10-Q 1 f10q0317_pingtanmarine.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2017

 

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
incorporation of organization)
  (I.R.S. Employer
Identification No.)

 

18/F, Zhongshan Building A,

No. 154 Hudong Road

Fuzhou, China 350001

(Address of principal executive offices)

 

(86) 591-8727-1266

(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 ☒  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 ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

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

 

As of May 15, 2017, the outstanding number of shares of the registrant’s ordinary shares, par value $0.001 per share, was 79,055,053.

 

 

 

 

 

 

PINGTAN MARINE ENTERPRISE LTD.

FORM 10-Q

March 31, 2017

 

TABLE OF CONTENTS

  

    Page No.
PART I. - FINANCIAL INFORMATION  
   
Item 1. Financial Statements 1
  Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016 1
  Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2017 and 2016 2
  Unaudited Consolidated Statement of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2017 3
  Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 4
  Condensed Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 36
     
PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 37
Item 1A. Risk Factors 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3. Defaults upon Senior Securities 37
Item 4. Mine Safety Disclosures 37
Item 5. Other Information 37
Item 6. Exhibits 38

  

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, anticipated growth and growth strategies; need for additional capital and the availability of financing; operational, mechanical, climatic or other unanticipated issues that adversely affect the production capacity of the Company's vessels; delays in deploying vessels; our ability to successfully manage relationships with customers, distributors and other important relationships; technological changes; competition; demand for our products and services; the deterioration of general economic conditions, whether internationally, nationally or in the local markets in which we operate; legislative or regulatory changes that may adversely affect our business; and 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.

 

Unless otherwise indicated, references in this report to “we,” “us” or the “Company” refer to Pingtan Marine Enterprise Ltd. and its subsidiaries.

 

 

 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN U.S. DOLLARS)

 

   March 31,   December 31, 
   2017   2016 
   (Unaudited)     
ASSETS        
         
CURRENT ASSETS:            
Cash  $571,305   $820,396 
Restricted cash   3,362,660    2,911,922 
Accounts receivable, net of allowance for doubtful accounts   11,215,424    11,322,726 
Inventories, net of reserve for inventories   16,829,601    8,811,111 
Advances to suppliers   2,508,289    3,969,351 
Prepaid expenses   -    8,145 
Prepaid expenses - related party   1,126,753    522,337 
Other receivables   2,142,573    31,835,456 
Other receivables - related party   705,296    639,917 
           
Total Current Assets   38,461,901    60,841,361 
           
OTHER ASSETS:            
Cost method investment   3,043,787    3,027,245 
Equity method investment   28,932,614    28,493,273 
Prepayment for long-term assets   10,964,418    11,913,912 
Property, plant and equipment, net   132,050,274    122,196,594 
           
Total Other Assets   174,991,093    165,631,024 
           
Total Assets  $213,452,994   $226,472,385 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
           
CURRENT LIABILITIES:            
Accounts payable  $949,344   $916,737 
Accounts payable - related parties   4,452,059    2,560,760 
Short-term bank loans   23,578,267    21,554,636 
Long-term bank loans - current portion   17,393,069    17,298,544 
Accrued liabilities and other payables   5,757,308    4,399,536 
Accrued liabilities and other payables - related party   16,856,783    18,147,152 
Due to related parties   1,203,354    43,354 
          
Total Current Liabilities   70,190,184    64,920,719 
           
OTHER LIABILITIES:            
Long-term bank loans - non-current portion   21,958,749    21,839,412 
           
Total Liabilities   92,148,933    86,760,131 
           
COMMITMENTS AND CONTINGENCIES          
           
SHAREHOLDERS' EQUITY:             
Equity attributable to owners of the company:          
Ordinary shares ($0.001 par value; 225,000,000 shares authorized; 79,055,053 shares issued and outstanding at March 31, 2017 and December 31, 2016)   79,055    79,055 
Additional paid-in capital   81,906,871    111,008,085 
Retained earnings   26,567,818    17,438,215 
Statutory reserve   9,391,827    9,391,827 
Accumulated other comprehensive loss   (12,288,659)   (12,879,051)
Total equity attributable to owners of the company   105,656,912    125,038,131 
Non-controlling interest   15,647,149    14,674,123 
           
Total Shareholders' Equity   121,304,061    139,712,254 
           
Total Liabilities and Shareholders' Equity  $213,452,994   $226,472,385 

 

See condensed notes to unaudited consolidated financial statements.

 1 
 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(IN U.S. DOLLARS)

 

   For the Three Months Ended
March 31,
 
   2017   2016 
         
REVENUE  $5,661,140   $4,115,098 
           
COST OF REVENUE   5,597,807    7,427,810 
           
GROSS PROFIT (LOSS)   63,333    (3,312,712)
           
OPERATING EXPENSES:          
Selling   388,718    343,020 
General and administrative   1,087,872    1,467,471 
           
Total Operating Expenses   1,476,590    1,810,491 
           
LOSS FROM OPERATIONS   (1,413,257)   (5,123,203)
           
OTHER INCOME (EXPENSE):          
Interest income   147,383    2,367 
Interest expense   (703,076)   (522,265)
Foreign currency transaction gain   98,451    20,797 
Grant income   12,719,275    154,447 
Loss on equity method investment   (6,252)   (10,316)
Other expense   -    (264)
           
Total Other Income (Expense), net   12,255,781    (355,234)
           
INCOME (LOSS) BEFORE INCOME TAXES   10,842,524    (5,478,437)
           
INCOME TAXES   -    413 
           
NET INCOME (LOSS)  $10,842,524   $(5,478,850)
           
LESS: NET INCOME (LOSS) ATTRIBUTABLE TO THE NON-CONTROLLING INTEREST   922,370    (378,471)
           
NET INCOME (LOSS) ATTRIBUTABLE TO OWNERS OF THE COMPANY  $9,920,154   $(5,100,379)
           
COMPREHENSIVE INCOME (LOSS):          
NET INCOME (LOSS)   10,842,524    (5,478,850)
OTHER COMPREHENSIVE GAIN          
Unrealized foreign currency translation gain   641,048    879,423 
COMPREHENSIVE INCOME (LOSS)  $11,483,572   $(4,599,427)
LESS: COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE NON-CONTROLLING INTEREST   973,026    (309,448)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO OWNERS OF THE COMPANY  $10,510,546   $(4,289,979)
           
NET INCOME (LOSS) PER ORDINARY SHARE ATTRIBUTABLE TO OWNERS OF THE COMPNAY          
Basic and diluted  $0.13   $(0.06)
           
WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING:          
Basic and diluted   79,055,053    79,055,053 

 

See condensed notes to unaudited consolidated financial statements.

 2 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2017

(IN U.S. DOLLARS)

 

   Equity Attributable To Owners of The Company         
   Ordinary Shares   Additional           Accumulated Other   Non-   Total 
   Number of       Paid-in   Retained   Statutory   Comprehensive   controlling   Shareholders' 
   Shares   Amount   Capital   Earnings   Reserve   Loss   Interest   Equity 
                                 
Balance, December 31, 2016   79,055,053   $79,055   $111,008,085   $17,438,215   $9,391,827   $(12,879,051)  $14,674,123   $139,712,254 
                                         
Acquisition of fishing vessels from related party   -    -    (29,101,214)   -    -    -    -    (29,101,214)
                                         
Net income   -    -    -    9,920,154    -    -    922,370    10,842,524 
                                         
Dividend declared   -    -    -    (790,551)   -    -    -    (790,551)
                                         
Foreign currency translation adjustment   -    -    -    -    -    590,392    50,656    641,048 
                                         
Balance, March 31, 2017 (Unaudited)   79,055,053   $79,055   $81,906,871   $26,567,818   $9,391,827   $(12,288,659)  $15,647,149   $121,304,061 

 

See condensed notes to unaudited consolidated financial statements.

 

 3 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN U.S. DOLLARS)

 

   For the Three Months Ended
March 31,
 
   2017   2016 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income (loss)  $10,842,524   $(5,478,850)
Adjustments to reconcile net income (loss) from operations to net cash provided by operating activities:          
Depreciation   2,112,525    1,682,985 
Increase in allowance for doubtful accounts   96,399    277,982 
Increase in reserve for inventories   277,017    1,550,335 
Loss on equity method investment   6,252    10,316 
Changes in operating assets and liabilities:          
Accounts receivable   73,099    3,406,211 
Inventories   (8,262,638)   (2,967,993)
Advances to suppliers   1,485,594    170,802 
Prepaid expenses   8,205    1,266 
Prepaid expenses - related party   (602,715)   1,860,757 
Other receivables   29,923,685    (17)
Other receivables - related party   -    (97)
Accounts payable   27,651    (37,895)
Accounts payable - related parties   1,880,905    656,067 
Accrued liabilities and other payables   677,512    (507,011)
Accrued liabilities and other payables - related party   (18,281,290)   - 
Due to related parties   (20,000)   - 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES   20,244,725    624,858 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property, plant and equipment   (9,763,774)   (113,479)
Payments made for acquisition of fishing vessels from related party   (12,252,689)   - 
Prepayments made for long-term assets   -    (20,108,663)
Payments for equity method investment   (290,440)   - 
Proceeds from transferring equity method investment share   -    15,291,759 
           
NET CASH USED IN INVESTING ACTIVITIES   (22,306,903)   (4,930,383)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from short-term bank loans   5,100,335    3,156,505 
Repayments of short-term bank loans   (3,190,832)   (7,214,044)
Increase in restricted cash   (435,660)   (611,670)
Advances from related parties   1,180,000    200,000 
Payments made for dividend   (790,551)   - 
           
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   1,863,292    (4,469,209)
           
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS   (50,205)   (90,453)
           
NET DECREASE IN CASH AND CASH EQUIVALENTS   (249,091)   (8,865,187)
           
CASH AND CASH EQUIVALENTS - beginning of period   820,396    11,448,684 
           
CASH AND CASH EQUIVALENTS - end of period  $571,305   $2,583,497 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for:          
Interest  $587,221   $556,138 
Income taxes  $-   $- 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Acquisition of property and equipment by decreasing prepayment for long-term assets  $1,016,541   $10,551,314 
Property and equipment acquired on credit as payable  $658,827   $- 

Fishing vessels acquired on credit as payable – related party

  $16,889,095   $- 
Offset other receivables - related parties against due to related parties  $-   $1,560,000 

 

See condensed notes to unaudited consolidated financial statements.

 4 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

  

NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION

 

Pingtan Marine Enterprise Ltd. (the “Company” or “PME”), formerly China Growth Equity Investment Limited (“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 People’s Republic of China (“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. (“Merchant Supreme”), 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, 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) have 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”.

 

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 operated by China Dredging; the Company completed the sale of CDGC and its subsidiaries on December 4, 2013.

 

On February 9, 2015, the Company terminated its existing Variable Interest Entity (“VIE”) agreements, pursuant to an Agreement of Termination dated February 9, 2015, entered into by and among Ms. Honghong Zhuo, Mr. Zhiyan Lin (each a shareholder of Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd (“Pingtan Fishing”), together the “Pingtan Fishing’s Shareholders”), Pingtan Fishing and Pingtan Guansheng Ocean Fishing Co., Ltd. ("Pingtan Guansheng"). On February 9, 2015, the Pingtan Fishing’s Shareholders transferred 100% of their equity interest in Pingtan Fishing to Fujian Heyue Marine Fishing Development Co., Ltd. (“Fujian Heyue”), pursuant to an Equity Transfer Agreement dated February 9, 2015, entered into by and among the Pingtan Fishing’s Shareholders, Pingtan Fishing and Fujian Heyue. On February 15, 2015, China Agriculture Industry Development Fund Co., Ltd. (“China Agriculture”) invested RMB 400 million (approximately $65 million) into Pingtan Fishing for an 8% equity interest in Pingtan Fishing. After the restructuring transactions described above, Pingtan Fishing and its entities became the 92% equity-owned subsidiaries of the Company and was no longer a VIE. 

 

 5 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION (continued)

 

Details of the Company’s subsidiaries which are included in these consolidated financial statements as of March 31, 2017 are as follows:

 

Name of subsidiaries  Place and date of incorporation  Percentage of ownership  Principal activities
Merchant Supreme Co., Ltd. (“Merchant Supreme”)  BVI,
June 25, 2012
  100% held by PME  Intermediate holding company
          
Prime Cheer Corporation Ltd. (“Prime Cheer”)  Hong Kong,
May 3, 2012
  100% held by Merchant Supreme  Intermediate holding company
          
Pingtan Guansheng Ocean Fishing Co., Ltd. (“Pingtan Guansheng”)  PRC,
October 12, 2012
  100% held by Prime Cheer  Intermediate holding company
          
Fujian Heyue Marine Fishing Development Co., Ltd. (“Fujian Heyue”)  PRC,
January 27, 2015
  100% held by Pingtan Guansheng  Intermediate holding company
          
Fujian Provincial Pingtan County Fishing Group Co., Ltd. (“Pingtan Fishing”)  PRC,
February 27, 1998
  92% held by Fujian Heyue  Oceanic fishing
          
Pingtan Dingxin Fishing Information Consulting Co., Ltd. (“Pingtan Dingxin”)  PRC,
October 23, 2012
  100% held by Pingtan Fishing  Dormant
          
Pingtan Duoying Fishing Information Consulting Co., Ltd. (“Pingtan Duoying”)  PRC,
October 23, 2012
  100% held by Pingtan Fishing  Dormant
          
Pingtan Ruiying Fishing Information Consulting Co., Ltd. (“Pingtan Ruiying”)  PRC,
October 23, 2012
  100% held by Pingtan Fishing  Dormant

 

Fujian Heyue, through its PRC subsidiary, Pingtan Fishing, engages in ocean fishing with its owned and licensed vessels within the Indian Exclusive Economic Zone, Indo-Pacific waters, Arafura Sea of Indonesia and the international waters of Atlantic and Pacific Oceans.

 

The Company meets its day-to-day working capital requirements through cash flow provided by operations, bank loans and related parties’ advances. The Indonesian government's moratorium on fishing licenses renewals creates uncertainty over fishing operations in Indonesian waters. The Company’s forecasts and projections, taking account of on-going operations in Indian waters and consideration of opportunities in new fishing territories, such as acquisition of 5 licensed vessels to operate in the international waters, shows that the Company has adequate resources to continue in operational existence for the foreseeable future.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

These interim consolidated financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim consolidated financial statements have been included. The results reported in the unaudited 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 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 Company’s unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

  

 6 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Basis of presentation (continued)

 

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 for the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 23, 2017.

 

Use of estimates

 

The preparation of the unaudited 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 three months ended March 31, 2017 and 2016 include allowance for doubtful accounts, reserve for inventories, 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 in banks. The Company maintains cash with various financial institutions in the PRC and Hong Kong and none of these deposits are covered by insurance. At March 31, 2017 and December 31, 2016, cash balances in the PRC are $555,829 and $683,307, respectively, and cash balances in Hong Kong are $15,476 and $137,089, respectively, and are uninsured. The Company has not experienced any losses in bank accounts and believes it is not exposed to any risks on its cash in bank accounts.

 

Restricted cash

 

Restricted cash consists of cash deposits held by China Development Bank to secure short term bank loans from China Development Bank. At March 31, 2017 and December 31, 2016, restricted cash amounted $3,362,660 and $2,911,922, respectively.

 

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.

 

The carrying amounts reported in the consolidated balance sheets for cash, restricted cash, accounts receivable, inventories, advances to suppliers, prepaid expenses, prepaid expenses – related party, other receivables, other receivables – related party, accounts payable, accounts payable – related parties, bank loans, accrued liabilities and other payables, accrued liabilities and other payables – related party, and due to related parties approximate their fair market value based on the short-term maturity of these instruments. As of March 31, 2017, the Company does not have any assets or liabilities that are measured on a recurring basis at fair value. The Company’s short-term bank borrowings that are considered Level 2 financial instruments measured at fair value on a non-recurring basis as of March 31, 2017. As of March 31, 2017, the Company does not have any level 3 financial instruments.

 

 7 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Fair value of financial instruments (continued)

 

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 an 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. At March 31, 2017 and December 31, 2016, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $350,152 and $252,558, respectively.  

 

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 is primarily comprised of fuel, freight, depreciation, direct labor, consumables, government levied charges and taxes. Consumables include fishing nets and metal containers used by fishing vessels. The Company’s fishing fleets in Indian and Indonesian waters and Western and Central Pacific Ocean of the international waters operate throughout the year, although the May to July period demonstrates lower catch quantities compared to the October to January period, 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. At March 31, 2017 and December 31, 2016, the Company recorded a reserve for inventories in the amount of $276,487 and $0, respectively.

 

When recorded, inventory reserves are intended to reduce the carrying value of inventories to their net realizable value. The Company regularly evaluates the ability to realize the value of inventories based on a combination of factors including the following: forecasted sales, estimated current and future market value.

 

Advances to suppliers

 

Advances to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $2,508,289 and $3,969,351 at March 31, 2017 and December 31, 2016, respectively.

 

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 our fishing vessels operating in Indonesian waters requires a fishing license granted by the authority in Indonesia.

 

 8 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Investment in unconsolidated company – Global Deep Ocean

 

The Company uses the equity method of accounting for its investment in, and earning or loss of, company that it does not control but over which it does exert significant influence. The Company considers whether the fair value of its equity method investment has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded value may not be recoverable. If the Company considers any decline to be other than temporary (based on various factors, including historical financial results and the overall health of the investee), then a write-down would be recorded to estimated fair value. See Note 7 for discussion of equity method investment.

 

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.

 

The estimated useful lives of the assets are as follows:

 

   Estimated useful life 
Fishing vessels  10 - 20 Years 
Vehicles  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 fishing vessels 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 $5,336 and $113,479 for the three months ended March 31, 2017 and 2016, respectively, in the fishing vessels under construction.

 

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 months ended March 31, 2017 and 2016.

 

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 respect 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 a 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.

 

 9 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Government grant

 

Government grants are recognized when 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, it 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. 

 

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 are 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 consolidated statements of operations and comprehensive income (loss).

 

The Company's subsidiary, 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.

 

The new China’s Enterprise Income Tax Law (“EIT Law”) also provides that an enterprise established under the laws of foreign countries or regions but whose “de facto management body” is located in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its worldwide income. The Implementing Rules of the new EIT Law merely defines the location of the “de facto management body” as “the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.” On April 22, 2009, the PRC State Administration of Taxation further issued a notice entitled “Notice Regarding Recognizing Offshore-Established Enterprises Controlled by PRC Shareholders as Resident Enterprises Based on Their Place of Effective Management.” Under this notice, a foreign company controlled by a PRC company or a group of PRC companies shall be deemed as a PRC resident enterprise if (i) the senior management and the core management departments in charge of its daily operations mainly function in the PRC; (ii) its financial decisions and human resource decisions are subject to decisions or approvals of persons or institutions in the PRC; (iii) its major assets, accounting books, company seals, minutes and files of board meetings and shareholders’ meetings are located or kept in the PRC; and (iv) more than half of the directors or senior management personnel with voting rights reside in the PRC. Based on a review of surrounding facts and circumstances, the company does not believe that it is likely that its operations outside of the PRC should be considered a resident enterprise for PRC tax purposes. However, due to limited guidance and implementation history of the new EIT Law, should the Company be treated as a resident enterprise for PRC tax purposes, the Company will be subject to PRC tax on worldwide income at a uniform tax rate of 25% retroactive to May 3, 2012.

 

In addition, Pingtan Fishing is not subject to foreign income taxes for its operations in either India and Indonesia Exclusive Economic Zones or the Western and Central Pacific Fisheries Commission areas.

 

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 operations and comprehensive income (loss) in the period that includes the enactment date.

 

 10 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Income taxes (continued)

 

The Company has not recorded deferred income taxes applicable to undistributed earnings of the subsidiaries 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 subsidiaries amounted to approximately $190.0 million and $179.3 million as of March 31, 2017 and December 31, 2016, 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 March 31, 2017 and December 31, 2016, 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 expense and totaled $142,900 and $76,547 for the three months ended March 31, 2017 and 2016, respectively.

 

Employee benefits

 

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 $83,395 and $94,159 for the three months ended March 31, 2017 and 2016, respectively. 

 

Advertising

 

Advertising is expensed as incurred and is included in selling expense on the accompanying consolidated statements of operations and comprehensive income (loss). Advertising totaled $29,044 and $0 for the three months ended March 31, 2017 and 2016, respectively.

 

Research and development

 

Research and development costs are expensed as incurred and are included in general and administrative expense. The Company did not incur any research and development costs during the three months ended March 31, 2017 and 2016.

 

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 subsidiaries of Pingtan Guansheng, Fujian Heyue and Pingtan Fishing is the Chinese Renminbi (“RMB”). For the subsidiaries of Pingtan Guansheng, Fujian Heyue and Pingtan Fishing, 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 three months ended March 31, 2017 and 2016 was $(50,205) and $(90,453), 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.

 

 11 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Foreign currency translation (continued)

 

All of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries. 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.

 

Asset and liability accounts at March 31, 2017 and December 31, 2016 were translated at 6.8993 RMB to $1.00 and at 6.9370 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 operations for the three months ended March 31, 2017 and 2016 were 6.8861 RMB and 6.5395 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 (loss) per share

 

ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings (loss) 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 net income (loss) per share are computed by dividing net income (loss) available to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of ordinary shares, ordinary share equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive ordinary shares consist of the ordinary shares issuable upon the exercise of ordinary share warrants (using the treasury stock method). Ordinary share equivalents are not included in the calculation of diluted earnings (loss) per share if their effect would be anti-dilutive. In a period in which the Company has a net loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact. The following table presents a reconciliation of basic and diluted net income (loss) per share:

 

   Three Months Ended
March 31,
 
   2017   2016 
Net income (loss) available to owners of the Company for basic and diluted net income (loss) per share of ordinary share  $9,920,154   $(5,100,379)
Weighted average ordinary shares outstanding - basic and diluted   79,055,053    79,055,053 
Net income (loss) per ordinary share attributable to owners of the Company - basic and diluted  $0.13   $(0.06)

 

For the three months ended March 31, 2017 and 2016, warrants to purchase 8,966,667 ordinary shares have not been included in the calculation of diluted earnings (loss) per share in order to avoid any anti-dilutive effect.

 

Non-controlling interest

 

On February 15, 2015, China Agriculture invested RMB 400 million (approximately $65 million) into Pingtan Fishing and acquired an 8% equity interest in Pingtan Fishing. As of March 31, 2017, China Agriculture owned 8% of the equity interest of Pingtan Fishing, which was not under the Company’s control.

 

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 significant related party transactions.

 

 12 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Comprehensive income (loss)

 

Comprehensive income (loss) is comprised of net income (loss) 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 (loss) for the three months ended March 31, 2017 and 2016 included net income (loss) and unrealized gain 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 the chief operating decision maker to be aggregated in one reportable operating segment. All of the Company’s 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 March 31, 2017 and December 31, 2016. 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.

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. All of the Company’s cash is maintained with state-owned banks within the PRC and Hong Kong, 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 abilities to pay are 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 a related company, Fuzhou Honglong Ocean Fishery Co., Ltd (“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.

 

As the Company has historically derived the majority of its revenue from Indonesian waters, the suspension of fishing operation in this area has had and will continue to have a significant negative impact on the Company.

 

 13 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent accounting pronouncements

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Subtopic 842).” The new guidance requires lessees to recognize assets and liabilities arising from leases as well as extensive quantitative and qualitative disclosures. A lessee will need to recognize on its balance sheet a right-of-use asset and a lease liability for the majority of its leases (other than leases that meet the definition of a short-term lease). The lease liabilities will be equal to the present value of lease payments. The right-of-use asset will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs. The standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. ASU 2016-02 is required to be applied using the modified retrospective approach for all leases existing as of the effective date and provides for certain practical expedients. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.

  

NOTE 3 – ACCOUNTS RECEIVABLE

 

At March 31, 2017 and December 31, 2016, accounts receivable consisted of the following:

 

   March 31, 2017   December 31, 2016 
Accounts receivable  $11,565,576   $11,575,284 
Less: allowance for doubtful accounts   (350,152)   (252,558)
   $11,215,424   $11,322,726 

 

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.

 

NOTE 4 – INVENTORIES

 

At March 31, 2017 and December 31, 2016, inventories consisted of the following:

 

   March 31, 2017   December 31, 2016 
Frozen fish and marine catches in warehouse  $17,106,088   $7,082,129 
Frozen fish and marine catches in transit   -    1,728,982 
    17,106,088    8,811,111 
Less: reserve for inventories   (276,487)   - 
   $16,829,601   $8,811,111 

 

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.

 

 14 

 

 

PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 5 – OTHER RECEIVABLES

 

At March 31, 2017 and December 31, 2016, other receivables consisted of the following:

 

   March 31, 2017   December 31, 2016 
Prepayments made for fish goods (1)  $-   $29,848,189 
Interest receivable   1,973,973    1,819,258 
Security deposit   75,000    75,000 
Other   93,600    93,009 
   $2,142,573   $31,835,456 

 

(1)According to related signed agreement, the Company has the right to receive refund for these prepayments if the situation of demands and supplies changes. The Company received the refund in full in January and February 2017.

 

NOTE 6 – COST METHOD INVESTMENT

 

At March 31, 2017 and December 31, 2016, cost method investment amounted to $3,043,787 and $3,027,245, respectively. The investment represents the Company’s subsidiary, Pingtan Fishing’s minority 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 (approximately $3.0 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 March 31, 2017 and December 31, 2016.

 

In according to ASC 325, the Company 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. 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 March 31, 2017 and December 31, 2016.

 

NOTE 7 – EQUITY METHOD INVESTMENT

 

At March 31, 2017 and December 31, 2016, equity method investment amounted to $28,932,614 and $28,493,273, respectively. The investment represents the Company’s subsidiary, Pingtan Fishing’s interest in Global Deep Ocean. On June 12, 2014, Pingtan Fishing incorporated Global Deep Ocean with other two unrelated companies in PRC. Global Deep Ocean will process, cold storage, and transport deep ocean fishing products.

 

Pingtan Fishing and the other two investing companies accounted for 20%, 44% and 36% of the total ownership, respectively. All of the three investing companies hold less than 50% of the total shares. Total registered capital of Global Deep Ocean is RMB 1 billion (approximately $144.9 million) and Pingtan Fishing needs to contribute RMB 200 million (approximately $29.0 million), and as of March 31, 2017, the Company has contributed its share of registered capital.

 

The Company treats the equity investment in the 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. For the three months ended March 31, 2017 and 2016, the Company’s share of Global Deep Ocean’s net loss was $6,252 and $10,316, respectively, which was included in loss on equity method investment in the accompanying consolidated statements of operations and comprehensive income (loss).

 

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PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 7 – EQUITY METHOD INVESTMENT (continued)

 

The tables below present the summarized financial information, as provided to the Company by the investee, for the unconsolidated company:

 

   March 31, 2017   December 31, 2016 
Current assets  $49,028,248   $48,488,573 
Noncurrent assets   4,343,331    4,335,801 
Current liabilities   17,976    18,007 
Noncurrent liabilities   -    - 
Equity   53,353,603    52,806,367 

 

   Three Months Ended
March 31,
 
   2017   2016 
Net revenue  $-   $- 
Gross profit   -    - 
Loss from operation   31,158    51,581 
Net loss   31,260    51,581 

 

NOTE 8 – PREPAYMENT FOR LONG-TERM ASSETS

 

At March 31, 2017 and December 31, 2016, prepayment for long-term assets consisted of prepayment for fishing vessels’ construction. The Company reclassifies the prepayment for fishing vessels’ construction to construction-in-progress using the percentage of completion method. During the three months ended March 31, 2017, the Company reclassified RMB 7,000,000 (approximately $1.0 million) from prepayment for long-term assets to construction-in-progress. 

 

For the three months ended March 31, 2017, a summary of activities in prepayment for long-term assets was as follows:

 

   Prepayment for fishing vessels’ construction 
Balance - December 31, 2016  $11,913,912 
Prepayments made for fishing vessels’ construction   - 
Reclassification to construction-in-progress   (1,016,541)
Foreign currency fluctuation   67,047 
Balance – March 31, 2017  $10,964,418 

 

NOTE 9 – PROPERTY, PLANT AND EQUIPMENT

 

At March 31, 2017 and December 31, 2016, property, plant and equipment consisted of the following:

 

   Useful life   March 31, 2017   December 31, 2016 
Fishing vessels   10 - 20 Years   $153,791,784   $122,989,702 
Vehicles   5 Years    122,135    121,472 
Office and other equipment   3 – 5 Years    425,312    423,001 
Construction-in-progress   -    -    18,754,740 
         154,339,231    142,288,915 
Less: accumulated depreciation        (22,288,957)   (20,092,321)
        $132,050,274   $122,196,594 

 

For the three months ended March 31, 2017 and 2016, depreciation expense amounted to $2,112,525 and $1,682,985, respectively, of which $2,112,340 and $1,483,452, respectively, was included in cost of revenue and inventories, and the remainder was included in general and administrative expense, respectively.

 

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PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 9 – PROPERTY, PLANT AND EQUIPMENT (continued)

 

At March 31, 2017 and December 31, 2016, the Company had 37 fishing vessels with net carrying amount of approximately $29.2 million and $29.4 million, respectively, pledged as collateral for its bank loans.

 

Included in construction-in-progress are fishing vessels 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.

 

NOTE 10 – RELATED PARTIES TRANSACTIONS

 

Prepaid expenses – related party

 

At March 31, 2017 and December 31, 2016, prepaid expenses – related party consisted of the following:

 

   March 31, 2017   December 31, 2016 
Prepaid miscellaneous items to PT. Avona Mina Lestari (1)  $1,126,753   $522,337 
   $1,126,753   $522,337 

 

(1)PT. Avona Mina Lestari is an affiliate company controlled by Xinrong Zhuo family.

 

Other receivable – related party

 

At March 31, 2017 and December 31, 2016, other receivable – related party consisted of the following:

 

   March 31, 2017   December 31, 2016 
Advance to Zhiyan Lin (1)  $705,296   $639,917 
   $705,296   $639,917 

 

(1)Zhiyan Lin is a shareholder and legal representative of Pingtan Fishing.

 

In connection with the termination of VIE structure and to comply with PRC regulation, the Company paid RMB 83 million in total, which is Pingtan Fishing’s registered capital, to Pingtan Fishing’s Shareholders to transfer their 100% of equity interest of Pingtan Fishing to Fujian Heyue, the Company’s subsidiary pursuant to the Equity Transfer Agreement dated February 9, 2015. Those payments are expected to be returned in full to the Company by March 31, 2018.

 

Accounts payable - related parties

 

At March 31, 2017 and December 31, 2016, accounts payable - related parties consisted of the following:

 

Name of related party  March 31, 2017   December 31, 2016 
Hong Fa Shipping Limited  $3,131,350   $1,740,000 
Hong Long (1)   784,709    805,930 
Huna Lin (2)   -    14,320 
Hai Yi Shipping Limited   536,000    510 
   $4,452,059   $2,560,760 

 

(1)Hong Long is an affiliate company majority owned and controlled by Ping Lin, spouse of the Company’s CEO.
(2)Huna Lin is Zhiyan Lin’s daughter.

 

These accounts payable – related parties’ amounts are short-term in nature, non-interest bearing, unsecured and payable on demand.

 

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PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 10 – RELATED PARTIES TRANSACTIONS (continued)

 

Accrued liabilities and other payables – related party

 

At March 31, 2017 and December 31, 2016, the accrued liabilities and other payables – related party consisted of the following:

 

Name of related party  March 31, 2017   December 31, 2016 
Hong Long  $16,856,783   $18,147,152 
   $16,856,733   $18,147,152 

 

The amount of accrued liabilities and other payables – Hong Long is short-term in nature, non-interest bearing, unsecured and payable on demand.

 

Due to related parties

 

At March 31, 2017 and December 31, 2016, the due to related parties amount consisted of the following:

 

   March 31, 2017   December 31, 2016 
Accrued compensation for Roy Yu, Chief Financial Officer  $20,000   $40,000 
Accrued compensation for Xinrong Zhuo   3,354    3,354 
Advance from Xinrong Zhuo, Chief Executive Officer   1,180,000    - 
   $1,203,354   $43,354 

 

The advance from Xinrong Zhuo, the Company’s Chief Executive Officer, is for working capital purposes and short-term in nature, non-interest bearing, unsecured and payable on demand.

 

Operating lease

 

On July 31, 2012, the Company entered into a lease for office space with Ping Lin, spouse of the Company’s CEO, (the “Office Lease”). The Company renewed the Office Lease. Pursuant to the renewed Office Lease, the annual rent is RMB 84,000 (approximately $12,200) and the renewed Office Lease expires on July 31, 2017.

 

For the three months ended March 31, 2017 and 2016, rent expense related to the Office Lease amounted $3,050 and $3,211, respectively. Future minimum rental payment required under the Office Lease is as follows:

 

Twelve-month period Ending March 31:  Amount 
2018  $4,066 

 

Rental and related administrative service agreement

 

On July 1, 2013, the Company entered into a service agreement with Hai Yi Shipping Limited that provided the Company a portion of use of premises located in Hong Kong as office and provided related administrative service (the “Service Agreement”). The Company renewed the Service Agreement. Pursuant to the renewed Service Agreement, the monthly payments are HK$298,500 (approximately $38,500) and the renewed Service Agreement expires on December 31, 2017.

 

For the three months ended March 31, 2017 and 2016, rent expense and corresponding administrative service charge related to the Service Agreement amounted to $115,519 and $115,340, respectively. Future minimum rental and related administrative service charge payment required under the Service Agreement is as follows: 

 

Twelve-month period Ending March 31:  Amount 
2018  $346,557 

 

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PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 10 – RELATED PARTIES TRANSACTIONS (continued)

 

Purchases from related parties

 

During the three months ended March 31, 2017 and 2016, purchases from related parties were as follows:

 

   Three Months Ended
March 31,
 
   2017   2016 
Purchase of fuel, fishing nets and other on-board consumables        
from Hong Fa Shipping Limited  $4,159,268   $2,723,153 
from Hai Yi Shipping Ltd.   2,202,442    3,133,860 
from Haifeng Dafu Enterprise Co., Ltd.   -    12,003 
    6,361,710    5,869,016 
Purchase of vessel maintenance service          
from PT. Avona Mina Lestari   14,218    - 
   $14,218   $- 

 

On March 28, 2017, the Company entered into a master agreement with Fuzhou Honglong Ocean Fishery Co., Ltd, (“Hong Long”) for the acquisition of 5 vessels with total consideration of approximately $38.5 million representing the fair market value on the date of acquisition. Based on Accounting Standards Codification (“ASC”) 805-50, the Company recorded the value of approximately $9.4 million as the cost of the 5 vessels which was the net book value of the 5 vessels in Hong Long’s book at the date of transfer. The balance of approximately $29.1 million above cost was treated as a return of capital in the equity accounts and was recorded as a reduction in additional paid-in capital.

 

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PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 11 – 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 banks upon maturities. At March 31, 2017 and December 31, 2016, short-term bank loans consisted of the following:

 

   March 31,
2017
   December 31, 2016 
Loan from Fujian Haixia Bank, due on September 13, 2017 with annual interest rate of 6.960% at March 31, 2017 and December 31, 2016, collateralized by Pingtan Fishing’s 17 fishing vessels  $4,348,267   $4,324,636 
Loan from Fujian Haixia Bank, due on September 22, 2017 with annual interest rate of 1.529% at March 31, 2017 and December 31, 2016, collateralized by Pingtan Fishing’s 17 fishing vessels   1,150,000    1,150,000 
Loan from Fujian Haixia Bank, due on October 10, 2017 with annual interest rate of 1.739% at March 31, 2017 and December 31, 2016, collateralized by Pingtan Fishing’s 17 fishing vessels   1,080,000    1,080,000 
Loan from China Development Bank, due on March 21, 2017 with variable annual interest rate based on London Interbank Offered Rate (“LIBOR”)(1) plus 230 basis points (3.211% at December 31, 2016), secured by the Company’s restricted cash which is a deposit with the lender of approximately $0.6 million (RMB 4 million) and collateralized by a related party’s land use right, and repaid on due date   -    3,000,000 
Loan from China Development Bank, due on April 18, 2017 with variable annual interest rate based on LIBOR(1) plus 230 basis points (3.204% at March 31, 2017 and December 31, 2016), secured by the Company’s restricted cash which is a deposit with the lender of approximately $0.6 million (RMB 4 million) and collateralized by a related party’s land use right, and repaid on due date   3,000,000    3,000,000 
Loan from China Development Bank, due on April 18, 2017 with variable annual interest rate based on LIBOR(1) plus 230 basis points (3.257% at March 31, 2017 and December 31, 2016), secured by the Company’s restricted cash which is a deposit with the lender of approximately $0.3 million (RMB 2 million) and collateralized by a related party’s land use right, and repaid on due date   1,500,000    1,500,000 
Loan from China Development Bank, due on August 22, 2017 with variable annual interest rate based on LIBOR(1) plus 230 basis points (3.510% at March 31, 2017 and December 31, 2016), secured by the Company’s restricted cash which is a deposit with the lender of approximately $1.0 million (RMB 6.7 million) and collateralized by a related party’s two vessels   5,000,000    5,000,000 
Loan from China Development Bank, due on December 9, 2017 with variable annual interest rate based on LIBOR(1) plus 230 basis points (3.593% at March 31, 2017 and December 31, 2016), secured by the Company’s restricted cash which is a deposit with the lender of approximately $0.5 million (RMB 3.5 million) and collateralized by a related party’s two vessels   2,500,000    2,500,000 
Loan from China Development Bank, due on March 8, 2018 with variable annual interest rate based on LIBOR(1) plus 230 basis points (3.721% at March 31, 2017), secured by the Company’s restricted cash which is a deposit with the lender of approximately $1 million (RMB 7 million) and collateralized by seven vessels   5,000,000    - 
   $23,578,267   $21,554,636 

 

(1)Represents six-month LIBOR rate on the loan commencement date.

 

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PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 11 – BANK LOANS (continued)

 

Long-term bank loans

 

Long-term bank loans represent the amounts due to various banks lasting over one year. Usually, the long-term bank loans cannot be renewed with these banks upon maturities. At March 31, 2017 and December 31, 2016, long-term bank loans consisted of the following:

 

    March 31, 2017     December 31, 2016  
Loan from The Export-Import Bank of China, due on various dates until December 10, 2017 with annual interest rate of 4.750% and 4.900% at March 31, 2017 and December 31, 2016, respectively, collateralized by Hong Long's investment in equity interest of a China local bank   $ 5,884,655     $ 5,852,674  
 Loan from The Export-Import Bank of China, due on various dates until December 10, 2017 with annual interest rate of 4.750% and 4.900% at March 31, 2017 and December 31, 2016, respectively, collateralized by Fujian International Trading and Transportation Co., Ltd.'s investment in equity interest of a China local bank     1,159,538       1,153,236  
 Loan from The Export-Import Bank of China, due on various dates until December 10, 2017 with annual interest rate of 4.750% and 4.900% at March 31, 2017 and December 31, 2016, respectively, guaranteed by Hong Long     4,768,600       4,742,684  
 Loan from The Export-Import Bank of China, due on various dates until January 30, 2023 with annual interest rate of 4.900% at March 31, 2017 and December 31, 2016, guaranteed by Huanghai Ship Construction Co., Ltd, Xinrong Zhuo and Ping Lin and collateralized by 2 fishing vessels under construction and collateralized by three related parties’ investments in equity interest of two PRC local banks     18,117,780       18,019,317  
 Loan from China Development Bank, due on various dates until November 27, 2023 with annual interest rate of 5.145% at March 31, 2017 and December 31, 2016, guaranteed by Xinrong Zhuo, Honghong Zhuo, Mr. and Mrs. Zhiyan Lin and 6 fishing vessels     9,421,245       9,370,045  
Total long-term bank loans   $ 39,351,818     $ 39,137,956  
Less: current portion     (17,393,069 )     (17,298,544 )
Long-term bank loans, non-current portion   $ 21,958,749     $ 21,839,412  

 

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

 

Due in twelve-month periods ending March 31,  Principal 
2018  $17,393,069 
2019   5,652,747 
2020   5,725,219 
2021   4,348,267 
2022   1,521,894 
Thereafter   4,710,622 
   $39,351,818 
Less: current portion   (17,393,069)
Long-term liability  $21,958,749 

 

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PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 11 – BANK LOANS (continued)

 

The weighted average interest rate for short-term bank loans was approximately 3.8% and 5.6% for the three months ended March 31, 2017 and 2016, respectively.

 

The weighted average interest rate for long-term bank loans was approximately 5.0% for the three months ended March 31, 2017 and 2016.

 

For the three months ended March 31, 2017 and 2016, interest expense related to bank loans amounted to $708,412 and $635,745, respectively, of which, $5,336 and $113,479 was capitalized to construction-in-progress, respectively.

 

NOTE 12 – ACCRUED LIABILITIES AND OTHER PAYABLES

 

At March 31, 2017 and December 31, 2016, accrued liabilities and other payables consisted of the following:

 

   March 31, 2017   December 31, 2016 
Accrued salaries and related benefits  $4,716,046   $4,126,938 
Fishing vessels construction payable   652,240    - 
Accrued interest due   213,793    92,329 
Other   175,229    180,269 
   $5,757,308   $4,399,536 

 

NOTE 13 – 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 consisted of one ordinary share, $0.001 par value, of the Company and one purchase warrant. Each warrant will entitle the holder to purchase from the Company one ordinary share at an exercise price of $12.00 per share 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.

 

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 U.S. GAAP, the Company accounted for the Warrants as equity instruments.

 

There were no stock warrants issued, expired/terminated/forfeited, exercised during the three months ended March 31, 2017.

 

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PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 13 – SHAREHOLDERS’ EQUITY (continued)

 

Warrants (continued)

 

The following table summarizes the shares of the Company’s ordinary shares issuable upon exercise of warrants outstanding and exercisable at March 31, 2017:

 

Warrants outstanding   Warrants exercisable 
Exercise price   Number outstanding at
March 31, 2017
   Weighted average remaining contractual life (years)   Weighted average exercise price   Number exercisable at
March 31,
2017
   Weighted average exercise
price
 
$12.00    8,966,667    0.9   $12.00    8,966,667   $12.00 

 

Statutory reserve

 

Pingtan Guansheng, Fujian Heyue, 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, 2016, the Company appropriated the required 50% of its registered capital to statutory reserve for Heyue. Accordingly, no additional statutory reserve for Heyue is required for the three months ended March 31, 2017. The Company will make appropriation to statutory reserve for Pingtan Fishing by the end of year 2017.

 

Pingtan Guansheng, Pingtan Dingxin, Pingtan Duoying and Pingtan Ruiying had sustained losses since their establishments. No appropriation to statutory reserves for them was required as they incurred recurring net losses.

 

NOTE 14 – CERTAIN RISKS AND CONCENTRATIONS

 

Credit risk

 

At March 31, 2017 and December 31, 2016, the Company’s cash included bank deposits in accounts maintained within the PRC and Hong Kong where there are currently no rules or regulations in place for obligatory insurance to cover bank deposits in event of bank failure. However, the Company does not experience any losses in such accounts and believes it is not exposed to any significant 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 months ended March 31, 2017 and 2016.

 

   Three Months Ended
March 31,
 
Customer  2017   2016 
A   13%   * 
B   13%   * 

 

*less than 10%

 

No customer accounted for 10% or more of the Company’s total outstanding accounts receivable at March 31, 2017 and December 31, 2016.

 

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PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 14 – CERTAIN RISKS AND CONCENTRATIONS (continued)

 

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 months ended March 31, 2017 and 2016.

 

   Three Months Ended
March 31,
 
Supplier  2017   2016 
A (Hong Fa Shipping Limited, a related party)   38%   36%
B (Hong Long, a related party)   25%   * 
C (Hai Yi Shipping Ltd., a related party)   20%   42%
D   14%   * 
E (PT Avona Mina Lestari, a related party)   *    17%

 

*less than 10%

 

Three suppliers, whose outstanding accounts payable accounted for 10% or more of the Company’s total outstanding accounts payable and accounts payable – related parties at March 31, 2017, accounted for 87.4% of the Company’s total outstanding accounts payable and accounts payable – related parties at March 31, 2017.

 

Three suppliers, whose outstanding accounts payable accounted for 10% or more of the Company’s total outstanding accounts payable and accounts payable – related parties at December 31, 2016, accounted for 95.9% of the Company’s total outstanding accounts payable and accounts payable – related parties at December 31, 2016. 

 

NOTE 15 – 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 March 31, 2017 and December 31, 2016, which have not been reflected in its consolidated financial statements. 

 

Operating lease

 

See note 10 for related party operating lease commitment.

 

Rental payment and related administrative service charge

 

See note 10 for related party rental and related administrative service agreement commitment.

 

Fishing vessels construction agreement

 

In December 2015, Hong Long entered into an agreement with Fujian Xinchang Ship Construction Co., Ltd. (“Xinchang”) related to the construction of 4 fishing vessels (“Xinchang Construction Agreement”). The agreement expired in October 2016. In March 2016, Pingtan Fishing and Hong Long and Xinchang entered into a Three-party Agreement. According to the Three-party Agreement, Hong Long assigned all of its rights and obligations related to the Xinchang Construction Agreement to Pingtan Fishing. The project requires a total investment of RMB 140 million (approximately $20.3 million). The funds are required to be invested over the construction period of the project. As of March 31, 2017 and December 31, 2016, Pingtan Fishing has paid RMB 135.5 million (approximately $19.6 million) and RMB 133.0 million (approximately $19.2 million) of the total investment that was recorded as property, plant and equipment and prepayment for long-term assets on the accompanying consolidated balance sheets, respectively.

 

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PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(IN U.S. DOLLARS)
MARCH 31, 2017

 

NOTE 15 – COMMITMENTS AND CONTINGENCIES (continued)

 

Fishing vessels purchase agreement

 

On March 28, 2017, the Company entered into an agreement with Hong Long related to the purchase of 5 vessels. The purchase price for these 5 vessels is approximately $38.5 million. As of March 31, 2017, the Company has paid approximately $21.6 million and the remaining balance of approximately $16.9 was included in accrued liabilities and other payables – related party on the accompanying consolidated balance sheets.

 

NOTE 16 – SUBSEQUENT EVENTS

 

On April 13, 2017, the Company’s Board of Directors declared a cash dividend of $0.01 per share to the Company’s holders of ordinary shares of record on April 30, 2017.

 

On April 18, 2017, the Company repaid a short-term bank loan of $4,500,000 to China Development Bank in accordance with the loan repayment schedule

 

On April 26, 2017, the Company signed a loan agreement with National Development Bank and borrowed $3.5 million from the bank. The loan is due on April 25, 2018 with variable annual interest rate based on LIBOR plus 230 basis points (3.7232% at April 26, 2017), secured by the Company’s restricted cash which is a deposit with the lender of approximately $0.7 million (RMB 4.9 million) and collateralized by Pingtan Fishing’s 4 fishing vessels.

 

 25 

 

 

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 months ended March 31, 2017 and 2016 should be read in conjunction with the Pingtan Marine Enterprise Ltd. unaudited 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 as filed with the Securities and Exchange Commission on March 23, 2017. 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 .

 

Unless otherwise indicated, references to the “Company,” “us” or “we” refer to Pingtan Marine Enterprise Ltd. and its subsidiaries. All amounts expressed below are in US dollars.

 

Overview

 

We are a marine enterprises group primarily engaging in ocean fishing through our PRC operating subsidiary, 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, Indo-Pacific waters, the Arafura Sea of Indonesia and international waters of Atlantic and Pacific Oceans. 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 vessels through a purchase of 46 fishing trawlers. We began operating these vessels in the third quarter of 2013 and have been entitled to net profits from their operation. Each vessel carries a crew of 10 to 15 persons. These vessels have resulted in additional carrying capacity of approximately 45,000 to 50,000 tons of fish.

 

In September 2013, we further increased our fleet to 106 vessels with the acquisition of 20 newly-built fishing trawlers. These vessels have a run-in period of 3 - 6 months, during which each is placed into the sea for testing prior to full operation. At full operation, each vessel is capable of harvesting 900 to 1,000 tons of fish.

 

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.

 

On December 4, 2013, in connection with the sale of CDGC to Hong Long, a related party, we acquired 25-year operating license rights in connection with the lease of 20 fishing drifters 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.

 

In September 2014, we further expanded our fleet to 129 vessels with the addition of 3 newly-built light luring seine vessels. At full operation, each vessel is capable of harvesting 2,000 tons of fish.

 

In June 2015, we purchased 4 longline fishing vessels and 2 squid jigging vessels for the appraised fair market value of approximately $56.2 million. These vessels are primarily focused on catching tuna and squid.

 

In March 2017, we purchased 1 refrigerated transport vessel and 4 squid jigging vessels for the appraised fair market value of approximately $38.5 million.

 

As of March 31, 2017, we own 91 trawlers, 15 drifters, 6 squid jigging vessels, 4 longline fishing vessels, 3 light luring seine vessels, 1 transport vessel and have exclusive operating license rights to 20 drifters. We are the second largest China-based fishery company operating its vessels outside of China waters and our fleet has an average remaining useful life of approximately 13.2 years. These vessels are fully licensed to operate in their fishing territories.

 

Among the 140 vessels, 13 are operating in Indo-Pacific waters; 12 are operating in the Bay of Bengal in India; 9 are operating in international waters, 2 will be deployed to international waters after regular maintenance and the remaining vessels are licensed to operate in the Arafura Sea in Indonesia but temporarily not operating due to the moratorium discussed below.

 

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We catch nearly 20 different species of fish including ribbon fish, 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 nearby onshore fishing bases. We then arrange chartered transportation ships to deliver frozen stocks to 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 sale of frozen seafood products. We sell our products directly to customers including distributors, restaurant owners and exporters. Most of our customers have long-term, cooperative relationships 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 while harvest volumes in the second and third quarters are relatively low due to the spawn season of certain fish species, including ribbon fish, cuttlefish, pomfret, 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 the termination of the Indonesian moratorium discussed below and our ability to expand our customer base.

 

Significant factors affecting our results of operations

 

   ● The Indonesian government's moratorium on fishing licenses renewals:  In early December 2014, the Indonesian government introduced a six-month moratorium on issuing new fishing licenses and renewals so that the country’s Ministry of Maritime Affairs and Fisheries (“MMAF”) could monitor the operations of existing fleets and to fight illegal fishing activities. As a result, all licensed fishing vessels operating in Indonesian waters have been informed by the Indonesian government to operate within strict guidelines and subsequently to cease operation, in order to avoid potential enforcement actions, such as boat seizures, by the Indonesian Navy. We currently operate 140 vessels and have a license to operate 104 of those vessels in the Arafura Sea of Indonesia. To cooperate and comply with the Indonesian government’s fishing license check procedures, in January 2015, we lowered our operation to approximately half of our normal level. Since February 2015, we have ceased operations in the Indonesian waters. Since we derive a majority of our revenue from this area, this ban has caused a significant drop in our production. In November 2015, the Indonesian government announced that the moratorium had concluded. Our expectation is that the MMAF will implement new fishing policies and resume the license renewal process although this has not yet occurred. In the meantime, we deployed 13 vessels to the Indo-Pacific waters and 2 squid jigging vessels to the international waters in the second half of fiscal 2016. Furthermore, in first quarter of 2017, we deployed 4 longline fishing vessels, 2 squid jigging vessels and 1 refrigerated transport vessel to international waters and we will deploy 2 more squid jigging vessels after regular maintenance.
     
   ● 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 government agencies. Our inability to obtain, or loss or denial of extensions to, any of our applicable licenses or permits could hamper our ability to generate revenue from our operations.
     
   ● Resource & environmental factors:  Our fishing expeditions are based in the Indian Exclusive Economic Zone, Indo-Pacific waters, the Arafura Sea of Indonesia and international waters of Atlantic and Pacific Oceans. 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 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 the business in the Bay of Bengal in India, Indo-Pacific waters, the Arafura Sea of Indonesia and international waters of Atlantic and Pacific Oceans. Competition within our dedicated fishing areas is not currently significant as the region is not overfished or regulated by government limits on the number of vessels that are allowed to fish in the territories; however, there is no guarantee that competition will not become more intense. Competition in the consumer market in China, however, is keen. We compete with other fishing companies which offer similar and varied products. There is significant demand for fish in the Chinese market. We believe our catch appeals to a wide segment of consumers because of the low price points of our products.
     
   ● Fishing licenses:  Each of our fishing vessels requires 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.

 

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RESULTS OF OPERATIONS

 

Comparison of results of operations for the three months ended March 31, 2017 and 2016

 

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 the PRC, 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. Deposits or advance payments from customers prior to delivery of goods are recorded as advances from customers.

 

For the three months ended March 31, 2017 and 2016, our revenue by species of fish was as follows (dollars in thousands, except for average price):

 

   Three Months Ended March 31, 2017 
   Revenue   Volume (KG)   Average price   Percentage
of revenue
 
Croaker fish  $2,857    1,154,679   $2.47    50.5%
Ribbon fish   1,860    597,317    3.11    32.9%
Conger eel   400    176,871    2.26    7.1%
Reefcod   183    139,200    1.31    3.2%
Slender shad   143    75,976    

1.89

    2.5%
Squid   69    13,512    

5.08

    1.2%
Others   149    65,443    2.28    2.6%
Total  $5,661    2,222,998   $2.55    100.0%

 

   Three Months Ended March 31, 2016 
   Revenue   Volume
(KG)
   Average price   Percentage
of revenue
 
Croaker fish  $2,084    759,263   $2.75    50.7%
Ribbon fish   1,009    342,280    2.95    24.5%
Squid   390    423,588    0.92    9.5%
Reefcod   369    133,017    2.77    9.0%
Shrimp   109    21,864    4.98    2.6%
Conger eel   38    12,628    3.00    0.9%
Others   116    47,705    2.44    2.8%
Total  $4,115    1,740,345   $2.36    100.0%

 

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For the three months ended March 31, 2017, we had revenue of $5,661,140, as compared to revenue of $4,115,098 for the three months ended March 31, 2016, an increase of $1,546,042, or 37.6%. The increase was mainly attributable to our business expansion resulting from more fishing vessels put in operation. Sales volumes in the three months ended March 31, 2017 increased 27.7% to 2,222,998 kg from 1,740,345 kg in the three months ended March 31, 2016. Average unit sale price increased 8.1% in the three months ended March 31, 2017 as compared to the three months ended March 31, 2016, which was primarily due to the different sales mix.

 

Cost of revenue

 

Our cost of revenue primarily consists of fuel cost, depreciation, direct labor cost, fishing vessels maintenance fee, other overhead costs, and reserve for inventories. Fuel cost, depreciation, and labor cost generally accounted for the majority of our 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 March 31, 2017 and 2016 (dollars in thousands ):

 

   Three Months Ended March 31, 
   2017   2016 
   Amount   % of cost of
revenue
   % of revenue   Amount   % of cost of
revenue
   % of
revenue
 
Fuel cost  $3,673    65.6%   64.9%  $4,592    61.7%   111.6%
Depreciation   852    15.2%   15.0%   1,146    15.4%   27.8%
Labor cost   355    6.3%   6.3%   1,002    13.5%   24.4%
Reserve for inventories   277    4.9%   4.9%   -    -    - 
Spare parts   262    4.7%   4.6%   140    1.9%   3.4%
Maintenance fee   88    1.6%   1.6%   4    0.1%   0.1%
Freight   87    1.6%   1.5%   63    0.9%   1.5%
Fishing license and agent fee   4    0.1%   0.1%   -    -    - 
Other *   -    -    -    481    6.5%   11.7%
Total cost of revenue  $5,598    100.0%   98.9%  $7,428    100.0%   180.5%

 

*Represents the cost of fish purchased from third parties to satisfy our customers’ demand.

 

Cost of revenue for the three months ended March 31, 2017 was $5,597,807, representing a decrease of $1,830,003 or 24.6% as compared to $7,427,810 for the three months ended March 31, 2016. The decrease was primarily attributable to the decrease in our unit costs of fish.

 

Gross profit (loss)

 

Our gross profit (loss) is affected primarily by changes in production costs. Fuel cost, depreciation, and labor cost together account for about 87.1% and 90.6% of cost of revenue for the three months ended March 31, 2017 and 2016, respectively. The fluctuation of fuel price, and change in labor cost may significantly affect our cost level and gross profit (loss).

 

The following table sets forth information as to our revenue, cost of revenue, gross profit (loss) and gross margin for the three months ended March 31, 2017 and 2016.

 

   Three Months Ended
March 31,
 
   2017   2016 
Revenue  $5,661,140   $4,115,098 
Cost of revenue  $5,597,807   $7,427,810 
Gross profit (loss)  $63,333   $(3,312,712)
Gross margin   1.1%   (80.5)%

 

Gross profit for the three months ended March 31, 2017 was $63,333, representing an increase of $3,376,045 or 101.9% as compared to gross loss of $3,312,712 for the three months ended March 31, 2016 due to the increase in our sales revenue and the decrease in our unit sales costs of fish.

 

Gross margin increased to 1.1% for the three months ended March 31, 2017 from (80.5)% for the three months ended March 31, 2016. The increase in gross margin for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily attributable to the decrease in our unit sales costs of fish resulting from the increase in our fishing activities by deploying more fishing vessels into operations.

 

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Selling expense

 

Our selling expense mainly includes shipping and handling fees, insurance, customs service charge, storage fees and advertising 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. As a result, our selling expense has been relatively small as a percentage of our revenue.

 

Selling expense totaled $388,718 for the three months ended March 31, 2017, as compared to $343,020 for the three months ended March 31, 2016, an increase of $45,698 or 13.3%. Selling expense as a percentage of revenue for the three months ended March 31, 2017 decreased to 6.9% from 8.3% for the three months ended March 31, 2016, which was mainly attributable to the increase in sales revenue. Selling expense for the three months ended March 31, 2017 and 2016 consisted of the following:

 

   Three Months Ended
March 31,
 
   2017   2016 
Shipping and handling fees  $142,900   $76,547 
Insurance   77,093    147,815 
Customs service charge   72,313    32,841 
Storage fees   63,737    85,817 
Advertising   29,044    - 
Other   3,631    - 
   $388,718   $343,020 

 

  For the three months ended March 31, 2017, shipping and handling fees increased by $66,353, or 86.7%, as compared to the three months ended March 31, 2016. The increase was primarily attributable to the increase in our sales revenue.
     
  For the three months ended March 31, 2017, insurance decreased by $70,722, or 47.8%, as compared to the three months ended March 31, 2016. The change was mainly attributable to the different insured fishing vessels mix.
     
  For the three months ended March 31, 2017, customs service charge increased by $39,472, or 120.2%, as compared to the three months ended March 31, 2016, due to the increase in our oversea fishing activities.
     
  For the three months ended March 31, 2017, storage fees decreased by $22,080, or 25.7%, as compared to the three months ended March 31, 2016. The decrease was mainly attributable to the decrease in our storage area.
     
  For the three months ended March 31, 2017, advertising expenses increased by $29,044, or 100.0%, as compared to the three months ended March 31, 2016, mainly due to the increase in advertising activities in order to increase our visibility.
     
  Other miscellaneous selling expense for the three months ended March 31, 2017 increased by $3,631, or 100.0%, as compared to the three months ended March 31, 2016.

 

General and administrative expense

 

General and administrative expense totaled $1,087,872 for the three months ended March 31, 2017, as compared to $1,467,471 for the three months ended March 31, 2016, a decrease of $379,599 or 25.9%. General and administrative expense for the three months ended March 31, 2017 and 2016 consisted of the following:

 

   Three Months Ended
March 31,
 
   2017   2016 
Professional fees  $448,671   $462,690 
Compensation and related benefits   286,132    357,611 
Rent and related administrative service charge   118,569    118,551 
Bad debt expense   96,399    277,982 
Travel and entertainment   63,649    19,585 
Other   74,452    231,052 
   $1,087,872   $1,467,471 

 

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  Professional fees, which primarily consist of legal fees, accounting fees, investor relations services charge, valuation service fees, consulting fees, and other fees associated with being a public company, remained roughly consistent for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016.
     
  Compensation and related benefits decreased by $71,479, or 20.0%, for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. The decrease was mainly attributable to a decrease in salaries for our management staff of approximately $68,000 and a decrease in benefits for our management staff of approximately $3,000, mainly due to our strict control on corporation spending.
     
  Rent and related administrative service charge remained consistent for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016.
     
  For the three months ended March 31, 2017, we recorded bad debt expense of $96,399 as compared to $277,982 for the three months ended March 31, 2016. Based on our periodic review of accounts receivable balances, we adjusted the allowance for doubtful accounts after considering management’s evaluation of the collectability of individual receivable balances, including the analysis of subsequent collections, the customers’ collection history, and recent economic events.
     
  For the three months ended March 31, 2017, travel and entertainment expense increased by $44,064, or 225.0% as compared to the three months ended March 31, 2016. The increase was mainly attributable to an increase in travel expense of approximately $24,000 due to our business expansion and an increase in entertainment expense of approximately $20,000 in order to strengthen our popularity.
     
  Other general and administrative expense, which primarily consist of insurance, communication fees, office supply, miscellaneous taxes, bank service charge, depreciation, and NASDAQ listing fee. For the three months ended March 31, 2017, other general and administrative expense decreased by $156,600, or 67.8%, as compared to the three months ended March 31, 2016. The decrease was mainly attributable to a decrease in depreciation expense of approximately $199,000, offset by an increase in other miscellaneous items of approximately $43,000. During the three months ended March 31, 2016, our 13 upgraded and renovated fishing vessels were temporarily idle. We recorded the related depreciation for these 13 fishing vessels as operating expenses rather than as cost of revenue. Therefore, the depreciation for operating expenses for the first quarter of 2017 decreased as compared to the first quarter of 2016.      

 

Loss from operations

 

As a result of the factors described above, for the three months ended March 31, 2017, loss from operations amounted to $1,413,257, as compared to $5,123,203 for the three months ended March 31, 2016, a change of $3,709,946, or 72.4%.

 

Other income (expense)

 

Other expense/income mainly include interest income from bank deposits, interest expense generated from short-term and long-term bank borrowings, foreign currency transaction gain, grant income from Chinese government, and loss on equity method investment.

 

For the three months ended March 31, 2017, other income, net, amounted to $12,255,781 as compared to other expense, net, of $355,234 for the three months ended March 31, 2016, a change of $12,611,015, or 3,550.1%, which was primarily attributable to an increase in interest income of approximately $145,000, an increase in foreign currency transaction gain of approximately $78,000, and a significant increase in grant income from Chinese government of approximately $12,565,000 mainly due to the significant increase in our fuel expenditures on our fishing activities resulting from more fishing vessels put in operations, offset by an increase in interest expense of approximately $181,000.

 

The grant income represents an incentive granted by the Chinese government to encourage the development of the ocean fishing industry in order to satisfy the demand for natural seafood in China. The grant income, which was recognized in the three months ended March 31, 2017, is primarily related to the reimbursement of our fuel expenditures incurred in 2016. 

 

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Income taxes

 

We are exempted from income taxes for income generated from our ocean fishing operations in China for the three months ended March 31, 2017 and 2016. 

 

For the three months ended March 31, 2016, income taxes expense was $413 which was generated by Heyue’s taxable income from fish reselling activities. Since February 2015, we have temporarily ceased fishing operations in Indonesian waters due to the Indonesian government’s moratorium described previously. In order to satisfy our customers’ demand, Heyue purchased fish from a third party and resold to our customers. We are required to pay income taxes for our fish reselling operations.

 

Net income (loss)

 

As a result of the factors described above, our net income was $10,842,524 for the three months ended March 31, 2017, compared to net loss of $5,478,850 for the three months ended March 31, 2016, a change of $16,321,374 or 297.9%.

 

Net income (loss) attributable to owners of the Company

 

The net income attributable to owners of the Company was $9,920,154, or $0.13 per ordinary share (basic and diluted) for the three months ended March 31, 2017, compared to net loss attributable to owners of the Company of $5,100,379, or $(0.06) per ordinary share (basic and diluted) for the three months ended March 31, 2016, a change of $15,020,533 or 294.5%.

 

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 subsidiaries incorporated in China is the Chinese Renminbi (“RMB”). The financial statements of our subsidiaries incorporated in China 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 revenue, 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 $641,048 for the three months ended March 31, 2017, as compared to $879,423 for the three months ended March 31, 2016. This non-cash gain had the effect of increasing/decreasing our reported comprehensive income/loss.

 

Comprehensive income (loss)

 

As a result of our foreign currency translation adjustment, we had comprehensive income for the three months ended March 31, 2017 of $11,483,572, compared to comprehensive loss of $4,599,427 for the three months ended March 31, 2016.

 

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. Our principal liquidity demands are based on the capital needs of Pingtan Fishing related to the acquisition or construction of new fishing vessels and continuously upgrading and renovating existing vessels, and our general corporate purposes. We historically relied on cash flow provided by operations and bank loans to supplement our working capital. We also receive government grants as the government incentive for encouraging development of ocean fishing industry. At March 31, 2017 and December 31, 2016, we had cash balances of approximately $571,000 and $820,000, respectively. The significant portion of these funds are located in financial institutions located in the PRC and will continue to be indefinitely reinvested in our operations in the PRC.

 

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The following table sets forth a summary of changes in our working capital from December 31, 2016 to March 31, 2017:

 

           December 31, 2016
to
March 31, 2017
 
   March 31,
2017
   December 31, 2016   Change   Percentage Change 
Working capital deficit:                    
Total current assets  $38,461,901   $60,841,361   $(22,379,460)   (36.8)%
Total current liabilities   70,190,184    64,920,719    5,269,465    8.1%
Working capital deficit:  $(31,728,283)  $(4,079,358)  $(27,648,925)   (677.8)%

 

Our working capital deficit increased $27,648,925 to working capital deficit of $31,728,283 at March 31, 2017 from working capital deficit of $4,079,358 at December 31, 2016. This increase in working capital deficit is primarily attributable to a decrease in cash of approximately $249,000, a decrease in accounts receivable, net of allowance for doubtful accounts, of approximately $107,000, a decrease in advances to suppliers of approximately $1,461,000, a significant decrease in other receivables of approximately $29,693,000 since we received the refund of prepayment made for fish goods of approximately $30 million from a third party in January and February 2017 (see note 5), an increase in accounts payable –related parties of approximately $1,891,000, an increase in short-term bank loans of approximately $2,024,000, an increase in accrued liabilities and other payables of approximately $1,358,000, and an increase in due to related parties of approximately $1,160,000, offset by an increase in restricted cash of approximately $451,000, a significant increase in inventories, net of reserve for inventories, of approximately $8,018,000 due to our business expansion resulting from more fishing vessels put in operations, an increase in prepaid expenses – related party of approximately $604,000, and a decrease in accrued liabilities and other payables – related party of approximately $1,290,000.

 

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

 

Cash flows for the three months ended March 31, 2017 compared to the three months ended March 31, 2016

 

The following summarizes the key components of our cash flows for the three months ended March 31, 2017 and 2016:

 

   Three Months Ended
March 31,
 
   2017   2016 
Net cash provided by operating activities  $20,244,725   $624,858 
Net cash used in investing activities   (22,306,903)   (4,930,383)
Net cash provided by (used in) financing activities   1,863,292    (4,469,209)
Effect of exchange rate on cash   (50,205)   (90,453)
Net decrease in cash  $(249,091)  $(8,865,187)

 

Net cash flow provided by operating activities was $20,244,725 for the three months ended March 31, 2017 as compared to $624,858 for the three months ended March 31, 2016, an increase of $19,619,867.

 

  Net cash flow provided by operating activities for the three months ended March 31, 2017 primarily reflected our net income of approximately $10,843,000, and the add-back of non-cash items, mainly consisting of depreciation of approximately $2,113,000, increase in allowance for doubtful accounts of approximately $96,000, and increase in reserve for inventories of approximately $277,000, and changes in operating assets and liabilities primarily consisting of a decrease in advances to suppliers of approximately $1,486,000, a significant decrease in other receivables of approximately $29,924,000 mainly due to the refund of prepayment made for fish goods of approximately $30 million received from a third party in January and February 2017 (see note 5), an increase in accounts payable – related parties of approximately $1,881,000, and an increase in accrued liabilities and other payables of approximately $678,000, offset by a significant increase in inventories of approximately $8,263,000 due to our business expansion resulting from more fishing vessels in operations, an increase in prepaid expenses – related party of approximately $603,000, and a significant decrease in accrued liabilities and other payables – related party of approximately $18,281,000 due to repayments made to our related party in the first quarter of 2017. 
  Net cash flow provided by operating activities for the three months ended March 31, 2016 primarily reflected the add-back of non-cash items, consisting of depreciation of approximately $1,683,000, increase in allowance for doubtful accounts of approximately $278,000, increase in reserve for inventories, which reflects the difference between cost and market value, of approximately $1,550,000 due to the higher unit cost resulting from the reduced scale of operations, a loss on equity method investment of approximately $10,000, and changes in operating assets and liabilities primarily consisting of a decrease in accounts receivable of approximately $3,406,000 mainly due to the collections made in 2016, a decrease in advances to suppliers of approximately $171,000, a decrease in prepaid expenses – related parties of approximately $1,861,000, and an increase in accounts payable – related parties of approximately $656,000, offset by our net loss of approximately $5,479,000, and changes in operating assets and liabilities primarily consisting of an increase in inventories of approximately $2,968,000, and a decrease in accrued liabilities and other payables of approximately $507,000.

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Net cash flow used in investing activities was $22,306,903 for the three months ended March 31, 2017 as compared to $4,930,383 for the three months ended March 31, 2016. During the three months ended March 31, 2017, we made payments for purchase of property, plant and equipment of approximately $9,764,000, made payments for acquisition of fishing vessels from a related party of approximately $12,253,000, and made payments for equity method investment of approximately $290,000. During the three months ended March 31, 2016, we made payments for purchase of property, plant and equipment of approximately $113,000, and made prepayments for long-term assets of approximately $20,109,000, offset by proceeds received from transferring equity method investment share of approximately $15,292,000.

 

Net cash flow provided by financing activities was $1,863,292 for the three months ended March 31, 2017 as compared to net cash flow used in financing activities of $4,469,209 for the three months ended March 31, 2016. During the three months ended March 31, 2017, we received proceeds from short-term bank loans of approximately $5,100,000, and received advances from related parties of approximately $1,180,000, offset by the repayments of short-term bank loans of approximately $3,191,000, the payments made to increase restricted cash of approximately $436,000, and cash made for dividend payments of approximately $791,000. During the three months ended March 31, 2016, we made repayments for short-term bank loans of approximately $7,214,000, and increase in restricted cash of approximately $612,000, offset by proceeds from short-term bank loans of approximately $3,157,000, and advances from related parties of approximately $200,000.

 

We have historically funded our capital expenditures through cash flow provided by operations, bank loans and related parties’ advances. As of March 31, 2017, we have contractual commitments of RMB 4.5 million (approximately $652,000) related to 4 fishing vessels construction commitment and $16.9 million related to 5 vessels purchase commitment. We intend to fund the costs with cash flow from our operations 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 we have not encountered difficulties in obtaining needed borrowings from local banks. Considering our available cash together with our cash inflow from gradually recovering operations and financing, we believe that it is not likely that we will not 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.

 

The following tables summarize our contractual obligations as of March 31, 2017 (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  $4   $4   $-   $-   $- 
Related party rental and related administrative service charge obligation   347    347    -    -    - 
4 fishing vessels construction obligation   652    652    -    -    - 
5 vessels purchase commitment   16,857    16,857    -    -    - 
Short-term bank loans (1)   23,578    23,578    -    -    - 
Long-term bank loans   39,352    17,393    11,378    5,870    4,711 
Total  $80,790   $58,831   $11,378   $5,870   $4,711 

 

(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.

 

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Off-balance sheet arrangements

 

None.

 

Recent accounting pronouncements

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Subtopic 842).” The new guidance requires lessees to recognize assets and liabilities arising from leases as well as extensive quantitative and qualitative disclosures. A lessee will need to recognize on its balance sheet a right-of-use asset and a lease liability for the majority of its leases (other than leases that meet the definition of a short-term lease). The lease liabilities will be equal to the present value of lease payments. The right-of-use asset will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs. The standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. ASU 2016-02 is required to be applied using the modified retrospective approach for all leases existing as of the effective date and provides for certain practical expedients. We are currently evaluating the impact of adopting ASU 2016-02 on our consolidated financial statements.

  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Commodity price risk

 

Oil cost accounts for approximately 65.6% of our total cost of revenue for the three months ended March 31, 2017. 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 March 31, 2017 and did not employ any commodity price derivatives in the three months ended March 31, 2017.

  

Foreign currency exchange rate risk 

 

While our reporting currency is the USD, all of our consolidated revenue and consolidated cost of revenue and a significant portion of our consolidated 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 revenue, earnings and assets as expressed in our USD financial statements will decline. A 1% average appreciation (depreciation) of the RMB against the USD would decrease (increase) our comprehensive gain by $115,000 for the three months ended March 31, 2017 based on our revenue, costs and expenses, and assets and liabilities denominated in RMB as of March 31, 2017. 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 $62.9 million at March 31, 2017. 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 interest on our borrowings by approximately $28,000. The potential change in interest amount is calculated based on the change in the interest amount over a one year 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 and 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 March 31, 2017, 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 not effective as of March 31, 2017 due to the material weakness we reported in our 2016 10-K which has not yet been remediated. In our 2016 10-K we reported that we did not maintain a sufficient complement of personnel with an appropriate level of experience and training in the application of U.S. GAAP commensurate with our financial reporting requirements.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes (including corrective actions with regard to material weakness) in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. Currently, we are not a party to any litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business, operating results, cash flows or financial condition.

 

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 for the fiscal year ended December 31, 2016 filed with the SEC on March 23, 2017.

 

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

 

None.

  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

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

 

Exhibit

 

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