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Pingtan Marine Enterprise Ltd. - Quarter Report: 2014 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

COMMISSION FILE NUMBER: 001-35192

 

PINGTAN MARINE ENTERPRISE LTD.

(Exact name of Registrant as specified in its charter)

 

Cayman Islands N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)

 

18/F, Zhongshan Building A,

No. 154 Hudong Road

Fuzhou, China 350001

(Address of principal executive offices)


(86) 59187271266

(Registrant’s telephone number, including area code)

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ Smaller reporting company ¨
 (Do not check if smaller reporting company)      

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of ordinary stock, as of the latest practicable date. As of November 10, 2014, the outstanding number of shares of the registrant’s ordinary stock, par value $0.001 per share, was 79,055,053.

 

 
 

 

PINGTAN MARINE ENTERPRISE LTD.

FORM 10-Q

September 30, 2014

 

TABLE OF CONTENTS

 

 

  Page No.
  PART I. - FINANCIAL INFORMATION  
Item 1. Financial Statements  
     
 

Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013

3
  Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 4
  Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2014 5
  Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 6
  Notes to Unaudited Condensed Consolidated Financial Statements. 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 39
Item 3 Quantitative and Qualitative Disclosures About Market Risk. 54
Item 4 Controls and Procedures. 55
     
  PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 56
Item 1A. Risk Factors 56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 56
Item 3. Defaults upon Senior Securities 56
Item 4. Mine Safety Disclosures 57
Item 5. Other Information 57
Item 6. Exhibits. 57

 

FORWARD LOOKING STATEMENTS

 

This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

 

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

 

We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

  

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

References in this report to “we,” “us” or “our company” refer to Pingtan Marine Enterprise Ltd.

 

2
 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN U.S. DOLLARS)

 

   September 30,
2014
   December 31,
2013
 
   (Unaudited)   (As Restated) 
ASSETS          
           
CURRENT ASSETS:          
Cash  $11,797,659   $8,156,599 
Accounts receivable, net of allowance for doubtful accounts   41,566,819    9,133,130 
Inventories, net of reserve for obsolete inventories   6,033,328    9,095,736 
Prepaid expense   288,292    4,309,574 
Prepaid expense - related parties   3,107,842    - 
Deferred expense - related parties   2,236,288    - 
Advance to suppliers   258,085    - 
Other receivable   168,222    11,665 
           
 Total Current Assets   65,456,535    30,706,704 
           
OTHER ASSETS:          
Long-term investment   19,338,902    3,468,953 
Prepayment for long-term assets   28,802,523    33,985,148 
Property, plant and equipment, net   120,956,039    101,970,707 
           
Total Other Assets   169,097,464    139,424,808 
           
Total Assets  $234,553,999   $170,131,512 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable  $312,405   $2,184,964 
Accounts payable - related parties   4,343,814    13,807,605 
Advance from customers   161,901    297,034 
Short-term bank loans   36,071,023    9,085,353 
Long-term bank loans - current portion   26,895,700    20,252,077 
Accrued liabilities and other payable   4,812,723    4,643,272 
Due to related parties   673,348    - 
Dividend payable   790,551    - 
Deferred grant income   -    520,045 
           
Total Current Liabilities   74,061,465    50,790,350 
           
OTHER LIABILITIES:          
Long-term bank loans - non-current portion   44,706,991    54,499,727 
           
Total Liabilities   118,768,456    105,290,077 
           
SHAREHOLDERS' EQUITY:          
Ordinary shares ($0.001 par value; 225,000,000 shares authorized; 79,055,053   shares issued and outstanding at September 30, 2014 and December 31, 2013)   79,055    79,055 
Additional paid-in capital   117,525,377    117,525,377 
Accumulated deficit   (12,019,389)   (63,654,445)
Statutory reserve   6,412,892    6,412,892 
Accumulated other comprehensive income - foreign currency translation adjustment   3,787,608    4,478,556 
           
Total Shareholders' Equity   115,785,543    64,841,435 
           
Total Liabilities and Shareholders' Equity  $234,553,999   $170,131,512 

 

See notes to unaudited condensed consolidated financial statements

 

3
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(IN U.S. DOLLARS)

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2014   2013   2014   2013 
       (As Restated)       (As Restated) 
                 
REVENUE                    
Revenue  $54,416,793   $20,576,492   $176,909,177   $51,302,671 
Revenue - related party   -    32,615    -    10,338,269 
                     
Total Revenue   54,416,793    20,609,107    176,909,177    61,640,940 
                     
COST OF REVENUE                    
Cost of revenue   38,932,806    12,956,478    118,388,729    32,909,027 
Cost of revenue - related party   -    20,413    -    6,470,581 
                     
Total Cost of Revenue   38,932,806    12,976,891    118,388,729    39,379,608 
                     
GROSS PROFIT   15,483,987    7,632,216    58,520,448    22,261,332 
                     
OPERATING EXPENSES:                    
Selling   675,442    362,000    1,914,815    730,734 
General and administrative   828,530    1,178,033    2,407,370    2,345,569 
                     
Total Operating Expenses   1,503,972    1,540,033    4,322,185    3,076,303 
                     
INCOME FROM OPERATIONS   13,980,015    6,092,183    54,198,263    19,185,029 
                     
OTHER INCOME (EXPENSE):                    
Interest income   4,845    2,305    14,016    4,861 
Interest expense   (679,484)   (1,414,015)   (3,088,685)   (2,123,800)
Foreign currency transaction gain (loss)   171,058    194,433    (286,576)   (25,972)
Grant income   716,121    168,900    1,240,542    204,492 
Investment income   2,399    218    348,382    69,289 
Other (expense) income   (424)   7    (335)   2,021 
                     
Total Other Income (Expense), net   214,515    (1,048,152)   (1,772,656)   (1,869,109)
                     
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES   14,194,530    5,044,031    52,425,607    17,315,920 
                     
INCOME TAXES   -    -    -    - 
                     
NET INCOME FROM CONTINUING OPERATIONS   14,194,530    5,044,031    52,425,607    17,315,920 
                     
NET INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX   -    12,362,523    -    39,461,777 
                     
NET INCOME  $14,194,530   $17,406,554   $52,425,607   $56,777,697 
                     
COMPREHENSIVE INCOME:                    
NET INCOME  $14,194,530   $17,406,554   $52,425,607   $56,777,697 
                     
OTHER COMPREHENSIVE INCOME  Foreign currency translation gain (loss)   302,391    796,724    (690,948)   6,551,401 
                     
 TOTAL COMPREHENSIVE INCOME  $14,496,921   $18,203,278   $51,734,659   $63,329,098 
                     
BASIC AND DILUTED EARNINGS PER SHARE                    
From continuing operations  $0.18   $0.06   $0.66   $0.22 
From discontinued operations   0.00    0.16    0.00    0.50 
Net income  $0.18   $0.22   $0.66   $0.72 
                     
WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING:                    
Basic and diluted   79,055,053    79,055,053    79,055,053    78,641,031 

 

See notes to unaudited condensed consolidated financial statements

 

4
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Nine Months Ended September 30, 2014

(IN U.S. DOLLARS)

 

   Ordinary Shares   Additional           Accumulated Other   Total 
   Number of       Paid-in   Accumulated   Statutory   Comprehensive   Stockholders' 
   Shares   Amount   Capital   Deficit   Reserve   Income   Equity 
                             
Balance, December 31, 2013 - as restated   79,055,053   $79,055   $117,525,377   $(63,654,445)  $6,412,892   $4,478,556   $64,841,435 
                                    
Net income   -    -    -    52,425,607    -    -    52,425,607 
                                    
Dividend declared   -    -    -    (790,551)   -    -    (790,551)
                                    
Foreign currency translation adjustment   -    -    -    -    -    (690,948)   (690,948)
                                    
Balance, September 30, 2014 (unaudited)   79,055,053   $79,055   $117,525,377   $(12,019,389)  $6,412,892   $3,787,608   $115,785,543 

 

See notes to consolidated financial statements

 

5
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the Nine Months Ended 
   September 30, 
   2014   2013 
       (As Restated) 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income from continuing operations  $52,425,607   $17,315,920 
Adjustments to reconcile net income from operations to net cash provided by operating activities:          
Depreciation   4,022,232    1,160,603 
Changes in operating assets and liabilities:          
Accounts receivable   (32,622,490)   1,568,675 
Other receivable   (156,943)   19,657 
Prepaid expense   3,956,449    (4,479,159)
Prepaid expense - related parties   (3,111,736)   - 
Deferred expense - related parties   (2,239,090)   - 
Inventories   2,918,687    (5,191,641)
Advance to suppliers   (258,408)   - 
Accounts payable   (1,839,459)   77,561 
Accounts payable - related parties   (6,849,973)   494,616 
Advance from customers   (130,484)   473,183 
Advance from customers - related parties   -    (12,983,365)
Accrued liabilities and other payable   241,133    5,613,387 
Due to related parties   23,348    - 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING OPERATIONS   16,378,873    4,069,437 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from government grants for fishing vessels construction   1,195,275    6,224,357 
Payment for fishing vessels deposit   -    (3,271,878)
Prepayments made for long-term assets   (22,461,657)   - 
Purchase of property, plant and equipment   (1,268,934)   (213,813,927)
Advance to related parties   -    (4,044,837)
Investment in joint venture interest   (15,946,109)   - 
Decrease in cash related to sale of subsidiary   -    (76,987,656)
           
NET CASH USED IN INVESTING ACTIVITIES FOR CONTINUING OPERATIONS   (38,481,425)   (291,893,941)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from short-term bank loans   44,891,439    43,439,587 
Repayments of short-term bank loans   (17,724,568)   (46,996,499)
Proceeds from long-term bank loans   3,742,454    45,889,055 
Repayments of long-term bank loans   (5,682,835)   (1,890,743)
Advance from related parties   650,000    3,847,492 
Cash acquired in recapitalization   -    3,565,355 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES FROM CONTINUING OPERATIONS   25,876,490    47,854,247 
           
CASH FLOWS FROM DISCONTINUED OPERATIONS:          
Net income from discontinued operations   -    39,461,777 
Adjustments to reconcile net income from operations to net cash provided by operating activities:          
Depreciation   -    5,756,650 
Gain on derivative   -    (1,764,249)
Changes in operating assets and liabilities   -    26,198,314 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS   -    69,652,492 
           
NET CASH PROVIDED BY INVESTING ACTIVITIES FROM DISCONTINUED OPERATIONS   -    7,624,250 
           
NET CASH USED IN FINANCING ACTIVITIES FOR DISCONTINUED OPERATIONS   -    (560,216)
           
NET CASH PROVIDED BY DISCONTINUED OPERATIONS   -    76,716,526 
           
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS   (132,878)   2,162,371 
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   3,641,060    (161,091,360)
           
CASH AND CASH EQUIVALENTS - beginning of period   8,156,599    171,923,360 
           
CASH AND CASH EQUIVALENTS - end of period  $11,797,659   $10,832,000 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid:          
From continuing operations          
Interest paid  $4,065,601   $2,325,864 
From discontinued operations          
Income tax paid  $-   $12,814,679 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Purchase of property, plant and equipment by setting off advance to related parties  $-   $54,882,642 
Deposit on setting up joint venture netted of accounts payable - related parties  $-   $6,090,302 
Acquisition of property, plant and equipment by decreasing prepayment for long-term assets  $27,099,444   $- 
Decrease in cost of property, plant and equipment by proceeds from government grants  $1,195,275   $- 
Decrease in cost of property, plant and equipment by recognition of deferred grant income  $512,261   $ 

 

See notes to unaudited condensed consolidated financial statements

 

6
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION

 

Pingtan Marine Enterprise Ltd. (“the Company” or “PME”), formerly 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, in February 2013, CGEI changed its name to Pingtan Marine Enterprise Ltd.

 

On October 24, 2012, CGEI and China Dredging Group Co., Ltd (“CDGC” or “China Dredging”) entered into a Merger Agreement providing for the combination of CGEI and CDGC and on October 24, 2012, CGEI also acquired all of the outstanding capital shares and other equity interests of Merchant Supreme Co., Ltd., a company incorporated on June 25, 2012, in British Virgin Island (“BVI”), as per a Share Purchase Agreement.  On February 25, 2013, the merger between the Company (formerly known as China Growth Equity Investment Ltd.), CDGC and Merchant Supreme became effective and has been accounted for as a “reverse merger” and recapitalization since the common shareholders of CDGC and Merchant Supreme (i) owned a majority of the outstanding ordinary shares of the Company immediately following the completion of the transaction, and (ii) has significant influence and the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity. In accordance with the provision of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 805-40, CDGC and Merchant Supreme are deemed the accounting acquirers and the Company is the legal acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of the Company. Accordingly, the assets and liabilities and the historical operations that are reflected in the consolidated financial statements are those of CDGC, Merchant Supreme and their subsidiaries and are recorded at the historical cost basis. The Company’s assets, liabilities and results of operations were consolidated with the assets, liabilities and results of operations of CDGC, Merchant Supreme and their subsidiaries subsequent to the acquisition date of February 25, 2013. Following the completion of the business combination which became effective 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 are listed on The NASDAQ Capital Market under the symbol “PME”.

 

Details of the Company’s subsidiaries and VIEs which are included as continuing operations in these consolidated financial statements as of September 30, 2014 and December 31, 2013 are as follows:

 

Name of subsidiaries  Place and date of
incorporation
  Percentage of ownership   Principal activities
          
Merchant Supreme  BVI,  100% held by PME   Intermediate holding company
Co., Ltd. (“Merchant  June 25, 2012      
Supreme”)         
          
Prime Cheer  Hong Kong,  100% held by Merchant   Intermediate holding company
Corporation Ltd. (“Prime Cheer”)  May 3, 2012  Supreme    
          
Pingtan Guansheng  PRC,  100% held by Prime Cheer  Intermediate holding company
Ocean Fishing Co., Ltd. ("Pingtan Guansheng")  October 12, 2012      

 

7
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION (continued)

 

The following variable interest entities (“VIEs”) are consolidated into financial statements.

 

Name of VIEs  
Fujian Provincial Pingtan County Fishing Group Co., Ltd. (“Pingtan Fishing”)
Pingtan Dingxin Fishing Information Consulting Co., Ltd. (“Pingtan Dingxin”)
Pingtan Duoying Fishing Information Consulting Co., Ltd. (“Pingtan Duoying”)
Pingtan Ruiying Fishing Information Consulting Co., Ltd. (“Pingtan Ruiying”)

 

Merchant Supreme, through its PRC VIE, Pingtan Fishing engages in ocean fishery with its owned and licensed vessels within Indian EEZ and Arafura Sea of Indonesia. Pingtan Fishing is ranked highly as one of the leading private (not state-owned) supplier and trader of oceanic aquatic products in PRC.

 

On June 19, 2013, the Company entered into a master agreement with a related company, Fuzhou Honglong Ocean Fishery Co., Ltd (“Hong Long”) to acquire 46 fishing vessels with total consideration of $410.1 million representing the fair market value on the date of acquisition. The major shareholder of Hong Long is Ms. Ping Lin, spouse of Xinrong Zhuo (“Mr. Zhuo”), the Company’s Chairman and CEO. Ms. Ping Lin holds 66.5% of Hong Long, whereas the remaining two shareholders, Mr. Zhuo’s cousins, hold 33.5%.  Mr. Zhuo currently holds about 56.2% of PME. The transaction between PME and Hong Long is accounted as common control transaction. Based on Accounting Standards Codification ("ASC") 805-50, PME recorded the value of $21.8 million as the cost of the vessels which was the net carrying amount recorded in Hong Long's books at the date of transfer. The balance of $388.3 million above cost was treated as a return of capital in the equity accounts. $249.3 million was recorded as a reduction in retained earnings and the balance of $139.0 million applied to additional paid-in capital.

 

On December 4, 2013, the Company completed the sale of CDGC and its subsidiaries (See Note 2).

 

On December 4, 2013, in connection with the sale of CDGC, the Company and Hong Long entered into an agreement whereby Hong Long assigned its operating rights of 20 vessels for a period of 25 years pursuant to a license agreement to Pingtan Fishing. Subsequent to the licensing of the operating rights, Pingtan Fishing is entitled to 100% operation and operating results from vessels from September 1, 2013 onwards. Hong Long was not able to transfer ownership of these 20 vessels to the Company since Hong Long received subsidies from China’s central government budget in 2012 for the construction of these 20 vessels and Hong Long received notification from the Government prohibiting the sale or transfer of ownership of these vessels for a period of 10 years for fishing vessels that have received such subsidies.

 

NOTE 2 – DISCONTINUED OPERATIONS

 

In order to place increased focus on fishing business and pursue more effective growth opportunities, the Company decided to exit and sell the specialized dredging services currently operated by China Dredging to its affiliate, Hong Long, and the sale was completed on December 4, 2013 with payment in kind consideration of $543.8 million. Pursuant to ASC Topic 205-20, Presentation of Financial Statements-Discontinued Operations, the business of CDGC is considered as a discontinued operation because: (a) the operations and cash flows of CDGC were eliminated from the Company’s operations; and (b) the Company would not have ability to influence the operation or financial policies of CDGC subsequent to the sale.

 

8
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 2 – DISCONTINUED OPERATIONS (continued)

 

The payment consideration for the sale consisted of following items:

 

(a)offset the Company's current $155.2 million promissory note payable to Hong Long which matures on June 19, 2015 and bears an interest rate of 4%;
(b)the fair value of a 25-year lease agreement for the operating rights to 20 fishing vessels, with such rights appraised by an independent third party at fair market value of $216.1 million; and
(c)offset of current accounts of $172.5 million made between the Company and CDGC.

 

The net assets of CDGC and its subsidiaries at the date of the sale of December 4, 2013 was $236.6 million (after offsetting current accounts of $172.5 million made between the Company and CDGC), the disposal resulted in a net gain of $117.5 million, which was presented as part of additional paid-in capital for the year ended December 31, 2013 as it was sold to a related party with common control.

 

The results of operation of CDGC and its subsidiaries have been presented as discontinued operations for the three and nine months ended September 30, 2013. There were no discontinued operations in 2014. The following table provides the financial results included in net income from discontinued operations during the periods presented:

 

   Three Months Ended
September 30, 2013
   Nine Months Ended
September 30, 2013
 
Revenue  $54,323,389   $131,610,091 
Income from discontinued operations before income tax   17,089,139    51,664,971 
Income tax   (4,726,616)   (12,203,194)
Net income from discontinued operations  $12,362,523   $39,461,777 

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

These interim condensed 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 condensed consolidated financial statements have been included. The results reported in the unaudited condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying unaudited condensed 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 condensed 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 unaudited condensed 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.

 

Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2013 filed with the Securities and Exchange Commission on November 10, 2014.

 

9
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Consolidation of VIE

 

The Company has no direct or indirect legal or equity ownership interest in Pingtan Fishing. Moreover, 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 in Pingtan Fishing to Pingtan Guansheng, 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, Pingtan Fishing is consolidated as VIE.

 

In accordance with ASC 810-10-15-14, Pingtan Fishing and its subsidiaries, namely Pingtan Dingxin, Pingtan Duoying and Pingtan Ruiying are deemed VIEs for two reasons. First, the equity stockholders of Pingtan Fishing do not significantly enjoy the benefits of income or suffer the consequences of losses. Second, the equity stockholders of Pingtan Fishing 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 Pingtan Fishing. Therefore, in accordance with ASC 810-10-25-38A, the Company is deemed to be the primary beneficiary of Pingtan Fishing and the financial statements of Pingtan Fishing are consolidated in the Company’s consolidated financial statements. The Company does not have any non-controlling interest and, accordingly, did not subtract any net income in calculating the net income of the VIEs that is attributable to the Company.

 

The following table shows the assets and liabilities of the Company’s VIEs after eliminating the intercompany balances as of September 30, 2014 and December 31, 2013. The VIEs include Pingtan Fishing Group which comprises of Pingtan Fishing itself and its three subsidiaries; namely Pingtan Dingxin, Pingtan Duoying and Pingtan Ruiying. The creditors of Pingtan Fishing Group do not have recourse against the general creditors of their primary beneficiaries or other Group members.

 

   September 30, 2014   December 31, 2013 
        (As Restated) 
ASSETS          
Cash  $11,505,876   $7,736,309 
Accounts receivable   41,566,819    9,133,130 
Other receivable   168,190    11,632 
Inventories   6,033,328    9,095,736 
Prepaid expense   288,292    4,306,753 
Prepaid expense - related parties   3,107,842    - 
Deferred expense – related parties   2,236,288      
Advance to suppliers   258,085      
Long-term investment   19,338,902    3,468,953 
Prepayment for long-term assets   28,802,523    33,985,148 
Property, plant and equipment, net   95,401,816    75,623,422 
TOTAL ASSETS  $208,707,961   $143,361,083 
LIABILITIES          
Accounts payable  $312,405   $2,184,964 
Accounts payable - related parties   4,343,814    13,807,605 
Advance from customers   161,901    297,034 
Bank loans   107,673,714    83,837,157 
Accrued liabilities and other payable   4,349,801    4,423,847 
Deferred grant income   -    520,045 
TOTAL LIABILITIES  $116,841,635   $105,070,652 

 

10
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Consolidation of VIE (continued)

 

The following table shows the revenue and cost of revenue and net income of the Company’s VIEs after eliminating the intercompany balance for the three and nine months ended September 30, 2014 and 2013.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2014   2013   2014   2013 
       (As Restated)       (As Restated) 
Revenue  $54,416,793   $20,609,107   $176,909,177   $61,640,940 
Cost of revenue   (38,139,744)   (12,976,891)   (117,595,667)   (39,379,608)
Net income from continuing operations  $11,018,017   $5,769,153   $54,617,710   $19,018,274 

 

Use of estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates in the nine months ended September 30, 2014 and 2013 include the allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property, plant and equipment, assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets and accruals for taxes due.

 

Cash

 

Cash consists of cash on hand and cash at banks. The Company maintains cash with various financial institutions in China and Hong Kong. As of September 30, 2014 and December 31, 2013, cash balances in banks in China of $11,797,659 and $8,156,599, respectively, are uninsured.

 

Fair value of financial instruments

 

The Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

11
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Fair value of financial instruments (continued)

 

The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, inventories, prepaid expense, prepaid expense – related parties, deferred expense – related parties, advance to suppliers, other receivable, accounts payable, accounts payable – related parties, advance from customers, bank loans, accrued liabilities and other payable, due to related parties, dividend payable, deferred grant income approximate their fair market value based on the short-term maturity of these instruments.

 

As of September 30, 2014, the Company does not have any assets or liabilities that are measured on a recurring basis at fair value. The Company’s short-term borrowings, loans payable, related party notes payable and unrelated party notes payable that are considered Level 2 financial instruments measured at fair value on a non-recurring basis as of September 30, 2014. The Company does not have any level 3 financial instruments.

 

ASC Topic 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

Accounts receivable

 

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowance for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowance when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balance, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. The Company only grants credit terms to established customers who are deemed to be financially responsible. Credit periods to customers are within 180 days after customers received the purchased goods.

 

Management believes that the accounts receivable are fully collectable. Therefore, no allowance for doubtful accounts is deemed to be required on its accounts receivable at September 30, 2014 and December 31, 2013. The Company historically has not experienced uncollectible accounts from customers granted with credit sales.

 

Inventories

 

Inventories, consisting of frozen fish and marine catches, are stated at the lower of cost or market utilizing the weighted average method. The Cost of inventories comprises of fuel, depreciation, amortization, direct labor, shipping, consumables, and government levied charges and taxes. Consumables include fishing nets and metal containers used by fishing vessels. The Company’s fishing fleets in India and Indonesia waters operate throughout the year, although the May to July period demonstrates lower catch quantities compared to the October to January which is the peak season.

 

An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserve for the difference between the cost and the market value. These reserves are recorded based on estimates. The Company did not record any inventory reserve at September 30, 2014 and December 31, 2013.

 

Advances to suppliers

 

Advances to suppliers represent the cash paid in advance for the purchase of fuel costs from suppliers. The advance payments are intended to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $258,085 and $0 as of September 30, 2014 and December 31, 2013, respectively.

 

12
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Fishing licenses

 

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

 

Each of the Company’s 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 the Company applies for renewal prior to expiration. The Company records cost of Indonesia fishing licenses in prepaid expenses on the accompanying unaudited condensed consolidated balance sheets and amortizes over the effective period of the licenses.

 

Property, plant and equipment

 

Property, plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. 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. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

 

Included in property, plant and equipment is fishing vessel under construction which includes the costs of construction and any interest charges arising from borrowings used to finance these assets during the period of construction of the assets. No provision for depreciation is made on fishing vessels under construction until such time as the relevant assets are completed and ready for their intended use.

 

The estimated useful lives of the assets are as follows:

 

    Estimated useful life
Fishing vessels pursuant to capital lease – related party   25 Years
Fishing vessels   10- 20 Years
Motor vehicle   5 Years
Office and other equipment   3 - 5 Years

 

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

 

Capitalized interest

 

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 Company’s outstanding borrowings. Capitalization of interest ceases when the construction is substantially complete or the construction activity is suspended for more than a brief period. The Company capitalized interest of $635,050 and $117,696 for the three months ended September 30, 2014 and 2013, respectively; $1,228,048 and $828,873 for the nine months ended September 30, 2014 and 2013, respectively in the fishing vessels under construction.

 

13
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Impairment of long-lived assets

 

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.  The Company did not record any impairment charge for the three and nine months ended September 30, 2014 and 2013.

 

Advance from customers

 

Advance from customers at September 30, 2014 and December 31, 2013 amounted to $161,901 and $297,034, respectively, and consist of prepayments from customers for merchandise that had not yet been shipped or delivered. The Company will recognize the deposits as revenue as customers take delivery of the goods and the purchase price is fixed and collectability is reasonably assured in accordance with the Company’s revenue recognition policy.

 

Revenue recognition

 

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability 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, the Company recognizes revenue when customers pick up purchased goods at the Company’s cold storage warehouse, after payment is received by the Company or credit sale is approved by the Company for recurring customers who have history of financial responsibility. The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers. The Company does not accept returns from customers.

 

Government grant

 

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.

 

Deferred grant income

 

Deferred grant income represents grant collected but not earned as of the report date. This is primarily composed of receipts of the government grants to construct new fishing vessels. Upon the completion of the construction of the fishing vessels, the grant is deducted from the cost of the fishing vessels.

 

14
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Income taxes

 

Under the current laws of the Cayman Islands and British Virgin Islands, the Company and Merchant Supreme are not subject to any income or capital gains tax, and dividend payments that the Company may make are not subject to any withholding tax in the Cayman Islands or British Virgin Islands. Under the current laws of Hong Kong, Prime Cheer is not subject to any capital gains tax and dividend payments and is not subject to any withholding tax in Hong Kong.

 

The Company is not incorporated nor does it engage in any trade or business in the United States and is not subject to United States federal income taxes. The Company did not derive any significant amount of income subject to such taxes after completion of the Share Exchange and accordingly, no relevant tax provision is made in the accompanying unaudited condensed consolidated statements of income.

 

The Company's VIE, Pingtan Fishing, is a qualified ocean fishing enterprise certified by the Ministry of Agriculture of the PRC. The qualification is renewed on April 1 each year. Pingtan Fishing 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.

 

In addition, Pingtan Fishing is not subject to foreign income taxes for its operations in India and Indonesia Exclusive Economic Zones.

 

Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be effective when the differences are expected to reverse.

 

Deferred tax assets are reduced by a valuation allowance to the extent that management concludes it is more likely than not that the assets will not be realized. 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 the consolidated statements of income in the period that includes the enactment date.

 

The Company has not recorded deferred income taxes applicable to undistributed earnings of the subsidiary and VIEs located in the PRC because it is the present intention of management to reinvest the undistributed earnings indefinitely in PRC. The cumulative undistributed earnings from PRC subsidiary and VIEs amounted to approximately $139.1 million and $84.5 million as of September 30, 2014 and December 31, 2013, respectively, which are included in consolidated retained earnings. Generally, such earnings become subject to the PRC tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.

 

The Company prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. As of September 30, 2014 and December 31, 2013, there were no amounts that had been accrued with respect to uncertain tax positions.

 

Shipping and handling costs

 

Shipping and handling costs are included in selling expenses and totaled approximately $112,000 and $86,000 for the three months ended September 30, 2014 and 2013, respectively. Shipping and handling costs totaled approximately $478,000 and $168,000 for the nine months ended September 30, 2014 and 2013, respectively.

 

15
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Employee benefits

 

The Company’s operations and employees are all located in the PRC. The Company makes mandatory contributions to the PRC government’s health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws. The costs of these payments are charged to the same accounts as the related salary costs in the same period as the related salary costs incurred. Employee benefit costs totaled approximately $574,000 and $181,000 for the three months ended September 30, 2014 and 2013, respectively. Employee benefit costs totaled approximately $1,128,000 and $413,000 for the nine months ended September 30, 2014 and 2013, respectively. During the second quarter of 2014, the Company accrued the social insurance for our sailors, but some of them left from the Company. Then, the Company made the corresponding adjustment for the accrued social insurance in the third quarter of 2014. Therefore, the employee benefit costs for the third quarter of 2014 is a negative number.

 

Advertising

 

Advertising is expensed as incurred and is included in selling expenses on the accompanying unaudited condensed consolidated statements of income and totaled approximately $20,000 for the three and nine months ended September 30, 2014 and we did not incur any advertising expense during the three and nine months ended September 30, 2013.

 

Research and development

 

Research and development costs are expensed as incurred and are included in general and administrative expenses. The Company did not incur any research and development costs during the three and nine months ended September 30, 2014 and 2013.

 

Foreign currency translation

 

The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company and subsidiaries of Merchant Supreme and Prime Cheer is the U.S. dollar and the functional currency of the Company’s subsidiary of Pingtan Guansheng and operating VIEs is the Chinese Renminbi (“RMB”). For the subsidiary of Guansheng and VIEs, whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. The cumulative translation adjustment and effect of exchange rate changes on cash for the nine months ended September 30, 2014 and 2013 was $(132,878) and $2,162,371, respectively. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

All of the Company’s revenue transactions are transacted in the functional currency of the operating VIEs. The Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

 

16
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Foreign currency translation (continued)

 

The foreign currency exchange rates were obtained from www.oanda.com. Asset and liability accounts at September 30, 2014 and December 31, 2013 were translated at 6.1534 RMB to $1.00 and at 6.0537 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rate. The average translation rates applied to the statements of income for the nine months ended September 30, 2014 and 2013 were 6.1457 RMB and 6.1616 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate.

 

Earnings per share

 

ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

 

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common shares consist of the common shares issuable upon the exercise of common stock warrants (using the treasury stock method). Common stock equivalents are not included in the calculation of diluted earnings per share if their effect would be anti-dilutive. Retroactive treatment as required by FASB ASC paragraph 260-10-55-12 has been applied in computing earnings per share to reflect the business combination held on February 25, 2013. The following table presents a reconciliation of basic and diluted net income per share:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2014   2013   2014   2013 
       (As Restated)       (As Restated) 
Net income                    
From continuing operation  $14,194,530   $5,044,031   $52,425,607   $17,315,920 
From discontinued operation   -    12,362,523    -    39,461,777 
   $14,194,530   $17,406,554   $52,425,607   $56,777,697 
                     
Weighted average ordinary shares outstanding (basic and diluted)   79,055,053    79,055,053    79,055,053    78,641,031 
Net income per share (basic and diluted)                    
From continuing operation  $0.18   $0.06   $0.66   $0.22 
From discontinued operation   0.00    0.16    0.00    0.50 
                     
Net income applicable to ordinary shares  $0.18   $0.22   $0.66   $0.72 

 

As of September 30, 2014 and 2013, the warrants to purchase 8,966,667 shares of common stock have not been included in the calculation of diluted earnings per share in order to avoid any anti-dilutive effect.

 

17
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Related parties

 

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded at fair value of the goods or services exchanged.

 

Comprehensive income

 

Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the three and nine months ended September 30, 2014 and 2013 included net income and unrealized gains (loss) from foreign currency translation adjustments.

 

Segment information

 

ASC 280 “Segment reporting” establishes standards for reporting information on operating segments in interim and annual financial statements. All of the Company's operations are considered by management to be aggregated in one reportable operating segment. All of the Company’s operations and customers are in the PRC and all income is derived from ocean fishery.

 

Commitments and contingencies

 

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 September 30, 2014 and December 31, 2013. 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.

 

Concentrations of credit, economic and political risks

 

The Company’s operations are carried out 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’s 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.

 

18
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Concentrations of credit, economic and political risks (continued)

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.

 

According to the sale agreement signed on December 4, 2013, the Company does not own 20 fishing vessels but has the leased operating rights to operate these vessels which are owned by Hong Long and the Company is entitled to 100% of net profit (loss) of the vessels. The Company has latitude in establishing price and discretion in supplier selection. There were no economic risks associated with the leased operating rights but the Company may need to bear the operation risks and credit risks as aforementioned.

 

Recent accounting pronouncements

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The amendments in this ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results and include disposals of a major geographic area, a major line of business, or a major equity method investment. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. Additionally, the new guidance requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company has not early adopted it and does not expect the adoption of ASU 2014-08 to have a material impact on its consolidated financial statements.

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.  The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  Early adoption is not permitted.  The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (ASU 2014-12).  The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities.  The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

19
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent accounting pronouncements (continued)

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU 2014-15).  The guidance in ASU 2014-15 sets forth management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management's plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted.  The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications have no effect on the previously reported financial position, results of operations and cash flows.

 

NOTE 4 – ACCOUNTS RECEIVABLE

 

At September 30, 2014 and December 31, 2013, accounts receivable consisted of the following:

 

   September 30, 2014   December 31, 2013 
       (As Restated) 
Accounts receivable  $41,566,819   $9,133,130 
Less: allowance for doubtful accounts   -    - 
   $41,566,819   $9,133,130 

 

The Company reviews the accounts receivable on a periodic basis and makes general and specific allowance when there is doubt as to the collectability of individual balance. The Company did not make any allowance for doubtful accounts for the three and nine months ended September 30, 2014 and 2013.

 

NOTE 5 - INVENTORIES

 

At September 30, 2014 and December 31, 2013, inventories consisted of the following:

 

   September 30, 2014   December 31, 2013 
       (As Restated) 
Frozen fish and marine catches  $6,033,328   $9,095,736 
    6,033,328    9,095,736 
Less: reserve for obsolete inventories   -    - 
   $6,033,328   $9,095,736 

 

20
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 6 – PREPAID EXPENSE

 

At September 30, 2014 and December 31, 2013, prepaid expense consisted of the following:

 

   September 30, 2014   December 31, 2013 
       (As Restated) 
Prepayments on fuel, consumables and equipment  $288,292   $3,638,165 
Prepaid fishing licenses   -    668,589 
Other   -    2,820 
   $288,292   $4,309,574 

  

NOTE 7 – OTHER RECEIVABLE

 

At September 30, 2014 and December 31, 2013, other receivable consisted of the following:

 

   September 30, 2014   December 31, 2013 
       (As Restated) 
Deposit for tax exemption application for import of fishing vessel equipment  $164,787   $- 
Other   3,435    11,665 
   $168,222   $11,665 

 

NOTE 8 – LONG-TERM INVESTMENT

 

As of September 30, 2014 and December 31, 2013, long-term investment in cost method amounted to $3,412,747 and $3,468,953, respectively. The investment represents the Company’s VIE, Pingtan Fishing’s interest in Fujian Pingtan Rural-Commercial Bank Joint-Stock Co., Ltd. (“Pingtan Rural-Commercial Bank’’), a private financial institution. Pingtan Fishing completed its registration as a shareholder on October 17, 2012 and paid RMB 21 million, or approximately $3.4 million to subscribe 5% of the common stock of Pingtan Rural-Commercial Bank. Pingtan Fishing held 15,113,250 shares and accounted for 4.8 % investment in the total equity investment of the bank as of September 30, 2014 and December 31, 2013. These shares were as collateral for the Company’s long term loan amounting to $2.3 million as of September 30, 2014 and December 31, 2013.

 

In according to ASC 325, Pingtan Fishing uses the cost method of accounting to record its investment since Pingtan Fishing does not have the ability to exercise significant influence over the operating and financing activities of Pingtan Rural-Commercial Bank and treats as long-term investment. Long-term investment for which there are no quoted market prices, a reasonable estimate of fair value could not be made without incurring excessive costs. The Company monitors its investment in the non-marketable security and will recognize, if ever existing, a loss in value which is deemed to be other than temporary. The Company determined that there was no impairment on this investment as of September 30, 2014 and December 31, 2013.

 

21
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 8 – LONG-TERM INVESTMENT (continued)

 

As of September 30, 2014 and December 31, 2013, long-term investment in equity method amounted to $15,926,155 and $0, respectively. The investment represents the Company’s VIE, Pingtan Fishing’s interest in Global Deep Ocean Fishing (Pingtan) Industrial Limited. On June 12 2014, Pingtan Fishing incorporated a joint venture, known as Global Deep Ocean Fishing (Pingtan) Industrial Limited, with other two unrelated companies in PRC. Pingtan Fishing and the other joint venture entities accounted for 35% and 65% of the total ownership, respectively. Total registered capital of the joint venture is $161.2 million (RMB 1 billion) and Pingtan Fishing will contribute $56.4 million (RMB 350 million). No company holds 50% or more of the total shares. The joint venture will process, cold storage, and transport deep ocean fishing products. The Company treats the investment in the joint venture in the unaudited consolidated financial statements under the equity method. Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Company’s share of the incorporated-date fair values of the investee’s identifiable net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post incorporation change in the Company’s share of the investee’s net assets and any impairment loss relating to the investment. As of September 30, 2014 and December 31, 2013, the total of long-term investment amounted to $19,338,902 and $3,468,953, respectively, which was included in the accompanying consolidated balance sheets.

 

NOTE 9 – PREPAYMENT FOR LONG-TERM ASSETS

 

At September 30, 2014 and December 31, 2013, prepayment for long-term assets consisted of the following:

 

   September 30, 2014   December 31, 2013 
       (As Restated) 
Deposit for acquisition of commercial retail space  $22,433,550   $- 
Payment for vessels construction   6,368,973    33,985,148 
   $28,802,523   $33,985,148 

 

As of September 30, 2014, Pingtan Fishing made total payments of $22,433,550 to property developers in order to purchase commercial retail space located in Hubei and Anhui Province, PRC. These commercial retail spaces will be used for market expansion in the fishery product markets in central and western areas of PRC in order to capture more sales directly to final customers. The total consideration for the commercial retail space will be approximately $27 million (RMB166,227,200) and the Company expects the title to these retail spaces will be transferred to Pingtan Fishing by the end of fiscal 2014 (see note 16 – commercial retail space purchase commitment).

 

NOTE 10 – PROPERTY, PLANT AND EQUIPMENT

 

At September 30, 2014 and December 31, 2013, property, plant and equipment consisted of the following:

 

   Useful life  September 30,
2014
   December 31,
2013
 
          (As Restated) 
Fishing vessels  10 - 20 Years  $65,510,000   $61,840,994 
Fishing vessels pursuant to capital lease – related party  25 Years   26,435,403    26,435,403 
Vehicle  5 Years   136,940    139,196 
Office and other equipment  3 – 5 Years   476,225    481,239 
Fishing vessels under construction  -   35,564,258    16,272,875 
       128,122,826    105,169,707 
Less: accumulated depreciation      (7,166,787)   (3,199,000)
      $120,956,039   $101,970,707 

  

22
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 10 – PROPERTY, PLANT AND EQUIPMENT (continued)

 

For the three months ended September 30, 2014 and 2013, depreciation expense amounted to $753,519 and $549,927, respectively, of which $746,155 and $543,200, respectively, was included in cost of revenue, and the remainder was included in operating expense, respectively. For the nine months ended September 30, 2014 and 2013, depreciation expense amounted to $4,022,232 and $1,160,603, respectively, of which $4,000,510 and $1,140,703, respectively, was included in cost of revenue, and the remainder was included in operating expense, respectively.

 

Depreciation is not taken during the period of construction. Upon completion of the construction, fishing vessel under construction balances will be classified to fishing vessels.

 

As of September 30, 2014 and December 31, 2013, the Company had 31 and 38 fishing vessels with net carrying amount of approximately $32.5 million and $33.1 million, respectively, pledged as collateral for its bank loans and bank loans of a related party. The bank loans of the related party were in the amount of approximately $21.6 million and $20.7 million as of September 30, 2014 and December 31, 2013, respectively (see note 16).

 

As of September 30, 2014 and December 31, 2013, the Company pledged approximately $15.7 million and $16.2 million, respectively, of fishing vessels under construction as collateral for its bank loans (see note 12).

 

NOTE 11 – RELATED PARTIES TRANSACTIONS

 

The Company conducted transactions with certain of the Company’s officers and directors, as well as with the following related parties:

 

Name of related parties   Relationship
Xinrong Zhuo   CEO, Director and major shareholder of the Company, a Family Member*
Ping Lin   Spouse of Xinrong Zhuo, a Family Member and shareholder of Hong Long
Panxing Zhuo   Father of Xinrong Zhuo, a Family Member
Honghong Zhuo   Shareholder of Pingtan Fishing,daughter of Xinrong Zhuo and a Family Member
Qing Lin   Brother-in-law of Xinrong Zhuo, a Family Member
Longfei Zhuo   Cousin of Xinrong Zhuo
Sunqiang Zhou   Brother-in-law of Xinrong Zhuo, a Family Member
Cheng Chen   Cousin of Xinrong Zhuo, a Family Member and shareholder of Hong Long
Xiaojie Wu   Brother-in-law of Xinrong Zhuo
Xiaoqin Xu   An employee of an affiliate company
Xiaomei Yang   An employee of the Company and niece of Xinrong Zhuo
Xiaofang Zhuo   Cousin of Xinrong Zhuo
Longhua Zhuo   Sister of Xinrong Zhuo
Zhiyan Lin   Shareholder and legal representative of Pingtan Fishing, a Family Member
Fujian Yihai Investment Co., Ltd.   An affiliate company majority owned by Longjie Zhuo, sibling of Xinrong Zhuo
Fuzhou Haifeng Dafu Ocean Fishing Co., Ltd.   An affiliate company owned by Longfei Zhuo and Honghong Zhuo
Fujian Lutong Highway Engineering Construction Co., Ltd.   An affiliate company majority owned by Xiaojie Wu, brother-in-law of Xinrong Zhuo

 

23
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 11 – RELATED PARTIES TRANSACTIONS (continued)

 

Name of related parties   Relationship

Fujian Haiyi International

Shipping Agency Co., Ltd.

 

An affiliate company to which the Company acted as a trustee equity owner. Haiyi

International is ultimately majority owned and controlled by Sunqiang Zhou

Fujian Xinnong Ocean Fisheries

Development Co., Ltd.

 

An affiliate company to which the Company acted as a trustee equity owner.

Xinnong is ultimately owned and controlled by Xiaojie Wu

Fuzhou Haoyouli Fisheries

Development Co., Ltd.

 

An affiliate company to which the Company acted as trustee equity owner.

Haoyouli is ultimately owned and controlled by Sunqiang Zhou

Fuzhou Honglong Ocean Fishery

Co., Ltd. (“Hong Long”)

   An affiliate company majority owned and controlled by Ping Lin
Fujian Province Ocean Fishery Co., Ltd.   An affiliate company majority owned and controlled by Fuzhou Honglong Ocean Fishery Co., Ltd.
 PT. Avona Mina Lestari  

An affiliate company controlled by Xinrong Zhuo family domiciled in Indonesia,

engaged in fishing base management and fishing vessel service

 PT. Dwikarya Reksa Abadi  

An affiliate company controlled by Xinrong Zhuo family domiciled in Indonesia,

engaged in fishing base management and fishing vessel service

Haifeng Dafu Enterprise

Company Limited

 

An affiliate company ultimately controlled by Xinrong Zhuo and domiciled in the

Hong Kong Special Administrative Region of the PRC (“Hong Kong”)

Hai Yi Shipping Limited  

An affiliate company ultimately controlled by Xinrong Zhuo and domiciled in

Hong Kong Administrative Region of the PRC (“Hong Kong”)

China Communication Materials

Central and South Co., Ltd.

  An affiliate company majority-owned by Fujian Lutong Highway Engineering

Fujian International Trading and

Transportation Co., Ltd.

 

An affiliate company owned by Yihai Investment and Longhao Zhuo, sibling of

Xinrong Zhuo and a Family Member

Fuzhou Dongxing Longju Real

Estate Co., Ltd.

  An affiliate company owned by Xinrong Zhuo

Shenzhen Western Coast

Fisherman Pier Co., Ltd.

  An affiliate company owned by Xinrong Zhuo
Pingtan Heshun Fuel Co., Ltd.   An affiliate company under Xinrong Zhuo’s common control
Fuzhou Hairong Trading Co., Ltd.   An affiliate company under Xinrong Zhuo’s common control
 Hong Fa Shipping Limited  

An affiliate company ultimately owned by Xinrong Zhuo and domiciled in Hong Kong

Administrative Region of the PRC (“Hong Kong”)

 

* Family Member: Pursuant to a Family Agreement executed on November 23, 2004, among Xinrong Zhuo and certain of his family members, Xinrong Zhuo is the sole decision maker of Pingtan Fishing and is responsible for all of Pingtan Fishing’s operation and management, including financial management. The person who subjects to this Family Agreement is called Family Member.

 

Prepaid expense – related parties

 

At September 30, 2014 and December 31, 2013, prepaid expense – related parties consisted of the following:

 

   September 30, 2014   December 31, 2013 
       (As Restated) 
Prepaid fuel cost to Hai Yi Shipping Limited  $1,668,242   $- 
Prepaid fuel cost to Haifeng Dafu Enterprise   1,439,600    - 
   $3,107,842   $- 

  

24
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 11 – RELATED PARTIES TRANSACTIONS (continued)

 

Deferred expense – related parties

 

At September 30, 2014 and December 31, 2013, deferred expense – related parties amount consisted of the following:

 

   September 30,
2014
   December 31,
2013
 
       (As Restated) 
Prepaid fishing licenses application fee to PT. Avona Mina Lestari  $448,211   $- 
Prepaid fishing licenses application fee to Hong Long   742,340    - 
Deferred vessel maintenance service charge - PT. Avona Mina Lestari   416,281    - 
Deferred vessel maintenance service charge - Hong Long   629,456    - 
   $2,236,288   $- 

  

The above mentioned deferred vessel maintenance service charge will be amortized over the rest of the corresponding service periods and the Company reflects the amortization of deferred vessel maintenance service fee in cost of revenue. PT. Avona Mina Lestari and Hong Long act as agent to apply fishing licenses for the Company and pay the related fishing licenses application fee on behalf of the Company. Therefore, the Company either prepays or reimburses them for fishing licenses application fee paid on behalf of the Company.

 

Accounts payable - related parties

 

At September 30, 2014 and December 31, 2013, accounts payable - related parties amount consisted of the following:

 

Name of related parties  September 30, 2014   December 31, 2013 
       (As Restated) 
PT. Avona Mina Lestari  $2,443,810   $1,967,151 
Hong Long   1,348,821    6,214,491 
Hai Yi Shipping Limited   -    251,341 
Haifeng Dafu Enterprise Company Limited   -    377,216 
Hong Fa Shipping Limited   551,183    4,996,031 
Zhiyan Lin   -    1,375 
   $4,343,814   $13,807,605 

 

From time to time, PT. Avona Mina Lestari and Hong Long made payments to various unrelated third parties on behalf of the Company. At September 30, 2014 and December 31, 2013, the Company owed PT. Avona Mina Lestari and Hong Long $3,792,631 and $8,181,642, respectively. These advances are short-term in nature, non-interest bearing, unsecured and payable on demand.

 

The rest of Accounts payable – related parties are primarily comprised of payable for service charge. These accounts payable – related parties amounts are short-term in nature, non-interest bearing, unsecured and payable on demand.

 

25
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 11 – RELATED PARTIES TRANSACTIONS (continued)

 

Due to related parties

 

Certain of the Company’s officers and directors, from time to time, have provided advances to the Company for working capital purpose. These advances are short-term in nature, non-interest bearing, unsecured and payable on demand. At September 30, 2014 and December 31, 2013, the due to related parties amount consisted of the following:

 

   September 30, 2014   December 31, 2013 
       (As Restated) 
Advance from Xinrong Zhuo  $650,000   $- 
Accrued compensation for Xinrong Zhuo   3,348    - 
Accrued compensation for Roy Yu   20,000    - 
   $673,348   $- 

 

Sales to related party

 

During the three and nine months ended September 30, 2014 and 2013, sales to related party were as follows:

 

  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
   2014   2013   2014   2013 
       (As Restated)       (As Restated) 
Sale of frozen fish and other marine catches to Shenzhen Western Coast Fisherman Pier Co., Ltd  $-   $32,615   $-   $10,338,269 

 

26
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 11 – RELATED PARTIES TRANSACTIONS (continued)

 

Purchase from related parties

 

During the three and nine months ended September 30, 2014 and 2013, purchase from related parties was as follows:

 

   Three Months Ended
September 30,
   Nine Months Ended 
September 30,
 
   2014   2013   2014   2013 
       (As Restated)       (As Restated) 
Purchase of fuel, fishing nets and other on board consumables                    
from PT. Avona Mina Lestari  $-   $4,080,300   $-   $15,696,740 
from Hong Fa Shipping Limited   7,740,333    -    27,957,529    - 
from Haifeng Dafu Enterprise Co., Ltd.   29,491    -    29,491    - 
from Hai Yi Shipping Ltd.   254,605    -    254,605    - 
from PT. Dwikarya Reksa Abadi   -    752,850    -    752,850 
    8,024,429    4,833,150    28,241,625    16,449,590 
                     
Purchase of vessel maintenance service                    
from PT. Avona Mina Lestari   1,260,652    1,099,929    3,581,161    2,415,303 
from PT. Dwikarya Reksa Adadi   1,400,840    -    3,955,437    - 
    2,661,492    1,099,929    7,536,598    2,415,303 
Purchase of transportation service                    
from Fuzhou Honglong Ocean Fishery Co., Ltd.   1,735,365    -    7,770,602    - 
from Haifeng Dafu Enterprise Company Limited   456,717    539,144    1,987,658    2,263,004 
from Hai Yi Shipping Limited   159,220    -    929,919    735,890 
from Hong Fa Shipping Limited   563,268    1,061,852    2,049,184    2,231,917 
from PT. Avona Mina Lestari   -    -    -    35,149 
    2,914,570    1,600,996    12,737,363    5,265,960 
Purchase of Indonesia vessel agent service                    
from PT. Avona Mina Lestari (1)   381,127    248,479    1,124,531    593,516 
from PT. Dwikarya Reksa Abadi   335,392    -    989,581    - 
   $716,519   $248,479   $2,114,112   $593,516 

 

(1). PT. Avona Mina Lestari and PT. Dwikarya Reksa Abadi act as Pingtan Fishing’s agent to apply and renew Indonesia fishing licenses and Pingtan Fishing pays the agent service fee to them.

 

27
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 11 – RELATED PARTIES TRANSACTIONS (continued)

 

Operating lease

 

On July 31, 2012, Pingtan Fishing entered into a lease for office space with Ping Lin (the “Office Lease”). Pursuant to the Office Lease, annual payments of approximately $14,000 (RMB 84,000) are due for each year of the term. The term of the Office Lease is 3 years and expires on August 1, 2015. For the three months ended September 30, 2014 and 2013, rent expense related to the Office Lease amounted approximately $3,000. For the nine months ended September 30, 2014 and 2013, rent expense related to the Office Lease amounted approximately $10,000.

 

Future minimum rental payments required under the Office Lease is as follows:

 

Twelve-month period Ending September 30:  Amount 
2015  $11,376 

 

Rental and related administrative service agreement

 

On July 1, 2013, the Company entered into a service agreement with Hai Yi Shipping Limited that provides the Company a portion of use of premises located in Hong Kong as office and provides related administrative service (the “Service Agreement”). Pursuant to the Service Agreement, monthly payments of approximately $38,000 (HK$298,500) are due for each month of the term. The term of the Service Agreement is 1.5 years and expires on December 31, 2014. For the three months ended September 30, 2014 and 2013, rent expense and corresponding administrative service charge related to the Service Agreement amounted to approximately $115,000. For the nine months ended September 30, 2014 and 2013, rent expense and corresponding administrative service charge related to the Service Agreement amounted to approximately $346,000 and $115,000, respectively.

 

Future minimum rental and related administrative service charge payment required under the Service Agreement is as follows:

 

Twelve-month periods ending September 30:  Amount 
2014  $115,340 

 

NOTE 12 – BANK LOANS

 

Short-term bank loans

 

Short-term bank loans represent the amounts due to various banks that are due within one year. These loans can be renewed with the bank upon maturity. At September 30, 2014 and December 31, 2013, short-term bank loans consisted of the following:

 

28
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 12 – BANK LOANS (continued)

 

Short-term bank loans (continued)

 

   September 30,
2014
   December 31,
2013
 
       (As Restated) 
Loan from China Development Bank, due on October 17, 2014 with annual interest rate of 2.770% at September 30, 2014, guaranteed by Xinrong Zhuo, Honghong Zhuo, Zhiyan Lin and Shuhui Ke and repaid on due date  $4,482,960   $- 
Loan from China Development Bank, due on November 3, 2014 with annual interest rate of 2.773% at September 30, 2014, guaranteed by Xinrong Zhuo, Honghong Zhuo, Zhiyan Lin and Shuhui Ke and repaid on due date   1,513,990    - 
Loan from China Development Bank, due on November 14, 2014 with annual interest rate of 2.774% at September 30, 2014, guaranteed by Xinrong Zhuo, Honghong Zhuo, Zhiyan Lin and Shuhui Ke    3,881,430    - 
Loan from China Development Bank, due on December 7, 2014 with annual interest rate of 2.771% at September 30, 2014, guaranteed by Xinrong Zhuo, Honghong Zhuo, Zhiyan Lin and Shuhui Ke    5,974,741    - 
Loan from China Development Bank, due on December 14, 2014 with annual interest rate of 2.776% at September 30, 2014, guaranteed by Xinrong Zhuo, Honghong Zhuo, Zhiyan Lin and Shuhui Ke    5,105,000    - 
Loan from China Development Bank, due on December 31, 2014 with annual interest rate of 2.777% at September 30, 2014, guaranteed by Xinrong Zhuo, Honghong Zhuo, Zhiyan Lin and Shuhui Ke   5,547,930      
Loan from China Development Bank, due on July 22, 2015 with annual interest rate of 3.137% at September 30, 2014, guaranteed by Xinrong Zhuo, Honghong Zhuo, Zhiyan Lin and Shuhui Ke   5,000,000      
Loan from China Development Bank, due on March 8, 2015 with annual interest rate of 2.777% at September 30, 2014, guaranteed by Xinrong Zhuo, Honghong Zhuo, Zhiyan Lin and Shuhui Ke   3,185,980      
Loan from Industrial and Commercial Bank of China, due on October 15, 2014 with annual interest rate of 3.050% at September 30, 2014, guaranteed by Xinrong Zhuo and repaid on due date   188,995      
Loan from Industrial and Commercial Bank of China, due on October 15, 2014 with annual interest rate of 3.050% at September 30, 2014, guaranteed by Xinrong Zhuo and repaid on due date   1,189,997      
Loan from Fujian Haixia Bank, due on March 22, 2014 with annual interest rate of 8.400% at December 31, 2013, guaranteed by Xinrong Zhuo and repaid on due date   -    4,955,647 
Loan from Fujian Haixia Bank, due on May 9, 2014 with annual interest rate of 9.000% at December 31, 2013, guaranteed by Xinrong Zhuo and repaid on due date   -    1,651,883 
Loan from Fujian Haixia Bank, due on April 23, 2014 with annual interest rate of 9.000% at December 31, 2013, guaranteed by Xinrong Zhuo and repaid on due date   -    2,477,823 
   $36,071,023   $9,085,353 

 

29
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 12 – BANK LOANS (continued)

 

Long-term bank loans

 

Long-term bank loan represents an amount due to a bank lasting over one year. Usually, the long-term bank loan cannot be renewed with the bank upon maturity. At September 30, 2014 and December 31, 2013, long-term bank loans consisted of the following:

 

   September 30,
2014
   December 31,
2013
 
       (As Restated) 
Loan from China Minsheng Bank, due on various dates until March 16, 2015 with annual interest rate of 7.660% at September 30, 2014 and December 31, 2013, collateralized by Pingtan Fishing's and Hong Long's fishing vessels and guaranteed by Xinrong Zhuo  $5,996,685   $9,143,169 
Loan from China Minsheng Bank, due on various dates until March 16, 2015 with annual interest rate of 7.372% at September 30, 2014 and December 31, 2013, collateralized by Pingtan Fishing's and Hong Long's fishing vessels and guaranteed by Xinrong Zhuo   1,462,606    2,230,041 
Loan from China Minsheng Bank, due on various dates until March 16, 2015 with annual interest rate of 7.372% at September 30, 2014 and December 31, 2013, collateralized by Pingtan Fishing's and Hong Long's fishing vessels and guaranteed by Xinrong Zhuo   2,267,039    3,456,564 
Loan from Fujian Haixia Bank, due on various dates until March 22, 2015 with annual interest rate of 9.310% at September 30, 2014 and December 31, 2013, guaranteed by Xinrong Zhuo   2,437,677    3,303,764 
Loan from The Export-Import Bank of China, due on various dates until December 10, 2017 with annual interest rate of 6.400% at September 30, 2014 and December 31, 2013, collateralized by Hong Long's investment in equity interest of a China local bank   19,322,651    19,640,881 
Loan from The Export-Import Bank of China, due on various dates until December 10, 2017 with annual interest rate of 6.400% at September 30, 2014 and December 31, 2013, collateralized by Hong Long's investment in equity interest of a China local bank   706,926    718,569 
Loan from The Export-Import Bank of China, due on various dates until December 10, 2017 with annual interest rate of 6.400% at September 30, 2014 and December 31, 2013, collateralized by Fujian International Trading and Transportation Co., Ltd.'s investment in equity interest of a China local bank   3,721,520    3,782,810 
Loan from The Export-Import Bank of China, due on various dates until December 10, 2017 with annual interest rate of 6.400% at September 30, 2014 and December 31, 2013, guaranteed by Hong Long   15,601,131    15,858,070 
Loan from The Export-Import Bank of China, due on various dates until December 10, 2017 with annual interest rate of 6.400% at September 30, 2014 and December 31, 2013, collateralized by Fujian International Trading and Transportation Co., Ltd.'s investment in equity interest of a China local bank   455,033    462,527 
Loan from The Export-Import Bank of China, due on various dates until December 10, 2017 with annual interest rate of 6.400% at September 30, 2014 and December 31, 2013, collateralized by Hong Long's investment in equity interest of a China local bank  $1,235,090   $1,255,431 

 

30
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 12 – BANK LOANS (continued)

 

Long-term bank loans (continued)

 

   September 30,
2014
   December 31,
2013
 
       (As Restated) 
Loan from The Export-Import Bank of China, due on various dates until December 10, 2017 with annual interest rate of 6.400% at September 30, 2014 and December 31, 2013, collateralized by Hong Long's investment in equity interest of a China local bank  $2,616,440   $2,659,531 
Loan from The Export-Import Bank of China, due on various dates until December 10, 2017 with annual interest rate of 6.400% at September 30, 2014 and December 31, 2013, collateralized by Pingtan Fishing's investment in equity interest of a China local bank   2,291,416    2,329,153 
Loan from China Development Bank, due on various dates until November 27, 2023 with annual interest rate of 6.8775% at September 30, 2014 and December 31, 2013, guaranteed by Xinrong Zhuo, Honghong Zhuo, Mr. and Mrs. Zhiyan Lin and 14 fishing vessels under construction   9,750,707    9,911,294 
Loan from China Development Bank, due on various dates until January 14, 2024 with annual interest rate of 6.8775% at September 30, 2014 and December 31, 2013, guaranteed by Xinrong Zhuo, Honghong Zhuo, Mr. and Mrs. Zhiyan Lin and 14 fishing vessels under construction   3,250,236    - 
Loan from China Development Bank, due on various dates until March 16, 2024 with annual interest rate of 6.8775% at September 30, 2014 and December 31, 2013, guaranteed by Xinrong Zhuo, Honghong Zhuo, Mr. and Mrs. Zhiyan Lin and 14 fishing vessels under construction   487,534    - 
Total long-term bank loans  $71,602,691   $74,751,804 
Less: current portion   (26,895,700)   (20,252,077)
Long-term bank loans, non-current portion  $44,706,991   $54,499,727 

 

The future maturities of long-term bank loans are as follows:

 

Due in twelve-month periods ending September 30,  Principal 
2015  $26,895,700 
2016   13,147,203 
2017   14,609,809 
2018   8,499,366 
2019   1,462,606 
Thereafter   6,988,007 
   $71,602,691 
Less: current portion   (26,895,700)
Long-term liability  $44,706,991 

 

31
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 12 – BANK LOANS (continued)

 

The weighted average interest rate for short-term bank loans was approximately 1.6% and 4.0%, for the nine months ended September 30, 2014 and 2013, respectively.

 

The weighted average interest rate for long-term bank loans was approximately 5.2% and 7.3%, respectively, for the nine months ended September 30, 2014 and 2013, respectively.

 

For the three months ended September 30, 2014 and 2013, interest expense related to bank loans amounted to approximately $1,315,000 and $1,049,000, respectively, of which, approximately $635,000 and $118,000 was capitalized to construction-in-progress, respectively.

 

For the nine months ended September 30, 2014 and 2013, interest expense related to bank loans amounted to approximately $4,317,000 and $2,445,000, respectively, of which, approximately $1,228,000 and $829,000 was capitalized to construction-in-progress, respectively.

 

NOTE 13 – ACCRUED LIABILITIES AND OTHER PAYABLE

 

At September 30, 2014 and December 31, 2013, accrued liabilities and other payable consisted of the following:

 

   September 30, 2014   December 31, 2013 
       (As Restated) 
Accrued salaries and related benefit  $3,673,606   $4,022,049 
Accrued interest due   424,998    177,049 
Accrued professional fees   53,400    201,672 
Other   660,719    242,502 
   $4,812,723   $4,643,272 

 

NOTE 14 – SHAREHOLDERS’ EQUITY

 

Warrants

 

An aggregate of 30,329,883 ordinary shares and 3,966,667 warrants were originally issued by CGEI to Chum Capital Group Limited, in connection with a private placement prior to CGEI’s initial public offering, and that became exercisable for the Company’s ordinary shares beginning on March 27, 2013 (the “Sponsor Warrants”). The Sponsor Warrants have been registered for resale by the selling security-holders under Form S-3 filed on June 17, 2013 and declared effective on June 19, 2013. On June 2, 2011, the Company sold 5,000,000 units, at an offering price of $10.00 per unit, generating gross proceeds of $50,000,000. Each unit consists of one ordinary share, $0.001 par value, of the Company and one redeemable purchase warrant. Each warrant will entitle the holder to purchase from the Company one ordinary share at an exercise price of $12.00 commencing upon the completion of a business combination and expiring five years from the consummation of a business combination. The Company also registered an aggregate of 8,966,667 ordinary shares that are issuable by the Company upon exercise of the 3,966,667 Sponsor Warrants and 5,000,000 warrants that were issued in the CGEI’s initial public offering (the “Public Warrants”) and that became exercisable upon the consummation of the transactions contemplated by that certain Agreement and Plan of Merger, dated as of October 24, 2012, between CGEI, CDGC, China Growth Dredging Sub Ltd. and Xinrong Zhuo and by that certain Share Purchase Agreement, dated as of October 24, 2012, between CGEI and Merchant Supreme.

 

32
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)

SEPTEMBER 30, 2014

 

NOTE 14 – SHAREHOLDERS’ EQUITY (continued)

 

Warrants (continued)

 

Each Public Warrants and Sponsor Warrant (the “Warrants”) entitles the registered holder thereof to purchase one of the Company’s ordinary shares upon payment of the exercise price of $12.00 per share.

 

The Sponsor Warrants are identical to the Public Warrants except that the Sponsor Warrants will be exercisable for cash or on a cashless basis, at the holder’s option, and will not be redeemable by the Company, in each case so long as they are still held by these purchases or their transferees.

 

In accordance with US GAAP, the Company accounted for the Warrants as equity instruments.

 

Warrants issued, terminated/forfeited, exercised and outstanding during the nine months ended September 30, 2014 were as follows:

 

   Number of warrants   Average exercise price per share 
Warrants outstanding, December 31, 2013   8,966,667   $12.00 
Warrants granted   -    - 
Warrants expired/terminated/forfeited   -    - 
Warrants exercised   -    - 
Warrants outstanding, September 30, 2014   8,966,667   $12.00 

 

The following table summarizes the shares of the Company’s ordinary stock issuable upon exercise of warrants outstanding at September 30, 2014:

 

Warrants outstanding   Warrants exercisable 
Range
of
exercise
price
   Number
outstanding at
September 30,
2014
   Weighted average
remaining
contractual life
(years)
   Weighted
average
exercise
price
   number
exercisable at
September 30,
2014
   Weighted
average
exercise
price
 
$12.00    8,966,667    3.4   $12.00    8,966,667   $12.00 

 

33
 

  

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
SEPTEMBER 30, 2014

 

NOTE 14 – SHAREHOLDERS’ EQUITY (continued)

 

Statutory reserve

 

Pingtan Guansheng, Pingtan Fishing, Pingtan Dingxin, Pingtan Duoying and Pingtan Ruiying operate in the PRC, are required to reserve 10% of their net profits after income tax, as determined in accordance with the PRC accounting rules and regulations. Appropriation to the statutory reserve by the Company is based on profit arrived at under PRC accounting standards for business enterprises for each year. The statutory reserves of the Company represent the statutory reserves of the above-mentioned companies as required under the PRC law.

 

The profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory reserve. Appropriation to the statutory reserve must be made before distribution of dividends to shareholders. The appropriation is required until the statutory reserve reaches 50% of the registered capital. This statutory reserve is not distributable in the form of cash dividends.

 

As of December 31, 2013, the Company appropriated the required 50% of its registered capital to statutory reserves for Pingtan Fishing. Accordingly, no additional statutory reserve is required for the nine months ended September 30, 2014 for Pingtan Fishing.

 

Pingtan Guansheng, Pingtan Dingxin, Pingtan Duoying and Pingtan Ruiying had sustained losses since its establishment. Therefore, no appropriation of net profits to the statutory reserves was required.

 

NOTE 15 – CERTAIN RISKS AND COCENTRATIONS

 

Credit risk

 

Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

 

Major customers

 

The following table sets forth information as to each customer that accounted for 10% or more of the Company’s sales for the three and nine months ended September 30, 2014 and 2013.

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
Customer  2014   2013   2014   2013 
       (As Restated)       (As Restated) 
Shenzhen Western Coast Fisherman Pier Co., Ltd, a related party   *    *    *    17%

 

*Less than 10%.

 

34
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
SEPTEMBER 30, 2014

 

NOTE 15 – CERTAIN RISKS AND COCENTRATIONS

 

Major suppliers

 

The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchases for the three and nine months ended September 30, 2014 and 2013.

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
Supplier  2014   2013   2014   2013 
       (As Restated)       (As Restated) 
A   *    31%   *    19%
B   *    *    *    14%
C (Hong Long, a related party)   48%   26%   47%   22%
D (Hong Fa Shipping Limited, a related party)   28%   *    29%   * 
E (PT. Avona Mina Lestari, a related party)   13%   29%   *    35%

 

*Less than 10%.

 

NOTE 16 – COMMITMENTS AND CONTINGENCIES

 

Severance payments

 

The Company has employment agreements with certain employees that provided severance payments upon termination of employment under certain circumstances, as defined in the applicable agreements. The Company has estimated its possible severance payments of approximately $10,000 as of September 30, 2014 and December 31, 2013, which have not been reflected in its unaudited condensed consolidated financial statements.

 

Operating lease

 

See note 11 for related party operating lease commitment.

 

Rental payment and related administrative service charge

 

See note 11 for related party rental and related administrative service agreement commitment.

 

Share purchase agreement

 

Pursuant to the Shares Purchase Agreement dated December 4, 2013 (“the Share Purchase Agreement”), where the Company exited and sold CDGC to Hong Long, the Company is required to indemnify Hong Long and the same indemnification responsibility applies to the Hong Long for the events arising out of any breach of the Share Purchase Agreement or the memorandum of agreement in relation to the sale, purchase and delivery of the vessels for two years until December 3, 2015 and would be liable for the full amount of damages that exceed $1,000,000. The amount of damage shall be the amount finally determined by a court of competent jurisdiction or appropriate governmental administrative agency, or the amount agreed to upon settlement in accordance with the terms of the Share Purchase Agreement.

 

35
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
SEPTEMBER 30, 2014

 

NOTE 16 – COMMITMENTS AND CONTINGENCIES (continued)

 

Guarantees and collaterals provided to related parties

 

In October 2012, Pingtan Fishing entered into two pledge contracts with China Minsheng Banking Corp., Ltd. Pursuant to the terms of the pledge contracts, Pingtan Fishing assigned 10 fishing vessels, as collateral to secure Hong Long’s long-term loans from the financial institution in amount of approximately $10.8 million, which are due on April 18, 2015. In addition to the collateral provided to Hong Long, Pingtan Fishing also guaranteed the repayment of $46.3 million for Hong Long’s long-term loans.

 

In December 2013, Pingtan Fishing entered into a guarantee agreement with Ping An Bank Co., Ltd. Pursuant to the terms of the guarantee agreement, Pingtan Fishing provide maximum guarantees approximately of $8.3 million to Hong Long’s credit line in amount of $16.5 million which is due on December 23, 2014.

 

As of the filing date of this report, Pingtan Fishing has not receive any demand from the lender that collateralized properties are intended to be disposed of or to make any payments under the guarantee.

 

Pursuant Accounting Standards Codification (“ASC”) 460-10-25-2, the guarantor is obligated in two aspects in every guarantee or indemnification—a noncontingent liability and a contingent liability. The noncontingent liability represents the guarantor's obligation to stand ready to perform under the terms of the guarantee in the event that the specified triggering events or conditions occur. The contingent liability represents the guarantor’s obligation to make future payments if those triggering events or conditions occur and based on the probability that the guaranteed party will not perform under the contractual terms of the guaranty agreement.

 

We have assessed the contingent liabilities arising from the above-described guarantees and have concluded that no liabilities in respect of the guarantees were required to be recognized as of September 30, 2014 and December 31, 2013.

 

Commercial retail space commitment

 

In June 2014, Pingtan Fishing entered into three commercial retail space purchase agreements with third parties property developers in order to purchase retail space located in Hubei and Anhui province, China. These retail spaces will be used for market expansion in the fishery product markets in central and western areas of China in order to capture more sales directly from final customers. The total consideration for these three commercial retail space purchase agreements is approximately $27 million (RMB 166,227,200). As of September 30, 2014, the Company has paid approximately $22.4 million (RMB of 138,042,604) of the total investment that was recorded as prepayment for long-term assets on the accompanying unaudited condensed consolidated balance sheets. Pingtan Fishing intends to use its working capital to fund the rest of related costs and plans to pay it in full by the end of fiscal 2014.

 

Joint venture commitment

 

On June 12, 2014, Pingtan Fishing incorporated a joint venture with two companies for the fishery processing purpose. Total registered capital of the joint venture is approximately $163 million (RMB 1 billion) and Pingtan Fishing accounted for 35% of the total ownership. Therefore, Pingtan Fishing has the obligation to contribute approximately $57 million (RMB 350 million) as the joint venture’s registered capital. As of September 30, 2014, the Pingtan Fishing has contributed approximately $16 million (RMB 98,000,000) as registered capital that was recorded as long-term investment on the accompanying unaudited condensed consolidated balance sheets. Pingtan Fishing intends to use its present working capital together with bank loans to fund the project cost.

 

36
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
SEPTEMBER 30, 2014

 

NOTE 17 – SUBSEQUENT EVENTS

 

The Company has evaluated all subsequent events through November 10, 2014, the date these consolidated financial statements were issued, and determined that there were no subsequent events or transactions that require recognition or disclosures in the financial statements.

 

NOTE 18 – RESTATEMENT OF INTERIM FINANCIAL RESULTS

 

The Company’s consolidated financial statements have been restated for the three and nine months ended September 30, 2013.  The Company incorrectly reflected certain balances of China Growth Equity Investments Ltd. in its consolidated financial statements that should have been reflected as part of the recapitalization of the Company on the effective date of the share exchange agreement dated February 25, 2013. Accordingly, the Company amended its consolidated financial statements to reflect the historical consolidated financial statements of China Dredging Group Co., Ltd (“CDGC”) and Merchant Supreme as the accounting acquirer prior to February 25, 2013 and the consolidated financial statements of PME, CDGC and Merchant Supreme and related subsidiaries for all periods subsequent to the effective date.

 

Additionally, the Company restated the following in its unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2013:

 

a)The Company incorrectly accounted for prepaid operating license rights for 20 vessels in its appraised fair value in Original Report. The management concluded that prepaid operating license rights should be considered as a capital lease and recorded the historical cost of the related party which is under common control as a common control transaction in accordance with ASC 805-50. The Company restated prepaid operating license rights, property, plant and equipment, related depreciation and amortization expense.

 

b)The Company recorded other miscellaneous adjustments such as the reclassification of certain balance sheets items and accrued wages and social insurance for some employee.

 

Accordingly, the Company’s unaudited interim consolidated balance sheets, statements of income and comprehensive income, and statements of cash flows at September 30, 2013 have been restated herein. The effect of correcting these errors in the Company’s (a) unaudited consolidated balance sheets at September 30, 2013; (b) unaudited consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2013; and (c) unaudited consolidated statements of cash flows for the nine months ended September 30, 2013 are shown in the tables as follows:

 

Consolidated balance sheets data:

 

   September 30, 2013 
   As Previously
 Filed
   Adjustments to
Restate
   As
Restated
 
Total current assets  $281,665,140   $-   $281,665,140 
Long-term investment   3,431,373    -    3,431,373 
Prepayment for long-term assets        3,294,118    3,294,118 
Property, plant and equipment, net   66,979,281    (1,518,105)   65,461,176 
Other receivable   3,283,333    (1,200,294)   2,083,039 
Total assets  $355,359,127   $575,719   $355,934,846 
                
Accrued liabilities and other payable  $3,684,872   $1,250,591   $4,935,463 
Deferred grant income   1,714,706    (1,200,294)   514,412 
Liabilities of discontinued operations   181,463,364    -    181,463,364 
Total current liabilities   221,546,326    50,297    221,596,623 
Total liabilities   279,977,699    50,297    280,027,996 
                
Retained earning   -    522,198    522,198 
Accumulated other comprehensive income   28,779,372    3,224    28,782,596 
Total shareholders' equity   75,381,428    525,422    75,906,850 
Total liabilities and shareholders' equity  $355,359,127   $575,719   $355,934,846 

 

37
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
SEPTEMBER 30, 2014

 

NOTE 18 – RESTATEMENT OF INTERIM FINANCIAL RESULTS (continued)

 

Consolidated statements of income and comprehensive income data:

 

   Three Months Ended September 30, 2013   Nine Months Ended September 30, 2013 
   As
Previously
Filed
   Adjustments to
 Restate
   As
Restated
   As
 Previously
Filed
   Adjustments to
 Restate
   As
Restated
 
Cost of revenue  $12,446,879   $530,012   $12,976,891   $38,974,488   $405,120   $39,379,608 
Interest expense   1,049,040    364,975    1,414,015    2,444,782    (320,982)   2,123,800 
Net income from continuing operations  $5,939,018   $(894,987)  $5,044,031   $17,400,058   $(84,138)  $17,315,920 

 

Consolidated statements of cash flows data:

   Nine Months Ended September 30, 2013 
   As Previously
Filed
   Adjustments to
Restate
   As
Restated
 
Net income from continuing operations  $17,400,058   $(84,138)  $17,315,920 
Adjustments to reconcile net income to net cash provided by  operating activities:               
Depreciation   2,268,063    (1,107,460)   1,160,603 
Changes in operating assets and liabilities:               
Accrued liabilities and other payable   2,602,770    3,010,617    5,613,387 
Net cash provided by operating activities from continuing operations   2,250,418    1,819,019    4,069,437 
                
Payment for fishing vessels deposit   -    (3,271,878)   (3,271,878)
Purchase of property, plant and equipment   (216,850,307)   3,036,380    (213,813,927)
Decrease in cash related to sale of subsidiary   -    (76,987,656)   (76,987,656)
Net cash used in investing activities for continuing operations   (214,670,787)   (77,223,154)   (291,893,941)
                
Cash acquired in recapitalization   -    3,565,355    3,565,355 
Net cash provided by financing activities from continuing operations   44,288,892    3,565,355    47,854,247 
                
Net cash provided by operating activities from discontinued operations  $71,420,962   $(1,768,470)  $69,652,492 

 

38
 

  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the results of operations and financial condition of Pingtan Marine Enterprise Ltd. for the three and nine months ended September 30, 2014 and 2013 should be read in conjunction with the Pingtan Marine Enterprise Ltd. unaudited condensed financial statements and the notes thereto contained elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Special Note Regarding Forward-Looking Statements and Business sections in our Form 10-K/A as filed with the Securities and Exchange Commission on November 10, 2014. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

References to the “Company,” “us” or “we” refer to Pingtan Marine Enterprise Ltd..

 

Overview

 

We are a marine enterprises group primarily engaging in ocean fishing through our wholly-owned PRC operating subsidiary or VIE, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd., or Pingtan Fishing. We harvest a variety of fish species with many of our-owned or licensed vessels operating within the Indian Exclusive Economic Zone and the Arafura Sea of Indonesia. We provide high quality seafood to a diverse group of customers including distributors, restaurant owners and exporters in the PRC.

 

In June 2013, we expanded our fleet from 40 to 86 through a purchase of 46 fishing trawlers from a related party for a total consideration of $410.1 million. We began operating the vessels in the third quarter of 2013 and since then we have been entitled to their net profits from there operation. These vessels are fully licensed to fish in Indonesian waters. Each vessel carries crew of 10 to 15 persons. These vessels have resulted in additional carrying capacity of approximately 45,000 to 50,000 tons for us.

 

In September 2013, we further increased our fleet to 106 vessels with the acquisition of 20 newly-built fishing trawlers, which were initially ordered in September 2012. These vessels have an expected run-in period of 3 - 6 months, during which each is placed into the sea for testing prior to full operation. These vessels are fully licensed to fish in Indian and Indonesian waters. At full operation, each vessel is capable of harvesting 900 to 1,000 tons of fish. We expect that the expansions of our fleet will greatly increase our fish harvest volume and revenue.

 

Subsequent to our fleet expansions, in September 2013, the Ministry of Agriculture of the People’s Republic of China (“MOA”) issued a notification that it would suspend accepting shipbuilding applications for tuna harvesting vessels, squid harvesting vessels, Pacific saury harvesting vessels, trawlers operating on international waters, seine on international waters, and trawlers operating on the Arafura Sea, Indonesia. We believe the announcement is a positive indicator for long-term stability and balance in China’s fishing industry. We believe that this has helped to ensure our fishing productivity in international waters, while also serving as a major barrier to entry for competitors in our industry and strengthening our competitive position in the markets.

 

39
 

 

On December 4, 2013, in connection with the sale of CDGC to Hong Long, we acquired 25-year operating license rights in connection with the lease of 20 fishing vessels for the appraised fair market value of approximately $216.1 million, whereby we are entitled to 100% of the operations and net profits (losses) from the vessels for the term of the lease. The 20 vessels were leased from Hong Long, a related party under common control. Accordingly, the transaction between us and Hong Long was accounted as a common control transaction pursuant to ASC 805-50 and it related subsections. Pursuant to ASC 805-50, we recorded the value of $26,435,403 as the cost of the vessels which was the net historical carrying amount recorded in Hong Long's books at the date of sale of CDGC to Hong Long.

 

We currently operate 129 fishing vessels and is the second largest China based fishery company operating its vessels outside of China waters.

 

As of September 30, 2014, we own 107 trawlers and 2 drifters and have exclusive operating license rights to 20 drifters. Our fleet has an average useful life of approximately 16 years. These vessels are fully licensed to fish in Indonesian or Indian waters. Among the 129 fishing vessels, 117 of these vessels are operating in the Arafura Sea in Indonesia, and the remaining 12 vessels are operating in the Bay of Bengal in India.

 

Currently we catch nearly 30 different species of fish including ribbon fish, Indian white shrimp, croaker fish, pomfret, Spanish mackerel, conger eel, squid and red snapper. All of our catch is shipped back to China. Our fishing vessels transport frozen catch to a cold storage warehouse at nearby onshore fishing bases. We then arrange periodic charted transportation ships to deliver frozen stocks to its eight cold storage warehouses located in one of China’s largest seafood trading centers, Mawei Seafood Market in Fujian Province.

  

We derive our revenue primarily from the sales of frozen seafood products. We sell our products directly to customers including distributors, restaurant owners and exporters, and most of our customers have long-term and trustworthy cooperative relationship with us. Our existing customers also introduce new customers to us from time to time. Our operating results are subject to seasonal variations. Harvest volume is the highest in the fourth quarter of the year and harvest volumes in the second and third quarters are relatively low due to the spawn season of certain fish species, including ribbon fish, cuttlefish, butterfish, and calamari. Based on past experiences, demand for seafood products is the highest from December to January during Chinese New Year. We believe that our profitability and growth are dependent on our ability to expand the customer base. With the expansions of operating capacity and expected increases in harvest volume in the coming years, we will continue to develop new customers from existing and new territories in China.

 

Discontinued operations

 

In December 2013, we have completed the sale of the China Dredging Group (“CDGC”) business, which has been reported as discontinued operations for the three and nine months ended September 30, 2013, to Hong Long, a related party owned by the wife of our Chairman and CEO, Mr. Xinrong Zhuo. In exchange for (i) offset of our current $155.2 million 4% promissory note due to Hong Long; (ii) the assignment of the 25-year exclusive operating license rights for 20 new fishing vessels to us, with a fair market value of $216.1 million (iii) offset of PME’s current accounts payable due to CDGC with amount $172.5 million. In connection with these 20 fishing vessels, Hong long received subsidies from China’s central government budget in 2012, and a recent notification from the Government prohibits the sale or transfer of ownership for a period of 10 years for fishing vessels that have received such subsidies.

 

40
 

 

The Board, excluding Mr. Zhuo and our Senior Officer, Mr. Bin Lin, retained our independent financial advisor to provide a fairness opinion on the transaction proposed by Mr. Zhuo. Subsequent to the receipt of the fairness opinion from our independent financial advisor on October 28, 2013, the Board would evaluate potential alternative proposals received during a 30 day period. After receiving no alternative proposals, on December 3, 2013, the Board, excluding Mr. Zhuo and Mr. Lin approved moving forward with the transaction and executed and closed the Share Purchase Agreement. The total consideration of the transaction is approximately $543.8 million with a gain on sale of $117.5 million which was recorded as an adjustment to our equity as it was sold to a related party under common control.

 

Significant factors affecting our results of operations

 

Governmental policies: Fishing is a highly regulated industry and our operations require licenses and permits. Our ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to changes in regulations and policies and is at the discretion of the applicable governments. Our inability to obtain, or loss or denial of extensions, to any of its applicable licenses or permits could hamper our ability to generate revenues from its operations.
   
Resource & environmental factors: Our fishing expeditions are based in India and Indonesia. Any earthquake, tsunami, adverse weather or oceanic conditions or other calamities in such areas may result in disruption to our operations and could adversely affect our sales. Adverse weather conditions such as storms, cyclones and typhoons or cataclysmic events may also decrease the volume of fish catches or may even hamper our operations. Our fishing volumes may also be adversely affected by major climatic disruptions such as El Nino, which in the past has caused significant decreases in seafood catch worldwide. Besides weather patterns, other unpredictable factors, such as fish migration, may also have impact our harvest volume.
   
Fluctuation on fuel prices: Our operations may be adversely affected by fluctuations in fuel prices. Changes in fuel prices 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.
   
Competition: We engage in fishing business in the Arafura Sea in Indonesia and the Bay of Bengal in India. Competition within our dedicated fishing areas is not significant as the region is not overfished and regulated by the government, which limits the number of vessels that are allowed to fish in the territories. Competition in the market in China is high. We compete with other fishing companies which offer similar and varied products. There is significant demand for fish in the Chinese market. Our catch appeals to a wide segment of consumers because of the low price points of our products. We have been able to sell our catch at market prices and such market prices have been increasing significantly since 2012.

 

Fishing licenses: Each of our fishing vessels requires an approval from the Ministry of Agriculture of the People’s Republic of China to carry out ocean fishing projects in foreign territories. These approvals are valid for a period of three to twelve months, and are awarded to us at no cost. We apply for the renewal of the approval prior to expiration to avoid interruptions of our fishing vessels’ operations. Each of our fishing vessels operating in Indonesian waters requires a fishing license granted by the authority in Indonesia. Indonesian fishing licenses remain effective for a period of twelve months and we apply for renewal upon expiration. We record cost of Indonesian fishing licenses in prepaid expenses on the accompanying consolidated balance sheets and amortize the cost over the effective period of the licenses.

 

41
 

 

Principal income statement components

 

Revenue

 

We recognize revenue from sales of frozen fish and other marine catches 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 respect to the sales to third party customers the majority of whom are sole proprietor regional wholesalers in China, we recognize revenue when customers receive purchased goods at our cold storage warehouse, after payment is received or credit sale is approved for recurring customers with excellent payment histories.

 

We do not offer promotional payments, customer coupons, rebates or other cash redemption offers to customers. We do not accept returns from customers. Payments received from customers prior to delivery of goods are recorded as advance from customers.

 

Cost of revenue

 

Our cost of revenues primarily consists of fuel costs, freight, direct labor costs, depreciation, maintenance fees and other overhead costs. Fuel costs generally accounted for the majority of our cost of revenues.

 

Gross profit

 

Our gross profit is affected primarily by changes in production cost. Fuel cost, freight and labor costs together account for about 85.3% and 84.1% of cost of revenue for the nine months ended September 30, 2014 and 2013, respectively. The fluctuation of fuel price, freight price and exchange rates may significantly affect our cost level and gross profit.

 

Selling expense

 

Our selling expense includes storage and shipping fees, insurance, traveling expense for our sales personnel and other miscellaneous expenses. Our sales activities are conducted through direct selling by our internal sales staff.  Because of the strong demand for our products and services, we do not have to aggressively market and distribute our products, thus our selling expenses have been relatively small as a percentage of our revenue.

 

General and administrative expense

 

Our general and administrative expense includes compensation and related benefits, professional fees, travel and entertainment expense, business insurance, rental and related administrative service charge and other miscellaneous items related to our corporate administrative activities.

 

We expect that our general and administrative expense will increase as we incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission.

 

Other income / expense

 

Other income / expense mainly include interest income from bank deposits, interest expenses of short-term and long-term borrowings, foreign currency transaction gain/loss, grant income, dividend income from cost-method investment and other miscellaneous income and expense, net.

 

42
 

 

Income tax

 

Under the current laws of the Cayman Islands and British Virgin Islands, we are not subject to any income or capital gains tax, and dividend payments we make are not subject to any withholding tax in the Cayman Islands or British Virgin Islands. Under the current laws of Hong Kong, we are not subject to any income or capital gains tax and dividend payments and are not subject to any withholding tax in Hong Kong.

 

Our VIE, Pingtan Fishing, is a qualified ocean fishing enterprise certified by the Ministry of Agriculture of the PRC. The qualification is renewed on April 1 each year. Pingtan Fishing 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.

 

In addition, Pingtan Fishing is not subject to foreign income taxes for its operations in India and Indonesia Exclusive Economic Zones.

 

Other comprehensive income

 

Our comprehensive income consists of net income and foreign currency translation adjustments. We translate our assets and liabilities of foreign operations at the rate of exchange in effect on the balance sheet date. We translate income and expenses at the average rate of exchange prevailing during the period. The related translation adjustments are reflected in “Accumulated other comprehensive income” in the equity section of our unaudited condensed consolidated balance sheets. Foreign currency gains and losses resulting from transactions are included in earnings.

 

Income per ordinary share

 

Income per ordinary share (basic and diluted) is based on the net income divided by the weighted average number of ordinary shares outstanding during each period. Ordinary share equivalents of approximately 9 million are not included in the calculation of diluted earnings per ordinary share if their effect would be anti-dilutive.

 

RESULTS OF OPERATIONS

 

Comparison of results of operations for the three and nine months ended September 30, 2014 and 2013

 

Revenue

 

For the three months ended September 30, 2014 and 2013, our revenue by species of fish was as follows (dollars in thousands, except for average price):

 

   Three Months Ended September 30, 
   2014   2013 (As Restated) 
   Revenue   Volume
 (KG)
   Average
price
   % of
revenue
   Revenue   Volume
(KG)
   Average
price
   % of
 revenue
 
Indian white shrimp  $13,004    1,049,036   $12.40    23.9%  $2,204    193,774   $11.37    10.7%
Ribbon fish   12,309    4,975,947    2.47    22.6%   6,406    2,270,353    2.82    31.1%
Spanish mackerel   5,671    1,629,428    3.48    10.4%   583    176,550    3.30    2.8%
Black pomfret   5,501    2,052,621    2.68    10.1%   1,903    811,050    2.35    9.2%
Croaker fish   3,968    1,394,588    2.85    7.3%   2,154    929,572    2.32    10.5%
Conger eel   2,613    981,565    2.66    4.8%   862    293,400    2.94    4.2%
other   11,351    3,784,844    3.00    20.9%   6,497    1,855,904    3.50    31.5%
   $54,417    15,868,029   $3.43    100.0%  $20,609    6,530,603   $3.16    100.0%

 

43
 

 

For the three months ended September 30, 2014, we had revenue of $54,417,000, as compared to revenue of $20,609,000 for the three months ended September 30, 2013, an increase of $33,808,000, or 164.0%. The increase was primarily attributable to an increase in sales volume as a result of the addition of 66 fishing vessels in June and September 2013, which were operating at full capacity in the third quarter of 2014; and the addition of 20 new fishing vessels acquired from Hong Long in December 2013, which were ready for use at the beginning of 2014. Sales volume in the third quarter of 2014 increased 143.0% to 15,868,029 kg from 6,530,603 kg in the third quarter of 2013. Average unit selling price increased 8.5% in the third quarter of 2014 compared to the third quarter of 2013 mainly due to the higher demand of natural seafood in China.

 

For the nine months ended September 30, 2014 and 2013, our revenue by species of fish was as follows (dollars in thousands, except for average price):

 

   Nine Months Ended September 30, 
   2014   2013 (As Restated) 
   Revenue   Volume
(KG)
   Average
 price
   % of
revenue
   Revenue   Volume
(KG)
   Average
price
   % of
revenue
 
Ribbon fish  $51,444    19,927,679   $2.58    29.1%  $20,025    9,296,266   $2.15    32.5%
Indian white shrimp   36,173    3,725,436    9.71    20.4%   10,409    1,282,892    8.11    16.9%
Black pomfret   24,021    10,098,347    2.38    13.6%   5,731    2,474,892    2.32    9.3%
Croaker fish   14,722    5,473,622    2.69    8.3%   8,285    4,230,120    1.96    13.4%
Spanish mackerel   9,046    2,778,814    3.26    5.1%   1,207    355,800    3.39    2.0%
Conger eel   6,237    2,462,951    2.53    3.5%   1,393    486,000    2.87    2.3%
other   35,266    13,325,615    2.65    20.0%   14,591    4,693,950    3.11    23.6%
   $176,909    57,792,464   $3.06    100.0%  $61,641    22,819,920   $2.70    100.0%

 

For the nine months ended September 30, 2014, we had revenue of $176,909,000, as compared to revenue of $61,641,000 for the nine months ended September 30, 2013, an increase of $115,268,000, or 187.0%. The increase was mainly due to increase in sales volume as a result of the addition of 66 fishing vessels into our operation in June and September 2013, most of which were operating at full capacity in the nine months ended September 30, 2014; and the addition of 20 new fishing vessels acquired from Hong Long in December 2013, which were put in our operation in the nine months ended September 30, 2014. Sales volumes in the nine months ended September 30, 2014 increased 153.3% to 57,792,464 kg from 22,819,920 kg in the comparable period of 2013. Average unit sales prices increased 13.3% in the nine months ended September 30, 2014 compared to the corresponding period of 2013, which was driven by the higher demand of natural seafood in China.

 

Cost of revenue

 

The following table sets forth our cost of revenue information, both in amounts and as a percentage of revenue for the three months ended September 30, 2014 and 2013 (dollars in thousands):

 

   Three Months Ended September 30, 
   2014   2013 (As Restated) 
   Amount   % of cost of
revenue
   % of
revenue
   Amount   % of cost of
revenue
   % of
revenue
 
Fuel cost  $24,019    61.7%   44.1%  $7,422    57.2%   36.0%
Freight   3,792    9.7%   7.0%   1,264    9.7%   6.1%
Labor cost   5,241    13.5%   9.6%   1,322    10.2%   6.4%
Depreciation   403    1.0%   0.7%   883    6.8%   4.3%
Maintenance fee   3,149    8.1%   5.8%   908    7.0%   4.4%
Spare parts   341    0.9%   0.6%   650    5.0%   3.2%
Fishing license and agent fee   1,988    5.1%   3.7%   528    4.1%   2.6%
Total cost of revenue  $38,933    100.0%   71.5%  $12,977    100.0%   63.0%

 

44
 

 

Cost of revenue for the three months ended September 30, 2014 was $38,933,000, representing an increase of $25,956,000 or approximately 200.0% as compared to $12,977,000 for the three months ended September 30, 2013. The increase was principally due to the increase in our revenue.

 

The following table sets forth our cost of revenue information, both in amounts and as a percentage of revenue for the nine months ended September 30, 2014 and 2013 (dollars in thousands):

 

   Nine Months Ended September 30, 
   2014   2013 (As Restated) 
   Amount   % of cost of
revenue
   % of
revenue
   Amount   % of cost of
revenue
   % of
revenue
 
Fuel cost  $75,470    63.7%   42.7%  $24,045    61.1%   39.0%
Freight   13,122    11.1%   7.4%   4,851    12.3%   7.9%
Labor cost   12,442    10.5%   7.0%   4,230    10.7%   6.9%
Depreciation   3,538    3.0%   2.0%   1,138    2.9%   1.8%
Maintenance fee   7,729    6.5%   4.4%   2,126    5.4%   3.4%
Spare parts   1,088    0.9%   0.6%   1,596    4.1%   2.6%
Fishing license and agent fee   5,000    4.3%   2.8%   1,394    3.5%   2.3%
Total cost of revenue  $118,389    100.0%   66.9%  $39,380    100.0%   63.9%

 

Cost of revenue for the nine months ended September 30, 2014 was $118,389,000, representing an increase of $79,009,000 or approximately 200.6% as compared to $39,380,000 for the nine months ended September 30, 2013. The increase was primarily attributable to the increase in our revenue.

 

Gross profit

 

The following table sets forth information as to our revenue, gross profit and gross margin for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands).

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2014   2013   2014   2013 
       (As Restated)       (As Restated) 
Revenue  $54,417   $20,609   $176,909   $61,641 
Cost of revenue  $38,933   $12,977   $118,389   $39,380 
Gross profit  $15,484   $7,632   $58,520   $22,261 
Gross margin   28.5%   37.0%   33.1%   36.1%

 

Gross profit for the three months ended September 30, 2014 was $15,484,000, representing an increase of $7,852,000 or approximately 102.9% as compared to $7,632,000 for the three months ended September 30, 2013 as a result of business expansion. Gross margin decreased to 28.5% for the three months ended September 30, 2014 from 37.0% for the three months ended September 30, 2013, primarily due to the increase in fuel cost and maintenance fee for our fishing vessels and the increase in labor cost.

 

Gross profit for the nine months ended September 30, 2014 was $58,520,000, representing an increase of $36,259,000 or approximately 162.9% as compared to $22,261,000 for the nine months ended September 30, 2013 as a result of business expansion. Gross margin decreased to 33.1% for the nine months ended September 30, 2014 from 36.1% for the nine months ended September 30, 2013, primarily due to the increase in fuel cost and maintenance fee for our fishing vessels.

 

We expect our gross margin will remain in its current level with minimal increase in the near future.

 

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Selling expense

 

Selling expense totaled $676,000 for the three months ended September 30, 2014, as compared to $362,000 for the three months ended September 30, 2013, an increase of $314,000 or approximately 86.6%. Selling expense totaled $1,915,000 for the nine months ended September 30, 2014, as compared to $731,000 for the nine months ended September 30, 2013, an increase of $1,184,000 or approximately 162.0%. Selling expense for the three and nine months ended September 30, 2014 and 2013 consisted of the following (dollars in thousands):

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2014   2013   2014   2013 
       (As Restated)       (As Restated) 
Storage fee  $185   $113   $736   $257 
Shipping and handling fee   112    86    478    168 
Insurance   311    119    583    156 
Other   68    44    118    150 
   $676   $362   $1,915   $731 

 

·Storage fee for the three months ended September 30, 2014 increased by $72,000, or 63.7%, as compared to the three months ended September 30, 2013. Storage fee for the nine months ended September 30, 2014 increased by $479,000, or 186.4%, as compared to the nine months ended September 30, 2013. The increase was primarily attributable to the increase in our business revenue.

 

·Shipping and handling fee for the three months ended September 30, 2014 increased by $26,000, or 30.2%, as compared to the three months ended September 30, 2013. Shipping and handling fee for the nine months ended September 30, 2014 increased by $310,000, or 184.5%, as compared to the nine months ended September 30, 2013. The increase was mainly attributable to the increase in our business revenue.

 

·Insurance for the three months ended September 30, 2014 increased by $192,000, or 161.3%, as compared to the three months ended September 30, 2013. Insurance for the nine months ended September 30, 2014 increased by $427,000, or 273.7%, as compared to the nine months ended September 30, 2013. The increase was primarily attributable to the increase in our business revenue.

 

·Other selling expense, which primarily consisted of customs service charge, inspection and examination for fishing vessels and advertising expense, for the three months ended September 30, 2014 increased by $24,000, or 54.5%, as compared to the three months ended September 30, 2013. The increase in other selling expense was primarily attributable to the increase in our business revenue. Other selling expense for the nine months ended September 30, 2014 decreased by $32,000, or 21.3%, as compared to the nine months ended September 30, 2013 which was primarily attributable to the more strict control on our selling expenditure.

 

46
 

 

General and administrative expense

 

General and administrative expense totaled $829,000 for the three months ended September 30, 2014, as compared to $1,178,000 for the three months ended September 30, 2013, a decrease of $349,000 or approximately 29.7%. General and administrative expense totaled $2,407,000 for the nine months ended September 30, 2014, as compared to $2,345,000 for the nine months ended September 30, 2013, an increase of $62,000 or approximately 2.6%. General and administrative expense for the three and nine months ended September 30, 2014 and 2013 consisted of the following (dollars in thousands):

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2014   2013   2014   2013 
       (As Restated)       (As Restated) 
Compensation and related benefits  $288   $164   $710   $302 
Professional fees   141    843    439    1,315 
Travel and entertainment   48    28    245    36 
Rent and related administrative service charge   119    118    357    125 
Liability insurance   -    -    288    320 
Other   233    25    368    247 
   $829   $1,178   $2,407   $2,345 

 

·Compensation and related benefits for the three months ended September 30, 2014 increased by $124,000, or 75.6%, as compared to the three months ended September 30, 2013. Compensation and related benefits for the nine months ended September 30, 2014 increased by $408,000, or 135.1%, as compared to the nine months ended September 30, 2013. The increase was primarily attributable to our business expansion.

 

·

Professional fees, which consist of legal fees, accounting fees, internal control consulting services and other fees associated with being a public company, for the three months ended September 30, 2014 decreased by $702,000, or 83.3%, as compared to the three months ended September 30, 2013. Professional fees for the nine months ended September 30, 2014 decreased by $876,000, or 66.6%, as compared to the nine months ended September 30, 2013. The decrease for the three and nine months ended September 30, 2014 was primarily attributable to the decrease in legal and accounting service charge. During the nine months ended September 30, 2013, we incurred and paid legal fee and accounting service fee for our merger transaction, while, we did not incur comparable expenses in the corresponding period of 2014.

 

·Travel and entertainment expense for the three months ended September 30, 2014 increased by $20,000, or 71.4% as compared to the three months ended September 30, 2013. Travel and entertainment expense for the nine months ended September 30, 2014 increased by $209,000, or 580.6% as compared to the nine months ended September 30, 2013. We increased our travel and entertainment expenditure in the three and nine months ended September 30, 2014 as compared to the corresponding periods in 2013 in order to increase our visibility.

 

·Rent and related administrative service charge for the three months ended September 30, 2014 increased by $1,000, or 0.8%, as compared to the three months ended September 30, 2013. Rent and related administrative service charge for the nine months ended September 30, 2014 increased by $232,000, or 185.6%, as compared to the nine months ended September 30, 2013. We rent an office in Hong Kong beginning July 2013 and we pay monthly rental and related administrative service fee of approximately $38,000 (HK$ 298,500). Therefore, our rental and related administrative service charge for the nine months ended September 30, 2014 increased as compared to the comparable period of 2013.

 

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·Liability insurance, which primarily consist of director and officer liability insurance, for the nine months ended September 30, 2014 decreased by $32,000, or 10.0%, as compared to the nine months ended September 30, 2013, due to the restriction on corporation spending.

 

·Other general and administrative expense, which primarily consist of vehicle expense, communication fee, office supply, depreciation, miscellaneous taxes and bank service charge, for the three months ended September 30, 2014 increased by $208,000, or 832.0%, as compared to the three months ended September 30, 2013, which was primarily attributable to an increase in bank service charge of approximately $159,000 and an increase in other miscellaneous items of approximately $49,000. Other general and administrative expense for the nine months ended September 30, 2014 increased by $121,000, or 49.0%, as compared to the nine months ended September 30, 2013 which was primarily attributable to an increase in bank service charge of approximately $164,000, offset by a decrease in other miscellaneous items of approximately $43,000.

 

Operating income

 

For the three months ended September 30, 2014, operating income was $13,980,000, as compared to $6,092,000 for the three months ended September 30, 2013, an increase of $7,888,000 or 129.5%. For the nine months ended September 30, 2014, operating income was $54,198,000, as compared to $19,185,000 for the nine months ended September 30, 2013, an increase of $35,013,000 or 182.5%.

 

Other income (expense)

 

Other income (expense) includes interest income, grant income, investment income, foreign currency transaction gain/loss, other income/expense and interest expense.

 

For the three months ended September 30, 2014, other income amounted to $215,000 as compared to other expense of $1,048,000 for the three months ended September 30, 2013, an increase of $1,263,000 or 120.5%, which was mainly attributable to a decrease in interest expense of approximately $735,000 mainly due to the low annual interest rate for our short-term bank loans from China Development Bank and an increase in government grant income of approximately $547,000, offset by a decrease in foreign currency transaction gain of approximately $23,000.

 

For the nine months ended September 30, 2014, other expense amounted to $1,773,000 as compared to other expense of $1,869,000 for the nine months ended September 30, 2013, a decrease of $96,000 or 5.2%, which was mainly attributable to an increase in government grant income of approximately $1,036,000 and an increase in investment income of approximately $279,000, offset by an increase in interest expense of approximately $965,000 due to the increase in our interest bearing bank loans and an increase in foreign currency transaction loss of approximately $261,000.

 

Income tax

 

We are exempted from income tax for income generated from our ocean fishing operations in China for the three and nine months ended September 30, 2014 and 2013.

 

Net income from continuing operations

 

As a result of the factors described above, our net income from continuing operations was $14,195,000, or $0.18 per ordinary share (basic and diluted) for the three months ended September 30, 2014, as compared with $5,044,000, or $0.06 per ordinary share (basic and diluted) for the three months ended September 30, 2013, an increase of $9,151,000 or 181.4%. Our net income from continuing operations was $52,426,000, or $0.66 per ordinary share (basic and diluted) for the nine months ended September 30, 2014, as compared with $17,316,000, or $0.22 per ordinary share (basic and diluted) for the nine months ended September 30, 2013, an increase of $35,110,000 or 202.8%.

 

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Net income from discontinued operations, net of income tax

 

We did not have any discontinued operations during the three and nine months ended September 30, 2014. Our net income from discontinued operations, net of income tax, for the three and nine months ended September 30, 2013 was $12,363,000 and $39,462,000, or $0.16 and $0.50 per ordinary share (basic and diluted), respectively.

 

Foreign currency translation adjustment

 

Our reporting currency is the U.S. dollar. The functional currency of our parent company and subsidiaries of Merchant Supreme and Prime Cheer is the U.S. dollar and the functional currency of the Company’s subsidiary of Pingtan Guansheng and operating VIEs is the Chinese Renminbi (“RMB”). The financial statements of our subsidiary of Guansheng and VIEs are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $302,000 for the three months ended September 30, 2014, as compared to a foreign currency translation gain of $797,000 for the three months ended September 30, 2013. We reported a foreign currency translation loss of $691,000 for the nine months ended September 30, 2014, as compared to a foreign currency translation gain of $6,551,000 for the nine months ended September 30, 2013. This non-cash gain/loss had the effect of increasing/decreasing our reported comprehensive income.

 

Comprehensive income

 

As a result of our foreign currency translation gain/loss, we had comprehensive income for the three months ended September 30, 2014 of $14,497,000, compared to $18,203,000 for the three months ended September 30, 2013. We had comprehensive income for the nine months ended September 30, 2014 of $51,735,000, compared to $63,329,000 for the nine months ended September 30, 2013.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At September 30, 2014 and December 31, 2013, we had cash balances of approximately $11,798,000 and $8,157,000, respectively. Significant portion of these funds are located in financial institutions located in China and will continue to be indefinitely reinvested in China operations.

 

The following table sets forth a summary of changes in our working capital from December 31, 2013 to September 30, 2014 (dollars in thousands):

 

           December 31, 2013 to
September 30, 2014
 
   September 30,
2014
   December 31,
2013
   Change   Percentage
Change
 
       (As Restated)         
Working capital:                    
Total current assets  $65,456   $30,706   $34,750    113.2%
Total current liabilities   74,061    50,790    23,271    45.8%
Working capital deficit:  $(8,605)  $(20,084)  $11,479    (57.2)%

 

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Our working capital deficit decreased $11,479,000 to $8,605,000 at September 30, 2014 from working capital deficit of $20,084,000 at December 31, 2013. This decrease in working capital deficit is primarily attributable to an increase in cash of $3,641,000, an increase in accounts receivable, net of allowance for doubtful accounts, of $32,434,000 mainly due to the significant increase in our revenue, an increase in prepaid expense – related parties of $3,108,000, an increase in deferred expense – related parties of $2,236,000, an increase in advance to suppliers of $258,000, an increase in other receivable of $157,000, a decrease in accounts payable of $1,873,000, a decrease in accounts payable – related parties of $9,464,000 due to the payments made to our related parties in 2014, a decrease in advance from customers of $135,000 and a decrease in deferred grant income of $520,000, offset by a decrease in inventories, net of reserve for obsolete inventories, of $3,062,000, a decrease in prepaid expense of $4,021,000, an increase in short-term bank loans of $36,986,000 in order to satisfy our working capital requirement from our expanding operations, an increase in long-term bank loans – current portion of $6,644,000, an increase in accrued liabilities and other payable of $169,000, an increase in due to related parties of $673,000 and an increase in dividend payable of $791,000.

 

Because the exchange rate conversion is different for the unaudited condensed consolidated balance sheets and the unaudited condensed consolidated statements of cash flows, the changes in assets and liabilities reflected on the unaudited condensed consolidated statements of cash flows are not necessarily identical with the comparable changes reflected on the unaudited condensed consolidated balance sheets.

 

Cash flows for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013

 

The following summarizes the key components of our cash flows for the nine months ended September 30, 2014 and 2013 (dollars in thousands):

 

   Nine Months Ended September 30, 
   2014   2013 
       (As Restated) 
Net cash provided by operating activities from continuing operations  $16,379   $4,070 
Net cash used in investing activities for continuing operations   (38,481)   (291,894)
Net cash provided by financing activities from continuing operations   25,876    47,854 
Net cash provided by operating activities from discontinued operations   -    69,653 
Net cash provided by investing activities from discontinued operations   -    7,624 
Net cash used in financing activities for discontinued operations   -    (560)
Effect of exchange rate on cash   (133)   2,162 
Net increase (decrease) in cash  $3,641   $(161,091)

 

Net cash flow provided by operating activities from continuing operations was $16,379,000 for the nine months ended September 30, 2014 as compared to $4,070,000 for the nine months ended September 30, 2013, an increase of approximately $12,309,000.

 

·Net cash flow provided by operating activities from continuing operations for the nine months ended September 30, 2014 primarily reflected net income of $52,426,000 and the add-back of non-cash item consisting of depreciation of $4,022,000, and changes in operating assets and liabilities primarily consisting of a decrease in prepaid expense of $3,956,000, a decrease in inventories of $2,919,000 and an increase in accrued liabilities and other payable of $241,000, offset primarily by an increase in accounts receivable of $32,622,000 mainly due to the significant increase in our sales revenue, an increase in other receivable of $157,000, an increase in prepaid expense – related parties of $3,112,000, an increase in deferred expense – related parties of $2,239,000, an increase in advance to suppliers of $258,000, a decrease in accounts payable of $1,839,000, a decrease in accounts payable – related parties of $6,850,000 due to the payments made to our related parties in 2014 and a decrease in advance from customers of $130,000.

 

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·Net cash flow provided by operating activities from continuing operations for the nine months ended September 30, 2013 primarily reflected net income of $17,316,000 adjusted for non-cash item consisting of depreciation of $1,161,000, and changes in operating assets and liabilities primarily consisting of a decrease in accounts receivable of $1,569,000, an increase in accounts payable – related parties of $495,000, an increase in advance from customers of $473,000 and an increase in accrued liabilities and other payable of $5,613,000, offset mainly by a decrease in prepaid expense of $4,479,000, a decrease in inventories of $5,192,000 and an increase in advance from customers – related parties of $12,983,000.

 

Net cash flow used in investing activities for our continuing operations was $38,481,000 for the nine months ended September 30, 2014 as compared to $291,894,000 for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, we made the prepayments for shops purchase and fishing vessels construction of $22,462,000, and made payments for purchase of property, plant and equipment of $1,269,000 and made investment in joint venture interest of $15,946,000, offset by proceeds from government grants for fishing vessels construction of $1,195,000. During the nine months ended September 30, 2013, we made payment for fishing vessels deposit of $3,272,000, and made payments for purchase of property, plant and equipment of $213,814,000, and made advance to related parties of $4,045,000, and had a decrease in cash related to sale of subsidiary CDGC of $76,988,000, offset by proceeds from government grants for fishing vessels construction of $6,224,000.

 

Net cash flow provided by financing activities from continuing operations was $25,876,000 for the nine months ended September 30, 2014 as compared to $47,854,000 for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, we received proceeds from short-term bank loans of $44,891,000, and received proceeds from long-term bank loans of $3,742,000, and received advance from related parties of $650,000, offset by the repayments of short-term bank loans of $17,725,000, and repayments of long-term bank loans of $5,683,000. During the nine months ended September 30, 2013, we received proceeds from short-term bank loans of $43,440,000, and received proceeds from long-term bank loans of $45,889,000, and received advance from related parties of $3,847,000, and acquired cash in recapitalization of $3,565,000, offset by the repayments of short-term bank loans of $46,996,000, and repayments of long-term bank loans of $1,891,000.

 

We noted the negative working capital and believe this is a temporary trend giving the fact that we still have positive cash flow from operations. We believe our working capital situation will be turned around in the near future. We have historically funded our capital expenditures from our working capital and bank loans. As of September 30, 2014, we have contractual commitments of approximately $44.5 million related to three shop purchase agreements and a joint venture commitment. We intend to fund the costs with our existing working capital and by obtaining financing mainly from local banking institutions with which we have done business in the past. We believe that the relationships with local banks are in good standing and based on our experience, we did not encounter difficulties in obtaining needed borrowings from local banks. We believe that our available cash together with our cash flow from operations and secured bank financing and/or other third party financing will be sufficient to meet our anticipated cash requirements for the next twelve months.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual obligations

 

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

 

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The following tables summarize our contractual obligations as of September 30, 2014 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 

   Payments Due by Period 
Contractual obligations:  Total   Less than 1
 year
   1-3
years
   3-5
years
   5+ years 
Related party office lease obligation  $11   $11   $-   $-   $- 
Related party rental and related administrative service charge obligation   115    115    -    -    - 
Shop purchase obligation   3,545    3,545    -    -    - 
Registered capital contribution obligation in joint venture interest   40,953    -    -    -    40,953 
Short-term bank loans (1)   36,071    36,071    -    -    - 
Long-term bank loans   71,603    26,896    27,757    9,962    6,988 
Total  $152,298   $66,638   $27,757   $9,962   $47,941 

 

(1) Historically, we have refinanced these short-term bank loans for an additional term of six months to one year and we expect to continue to refinance these loans upon expiration.

 

Off-balance sheet arrangements

 

Guarantees and collateral provided to related parties

 

In October 2012, Pingtan Fishing entered into two pledge contracts with China Minsheng Banking Corp., Ltd. Pursuant to the terms of the pledge contracts, Pingtan Fishing assigned 10 fishing vessels, as collateral to secure Hong Long’s long-term loans from the financial institution in amount of approximately $10.8 million, which are due on April 18, 2015. In addition to the collateral provided to Hong Long, Pingtan Fishing also guaranteed the repayment of $46.3 million for Hong Long’s long-term loans.

 

In December 2013, Pingtan Fishing entered into a guarantee agreement with Ping An Bank Co., Ltd. Pursuant to the terms of the guarantee agreement, Pingtan Fishing provide maximum guarantees approximately of $8.3 million to Hong Long’s credit line in amount of $16.5 million which is due on December 23, 2014.

 

As of the filing date of this report, Pingtan Fishing has not receive any demand from the lender that collateralized properties are intended to be disposed of or to make any payments under the guarantee.

 

Other arrangements 

 

Pursuant to the Share Purchase Agreement dated December 4, 2013, where the Company exited and sold China Dredging Group Co., Ltd and its subsidiaries to Hong Long , the Company is required to indemnify Hong Long and the same indemnification responsibility applies to Hong Long breach for the events arriving out of any of the Share Purchase Agreement or the memorandum of agreement in relation to the sale, purchase and delivery of the vessels for two years until December 3, 2015 and would be liable for the full amount of damages that exceed $1 million.  The amount of damage shall be the amount finally determined by a court of competent jurisdiction or appropriate governmental administrative agency, or the amount agreed to upon settlement in accordance with the terms of the Share Purchase Agreement.

 

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Recent accounting pronouncements

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The amendments in this ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results and include disposals of a major geographic area, a major line of business, or a major equity method investment. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. Additionally, the new guidance requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. We have not early adopted it and do not expect the adoption of ASU 2014-08 to have a material impact on our consolidated financial statements.

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.  The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  Early adoption is not permitted.  The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

 

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (ASU 2014-12).  The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities.  The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

 

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU 2014-15).  The guidance in ASU 2014-15 sets forth management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management's plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. Early application is permitted.  The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

 

Results of Discontinued Operations

 

Three and nine months ended September 30, 2013

 

During the year ended December 31, 2013, we decided to exit our dredging businesses (see Note 2 — Discontinued Operations) in order to increase the focus on our core operations and to improve overall profitability. In addition, we established certain targets in the areas of internal control in order to enhance our profitability profile. As a result of this business exit, we believe we are better positioned to achieve future financial success. The sale of our wholly owned subsidiary of CDGC is reflected as discontinued operations. Our operating results for the three and nine months ended September 30, 2013 have been retroactively adjusted to properly reflect discontinued operations. The transaction involved no cash but our $155.2 million, 4% promissory note due on June 19, 2015 was forgiven. We do not foresee any material impact on our liquidity and financial condition as a result of this disposal. We also do not anticipate any contingencies which would be required to accrue and include in our 2013 financials.

  

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Revenues are derived from contract revenues of our dredging service. The table below sets forth more detail regarding the results of discontinued operations (dollars in thousands):

 

   Three Months Ended
September 30, 2013
   Nine Months Ended
September 30, 2013
 
   Amount   % of
revenue
   Amount   % of
revenue
 
Revenue  $54,323    100.0%  $131,610    100.0%
Cost of revenue   (33,521)   (61.7)%   (74,762)   (56.8)%
Gross profit   20,802    38.3%   56,848    43.2%
Operating expenses   (2,200)   (4.1)%   (5,615)   (4.3)%
Income from operations   18,602    34.2%   51,233    38.9%
Income before income taxes   17,089    31.5%   51,665    39.3%
Income taxes   (4,726)   (8.7)%   (12,203)   (9.3)%
Net income  $12,363    22.8%  $39,462    30.0%

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Commodity price risk

 

Oil cost accounts for approximately 64% of our total cost of revenue for the nine months ended September 30, 2014. We are primarily exposed to oil price volatility caused by supply conditions, political and economic variables and other unpredictable factors. We purchase oil used by our vessels at prevailing market prices. We do not have formal long-term purchase contracts with our suppliers and, therefore, we are exposed to the risk of fluctuating oil prices.

 

We did not have any commodity price derivatives or hedging arrangements outstanding at September 30, 2014 and did not employ any commodity price derivatives in the nine months ended September 30, 2014.

 

Foreign currency exchange rate risk

 

While our reporting currency is the USD, a significant portion of our consolidated revenue and consolidated cost of revenue and expenses are denominated in RMB. Furthermore, a significant portion of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenue and result of operations may be affected by fluctuations in the exchange rate between USD and RMB.

 

The value of the RMB against the USD and other currencies is affected by, among other things, changes in the PRC’s political and economic conditions. Since July 2005, the RMB has not been pegged to the USD. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the USD in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

 

If the RMB depreciates against the USD, the value of our RMB revenues, earnings and assets as expressed in our USD financial statements will decline. A 1% average appreciation (depreciation) of the RMB against the USD would increase (decrease) our comprehensive income by $0.6 million based on our revenue, costs and expenses, assets and liabilities denominated in RMB as of September 30, 2014. To date, we have not entered into any hedging transactions to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure at all. 

 

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Interest rate risk

 

We are exposed to interest rate risk arising from short-term and long-term variable rate borrowings from time to time. Our future interest expense will fluctuate in line with any change in our borrowing rates. Our bank borrowings amounted to $107.7 million as of September 30, 2014. Based on the variable nature of the underlying interest rate, the bank borrowings approximated fair value at that date.

 

A hypothetical 100 basis point change in interest rates would impact our earnings and cash flows by approximately $0.7 million. The potential change in cash flows and earning is calculated based on the change in the net interest expense over a nine month period due to an immediate 100 basis point change in interest rates.

 

Inflation risk

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

 

In connection with the preparation of the quarterly report on Form 10-Q for the quarter ended September 30, 2014, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, which are defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Based on this evaluation, management concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2014.

 

Changes in Internal Control over Financial Reporting

 

As disclosed in the annual report for the year ended December 31, 2013 and the quarterly report for the quarter ended March 31, 2014, our management evaluated and concluded that our internal control over financial reporting was not effective as of December 31, 2013 and March 31, 2014, due to the identification of a material weakness. The material weakness we identified was that none of our employees had any formal training in U.S. GAAP and SEC rules and regulations.

 

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In response to the identified material weakness, our management, with oversight from our audit committee, has dedicated significant resources to improve our control environment and to remedy the identified material weakness.

 

On April 18, 2013, we appointed Mr. Roy Yu as Chief Financial Officer of the Company. Mr. Yu has over 9 years’ experience in senior management roles in U.S. listed companies and served as Chief Financial Officer or senior financial executive for three companies. Prior to joining the Company, Mr. Yu served as the Chief Financial Officer of Lihua International, Inc. (NASDAQ: LIWA). Mr. Yu attended London Southbank University from 2001 to 2004, where he holds a degree in accounting and finance. In 2005, Mr. Yu was trained in Sarbanes-Oxley Act compliance. On May 6, 2013, the Company appointed Mr. Lam Man Fung as Financial Controller of the Company. Prior to joining the Company, Mr. Lam served as Financial Controller of Shouguang Dili Agri-products Group Company Limited. From 2005 to 2009, Mr. Lam was a senior auditor of Ernst & Young. Management believes Mr. Yu and Mr. Lam has brought to the Company necessary professional knowledge and has lead the Company in taking remediation steps necessary to address the material weakness described above, regarding that none of the Company’s employees had any formal training in U.S. GAAP and SEC rules and regulations. On May 16, 2013, the Company appointed an independent compliance consultant of the Company to review and advise on the Company’s system of internal control over financial reporting pursuant to the Section 404 requirements of the Sarbanes-Oxley. We have taken further steps to improve our internal control over financial reporting. We have engaged a PCAOB registered and inspected public accounting firm in the United States to provide consulting services to us in matters involving U.S. GAAP and SEC rules and regulations. During the first half of 2014, we also have also expanded our internal control functions by hiring more experienced staff and implemented additional financial and management control procedures. In June 2014, we engaged an external consultant to advise on our internal control systems and to provide U.S. GAAP training to our accounting, internal audit and finance staff. Our staff was trained in regulations regarding financial statement disclosures, differences between U.S. GAAP and PRC GAAP, and the 2013 COSO framework.

 

We believe that our remediation measures and our continuing plan have significantly remediated the material weakness and management concluded that we have effective internal control over financial reporting as of September 30, 2014.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

Factors that could cause our actual results to differ materially from those in this report are any of the risks described in Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013 filed with the SEC. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this Report, there have been no material changes to the risk factors disclosed in Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013, except we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

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ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

 

Exhibit

 

  10.1*  

Master Agreement by and between Pingtan Marine Enterprise Ltd. and Fuzhou Honglong Ocean Fishery Co., Ltd., dated June 19, 2013 (re-filed).

       
  31.1*   Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
       
  31.2*   Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
       
  32*   Certification of the Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) or Rule 15d- 14(b) and 18 U.S.C. 1350.
       
  101.INS*   XBRL INSTANCE DOCUMENT
       
  101.SCH*   XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
       
  101.CAL*   XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
       
  101.DEF*   XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
       
  101.LAB*   XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
       
  101.PRE*   XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT

 

* Filed herewith

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

  

  PINGTAN MARINE ENTERPRISE LTD.
  (Registrant)  
     
Date: November 10, 2014 By: /s/ Xinrong Zhuo
    Xinrong Zhuo
    Chairman and Chief Executive Officer
     
Date: November 10, 2014 By: /s/ Roy Yu
    Roy Yu
    Chief Financial Officer

 

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