. The
gross profit ratio for this segment was around 81% and the major expense for
this segment was advertising, which was about 52% of the turnover. The net
income contributed by this segment was $404,766 in the current quarter. Jiahua
Marine was acquired during the third quarter of 2004 and no comparative figures
for the first quarter of 2004 are shown.
Another principal activity of the Group continues to be the manufacturing and
selling of aquatic products. The turnover contributed by this segment was
$1,092,495 and $241,373 for the three months ended March 31, 2005 and 2004,
respectively. The gross profit ratio of this segment was 7% and 11% for the
three months ended March 31, 2005 and 2004, respectively. This segment
contributed net loss of $395,969 and $1,462,182 for the three months ended March
31, 2005 and 2004, respectively.
For the three months ended March 31, 2005, revenue increased by $2,775,513 or
11.5 times to $3,016,886 from $241,373 as compared to the corresponding period
of the prior year. The increase resulted primarily from HQSM's acquisition of
Sealink in August 2004 and the resulting inclusion of Sealink's turnover as part
of our revenue for this quarter.
Cost of sales increased by $1,085,337 or 5 times to $1,299,166 from $213,829 for
the three months ended March 31, 2005, as compared to the corresponding period
of the prior year. Approximately two thirds of the increase was due to increased
activities in the aquatic products segment, and the balance of the increase was
due to the acquisition of Sealink in August 2004.
Selling and distribution expenses increased by $6,009 or 17% to $40,608 as
compared to the corresponding period of the prior year. The primary factor
responsible for the increase was that the Group's sales increased this quarter
compared with the same quarter last year.
Advertising expenses increased by $1,000,819 from zero as compared to the
corresponding period of the prior year. The primary factor responsible for the
increase was that HQSM acquired Jiahua Marine (as part of its acquisition of
Sealink) in August 2004, and, consistent with industry practices, Jiahua Marine
requires significant advertising expenditures for the promotion of its
nutraceutical products in order to achieve customer recognition.
General and administrative expenses increased by $293,480 or 88% to $626,941 as
compared to the corresponding period of the prior year. The primary factors
responsible for the increase was that the Group incurred additional costs as a
public company in 2005, and also that it acquired and shared the expenses of
Sealink.
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Depreciation charged to general and administrative expenses increased by
$160,907 or two times to $240,272 as compared to the corresponding period of the
prior year. The increase was due to the effect in the current period of
improvements made in the first half of 2004 by HQOF, and additional assets
purchased through the acquisition of Jiahua Marine in mid-August 2004.
Provision for bad and doubtful debts decreased by $1,246,398 or 97% from
$1,284,750 to $38,352 as compared to corresponding period of the prior year. The
decrease was due to increased recoverability of trade receivable.
Finance cost increased to $91,708 from zero for the three months ended March 31,
2005, as compared to the corresponding period of the prior year. The increase is
due to financing costs incurred in the health and bio-product segment during the
current period which were not in the Group in 2004, and additional loan interest
costs supported by HQOF in 2005.
Other income decreased by $16,445 or 97% from $17,028 to $583 for the three
months ended March 31, 2005. The other income mainly represents the interest
income earned during the period.
Other expenses decreased from $128,577 for the three months ended March 31, 2004
to $67,709 for the three months ended March 31, 2005, a 47% or $60,868 decrease.
The main reason of the decrease was the reduction of the insurance for the
vessels and some sailors being released during the current period.
Current income taxes increased from zero to $32,819 in the current period. Such
increase was due to the fact that Jiahua Marine earned taxable income in 2005
and HQOF suffered a loss in 2004 and 2005.
Minority interest decreased from $268,363 to zero. The change resulted from
HQSM's acquisition of the 15.58% minority interest of HQOF in August 2004.
The net loss attributable to shareholders decreased by $1,132,574 to $437,968
for the first quarter of 2005. The decrease was mostly due to a combination of
additional income from the Jiahua Marine and the reduction in provision for
doubtful debts.
Liquidity and Capital Resources
We have funded capital requirements through cash flow from operations. As of
March 31, 2005, we had a cash balance of $3,952,818 and a working capital
surplus of $1,699,720. This compares with a cash balance of $4,551,505 and a
working capital surplus of $1,471,961 as of December 31, 2004.
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Management believes that, to fund our working capital needs, operations and
anticipated expansion, from time to time, we may attempt to raise financing
through some combination of commercial bank borrowings or the private or public
sale of equity or debt securities, in an effort to ensure that we have access to
sufficient funds to meet our needs. However, future equity or debt financings
may not be available to us at all, or, if available, may not be on favorable
terms. We cannot assure you that these efforts, together with items described
above, will be sufficient to fund our growth, or that external funding will be
available to us at favorable interest rates or at all. 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.
Cash Flow
Period-to-period fluctuations in various cash-flow category line items were the
result of several factors, including the decrease in net income and gross
margins that resulted during the period of construction of our factory, which
took place during the current period. Since the conclusion of the construction,
the Group's operation has returned to normal and management believes the
operation production will grow.
Fluctuations in cash-flow category line items such as period over period
increase in accounts receivable, accounts payable and accrued expenses are
subject to period-to-period timing differences.
Because of the size and schedule requirements of particular projects undertaken
by the company, a significant time lag may occur between inventory build-up
related outlays and revenue recognition related to these projects. Due to the
variability of the timing of these cash flows as compared with the date used for
reporting purposes, significant fluctuations of individual line item cash flows
period-over-period are apparent.
Management does not believe these fluctuations are consequential to the
substantive performance or financial condition of the company. Management does
not believe that these fluctuations are indicative of any material trend with
regard to the substantive performance or financial condition of the company.
Forward-Looking Statements
You should read the following discussion of our financial condition and
operations in conjunction with the consolidated financial statements and the
related notes included elsewhere in this prospectus. This prospectus contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe,"
"our company believes," "management believes" and similar language. The
forward-looking statements are based on our current expectations and are subject
to certain risks, uncertainties and assumptions, including our ability to (1)
obtain sufficient capital or a strategic business arrangement to fund our
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expansion plans; (2) build the management and human resources infrastructure
necessary to support the growth of our business; (3) competitive factors and
developments beyond our control; and (4) those other risk factors, uncertainties
and assumptions that are set forth in the discussion under the headings
captioned "Business," "Risk Factors," and "Management's Discussion and
Analysis." Our actual results may differ materially from results anticipated in
these forward-looking statements. We base the forward-looking statements on
information currently available to us, and we assume no obligation to update or
revise them, whether as a result of new information, future events or otherwise.
In addition, our historical financial performance is not necessarily indicative
of the results that may be expected in the future and we believe that such
comparisons cannot be relied upon as indicators of future performance.
62
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the years ended December 31, 2003 and 2002, Jade sold goods to a related
company, Hainan Jiahua Marine Bioproducts Company Limited, amounting to $51,743
and $167,802, respectively. Hainan Marine is a company organized under the laws
of the People's Republic of China. Some of its directors are also directors of
Jade and Hainan Quebec. The above transactions were consummated under terms
similar to those we extend to our third party customers.
In addition, as stated in the Current Form 8-K filed on March 17, 2004, Jade is
the parent and management company that owns 84.42% of Hainan Quebec. Lillian Li
Wang , who owns 21.27% of Jade and Norbert Sporns, who owns 20.41% of Jade are
husband and wife. Lillian Li Wang and Harry Wang Hua, who owns 43.38% of Jade,
are brother and sister, and Wang Fu Hai, one of our executive officers, is their
uncle. Their father, who does not own any shares of Jade, indirectly owns 14.02%
in Hainan Quebec. The remaining minority equity interest in Hainan Quebec is
owned by an unrelated party residing in the PRC.
MARKET INFORMATION
Our common stock is quoted sporadically, with relatively small volumes of actual
trading, on the Over-The-Counter Bulletin Board system and the National
Association of Securities Dealers (NASD) Electronic Bulletin Board under the
symbol "HQSM.OB."
The following table sets forth, for the periods indicated, the high and low sale
prices for our common stock as reported by the National Quotation Bureau, Inc.
Fiscal Year Ended April 30 (1)
2003 First Quarter (May 2003 - July 2003) $0.17 $0.16
Second Quarter (August 2003 - October 2003) $0.25 $0.16
Third Quarter (November 2003 - January 2004) $0.5 $0.17
Fourth Quarter (February 2004 - April, 2004) $2.8 $0.15
Fiscal Year Ended December 31
2004 First Quarter (May 2004 - June 2004) $1.15 $0.56
Second Quarter (July 2004 - September 2004) $0.95 $0.27
Third Quarter (October 2004 - December 2004) $0.38 $0.18
Period following December 31, 2004
January 2005 $0.31 $0.22
February 2005 $0.31 $0.22
March 2005 $0.31 $0.21
June 30 2005 $0.17.5 $0.16
(1) Effective May 1, 2004, we changed our fiscal year end from April 30 to
December 31.
On June 30, 2005, the closing bid price of our common stock was $0.16. As of
June 30, 2005, there were 1,149 holders of record of our common stock.
63
DIVIDEND POLICY
We do not presently anticipate that we will pay dividends at any time in the
foreseeable future. The payment of any dividends will depend, among other
things, upon our earnings, assets and general financial condition, and upon
other relevant factors.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of common stock as of July 1, 2005, and after giving effect to our
recent merger described elsewhere in this prospectus, by:
o each person known to us to own beneficially more than 5%, in the aggregate, of
the outstanding shares of our common stock;
o each director;
o each of our chief executive officer and our other two most highly compensated
executive officers; and
o all executive officers and directors as a group.
The number of shares beneficially owned and the percent of shares outstanding
are based on 100,261,523 shares outstanding as of June 30, 2005. 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., Wall Street Center, 14 Wall
Street, 20th Floor, New York, New York 10005.
Shares of Common Stock
Beneficially Owned
Beneficial Owner Number Percent
- ---------------- ---------------------- -------
Barron Partners LP 2,881,000(1) 2.9%
Norbert Sporns 16,708,759(2) 16.7%
Lillian Wang Li 17,404,957(2) 17.4%
Harry Wang Hua 35,506,113(2) 35.5%
Jacques Vallee 86,904 0.09%
Fred Bild 86,904 0.09%
Daniel Too 69,047 0.07%
All such directors and executive
officers as a group (6 persons) 69,862,684 69.68%
64
(1) Consists of 2,881,000 shares of our common stock that are currently owned
beneficially; 1,480,000 shares of common stock underlying a Class C common stock
purchase warrant that may be exercised within 60 days; and 1,480,000 shares of
common stock underlying a Class D common stock purchase warrant that may be
exercised within 60 days. Barron Partners LP's address is to the attention of
Andrew Barron Worden, Managing Partner, 730 Fifth Avenue, 9th Floor, New York,
NY 10019.
(2) 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%, 25% and 51% of the issued capital
of Red Coral and share voting and investment power over the shares held by Red
Coral and Sino-Sult Canada.
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is qualified in
its entirety by the provisions of our Certificate of Incorporation, as amended
to date, and our Bylaws, all of which have been filed as exhibits to our
registration statement of which this prospectus is a part. All material terms of
these referenced documents are disclosed in this prospectus. Effective as of the
merger, our authorized capital stock consists of 200,000,000 shares of common
stock, $.001 par value per share. Common Stock Prior to the reincorporation,
Process Equipment, Inc.'s Articles of Incorporation authorized the issuance of
25,000,000 shares of common stock, $.001 par value per share. Effective after
the reincorporation, HQSM has authorized for issuance 200,000,000 shares of
common stock at $.001 par value per share under its certificate of incorporation
which is the certificate of incorporation of the surviving corporation.
Unless otherwise provided in the certificate of incorporation, each stockholder
shall be entitled to one vote, in person or by proxy, for each share of capital
stock having voting power held by such stockholder. Any stock of any class or
series may be subject to redemption by us at our option or at the option of the
holders of such stock or upon the happening of an event specified by our board
of directors. Transfers of shares shall be made on our share register or
transfer books upon surrender of the certificate therefor, endorsed by the
person named in the certificate or by an attorney lawfully constituted in
writing. No transfer shall be made which would be inconsistent with the
provisions of applicable law.
Dividends
We do not presently anticipate that we will pay dividends at any time in the
foreseeable future. The payment of any dividends will depend, among other
things, upon our earnings, assets and general financial condition, and upon
other relevant factors. Any future decision to declare and pay dividends on
shares of our common stock will be solely at the discretion of our board of
directors. See also "Dividend Policy" and "Risk Factors--We may never pay any
dividends to our shareholders."
65
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
As permitted by the General Corporation Law of Delaware, our Bylaws provide that
we will indemnify our officers, directors, employees and agents. This includes
indemnification against expenses incurred by a director of HQSM in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of HQSM (or was serving at HQSM's request as a director or
officer of another corporation). Such expenses shall be paid by HQSM in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by HQSM as
authorized by relevant sections of the General Corporation Law of Delaware.
The indemnification and advances of expenses provided in our Bylaws shall not be
deemed exclusive of any other rights provided by any agreement, vote of
stockholders or disinterested directors or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling our company pursuant
to the foregoing provisions, we have been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
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.
LEGAL MATTERS
The law firm of Joseph I. Emas, P.A. located at 1224 Washington Avenue, Miami
Beach, Florida 33139 has passed on the validity of the common stock offered
hereby.
66
EXPERTS
Our consolidated balance sheets of HQ Sustainable Maritime Industries, Inc. and
Subsidiaries as of December 31, 2004 and April 30, 2004, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the eight months ended December 31, 2004 and 2003, have been included
in this prospectus and in the registration statement of which this prospectus
forms a part in reliance on the reports of Rotenberg & Co., LLP
ADDITIONAL INFORMATION
We have filed with the Commission a post-effective registration statement on
Form SB-2/A under the Securities Act with respect to the common stock offered
hereby. This prospectus constitutes the prospectus of HQ Sustainable Maritime
Industries, Inc., filed as part of the registration statement, and it does not
contain all of the information in the registration statement, as certain
portions have been omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. For further information with respect to our
company and this offering, we refer you to the registration statement and
exhibits filed as part of it. You may inspect the registration statement,
including the exhibits thereto, without charge at the Public Reference Room of
the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. You may obtain copies of all or any portion of the registration statement
from the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, upon payment of the prescribed fees.
You may obtain information on the operation of the Public Reference Room by
calling the Commission at 1-800-SEC-0330. You may also access such material
electronically by means of the Commissions home page on the Internet at
http://www.sec.gov. Descriptions contained in this prospectus as to the contents
of a contract or other document filed as an exhibit to the registration
statement are not necessarily complete and each such description is qualified by
reference to such contract or document.
67
FINANCIAL STATEMENTS
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE
WITH LIMITED LIABILITY)
CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2004 and
April 30, 2004 F-3 - F-4
Consolidated Statements of Income for the eight months ended
December 31, 2004 and 2003 F-5
Consolidated Statements of Changes in Shareholders' Equity
for the eight months ended December 31, 2004 and 2003 F-6 - F-7
Consolidated Statements of Cash Flows for the eight months ended
December 31, 2004 and 2003 F-8
Notes to Consolidated Financial Statements F-9 - F-21
Condensed Consolidated Balance Sheets as at March 31, 2005
and December 31, 2004 (Unaudited) F-24 - F-25
Condensed Consolidated Statements of Income for the three months
ended March 31, 2005 and December 31, 2004 (Unaudited) F-26
Condensed Consolidated Statements of Cash Flow for the three months
ended March 31, 2005 and December 31, 2004 (Unaudited) F-27
Notes for the Consolidated Financial Statements - March 31, 2005
(Unaudited) F-28 - F-32
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
HQ Sustainable Maritime Industries, Inc. and Subsidiaries in State of Delaware
We have audited the accompanying consolidated balance sheets of HQ Sustainable
Maritime Industries, Inc. and Subsidiaries as of December 31, 2004 and April 30,
2004, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the eight months ended December 31,
2004 and 2003. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with The Public Company Accounting
Oversight Board Standards (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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of HQ
Sustainable Maritime Industries, Inc. and Subsidiaries as of December 31, 2004
and April 30, 2004, and the results of their consolidated operations and their
consolidated cash flows for the eight months ended December 31, 2004 and 2003,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Rotenberg & Co., LLP
Rotenberg & Co., LLP
Certified Public Accountants
Rochester, New York
March 16, 2005
F-2
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE
WITH LIMITED LIABILITY)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND APRIL 30, 2004
ASSETS
------
December 31, April 30,
2004 2004
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 4,551,505 $ 5,854,623
Trade receivables, net of provision 5,406,172 2,368,364
Inventory 228,564 79,527
Prepayments 1,932 45,052
Due from related parties, net of provision 388,506 188,802
Due from directors -- 42,613
Advance to employee 27,918 --
Tax recoverable 81,602 81,602
------------ ------------
TOTAL CURRENT ASSETS 10,686,199 8,660,583
------------ ------------
OTHER ASSETS
Deferred taxes 1,209,790 1,403,609
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 9,029,673 2,211,633
------------ ------------
CONSTRUCTION IN PROGRESS, NET -- 3,378,990
------------ ------------
VESSELS HELD FOR SALE -- --
------------ ------------
TOTAL ASSETS $ 20,925,662 $ 15,654,815
============ ============
The accompanying notes are in integral part of the consolidated financial
statements
F-3
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND APRIL 30, 2004
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, April 30,
2004 2004
------------ ------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,204,630 $ 1,503,109
Deposit received from customers -- 37,452
Bank loans 4,457,831 3,012,048
Amount due to related parties 86,994 --
Due to directors 209,361 --
Convertible notes 255,422 255,422
Subscription received -- 1,848,410
------------ ------------
TOTAL CURRENT LIABILITIES 9,214,238 6,656,441
------------ ------------
OTHER LIABILITIES
Promissory note 100,000 --
------------ ------------
TOTAL LIABILITIES 9,314,238 6,656,441
MINORITY INTEREST -- (397,910)
SHAREHOLDERS' EQUITY
Share capital 95,055 25,000
Additional paid-in capital 13,099,205 13,121,114
Reserves 1,146,316 957,656
Accumulated losses (2,729,152) (4,707,486)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 11,611,424 9,396,284
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 20,925,662 $ 15,654,815
============ ============
The accompanying notes are in integral part of the consolidated financial
statements
F-4
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)
STATEMENTS OF INCOME
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 2004 AND 2003
May 1, 2004 to May 1, 2003 to
December 31, 2004 December 31, 2003
----------------- -----------------
SALES $ 20,782,264 $ 10,780,448
COST OF SALES 15,637,756 7,456,045
----------------- -----------------
GROSS PROFIT/(LOSS) 5,144,508 3,324,403
SELLING AND DISTRIBUTION EXPENSES 331,379 474,231
ADVERTISING 1,674,988 --
GENERAL AND ADMINISTRATIVE EXPENSES 1,871,275 672,681
DEPRECIATION 509,300 210,411
PROVISION FOR DOUBTFUL DEBTS -- 800,264
----------------- -----------------
INCOME/(LOSS) FROM OPERATIONS 757,566 1,166,816
FINANCE COSTS 400,064 304,344
OTHER INCOME (2,340,895) (94,984)
OTHER EXPENSES 139,525 188,296
----------------- -----------------
INCOME/(LOSS) BEFORE INCOME TAXES 2,558,872 769,160
INCOME TAXES
CURRENT -- --
DEFERRED 193,819 120,511
----------------- -----------------
NET INCOME/(LOSS) BEFORE MINORITY INTEREST 2,365,053 648,649
MINORITY INTEREST (235,006) (158,127)
----------------- -----------------
NET INCOME/(LOSS) ATTRIBUTABLE TO SHAREHOLDERS $ 2,130,047 $ 490,522
================= =================
NET INCOME/(LOSS) PER SHARE
BASIC AND DILUTED $ .03 $ N/A
================= =================
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING 69,770,366 N/A
================= =================
The accompanying notes are in integral part of the consolidated financial
statement
F-5
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 2004
Additional
Share capital paid-in Accumulated
Share Par value capital Reserves losses Total
------------ ------------ ------------ ------------ ------------ ------------
Balance at April 30, 2004 25,000,000 25,000 13,121,114 957,656 (4,707,486) 9,396,284
------------ ------------ ------------ ------------ ------------ ------------
Issued 70,055,123 share at $0.001 each 70,055,123 70,055 22,533,644 -- -- 22,603,699
Net income for the period of 8 months -- -- -- -- 2,130,047 2,130,047
Transfer to reserve -- -- -- 151,713 (151,713) --
Capital reserve accrued during the period -- -- -- 36,947 -- 36,947
Adjustment from acquisition of Assets
under cost basis -- -- (22,555,553) -- -- (22,555,553)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 95,055,123 $ 95,055 $ 13,099,205 $ 1,146,316 $ (2,729,152) $ 11,611,424
============ ============ ============ ============ ============ ============
The accompanying notes are in integral part of the consolidated financial
statements
F-6
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 2003
Additional
Share capital paid-in Accumulated
Share Par value capital Reserves losses Total
----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 2003 10,000 100 12,731,114 778,550 (2,504,912) 11,004,852
----------- ----------- ----------- ----------- ----------- -----------
Net income for the period of 8 months -- -- -- -- 490,522 490,522
Transfer to reserve -- -- -- 179,106 (179,106) --
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003 10,000 $ 100 $12,731,114 $ 957,656 $(2,193,496) $11,495,374
=========== =========== =========== =========== =========== ===========
The accompanying notes are in integral part of the consolidated financial
statements
F-7
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)
STATEMENTS OF CASH FLOWS
FOR THE EIGHT MONTHS ENDED
DECEMBER 31, 2004 AND 2003
May 1, 2004 to May 1, 2003 to
December 31, 2004 December 31, 2003
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income / (loss) $ 2,130,047 $ 490,522
Adjustments to reconcile net income to net cash
provided by operating activities :
Increase/(decrease) in provision for doubtful account (2,535,047) (2,535,047)
Goodwill adjusted for reorganization process (22,555,553) --
Depreciation 509,300 210,411
(Increase)/decrease in assets:
Inventory 36,176 41,529
Trade receivables, net of provisions 3,821,544 1,393,289
Prepayment 296,398 253,396
Advance to employee (27,918) --
Taxation -- (174,917)
Deferred taxes 193,819 45,449
Increase/(decrease) in liabilities:
Accounts payables and accrued expenses 84,054 (82,507)
Deposit received from customers (37,452) (35,547)
Promissory note 100,000 --
Subscription received -- --
----------------- -----------------
Net cash used in operating activities (17,984,632) (393,442)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (409,000) (2,742,198)
Additions to construction in progress -- --
Capital expenditure (5,966,633) --
Cash received from acquisition 1,205,193 --
----------------- -----------------
Net cash used in investing activities (5,170,440) (2,742,198)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock 20,755,288 1,915,746
Received from/(payment to) directors 251,975 (52,956)
Received from/(payment to) related parties 687,745 214,973
Purchase of minority interest from shareholders 397,910 158,127
Repayment of bank loan (240,964) --
----------------- -----------------
Net cash provided by financing activities 21,851,954 2,235,890
----------------- -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,303,118) (899,730)
Cash and cash equivalents, beginning of period 5,854,623 11,937,510
----------------- -----------------
Cash and cash equivalents, end of period $ 4,551,505 $ 11,037,780
================= =================
SUPPLEMENTARY CASH FLOWS DISCLOSURES
Interest paid $ 225,661 $ 387,395
================= =================
Taxes paid $ -- $ 249,979
================= =================
SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Note payable in connection with acquisition
of Jiahua Marine $ 100,000 $ --
================= =================
The accompanying notes are in integral part of the consolidated financial
statements
F-8
HQ SUSTAINABLE MARITIME INDUSTRIES, INC.
(INCORPORATED IN THE STATE OF DELAWARE WITH LIMITED LIABILITY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND APRIL 30, 2004
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
HQ Sustainable Maritime Industries, Inc. ("HQSM") was initially incorporated as
Sharon Capital Corporation, or Sharon, on September 21, 1989 under the laws of
the State of Nevada. Sharon was a "blind pool/blank check" corporation organized
for the purpose of purchasing, merging with or acquiring a business or assets
from another company. In July 1990, Sharon was changed to PEI, Inc., which was
subsequently changed to Process Equipment, Inc. in November 1990. 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.
Pursuant to that agreement, Process Equipment, Inc., through PEAC, acquired
Jade, and 84.42% 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,
HQSM. The name change, change of domicile and merger became effective on May 19,
2004, with HQSM being the surviving entity in the merger and acquiring all the
assets and liabilities of Process Equipment, Inc. On August 17, 2004, we have
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. That purchase agreement has been filed as an exhibit to
our current report on Form 8K filed with the Commission on August 18, 2004.
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 the above current report.
Also as previously disclosed, in the same current report, SSC is owned by three
of our current directors and executive officers who are also, together, indirect
beneficial owners of the majority of our capital stock.
Further, as previously disclosed in the above current report, effective August
17, 2004, HQSM caused Jade Profit Investment Limited, its wholly-owned
subsidiary, to acquire the minority equity interest equal to 15.58% that Jade
did not already own in Hainan Quebec Ocean Fishing Company Limited, HQSM's
principal operating subsidiary. This purchase was effected by Jade pursuant to
F-9
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 co-operative 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 exporting, directly and indirectly, to the United States, Canada, Japan
and European countries. The major market is for export.
The Group has also engaged in the production and sales of marine bio-products
and healthcare products in the PRC. The principal products of Hainan Jiahua
Marine Bio-Product Company Limited (100% hold subsidiary of Sealink) are Shark
Cartilage Capsule, Shark Liver Oil and Shark Liver (Soft gel). The major market
is domestic in the PRC.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of HQSM 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.
3. SUMMARY OF PRINCIPAL 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. TRADE RECEIVABLE
In order to determine the value of the Group's accounts receivable, the Group
records a provision for doubtful accounts to cover estimated credit losses.
Management reviews and adjusts this allowance periodically based on historical
experience and its evaluation of the collectibility of outstanding accounts
receivable. The Group evaluates the credit risk of its customers utilizing
historical data and estimates of future performance.
C. INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost is
calculated on the moving-average basis and includes all costs to acquire and
other costs incurred in bringing the inventories to their present location and
condition. The Group evaluates the net realizable value of its inventories on a
regular basis and records a provision for loss to reduce the computed
moving-average cost if it exceeds the net realizable value.
F-10
D. 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 2.25% - 9%
Plant and machinery 9% - 18%
Motor vehicles 18%
Office equipment and furnishings 18%
E. 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, 2004 and April 30, 2004 due to the relatively short-term nature of
these instruments.
F. CONSTRUCTION IN PROGRESS
Construction in progress represents buildings, machinery and other fixed assets
under construction or installation, which is stated at cost less any impairment
losses, and is not depreciated. Cost comprises the direct costs of purchase,
construction and installation. Construction in progress is reclassified to the
appropriate category of fixed assets when completed and ready for use. The
management is of the opinion that no impairment loss is considered necessary at
year-end.
G. INCOME TAXES
Taxes are calculated in accordance with taxation principles currently effective
in the PRC. The Group 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 in 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.
F-11
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.
J. FOREIGN CURRENCY TRANSLATION
The Group maintains its books and accounting records in Renminbi ("RMB"), the
PRC's currency, being the functional currency. Translation of amounts from RMB
in United States dollars ("US$") has been made at the single rate of exchange of
US$1.00:RMB8.30. No representation is made that RMB amounts could have been or
could be, converted into US dollar at that rate.
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.
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.
F-12
L. REVENUE RECOGNITION
In accordance with the provisions of Staff Accounting Bulletin No. 103, revenue
is recognized when merchandise is shipped and title passes to the customer and
collectibility is reasonably assured.
The Group does not always receive revenue for shipping and handling to
customers. Shipping and handling expenses incurred by the Group amounted to
$175,065 and $290,023 for the eight months ended December 31, 2004 and 2003,
respectively and are included in selling and administrative expenses in the
accompanying consolidated statements of income.
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.
N. SEGMENTS
No geographical segment analysis is provided, as less than 10% of consolidated
revenues and less than 10% of consolidated income from operations is
attributable to business segment other than the vertically integrated business
of aquaculture through processing and sales of farm-bred and ocean harvested
aquatic products.
Business segment for the eight months ended December 31, 2004
Aquaculture Health and Unallocated
products bio-products items Consolidated
------------ ------------ ------------ ------------
Sales to external customers $ 17,539,976 $ 3,242,288 $ -- $ 20,782,264
============ ============ ============ ============
General and administrative
expenses -- -- (1,871,275) (1,871,275)
Depreciation
Selling expenses (303,171) (28,208) -- (331,379)
Advertising -- (1,674,988) -- (1,674,988)
Finance costs (155,627) (50,088) (194,349) (400,064)
Profit before taxation 3,240,259 1,005,557 (1,686,944) 2,558,872
Taxation (193,819) -- -- (193,819)
Profit for the year $ 2,811,434 $ 1,005,557 $ (1,686,944) $ 2,130,047
============ ============ ============ ============
Segment assets $ 13,412,191 $ 7,452,718 $ 60,753 $ 20,925,662
============ ============ ============ ============
Segment liabilities $ 4,809,501 $ 2,932,717 $ 1,572,020 $ 9,314,238
============ ============ ============ ============
Other segment items
Depreciation $ (380,933) $ (124,068) $ (4,299) $ (509,300)
Capital expenditure $ 377,117 $ 325 $ 31,558 $ 409,000
============ ============ ============ ============
F-13
O. COMPREHENSIVE INCOME/(LOSS)
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 (loss) 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.
P. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Group to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Group performs ongoing credit evaluations with respect to the financial
condition of its creditors, but does not require collateral. In order to
determine the value of the Group's accounts receivable, the Group 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 collectibility of outstanding accounts receivable.
Q. RECENT PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
The changes in SFAS No. 149 improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. This
statement is effective for contracts entered into or modified after June 30,
2003 and all of its provisions should be applied prospectively.
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
changes the accounting for certain financial instruments with characteristics of
both liabilities and equity that, under previous pronouncements, issuers could
account for as equity. The new accounting guidance contained in SFAS No. 150
requires that those instruments be classified as liabilities in the balance
sheet.
SFAS No. 150 affects the issuer's accounting for three types of freestanding
financial instruments. One type is mandatory redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other assets. A
second type includes put options and forward purchase contracts, which involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instruments that are
F-14
liabilities under this SFAS is obligations that can be settled with shares, the
monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuers'
shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this SFAS are consistent with
the FASB's proposal to revise that definition to encompass certain obligations
that a reporting entity can or must settle by issuing its own shares. This SFAS
shall be effective for financial instruments entered into or modified after May
31, 2003 and otherwise shall be effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatory redeemable financial
instruments of a non-public entity, as to which the effective date is for fiscal
periods beginning after December 15, 2004.
In January 2003, and as revised in December 2003, the FASB issued Interpretation
No. 46, "Consolidation of Variable Interest Entities" "Interpretation No. 46"),
an interpretation of Accounting Research Bulletin ("ARB") No. 51", "Consolidated
Financial Statements". Interpretation No. 46 addresses consolidation by business
enterprises of variable interest entities, which have one or both of the
following characteristics: (i) the equity investment at risk is not sufficient
to permit the entity to finance its activities without additional subordinated
support from other parties, which is provided through another interest that will
absorb some or all of the expected losses of the entity; (ii) the equity
investors lack one or more of the following essential characteristics of a
controlling financial interest: the direct or indirect ability to make decisions
about the entity's activities through voting rights or similar rights; or the
obligation to absorb the expected losses of the entity if they occur, which
makes it possible for the entity to finance its activities; the right to receive
the expected residual returns of the entity if they occur, which is the
compensation for the risk of absorbing the expected losses.
Interpretation No. 46, as revised, also requires expanded disclosures by the
primary beneficiary (as defined) of a variable interest entity and by an
enterprise that holds a significant variable interest in a variable interest
entity but is not the primary beneficiary.
Interpretation No. 46, as revised, applies to small business issuers no later
than the end of the first reporting period that ends after December 15, 2004.
This effective date includes those entities to which Interpretation No. 46 had
previously been applied. However, prior to the required application of
Interpretation No. 46, a public entity that is a small business issuer shall
apply Interpretation No. 46 to those entities that are considered to be
special-purpose entities no later than as of the end of the first reporting
period that ends after December 15, 2003.
F-15
Interpretation No. 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
In June 2003, the FASB issued an Exposure Draft for proposed SFAS entitled
"Qualifying Special Purpose Entities ("QSPE") and Isolation of Transferred
Assets", an amendment of SFAS No. 140 ("The Exposure Draft"). The Exposure Draft
is a proposal that is subject to change and as such, is not yet authoritative.
If the proposal is enacted in its current form, it will amend and clarify SFAS
140. The Exposure Draft would prohibit an entity from being a QSPE if it enters
into an agreement that obliged a transferor of financial assets, its affiliates,
or its agents to deliver additional cash or other assets to fulfill the
special-purposes entity's obligation to beneficial interest holders.
Management does not expect these recent pronouncements to have a material impact
on the Company's consolidated financial position or results of operations.
4. TRADE RECEIVABLE
The Group's trade receivable at December 31, 2004 and April 30, 2004 are
summarized as follows:
December 31, 2004 April 30, 2004
----------------- -----------------
Trade receivable $ 5,406,172 $ 4,721,411
Less: Allowance for doubtful accounts -- 2,353,047
----------------- -----------------
$ 5,406,172 $ 2,368,364
================= =================
The activity in the Group's allowance for doubtful accounts during the eight
months ended December 31, 2004 and for the four months ended April 30, 2004 is
summarized as follows:
December 31, 2004 April 30, 2004
----------------- -----------------
Balance at beginning of year $ 2,353,047 $ 829,716
Add: amounts provided during the year -- 1,523,331
Less: amounts written off during the year (2,353,047) --
----------------- -----------------
Balance at end of year $ -- $ 2,353,047
================= =================
5. PROPERTY, PLANT AND EQUIPMENT
December 31, 2004 April 30,2004
----------------- -----------------
Cost :
Buildings and leasehold improvement $ 2,817,990 $ 61,254
Plant and machinery 8,461,585 3,038,046
Motor vehicles 68,580 65,493
Office equipment and furnishings 126,470 48,793
----------------- -----------------
11,474,625 3,213,586
F-16
Less Accumulated depreciation:
Buildings and leasehold improvement 273,479 37,196
Plant and machinery 2,050,400 892,133
Motor vehicles 55,228 45,463
Office equipment and furnishings 65,845 27,161
----------------- -----------------
2,444,952 1,001,953
----------------- -----------------
Property, plant and equipment, net $ 9,029,673 $ 2,211,633
================= =================
Depreciation expenses relating to property, plant and equipment was $509,300 and
$210,411 for the eight months ended December 31, 2004 and 2003, respectively.
6. INVENTORIES
December 31, 2004 April 30, 2004
----------------- -----------------
Raw materials $ 84,569 $ 44,588
Work-in-progress 82,609 --
Finished goods 61,386 34,939
----------------- -----------------
Total Inventories $ 228,564 $ 79,527
================= =================
7. PREPAYMENT
Prepayment represents advances to suppliers.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 2004 and April 30, 2004
are summarized as follows:
December 31, 2004 April 30, 2004
----------------- -----------------
Accounts payable $ 146,026 $ 97,148
Accrued expenses 4,058,604 1,405,961
----------------- -----------------
$ 4,204,630 $ 1,503,109
================= =================
9. BANK LOANS
As at December 31, 2004, the Group has 3 expired loans from banks at an amount
of $1,807,229, $963,855 and 1,686,747 bearing an interest of 6.588%, 6.588% and
5.04% per annum, respectively. As at the date of the report, the Group is in
negotiation with the bankers to extend and expects to have the loans extended
for not less than one year to December 2005. The loans were secured by the
pledge of certain fixed assets held by the Group and its subsidiaries.
F-17
10. INCOME TAXES
HQOF registered in the PRC is subject to state and local income taxes within the
PRC at the applicable tax rate on the taxable income as reported in their PRC
statutory financial statements in accordance with the relevant income tax laws
applicable to foreign enterprises. HQOF was subject to a tax rate of 7.5% during
2003. HQOF is entitled to a two-year tax free and three-year half tax holidays
from 2001 commencing with the first profit-making year. Further, the newly
acquired subsidiary Jiahua Marine enjoys the two-year tax free and three-year
half-tax holidays from 2003 commencing with the first profit-marking year. The
reconciliation of the effective income tax rate of the Company to the statutory
income tax rate in the PRC for the eight months ended December 31, 2004 is as
follows:
Statutory tax rate 15.0%
Tax holidays and concessions (7.5%)
-------
Effective tax rate 7.5%
=======
The Group's income before income taxes was comprised of the following for the
eight months ended December 31, 2004 and 2003, respectively:
December 31, 2004 December 31, 2003
----------------- -----------------
United States $ (1,694,305) $ --
PRC 4,253,177 769,160
----------------- -----------------
$ 2,558,872 $ 769,160
================= =================
Income taxes are calculated on a separate entity basis. There currently is no
tax benefit or burden recorded for the United States.
The provisions for income taxes for the eight months ended December 31, 2004 and
2003, respectively,are summarized as follows:
PRC only: December 31, 2004 December 31, 2003
----------------- -----------------
Current $ -- $ --
Deferred tax 193,819 120,511
----------------- -----------------
$ 193,819 $ 120,511
================= =================
F-18
11. INCOME TAXES (CONT'D)
Tax recoverable comprise the following:
December 31, 2004 April 30, 2004
----------------- -----------------
Balance at beginning of the period $ 81,602 $ 81,602
Income tax provided for the period -- --
----------------- -----------------
As at the end of the period $ 81,602 $ 81,602
================= =================
Deferred tax assets comprise the following:
December 31, 2004 April 30, 2004
----------------- -----------------
Balance at beginning of the period $ 1,403,609 $ 1,426,334
Deferred tax written off for the period 193,819 22,725
----------------- -----------------
As at the end of the period $ 1,209,790 $ 1,403,609
================= =================
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.
12. CONVERTIBLE NOTES
In December 2002, the Company entered into a subscription agreement,
non-interest bearing, with an accredited investor, for the sale of a $255,422
principal amount of convertible notes, in a private placement, to assist with
the financing of operations in PRC. . In May 2004, a supplementary agreement was
signed to extend the maturity date of the notes to May 2005.
13. RESERVES
The reserve funds are comprised of the following:
December 31, 2004 April 30, 2004
----------------- -----------------
Statutory surplus reserve fund $ 739,580 $ 681,877
Public welfare fund 369,790 275,779
Capital reserve 36,946 --
----------------- -----------------
$ 1,146,316 $ 957,656
================= =================
Pursuant to the relevant laws and regulations of Sino-foreign joint venture
enterprises, the profits of the HQ, 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 in previous years, and made appropriations to reserve funds, as
determined at the discretion of the board of directors in accordance with the
PRC accounting standards and regulations.
F-19
As stipulated by the relevant laws and regulations for enterprises operating in
the PRC, the Jade Profit's Sino-foreign joint ventures are required to make
annual appropriations to two reserve funds, consisting of the statutory surplus
and public welfare funds. 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 profits after taxation, as
determined in accordance with the PRC accounting standards applicable to the
companies, to the statutory surplus reserve until such reserve reaches 50% of
the registered capital of the companies.
Net income as reported in the US GAAP financial statements differs from that as
reported in the PRC statutory financial statements. In accordance with the
relevant laws and regulations in the PRC, the 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.
14. EMPLOYEE STOCK OPTION PLAN
On December 2, 2004, our board of directors ratified grants of non-qualified
stock options to purchase shares of our common stock under our Stock Option Plan
(the "Plan") to some of our executive officers and directors, as well as to
several of our employees, as further detailed in this current report on Form
8-K. 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 $0.28, which represents
the fair market value as of the initial grant date of November 23, 2004.
Specifically, Norbert Sporns, our Chief Executive Officer, President and
director, received 500,000 stock options. Lillian Wang, the Chairman of our
board of directors, received 500,000 stock options. Harry Wang, our Chief
Operating Officer, director and brother of Ms. Wang, received 500,000 stock
options; and Fusheng Wang, our director, Honorary Chairman and father of Ms.
Wang, received 1,000,000 stock options. Together, Norbert Sporns, Harry Wang and
Lillian Wang also indirectly control the majority of capital stock of HQSM. 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 200,000 stock options. Mr. Dallaire's options are vested
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, our board of directors ratified grants of stock options to thirteen
other employees of HQSM. These stock options are 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.
F-20
Our board of directors believes that these stock option grants will help our
company to continue to attract, retain and incentivize our employees, directors
and executive officers. In connection with these grants, our board of directors
reserved 5,000,000 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 Norbert Sporns, Fred Bild, an
independent director, and Daniel Too, also an independent director of HQSM.
15. SIGNIFICANT CONCENTRATION
The Group grants credit to its customers, generally on an open account basis.
The Group's five largest customers accounted for 57.4% of the consolidated sales
for the eight months ended December 31, 2004, in which all customers are in
excess of 10% of consolidated sales, with 15.9%, 12.0% and 10.6% of consolidated
sales, or an aggregate of 38.5% of consolidated sales.
At December 31, 2004, approximately 43.3% of trade receivables were from trade
transactions with the aforementioned five customers.
16. WARRANTIES
The Group did not incur any warranty costs for the eight months ended December
31, 2004 and for the four months ended April 30, 2004.
17. COMMITMENTS AND CONTINGENCIES
A. CAPITAL COMMITMENTS
As of December 31, 2004, the Group has no significant capital commitments
required for disclosure.
B. LEGAL PROCEEDINGS
The Group is not currently a party to any threatened or pending legal
proceedings.
18. 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.
F-21
19. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On August 17, 2004, HQSM and Sealink, as the parent and management company of
Hainan Jiahua Marine Bio-products Company Limited. ("Jiahua Marine"),
consummated an Purchase Agreement whereby HQSM acquired all of the issued and
outstanding capital stock of Sealink in consideration is payable by HQSM in the
following manner: $8,888,655 in the form of 12,698,078 shares of HQSM's common
stock, $0.001 par value per share, up to but not exceeding 19.9% of the
outstanding shares of HQSM's common stock, on a fully-diluted basis, to be
delivered to SSC at closing, and (ii) the remaining balance of $11,111,345 to be
payable in the form of a convertible promissory note issued by HQSM to SSC. This
note is included as Exhibit B to the Nutraceutical Purchase Agreement. The note
will accrue interest at the rate of 5% per annum and is convertible into: first
one hundred thousand US Dollars (US$100,000) for 100,000 shares of HQSM's Series
A preferred stock, $0.001 par value per share, the proposed terms of which are
described below and are fully subject to receipt of all necessary shareholder
consents and approvals, and thereafter the remaining principal amount of the
note equal to US$11,011,345 into 15,730,493 shares of HQSM's common stock. The
note is convertible only upon completion of an audit of HQSM's acquisition of
Sealink and Jiahua Marine, performed to the satisfaction of HQSM and receipt of
all necessary shareholder consents and approvals.
The Purchase Agreement is being accounted for as a recapitalization of Sealink
whereby the historical financial information of Sealink becomes the historical
financial information of the Registrant.
The accompanying Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 2004 and 2003 and the Unaudited Pro Forma Condensed Consolidated
Statements of Income for the Eights Months ended December 31, 2004 and 2003,
have been prepared to reflect the acquisition as if it had occurred as of May 1,
2003 the first day of the earliest period presented in the financial statements.
The accompanying pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the financial position or results of
operations which would actually have been reported had the merger been in effect
during the periods presented, or which may be reported in the future.
May 1 to Dec 31, 2004 May 1 to Dec 31, 2003
(USD `000) (USD `000)
Turnover 22,383 16,409
Income from operations 2,893 2,477
Net income attributable to shareholders 4,156 1,729
====== ======
F-22
Total assets 23,340 31,117
====== ======
Total liabilities 11,306 14,879
====== ======
F-23
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE
WITH LIMITED LIABILITY)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004
ASSETS
March 31, 2005 December 31, 2004
----------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 3,952,818 $ 4,551,505
Trade receivables, net of provision 5,697,876 5,406,172
Inventory 236,679 228,564
Prepayments 1,932 1,932
Due from related parties, net of provision 183,986 388,506
Advance to employee 29,332 27,918
Tax recoverable 81,602 81,602
----------------- -----------------
TOTAL CURRENT ASSETS 10,184,225 10,686,199
----------------- -----------------
OTHER ASSETS
Deferred taxes 1,192,746 1,209,790
----------------- -----------------
PROPERTY, PLANT AND EQUIPMENT, NET 8,789,401 9,029,673
----------------- -----------------
VESSELS HELD FOR SALE -- --
----------------- -----------------
TOTAL ASSETS $ 20,166,372 $ 20,925,662
================= =================
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE
WITH LIMITED LIABILITY)
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, 2005 December 31, 2004
----------------- -----------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 3,392,724 $ 4,204,630
Bank loans 4,457,831 4,457,831
Tax payable 32,873 --
Amount due to related parties 134,006 86,994
Due to directors 211,649 209,361
Convertible notes 255,422 255,422
----------------- -----------------
TOTAL CURRENT LIABILITIES 8,484,505 9,214,238
----------------- -----------------
OTHER LIABILITIES
Promissory note 100,000 100,000
----------------- -----------------
TOTAL LIABILITIES 8,584,505 9,314,238
MINORITY INTEREST -- --
SHAREHOLDERS' EQUITY
Share capital 98,125 95,055
Additional paid-in capital 13,504,546 13,099,205
Reserves 1,146,316 1,146,316
Accumulated loss (3,167,120) (2,729,152)
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 11,581,867 11,611,424
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 20,166,372 $ 20,925,662
================= =================
The accompanying notes are an integral part of the consolidated financial
statements.
F-25
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE
WITH LIMITED LIABILITY)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
2005 2004
------------ ------------
SALES $ 3,016,886 $ 241,373
COST OF SALES 1,299,166 213,829
------------ ------------
GROSS PROFIT 1,717,720 27,544
SELLING AND DISTRIBUTION EXPENSES 40,608 34,599
ADVERTISING
1,000,819 --
GENERAL AND ADMINISTRATIVE EXPENSES 626,941 333,461
DEPRECIATION 240,272 79,365
PROVISION FOR DOUBTFUL DEBTS 38,352 1,284,750
------------ ------------
LOSS FROM OPERATIONS (229,272) (1,704,631)
FINANCE COSTS 91,708 --
OTHER INCOME (583) (17,028)
OTHER EXPENSES 67,709 128,577
------------ ------------
LOSS BEFORE INCOME TAXES (388,106) (1,816,180)
INCOME TAXES
CURRENT
32,819 --
DEFERRED 17,043 22,725
------------ ------------
NET LOSS BEFORE MINORITY INTEREST (437,968) (1,838,905)
MINORITY INTEREST -- 268,363
------------ ------------
NET LOSS ATTRIBUTABLE TO SHAREHOLDERS $ (437,968) (1,570,542)
============ ============
NET LOSS PER SHARE BASIC AND DILUTED $ (0.00) (62.82)
============ ============
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING 96,194,971 25,000
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-26
HQ SUSTAINABLE MARITIME INDUSTRIES, INC. AND SUBSIDIARIES
(INCORPORATED IN THE STATE OF DELAWARE
WITH LIMITED LIABILITY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (437,968) $ (1,838,905)
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for doubtful account (38,352) 1,284,750
Depreciation 240,272 79,365
(Increase)/decrease in assets:
Inventory (8,115) 51,055
Trade receivables, net of provisions (253,353) 143,294
Prepayment -- (70,017)
Advance to employee (1,414) --
Deferred taxes 17,044 22,725
Increase/(decrease) in liabilities:
Accounts payable sand accrued expenses (811,905) 36,938
Deposit received from customers -- 8,789
Taxes payable 32,873 --
------------ ------------
Net cash from by operating activities (1,260,918) (282,006)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment -- (632,576)
------------ ------------
Net cash from by investing activities -- (632,576)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock 408,411 414,900
Receive from/(payment to) directors 2,287 (42,589)
Receive from/(payment to) related parties 251,533 (148,977)
Repayment of bank loans -- (6,024,097)
------------ ------------
Net cash from by financing activities 662,231 (5,800,763)
------------ ------------
Net CHANGE IN CASH AND CASH EQUIVALENTS (598,687) (6,715,345)
Cash and cash equivalents, beginning of period 4,551,505 11,037,780
------------ ------------
Cash and cash equivalents, end of period $ 3,952,818 $ 4,322,435
============ ============
SUPPLEMENTARY CASH FLOWS DISCLOSURES
Interest paid $ 62,848 $ --
============ ============
Taxes paid $ -- $ --
============ ============
SUPPLEMENTARY DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Note payable in connection with acquisition of Jiahua Marine $ 100,000 $ 100,000
============ ============
The accompanying notes are an integral part of the financial statements.
F-27
HQ SUSTAINABLE MARTIME INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 2005
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of HQ Sustainable
Maritime Industries, Inc., or HQSM, have been prepared in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the requirements for reporting on Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted in United States
of America for complete financial statements. However, such information reflects
all adjustments (consisting solely of normal recurring adjustments), which are,
in the opinion of management, necessary for a fair statement of results for the
interim periods. Results shown for interim periods are not necessarily
indicative of the results to be obtained for a full fiscal year. The condensed
consolidated balance sheet information as of December 31, 2004 was derived from
the audited consolidated financial statements included in the Company's Annual
Report Form 10-KSB. These interim financial statements should be read in
conjunction with that report.
NOTE 2 - NATURE OF COMPANY
HQ Sustainable Maritime Industries, Inc. ("HQSM") was initially incorporated as
Sharon Capital Corporation, or Sharon, on September 21, 1989 under the laws of
the State of Nevada. Sharon was a "blind pool/blank check" corporation organized
for the purpose of purchasing, merging with or acquiring a business or assets
from another company. In July 1990, Sharon was changed to PEI, Inc., which was
subsequently changed to Process Equipment, Inc. in November 1990. 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.
Pursuant to that agreement, Process Equipment, Inc., through PEAC, acquired
Jade, and 84.42% 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,
HQSM. The name change, change of domicile and merger became effective on May 19,
2004, with HQSM being the surviving entity in the merger and acquiring all the
assets and liabilities of Process Equipment, Inc. On August 17, 2004, we have
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. That purchase agreement has been filed as an exhibit to
our current report on Form 8K filed with the Commission on August 18, 2004.
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 the above current report.
Also as previously disclosed, in the same current report, SSC is owned by three
of our current directors and executive officers who are also, together, indirect
beneficial owners of the majority of our capital stock.
F-28
Further, as previously disclosed in the above current report, effective August
17, 2004, HQSM caused Jade Profit Investment Limited, its wholly-owned
subsidiary, to acquire the minority equity interest equal to 15.58% that Jade
did not already own in HQOF, HQSM'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.
HQSM and its subsidiaries, collectively referred to in this report as the Group,
is principally engaged in the vertically integrated business of aquaculture
through co-operative 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
exporting, directly and indirectly, to the United States, Canada, Japan and
European countries. The major market is for export.
The Group has also engaged in the production and sales of marine bio-products
and healthcare products in the PRC. The principal products of Hainan Jiahua
Marine Bio-Product Company Limited (wholly-owned subsidiary of Sealink) are
Shark Cartilage Capsule, Shark Liver Oil and Shark Liver (Soft gel). The major
market for these products is the PRC.
NOTE 3 - USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
NOTE 4 - 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 share are computed similar to basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash and cash equivalents,
receivables, accounts payable and accrued expenses and debt, approximates their
fair value at March 31, 2005 and December 31, 2004 due to the relatively
short-term nature of these instruments.
NOTE 6 - FOREIGN CURRENCY CONVERSION
The Company's financial information is presented in US dollars. People's
Republic of China currency (Renminbi) has been converted into US dollars at the
exchange rate of 8.3 to 1.
F-29
NOTE 7 - INCOME TAXES
Taxes are calculated in accordance with taxation rates currently effective in
the PRC. The Company's 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.
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. Jiahua Marine was
subject to a tax rate of 7.5% during this quarter. Jiahua Marine is entitled to
a two-year tax holiday from 2002 commencing with the first profit-making year.
HQOF did not have any assessable profits for the three months ended March 2005.
The reconciliation of the effective income tax rate of the Company to the
statutory income tax rate in the PRC for this quarter is as follows:
Statutory tax rate 15.0%
Tax holidays and concessions (7.5%)
----------
Effective tax rate 7.5%
==========
Income taxes are calculated on a separate entity basis. Currently there is no
tax benefit or burden recorded for the United States.
NOTE 8 - SEGMENTS
No geographical segment analysis is provided for the three months ended March
31, 2005 and 2004, as less than 10% of consolidated revenues and less than 10%
of consolidated income from operations is attributable to the segment other than
the Mainland China.
Business segment for the three months ended March 31, 2005
Aquaculture Health and Unallocated Consolidation
Product Bio-product Items
Sales to external customers 1,092,495 1,924,391 -- 3,016,886
=========== =========== =========== ===========
General and administrative expenses 147,682 36,078 443,181 626,941
Depreciation 163,824 75,311 1,137 240,272
Selling expenses 20,535 20,073 -- 40,608
Advertising -- 1,000,819 -- 1,000,819
Finance costs 57,778 31,220 2,710 91,708
Profit/(Loss) before taxation (378,926) 437,585 (446,765) (388,106)
Taxation 17,043 32,819 -- 49,862
Profit/(Loss) for the period (395,969) 404,766 (446,765) (437,968)
=========== =========== =========== ===========
F-30
Segment assets 12,764,745 7,156,065 245,562 20,166,372
=========== =========== =========== ===========
Segment liabilities 4,162,120 2,480,794 1,941,591 8,584,505
=========== =========== =========== ===========
No business segment is provided for the three months ended March 31, 2004 as no
revenues and income from operations is attributable to business segment other
than the vertically integrated business of aquaculture through processing and
sales of farm-bred and ocean harvested aquatic products.
NOTE 9 - UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On August 17, 2004, HQSM and Sealink, as the parent and management company of
Jiahua Marine, consummated a Purchase Agreement whereby HQSM acquired all of the
issued and outstanding capital stock of Sealink at consideration payable by HQSM
in the following manner: $8,888,655 in the form of 12,698,078 shares of HQSM's
common stock, $0.001 par value per share, up to but not exceeding 19.9% of the
outstanding shares of HQSM's common stock, on a fully-diluted basis, to be
delivered to SSC at closing, and (ii) the remaining balance of $11,111,345 to be
payable in the form of a convertible promissory note (the "Note") issued by HQSM
to SSC. This Note is included as Exhibit B to the Nutraceutical Purchase
Agreement. The Note will accrue interest at the rate of 5% per annum and is
convertible into: (1) one hundred thousand US Dollars (US$100,000) for 100,000
shares of HQSM's Series A preferred stock, $0.001 par value per share, (2) the
remaining principal amount of the Note equal to US$11,011,345 into 15,730,493
shares of HQSM's common stock. The Note is convertible only upon completion of
an audit of HQSM's acquisition of Sealink and Jiahua Marine, performed to the
satisfaction of HQSM and receipt of all necessary shareholder consents and
approvals.
The Purchase Agreement is being accounted for as a recapitalization of Sealink
whereby the historical financial information of Sealink becomes the historical
financial information of the Registrant.
The accompanying Unaudited Pro Forma Condensed Consolidated Statement of Income
for the quarter ended March 31, 2004, has been prepared to reflect the
acquisition as if it had occurred as of January 1, 2004.
The accompanying pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the financial position or results of
operations which would actually have been reported had the merger been in effect
during the periods presented, or which may be reported in the future.
3/31/2004
USD (`000)
Turnover 2,166
Loss from operations 1,179
Net loss attributable to shareholder 1,076
==========
Weighted average outstanding number of shares 25,000
==========
as at March 31, 2004
Earnings (loss) per share (43.05)
==========
F-31
NOTE 10 - SUBSEQUENT EVENTS
HQSM had an obligation under the Note to issue to SSC 100,000 shares of its
preferred stock corresponding to $100,000 principal amount under the Note. HQSM
and SSC entered into a Waiver and Amendment Agreement dated May 4, 2005,
extending the due date of the issuance of the related 100,000 preferred stock to
November 4, 2005. The Waiver and Amendment Agreement has been filed as an
exhibit to this quarterly report. Also pursuant to the Waiver and Amendment
Agreement, SSC waived any and all defaults that have occurred and are continuing
under the original agreement dated November 4, 2004 and under the Note.
F-32
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification Of Officers And Directors.
As permitted by the General Corporation Law of Delaware, our Bylaws provide that
we will indemnify our officers, directors, employees and agents. This includes
indemnification against expenses incurred by a director of HQSM in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of HQSM (or was serving at HQSM's request as a director or
officer of another corporation). Such expenses shall be paid by HQSM in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by HQSM as
authorized by relevant sections of the General Corporation Law of Delaware.
The indemnification and advances of expenses provided in our Bylaws shall not be
deemed exclusive of any other rights provided by any agreement, vote of
stockholders or disinterested directors or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling our company pursuant
to the foregoing provisions, we have been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 25. Other Expenses Of Issuance And Distribution.
Expenses payable in connection with the registration and distribution of the
securities being registered hereunder, all of which will be borne by the
Registrant, are as follows:
68
Registration Fee - Securities and Exchange Commission $720.53
Blue sky fees and expenses (including legal fees) $1,000
Legal fees and expenses (other than blue sky fees) $5,000
Accountants' fees and expenses $2,000
Printing expenses $ 500
Miscellaneous expenses $ 500
Total estimated expenses $9,720.53
ITEM 26. Recent Sales Of Unregistered Securities.
Recent Sales of Unregistered Securities
On March 17, 2004, in connection with the merger of all of the capital stock of
Jade Profit Investment Limited, a British Virgin Islands limited liability
corporation, into Process Equipment, Inc., we issued:
(a) 21,355,200 shares of our common stock to four shareholders, in a private
placement under Section 4(2) of the Securities Act;
(b) warrants to acquire an additional 27,068,570 shares of newly-issued common
stock to four shareholders. The warrants' exercise price was $0.00 per share.
The warrants were issued instead of shares due to the lack of sufficient
authorized numbers of shares of common stock, which were issued after
shareholders approval was obtained. The warrants were issued in reliance upon
the exemption from registration provided in Section 4(2) of the Securities Act
and Regulation D thereunder. All of the warrants were exercised in full in May
2004 after the shareholders approved the increase of the authorized shares of
common stock.
On May 28, 2004, we issued 18,600 shares of our common stock and 150,000
warrants to purchase shares of our common stock to Consulting for Strategic
Growth 1, Ltd., in consideration of the public relations services rendered to us
by that firm. In consideration of the same services, we also issued 900 shares
to Bonnie Barrett Stretch, a related party of Consulting for Strategic Growth.
All of these securities were issued in reliance upon the exemption from
registration provided in Section 4(2) of the Securities Act.
On August 17, 2004, we entered into a Purchase Agreement ("Nutraceutical
Purchase Agreement") with Sino-Sult Canada (S.S.C.) Limited, a Canadian limited
liability corporation ("SSC"), and Sealink Wealth Limited, a British Virgin
Islands limited liability corporation ("Sealink"), whereby we acquired Sealink,
SSC's wholly owned subsidiary, on the terms and conditions as specified therein.
The Nutraceutical Purchase Agreement has been filed as an exhibit to the report
we filed on Form 8-K on August 18, 2004.
69
The consideration is payable by HQSM in the following manner:
(i) On August 27, 2004, $8,888,655 in the form of 12,698,078 shares of HQSM's
common stock, $0.001 par value per share, up to but not exceeding 19.9% of the
outstanding shares of HQSM's common stock, on a fully-diluted basis, to be
delivered to SSC at closing; and
(ii) the remaining balance of $11,111,345 to be payable in the form of a
convertible promissory note issued by HQSM to SSC. The note will accrue interest
at the rate of 5% per annum and is convertible into: first, one hundred thousand
US Dollars (US$100,000) for 100,000 shares of HQSM's Series A preferred stock,
$0.001 par value per share, the proposed terms of which are described below and
are fully subject to receipt of all necessary shareholder consents and
approvals, and thereafter, the remaining principal amount of the note equal to
US$11,011,345 into 15,732,493 shares of HQSM's common stock. On November 18,
2004, the $11,011,345 promissory note was converted to 15,732,493 shares of
HQSM's common stock.
On August 31, 2004, we issued 35,411 shares of our common stock to three parties
in consideration of $24,508.
In October, 2004, we issued 570,351 shares of our common stock to nineteen
parties in consideration of $217,340.
In November, 2004, we issued 641,169 shares of our common stock to twenty-six
parties in consideration of $177,737.
On November 18, 2004, we issued 89,285 shares of our common stock to our three
independent non-executive directors Jacques Vallee, Fred Bild and Daniel Too in
consideration of $25,000 of their salaries.
In December, 2004, we issued 919,964 shares of our common stock to twenty-nine
parties in consideration of $285,286.
On December 1, 2004, we issued 18,600 shares of our common stock to Consulting
for Strategic Growth 1, Ltd., in consideration of the public relations services
rendered to us by that firm, amounting at $5,394. In consideration of the same
services, we also issued 900 shares to Bonnie Barrett Stretch, a related party
of Consulting for Strategic Growth in consideration of $261.
On December 1, 2004, we issued 520,685 shares of our common stock to John
O'Shea, Henry S. Krauss, Daniel Luskind and Marika Xirouhakis in consideration
of their services rendered to us as financial advisors in our Spring 2004
reverse merger.
70
On December 22, 2004, we issued 18,750 shares of our common stock and 50,000
warrants to purchase shares of our common stock to Consulting for Strategic
Growth 1, Ltd., in consideration of the public relations services rendered to us
by that firm, amounting at $6,562.50.
In January 2005, we issued 124,167 and 240,000 shares of our common stock to
Lucky Ventures Resources Limited in consideration of the financial consultant
services rendered to us by that firm and Paul Courteau in consideration of the
consultant service rendered to us by that individual, respectively. All of these
securities were issued in reliance upon the exemption from registration provided
in Section 4(2) of the Securities Act.
In February 2005, we issued 53,571 shares of our common stock to three
independent non-executive directors Jacques Vallee, Fred Bild and Daniel Too in
consideration of $15,000 as their salaries.
During the first quarter of 2005, we issued 2,651,998 shares of our common
stock, pursuant to Regulation S promulgated under the securities Act, to
ninety-five parties for a gross consideration of $745,230 and net proceeds of
$265,541, after payment of escrow, finders' and other fees.
In April 2005, we issued 33,333 shares of our common stock to each independent
non-executive directors Jacques Vallee, Fred Bild and Daniel Too in
consideration of $15,000 as their salaries.
During the second quarter of 2005, we issued 1,888,665 shares of our common
stock, pursuant to Regulation S promulgated under the securities Act, to fifty
parties for a gross consideration of $400,595 and net proceeds of $144,214,
after payment of escrow, finders' and other fees.
In April 2005, we issued 148,000 shares to an independent professional party,
for services rendered to our Company as compensation for professional fees of
$51,800.
ITEM 27. Exhibits.
The following exhibits are included as part of this Registration Statement.
Exhibit No. Description of Exhibit
- ----------- ----------------------
2 Agreement and Plan of Merger, dated as of March 17, 2004, by
and among Process Equipment, Inc., Process Equipment
Acquisition Corporation and Jade Profit investment Limited
(incorporated by reference to the Report on Form 14-C of
Process Equipment, Inc. (Commission File No. 0-18980), filed
with the Commission on April 28, 2004.
3.1 Certificate of Incorporation of HQ Sustainable Maritime
Industries, Inc., as amended (incorporated by reference to the
Report on Form 14-C of Process Equipment, Inc. (Commission
file No. 0-18980), filed with the Commission on April 28,
2004.
71
3.2 Bylaws of HQ Sustainable Maritime Industries, Inc.
(incorporated by reference to the Report on Form 14-C of
Process Equipment, Inc. (Commission file No. 0-18980), filed
with the Commission on April 28, 2004.
4 Process Equipment, Inc. 2003 Stock Incentive Plan
(incorporated by reference to the Report on Form 14-C
(commission File Number 0-18980), filed with the Commission on
April 28, 2004.
5 Opinion of Joseph I. Emas, P.A.
10.1 Form of Stock Option Grant Notice (incorporated by reference
to the Report on Form 8-K (commission File Number 0-18980),
filed with the Commission on December 3, 2004.
10.2 Form of Option Agreement (incorporated by reference to the
Report on Form 8-K (commission File Number 0-18980), filed
with the Commission on December 3, 2004.
10.3 Form of Exercise Agreement (incorporated by reference to the
Report on Form 8-K (commission File Number 0-18980), filed
with the Commission on December 3, 2004.
10.4 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 the Report on
Form 10-QSB (Commission file No. 0-18980), filed with the
Commission on November 15, 2004.
10.5 Independent Non-Executive Director Agreement, dated as of
September 2, 2004, between HQ Sustainable Maritime Industries
Inc. and Daniel Too (incorporated by reference to the Report
on Form 10-QSB (Commission file No. 0-18980), filed with the
Commission on November 15, 2004.
10.6 Employment Agreement, dated as of September 1, 2004, between
HQ Sustainable Maritime Industries Inc. and Jean-Pierre
Dallaire (incorporated by reference to the Report on Form
10-QSB (Commission file No. 0-18980), filed with the
Commission on November 15, 2004.
10.7 Purchase Agreement, dated as of August 17, 2004, among HQ
Sustainable Maritime Industries, inc., Sino-Sult Canada
(S.S.C.) Limited and Sealink Wealth Limited (incorporated by
reference to the Report on Form 8-K (commission File Number
0-18980), filed with the Commission on August 18, 2004.
10.8 Purchase Agreement, dated as of August 17, 2004, between Jade
Profit Investment Limited and Hainan Fuyuan Investment Company
Limited (incorporated by reference to the Report on Form 8-K
(commission File Number 0-18980), filed with the Commission on
August 18, 2004.
10.9 Form of Employment Agreement, effective as of April 1, 2004,
between HQ Sustainable Maritime Industries, Inc. and Harry
Wang (incorporated by reference to the Report on Form 10-QSB
(commission File Number 0-18980), filed with the Commission on
August 13, 2004.
10.10 Form of Employment Agreement, effective as of April 1, 2004,
between HQ Sustainable Maritime Industries, Inc. and Lillian
Wang Li (incorporated by reference to the Report on Form
10-QSB (commission File Number 0-18980), filed with the
Commission on August 13, 2004.
72
10.11 Form of Employment Agreement, effective as of April 1, 2004,
between HQ Sustainable Maritime Industries, Inc. and Norbert
Sporns (incorporated by reference to the Report on Form 10-QSB
(commission File Number 0-18980), filed with the Commission on
August 13, 2004.
10.12 Form of Independent Non-Executive Director Agreement, dated as
of June 15, 2004, between HQ Sustainable Maritime Industries
Inc. and Fred Bild (incorporated by reference to the Report on
Form 10-QSB (Commission file No. 0-18980), filed with the
Commission on August 13, 2004.
10.13 Independent Non-Executive Director Agreement, dated as of June
15, 2004, between HQ Sustainable Maritime Industries Inc. and
Jacques Vallee (incorporated by reference to the Report on
Form 10-QSB (Commission file No. 0-18980), filed with the
Commission on August 13, 2004.
10.14 Amendment No. 1 to Employment Agreement, dated July, 2005,
between HQ Sustainable Maritime Industries, Inc. and Norbert
Sporns. (incorporated by reference to the Report on Form
10-KSB (commission File Number 18980), filed with the
Commission on April 11, 2005.
10.15 Amendment No. 1 to Employment Agreement, dated July, 2005,
between HQ Sustainable Maritime Industries, Inc. and Lillian
Wang. (incorporated by reference to the Report on Form 10-KSB
(commission File Number 18980), filed with the Commission on
April 11, 2005.
10.16 Amendment No. 1 to Employment Agreement, dated July, 2005,
between HQ Sustainable Maritime Industries, Inc. and Harry
Wang. (incorporated by reference to the Report on Form 10-KSB
(commission File Number 18980), filed with the Commission on
April 11, 2005.
14 Code of Ethics (incorporated by reference to the Report on
Form 10-KSB (commission File Number 18980), filed with the
Commission on April 11, 2005.
16 Letter, dated May 18, 2004 from Baum & Company, P.A., the
Registrant's former principal accountants, to the Securities
and Exchange Commission pursuant to Item 304(a)(3) of
Regulation S-B (incorporated by reference to the Report on
Form 8-K (commission File Number 0-18980), filed with the
Commission on May 18, 2004.
21 Subsidiaries of the Registrant
23.1 Consent of Rotenberg & Co. LLP
23.2 Consent of Joseph I. Emas (included in Exhibit 5).
24 Power of Attorney (included on signature page to this
Registration Statement).
ITEM 28. Undertakings.
The undersigned Registrant hereby undertakes the following:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
73
(i) to include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933, as amended;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information in this Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement, or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment to this
Registration Statement any of the securities being registered which remain
unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation, or otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in such Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or person controlling the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or person controlling the Registrant in connection with any
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Haikou, People's Republic of China, on the date specified below.
Dated: July 11, 2005
HQ SUSTAINABLE MARITIME INDUSTRIES, INC.
By: /s/ Norbert Sporns
--------------------------------------------
Name: Norbert Sporns
Title: Chief Executive Officer and President
POWER OF ATTORNEY
We, the undersigned directors and officers of HQ Sustainable Maritime
Industries, Inc., do hereby constitute and appoint Norbert Sporns and Lillian
Wang Li, acting individually, our true and lawful attorney and agent, to do any
and all acts and things in our name and behalf in our capacities as directors
and officers, and to execute any and all instruments for us an d in our names in
the capacities indicated below, which said attorney and agent may deem necessary
or advisable to enable said corporation to comply with the Securities Act of
1933, as amended, and any rules, regulations and requirements of the Securities
and Exchange Commission, in connection with this Registration Statement,
including specifically, but without limitation, power and authority to sign for
us or any of us in our names and in the capacities indicated below, any and all
amendments (including post-effective amendments) hereof; and we do hereby ratify
and confirm all that the said attorney and agent shall do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Norbert Sporns Chief Executive Officer, President July 11, 2005
- ------------------------- and Director
Norbert Sporns (Principal Executive Officer)
/s/ Lillian Wang Secretary, Chairman of the Board July 11, 2005
- ------------------------- of Directors, and Director
Lillian Wang
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/s/ Harry Wang Chief Operating Officer and July 11, 2005
- ------------------------- Director
Harry Wang
/s/ Jacque Vallee Director July 11, 2005
- -------------------------
Jacque Vallee
/s/ Fred Bild Independent Non-executive Director July 11, 2005
- -------------------------
Fred Bild
/s/ Daniel Too Independent Non-executive Director July 11, 2005
- -------------------------
Daniel Too
/s/ Jean-Pierre Dallaire Chief Financial Officer and July 11, 2005
- ------------------------- Financial Controller
Jean-Pierre Dallaire (Principal Financial Officer)
/s/ Fusheng Wang Honorary Chairman and Director July 11, 2005
- -------------------------
Fusheng Wang
76