Pingtan Marine Enterprise Ltd. - Quarter Report: 2013 March (Form 10-Q)

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2013

or

For the transition period from               to              

Commission File Number: 001-35192

PINGTAN MARINE ENTERPRISE LTD.

 (Exact name of registrant as specified in its charter)

18/F, Zhongshan Building A,

No. 154 Hudong Road

Fuzhou, P.R.C. 350001

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 86-591-8727-1266

(Former name, former address and former fiscal year, if changed since last report)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of May 7, 2013, the outstanding number of shares of the registrant’s common stock, par value $0.01 per share, was 79,055,053.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this report, and the information incorporated by reference herein, which reflect our current views with respect to future events and financial performance, and any other statements of a future or forward-looking nature, constitute “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 (the “Exchange Act”). Forward-looking statements give current expectations or forecasts of future events. Our forward-looking statements include, but are not limited to, statements regarding our expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this report may include, for example, statements about:

The forward-looking statements contained or incorporated by reference in this report are based on our current expectations and beliefs concerning future developments and their potential effects on us and speak only as of the date of such statement. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

References in this report to “we,” “us” or “our company” refer to Pingtan Marine Enterprise Ltd. References in this report to our “public shares” are to our ordinary shares sold as part of the units in our initial public offering (whether they are purchased in our initial public offering or thereafter in the open market) and references to “public stockholders” refer to the holders of our public shares, including our initial stockholders (as defined below) to the extent our initial stockholders purchased public shares, provided that each initial stockholder’s status as a “public stockholder” shall only exist with respect to such public shares.

CHINA GROWTH EQUITY INVESTMENT LTD.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PINGTAN MARINE ENTERPRISE LTD.

Consolidated Balance Sheets

See accompanying notes to unaudited consolidated financial statements.

PINGTAN MARINE ENTERPRISE LTD.

Consolidated Statements of Income

(unaudited)

See accompanying notes to unaudited consolidated financial statements.

PINGTAN MARINE ENTERPRISE LTD.

Consolidated Statements of Comprehensive Income

(unaudited)

See accompanying notes to unaudited consolidated financial statements.

PINGTAN MARINE ENTERPRISE LTD.

Consolidated Statement of Shareholders’ Equity

(unaudited)

See accompanying notes to unaudited consolidated financial statements.

PINGTAN MARINE ENTERPRISE LTD.

Consolidated Statement of Cash Flows

(unaudited)

*Note 1: Deposit on setting up Joint Venture netted off with accounts payable – related parties.
**Note 2: Deferred income relates to government grants to construct new fishing vessels.

See accompanying notes to unaudited consolidated financial statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

China Equity Growth Investment Ltd. (“CGEI”) incorporated in the Cayman Islands as an exempted limited liability company, was incorporated as a blank check company on January 18, 2010 with the purpose of directly or indirectly acquiring, through a merger, share exchange, asset acquisition, plan of arrangement, recapitalization, reorganization or similar business combination, an operating business, or control of such operating business through contractual arrangements, that has its principal business and/or material operations located in the PRC. In connection with its initial business combination, CGEI changed its name to Pingtan Marine Enterprise Ltd. (“the Company” or “PME”) in February 2013.

China Dredging Group Co., Ltd (“CDGC” or “China Dredging”) and Merchant Supreme Co., Ltd (“Merchant Supreme”) are limited liability companies incorporated on April 14, 2010 and June 25, 2012, respectively, in British Virgin Island (“BVI”).

China Dredging, through its PRC Variable Interest Entity (“VIE”), Fujian Service Port Service Co., Ltd (“Fujian Service”), provides specialized dredging services exclusively to the PRC marine infrastructure market and is, based on the number and capacity of the dredging vessels it operates, one of the leading independent (not state-owned) providers of such services in the PRC. Since its inception, China Dredging has functioned exclusively as a specialist subcontractor, performing dredging services for other companies licensed to function as general contractors. China Dredging engages in capital dredging, maintenance dredging and reclamation dredging projects and primarily sources its projects by subcontracting projects from general contractors.

Merchant Supreme, through its PRC VIE, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd. (“Pingtan Fishing”) engages in ocean fishery with its self-owned vessels within Indian EEZ and Arafura Sea of Indonesia, Pingtan Fishing is ranked as one of the leading private (not state-owned) supplier and trader of oceanic aquatic products in PRC.

CGEI and CDGC entered into the Merger Agreement dated October 24, 2012, providing for the combination of CGEI and CDGC. Pursuant to the Merger Agreement, CDGC would continue as the surviving company and a wholly-owned subsidiary of CGEI. CGEI also acquired all of the outstanding capital shares and other equity interests of Merchant Supreme as per Share Purchase Agreement dated October 24, 2012. Following the completion of the business combination held on February 25, 2013, CDGC and Merchant Supreme became the wholly-owned subsidiaries of the Company. The ordinary shares, par value $0.001 per share were listed on The NASDAQ Capital Market under the symbol “PME”.

Details of the Company’s subsidiaries and VIEs which are included in these consolidated financial statements as of March 31, 2013 are as follows:

These interim consolidated financial statements of the Company and its subsidiaries and variable interest entities (each, a “VIE”, and together with the Company and its subsidiaries, the “Group”) are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim consolidated financial statements have been included. The results reported in the consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”).

The unaudited consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and VIEs in which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated. The consolidated financial statements of the Company have been prepared as if the existing corporate structure had been in existence throughout the periods presented and as if the reorganization had occurred as of the beginning of the earliest period presented.

.

The Company has no direct or indirect legal or equity ownership interest in Pingtan Fishing and it only owes 50% equity interest in Fujian Service. However, through the VIE Agreements between Fujian WangGang and the shareholders of Wonder Dredging, the shareholders of Wonder Dredging have assigned all their rights as shareholders, including voting rights and disposition rights of their equity interests in Wonder Dredging and Fujian Service to Fujian WangGang, our direct, wholly-owned subsidiary. Based on the VIE Agreements, Fujian WangGang provides management services to Fujian Service and is entitled to (1) receive all of the economic benefits from Fujian Service, (2) exercise effective control over Fujian Service and Wonder Dredging, and (3) has an exclusive option to purchase all or part of the equity interests in Fujian Service. Accordingly, by virtue of the VIE Agreements, Fujian WangGang is the primary beneficiary of Fujian Service as defined by ASC 810 "Consolidation of Variable Interest Entities". Therefore we consolidate Fujian Service and Wonder Dredging as VIEs.

Another set of VIE agreements have been entered between Pingtan Guansheng and the shareholders of Pingtan Fishing. The shareholders of Pingtan Fishing also have assigned all their rights as shareholders, including voting rights and disposition rights of their equity interest Pingtan Fishing to Pingtan Guanshen, our direct, wholly-owned subsidiary. Accordingly, by virtue of the VIE Agreements, Pingtan Guansheng is the primary beneficiary of Pingtan Fishing as defined by ASC 810 "Consolidation of Variable Interest Entities". Therefore we consolidate Pingtan Fishing as VIE.

In accordance with Accounting Standards Codification ("ASC") 810-10-15-14, Fujian Service, Wonder Dredging and Pingtan Fishing are deemed VIEs for two reasons. First, the equity stockholders of these companies do not significantly enjoy the benefits of income or suffer the consequences of losses. Second, the equity stockholders of these companies do not possess the direct or indirect ability through voting or similar rights to make decisions regarding their activities that have a significant effect on the success of the companies. Therefore, in accordance with ASC 810-10-25-38A, the Company is deemed to be the primary beneficiary of these companies and the financial statements of these companies are consolidated in the Company's consolidated financial statements.

The following tables show the assets and liabilities of the Company's VIEs after eliminating the intercompany balances as of March 31, 2013 and December 31, 2012. The VIEs include Wonder Dredging, Fujian Service and Pingtan Fishing Group which comprises of Pingtan Fishing itself and the three subsidiaries; namely Pingtan Dingxin, Pingtan Duoying and Pingtan Ruiying. The creditors of Wonder Dredging, Fujian Service and Pingtan Fishing Group do not have recourse against the general creditors of their primary beneficiaries or other Group members.

The following tables show the revenue and cost of revenues, and net income/(loss) of the Company's VIEs after eliminating the intercompany balances for the three months ended March 31, 2013 and 2012. The VIEs include Wonder Dredging, Fujian Service and Pingtan Fishing Group which comprises of Pingtan Fishing itself and the three subsidiaries; namely Pingtan Dingxin, Pingtan Duoying and Pingtan Ruiying.

The following table shows the condensed cash flow activities of Wonder Dredging, Fujian Service and Pingtan Fishing Group for the three months ended March 31, 2013 and 2012:

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management of the Company to make a number of estimates and assumptions relating to 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 amounts of revenues and expenses during the years. Significant items subject to such estimates and assumptions include the recoverability of the carrying amount and the estimated useful lives of long-lived assets; valuation allowances for receivables, and realizable values for inventories. Accordingly, actual results could differ from those estimates.

The Company uses United States dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The subsidiaries within the Company maintain their books and records in their respective functional currency, Chinese Renminbi (“RMB”) and Hong Kong dollars (“HKD”), being the lawful currency in the PRC and Hong Kong, respectively. Assets and liabilities of foreign subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rate of exchange prevailing during the period. The related transaction adjustments are reflected in “Accumulated other comprehensive income’’ in the equity section of the Company's consolidated balance sheet. A summary of exchange rate is as follows:

Cash consists of cash on hand and at banks.

China Dredging

Accounts receivable represent billed under the terms of contracts with customers. There is no amount related to retainage. CDGC anticipates collection of all the outstanding balances within 30 to 90 days after completion reports of the contracts are issued. The allowance for doubtful accounts is CDGC’s best estimate of the amount of probable credit losses in the CDGC’s existing receivable. CDGC provides an allowance for estimated uncollectible receivables when events or conditions indicate that amounts outstanding are not recoverable. Outstanding account balances are reviewed individually for collectability. Based on the CDGC’s assessment of collectability, there has been no allowance for doubtful accounts recognized for the three months ended March 31, 2013 and 2012.

Merchant Supreme

Accounts receivable are recognized at original sales amounts and carried at net realizable value. Merchant Supreme only grants credit periods to established customers with long and good paying history. Credit periods to independent customers are within 180 days after customers pick up purchased goods.

Merchant Supreme maintains allowances for doubtful accounts for estimated losses resulting from the inability of Merchant Supremes’ debtors to make required payments. Merchant Supreme reviews customer credit worthiness, past transaction history, and changes in payment terms when determining the adequacy of these allowances. Accounts are written off against the allowance when it becomes evident collection will not occur.

No allowance for doubtful accounts has been provided for accounts receivable from third party customers for the three months ended March 31, 2013 and 2012, respectively. Merchant Supreme collected a majority of receivable balances from third party customers as of March 31, 2013 and December 31, 2012 within 60 days subsequent to respective balance sheet dates, and historically has not experienced uncollectible accounts from customers granted with credit sales.

China Dredging

CDGC recognizes contract revenues under the percentage-of-completion method to determine the appropriate amount to be recognized in a given period. Depending on the nature of contracts, the stage of completion is measured by reference to (a) the proportion of contract costs incurred for work performed to date to estimated total contract costs; (b) the amount of work certified by a site engineer; or (c) the completion of a physical proportion of the contract work. The difference between amounts billed and recognized as revenue is reflected in the balance sheet as either contract revenues in excess of billings or billings in excess of contract revenues. Provisions for estimated losses on contracts in progress are made in the period in which they are identified. In the event that contract revenue cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable.

Merchant Supreme

Merchant Supreme recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the customer is fixed or determinable, and collection of the resulting receivable is reasonably assured.

With respects to the sale of frozen fish and other marine catches to third party customers, most of which are sole proprietor regional wholesalers in China, Merchant Supreme recognizes revenue when customers pick up purchased goods at Merchant Supremes’ cold storage warehouse, after payment is received by Merchant Supreme or credit sale is approved by Merchant Supreme for recurring customers with excellent paying history. Merchant Supreme does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers. Merchant Supreme does not accept returns from customers. Deposits or advance payments from customers prior to delivery of goods are recorded as receipt in advance.

China Dredging

Cost and estimated earnings in excess of billings represent amounts of revenue earned under contracts in progress but not billed at the balance sheet date. These amounts become billable according to the contract terms, which usually consider passage of time, and/or completion of the project.

Merchant Supreme

Government grants are recognized at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognized as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to the cost of the asset and is released to the income statement over the expected useful life in a consistent manner with the depreciation method for the relevant asset.

Merchant Supreme

Deferred income represents income collected but not earned as of the report date. This is primarily composed of one off payment of the government grant to construct new fishing vessels. The fishing vessels were under construction. Upon the completion of the construction of fishing vessels, the grant would be deducted from the cost of the fishing vessels.

Merchant Supreme

Each of the Merchant Supremes’ fishing vessels requires an approval from Ministry of Agriculture of the Peoples' Republic of China to carry out ocean fishing project in foreign territories. These approvals are valid for a period from three to twelve months, and are awarded to Merchant Supreme at no cost. Merchant Supreme applies for the renewal of the approval prior to expiration to avoid interruptions of fishing vessels’ operations.

Each of the Merchant Supremes’ fishing vessels operated in Indonesia water requires a fishing license granted by the authority in Indonesia. Indonesia fishing licenses remain effective for a period of twelve months and Merchant Supreme applies for renewal prior to expiration. Merchant Supreme records cost of Indonesia fishing licenses in prepaid expenses and amortizes over the effective period of the licenses.

China Dredging

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average method. Inventories comprise of consumable parts.

Merchant Supreme

Inventories are stated at the lower of cost or market. Cost comprises of fuel, depreciation, direct labor, shipping, consumables, and government levied charges and taxes. Consumables include fishing nets and metal containers used by fishing vessels and are amortized during expected useful lives of three months. Merchant Supreme’s fishing fleets in India and Indonesia waters operate around the year, although the May to July period demonstrates lower catch quantities compared to the August to December peak season. Cost incurred during a fishing vessel’s relocation period between different operating territories is deferred and amortized in ensuing six-month period. Cost of frozen fish and other marine catches at period-ends is calculated using the weighted average method.

Dredger, fishing vessel, motor vehicle, machinery and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and betterments are capitalized. Depreciation of dredgers, fishing vessels, motor vehicles, machinery and equipment is computed by the straight-line method over the assets estimated useful lives ranging from five to twenty years.

Upon sale or retirement of dredgers, fishing vessels, motor vehicles, machinery and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations.

The estimated useful lives of the assets are as follows:

Expenditures for repairs and maintenance, which do not extend the useful life of the assets, are expensed as incurred.

Merchant Supreme

Interest associated with the construction of a fishing vessel is capitalized and included in the cost of the fishing vessels. When no debt is incurred specifically for the construction of a fishing vessel, interest is capitalized on amounts expended on the construction using weighted-average cost of the Companies outstanding borrowings. Capitalization of interest ceases when the construction is substantially complete or the construction activity is suspended for more than a brief period. For the three months ended March 31, 2013 and 2012, Merchant Supreme capitalized no interest in the fishing vessels under construction, respectively.

In accordance with FASB ASC Topic 360, Property, Plant and Equipment, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. If long-lived assets are to be disposed, depreciation is discontinued, if applicable, and the assets are reclassified as held for sale at the lower of their carrying amounts or fair values less costs to sell.

Based on the Company's assessment, no triggering events for the testing of long-lived assets for impairment were identified as of March 31, 2013 and December 31, 2012.

(o) Income taxes

China Dredging

CDGC recognizes interest and penalties related to income tax matters as income tax expense. For the three months ended March 31, 2013 and 2012, there was no penalty or interest recognized as income tax expenses.

Merchant Supreme

Merchant Supreme is a qualified ocean fishing enterprise, certified by the Ministry of Agriculture of the PRC. The qualification is renewed on April 1 each year. According to Cai Shui Zi (1997) No. 114 “Notice of Ministry of Finance and the State Administration of Taxation on Relevant Issues concerning Enterprise Income Tax on Domestic Enterprises Engaged in Fishery Business” issued by the Ministry of Finance of the PRC and State Administration of Taxation in 1997, Order of the State Council of the People's Republic of China No. 512 “Regulation on the Implementation of the Enterprise Income Tax Law of the People's Republic of China” issued by the State Council in 2007, Guo Shui Fa (2005) No. 129 “Measures for the Administration of Tax Deduction or Exemption (Trial Implementation)” issued by State Administration of Taxation in 2008, and State Administration of Taxation Announcement (2011) No. 48 “Notice of the State Administration of Taxation on Relevant Issues concerning the Implementation of Preferential Policies of Enterprise Income Tax on Agriculture, Forestry, Stockbreeding and Fishery Projects”, the Company is exempt from income tax derived from its ocean fishing operations in the periods it processes a valid Ocean Fishing Enterprise Qualification Certificate issued by the Ministry of Agriculture of the PRC.

Merchant Supreme is not subject to foreign income taxes for its operations in India and Indonesia Exclusive Economic Zones.

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update “ASU 2010-06” “Fair Value Measurements and Disclosures”. The new guidance clarifies two existing disclosure requirements and requires two new disclosures as follows: (1) a “gross” presentation of activities (purchases, sales, and settlements) within the Level 3 rollforward reconciliation, which will replace the “net” presentation format; and (2) detailed disclosures about the transfers in and out of Level 1 and 2 measurements. This guidance is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward information, which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods thereafter. The Company adopted the amended fair value disclosures guidance on January 1, 2012.

China Dredging

CDGC's financial instruments consist principally of cash, accounts receivable, cost and estimated earnings in excess of billings on contracts in progress, accounts payable and accrued liabilities, none of which are held for trading purposes. Pursuant to Accounting Standards Codification (“ASC 820”), the fair value of the CDGC's cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. CDGC believes that the carrying amounts of the Group's financial instruments, other than derivative liability, approximate their current fair values because of their nature and respective maturity dates or durations. Derivative liability, as described in Note 2(u) below, is carried at the estimated fair value at the balance sheet date using Level 3 inputs.

Merchant Supreme

As of March 31, 2013 and December 31, 2012, none of the Merchant Supreme’s financial assets or liabilities was measured at fair value on a recurring basis. As of March 31, 2013 and December 31, 2012, none of the Company’s non-financial assets or liabilities was measured at fair value on a nonrecurring basis.

The carrying values of Merchant Supreme’s financial assets and liabilities, including accounts receivable, other receivables, other current assets, short-term loans, accounts payable, and other payables and accrued liabilities, are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and if applicable, their stated interest rate approximates current rates available. It is not practicable to estimate the fair values of advance to and advance from related parties because of the related party nature of such advances.

In the normal course of business, the Company is subject to contingencies, including legal proceedings and environmental claims arising out of the normal course of businesses that relate to a wide range of matters, including among others, contracts breach liability. The Company records accruals for such contingencies based upon the assessment of the probability of occurrence and, where determinable, an estimate of the liability. Management may consider many factors in making these assessments including past history, scientific evidence and the specifics of each matter.

The Company's management has evaluated all such proceedings and claims that existed as of March 31, 2013 and December 31, 2012. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, liquidity or results of operations.

The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.

The Company's operation in the PRC is subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company'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, remittances aboard, and rates and methods of taxation, among other things.

China Dredging

Full time employees of CDGC’s participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require CDGC to accrue for these benefits based on certain percentages of the employees’ salaries. Cost for pension and employee benefits of CDGC was $24,945 and $22,789 for the three months ended March 31, 2013 and 2012, respectively.

ASC 280 "Segment reporting" establishes standards for reporting information on operating segments in interim and annual financial statements. The Company has only two segments, all of the Company's operations and customers are in the PRC and all income is derived from dredging service and ocean fishery. Accordingly, segment information on products is presented.

China Dredging

Under the original terms of the preferred shares, the holders of the preferred shares had the right to receive 20% of the $5.00 purchase price on the second anniversary of issuance if not yet converted. Substantially, this was the right to receive $1.00 per share if CDGC failed to have the ordinary shares underlying the preferred shares both successfully registered with the SEC and listed on a suitable exchange by October 2012. CDGC had determined that this contingent right of the holders of the preferred shares is an embedded derivative financial instrument which must, for financial reporting purposes, be separated from the host instrument (i.e. from the preferred shares) and treated as a separate instrument. Proceeds of the private placement conducted in the fourth quarter 2010 (the “2010 Private Placement”) were allocated to the derivative liability in an amount equal to its estimated fair value. Prospectively, the derivative liability was adjusted to its estimated fair value at each balance sheet date with changes in its fair value recorded in CDGC’s statements of income.

CDGC had estimated the value of the embedded derivative based on the $10,012,987 proceeds that would be paid, discounted at an interest rate of 9% and multiplied by 18%, representing the probability, viewed from the time of the 2010 Private Placement, that the underlying ordinary shares would not be registered and listed. CDGC believes the 9% interest rate, which is consistent with then-effective high-yield rates in U.S. markets, is appropriate for debt in such amount at the parent-company level that is unsecured, illiquid and structurally subordinated to creditor claims at the operating companies (the locus of substantially all of the CDGC’s assets). The probability of the CDGC not being registered and listed by October 2012 was estimated to be the same as the actual percentage of all public Form F-1 filers in 2009 and 2010 failing to achieve effectiveness of their registration statements. However, the CDGC’s actual probability of success could differ from that of companies who filed such registration statements during the reference period, or an actual market participant could take a different view. CDGC believed that, in its case, based on circumstances in the fourth quarter 2010, if its registration statement were to become effective, all other requirements to achieve a national exchange listing would be satisfied or within its control, which would is sufficient to extinguish the embedded derivative. While listing requirements relating to market capitalization are not directly in CDGC’s control, CDGC believed it should have sufficient market capitalization based on its cash alone to meet requisite listing standards.

As of December 31, 2011, CDGC estimated the fair value of the derivative using a revised estimated probability of 90% of not meeting the listing requirements, or as a permitted alternative, conducting a sufficiently large public offering. The revised estimate was based on new restrictions placed by significant exchanges on the listing of “reverse merger” companies. They included a requirement that a stock trade in an alternative market for a “seasoning” period, unless a sufficiently large public offering is conducted. There were no data upon which to base and estimate on the likelihood of fulfilling the new requirements and determine the odds of a successful offering in the time frame. CDGC, in consultation with its investment banking advisors, decided to use 90% as the probability of being unable to avoid the obligation to make the payments as of December 31, 2011. Also, the discount rate used was decreased to 8.5% reflecting closer maturity date of the potential obligation.

During the fourth quarter of 2012, CDGC failed to meet the requirements to avoid triggering the liability under the terms of the preferred shares. The Preferred Shareholders agreed to a change in the terms of the derivative rather than demand payment of the $1.00 per share. Under the revised terms, the holders of the Preferred Shares would be entitled to the $1.00 per share payment if CDGC did not meet its listing requirements by December 31, 2013. Furthermore, if the amount due under this provision is due and remains unpaid at the time of Automatic Conversion, the holders may, at the sole discretion of the holders, apply any and all such payments due to purchase additional ordinary shares at a purchase price of $5.00 per share.

The terms of the preferred shares were also changed such that Automatic Conversion would also occur if CDGC’s shares were listed on the Hong Kong Stock Exchange (“HKSE.”)

As of December 31, 2012, CDGC estimated the fair value of the revised derivative using an estimated probability of 10% of not meeting the listing requirements or, as a permitted alternative, conducting a sufficiently large public offering. The reason for such a low estimated probability was that at the time, CDGC had entered into a definitive merger agreement, under which CDGC’s ordinary shares, including those into which the preferred shares would convert, would be exchanged for shares in a Company listed on the NASDAQ capital market, thus causing Automatic Conversion. This actually occurred in February, 2013. CDGC believes that market participants would, as of December 31, 2012, have viewed the likelihood of the merger transaction being finalized as very high. CDGC also believes that market participants would have also believed that if the merger transaction did not actualize, CDGC would have good prospects for listing on the HKSE or complete a different merger transaction before December 31, 2013.

The 10% probability was applied to estimated values for two separate elements of the derivative. First was the present value of the $1.00 per share required payment at December 31, 2013 if Automatic Conversion were to not occur. The $10,012,987 that would be due was discounted at 9% per annum, compounded monthly, resulting in a present value of $9,154,255. That amount was added to an estimate of the fair value of the option feature under which the holder of the preferred would, if not paid by CDGC, effectively have the option to acquire ordinary shares for $5.00 per share.

CDGC estimated the fair value of the option feature to be $8,488,236. When added to the $9,154,255 estimated present value of the cash payment, the total value was $17,642,491. Applying to this amount, the 10% estimated probability of the payments under the derivative being triggered; the derivative liability was recorded as $1,764,249.

CDGC based the value of the option feature by estimating the value of a two-year option using the Black-Scholes formula and then subtracting from that amount, the value of a one-year option representing CDGC’s right to eliminate the holders’ option by making the payment on time. The two-year and one year Black-Scholes calculations used an estimated $8.97 value of CDGC’s ordinary share, the $5.00 exercise price, a volatility of 30.55%, risk free interest rates of 0.25% and 0.16% and an assumption that were no expected dividends. The $8.97 estimate of value assumes that the shares will not be listed. This is the appropriate assumption for estimating the share’s value as a component of the derivative as the holders of the derivative only receive the option if the shares to not become listed.

CDGC calculated the $8.97 estimated fair value of its ordinary shares (under the hypothetical assumption that they will not be listed) at December 31, 2012 by applying to its earnings for the 12 months ended September 30, 2012, the price-earnings ratio equal to the average price-earnings ratio of the only two other public companies it could identify in the dredging industry, the peer companies, after making the adjustments described below. For one of the peer companies, earnings for the 12 months ended September 30, 2012 was compared to the December 31, 2012 share price. For the other, the earnings of that period were not meaningful (the resulting price-earnings ratio was over 50) and a published analyst estimate of forward price earnings ratio was used. The peer companies, whose price-earnings ratios averaged 12.5, are domiciled in developed countries, (the Netherlands and the United States), no single shareholder or group controls them and their shares are liquid and actively traded. To adjust the price-earnings ratio for the peer companies for differences in CDGC’s circumstances, CDGC applied a 65% discount encompassing several factors. This discount is to reflect 1) the market discount applicable to Chinese companies of scale consistent with that of the CDGC, 2) the lack of marketability of CDGC shares compared to public companies generally, and 3) the lack of control of CDGC as compared with public companies generally. The lack of marketability was based on the fact that there was no ready market for the shares and would likely not be when the holder obtains the right to the option. The size of the discount needed for lack of marketability was limited by the fact that CDGC was a public company through its reverse merger with Chardan Acquisition Corp. and had plans and a clear intention to register its shares and list on an exchange. The control element of the discount was necessary because a majority of CDGC’s voting shares were controlled by Mr. Xinrong Zhuo.

The 38.06% volatility used in the Black-Scholes calculations is the average two-year volatility of the peer companies as of December 31, 2012.

The use of the 10% figure for the chance of Automatic Conversion not occurring is highly judgmental on the part of management. There are no data upon which to base the estimate that market participants would have judged the probability at that level. Also significant judgments were necessary in ascribing a two year time period to the option right. It is reasonably possible that actual market participants would have judged these matters differently and that the amount that CDGC would have had to pay to have another party assume the contingent obligation would have differed materially from the amount recorded.

The original embedded derivative is part of the preferred shares and was entered into as an inducement to the 2010 Private Placement investors to purchase the preferred shares. In its modified form it was negotiated with the holders of the original to induce them to grant an extension of time to secure a listing. It is not used for hedging purposes. The estimate of the embedded derivative’s fair value is based on “Level 3” inputs, meaning unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The embedded derivative is the only instrument held by CDGC that is carried at fair value estimated using Level 3 inputs as of December 30, 2012. The changes in the carrying value of the Level 3 instruments as of March 31, 2013 and December 31, 2012 were as follows:

Quantitative information about Level 3 fair value measurements:

The significant unobservable inputs used in the fair value measurement of the embedded derivative are discount rates, the probability that CDGC would not achieve an appropriate listing for its shares by December 31, 2013, the value of CDGC’s ordinary shares and the volatility in the value of CDGC’s ordinary shares.

An increase (decrease) in the discount rate in isolation would result in a lower (higher) fair value measurement.

An increases (decreases) in the probability that CDGC would not achieve an appropriate listing for its shares by December 31, 2013, the value of CDGC’s ordinary shares and the volatility in the value of the CDGC’s ordinary shares would result in a higher (lower) fair value measurement.

The estimate of the fair value of the derivative was prepared by a consultant to CDGC and reviewed by the CDGC’s accounting staff and Chief Financial Officer.

The conditions for Automatic Conversion of the Preferred Shares were triggered by the merger into PME on February 25, 2013. This resulted in the cancellation of the derivative liability with a $1,764,249 for CDGC in the period from January 1 to February 25, 2013. 

Earnings per ordinary share (basic and diluted) is based on the net income attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during each period. Ordinary share equivalents are not included in the calculation of diluted earnings per ordinary share if their effect would be anti-dilutive. As of December 31, 2012, the weighted average outstanding ordinary share equivalents outstanding totaled 10,012,987 consisting of Class A Preferred Shares. There was automatic conversion of preferred shares into the Company's ordinary shares after the closing of the transactions. Retroactive treatment as required by FASB ASC paragraph 260-10-55-12 has been applied in computing earning per shares to reflect the business combination held on February 25, 2013.

The following table sets forth the computation of basic and diluted net income per ordinary share:

The following tables sets out the analysis of the Company's revenue and cost of revenue by segments:

The following is an analysis of the Company's revenue and results from continuing operations by reportable segment:

China Dredging

PME                      

Cash is classified by geographical areas and is denominated in the following currency:

Merchant Supreme

Cash is classified by geographical areas is set out as follows:                

In the PRC and Hong Kong, there are currently no rules or regulations mandating obligatory insurance of bank accounts. Management believes these financial institutions are of high credit quality.

Renminbi is not a freely convertible currency and the remittance of funds out of the PRC is subject to the exchange restrictions imposed by the PRC government.

China Dredging

As of March 31, 2013 and December 31, 2012, the balance of accounts receivable of $4,245,219 and $23,446,249, respectively, was set out as follows:

Notes:                                        

1. The contracts commenced and were completed in 2012, but the remaining balances were fully settled during January to March 2013.                                        

2. The contracts commenced and were completed during January to March 2013.