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 September 30, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER: 001-35192
PINGTAN MARINE ENTERPRISE LTD.
(Exact name of Registrant as specified in its charter)
| Cayman Islands | N/A | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation of organization) | Identification No.) |
18/F, Zhongshan Building A,
No. 154 Hudong Road
Fuzhou, China 350001
(Address of principal executive offices)
(86) 591-8727-1266
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Ordinary Shares, $0.001 par value | PME | The NASDAQ Capital Market |
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, every Interactive Data File required to be submitted 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 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 | ☐ | 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 November 8, 2019, the outstanding number of the registrant’s ordinary shares, par value $0.001 per share, was 79,055,053.
PINGTAN MARINE ENTERPRISE LTD.
FORM 10-Q
September 30, 2019
TABLE OF CONTENTS
i
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and information contained in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.
We 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.
ii
PART I - FINANCIAL INFORMATION
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 20,420,442 | $ | 1,966,855 | ||||
| Accounts receivable, net of allowance for doubtful accounts | 2,066,113 | 6,307,492 | ||||||
| Due from related parties | 40,038,786 | - | ||||||
| Inventories, net of reserve for inventories | 21,253,480 | 5,840,207 | ||||||
| Prepaid expenses | 948,059 | 644,824 | ||||||
| Other receivables | 566,463 | 698,450 | ||||||
| Total Current Assets | 85,293,343 | 15,457,828 | ||||||
| OTHER ASSETS: | ||||||||
| Cost method investment | 2,969,079 | 3,059,797 | ||||||
| Equity method investment | 27,663,103 | 28,872,521 | ||||||
| Right-of-use asset | 673,882 | - | ||||||
| Property, plant and equipment, net | 276,151,101 | 199,571,425 | ||||||
| Total Other Assets | 307,457,165 | 231,503,743 | ||||||
| Total Assets | $ | 392,750,508 | $ | 246,961,571 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 47,626,482 | $ | 30,642,125 | ||||
| Accounts payable - related parties | 319,056 | 3,244,843 | ||||||
| Short-term bank loans | 4,955,542 | 5,085,139 | ||||||
| Long-term bank loans - current portion | 51,676,116 | 8,487,295 | ||||||
| Accrued liabilities and other payables | 8,196,779 | 6,058,548 | ||||||
| Lease liability- current liability | 436,520 | - | ||||||
| Due to related parties | 23,328 | 19,555,277 | ||||||
| Total Current Liabilities | 113,233,823 | 73,073,227 | ||||||
| OTHER LIABILITIES: | ||||||||
| Lease liability | 198,282 | - | ||||||
| Long-term bank loans - non-current portion | 125,125,479 | 22,329,234 | ||||||
| Total Other Liabilities | 125,323,761 | 22,329,234 | ||||||
| Total Liabilities | $ | 238,557,584 | $ | 95,402,461 | ||||
| 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 September 30, 2019 and December 31, 2018) | 79,055 | 79,055 | ||||||
| Additional paid-in capital | 81,682,599 | 81,682,599 | ||||||
| Retained earnings | 56,317,408 | 49,593,069 | ||||||
| Statutory reserve | 14,760,112 | 14,760,112 | ||||||
| Accumulated other comprehensive loss | (17,884,517 | ) | (13,448,047 | ) | ||||
| Total equity attributable to owners of the company | 134,954,657 | 132,666,788 | ||||||
| Non-controlling interest | 19,238,267 | 18,892,322 | ||||||
| Total Shareholders’ Equity | 154,192,924 | 151,559,110 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 392,750,508 | $ | 246,961,571 | ||||
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 September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| REVENUE | $ | 11,179,946 | $ | 14,685,465 | $ | 55,067,249 | $ | 39,175,903 | ||||||||
| COST OF REVENUE | 7,594,714 | 5,300,829 | 38,134,552 | 17,235,179 | ||||||||||||
| GROSS PROFIT | 3,585,232 | 9,384,636 | 16,932,697 | 21,940,724 | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Selling | 650,786 | 319,919 | 1,895,991 | 1,181,720 | ||||||||||||
| General and administrative | 628,672 | 774,693 | 3,113,870 | 3,855,961 | ||||||||||||
| General and administrative - depreciation | 913,986 | 1,378,056 | 2,885,203 | 4,423,289 | ||||||||||||
| Subsidy | (5,288,586 | ) | (7,477,736 | ) | (5,288,586 | ) | (8,529,848 | ) | ||||||||
| Impairment loss | 70,896 | - | 2,546,338 | - | ||||||||||||
| (Gain) loss on fixed assets disposal | (1,777 | ) | (49,626 | ) | 164,375 | 2,129,124 | ||||||||||
| Total Operating Expenses | (3,026,023 | ) | (5,054,694 | ) | 5,317,191 | 3,060,246 | ||||||||||
| INCOME FROM OPERATIONS | 6,611,255 | 14,439,330 | 11,615,506 | 18,880,478 | ||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Interest income | 6,131 | 4,552 | 26,420 | 39,084 | ||||||||||||
| Interest expense | (776,569 | ) | (261,974 | ) | (2,903,816 | ) | (919,542 | ) | ||||||||
| Foreign currency transaction loss | (340,012 | ) | (373,237 | ) | (389,643 | ) | (207,022 | ) | ||||||||
| (Loss) gain from cost method investment | (6,766 | ) | (9,052 | ) | 340,885 | 388,368 | ||||||||||
| Loss on equity method investment | (96,129 | ) | (60,422 | ) | (477,972 | ) | (121,537 | ) | ||||||||
| Other expense | (987,517 | ) | (2,312 | ) | (735,359 | ) | (2,997 | ) | ||||||||
| Total Other Expense, net | (2,200,862 | ) | (702,445 | ) | (4,139,485 | ) | (823,646 | ) | ||||||||
| INCOME BEFORE INCOME TAXES | 4,410,393 | 13,736,885 | 7,476,021 | 18,056,832 | ||||||||||||
| INCOME TAXES | - | - | - | - | ||||||||||||
| NET INCOME | $ | 4,410,393 | $ | 13,736,885 | $ | 7,476,021 | $ | 18,056,832 | ||||||||
| LESS: NET INCOME ATTRIBUTABLE TO THE NON-CONTROLLING INTEREST | 377,859 | 1,133,820 | 751,682 | 1,635,990 | ||||||||||||
| NET INCOME ATTRIBUTABLE TO OWNERS OF THE COMPANY | $ | 4,032,534 | $ | 12,603,065 | $ | 6,724,339 | $ | 16,420,842 | ||||||||
| COMPREHENSIVE INCOME (LOSS): | ||||||||||||||||
| NET INCOME | 4,410,393 | 13,736,885 | 7,476,021 | 18,056,832 | ||||||||||||
| OTHER COMPREHENSIVE (LOSS) INCOME | ||||||||||||||||
| Unrealized foreign currency translation loss | (5,966,142 | ) | (6,297,631 | ) | (3,066,793 | ) | (8,348,613 | ) | ||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | (1,555,749 | ) | $ | 7,439,254 | $ | 4,409,228 | $ | 9,708,219 | |||||||
| LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO THE NON-CONTROLLING INTEREST | 220,968 | 630,060 | 345,945 | 968,131 | ||||||||||||
| COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO OWNERS OF THE COMPANY | $ | (1,776,717 | ) | $ | 6,809,194 | $ | 4,063,283 | $ | 8,740,088 | |||||||
| NET INCOME PER ORDINARY SHARE ATTRIBUTABLE TO OWNERS OF THE COMPANY | ||||||||||||||||
| Basic and diluted | $ | 0.05 | $ | 0.16 | $ | 0.09 | $ | 0.21 | ||||||||
| WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING: | ||||||||||||||||
| Basic and diluted | 79,055,053 | 79,055,053 | 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, JUNE 30 AND SEPTEMBER 30, 2019
(IN U.S. DOLLARS)
| Equity Attributable To Owners of The Company | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Ordinary Shares | Additional | Other | Non- | Total | ||||||||||||||||||||||||||||
| Number of | Paid-in | Retained | Statutory | Comprehensive | controlling | Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Reserve | Loss | Interest | Equity | |||||||||||||||||||||||||
| Balance, December 31, 2018 | 79,055,053 | $ | 79,055 | $ | 81,682,599 | $ | 49,593,069 | $ | 14,760,112 | $ | (13,448,047 | ) | $ | 18,892,322 | $ | 151,559,110 | ||||||||||||||||
| Net loss | - | - | - | (1,887,239 | ) | - | - | (81,100 | ) | (1,968,339 | ) | |||||||||||||||||||||
| Dividend declared | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | 2,693,272 | 206,077 | 2,899,349 | ||||||||||||||||||||||||
| Balance, March 31, 2019 (Unaudited) | 79,055,053 | $ | 79,055 | $ | 81,682,599 | $ | 47,705,830 | $ | 14,760,112 | $ | (10,754,775 | ) | $ | 19,017,299 | $ | 152,490,120 | ||||||||||||||||
| Net income | - | - | - | 4,579,044 | - | - | 454,923 | 5,033,967 | ||||||||||||||||||||||||
| Dividend declared | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (2,821,277 | ) | (245,516 | ) | (3,066,793 | ) | |||||||||||||||||||||
| Balance, June 30, 2019 (Unaudited) | 79,055,053 | $ | 79,055 | $ | 81,682,599 | $ | 52,284,874 | $ | 14,760,112 | $ | (13,576,052 | ) | $ | 19,226,706 | $ | 154,457,294 | ||||||||||||||||
| Net income | 4,032,534 | 377,859 | 4,410,393 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (4,308,465 | ) | (366,298 | ) | (4,674,763 | ) | |||||||||||||||||||||
| Balance, September 30, 2019 (Unaudited) | 79,055,053 | $ | 79,055 | $ | 81,682,599 | $ | 56,317,408 | $ | 14,760,112 | $ | (17,884,517 | ) | $ | 19,238,267 | $ | 154,192,924 | ||||||||||||||||
See condensed notes to unaudited consolidated financial statements
3
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, JUNE 30 AND SEPTEMBER 30, 2018
(IN U.S. DOLLARS)
| Equity Attributable To Owners of The Company | ||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Ordinary Shares | Additional | Other | Non- | Total | ||||||||||||||||||||||||||||
| Number of | Paid-in | Retained | Statutory | Comprehensive | controlling | Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Reserve | Loss | Interest | Equity | |||||||||||||||||||||||||
| Balance, December 31, 2017 | 79,055,053 | $ | 79,055 | $ | 81,682,599 | $ | 40,349,189 | $ | 12,978,343 | $ | (5,731,889 | ) | $ | 18,147,859 | $ | 147,505,156 | ||||||||||||||||
| Net income | - | - | - | 872,293 | - | - | 112,395 | 984,688 | ||||||||||||||||||||||||
| Dividend declared | - | - | - | (790,551 | ) | - | - | - | (790,551 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | 5,155,694 | 448,214 | 5,603,908 | ||||||||||||||||||||||||
| Balance, March 31, 2018 (Unaudited) | 79,055,053 | $ | 79,055 | $ | 81,682,599 | $ | 40,430,931 | $ | 12,978,343 | $ | (576,195 | ) | $ | 18,708,468 | $ | 153,303,201 | ||||||||||||||||
| Net income | - | - | - | 2,945,484 | - | - | 389,775 | 3,335,259 | ||||||||||||||||||||||||
| Dividend declared | - | - | - | (790,550 | ) | - | - | - | (790,550 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (7,042,577 | ) | (612,313 | ) | (7,654,890 | ) | |||||||||||||||||||||
| Balance, June 30, 2018 (Unaudited) | 79,055,053 | $ | 79,055 | $ | 81,682,599 | $ | 42,585,865 | $ | 12,978,343 | $ | (7,618,772 | ) | $ | 18,485,930 | $ | 148,193,020 | ||||||||||||||||
| Net income | 12,603,065 | 1,133,820 | 13,736,885 | |||||||||||||||||||||||||||||
| Dividend declared | (790,551 | ) | (790,551 | ) | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (5,793,871 | ) | (503,760 | ) | (6,297,631 | ) | |||||||||||||||||||||
| Balance, September 30, 2018 (Unaudited) | 79,055,053 | $ | 79,055 | $ | 81,682,599 | $ | 54,398,379 | $ | 12,978,343 | $ | (13,412,643 | ) | $ | 19,115,990 | $ | 154,841,723 | ||||||||||||||||
See condensed notes to unaudited consolidated financial statements
4
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS)
| For the Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 7,476,021 | $ | 18,056,832 | ||||
| Adjustments to reconcile net income from operations to net cash provided by operating activities: | ||||||||
| Depreciation | 7,699,244 | 6,933,572 | ||||||
| Decrease in allowance for doubtful accounts | 13,247 | (36,814 | ) | |||||
| (Decrease) increase in reserve for inventories | (370,959 | ) | 38,614 | |||||
| Loss on equity method investment | 477,972 | 121,537 | ||||||
| Loss on disposal of fixed assets | 164,375 | 2,129,124 | ||||||
| Impairment loss of fishing vessels | 2,533,091 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 4,170,551 | 6,877,799 | ||||||
| Inventories | (15,713,023 | ) | (5,711,759 | ) | ||||
| Prepaid expenses | (332,644 | ) | (5,729,266 | ) | ||||
| Other receivables | 114,731 | (435,794 | ) | |||||
| Other receivables - related party | (358,553 | ) | - | |||||
| Accounts payable | (3,965,580 | ) | (530,936 | ) | ||||
| Accounts payable - related parties | (2,919,909 | ) | 677,529 | |||||
| Accrued liabilities and other payables | 1,552,427 | (939,878 | ) | |||||
| Advance from customers | 839,137 | - | ||||||
| Accrued liabilities and other payables - related party | (1,290 | ) | - | |||||
| Due to related parties | (9,432,979 | ) | 2,529,409 | |||||
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | (8,054,141 | ) | 23,979,969 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property, plant and equipment | (105,567,685 | ) | (21,915,319 | ) | ||||
| Proceeds from government subsidies for fishing vessels construction | 33,128,784 | 5,302,166 | ||||||
| NET CASH USED IN INVESTING ACTIVITIES | (72,438,901 | ) | (16,613,153 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from short-term bank loans | 15,184,981 | |||||||
| Repayments of short-term bank loans | - | (14,633,675 | ) | |||||
| Proceeds from long-term bank loans | 163,551,743 | - | ||||||
| Repayments of long-term bank loans | (11,963,642 | ) | (2,990,981 | ) | ||||
| (Repayments to) advances from related parties | (10,111,087 | ) | 3,712,957 | |||||
| Loans issued to related parties | (41,667,842 | ) | - | |||||
| Payments made for dividend | - | (2,371,652 | ) | |||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 99,809,172 | (1,098,370 | ) | |||||
| EFFECT OF EXCHANGE RATE ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (862,543 | ) | (574,848 | ) | ||||
| NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 18,453,587 | 5,693,598 | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH - beginning of period | 1,966,855 | 3,826,727 | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED - end of period | $ | 20,420,442 | $ | 9,520,325 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | 10,382,198 | $ | 1,331,128 | ||||
| Income taxes | $ | - | $ | - | ||||
| RECONCILIATION TO AMOUNTS ON CONSOLIDATED BALANCE SHEETS: | ||||||||
| Cash and cash equivalents | 20,420,442 | 9,520,325 | ||||||
| TOTAL CASH, CASH EQUIVALENTS AND RESTRICTED CASH | $ | 20,420,442 | $ | 9,520,325 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Acquisition of property and equipment by decreasing prepayment for long-term assets | $ | - | $ | 11,602,983 | ||||
| Property and equipment acquired on credit as payable | $ | 22,429,610 | 38,672,775 | |||||
See condensed notes to unaudited consolidated financial statements
5
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
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 Islands (“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 the 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.
6
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 1 –DESCRIPTION OF BUSINESS AND ORGANIZATION (continued)
Details of the Company’s subsidiaries, which are included in these consolidated financial statements as of September 30, 2019, 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 Yikang Global Fishery Co., Ltd. (“Yikang Fishery”) | PRC, September 14, 2017 | 100% held by Pingtan Fishing | Dormant | |||
| Pingtan Shinsilkroad Fishery Co., Ltd. (“Shinsilkroad Fishery”) | PRC, September 14, 2017 | 100% held by Pingtan Fishing | Dormant | |||
| Fuzhou Howcious Investment Co., Ltd (“Howcious Investment”) | PRC, September 5, 2017 | 100% held by Pingtan Fishing | Dormant | |||
| Pingtan Ocean Fishery Co., Ltd (“Ocean Fishery”) | PRC, July 21, 2017 | 100% held by Pingtan Fishing | Dormant |
7
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 1 –DESCRIPTION OF BUSINESS AND ORGANIZATION (continued)
Fujian Heyue, through its PRC subsidiary, Pingtan Fishing, engages in ocean fishing with its owned and controlled vessels within the Indian Exclusive Economic Zone, the international waters and Arafura Sea of Indonesia.
The Company had a working capital deficit of $27,940,480 as of September 30, 2019. In order to mitigate its liquidity risk, the Company plans to rely on the proceeds from loans from banks and/or financial institutions to increase working capital in order to meet capital demands. In addition, Mr. Zhuo, the Chief Executive Officer and Chairman of the Board, will continue to provide financial support to the Company when necessary.
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 into account operations in Indian waters and international waters and consideration of opportunities in new fishing territories, 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.
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, 2018 filed with the Securities and Exchange Commission on March 15, 2019.
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 and nine months ended September 30, 2019 and 2018 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.
8
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 September 30, 2019 and December 31, 2018, cash balances in the PRC were $20,171,413 and $1,957,605, respectively, and cash balances in Hong Kong were $249,029 and $9,250, 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.
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 September 30, 2019, 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 September 30, 2019. As of September 30, 2019, the Company does not have any Level 3 financial instruments.
ASC Topic 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
9
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 September 30, 2019 and December 31, 2018, the Company established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $12,837 and nil, 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 waters and 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 September 30, 2019 and December 31, 2018, the Company recorded a reserve for inventories in the amount of $42,138 and $413,893, 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 and estimated current and future market value.
Fishing licenses
Each of the Company’s fishing vessels requires an approval from the Ministry of Agriculture and Rural Affairs of the People’s Republic of China to carry out ocean fishing projects in international waters and foreign territories, and to the extent required, a fishing license in local fishing territory where the vessel operates. These approvals are valid for a period from 3 to 12 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.
Investment in unconsolidated company – Global Deep Ocean
The Company uses the equity method of accounting for its investment in, and earning or loss of, companies 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 6 for discussion of equity method investment.
10
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 $213,514 and $367,917 for the three months ended September 30, 2019 and 2018, respectively, in the fishing vessels under construction. The Company capitalized interest of $321,333 and $568,790 for the nine months ended September 30, 2019 and 2018, 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 recognized impairment loss of $70,896 and nil for the three months ended September 30, 2019 and 2018, respectively. The Company recognized impairment loss of $2,546,338 and nil for the nine months ended September 30, 2019 and 2018, respectively.
Revenue recognition
Pursuant to the guidance of ASC Topic 606, the Company recognizes revenue when a sales arrangement with a customer exists (e.g., contract, purchase orders, others), transaction price is fixed or determinable and the Company has satisfied its performance obligation per the sales arrangement. The Company’s sales arrangements have standard payment terms that do not exceed a year. The majority of Company revenue originates from contracts with a single performance obligation to deliver products. The Company’s performance obligations are satisfied when control of the product is transferred to the customer per the arranged shipping terms.
The Company records a contract asset when it has a right to payment from a customer that is conditioned on events other than the passage of time. The Company also records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have any material unsatisfied performance obligations, contract assets or liabilities as of September 30, 2019 and December 31, 2018.
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.
11
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Government subsidies
Government subsidies are recognized when there is reasonable assurance that the subsidy will be received and all attaching conditions will be complied with. When the subsidy relates to an expense item, it is recognized as income over the periods necessary to match the subsidy on a systematic basis to the costs that it is intended to compensate. Where the subsidy 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 define 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.
12
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes (continued)
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.
The Company prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. As of September 30, 2019 and December 31, 2018, 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 $147,926 and $75,049 for the three months ended September 30, 2019 and 2018, respectively. Shipping and handling costs totaled $361,504 and $365,881 for the nine months ended September 30, 2019 and 2018, 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 $474,130 and $74,135 for the three months ended September 30, 2019 and 2018, respectively. Employee benefit costs totaled $1,690,484 and $329,112 for the nine months ended September 30, 2019 and 2018, respectively.
13
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 nine months ended September 30, 2019 and 2018 was $(862,543) and $(574,848), respectively. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
All of the Company’s revenue transactions are transacted in the functional currency of the operating 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 September 30, 2019 and December 31, 2018 were translated at 7.0729 RMB to $1.00 and at 6.8632 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 nine months ended September 30, 2019 and 2018 were 6.8541 RMB and 6.5196 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate.
Earnings per share
ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net income per share are computed by dividing net income available to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted net income per share is computed by dividing net income 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 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 per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Net income available to owners of the company for basic and diluted net income per share of ordinary stock | $ | 4,032,534 | $ | 12,603,065 | $ | 6,724,339 | $ | 16,420,842 | ||||||||
| Weighted average ordinary stock outstanding - basic and diluted | 79,055,053 | 79,055,053 | 79,055,053 | 79,055,053 | ||||||||||||
| Net income per ordinary share attributable to owners of the Company - basic and diluted | $ | 0.05 | $ | 0.16 | $ | 0.09 | $ | 0.21 | ||||||||
14
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 September 30, 2019, 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.
Comprehensive income (loss)
Comprehensive income (loss) is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018 included net income 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 September 30, 2019 and December 31, 2018. 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.
15
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of credit, economic and political risks (continued)
According to the sale agreement signed on December 4, 2013, the Company does not own 20 fishing vessels but has the 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 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 operations in this area has had and will continue to have a significant negative impact on the Company.
Recent Adopted Accounting Standards
Codification Improvements to Topic 842, Leases (“ASU 2018-10”) and ASU 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”). The amendments in ASU 2018-10 affect only narrow aspects of the guidance issued in the amendments in ASU 2016-02, including but not limited to lease residual value guarantee, rate implicit in the lease and lease term and purchase option. The amendments in ASU 2018-11 provide an optional transition method for adoption of the new standard, which will allow entities to continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption.
Effective January 1, 2019, we have adopted the new standard using the modified retrospective approach and implemented internal controls to enable the preparation of financial information upon adoption. We elected to adopt both the transition relief provided in ASU 2018-11 and the package of practical expedients which allowed us, among other things, to retain historical lease classifications and accounting for any leases that existed prior to adoption of the standard. Additionally, we elected the practical expedients allowing us not to separate lease and non-lease components and not record leases with an initial term of twelve months or less (“short-term leases”) on the balance sheet across all existing asset classes.
Adoption of the new standard resulted in the recording of right use asset and lease liability of $0.77 million as of January 1, 2019, which primarily relates to our corporate office leases. The standard did not materially impact our condensed consolidated statements of operations or cash flows. Adopting the new standard did not have a material impact on the accounting for leases under which we are the lessee.
Recent accounting pronouncements
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2018-02 is permitted, including adoption in any interim period for the public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We do not expect the adoption of ASU 2018-02 to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): simplifying the test for goodwill impairment”, the guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not the difference between the fair value and carrying amount of good will which was the Step 2 test before. The ASU should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. The ASU sets forth a “current expected credit loss” (“CECL”) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing probable incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgements used in determining the allowance for loan losses, as well as the credit quality and underwriting standards of an organization’s loan portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In October 2019, FASB approved the extension of the effective date for adoption of ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 31, 2022, including interim periods therein. Early adoption is permitted in fiscal years beginning after December 31, 2018. The Company is currently evaluating the alternative methodologies available and assessing its data and system needs to implement this ASU.
16
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 3 –ACCOUNTS RECEIVABLE
At September 30, 2019 and December 31, 2018, accounts receivable consisted of the following:
| September 30, 2019 | December 31, 2018 | |||||||
| Accounts receivable | $ | 2,078,950 | $ | 6,307,492 | ||||
| Less: allowance for doubtful accounts | (12,837 | ) | - | |||||
| $ | 2,066,113 | $ | 6,307,492 | |||||
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 an individual balance.
NOTE 4 –INVENTORIES
At September 30, 2019 and December 31, 2018, inventories consisted of the following:
| September 30, 2019 | December 31, 2018 | |||||||
| Frozen fish and marine catches in warehouse | $ | 513,716 | $ | 5,910,381 | ||||
| Frozen fish and marine catches work in progress | 19,282,872 | - | ||||||
| Frozen fish and marine catches in transit | 1,499,030 | 343,719 | ||||||
| 21,295,618 | 6,254,100 | |||||||
| Less: reserve for inventories | (42,138 | ) | (413,893 | ) | ||||
| $ | 21,253,480 | $ | 5,840,207 | |||||
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.
17
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 5 –COST METHOD INVESTMENT
At September 30, 2019 and December 31, 2018, cost method investment amounted to $2,969,079 and $3,059,797, 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 September 30, 2019 and December 31, 2018.
In according to ASC 321, the Company elected to use the measurement alternative to measure such investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. The Company monitors its investment in the non-marketable security and will recognize, if ever existing, a loss in value which is deemed to be other than temporary. The Company determined that there was no impairment on this investment as of September 30, 2019 and December 31, 2018.
NOTE 6 –EQUITY METHOD INVESTMENT
At September 30, 2019 and December 31, 2018, equity method investment amounted to $27,663,103 and $28,872,521, 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. In April 2017, these two companies sold their shares to another unrelated party, Zhen Lin. As of September 30, 2019, Pingtan Fishing and Zhen Lin accounted for 20% and 80% of the total ownership, respectively.
Global Deep Ocean will process, cold storage, and transport deep ocean fishing products. Total registered capital of Global Deep Ocean is RMB 1 billion (approximately $141.4 million) and as of September 30, 2019, Pingtan Fishing had contributed its share of registered capital of RMB 200 million (approximately $28.3 million).
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 September 30, 2019 and 2018, the Company’s share of Global Deep Ocean’s net loss was $126,848and $60,422, respectively, which was included in loss on equity method investment in the accompanying consolidated statements of operations and comprehensive income. For the nine months ended September 30, 2019 and 2018, the Company’s share of Global Deep Ocean’s net loss was $364,676 and $121,537, respectively, which was included in loss on equity method investment in the accompanying consolidated statements of operations and comprehensive income.
18
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 7 –PROPERTY, PLANT AND EQUIPMENT
At September 30, 2019 and December 31, 2018, property, plant and equipment consisted of the following:
| Useful life | September 30, 2019 | December 31, 2018 | ||||||||
| Fishing vessels | 10 - 20 Years | $ | 298,220,249 | $ | 203,057,291 | |||||
| Vehicles | 5 Years | 21,528 | 22,186 | |||||||
| Office and other equipment | 3 – 5 Years | 421,314 | 423,259 | |||||||
| Construction-in-progress | - | 19,033,223 | 31,044,006 | |||||||
| 317,696,314 | 234,546,742 | |||||||||
| Less: accumulated depreciation | (41,545,213 | ) | (34,975,317 | ) | ||||||
| $ | 276,151,101 | $ | 199,571,425 | |||||||
For the three months ended September 30, 2019 and 2018, depreciation expense amounted to $2,627,985 and $2,170,841, respectively, of which $1,713,999 and $634,089, respectively, was included in cost of revenue and inventories, and the remainder was included in general and administrative expense, respectively. For the nine months ended September 30, 2019 and 2018, depreciation expense amounted to $7,699,244 and $6,933,572, respectively, of which $4,814,041 and $2,253,662, respectively, was included in cost of revenue and inventories, and the remainder was included in general and administrative expense, respectively.
At September 30, 2019 and December 31, 2018, the Company had 54 and 19 fishing vessels with net carrying amount of approximately $159.1 million and $35.3 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.
19
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 8 –RELATED PARTIES TRANSACTIONS
Due from related party
At September 30, 2019 and December 31, 2018, the due from related party amount consisted of the following:
| September 30, 2019 | December 31, 2018 | |||||||
| Due from related party-Honglong | $ | 40,038,786 | $ | - | ||||
Accounts payable - related parties
At September 30, 2019 and December 31, 2018, accounts payable - related parties consisted of the following:
| Name of related party | September 30, 2019 | December 31, 2018 | ||||||
| Hong Long (1) | $ | - | $ | 2,007,768 | ||||
| Huna Lin | 319,056 | - | ||||||
| Hong Fa Shipping Limited (2) | - | 1,231,692 | ||||||
| Zhiyan Lin | - | 4,363 | ||||||
| Ping Lin | - | 1,020 | ||||||
| $ | 319,056 | $ | 3,244,843 | |||||
| (1) | Hong Long is an affiliate company majority owned by an immediate family member of the Company’s CEO. |
| (2) | An entity controlled by the Company’s CEO. |
These accounts payable – related parties’ amounts are short-term in nature, non-interest bearing, unsecured and payable on demand.
Due to related parties
At September 30, 2019 and December 31, 2018, the due to related parties amount consisted of the following:
| September 30, 2019 | December 31, 2018 | |||||||
| Accrued compensation for Roy Yu, Chief Financial Officer | $ | 20,000 | $ | 20,000 | ||||
| Accrued compensation for Xinrong Zhuo | 3,328 | 3,320 | ||||||
| Advance from Xinrong Zhuo, Chief Executive Officer | - | 9,432,987 | ||||||
| Due to related party-Honglong | - | 10,098,970 | ||||||
| $ | 23,328 | $ | 19,555,277 | |||||
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”). Pursuant to the Office Lease, the annual rent is RMB 84,000 (approximately $12,300) and the renewed Office Lease expires on July 31, 2021.
For the three months ended September 30, 2019 and 2018, rent expense related to the Office Lease amounted to $3,063 and $3,071, respectively. For the nine months ended September 30, 2019 and 2018, rent expense related to the Office Lease amounted to $9,192 and $9,663, respectively. Future minimum rental payment required under the Office Lease is as follows:
| Twelve-month period Ending September 30: | Amount | |||
| 2020 | $ | 10,210 | ||
20
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 8 –RELATED PARTIES TRANSACTIONS (continued)
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 to use a portion of the premises located in Hong Kong as office space and provided related administrative services (the “Service Agreement”). Pursuant to the Service Agreement, the monthly payments are HK$298,500 (approximately $38,000) and the Service Agreement expired on December 31, 2017. On January 1, 2018, the Service Agreement was renewed to February 28, 2018 under the same conditions. On March 1, 2018, the Company entered into a lease agreement directly with the landlord under the same conditions that expires on February 28, 2021.
For the three months ended September 30, 2019 and 2018, rent expense and corresponding administrative service charge related to the Service Agreement amounted to $114,672 and $114,177, respectively. For the nine months ended September 30, 2019 and 2018, rent expense and corresponding administrative service charge related to the Service Agreement amounted to $343,031 and $342,768, respectively.
As of September 30, 2019, future minimum lease payments on operating leases were as follows:
| September 30, 2019 | ||||
| Maturity of lease liabilities | ||||
| 2019 | $ | 114,781 | ||
| 2020 | 461,466 | |||
| 2021 | 127,119 | |||
| Total minimum lease payments | $ | 703,366 | ||
| Imputed interest | (68,564 | ) | ||
| Present value of minimum lease payments | $ | 634,802 | ||
The remaining lease terms (in years) and discount rates consisted of the following:
| September 30, 2019 | ||||
| Lease term and discount rate | ||||
| Remaining operating lease term | 1.58 | |||
| Discount rate | 5.13 | % | ||
Purchases from related parties
During the three and nine months ended September 30, 2019 and 2018 purchases from related parties were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Purchase of fuel, fishing nets and other on board consumables | ||||||||||||||||
| From Zhiyan Lin | $ | 1,033 | $ | 33,524 | $ | 1,577 | $ | 35,497 | ||||||||
| from Fuzhou Honglong Ocean Fishery Co., Ltd. | 953,274 | 733,327 | 3,622,460 | 1,310,976 | ||||||||||||
| 954,307 | 766,851 | 3,624,037 | 1,346,473 | |||||||||||||
| Purchase of leasing | ||||||||||||||||
| From Ping Lin | 2,998 | 3,071 | 9,192 | 9,663 | ||||||||||||
| 2,998 | 3,071 | 9,192 | 9,663 | |||||||||||||
| Purchase of vessel maintenance service | ||||||||||||||||
| From Huna Lin | 2,388,862 | 49,114 | 2,795,429 | 49,114 | ||||||||||||
| 2,388,862 | 49,114 | 2,795,429 | 49,114 | |||||||||||||
| Purchase of transportation service | ||||||||||||||||
| from Fuzhou Honglong Ocean Fishery Co., Ltd. | - | 365,878 | - | 365,878 | ||||||||||||
| $ | - | $ | 365,878 | $ | - | $ | 365,878 | |||||||||
21
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 9 –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 September 30, 2019 and December 31, 2018, short-term bank loans consisted of the following:
| September 30, 2019 | December 31, 2018 | |||||||
| Loan from Fujian Haixia Bank, due on November 14, 2019 with annual interest rate of 4.2870% at September 30, 2019, collateralized by Hong Long’s 5 fishing vessels and 7 real estate properties of Ping Lin and Ying Liu | $ | 714,000 | $ | 714,000 | ||||
| Loan from Fujian Haixia Bank, due on November 4, 2019 with annual interest rate of 6.9600% at September 30, 2019, collateralized by Hong Long’s 5 fishing vessels and 7 real estate properties of Ping Lin and Ying Liu, the debt ratio of borrower should not be higher than or equal to 100% | 4,241,542 | 4,371,139 | ||||||
| $ | 4,955,542 | $ | 5,085,139 | |||||
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 September 30, 2019 and December 31, 2018, long-term bank loans consisted of the following:
| September 30, 2019 | December 31, 2018 | |||||||
| Loan from The Export-Import Bank of China, due on various dates until August 28, 2020 with annual interest rate of 4.750% at September 30, 2019, guaranteed by Hong Long, Xinrong Zhuo and Ping Lin. | $ | 7,776,160 | $ | - | ||||
| Loan from The Export-Import Bank of China, due on various dates until January 30, 2023 with annual interest rate of 4.900% at September 30, 2019 and December 31, 2018, guaranteed by Xinrong Zhuo and Ping Lin and collateralized by 2 fishing vessels and collateralized by two related parties’ investments in equity interest of one PRC local banks. | 7,069,236 | 9,470,801 | ||||||
| Loan from China Development Bank, due on various dates until November 27, 2023 with annual interest rate of 5.145% at September 30, 2019 and December 31, 2018, guaranteed by Xinrong Zhuo, Honghong Zhuo, Mr. and Mrs. Zhiyan Lin and 17 fishing vessels, the debt ratio of borrower should not be higher than 80% | 6,079,543 | 6,920,970 | ||||||
| Loan from The Export-Import Bank of China, due on various dates until March 28, 2025 with annual interest rate of 4.949% at September 30, 2019 and December 31, 2018, guaranteed by Hong Long, Xinrong Zhuo, Ping Lin and collateralized by 20 fishing vessels. | 65,036,972 | - | ||||||
| Loan from The Export-Import Bank of China, due on various dates until September 30, 2020 with annual interest rate of 4.750% at September 30, 2019, guaranteed by Hong Long, Xinrong Zhuo, Ping Lin and collateralized by equity investment of 67 million shares of Honglong in Xiamen International Bank. | 16,259,243 | - | ||||||
| Loan from The Export-Import Bank of China, due on various dates until August 21, 2026 with annual interest rate of 4.700% at September 30, 2019, guaranteed by Pin Lin, Xinrong Zhuo and Yaohua Zhuo, 15 fishing vessels, the Land Use Right of B2 plot in central business district on the north shore of Minjiang river. | 62,350,663 | - | ||||||
| Loan from China Development Bank, due on various dates until July 30, 2026 with annual interest rate of 5.390% at September 30, 2019, guaranteed by Xinrong Zhuo, 11 fishing vessels and 6 Honglong’s fishing vessels, real estate of Mingguang Wanhao Property co., LTD., totaled area 22,123.50m2, the debt ratio of borrower should not be higher than 80% | 12,229,778 | 14,424,758 | ||||||
| Total long-term bank loans | $ | 176,801,595 | $ | 30,816,529 | ||||
| Less: current portion | (51,676,116 | ) | (8,487,295 | ) | ||||
| Long-term bank loans, non-current portion | $ | 125,125,479 | $ | 22,329,234 | ||||
22
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 9 –BANK LOANS (continued)
Long-term bank loans (continued)
The future maturities of long-term bank loans are as follows:
| Due in twelve-month periods ending September 30, | Principal | |||
| 2020 | $ | 51,676,116 | ||
| 2021 | 24,106,095 | |||
| 2022 | 23,540,556 | |||
| 2023 | 25,661,327 | |||
| 2024 | 24,247,480 | |||
| Thereafter | 27,570,021 | |||
| $ | 176,801,595 | |||
| Less: current portion | (51,676,116 | ) | ||
| Long-term liability | $ | 125,125,479 | ||
The weighted average interest rate for short-term bank loans was approximately 6.6% and 5.4% for the nine months ended September 30, 2019 and 2018, respectively.
The weighted average interest rate for long-term bank loans was approximately 4.9% and 5.1% for the nine months ended September 30, 2019 and 2018, respectively.
For the three months ended September 30, 2019 and 2018, interest expense related to bank loans amounted to $2,328,884 and $629,890, respectively, of which, $213,514 and $367,917 was capitalized to construction-in-progress, respectively. For the nine months ended September 30, 2019 and 2018, interest expense related to bank loans amounted to $4,012,965 and $1,488,332, respectively, of which, $321,333 and $568,790 was capitalized to construction-in-progress, respectively.
NOTE 10 –ACCRUED LIABILITIES AND OTHER PAYABLES
At September 30, 2019 and December 31, 2018, accrued liabilities and other payables consisted of the following:
| September 30, 2019 | December 31, 2018 | |||||||
| Accrued salaries and related benefits | $ | 6,508,832 | $ | 5,734,177 | ||||
| Accrued interest due | 250,510 | 62,243 | ||||||
| Other | 1,437,437 | 262,128 | ||||||
| $ | 8,196,779 | $ | 6,058,548 | |||||
23
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 11 –CERTAIN RISKS AND CONCENTRATIONS
Credit risk
At September 30, 2019 and December 31, 2018, 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 and nine months ended September 30, 2019 and 2018.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Customer | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| A | 25 | % | 33 | % | 16 | % | 21 | % | ||||||||
| B | 17 | % | * | * | * | |||||||||||
| C | 16 | % | 15 | % | 21 | % | 19 | % | ||||||||
| D | 13 | % | * | * | * | |||||||||||
| E | * | * | 11 | % | * | |||||||||||
| F | * | * | 14 | % | * | |||||||||||
| * | less than 10% |
Four and three customers accounted for 10% or more of the Company’s total outstanding accounts receivable at September 30, 2019 and December 31, 2018, respectively.
24
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
SEPTEMBER 30, 2019
NOTE 11 –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 and nine months ended September 30, 2019 and 2018.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Supplier | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| A | 32 | % | * | 17 | % | 20 | % | |||||||||
| B | 27 | % | 12 | % | * | 14 | % | |||||||||
| C | * | * | 16 | % | * | |||||||||||
| D | * | * | 16 | % | * | |||||||||||
| E | * | * | 14 | % | * | |||||||||||
One supplier, whose outstanding accounts payable accounted for 10% or more of the Company’s total outstanding accounts payable and accounts payable – related parties at September 30, 2019, accounted for 85.5% of the Company’s total outstanding accounts payable and accounts payable – related parties at September 30, 2019.
One supplier, 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, 2018, accounted for 76.0% of the Company’s total outstanding accounts payable and accounts payable – related parties at December 31, 2018.
NOTE 12 –COMMITMENTS AND CONTINGENCIES
Severance payments
The Company has employment agreements with certain employees that provide for severance payments to such employees upon termination of employment under certain circumstances, as defined in the applicable agreements. The Company has estimated its possible severance payments of approximately $10,000 as of September 30, 2019 and December 31, 2018, which have not been reflected in its consolidated financial statements.
Operating lease
See note 8 for related party operating lease commitment.
Rental payment and related administrative service charge
See note 8 for related party rental and related administrative service agreement commitment.
NOTE 13 –SUBSEQUENT EVENTS
On October 31, 2019, the Company received a loan of $44.40 million from The Export-Import Bank of China. The loan is due on October 21, 2025 with annual interest rate of 4.70%.
On November 1, 2019, the Company repaid a short-term bank loan of $4.24 million to Fujian Haixia Bank in accordance with the loan repayment schedule.
On November 1, 2019, the Company received a loan of $4.24 million from Fujian Haixia Bank. The loan is due on November 1, 2020 with annual interest rate of 6.09%.
On November 6, 2019, the Company received a loan of $4.95 million from Fujian Haixia Bank. The loan is due on November 6, 2020 with annual interest rate of 6.09%.
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 and nine months ended September 30, 2019 and 2018 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 15, 2019. 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 enterprise group primarily engaging in ocean fishing through our operating subsidiary, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd., or Pingtan Fishing, which is organized in the People’s Republic of China (“PRC”). We harvest a variety of fish species with many of our owned vessels or licensed vessels for which we have exclusive operating license rights. These vessels are located within the Indian Exclusive Economic Zone (“EEZ”), the Arafura Sea of Indonesia and the international waters. 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 Bureau of Fisheries of the Ministry of Agriculture and Rural Affairs 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 China Dredging Group Co., Ltd (“CDGC” or “China Dredging”) to Fuzhou Honglong Ocean Fishery Co., Ltd (“Hong Long”), an affiliate company majority owned by a close family member of the Company’s CEO, we acquired 20-year operating license rights 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 from Hong Long and Fuzhou Yishun Deep-Sea Fishing Co., Ltd. (“Yishun”), which is an affiliate company majority owned by an immediate family member of the Company’s CEO. These vessels are primarily focused on catching tuna and squid.
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In October 2016, we deployed 13 vessels, which were granted fishing licenses by the Ministry of Agriculture and Fisheries of the Democratic Republic of Timor-Leste (“MAF”), to operate in the Indo-Pacific waters of the country. These fishing licenses were valid for one year. The vessels were purchased from Hong Long in June 2013. In September 2017, we were informed that the fishing licenses of the 13 vessels were suspended and the vessels were docked in the port by the MAF. The MAF alleged and investigated whether false statements were made during the licensing process and the vessels were simultaneously registered in Indonesia. We disputed these allegations and the government of Timor-Leste eventually agreed to release these vessels as no evidence was presented to support such allegations. The 13 vessels have returned to China for regular maintenance.
In March 2017, we purchased from Hong Long 1 refrigerated transport vessel and 4 squid jigging vessels for the appraised fair market value of approximately $38.5 million. Of those vessels, 2 finished renovation in October 2017, the Company obtained the ownership certificates of those 2 vessels and deployed them to international waters. At present, the Company has not obtained the ownership of the remaining 3 vessels but is entitled to 100% of the operations and net profits (losses) from the vessels.
In December 2017, we deployed 2 squid jigging vessels to the international waters of the South-West Atlantic Ocean.
On April 2, 2018, 27 vessels received approval from the MOA to operate in the international waters. After the modification and rebuilding project, 19 of the 27 new fishing vessels have been deployed to sea in November and December 2018, and the remaining 8 new fishing vessels set their sail towards the designated waters by the end of first quarter 2019.
In October 2018, we purchased 1 refrigerated transport vessel, which started the modification and rebuilding project. The transport vessel finished renovation in June 2019 and will be deployed to international waters in support of the 27 new fishing vessels.
In January 2019, 24 vessels received approval from the MOA to operate in the international waters of the Indian Ocean, North Pacific Ocean, Southeast Pacific and Southwest Atlantic Oceans including Argentina after completion of modification and rebuilding.
In the first quarter of 2019, the Company dismantled 1 transport vessel and deregistered 6 fishing vessels and applied to the MOA for building 7 new vessels. The 6 fishing vessels, together with the 24 vessels received approval in January, will be rebuilt and modified into 15 squid jigging vessels and 15 seine vessels. Of those vessels, 1 transport vessel, 15 squid jigging vessels and 9 seine vessels finished renovation in the third quarter of 2019 and have been deployed to international waters.
As of September 30, 2019, we owned 41 squid jigging vessels, 36 trawlers, 13 drifters, 19 seine vessels and 4 longline fishing vessels, and 2 transport vessels, have exclusive operating license rights to 20 drifters, and also have 6 seine vessels which are in the modification and rebuilding project. We are the second largest China-based fishery company operating its vessels outside of Chinese waters and our fleet has an average remaining useful life of approximately 19.7 years. All of our vessels are approved by the MOA and, to the extent required, licensed by foreign fishing territories where they operate, subject to any foreign government’s moratorium or any suspensions or revocations that apply to the vessels or local entities, as described below.
Among the 141 vessels, 12 were located in the Bay of Bengal in India, 46 were located in international waters, 17 were in the preparation for sailing to the sea, 6 vessels were in the modification and rebuilding project, 13 have returned to China from the Democratic Republic of Timor-Leste due to the reason described above, and the remaining 47 vessels were licensed by the MOA to operate in the Arafura Sea in Indonesia and 19 of them returned to China for maintenance in the first nine months of 2019. The vessels in Indonesian waters, however, are not in operation because the licenses are currently inactive due to either the moratorium discussed below, the revocation of the fishery business license of the local entity through which the vessels operate, or, with respect to 4 vessels, the revocation of the local fishing licenses.
We catch nearly 30 different species of fish including ribbon fish, croaker fish, Indian Ocean squid and cuttle fish. All of our catch is shipped back to China. We 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. In July 2017, we entered into an exclusive strategic cooperation agreement to sell our fish products directly to consumers online. 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 squid. 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 or the redeployment of our vessels from Indonesian waters to other locations, our ability, and those with which we conduct business, to maintain effective licenses with local departments of fisheries, such as Indonesia and Timor-Leste, and our ability to expand our customer base.
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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 MMAF could combat illegal fishing and rectify ocean fishing order. As a result, all licensed fishing vessels operating in the 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. In February 2015, we ceased all fishing operations in Indonesia. During the Indonesian moratorium, we were informed that the fishing licenses of four vessels operated through PT Avona, one of the local companies through which we conduct business in Indonesia, and the fishery business license of PT Dwikarya, the other local company through which we conduct business in Indonesia, were revoked. Because license renewal was prohibited due to the general moratorium, all local fishing licenses of PME’s vessels in Indonesia are presently inactive. The MMAF has not yet restored license issuing or renewal process for vessels built abroad.
Although, in November 2015, the Indonesian government announced that the moratorium had concluded, the MMAF has neither implemented new fishing policies nor resumed the license renewal process. We do not know when exactly licensing and renewal will start. We have been paying close attention to any new trends in fishing policy and have been actively exploring other business operations and redeploying vessels to other locations. Since we derived a majority of our revenue from this area, this ban has caused a significant drop in our production and our financial results will continue to be adversely affected. | |
| ● | 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 EEZ, the international waters and the Arafura Sea of Indonesia. Any earthquake, tsunami, adverse weather or oceanic conditions, or other disasters 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 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 EEZ, the international waters, and the Arafura Sea of Indonesian. Competition within our designated 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 that 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 MOA to carry out ocean fishing projects in international waters and foreign territories. These approvals are granted annually and are normally valid for a period of 12 months. When the inspection certificate of a vessel is valid for less than 12 months, the approval will be granted with the validity period equal to that indicated on the inspection certificate and will be extended to full validity period when new inspection certificate is issued. Different countries may have different policies for foreign cooperation in fisheries. Some countries require fishing licenses issued by the accessed country; some others may require establishment of a joint venture or sole proprietorship to obtain local licenses. During the Indonesian moratorium, we were informed that the fishing licenses of four vessels operated through PT Avona, one of the local companies through which we conduct business in Indonesia, and the fishery business license of PT Dwikarya, the other local company through which we conduct business in Indonesia, were revoked. In September 2017, we were informed that the fishing licenses of the 13 vessels operating in the Indo-Pacific waters of Timor-Leste were suspended; and these vessels have returned to China for regular maintenance. |
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RESULTS OF OPERATIONS
Comparison of results of operations for the three and nine months ended September 30, 2019 and 2018
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 who have a history of financial responsibility.
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 September 30, 2019 and 2018, our revenue by species of fish was as follows (dollars in thousands, except for average price):
| Three Months Ended September 30, 2019 | ||||||||||||||||
| Revenue | Volume (KG) | Average price | Percentage of revenue | |||||||||||||
| Indian Ocean squid | $ | 8,955 | 8,009,340 | $ | 1.12 | 80.1 | % | |||||||||
| Cuttle fish | 1,108 | 236,260 | 4.69 | 9.9 | % | |||||||||||
| Argentina squid(whole) | 455 | 110,726 | 4.11 | 4.0 | % | |||||||||||
| Croaker fish | 342 | 165,223 | 2.07 | 3.1 | % | |||||||||||
| Ribbon fish | 18 | 5,490 | 3.28 | 0.2 | % | |||||||||||
| Others | 302 | 154,428 | 1.96 | 2.7 | % | |||||||||||
| Total | $ | 11,180 | 8,681,467 | $ | 1.29 | 100.0 | % | |||||||||
| Three Months Ended September 30, 2018 | ||||||||||||||||
| Revenue | Volume (KG) | Average price | Percentage of revenue | |||||||||||||
| Argentina squid (whole) | $ | 3,172 | 820,087 | $ | 3.87 | 21.6 | % | |||||||||
| Croaker fish | 2,717 | 1,458,817 | 1.86 | 18.5 | % | |||||||||||
| Ribbon fish | 2,648 | 1,145,468 | 2.31 | 18.0 | % | |||||||||||
| Cuttle fish | 730 | 169,785 | 4.30 | 5.0 | % | |||||||||||
| Pomfret | 683 | 43,150 | 15.82 | 4.7 | % | |||||||||||
| Puffer fish | 594 | 129,452 | 4.59 | 4.0 | % | |||||||||||
| Others | 4,141 | 2,060,796 | 2.01 | 28.2 | % | |||||||||||
| Total | $ | 14,685 | 5,827,555 | $ | 2.52 | 100.0 | % | |||||||||
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For the nine months ended September 30, 2019 and 2018, our revenue by species of fish was as follows (dollars in thousands, except for average price):
| Nine Months Ended September 30, 2019 | ||||||||||||||||
| Revenue | Volume (KG) | Average price | Percentage of revenue | |||||||||||||
| Indian Ocean squid | $ | 26,771 | 24,006,371 | $ | 1.12 | 48.6 | % | |||||||||
| Ribbon fish | 5,968 | 1,819,792 | 3.28 | 10.8 | % | |||||||||||
| Argentina squid(whole) | 4,234 | 1,000,671 | 4.23 | 7.7 | % | |||||||||||
| Croaker fish | 3,566 | 1,631,723 | 2.19 | 6.5 | % | |||||||||||
| Cuttle fish | 3,565 | 681,619 | 5.23 | 6.5 | % | |||||||||||
| Others | 10,963 | 3,712,634 | 2.95 | 19.9 | % | |||||||||||
| Total | $ | 55,067 | 32,852,810 | $ | 1.68 | 100.0 | % | |||||||||
| Nine Months Ended September 30, 2018 | ||||||||||||||||
| Revenue | Volume (KG) | Average price | Percentage of revenue | |||||||||||||
| Croaker fish | $ | 10,369 | 4,423,675 | $ | 2.34 | 26.4 | % | |||||||||
| Ribbon fish | 9,497 | 3,269,353 | 2.90 | 24.2 | % | |||||||||||
| Argentina squid(whole) | 3,172 | 820,087 | 3.87 | 8.1 | % | |||||||||||
| Chub mackerel | 2,398 | 2,605,640 | 0.92 | 6.1 | % | |||||||||||
| Peru squid(whole) | 1,434 | 819,658 | 1.75 | 3.7 | % | |||||||||||
| Peru squid(cleaned) | 1,190 | 435,043 | 2.73 | 3.0 | % | |||||||||||
| Others | 11,116 | 3,520,248 | 3.16 | 28.5 | % | |||||||||||
| Total | $ | 39,176 | 15,893,704 | $ | 2.46 | 100.0 | % | |||||||||
For the three months ended September 30, 2019, we had revenue of $11,179,946, as compared to revenue of $14,685,465 for the three months ended September 30, 2018, a decrease of $3,505,519, or 23.9%. The decrease was mainly attributable to changes in different sales mix. Sales volumes in the three months ended September 30, 2019 increased by 49.0% to 8,681,467 kg from 5,827,555 kg in the three months ended September 30, 2018. The increase was mainly attributable to more vessels in operation. Average unit sale price decreased 48.8% in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. The decrease was mainly attributable to the fish species with highest sales volume being sold at lower selling prices, which pulled down the average unit sale price.
For the nine months ended September 30, 2019, we had revenue of $55,067,249, as compared to revenue of $39,175,903 for the nine months ended September 30, 2018, an increase of $15,891,346, or 40.6%. Sales volumes in the nine months ended September 30, 2019 increased 106.7% to 32,852,810 kg from 15,893,704 kg in the nine months ended September 30, 2018. Average unit sale price decreased 31.7% in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.
For the nine months ended September 30, 2019, our increase in revenue was primarily attributable to more vessels in operation, which caused the sales volume to increase, and due to the different sales mix, average unit sale price decreased, as compared to the same period in 2018.
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Cost of revenue
Our cost of revenue primarily consists of fuel cost, depreciation, direct labor cost, freight, fishing vessels maintenance fees, and other overhead costs. 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 September 30, 2019 and 2018 (dollars in thousands):
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Amount | % of cost of revenue | % of revenue | Amount | % of cost of revenue | % of revenue | |||||||||||||||||||
| Fuel cost | $ | 5,867 | 77.2 | % | 52.5 | % | $ | 3,493 | 65.8 | % | 23.8 | % | ||||||||||||
| Labor cost | 746 | 9.8 | % | 6.7 | % | 465 | 8.8 | % | 3.2 | % | ||||||||||||||
| Depreciation | 508 | 6.7 | % | 4.5 | % | 439 | 8.3 | % | 3.0 | % | ||||||||||||||
| Spare parts | 349 | 4.6 | % | 3.1 | % | 98 | 1.8 | % | 0.7 | % | ||||||||||||||
| Freight | 21 | 0.4 | % | 0.2 | % | 731 | 13.8 | % | 5.0 | % | ||||||||||||||
| Maintenance fee | 4 | 0.0 | % | 0.0 | % | 94 | 1.8 | % | 0.6 | % | ||||||||||||||
| Reserve for inventories | - | - | - | (23 | ) | (0.4 | )% | (0.2 | )% | |||||||||||||||
| Other | 100 | 1.3 | % | 0.9 | % | 4 | 0.1 | % | 0.0 | % | ||||||||||||||
| Total cost of revenue | $ | 7,595 | 100.0 | % | 67.9 | % | $ | 5,301 | 100.0 | % | 36.1 | % | ||||||||||||
The following table sets forth our cost of revenue information, both in amounts and as a percentage of revenue for the nine months ended September 30, 2019 and 2018 (dollars in thousands):
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| Amount | % of cost of revenue | % of revenue | Amount | % of cost of revenue | % of revenue | |||||||||||||||||||
| Fuel cost | $ | 24,408 | 64.0 | % | 44.3 | % | $ | 11,533 | 67.0 | % | 29.4 | % | ||||||||||||
| Labor cost | 5,170 | 13.6 | % | 9.4 | % | 2,045 | 11.9 | % | 5.2 | % | ||||||||||||||
| Depreciation | 3,608 | 9.5 | % | 6.6 | % | 1,881 | 10.9 | % | 4.8 | % | ||||||||||||||
| Freight | 3,447 | 9.0 | % | 6.3 | % | 1,407 | 8.2 | % | 3.6 | % | ||||||||||||||
| Spare parts | 1,232 | 3.2 | % | 2.2 | % | 213 | 1.2 | % | 0.5 | % | ||||||||||||||
| Maintenance fee | 23 | 0.1 | % | 0.0 | % | 109 | 0.6 | % | 0.3 | % | ||||||||||||||
| Reserve for inventories | - | - | - | 39 | 0.2 | % | 0.1 | % | ||||||||||||||||
| Other | 247 | 0.6 | % | 0.4 | % | 8 | 0.0 | % | 0.0 | % | ||||||||||||||
| Total cost of revenue | $ | 38,135 | 100.0 | % | 69.2 | % | $ | 17,235 | 100.0 | % | 43.9 | % | ||||||||||||
Cost of revenue for the three months ended September 30, 2019 was $7,594,714, representing an increase of $2,293,885 or 43.3%, as compared to $5,300,829 for the three months ended September 30, 2018. Cost of revenue for the nine months ended September 30, 2019 was $38,134,552, representing an increase of $20,899,373 or 121.3% as compared to $17,235,179 for the nine months ended September 30, 2018. The increase was primarily attributable to the increase in our production activities.
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Gross profit
Our gross profit is affected primarily by changes in production costs. Fuel cost, depreciation, and labor cost together account for about 93.7% and 82.9% of cost of revenue for the three months ended September 30, 2019 and 2018, respectively. Fuel cost, depreciation, and labor cost together account for about 87.1% and 89.8% of cost of revenue for the nine months ended September 30, 2019 and 2018, respectively. The fluctuation of fuel price, and change in labor cost may significantly affect our cost level and gross profit.
The following table sets forth information as to our revenue, cost of revenue, gross profit and gross margin for the three and nine months ended September 30, 2019 and 2018.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenue | $ | 11,179,946 | $ | 14,685,465 | $ | 55,067,249 | $ | 39,175,903 | ||||||||
| Cost of revenue | $ | 7,594,714 | $ | 5,300,829 | $ | 38,134,552 | $ | 17,235,179 | ||||||||
| Gross profit | $ | 3,585,232 | $ | 9,384,636 | $ | 16,932,697 | $ | 21,940,724 | ||||||||
| Gross margin | 32.1 | % | 63.9 | % | 30.7 | % | 56.0 | % | ||||||||
Gross profit for the three months ended September 30, 2019 was $3,585,232, representing a change of $5,799,404, or 61.8%, as compared to gross profit of $9,384,636 for the three months ended September 30, 2018. Gross profit for the nine months ended September 30, 2019 was $16,932,697, representing a change of $5,008,027, or 22.8%, as compared to gross profit of $21,940,724 for the nine months ended September 30, 2018. The decrease was due to the decrease in our average unit sale price and our unit production cost of fish remained at a consistent level.
Gross margin decreased to 32.1% for the three months ended September 30, 2019 from 63.9% for the three months ended September 30, 2018. Gross margin decreased to 30.7% for the nine months ended September 30, 2019 from 56.0% for the nine months ended September 30, 2018. The decrease in gross margin for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018 was primarily attributable to a drop of average unit sale price by 48.8% and 31.7%, respectively, as a result of new fishing vessels being deployed in different waters of high seas and harvesting different catch mix.
Selling expense
Our selling expense mainly includes shipping and handling fees, insurance, customs clearance 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 typically do not aggressively market and distribute our products.
Selling expense totaled $650,786 for the three months ended September 30, 2019, as compared to $319,919 for the three months ended September 30, 2018, an increase of $330,867 or 103.4%. Selling expense totaled $1,895,991 for the nine months ended September 30, 2019, as compared to $1,181,720 for the nine months ended September 30, 2018, an increase of $714,271 or 60.4%. Selling expense as a percentage of revenue for the three months ended September 30, 2019 increased to 5.8% from 2.2% for comparable period in 2018, which was mainly attributable to the decrease in sales revenue and increase in selling expenses. Selling expense as a percentage of revenue for the nine months ended September 30, 2019 increased to 3.4% from 3.0% for the corresponding period in 2018, which was mainly attributable to the increase in selling expenses. Selling expense for the three and nine months ended September 30, 2019 and 2018 consisted of the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Insurance | $ | 304,310 | $ | 33,498 | $ | 840,041 | $ | 175,339 | ||||||||
| Shipping and handling fees | 147,926 | 75,049 | 361,504 | 365,881 | ||||||||||||
| Storage fees | 95,645 | 188,849 | 338,699 | 416,307 | ||||||||||||
| Customs clearance charge | 21,417 | 19,448 | 95,597 | 133,905 | ||||||||||||
| Advertising | 34,580 | - | 34,580 | 20,453 | ||||||||||||
| Other | 46,908 | 3,075 | 225,570 | 69,835 | ||||||||||||
| $ | 650,786 | $ | 319,919 | $ | 1,895,991 | $ | 1,181,720 | |||||||||
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| ● | For the three months ended September 30, 2019, insurance increased by $270,812, or 808.4%, as compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, insurance increased by $664,702, or 379.1%, as compared to the nine months ended September 30, 2018. The change was mainly attributable to more vessels are insured in 2019. |
| ● | For the three months ended September 30, 2019, shipping and handling fees increased by $72,877, or 97.1%, as compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, shipping and handling fees decreased by $4,377, or 1.2%, as compared to the nine months ended September 30, 2018. The decrease in fees was mainly attributable to the number of deliveries from ports to the warehouse in China. |
| ● | For the three months ended September 30, 2019, storage fees decreased by $93,204, or 49.4%, as compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, storage fees decreased by $77,608, or 18.6%, as compared to the nine months ended September 30, 2018. These changes were mainly attributable to warehouse space that was rented for inventory according to fish volume that was delivered. | |
| ● | For the three months ended September 30, 2019, customs clearance charge increased by $1,969, or 10.1%, as compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, customs clearance charge decreased by $38,308, or 28.6%, as compared to the nine months ended September 30, 2018. The change was mainly attributable to the numbers of customs declaration. | |
| ● | For the three months ended September 30, 2019, advertising expenses increased by $34,580, or 100%, as compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, advertising expenses increased by $14,127, or 69.1%, as compared to the nine months ended September 30, 2018. The change was mainly due to no advertising activities occurring during the period. |
| ● | Other miscellaneous selling expense for the three months ended September 30, 2019 increased by $43,833, or 1,425.5%, as compared to the three months ended September 30, 2018. Other miscellaneous selling expense for the nine months ended September 30, 2019 increased by $155,735, or 223.0%, as compared to the nine months ended September 30, 2018. The increase in fees was mainly attributable to satellite communication fees and pilotage fees occurring during the period. |
General and administrative expense
General and administrative expense totaled $1,613,554 for the three months ended September 30, 2019, as compared to $2,152,749 for the three months ended September 30, 2018, a decrease of $539,195 or 25.0%. General and administrative expense totaled $8,545,411 for the nine months ended September 30, 2019, as compared to $8,279,250 for the nine months ended September 30, 2018, an increase of $266,161 or 3.2%. General and administrative expense for the three and nine months ended September 30, 2019 and 2018 consisted of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Depreciation | $ | 913,986 | $ | 1,378,056 | $ | 2,885,203 | $ | 4,423,289 | ||||||||
| Compensation and related benefits | 387,037 | 215,054 | 1,084,328 | 1,292,879 | ||||||||||||
| Professional fees | 191,511 | 151,587 | 1,015,459 | 1,278,018 | ||||||||||||
| Impairment | 70,896 | - | 2,546,338 | - | ||||||||||||
| Rent and related administrative service charge | 33,119 | 117,248 | 299,440 | 352,431 | ||||||||||||
| Travel and entertainment | 9,390 | 18,377 | 117,516 | 56,893 | ||||||||||||
| Bad debt (recovery) expense | - | 4,284 | - | (36,814 | ) | |||||||||||
| Other | 7,615 | 268,143 | 597,127 | 912,554 | ||||||||||||
| $ | 1,613,554 | $ | 2,152,749 | $ | 8,545,411 | $ | 8,279,250 | |||||||||
| ● | We recorded the depreciation in relation to vessels that are not operating as operation expense rather than cost of revenue. For the three months ended September 30, 2019, depreciation expense decreased by $464,070, or 33.7%, as compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, depreciation expense decreased by $1,538,086, or 34.8%, as compared to the nine months ended September 30, 2018. | |
| ● | Compensation and related benefits increased by $171,983, or 80.0%, for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, compensation and related benefits decreased by $208,551, or 16.1%, as compared to the nine months ended September 30, 2018. The change was mainly attributable to booking the salaries of the crews that are not in operation in East Timor into G&A expenses in the first three quarters of 2018, and we have no such costs during the first three quarters of 2019 as these non-operation vessels shipped back to China. |
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| ● | Professional fees, which primarily consist of legal fees, accounting fees, investor relation service charges, valuation service fees and other fees associated with being a public company, for the three months ended September 30, 2019 increased by $39,924, or 26.3%, as compared to the three months ended September 30, 2018. The increase in the three months ended September 30, 2019 was primarily attributable to an increase in legal fees of approximately $53,000 and an increase in consulting fees of approximately $2,500, offset by a decrease in accounting fees of approximately $15,000 and a decrease in transfer agent fees of approximately $5,000. For the nine months ended September 30, 2019, professional fees decreased by $262,559, or 20.5%, as compared to the nine months ended September 30, 2018. The decrease in the nine months ended September 30, 2019 was primarily attributable to a decrease in consulting fees of approximately $102,000, a decrease in legal fees of approximately $184,000, offset by an increase in accounting fees of approximately $33,000. |
| ● | Impairment loss represents the impairment loss on the vessels whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recovered. During the nine months ended September 30, 2019, we dismantled 1 transport vessel and deregistered 6 fishing vessels and applied to the MOA for rebuilding 7 new vessels. As a result of the rebuilding projects, we assessed the recoverability of the 7 fishing vessels based on the undiscounted future cash flow that the fishing vessels are expected to generate as less than the carrying amount, and recognized an impairment loss of $2,546,338. |
| ● | Rent and related administrative service charge decreased by $84,129, or 71.8%, for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, rent and related administrative service charge decreased by $52,991, or 15.0%, as compared to the nine months ended September 30, 2018. | |
| ● | For the three months ended September 30, 2019, travel and entertainment expense decreased by $8,987, or 48.9%, as compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, travel and entertainment expense increased by $60,623, or 106.6%, as compared to the nine months ended September 30, 2018. The increase was mainly attributable to an increase in travel expense of approximately $7,000 and an increase in entertainment expense of approximately $53,000. | |
| ● | For the three months ended September 30, 2019, we have not recorded any bad debt expense as compared to bad debt of $4,284 for the three months ended September 30, 2018. For the nine months ended September 30, 2019, we have not recorded any bad debt expense as compared to bad debt recovery of $36,814 for the nine months ended September 30, 2018. 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, and customers’ collection history, and recent economic events. |
| ● | Other general and administrative expense, primarily consists of communication fees, office supplies, miscellaneous taxes, bank service charge, depreciation, and NASDAQ listing fee. For the three months ended September 30, 2019, other general and administrative expense decreased by $260,528, or 97.2%, as compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, other general and administrative expense decreased by $315,427, or 34.6%, as compared to the nine months ended September 30, 2018. The decrease was mainly attributable to a decrease in insurance of approximately $206,000, a decrease in bank service charge of approximately $119,000 and a decrease in depreciation of approximately $140,000, offset by an increase in miscellaneous tax of approximately $57,000, an increase in parking fee of approximately $31,000 and an increase in other items of approximately $74,000. |
Subsidy
The subsidy mainly consists of an incentive granted by the Chinese government to encourage the development of the ocean fishing industry in order to satisfy the demand of natural seafood in China and other miscellaneous subsidy from the Chinese government. For the three months ended September 30, 2019, subsidy decreased by $2,189,150, or 29.3%, as compared to the three months ended September 30, 2018. For the nine months ended September 30, 2019, subsidy decreased by $3,241,262, or 38.0%, as compared to the nine months ended September 30, 2018. The change was mainly due to the government’s subsidy disbursement schedule.
Gain or Loss on fixed assets disposal
Gain or loss on fixed assets disposal represents the gain or loss on the disposal of fixed assets we recorded as it incurred. For the three months ended September 30, 2019, the gain on fixed assets disposal was $1,777 and for the three months ended September 30, 2018, the gain on fixed assets disposal was $49,626. For the nine months ended September 30, 2019 and 2018, the loss on fixed assets disposal was $164,375 and $2,129,124, respectively. This was mainly due to 27 fishing vessels being dismantled for modification and rebuilding project in 2018.
Income from operations
As a result of the factors described above, for the three months ended September 30, 2019, income from operations amounted to $6,611,255, as compared to income from operations of $14,439,330 for the three months ended September 30, 2018, a change of $7,828,075, or 54.2%. For the nine months ended September 30, 2019, income from operations amounted to $11,615,506, as compared to income from operations of $18,880,478 for the nine months ended September 30, 2018, a change of $7,264,972, or 38.5%.
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Other income/expense
Other income/expense mainly include interest income from bank deposits, interest expense generated from short-term and long-term bank borrowings, foreign currency transaction gain, gain from cost method investment, and loss on equity method investment.
For the three months ended September 30, 2019, other expense, net, amounted to $2,200,862 as compared to other expense, net, of $702,445 for the three months ended September 30, 2018, an increase of $1,498,417, or 213.3%, which was primarily attributable to an increase in interest expenses of approximately $515,000 as a result of increase in bank loans, an increase in loss on equity method investment of approximately $36,000 and an increase in other expenses of approximately $985,000, offset by a decrease in foreign currency transaction loss of approximately $33,000 and a decrease in loss from cost method investment of approximately $2,000.
For the nine months ended September 30, 2019, other expense, net, amounted to $4,139,485 as compared to other expense, net, of $823,646 for the nine months ended September 30, 2018, an increase of $3,315,839, or 402.6%, which was primarily attributable to an increase in interest expenses of approximately $1,984,000 as a result of increase in bank loans, an increase in foreign currency transaction loss of approximately $183,000, a decrease in gain from cost method investment of approximately $47,000, an increase in loss on equity method investment of approximately $356,000, a decrease in interest income of approximately $13,000 and an increase in other expenses of approximately $732,000.
Income taxes
We are exempted from income taxes for income generated from our ocean fishing operations in China for the three and nine months ended September 30, 2019 and 2018.
Net income
As a result of the factors described above, our net income was $4,410,393 for the three months ended September 30, 2019, as compared with net income of $13,736,885 for the three months ended September 30, 2018, a change of $9,326,492 or 67.9%. Our net income was $7,476,021 for the nine months ended September 30, 2019, as compared with net income of $18,056,832 for the nine months ended September 30, 2018, a change of $10,580,811 or 58.6%.
Net income attributable to owners of the Company
The net income attributable to owners of the Company was $4,032,534, or $0.05 per ordinary share (basic and diluted), for the three months ended September 30, 2019, as compared with net income attributable to owners of the Company of $12,603,065, or $0.16 per ordinary share (basic and diluted), for the three months ended September 30, 2018, a change of $8,570,531 or 68.0%.
The net income attributable to owners of the Company was $6,724,339, or $0.09 per ordinary share (basic and diluted), for the nine months ended September 30, 2019, as compared with net income attributable to owners of the Company of $16,420,842, or $0.21 per ordinary share (basic and diluted), for the nine months ended September 30, 2018, a change of $9,696,503 or 59.0%.
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 which are incorporated in China is the Chinese Renminbi (“RMB”). The financial statements of our subsidiaries which are 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 and comprehensive income (loss). As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $5,966,142 for the three months ended September 30, 2019, as compared to a foreign currency translation loss of $6,297,631 for the three months ended September 30, 2018. We reported a foreign currency translation loss of $3,066,793 for the nine months ended September 30, 2019, as compared to a foreign currency translation loss of $8,348,613 for the nine months ended September 30, 2018. This non-cash loss had the effect of increasing/decreasing our reported comprehensive loss/gain.
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Comprehensive (loss) income
As a result of our foreign currency translation adjustment, we had comprehensive loss for the three months ended September 30, 2019 of $1,555,749, compared to comprehensive income of $7,439,254 for the three months ended September 30, 2018. We had comprehensive income for the nine months ended September 30, 2019 of $4,409,228, compared to comprehensive income of $9,708,219 for the nine months ended September 30, 2018.
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 subsidy as the government incentive for encouraging development of ocean fishing industry. At September 30, 2019 and December 31, 2018, we had cash balances of approximately $20,420,000 and $1,967,000, 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.
The following table sets forth a summary of changes in our working capital from December 31, 2018 to September 30, 2019:
| December 31, 2018 to September 30, 2019 | ||||||||||||||||
| September 30, 2019 | December 31, 2018 | Change | Percentage Change | |||||||||||||
| Working capital deficit: | ||||||||||||||||
| Total current assets | $ | 85,293,343 | $ | 15,457,828 | $ | 69,835,515 | 451.8 | % | ||||||||
| Total current liabilities | 113,233,823 | 73,073,227 | 40,160,596 | 55.0 | % | |||||||||||
| Working capital deficit: | $ | (27,940,480 | ) | $ | (57,615,399 | ) | $ | 29,674,919 | (51.5 | )% | ||||||
Our working capital deficit decreased $29,674,919 to a working capital deficit of $27,940,480 at September 30, 2019 from working capital deficit of $57,615,399 at December 31, 2018. This decrease in working capital deficit is primarily attributable to an increase in accounts payable of approximately $16,984,000 due to the vessel construction, an increase in long-term bank loans - current portion approximately of $43,189,000 due to the repayment schedule, an increase in accrued liabilities and other payables of approximately $2,138,000, an increase in lease liability of approximately $437,000 due to the adaptation of ASU 2016-02, a decrease in accounts receivable, net of allowance for doubtful accounts, of approximately $4,241,000, offset by an increase in prepaid expenses of approximately $303,000, an increase in due from related parties of approximately $40,039,000, an increase in inventories, net of reserve for inventories, of approximately $15,413,00 due to our business expansion resulting from more fishing vessels put in operations, a decrease in accounts payable - related parties of approximately $2,926,000 and a decrease in due to related parties of approximately $19,532,000.
In order to mitigate our liquidity risk, we plan to rely on the proceeds from loans from banks and/or financial institutions to increase working capital in order to meet capital demands. In addition, we expect Mr. Zhuo, the Chief Executive Officer and Chairman of the Board, to continue to provide financial support to the Company when necessary. We also expect to continue to receive government subsidy from local and central government for modifying and rebuilding vessel projects.
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 nine months ended September 30, 2019 compared to the nine months ended September 30, 2018
The following summarizes the key components of our cash flows for the nine months ended September 30, 2019 and 2018:
| Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Net cash (used in) provided by operating activities | $ | (8,054,141 | ) | $ | 23,979,969 | |||
| Net cash used in investing activities | (72,438,901 | ) | (16,613,153 | ) | ||||
| Net cash provided by (used in) financing activities | 99,809,172 | (1,098,370 | ) | |||||
| Effect of exchange rate on cash | (862,543 | ) | (574,848 | ) | ||||
| Net increase in cash | $ | 18,453,587 | $ | 5,693,598 | ||||
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Net cash flow used in operating activities was $8,054,141 for the nine months ended September 30, 2019 as compared to net cash flow provided by operating activities of $23,979,969 for the nine months ended September 30, 2018, a change of $32,034,110.
| ● | Net cash flow used in operating activities for the nine months ended September 30, 2019 primarily reflected our net income of approximately $7,476,000, and the add-back of non-cash items, mainly consisting of depreciation of approximately $7,669,000, an increase in allowance for doubtful accounts of approximately $13,000, a decrease in reserve for inventories of approximately $371,000, loss on equity method investment of approximately $478,000, loss on disposal of fixed assets of approximately $164,000 and impairment loss of fishing vessels of approximately $2,533,000, and changes in operating assets and liabilities primarily consisting of an increase in inventory of approximately $15,713,000 due to our business expansion resulting from more fishing vessels put in operations, an increase in prepaid expenses of approximately $333,000, an increase in other receivables- related parties of approximately $359,000, a decrease in accounts payable of approximately $3,966,000, a decrease in accounts payable-related parties of approximately $2,920,000 and a decrease in due to related parties of approximately $9,433,000, offset by a decrease in accounts receivable of approximately $4,171,000 and an increase in accrued liabilities and other payables of approximately $1,552,000. |
| ● | Net cash flow provided by operating activities for the nine months ended September 30, 2018 primarily reflected our net income of approximately $18,057,000, and the add-back of non-cash items, mainly consisting of depreciation of approximately $6,934,000, decrease in allowance for doubtful accounts of approximately $37,000, an increase in reserve for inventories of approximately $39,000, loss on disposal of fixed assets of approximately $2,129,000 and loss on equity method investment of approximately $122,000, and changes in operating assets and liabilities primarily consisting of a decrease in accounts receivable of approximately $6,878,000, an increase in accounts payable- related parties of approximately $678,000, and an increase in due to related parties of approximately $2,529,000, offset by an increase in inventories of approximately $5,712,000, an increase in prepaid expenses of approximately $5,729,000, an increase in other receivables of approximately $436,000, a decrease in accounts payable of approximately $531,000 and a decrease in accrued liabilities and other payables of approximately $940,000. |
Net cash flow used in investing activities was $72,438,901 for the nine months ended September 30, 2019 as compared to $16,613,153 for the nine months ended September 30, 2018. During the nine months ended September 30, 2019, we made payments for purchase of property, plant and equipment of approximately $105,568,000, offset by proceeds received from government subsidy for fishing vessel construction of approximately $33,129,000. During the nine months ended September 30, 2018, we made payments for purchase of property, plant and equipment of approximately $21,915,000, offset by proceeds received from government subsidy for fishing vessel construction of approximately $5,302,000.
Net cash flow provided by financing activities was $99,809,172 for the nine months ended September 30, 2019 as compared to net cash flow used in financing activities of $1,098,000 for the nine months ended September 30, 2018. During the nine months ended September 30, 2019, we received long-term bank loans of approximately $163,552,000, offset by the repayments of long-term bank loans of approximately $11,964,000 and advances to related parties of approximately $10,111,000 and advances from related parties of approximately $41,668,000. During the nine months ended September 30, 2018, we received advances from related parties of approximately $3,713,000 and proceeds from short-term bank loan of approximately $15,185,000, offset by the repayments of short-term bank loans of approximately $14,634,000, the repayment of long-term bank loans of approximately $2,991,000 and cash made for dividend payments of approximately $2,372,000.
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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 September 30, 2019 (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 | |||||||||||||||
| Office lease obligation | $ | 983 | $ | 480 | $ | 503 | $ | - | $ | - | ||||||||||
| Short-term bank loans (1) | 4,956 | 4,956 | - | - | - | |||||||||||||||
| Long-term bank loans | 176,801 | 51,676 | 47,646 | 49,909 | 27,570 | |||||||||||||||
| Total | $ | 182,740 | $ | 57,112 | $ | 48,149 | $ | 49,909 | $ | 27,570 | ||||||||||
| (1) | Historically, we have refinanced these short-term bank loans for an additional term of six months to one year and we expect to continue to refinance these loans upon expiration. |
Off-balance sheet arrangements
None.
Recent accounting pronouncements
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2018-02 is permitted, including adoption in any interim period for the public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We do not expect the adoption of ASU 2018-02 to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): simplifying the test for goodwill impairment”, the guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not the difference between the fair value and carrying amount of good will which was the step 2 test before. The ASU should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. The ASU sets forth a “current expected credit loss” (“CECL”) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing probable incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgements used in determining the allowance for loan losses, as well as the credit quality and underwriting standards of an organization’s loan portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In October 2019, FASB approved the extension of the effective date for adoption of ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 31, 2022, including interim periods therein. Early adoption is permitted in fiscal years beginning after December 31, 2018. The Company is currently evaluating the alternative methodologies available and assessing its data and system needs to implement this ASU.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Commodity price risk
Oil cost accounts for approximately 77.2% and 64.0% of our total cost of revenue for the three and nine months ended September 30, 2019, respectively. We are primarily exposed to oil price volatility caused by supply conditions, political and economic variables and other unpredictable factors. We purchase oil used by our vessels at prevailing market prices. We do not have formal long-term purchase contracts with our suppliers and, therefore, we are exposed to the risk of fluctuating oil prices.
We did not have any commodity price derivatives or hedging arrangements outstanding at September 30, 2019 and did not employ any commodity price derivatives in the nine months ended September 30, 2019.
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 increase (decrease) our comprehensive income by $44,092 for the nine months ended September 30, 2019 based on our revenue, costs and expenses, and assets and liabilities denominated in RMB as of September 30, 2019. 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.
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 $181.8 million at September 30, 2019. 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 $40,130. 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.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
In connection with the preparation of the quarterly report on Form 10-Q for the quarter ended September 30, 2019, 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 Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of September 30, 2019.
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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For a description of legal proceedings, refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on March 15, 2019.
Factors that could cause our actual results to differ materially from those in this report are described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on March 15, 2019.
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.
None.
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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 | |
| 101.PRE* | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT |
| * | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| PINGTAN MARINE ENTERPRISE LTD. | ||
| (Registrant) | ||
| Date: November 8, 2019 | By: | /s/ Xinrong Zhuo |
| Xinrong Zhuo | ||
| Chairman and Chief Executive Officer | ||
| Date: November 8, 2019 | By: | /s/ Roy Yu |
| Roy Yu | ||
| Chief Financial Officer | ||
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