UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013
or
¨ | 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 or organization) | Identification No.) |
18/F, Zhongshan Building A,
No. 154 Hudong Road
Fuzhou, P.R.C. 350001
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 86-591-8727-1266
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company x |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 7, 2013, the outstanding number of shares of the registrant’s common stock, par value $0.01 per share, was 79,055,053.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this report, and the information incorporated by reference herein, which reflect our current views with respect to future events and financial performance, and any other statements of a future or forward-looking nature, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give current expectations or forecasts of future events. Our forward-looking statements include, but are not limited to, statements regarding our expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this report may include, for example, statements about:
• | our ability to complete our initial business combination; |
• | our potential ability to obtain additional financing to complete our initial business combination; |
• | our pool of prospective target businesses; |
• | the ability of our officers and directors to generate a number of potential investment opportunities; |
• | our public securities’ limited liquidity and trading; |
• | the use of proceeds not held in the trust account or available to us from interest income on the trust account balance; or |
• | our financial performance. |
The forward-looking statements contained or incorporated by reference in this report are based on our current expectations and beliefs concerning future developments and their potential effects on us and speak only as of the date of such statement. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
References in this report to “we,” “us” or “our company” refer to Pingtan Marine Enterprise Ltd. References in this report to our “public shares” are to our ordinary shares sold as part of the units in our initial public offering (whether they are purchased in our initial public offering or thereafter in the open market) and references to “public stockholders” refer to the holders of our public shares, including our initial stockholders (as defined below) to the extent our initial stockholders purchased public shares, provided that each initial stockholder’s status as a “public stockholder” shall only exist with respect to such public shares.
CHINA GROWTH EQUITY INVESTMENT LTD.
TABLE OF CONTENTS
PART I. | FINANCIAL INFORMATION | ||
ITEM 1. | FINANCIAL STATEMENTS (unaudited) | 1 | |
Consolidated Balance Sheets | 1 | ||
Consolidated Statements of Income | 2 | ||
Consolidated Statements of Comprehensive Income | 3 | ||
Consolidated Statement of Shareholders’ Equity | 4 | ||
Consolidated Statements of Cash Flows | 5 | ||
Notes to Unaudited Consolidated Financial Statements | 7 | ||
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 52 | |
Special Note Regarding Forward-Looking Statements | 52 | ||
Overview | 52 | ||
Significant Factors Affecting Our Results of Operation | 54 | ||
Principal Income Statement Components | 55 | ||
Results of Operations | 57 | ||
Liquidity and Capital Resources | 61 | ||
Recent Accounting Pronouncements | 64 | ||
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 64 | |
ITEM 4. | CONTROLS AND PROCEDURES | 64 | |
PART II. | OTHER INFORMATION | 65 | |
ITEM 1. | LEGAL PROCEEDINGS | 65 | |
ITEM 1A. | RISK FACTORS | 65 | |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 65 | |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 65 | |
ITEM 4. | MINE SAFETY DISCLOSURES | 65 | |
ITEM 5. | OTHER INFORMATION | 65 | |
ITEM 6. | EXHIBITS | 65 |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINGTAN MARINE ENTERPRISE LTD.
Consolidated Balance Sheets
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | (A) | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $ | 206,108,221 | $ | 175,488,715 | ||||
Notes receivable (banker's acceptances) transferred from related parties | - | 3,645,817 | ||||||
Accounts receivable - third parties | 6,594,416 | 34,924,685 | ||||||
Cost and estimated earnings in excess of billings on contracts in progress | 9,531,476 | 8,133,021 | ||||||
Other receivables | 8,868,730 | 34,074 | ||||||
Advance to related parties | 60,318,092 | 49,802,821 | ||||||
Prepaid expenses | 1,444,979 | 410,966 | ||||||
Inventories | 4,647,929 | 5,223,984 | ||||||
Total current assets | 297,513,843 | 277,664,083 | ||||||
Other assets | ||||||||
Prepaid other deposits | 4,830 | 4,430 | ||||||
Prepaid dredger deposits | 23,346,429 | 23,274,105 | ||||||
Security deposits | 21,204,998 | 25,087,880 | ||||||
Long-term investment | 3,381,207 | 3,328,789 | ||||||
Deposit on setting up of Joint Venture | - | 6,090,302 | ||||||
Deposit for BT project | 67,060,604 | 66,852,860 | ||||||
Dredger, fishing vessel, motor vehicle, machinery and equipment, net | 93,225,303 | 81,707,388 | ||||||
Total other assets | 208,223,371 | 206,345,754 | ||||||
Total assets | $ | 505,737,214 | $ | 484,009,837 | ||||
Liabilities and equity | ||||||||
Current liabilities | ||||||||
Short-term loans | $ | 12,020,599 | $ | 25,169,260 | ||||
Long-term loans - current portion | 7,499,034 | 8,094,308 | ||||||
Accounts payable - third parties | 7,462,804 | 3,761,149 | ||||||
Accounts payable - related parties | 4,956,093 | 5,765,632 | ||||||
Advance from related parties | 19,147,153 | 714,177 | ||||||
Derivative liability | - | 1,764,249 | ||||||
Receipt in advance - third parties | 793,244 | - | ||||||
Receipt in advance - related parties | 4,908,426 | 12,681,102 | ||||||
Income tax payable | 1,584,914 | 5,333,519 | ||||||
Accrued liabilities and other payables | 4,645,682 | 3,738,134 | ||||||
Deferred income | 9,410,382 | - | ||||||
Total current liabilities | 72,428,331 | 67,021,530 | ||||||
Other liabilities | ||||||||
Long-term loans, net of current portion | 17,674,857 | 16,689,321 | ||||||
Total other liabilities | 17,674,857 | 16,689,321 | ||||||
Total liabilities | 90,103,188 | 83,710,851 | ||||||
Shareholders' equity | ||||||||
Ordinary
shares, 225,000,000 shares authorized |
79,055 | 79,055 | ||||||
Statutory reserves | 19,481,703 | 19,386,642 | ||||||
Additional paid-in capital | 141,381,098 | 141,381,098 | ||||||
Retained earnings | 230,911,700 | 217,224,220 | ||||||
Accumulated other comprehensive income | 23,780,470 | 22,227,971 | ||||||
Total shareholders’ equity | 415,634,026 | 400,298,986 | ||||||
Total liabilities and shareholders' equity | $ | 505,737,214 | $ | 484,009,837 |
(A) | Represents the consolidation retrospectively restated as if Pingtan Marine Enterprise Ltd. (formerly known as China Growth Equity Investment Limited) completed its merger with China Dredging Group Co., Ltd. and the share purchase of Merchant Supreme Co., Ltd. on January 1, 2012 rather than on February 25, 2013. |
See accompanying notes to unaudited consolidated financial statements.
1 |
PINGTAN MARINE ENTERPRISE LTD.
Consolidated Statements of Income
(unaudited)
For the Three Months Ended March 31, | ||||||||
2013 | 2012 (A) | |||||||
Revenue | $ | 46,408,547 | $ | 75,055,734 | ||||
Cost of revenue | (30,314,630 | ) | (37,731,229 | ) | ||||
Gross profit | 16,093,917 | 37,324,505 | ||||||
Selling and marketing expenses | (194,688 | ) | (209,674 | ) | ||||
. | ||||||||
General and administrative expenses | (1,407,815 | ) | (2,472,715 | ) | ||||
Operating income | 14,491,414 | 34,642,116 | ||||||
Other income/(expense) | ||||||||
Subsidy income | 35,387 | - | ||||||
Interest income | 170,132 | 150,269 | ||||||
Interest expenses | (685,377 | ) | (464,614 | ) | ||||
Sundry income | 2,003 | - | ||||||
Gain on foreign exchange, net | 207,984 | 51,538 | ||||||
Gain/(loss) on derivative | 1,764,249 | (192,957 | ) | |||||
Total other income/(expense) | 1,494,378 | (455,764 | ) | |||||
Income before income taxes | 15,985,792 | 34,186,352 | ||||||
Income tax expense | (2,203,251 | ) | (7,329,896 | ) | ||||
Net income | $ | 13,782,541 | $ | 26,856,456 |
Earnings per ordinary share | ||||||||
- Basic and diluted | $ | 0.17 | $ | 0.34 | ||||
Weighted average number of ordinary shares outstanding | ||||||||
- Basic and diluted | 79,055,053 | 79,055,053 |
(A) | Represents the consolidation retrospectively restated as if Pingtan Marine Enterprise Ltd. (formerly known as China Growth Equity Investment Limited) completed its merger with China Dredging Group Co., Ltd. and the share purchase of Merchant Supreme Co., Ltd. on January 1, 2012 rather than on February 25, 2013. |
See accompanying notes to unaudited consolidated financial statements.
2 |
PINGTAN MARINE ENTERPRISE LTD.
Consolidated Statements of Comprehensive Income
(unaudited)
For the Three Months Ended March 31, | ||||||||
2013 | 2012 (A) | |||||||
Net income | $ | 13,782,541 | $ | 26,856,456 | ||||
Other comprehensive income | ||||||||
Foreign currency translation gain | 1,552,499 | 92,635 | ||||||
Total comprehensive income | $ | 15,335,040 | $ | 26,949,091 |
(A) | Represents the consolidation retrospectively restated as if Pingtan Marine Enterprise Ltd. (formerly known as China Growth Equity Investment Limited) completed its merger with China Dredging Group Co., Ltd. and the share purchase of Merchant Supreme Co., Ltd. on January 1, 2012 rather than on February 25, 2013. |
See accompanying notes to unaudited consolidated financial statements.
3 |
PINGTAN MARINE ENTERPRISE LTD.
Consolidated Statement of Shareholders’ Equity
(unaudited)
Ordinary Shares, | Accumulated | |||||||||||||||||||||||||||
with no Par Value | Additional | other | Total | |||||||||||||||||||||||||
Number of | Statutory | paid-in | Retained | comprehensive | shareholders' | |||||||||||||||||||||||
Shares | Amount | reserves | capital | earnings | income | equity | ||||||||||||||||||||||
Balance as of January 1, 2013 (A) | 79,055,053 | $ | 79,055 | $ | 19,386,642 | $ | 141,381,098 | $ | 217,224,220 | $ | 22,227,971 | $ | 400,298,986 | |||||||||||||||
Net income | - | - | - | - | 13,782,541 | - | 13,782,541 | |||||||||||||||||||||
Appropriation to statutory reserves | - | - | 95,061 | - | (95,061 | ) | - | - | ||||||||||||||||||||
Foreign
currency translation gain | - | - | - | - | - | 1,552,499 | 1,552,499 | |||||||||||||||||||||
Balance as of March 31, 2013 | 79,055,053 | $ | 79,055 | $ | 19,481,703 | $ | 141,381,098 | $ | 230,911,700 | $ | 23,780,470 | $ | 415,634,026 |
(A) | Represents the consolidation retrospectively restated as if Pingtan Marine Enterprise Ltd. (formerly known as China Growth Equity Investment Limited) completed its merger with China Dredging Group Co., Ltd. and the share purchase of Merchant Supreme Co., Ltd. on January 1, 2012 rather than on February 25, 2013. |
See accompanying notes to unaudited consolidated financial statements.
4 |
PINGTAN MARINE ENTERPRISE LTD.
Consolidated Statement of Cash Flows
(unaudited)
For the Three Months Ended March 31, | ||||||||
2013 | 2012 (A) | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 13,782,541 | $ | 26,856,456 | ||||
Adjustments to reconcile net income to net | ||||||||
cash provided by operating activities | ||||||||
Depreciation of dredger, fishing vessel, motor vehicle, machinery and equipment | 2,648,376 | 2,701,825 | ||||||
(Gain)/loss on derivative | (1,764,249 | ) | 192,957 | |||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable - third parties | 28,555,829 | 2,247,242 | ||||||
Accounts receivable - related parties | - | (2,168,154 | ) | |||||
Cost and estimated earnings in excess of billings on contracts in progress | (1,371,834 | ) | 6,956,820 | |||||
Other receivables | (8,825,504 | ) | (24,668 | ) | ||||
Prepaid expenses | (1,026,911 | ) | 3,703,227 | |||||
Inventories | 594,162 | (1,593,977 | ) | |||||
Accounts payable - third parties | 3,685,453 | 750,194 | ||||||
Accounts payable - related parties* | 5,280,689 | 4,822 | ||||||
Receipt in advance - third parties | 792,465 | (1,162,810 | ) | |||||
Receipt in advance - related parties | (7,964,540 | ) | - | |||||
Income tax payable | (3,761,484 | ) | (958,004 | ) | ||||
Accrued liabilities and other payables | 883,230 | (1,260,362 | ) | |||||
Net cash provided by operating activities | 31,508,223 | 36,245,568 | ||||||
Cash flows from investing activities | ||||||||
Deposit paid for other fixed assets | (386 | ) | - | |||||
Changes in security deposits | 3,956,956 | - | ||||||
Proceeds from deferred income** | 9,401,148 | - | ||||||
Purchase of dredger, fishing vessels, motor vehicle machinery and equipment | (13,342,866 | ) | (1,587,377 | ) | ||||
Advance to related parties | (9,962,327 | ) | (9,096,655 | ) | ||||
Net cash used in investing activities | (9,947,475 | ) | (10,684,032 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from short-term loans | 9,727,422 | 9,117,597 | ||||||
Repayment of short-term loans | (23,259,126 | ) | (7,607,248 | ) | ||||
Advance from related parties | 22,355,241 | 12,330,083 | ||||||
Net cash provided by financing activities | 8,823,537 | 13,840,432 | ||||||
Net increase in cash | 30,384,285 | 39,401,968 | ||||||
Effect of exchange rate | 235,221 | (32,402 | ) | |||||
Cash at the beginning of period | 175,488,715 | 114,204,340 | ||||||
Cash at the end of period | $ | 206,108,221 | $ | 153,573,906 |
5 |
For the Three Months Ended March 31, | ||||||||
2013 | 2012 (A) | |||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid: | ||||||||
Income tax paid | $ | 5,964,685 | $ | 8,287,901 | ||||
Interest paid | $ | 685,377 | $ | 464,614 | ||||
Supplemental disclosures of non-cash transactions: | ||||||||
Deferred income | $ | 7,550,451 | $ | - |
*Note
1: Deposit on setting up Joint Venture netted off with accounts payable – related parties.
**Note 2: Deferred income relates to government grants to construct
new fishing vessels.
(A) | Represents the consolidation retrospectively restated as if Pingtan Marine Enterprise Ltd. (formerly known as China Growth Equity Investment Limited) completed its merger with China Dredging Group Co., Ltd. and the share purchase of Merchant Supreme Co., Ltd. on January 1, 2012 rather than on February 25, 2013. |
See accompanying notes to unaudited consolidated financial statements.
6 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. | DESCRIPTION OF BUSINESS AND ORGANIZATION |
China Equity Growth Investment Ltd. (“CGEI”) incorporated in the Cayman Islands as an exempted limited liability company, was incorporated as a blank check company on January 18, 2010 with the purpose of directly or indirectly acquiring, through a merger, share exchange, asset acquisition, plan of arrangement, recapitalization, reorganization or similar business combination, an operating business, or control of such operating business through contractual arrangements, that has its principal business and/or material operations located in the PRC. In connection with its initial business combination, CGEI changed its name to Pingtan Marine Enterprise Ltd. (“the Company” or “PME”) in February 2013.
China Dredging Group Co., Ltd (“CDGC” or “China Dredging”) and Merchant Supreme Co., Ltd (“Merchant Supreme”) are limited liability companies incorporated on April 14, 2010 and June 25, 2012, respectively, in British Virgin Island (“BVI”).
China Dredging, through its PRC Variable Interest Entity (“VIE”), Fujian Service Port Service Co., Ltd (“Fujian Service”), provides specialized dredging services exclusively to the PRC marine infrastructure market and is, based on the number and capacity of the dredging vessels it operates, one of the leading independent (not state-owned) providers of such services in the PRC. Since its inception, China Dredging has functioned exclusively as a specialist subcontractor, performing dredging services for other companies licensed to function as general contractors. China Dredging engages in capital dredging, maintenance dredging and reclamation dredging projects and primarily sources its projects by subcontracting projects from general contractors.
Merchant Supreme, through its PRC VIE, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd. (“Pingtan Fishing”) engages in ocean fishery with its self-owned vessels within Indian EEZ and Arafura Sea of Indonesia, Pingtan Fishing is ranked as one of the leading private (not state-owned) supplier and trader of oceanic aquatic products in PRC.
CGEI and CDGC entered into the Merger Agreement dated October 24, 2012, providing for the combination of CGEI and CDGC. Pursuant to the Merger Agreement, CDGC would continue as the surviving company and a wholly-owned subsidiary of CGEI. CGEI also acquired all of the outstanding capital shares and other equity interests of Merchant Supreme as per Share Purchase Agreement dated October 24, 2012. Following the completion of the business combination held on February 25, 2013, CDGC and Merchant Supreme became the wholly-owned subsidiaries of the Company. The ordinary shares, par value $0.001 per share were listed on The NASDAQ Capital Market under the symbol “PME”.
Details of the Company’s subsidiaries and VIEs which are included in these consolidated financial statements as of March 31, 2013 are as follows:
7 |
Subsidiaries' names | Place and date of incorporation | Percentage of ownership | Principal activities | |||
China Dredging Group Co., Ltd (“CDGC” or “China Dredging”) | BVI April 14, 2010 | 100% held by PME | Intermediate holding company | |||
China Dredging (HK) Company Limited (“China Dredging HK”) | Hong Kong, PRC April 26, 2010 | 100% through CDGC | Intermediate holding company | |||
Master Gold Corporation Limited (“Master Gold”) | Hong Kong, PRC June 1, 2012 | 100% through CDGC | Intermediate holding company | |||
Fujian
WangGang Dredging Construction Co., Ltd. (“Fujian WangGang”) | PRC June 12, 2010 | 100% through China Dredging H/C VIE Agreement signed with Wonder Dredging | Intermediate holding company | |||
PingTan XingYi Port Service Co., Ltd (“PingTan XingYi”) | PRC August 6, 2012 | 100% through Wonder Dredging | BT project involves dredging, reclamation and cofferdam construction | |||
PingTan ZhuoYing Dredging Engineering Construction Co., Ltd (“PingTan ZhuoYing”) | PRC September 26, 2012 | 100% through Master Gold | Intermediate holding company | |||
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, PRC, May 3, 2012 | 100% through Merchant Supreme | Intermediate holding company | |||
Pingtan Guansheng Ocean Fishing Co., Ltd. (“Pingtan Guansheng”) | PRC October 12, 2012 | 100% through Prime Cheer | Intermediate holding company |
Variable Interest Entities | Place and date of incorporation | Percentage of ownership | Remark | |||
Wonder Dredging Engineering LLC (“Wonder Dredging”) | PRC May 10, 2010 | 91% owned by Qing Lin, 9% owned by Panxing Zhuo | Signed VIE agreement with Fujian WangGang | |||
Fujian Xing Gang Port Service Co., Ltd. (“Fujian Service”) | PRC January 8, 2008 | 50% through Fujian WangGang, 50% through Wonder Dredging | Signed VIE agreement with WangGang. Provides specialized dredging services in the PRC | |||
Fujian Provincial Pingtan County Fishing Group Co., Ltd. (“Pingtan Fishing”) | PRC February 27, 1998 | 70% owned by Honghong Zhuo, 30% owned by Zhiyan Lin | Signed VIE agreement with Pingtan Guansheng. Engaged in ocean fishing and sale of frozen marine catches | |||
Pingtan Dingxin Fishing Information Consulting Co., Ltd. (“Pingtan Dingxin”) | PRC October 21, 2012 | 100% through Pingtan Fishing | No business activity | |||
Pingtan Duoying Fishing Information Consulting Co., Ltd. (“Pingtan Duoying”) | PRC October 21, 2012 | 100% through Pingtan Fishing | No business activity | |||
Pingtan Ruiying Fishing Information Consulting Co., Ltd. (“Pingtan Ruiying”) | PRC October 21, 2012 | 100% through Pingtan Fishing | No business activity |
8 |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
(a) | Basis of presentation |
These interim consolidated financial statements of the Company and its subsidiaries and variable interest entities (each, a “VIE”, and together with the Company and its subsidiaries, the “Group”) are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures necessary for a fair presentation of these interim consolidated financial statements have been included. The results reported in the consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”).
The unaudited consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and VIEs in which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated. The consolidated financial statements of the Company have been prepared as if the existing corporate structure had been in existence throughout the periods presented and as if the reorganization had occurred as of the beginning of the earliest period presented.
.
(b) | Consolidation of VIE |
The Company has no direct or indirect legal or equity ownership interest in Pingtan Fishing and it only owes 50% equity interest in Fujian Service. However, through the VIE Agreements between Fujian WangGang and the shareholders of Wonder Dredging, the shareholders of Wonder Dredging have assigned all their rights as shareholders, including voting rights and disposition rights of their equity interests in Wonder Dredging and Fujian Service to Fujian WangGang, our direct, wholly-owned subsidiary. Based on the VIE Agreements, Fujian WangGang provides management services to Fujian Service and is entitled to (1) receive all of the economic benefits from Fujian Service, (2) exercise effective control over Fujian Service and Wonder Dredging, and (3) has an exclusive option to purchase all or part of the equity interests in Fujian Service. Accordingly, by virtue of the VIE Agreements, Fujian WangGang is the primary beneficiary of Fujian Service as defined by ASC 810 "Consolidation of Variable Interest Entities". Therefore we consolidate Fujian Service and Wonder Dredging as VIEs.
Another set of VIE agreements have been entered between Pingtan Guansheng and the shareholders of Pingtan Fishing. The shareholders of Pingtan Fishing also have assigned all their rights as shareholders, including voting rights and disposition rights of their equity interest Pingtan Fishing to Pingtan Guanshen, our direct, wholly-owned subsidiary. Accordingly, by virtue of the VIE Agreements, Pingtan Guansheng is the primary beneficiary of Pingtan Fishing as defined by ASC 810 "Consolidation of Variable Interest Entities". Therefore we consolidate Pingtan Fishing as VIE.
9 |
In accordance with Accounting Standards Codification ("ASC") 810-10-15-14, Fujian Service, Wonder Dredging and Pingtan Fishing are deemed VIEs for two reasons. First, the equity stockholders of these companies do not significantly enjoy the benefits of income or suffer the consequences of losses. Second, the equity stockholders of these companies do not possess the direct or indirect ability through voting or similar rights to make decisions regarding their activities that have a significant effect on the success of the companies. Therefore, in accordance with ASC 810-10-25-38A, the Company is deemed to be the primary beneficiary of these companies and the financial statements of these companies are consolidated in the Company's consolidated financial statements.
The following tables show the assets and liabilities of the Company's VIEs after eliminating the intercompany balances as of March 31, 2013 and December 31, 2012. The VIEs include Wonder Dredging, Fujian Service and Pingtan Fishing Group which comprises of Pingtan Fishing itself and the three subsidiaries; namely Pingtan Dingxin, Pingtan Duoying and Pingtan Ruiying. The creditors of Wonder Dredging, Fujian Service and Pingtan Fishing Group do not have recourse against the general creditors of their primary beneficiaries or other Group members.
March 31, 2013 (Unaudited) | ||||||||||||
Wonder Dredging | Fujian Service |
Pingtan Fishing Group |
||||||||||
ASSETS | ||||||||||||
Cash | $ | 7,225 | $ | 195,721,706 | $ | 5,703,158 | ||||||
Accounts receivable - third parties | - | 4,245,219 | 2,349,197 | |||||||||
Cost and estimated earnings in excess of billings on contracts in progress |
- | 9,531,476 | - | |||||||||
Other receivables | - | 2,905 | 7,592,191 | |||||||||
Advance to related parties | - | - | 59,763,172 | |||||||||
Prepaid expenses | - | 1,420,979 | - | |||||||||
Inventories | - | 3,922,812 | 725,117 | |||||||||
Prepaid dredger deposits | - | 2,415,148 | - | |||||||||
Security deposits | - | 21,204,998 | - | |||||||||
Long-term investment | - | - | 3,381,207 | |||||||||
Dredger, fishing vessel, motor vehicle, machinery and equipment, net |
- | 42,833,915 | 49,846,411 | |||||||||
$ | 7,225 | $ | 281,299,158 | $ | 129,360,453 | |||||||
LIABILITIES | ||||||||||||
Short-term loans | $ | - | $ | - | $ | 12,020,599 | ||||||
Long-term loans | - | - | 25,173,891 | |||||||||
Accounts receivable - third parties | - | 3,701,885 | 2,324,374 | |||||||||
Accounts receivable - related parties | - | - | 4,956,093 | |||||||||
Advance from related parties | 4,830,296 | - | 13,652,546 | |||||||||
Receipt in advance - third parties | - | - | 417,476 | |||||||||
- related parties | - | - | 4,908,426 | |||||||||
Income tax payable | - | 1,464,555 | - | |||||||||
Accrued liabilities and other payables | - | 2,535,753 | 1,631,735 | |||||||||
Deferred income | - | - | 9,410,382 | |||||||||
$ | 4,830,296 | $ | 7,702,193 | $ | 74,495,522 |
10 |
December 31, 2012 | ||||||||||||
Wonder Dredging | Fujian Service |
Pingtan Fishing Group | ||||||||||
ASSETS | ||||||||||||
Cash | $ | 7,232 | $ | 164,323,611 | $ | 6,710,472 | ||||||
Notes receivable (banker's acceptances) transfer from related parties |
- | - | 3,645,817 | |||||||||
Accounts receivable - third parties | - | 23,446,249 | 11,478,436 | |||||||||
Cost and estimated earnings in excess of billings on contracts in progress | - | 8,133,021 | - | |||||||||
Other receivables | - | 2,868 | 29,885 | |||||||||
Advance to related parties | - | - | 49,802,897 | |||||||||
Prepaid expenses | - | - | 386,966 | |||||||||
Inventories | - | 5,029,653 | 194,331 | |||||||||
Prepaid dredger deposits | - | 2,407,666 | - | |||||||||
Security deposits | - | 25,087,880 | - | |||||||||
Long-term investment | - | - | 3,328,789 | |||||||||
Deposit on setting up Joint Venture | - | - | 6,092,302 | |||||||||
Dredger, fishing vessel, motor vehicle, machinery and equipment, net |
- | 44,479,511 | 37,141,906 | |||||||||
$ | 7,232 | $ | 272,910,459 | $ | 118,811,801 | |||||||
LIABILITIES | ||||||||||||
Short-term loans | $ | - | $ | - | $ | 25,169,260 | ||||||
Long-term loans | - | - | 24,783,629 | |||||||||
Accounts receivable - third parties | - | 3,690,417 | 70,732 | |||||||||
- related parties | - | - | 5,765,632 | |||||||||
Receipt in advance - related parties | - | - | 12,681,102 | |||||||||
Income tax payable | - | 5,333,519 | - | |||||||||
Accrued liabilities and other payables | - | 2,257,638 | 1,033,640 | |||||||||
$ | - | $ | 11,281,574 | $ | 69,503,995 |
The following tables show the revenue and cost of revenues, and net income/(loss) of the Company's VIEs after eliminating the intercompany balances for the three months ended March 31, 2013 and 2012. The VIEs include Wonder Dredging, Fujian Service and Pingtan Fishing Group which comprises of Pingtan Fishing itself and the three subsidiaries; namely Pingtan Dingxin, Pingtan Duoying and Pingtan Ruiying.
For the Three Months Ended March 31, 2013 (Unaudited) | ||||||||||||
Wonder Dredging | Fujian Service | Pingtan Fishing Group | ||||||||||
Revenue | $ | - | $ | 20,727,042 | $ | 19,669,476 | ||||||
Cost of revenue | $ | - | $ | (14,292,134 | ) | $ | (14,292,134 | ) | ||||
Net (loss)/income attributable to the Company | $ | (29 | ) | $ | 6,622,723 | $ | 4,506,292 |
11 |
For the Three Months Ended March 31, 2012 (Unaudited) | ||||||||||||
Wonder Dredging | Fujian Service | Pingtan Fishing Group | ||||||||||
Revenue | $ | - | $ | 59,499,531 | $ | 15,556,203 | ||||||
Cost of revenue | $ | - | $ | (28,022,118 | ) | $ | (9,709,111 | ) | ||||
Net income attributable to the Company | $ | 1,209 | $ | 21,949,737 | $ | 5,187,638 |
The following table shows the condensed cash flow activities of Wonder Dredging, Fujian Service and Pingtan Fishing Group for the three months ended March 31, 2013 and 2012:
For the Three Months Ended March 31, 2013 (Unaudited) | ||||||||||||
Wonder Dredging | Fujian Service | Pingtan Fishing Group | ||||||||||
Net cash (used in)/provided by operating activities | $ | (29 | ) | $ | 22,508,474 | $ | 7,443,376 | |||||
Net cash (used in)/provided by investing activities | (7,238,334 | ) | 8,762,736 | (12,633,113 | ) | |||||||
Net cash provided byfinancing activities | 7,238,334 | - | 4,077,847 | |||||||||
Net (decrease)/increase in cash | (29 | ) | 31,271,210 | (1,111,890 | ) | |||||||
Effect of exchange rate | 22 | 126,885 | 104,576 | |||||||||
Cash at the beginning of the period | 7,232 | 164,323,611 | 6,710,472 | |||||||||
Cash at the end of the period | $ | 7,225 | $ | 195,721,706 | $ | 5,703,158 |
For the Three Months Ended March 31, 2012 (Unaudited) | ||||||||||||
Wonder Dredging | Fujian Service | Pingtan Fishing Group | ||||||||||
Net provided by operating activities | $ | 1,209 | $ | 34,016,901 | $ | 2,456,499 | ||||||
Net cash used in investing activities | - | - | (10,684,032 | ) | ||||||||
Net cash (used in)/ provided by financing activities | - | (39,684 | ) | 13,840,432 | ||||||||
Net increase in cash | 1,209 | 33,977,217 | 5,612,899 | |||||||||
Effect of exchange rate | (547 | ) | (51,051 | ) | 19,345 | |||||||
Cash at the beginning of the period | 957,786 | 110,535,418 | 1,794,796 | |||||||||
Cash at the end of the period | $ | 958,448 | $ | 144,461,584 | $ | 7,427,040 |
(c) | Use of estimates |
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the years. Significant items subject to such estimates and assumptions include the recoverability of the carrying amount and the estimated useful lives of long-lived assets; valuation allowances for receivables, and realizable values for inventories. Accordingly, actual results could differ from those estimates.
12 |
(d) | Foreign currency translation |
The Company uses United States dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The subsidiaries within the Company maintain their books and records in their respective functional currency, Chinese Renminbi (“RMB”) and Hong Kong dollars (“HKD”), being the lawful currency in the PRC and Hong Kong, respectively. Assets and liabilities of foreign subsidiaries are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rate of exchange prevailing during the period. The related transaction adjustments are reflected in “Accumulated other comprehensive income’’ in the equity section of the Company's consolidated balance sheet. A summary of exchange rate is as follows:
China Dredging | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
Balance sheet items, except for equity accounts | RMB6.2108=$1 | RMB6.2301=$1 | ||||||
HKD7.7629=$1 | HKD7.7507=$1 | |||||||
For the Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Items in statements of income and cash flows | RMB6.2169=$1 | RMB6.2997=$1 | ||||||
HKD7.7578=$1 | HKD7.7587=$1 | |||||||
Merchant Supreme | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
Balance sheet items, except for equity accounts | RMB6.2108=$1 | RMB6.3086=$1 | ||||||
HKD7.7629=$1 | HKD7.7507=$1 | |||||||
For the Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
Items in statements of income and cash flows | RMB6.2169=$1 | RMB 6.2997=$1 | ||||||
HKD7.7578=$1 | HKD7.7587=$1 |
(d) | Cash |
Cash consists of cash on hand and at banks.
(e) | Accounts receivable |
China Dredging
Accounts receivable represent billed under the terms of contracts with customers. There is no amount related to retainage. CDGC anticipates collection of all the outstanding balances within 30 to 90 days after completion reports of the contracts are issued. The allowance for doubtful accounts is CDGC’s best estimate of the amount of probable credit losses in the CDGC’s existing receivable. CDGC provides an allowance for estimated uncollectible receivables when events or conditions indicate that amounts outstanding are not recoverable. Outstanding account balances are reviewed individually for collectability. Based on the CDGC’s assessment of collectability, there has been no allowance for doubtful accounts recognized for the three months ended March 31, 2013 and 2012.
13 |
Merchant Supreme
Accounts receivable are recognized at original sales amounts and carried at net realizable value. Merchant Supreme only grants credit periods to established customers with long and good paying history. Credit periods to independent customers are within 180 days after customers pick up purchased goods.
Merchant Supreme maintains allowances for doubtful accounts for estimated losses resulting from the inability of Merchant Supremes’ debtors to make required payments. Merchant Supreme reviews customer credit worthiness, past transaction history, and changes in payment terms when determining the adequacy of these allowances. Accounts are written off against the allowance when it becomes evident collection will not occur.
No allowance for doubtful accounts has been provided for accounts receivable from third party customers for the three months ended March 31, 2013 and 2012, respectively. Merchant Supreme collected a majority of receivable balances from third party customers as of March 31, 2013 and December 31, 2012 within 60 days subsequent to respective balance sheet dates, and historically has not experienced uncollectible accounts from customers granted with credit sales.
(f) | Revenue recognition |
China Dredging
CDGC recognizes contract revenues under the percentage-of-completion method to determine the appropriate amount to be recognized in a given period. Depending on the nature of contracts, the stage of completion is measured by reference to (a) the proportion of contract costs incurred for work performed to date to estimated total contract costs; (b) the amount of work certified by a site engineer; or (c) the completion of a physical proportion of the contract work. The difference between amounts billed and recognized as revenue is reflected in the balance sheet as either contract revenues in excess of billings or billings in excess of contract revenues. Provisions for estimated losses on contracts in progress are made in the period in which they are identified. In the event that contract revenue cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable.
Merchant Supreme
Merchant Supreme recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the customer is fixed or determinable, and collection of the resulting receivable is reasonably assured.
With respects to the sale of frozen fish and other marine catches to third party customers, most of which are sole proprietor regional wholesalers in China, Merchant Supreme recognizes revenue when customers pick up purchased goods at Merchant Supremes’ cold storage warehouse, after payment is received by Merchant Supreme or credit sale is approved by Merchant Supreme for recurring customers with excellent paying history. Merchant Supreme does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers. Merchant Supreme does not accept returns from customers. Deposits or advance payments from customers prior to delivery of goods are recorded as receipt in advance.
(g) | Cost and estimated earnings in excess of billings on contracts in progress |
China Dredging
Cost and estimated earnings in excess of billings represent amounts of revenue earned under contracts in progress but not billed at the balance sheet date. These amounts become billable according to the contract terms, which usually consider passage of time, and/or completion of the project.
14 |
(h) | Government grant |
Merchant Supreme
Government grants are recognized at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognized as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to the cost of the asset and is released to the income statement over the expected useful life in a consistent manner with the depreciation method for the relevant asset.
(i) | Deferred income |
Merchant Supreme
Deferred income represents income collected but not earned as of the report date. This is primarily composed of one off payment of the government grant to construct new fishing vessels. The fishing vessels were under construction. Upon the completion of the construction of fishing vessels, the grant would be deducted from the cost of the fishing vessels.
(j) | Fishing licenses |
Merchant Supreme
Each of the Merchant Supremes’ fishing vessels requires an approval from Ministry of Agriculture of the Peoples' Republic of China to carry out ocean fishing project in foreign territories. These approvals are valid for a period from three to twelve months, and are awarded to Merchant Supreme at no cost. Merchant Supreme applies for the renewal of the approval prior to expiration to avoid interruptions of fishing vessels’ operations.
Each of the Merchant Supremes’ fishing vessels operated in Indonesia water requires a fishing license granted by the authority in Indonesia. Indonesia fishing licenses remain effective for a period of twelve months and Merchant Supreme applies for renewal prior to expiration. Merchant Supreme records cost of Indonesia fishing licenses in prepaid expenses and amortizes over the effective period of the licenses.
(k) | Inventories |
China Dredging
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average method. Inventories comprise of consumable parts.
Merchant Supreme
Inventories are stated at the lower of cost or market. Cost comprises of fuel, depreciation, direct labor, shipping, consumables, and government levied charges and taxes. Consumables include fishing nets and metal containers used by fishing vessels and are amortized during expected useful lives of three months. Merchant Supreme’s fishing fleets in India and Indonesia waters operate around the year, although the May to July period demonstrates lower catch quantities compared to the August to December peak season. Cost incurred during a fishing vessel’s relocation period between different operating territories is deferred and amortized in ensuing six-month period. Cost of frozen fish and other marine catches at period-ends is calculated using the weighted average method.
(l) | Dredger, fishing vessel, motor vehicle, machinery and equipment |
Dredger, fishing vessel, motor vehicle, machinery and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and betterments are capitalized. Depreciation of dredgers, fishing vessels, motor vehicles, machinery and equipment is computed by the straight-line method over the assets estimated useful lives ranging from five to twenty years.
15 |
Upon sale or retirement of dredgers, fishing vessels, motor vehicles, machinery and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in operations.
The estimated useful lives of the assets are as follows:
Estimated lives | |
Dredger | 7.5-10 |
Fishing vessel | 10-20 |
Major improvement on fishing vessel | 4-20 |
Motor vehicle | 3-4 |
Machinery | 5 |
Office equipment | 3-5 |
Expenditures for repairs and maintenance, which do not extend the useful life of the assets, are expensed as incurred.
(m) | Capitalized Interest |
Merchant Supreme
Interest associated with the construction of a fishing vessel is capitalized and included in the cost of the fishing vessels. When no debt is incurred specifically for the construction of a fishing vessel, interest is capitalized on amounts expended on the construction using weighted-average cost of the Companies outstanding borrowings. Capitalization of interest ceases when the construction is substantially complete or the construction activity is suspended for more than a brief period. For the three months ended March 31, 2013 and 2012, Merchant Supreme capitalized no interest in the fishing vessels under construction, respectively.
(n) | Impairment of long-lived assets |
In accordance with FASB ASC Topic 360, Property, Plant and Equipment, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. If long-lived assets are to be disposed, depreciation is discontinued, if applicable, and the assets are reclassified as held for sale at the lower of their carrying amounts or fair values less costs to sell.
Based on the Company's assessment, no triggering events for the testing of long-lived assets for impairment were identified as of March 31, 2013 and December 31, 2012.
(o) Income taxes
China Dredging
CDGC recognizes interest and penalties related to income tax matters as income tax expense. For the three months ended March 31, 2013 and 2012, there was no penalty or interest recognized as income tax expenses.
16 |
Merchant Supreme
Merchant Supreme is a qualified ocean fishing enterprise, certified by the Ministry of Agriculture of the PRC. The qualification is renewed on April 1 each year. According to Cai Shui Zi (1997) No. 114 “Notice of Ministry of Finance and the State Administration of Taxation on Relevant Issues concerning Enterprise Income Tax on Domestic Enterprises Engaged in Fishery Business” issued by the Ministry of Finance of the PRC and State Administration of Taxation in 1997, Order of the State Council of the People's Republic of China No. 512 “Regulation on the Implementation of the Enterprise Income Tax Law of the People's Republic of China” issued by the State Council in 2007, Guo Shui Fa (2005) No. 129 “Measures for the Administration of Tax Deduction or Exemption (Trial Implementation)” issued by State Administration of Taxation in 2008, and State Administration of Taxation Announcement (2011) No. 48 “Notice of the State Administration of Taxation on Relevant Issues concerning the Implementation of Preferential Policies of Enterprise Income Tax on Agriculture, Forestry, Stockbreeding and Fishery Projects”, the Company is exempt from income tax derived from its ocean fishing operations in the periods it processes a valid Ocean Fishing Enterprise Qualification Certificate issued by the Ministry of Agriculture of the PRC.
Merchant Supreme is not subject to foreign income taxes for its operations in India and Indonesia Exclusive Economic Zones.
(p) | Fair value measurements |
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update “ASU 2010-06” “Fair Value Measurements and Disclosures”. The new guidance clarifies two existing disclosure requirements and requires two new disclosures as follows: (1) a “gross” presentation of activities (purchases, sales, and settlements) within the Level 3 rollforward reconciliation, which will replace the “net” presentation format; and (2) detailed disclosures about the transfers in and out of Level 1 and 2 measurements. This guidance is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward information, which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods thereafter. The Company adopted the amended fair value disclosures guidance on January 1, 2012.
China Dredging
CDGC's financial instruments consist principally of cash, accounts receivable, cost and estimated earnings in excess of billings on contracts in progress, accounts payable and accrued liabilities, none of which are held for trading purposes. Pursuant to Accounting Standards Codification (“ASC 820”), the fair value of the CDGC's cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. CDGC believes that the carrying amounts of the Group's financial instruments, other than derivative liability, approximate their current fair values because of their nature and respective maturity dates or durations. Derivative liability, as described in Note 2(u) below, is carried at the estimated fair value at the balance sheet date using Level 3 inputs.
Merchant Supreme
As of March 31, 2013 and December 31, 2012, none of the Merchant Supreme’s financial assets or liabilities was measured at fair value on a recurring basis. As of March 31, 2013 and December 31, 2012, none of the Company’s non-financial assets or liabilities was measured at fair value on a nonrecurring basis.
The carrying values of Merchant Supreme’s financial assets and liabilities, including accounts receivable, other receivables, other current assets, short-term loans, accounts payable, and other payables and accrued liabilities, are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and if applicable, their stated interest rate approximates current rates available. It is not practicable to estimate the fair values of advance to and advance from related parties because of the related party nature of such advances.
(q) | 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.
17 |
The Company's management has evaluated all such proceedings and claims that existed as of March 31, 2013 and December 31, 2012. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, liquidity or results of operations.
(r) | Economic and political risks |
The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company's operation in the PRC is subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances aboard, and rates and methods of taxation, among other things.
(s) | Pension and employee benefits |
China Dredging
Full time employees of CDGC’s participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require CDGC to accrue for these benefits based on certain percentages of the employees’ salaries. Cost for pension and employee benefits of CDGC was $24,945 and $22,789 for the three months ended March 31, 2013 and 2012, respectively.
(t) | Segment information |
ASC 280 "Segment reporting" establishes standards for reporting information on operating segments in interim and annual financial statements. The Company has only two segments, all of the Company's operations and customers are in the PRC and all income is derived from dredging service and ocean fishery. Accordingly, segment information on products is presented.
(u) | Derivative liability |
China Dredging
Under the original terms of the preferred shares, the holders of the preferred shares had the right to receive 20% of the $5.00 purchase price on the second anniversary of issuance if not yet converted. Substantially, this was the right to receive $1.00 per share if CDGC failed to have the ordinary shares underlying the preferred shares both successfully registered with the SEC and listed on a suitable exchange by October 2012. CDGC had determined that this contingent right of the holders of the preferred shares is an embedded derivative financial instrument which must, for financial reporting purposes, be separated from the host instrument (i.e. from the preferred shares) and treated as a separate instrument. Proceeds of the private placement conducted in the fourth quarter 2010 (the “2010 Private Placement”) were allocated to the derivative liability in an amount equal to its estimated fair value. Prospectively, the derivative liability was adjusted to its estimated fair value at each balance sheet date with changes in its fair value recorded in CDGC’s statements of income.
CDGC had estimated the value of the embedded derivative based on the $10,012,987 proceeds that would be paid, discounted at an interest rate of 9% and multiplied by 18%, representing the probability, viewed from the time of the 2010 Private Placement, that the underlying ordinary shares would not be registered and listed. CDGC believes the 9% interest rate, which is consistent with then-effective high-yield rates in U.S. markets, is appropriate for debt in such amount at the parent-company level that is unsecured, illiquid and structurally subordinated to creditor claims at the operating companies (the locus of substantially all of the CDGC’s assets). The probability of the CDGC not being registered and listed by October 2012 was estimated to be the same as the actual percentage of all public Form F-1 filers in 2009 and 2010 failing to achieve effectiveness of their registration statements. However, the CDGC’s actual probability of success could differ from that of companies who filed such registration statements during the reference period, or an actual market participant could take a different view. CDGC believed that, in its case, based on circumstances in the fourth quarter 2010, if its registration statement were to become effective, all other requirements to achieve a national exchange listing would be satisfied or within its control, which would is sufficient to extinguish the embedded derivative. While listing requirements relating to market capitalization are not directly in CDGC’s control, CDGC believed it should have sufficient market capitalization based on its cash alone to meet requisite listing standards.
18 |
As of December 31, 2011, CDGC estimated the fair value of the derivative using a revised estimated probability of 90% of not meeting the listing requirements, or as a permitted alternative, conducting a sufficiently large public offering. The revised estimate was based on new restrictions placed by significant exchanges on the listing of “reverse merger” companies. They included a requirement that a stock trade in an alternative market for a “seasoning” period, unless a sufficiently large public offering is conducted. There were no data upon which to base and estimate on the likelihood of fulfilling the new requirements and determine the odds of a successful offering in the time frame. CDGC, in consultation with its investment banking advisors, decided to use 90% as the probability of being unable to avoid the obligation to make the payments as of December 31, 2011. Also, the discount rate used was decreased to 8.5% reflecting closer maturity date of the potential obligation.
During the fourth quarter of 2012, CDGC failed to meet the requirements to avoid triggering the liability under the terms of the preferred shares. The Preferred Shareholders agreed to a change in the terms of the derivative rather than demand payment of the $1.00 per share. Under the revised terms, the holders of the Preferred Shares would be entitled to the $1.00 per share payment if CDGC did not meet its listing requirements by December 31, 2013. Furthermore, if the amount due under this provision is due and remains unpaid at the time of Automatic Conversion, the holders may, at the sole discretion of the holders, apply any and all such payments due to purchase additional ordinary shares at a purchase price of $5.00 per share.
The terms of the preferred shares were also changed such that Automatic Conversion would also occur if CDGC’s shares were listed on the Hong Kong Stock Exchange (“HKSE.”)
As of December 31, 2012, CDGC estimated the fair value of the revised derivative using an estimated probability of 10% of not meeting the listing requirements or, as a permitted alternative, conducting a sufficiently large public offering. The reason for such a low estimated probability was that at the time, CDGC had entered into a definitive merger agreement, under which CDGC’s ordinary shares, including those into which the preferred shares would convert, would be exchanged for shares in a Company listed on the NASDAQ capital market, thus causing Automatic Conversion. This actually occurred in February, 2013. CDGC believes that market participants would, as of December 31, 2012, have viewed the likelihood of the merger transaction being finalized as very high. CDGC also believes that market participants would have also believed that if the merger transaction did not actualize, CDGC would have good prospects for listing on the HKSE or complete a different merger transaction before December 31, 2013.
The 10% probability was applied to estimated values for two separate elements of the derivative. First was the present value of the $1.00 per share required payment at December 31, 2013 if Automatic Conversion were to not occur. The $10,012,987 that would be due was discounted at 9% per annum, compounded monthly, resulting in a present value of $9,154,255. That amount was added to an estimate of the fair value of the option feature under which the holder of the preferred would, if not paid by CDGC, effectively have the option to acquire ordinary shares for $5.00 per share.
CDGC estimated the fair value of the option feature to be $8,488,236. When added to the $9,154,255 estimated present value of the cash payment, the total value was $17,642,491. Applying to this amount, the 10% estimated probability of the payments under the derivative being triggered; the derivative liability was recorded as $1,764,249.
CDGC based the value of the option feature by estimating the value of a two-year option using the Black-Scholes formula and then subtracting from that amount, the value of a one-year option representing CDGC’s right to eliminate the holders’ option by making the payment on time. The two-year and one year Black-Scholes calculations used an estimated $8.97 value of CDGC’s ordinary share, the $5.00 exercise price, a volatility of 30.55%, risk free interest rates of 0.25% and 0.16% and an assumption that were no expected dividends. The $8.97 estimate of value assumes that the shares will not be listed. This is the appropriate assumption for estimating the share’s value as a component of the derivative as the holders of the derivative only receive the option if the shares to not become listed.
19 |
CDGC calculated the $8.97 estimated fair value of its ordinary shares (under the hypothetical assumption that they will not be listed) at December 31, 2012 by applying to its earnings for the 12 months ended September 30, 2012, the price-earnings ratio equal to the average price-earnings ratio of the only two other public companies it could identify in the dredging industry, the peer companies, after making the adjustments described below. For one of the peer companies, earnings for the 12 months ended September 30, 2012 was compared to the December 31, 2012 share price. For the other, the earnings of that period were not meaningful (the resulting price-earnings ratio was over 50) and a published analyst estimate of forward price earnings ratio was used. The peer companies, whose price-earnings ratios averaged 12.5, are domiciled in developed countries, (the Netherlands and the United States), no single shareholder or group controls them and their shares are liquid and actively traded. To adjust the price-earnings ratio for the peer companies for differences in CDGC’s circumstances, CDGC applied a 65% discount encompassing several factors. This discount is to reflect 1) the market discount applicable to Chinese companies of scale consistent with that of the CDGC, 2) the lack of marketability of CDGC shares compared to public companies generally, and 3) the lack of control of CDGC as compared with public companies generally. The lack of marketability was based on the fact that there was no ready market for the shares and would likely not be when the holder obtains the right to the option. The size of the discount needed for lack of marketability was limited by the fact that CDGC was a public company through its reverse merger with Chardan Acquisition Corp. and had plans and a clear intention to register its shares and list on an exchange. The control element of the discount was necessary because a majority of CDGC’s voting shares were controlled by Mr. Xinrong Zhuo.
The 38.06% volatility used in the Black-Scholes calculations is the average two-year volatility of the peer companies as of December 31, 2012.
The use of the 10% figure for the chance of Automatic Conversion not occurring is highly judgmental on the part of management. There are no data upon which to base the estimate that market participants would have judged the probability at that level. Also significant judgments were necessary in ascribing a two year time period to the option right. It is reasonably possible that actual market participants would have judged these matters differently and that the amount that CDGC would have had to pay to have another party assume the contingent obligation would have differed materially from the amount recorded.
The original embedded derivative is part of the preferred shares and was entered into as an inducement to the 2010 Private Placement investors to purchase the preferred shares. In its modified form it was negotiated with the holders of the original to induce them to grant an extension of time to secure a listing. It is not used for hedging purposes. The estimate of the embedded derivative’s fair value is based on “Level 3” inputs, meaning unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The embedded derivative is the only instrument held by CDGC that is carried at fair value estimated using Level 3 inputs as of December 30, 2012. The changes in the carrying value of the Level 3 instruments as of March 31, 2013 and December 31, 2012 were as follows:
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Liability balance brought forward | $ | 1,764,249 | $ | 8,279,827 | ||||
Decrease in liability fair value | - | (6,515,578 | ) | |||||
Gain on derivative | (1,764,249 | ) | - | |||||
Liability balance carried forward | $ | - | $ | 1,764,249 |
20 |
Quantitative information about Level 3 fair value measurements:
The significant unobservable inputs used in the fair value measurement of the embedded derivative are discount rates, the probability that CDGC would not achieve an appropriate listing for its shares by December 31, 2013, the value of CDGC’s ordinary shares and the volatility in the value of CDGC’s ordinary shares.
An increase (decrease) in the discount rate in isolation would result in a lower (higher) fair value measurement.
An increases (decreases) in the probability that CDGC would not achieve an appropriate listing for its shares by December 31, 2013, the value of CDGC’s ordinary shares and the volatility in the value of the CDGC’s ordinary shares would result in a higher (lower) fair value measurement.
The estimate of the fair value of the derivative was prepared by a consultant to CDGC and reviewed by the CDGC’s accounting staff and Chief Financial Officer.
The conditions for Automatic Conversion of the Preferred Shares were triggered by the merger into PME on February 25, 2013. This resulted in the cancellation of the derivative liability with a $1,764,249 for CDGC in the period from January 1 to February 25, 2013.
21 |
(v) | Earnings per ordinary share |
Earnings per ordinary share (basic and diluted) is based on the net income attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during each period. Ordinary share equivalents are not included in the calculation of diluted earnings per ordinary share if their effect would be anti-dilutive. As of December 31, 2012, the weighted average outstanding ordinary share equivalents outstanding totaled 10,012,987 consisting of Class A Preferred Shares. There was automatic conversion of preferred shares into the Company's ordinary shares after the closing of the transactions. Retroactive treatment as required by FASB ASC paragraph 260-10-55-12 has been applied in computing earning per shares to reflect the business combination held on February 25, 2013.
The following table sets forth the computation of basic and diluted net income per ordinary share:
For the Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
(Unaudited) | (Unaudited) | |||||||
Net income | $ | 13,782,541 | $ | 26,856,456 | ||||
Weighted average number of ordinary shares outstanding (Basic and diluted) | 79,055,053 | 79,055,053 | ||||||
Earnings per ordinary share (Basic and diluted) | $ | 0.17 | $ | 0.34 |
3. | SEGMENT INFORMATION |
The following tables sets out the analysis of the Company's revenue and cost of revenue by segments:
a) | CDGC |
b) | Pingtan Fishing |
The following is an analysis of the Company's revenue and results from continuing operations by reportable segment:
China Dredging
For the Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
(Unaudited) | (Unaudited) | |||||||
Contract revenue, including revenue from customers under control of a common parent company of $2,954,311 and $36,021,823 for the three months ended March 31, 2013 and 2012 | $ | 26,739,071 | $ | 59,499,531 | ||||
Cost of contract revenue, including depreciation of $1,887,597 and $1,864,560 for the three months ended March 31, 2013 and 2012 | (16,022,496 | ) | (28,022,118 | ) | ||||
$ | 10,716,575 | $ | 31,477,413 |
22 |
Merchant Supreme | ||||||||
For the Three Months Ended March 31, | ||||||||
2013 | 2012 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenue | ||||||||
Sale of fish and marine catches to third parties | $ | 11,704,936 | $ | 6,427,761 | ||||
Sale of fish and marine catches to related parties | 7,964,540 | 9,128,442 | ||||||
19,669,476 | 15,556,203 | |||||||
Cost of revenue | ||||||||
Sale of fish and marine catches to third parties | (8,875,657 | ) | (4,723,567 | ) | ||||
Sale of fish and marine catches to related parties | (5,416,477 | ) | (4,985,544 | ) | ||||
(14,292,134 | ) | (9,709,111 | ) | |||||
$ | 5,377,342 | $ | 5,847,092 |
23 |
4. | CASH |
PME
Cash is classified by geographical areas and is denominated in the following currency:
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Hong Kong, USD and maximum exposure to credit risk | $ | - | $ | 3,565,355 | ||||
China Dredging | ||||||||
Cash is classified by geographical areas is set out as follows: | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Hong Kong | $ | 3,482,245 | $ | 105,530 | ||||
The PRC | 196,765,676 | 164,957,045 | ||||||
Total and maximum exposure to credit risk | $ | 200,247,921 | $ | 165,062,575 | ||||
Cash is denominated in the following currencies: | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
USD | $ | 4,037,007 | $ | 506,986 | ||||
RMB | 196,208,093 | 164,399,529 | ||||||
HKD | 2,821 | 156,060 | ||||||
$ | 200,247,921 | $ | 165,062,575 |
24 |
Merchant Supreme
Cash is classified by geographical areas is set out as follows:
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Hong Kong | $ | 790 | $ | 862 | ||||
The PRC | 5,859,510 | 6,859,923 | ||||||
Total and maximum exposure to credit risk | $ | 5,860,300 | $ | 6,860,785 | ||||
Cash is denominated in the following currencies: |
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
USD | $ | 150,021 | $ | 150,001 | ||||
RMB | 5,709,489 | 6,709,922 | ||||||
HKD | 790 | 862 | ||||||
$ | 5,860,300 | $ | 6,860,785 |
In the PRC and Hong Kong, there are currently no rules or regulations mandating obligatory insurance of bank accounts. Management believes these financial institutions are of high credit quality.
Renminbi is not a freely convertible currency and the remittance of funds out of the PRC is subject to the exchange restrictions imposed by the PRC government.
25 |
5. | ACCOUNTS RECEIVABLE - THIRD PARTIES |
China Dredging
As of March 31, 2013 and December 31, 2012, the balance of accounts receivable of $4,245,219 and $23,446,249, respectively, was set out as follows:
March 31, 2013 (Unaudited) | ||||||||||||||||||||
Name of contract | Estimated contract value | Total revenue recognized during the three months ended March 31, 2013 | Amount received in 2013 | Accounts receivable | Status of contract (Completion %) | |||||||||||||||
1. Yingkou Steel Harbour Reclamation VI 1 | $ | 15,996,719 | $ | - | $ | 5,895,999 | $ | - | 100 | % | ||||||||||
2. Yingkou Steel Harbour Reclamation VII 1 | 3,575,737 | - | 1,344,898 | - | 100 | % | ||||||||||||||
3. Yingkou Steel Harbour Reclamation VIII 1 | 3,293,442 | - | 1,222,932 | - | 100 | % | ||||||||||||||
4. Panjin Vessels Ship Maintenance Area Reclamation III 1 | 5,457,704 | - | 1,518,677 | - | 100 | % | ||||||||||||||
5. Panjin Vessels Ship Maintenance Area Reclamation IV 1 | 4,328,524 | - | 1,833,291 | - | 100 | % | ||||||||||||||
6. Guangdong Shantao Huaneng Haimen Pier Maintenance I 1 | 2,225,546 | - | 375,764 | - | 100 | % | ||||||||||||||
7. Guangdong Datang Chaozhou Sanbaimen Dredging I 1 |
5,134,392 | - | 2,500,584 | - | 100 | % | ||||||||||||||
8. Guangdong Datang Chaozhou Sanbaimen Dredging II 2 | 1,742,026 | 1,093,212 | 1,776,359 | - | 100 | % | ||||||||||||||
9. Panjin Vessels Industrial Base Project V 1 | 10,906,079 | - | 5,542,842 | - | 100 | % | ||||||||||||||
10. Fujian Fuzhou Kemen Port Maintenance 1 | 3,510,592 | - | 1,231,452 | - | 100 | % | ||||||||||||||
12. Fujian Meizhouwan Xiuyugang Dredging I 1 | 2,059,467 | - | 341,248 | - | 100 | % | ||||||||||||||
13. Fujian Meizhouwan Xiuyugang Dredging II 2 | 852,193 | 168,620 | 627,424 | - | 100 | % | ||||||||||||||
14. Jiangsu Qidongshi Yuantuojiao | ||||||||||||||||||||
Reclamation II 1 | 4,872,203 | - | 1,688,344 | - | 100 | % | ||||||||||||||
15. Jiangsu Qidongshi Yuantuojiao | ||||||||||||||||||||
Reclamation III 2 | 9,369,622 | 7,151,756 | 5,275,731 | 4,245,219 | 100 | % | ||||||||||||||
$ | 73,324,246 | $ | 8,413,588 | $ | 31,175,545 | $ | 4,245,219 |
Notes:
1. The contracts commenced and were completed in 2012, but the remaining balances were fully settled during January to March 2013.
2. The contracts commenced and were completed during January to March 2013.
26 |
December 31, 2012 | ||||||||||||||||||||
Name of contract | Estimated contract value | Total revenue recognized in 2012 | Amount received in 2012 | Accounts receivable | Status of contract (Completion %) | |||||||||||||||
1. Yingkou Steel Harbour Reclamation II 1 | $ | 8,915,701 | $ | - | $ | 3,268,594 | $ | - | 100 | % | ||||||||||
2. Yingkou Steel Harbour Reclamation III 2 | 7,615,495 | 5,069,630 | 7,604,167 | - | 100 | % | ||||||||||||||
3. Yingkou Steel Harbour Reclamation IV | 7,429,751 | 7,495,723 | 7,495,723 | - | 100 | % | ||||||||||||||
4. Yingkou Steel Harbour Reclamation V | 5,200,826 | 5,205,848 | 5,205,848 | - | 100 | % | ||||||||||||||
5. Yingkou Steel Harbour Reclamation VI | 15,788,220 | 15,856,578 | 9,973,071 | 5,883,507 | 100 | % | ||||||||||||||
6. Yingkou Steel Harbour Reclamation VII | 3,529,132 | 3,572,011 | 2,229,963 | 1,342,048 | 100 | % | ||||||||||||||
7. Yingkou Steel Harbour Reclamation VIII | 3,250,516 | 3,273,851 | 2,053,510 | 1,220,341 | 100 | % | ||||||||||||||
8. Panjin Vessels Ship Maintenance Area Reclamation I | 3,714,875 | 3,719,503 | 3,719,503 | - | 100 | % | ||||||||||||||
9. Panjin Vessels Ship Maintenance Area Reclamation II | 3,714,875 | 3,732,258 | 3,732,258 | - | 100 | % | ||||||||||||||
10. Panjin Vessels Ship Maintenance Area Reclamation III | 5,386,569 | 5,390,012 | 3,874,553 | 1,515,459 | 100 | % | ||||||||||||||
11. Panjin Vessels Ship Maintenance Area Reclamation IV | 4,272,107 | 4,365,221 | 2,353,814 | 1,829,407 | 100 | % |
12. Guangdong Shantao Huaneng Haimen Pier Maintenance I | 2,196,539 | 2,198,712 | 1,823,744 | 374,968 | 100 | % | ||||||||||||||
13. Tangshan Caofeidian Port-Harbour Dredging & Reclamation XV 1 | 4,408,319 | - | 1,911,643 | - | 100 | % | ||||||||||||||
14. Tangshan Caofeidian Port-Harbour Dredging & Reclamation XVI 1 | 5,694,078 | - | 2,812,393 | - | 100 | % | ||||||||||||||
15. Tangshan Caofeidian Port-Harbour Dredging & Reclamation XVII | 3,673,599 | 3,698,948 | 3,698,948 | - | 100 | % | ||||||||||||||
16. Tangshan Caofeidian Port-Harbour Dredging & Reclamation XVIII | 1,836,799 | 1,838,535 | 1,838,535 | - | 100 | % | ||||||||||||||
17. Tangshan Caofeidian Port-Harbour Dredging & Reclamation XX | 5,326,719 | 5,328,890 | 5,328,890 | - | 100 | % | ||||||||||||||
18. Shandong Rizhaogang Lanshan Harbour Dredging I 1 | 4,058,422 | - | 1,775,185 | - | 100 | % | ||||||||||||||
19. Shandong Rizhaogang Lanshan Harbour Dredging II 1 | 5,534,212 | - | 2,757,422 | - | 100 | % | ||||||||||||||
20. Shandong Rizhaogang Lanshan Harbour Dredging III | 2,582,632 | 2,625,523 | 2,625,523 | - | 100 | % | ||||||||||||||
21. Shandong Rizhaogang Lanshan Harbour Dredging IV | 2,582,632 | 2,595,933 | 2,595,933 | - | 100 | % | ||||||||||||||
22. Shandong Rizhaogang Lanshan Harbour Dredging V | 5,349,738 | 5,362,768 | 5,362,768 | - | 100 | % |
27 |
December 31, 2012 | ||||||||||||||||||||
Name of contract | Estimated contract value | Total revenue recognized in 2012 | Amount received in 2012 | Accounts receivable | Status of contract (Completion %) | |||||||||||||||
23. Fujian Fuzhou Jiangyingang Dredging 5 |
456,834 | 392,103 | 392,103 | - | 100 | % | ||||||||||||||
24. Fujian Fuzhou Jiangyingang Dredging 5 |
456,834 | 389,218 | 389,218 | - | 100 | % | ||||||||||||||
25. Tangshan Caofeidian Port-Harbour Dredging & Reclamation XIV 2,3 | 22,479,759 | 5,592,770 | 22,094,273 | - | 100 | % | ||||||||||||||
26. Tangshan Caofeidian Port-Harbour Dredging & Reclamation XIV 2,3 | 18,733,132 | 4,702,298 | 18,453,551 | - | 100 | % | ||||||||||||||
27. Tangshan Caofeidian Port-Harbour Dredging & Reclamation XIV 2,3 | 22,479,759 | 5,681,008 | 22,182,511 | - | 100 | % | ||||||||||||||
28. Tangshan Caofeidian Port-Harbour Dredging & Reclamation IXX 4 | 3,184,632 | 3,289,861 | 3,289,861 | - | 100 | % |
29. Tangshan Caofeidian Port-Harbour Dredging & Reclamation IXX 4 | 3,746,626 | 3,747,769 | 3,747,769 | - | 100 | % | ||||||||||||||
30. Tangshan Caofeidian Port-Harbour Dredging & Reclamation XXI | 3,184,632 | 3,264,032 | 3,264,032 | - | 100 | % | ||||||||||||||
31. Qinzhou Port Channel Dredging XII 1 | 5,816,796 | - | 2,158,982 | - | 100 | % | ||||||||||||||
32. Qinzhou Port Channel Dredging XIII | 5,453,247 | 5,459,617 | 5,459,617 | - | 100 | % | ||||||||||||||
33. Qinzhou Port Channel Dredging IX | 5,271,472 | 5,275,547 | 5,275,547 | - | 100 | % | ||||||||||||||
34. Qinzhou Port Channel Dredging X | 5,453,247 | 5,482,055 | 5,482,055 | - | 100 | % | ||||||||||||||
35. Guangdong Shantao Passage Maintenance I | 2,190,824 | 2,197,686 | 2,197,686 | - | 100 | % | ||||||||||||||
36. Guangdong Shantao Passage Maintenance II | 1,643,118 | 1,658,044 | 1,658,044 | - | 100 | % | ||||||||||||||
37. Guangdong Datang Chaozhou Sanbaimen Dredging I | 5,067,471 | 5,167,911 | 2,672,625 | 2,495,286 | 100 | % |
38. Panjin Vessels Industrial Base Project III 1 | 11,135,101 | - | 6,055,669 | - | 100 | % | ||||||||||||||
39. Panjin Vessels Industrial Base Project IV | 10,763,931 | 10,877,065 | 10,877,065 | - | 100 | % | ||||||||||||||
40. Panjin Vessels Industrial Base Project V | 10,763,931 | 10,907,442 | 5,376,344 | 5,531,098 | 100 | % | ||||||||||||||
41. Zhuhai Gaolan Port Channel Dredging VII 2 | 4,568,185 | 563,321 | 4,519,135 | - | 100 | % | ||||||||||||||
42. Zhuhai Gaolan Port Channel Dredging VIII | 1,461,819 | 1,472,967 | 1,472,967 | - | 100 | % | ||||||||||||||
43. Zhuhai Gaolan Port Channel Dredging IX | 1,553,183 | 1,586,292 | 1,586,292 | - | 100 | % | ||||||||||||||
44. Zhuhai Gaolan Port Channel Dredging X | 1,553,183 | 1,573,430 | 1,573,430 | - | 100 | % | ||||||||||||||
45. Fuqing Yuanhong Pier Dredging I 1 | 2,385,776 | - | 1,200,119 | - | 100 | % |
28 |
46. Fuqing Yuanhong Pier Dredging II 2 | 1,835,212 | 657,478 | 1,865,766 | - | 100 | % | ||||||||||||||
47. Fuqing Yuanhong Pier Dredging III | 2,385,776 | 2,455,707 | 2,455,707 | - | 100 | % |
48. Fuqing Yuanhong Pier Dredging IV | 2,569,297 | 2,592,949 | 2,592,949 | - | 100 | % | ||||||||||||||
49. Fuqing Yuanhong Pier Dredging V | 2,569,297 | 2,606,982 | 2,606,982 | - | 100 | % | ||||||||||||||
50. Jiangsu Haimenshi Dongzao Harbour Dredging I | 2,398,158 | 2,413,669 | 2,413,669 | - | 100 | % | ||||||||||||||
51. Jiangsu Haimenshi Dongzao Harbour Dredging II | 2,767,106 | 2,775,782 | 2,775,782 | - | 100 | % | ||||||||||||||
52. Jiangsu Qidongshi Yuantuojiao Reclamation I | 15,720,749 | 15,726,446 | 15,726,446 | - | 100 | % |
53. Jiangsu Qidongshi Yuantuojiao Reclamation II | 4,808,700 | 4,847,505 | 3,162,738 | 1,684,767 | 100 | % | ||||||||||||||
54. Fujian Pingtan Jinjingwan Reclamation | 690,586 | 691,963 | 691,963 | - | 100 | % | ||||||||||||||
55. Fujian Fuzhou Kemen Port Maintenance | 3,464,836 | 3,465,006 | 2,236,163 | 1,228,843 | 100 | % | ||||||||||||||
56. Fujian Meizhouwan Xiuyugang Dredging I | 2,032,624 | 2,033,039 | 1,692,514 | 340,525 | 100 | % | ||||||||||||||
57. Fujian Pingtan Experimental Area Dredging II 1,6 | 1,047,785 | - | 141,624 | - | 100 | % | ||||||||||||||
58. Fujian Pingtan Experimental Area Dredging II 1,6 | 1,047,785 | - | 157,774 | - | 100 | % | ||||||||||||||
59. Jiangsu Guohua Chenjiagang Dredging II 1 | 6,462,137 | - | 3,668,723 | - | 100 | % | ||||||||||||||
$ | 311,665,296 | $ | 200,876,906 | $ | 257,609,683 | $ | 23,446,249 |
Notes: | ||||||||||||
1. | The contracts commenced and were completed in 2011, but the remaining balances were fully settled during January to March 2012. | |||||||||||
2. | The contracts commenced in 2011 and were completed during January to March 2012. | |||||||||||
3. | Dredgers Xinggangjun #3, #6 and #9 worked together on one project with the same customer. | |||||||||||
4. | Dredgers Xinggangjun #3 and #6 worked together on one project with the same customer. | |||||||||||
5, 6. | Dredgers Hengshunda #1 and Hengshunda #10 (formerly known as Liya #2) worked together on one project with the same customer. |
Merchant Supreme
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Accounts receivable held by independent third parties | $ | 2,349,197 | $ | 11,478,436 |
6. | COST AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON CONTRACTS IN PROGRESS |
China Dredging
Cost and estimated earnings in excess of billings on contracts in progress represent amounts of revenue earned under contracts in progress but not billed at the balance sheet date. These amounts become billable according to the contract terms, which usually consider passage of time, and/or completion of the project. As of March 31, 2013 and December 31, 2012, the balance of cost and estimated earnings in excess of billings on contracts in progress was $9,531,476 and $8,133,021, respectively. Cost and estimated earnings in excess of billings on contracts in progress include the following:
29 |
March 31, 2013 (Unaudited) | ||||||||||||||||||||
Name of contract | Estimated contract value | Total revenue recognized during the three months ended March 31, 2013 | Amount received in 2013 | Cost and estimated earnings in excess of billings on contracts in progress | Status of contract (Completion %) | |||||||||||||||
1. Panjin Vessels Ship Maintenance Area Reclamation V | $ | 5,269,507 | $ | 687,327 | $ | 1,476,691 | $ | 1,754,518 | 61 | % | ||||||||||
2. Panjin Vessels Ship Maintenance Area Reclamation VI | 4,893,114 | 652,415 | 950,178 | 775,423 | 35 | % | ||||||||||||||
3. Yingkou Economic Area Xiongyue Reclamation and Bank Retrival I | 7,547,170 | 1,006,289 | 1,057,797 | 1,355,488 | 32 | % | ||||||||||||||
4. Yingkou Economic Area Xiongyue Reclamation and Bank Retrival II | 3,396,226 | 608,279 | - | 608,877 | 18 | % | ||||||||||||||
5. Guangdong Datang Chaozhou Sanbaimen Dredging III | 6,417,990 | 5,501,134 | 2,812,270 | 2,688,865 | 86 | % | ||||||||||||||
6. Guangdong Datang Chaozhou Sanbaimen Dredging IV | 2,567,196 | 2,046,818 | 738,635 | 1,308,183 | 80 | % | ||||||||||||||
7. Fujian Meizhouwan Xiuyugang Dredging III | 1,320,899 | 979,288 | 430,545 | 548,743 | 74 | % | ||||||||||||||
8. Fujian Meizhouwan Xiuyugang Dredging IV | 1,164,664 | 831,903 | 340,524 | 491,379 | 71 | % | ||||||||||||||
$ | 32,576,766 | $ | 12,313,453 | $ | 7,806,640 | $ | 9,531,476 |
December 31, 2012 | ||||||||||||||||||||
Name of contract | Estimated contract value | Total revenue recognized in 2012 | Amount received in 2012 | Cost and estimated earnings in excess of billings | Status of contract (Completion %) | |||||||||||||||
1. Panjin Vessels Ship Maintenance Area Reclamation V | 5,200,826 | 2,543,882 | 453,400 | 2,090,482 | 49 | % | ||||||||||||||
2. Panjin Vessels Ship Maintenance Area Reclamation VI | 4,829,338 | 1,073,186 | - | 1,085,055 | 22 | % | ||||||||||||||
3. Yingkou Economic Area Xiongyu Reclamation and Bank Retrival I | 7,448,801 | 1,406,996 | - | 1,422,556 | 19 | % | ||||||||||||||
4. Guangdong Datang Chaozhou Sanbaimen Dredging II | 1,719,321 | 674,243 | - | 681,700 | 39 | % | ||||||||||||||
5. Jiangsu Qidongshi Yuantuojiao Reclamation III | 9,247,500 | 2,369,194 | - | 2,395,396 | 26 | % | ||||||||||||||
6. Fujian Meizhouwan Xiuyugang Dredging II | 841,086 | 675,082 | 217,250 | 457,832 | 80 | % | ||||||||||||||
$ | 29,286,872 | $ | 8,742,583 | $ | 670,650 | $ | 8,133,021 |
30 |
7. | OTHER RECEIVABLES |
Other receivables as of March 31, 2013 and December 31, 2012 consisted of the following:
China Dredging | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Petty cash held for BT project | $ | 1,272,178 | $ | - | ||||
Social insurance prepaid for staff | 4,238 | 4,066 | ||||||
Others | 123 | 123 | ||||||
$ | 1,276,539 | $ | 4,189 |
Other receivables include social insurance prepaid for staff's portion by CDGC, this amount will be directly deducted from staff's salaries and it is interest free.
Merchant Supreme | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Grants receivable from PRC Government | $ | 7,557,867 | $ | - | ||||
Others | 34,324 | 29,885 | ||||||
$ | 7,592,191 | $ | 29,885 |
Other receivables represented grant receivables for constructing new fishing vessels.
8. | PREPAID EXPENSES |
Prepaid expenses as of March 31, 2013 and December 31, 2012 consisted of the following:
PME
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Annual fee to NASDAQ | $ | 24,000 | $ | 24,000 |
China Dredging
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Prepaid to suppliers for the purchases of consumable parts | $ | 1,420,979 | $ | - |
31 |
Merchant Supreme
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Indonesian fishing licenses | $ | - | $ | 386,966 |
9. | Inventories |
Inventories as of March 31, 2013 and December 31, 2012 consisted of the following:
China Dredging
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Consumable parts | $ | 3,922,812 | $ | 5,029,653 |
Merchant Supreme
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Frozen fish and marine catches in warehouse | $ | 676,312 | $ | 161,484 | ||||
Frozen fish and marine catches in transit | 48,805 | 32,847 | ||||||
$ | 725,117 | $ | 194,331 |
10. | PREPAID DREDGER DEPOSITS |
Prepaid dredger deposits as of March 31, 2013 and December 31, 2012 consisted of the following:
China Dredging
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Non-related party | $ | 23,346,429 | $ | 23,274,105 |
Prepaid dredger deposits on March 31, 2013 and December 31, 2012 represent deposits of two new dredgers before delivery. CDGC paid deposits for the acquisition of two dredgers which will be used for the expansion of dredging operations. The total expected cost of the two dredgers was approximately $32.2 million and $41.9 million respectively. Both dredgers will be delivered in 2013 (see Note 25).
11. | SECURITY DEPOSITS |
China Dredging
Security deposits represent amounts on deposit with the owners of dredgers leased by CDGC’s VIE, Fujian Service. Such amounts will be returned to Fujian Service when the corresponding lease ends. Security deposits were $21,204,998 and $25,087,880 as of March 31, 2013 and December 31, 2012, respectively.
32 |
12. | LONG-TERM INVESTMENT |
Merchant Supreme
Long-term investment represents Merchant Supreme's VIE, Pingtan Fishing’s interest in Fujian Pingtan Rural-Commercial Bank Joint-Stock Co., Ltd. ("Pingtan Rural-Commercial Bank"), a private financial institution. Pingtan Fishing paid RMB 21 million, or approximately $3.3 million to subscribe to 13,434,000 shares, or 5% of the common stock of Pingtan Rural-Commercial Bank, and completed its registration as a shareholder on October 17, 2012.
Pingtan Fishing used the cost method of accounting to record its investment since Pingtan Fishing does not have the ability to exercise significant influence over the operating and financing activities of Pingtan Rural-Commercial Bank. Merchant Supreme determined that there was no impairment on this investment during three months ended March 31, 2013 and 2012, respectively.
As of March 31, 2013 and December 31, 2012, Pingtan Fishing has a deposit of $728 and $764 in Pingtan Rural-Commercial Bank, respectively.
13. | DEPOSIT ON SETTING UP OF JOINT VENTURE |
Deposit on setting up of Joint Venture as of March 31, 2013 and December 2012 consisted of the following:
Merchant Supreme
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Deposit for an asset interest acquisition and investment in a proposed Indonesia joint venture | $ | - | $ | 6,090,302 |
Pursuant to a Cooperative Agreement and a Joint-Venture Contract dated March 1, 2006 entered into between the Merchant Supreme’s VIE, Pingtan Fishing and PT. Avona Mina Lestari (“Avona”), an Indonesian enterprise engaged in fishing base management and fishing vessel operations, Pingtan Fishing agreed to acquire 80% controlling interest in a fishing base owned by Avona. A joint venture company that would be controlled by Pingtan Fishing will be established between Pingtan Fishing and Avona following Pingtan Fishing’s acquisition of controlling interest in Avona’s fishing base. Total investment for the acquisition of Avona fishing base 80% interest and establishment of a joint venture company is $7,200,000, comprising $5,470,000 cash and 14 fishing vessels to be valued at $1,730,000.
Pingtan Fishing deposited in aggregate $5,470,000 cash ($6,090,302 as of December 31, 2012) to Avona from July 2007 to November 2009, and did not transfer any fishing vessel to Avona or the proposed joint venture company as of the issuance date of these financial statements. Because of certain government restrictions on these proposed investments, the acquisition of the Avona fishing base’s 80% controlling interest and establishment of the joint-venture were not consummated. Under separate arrangements, Xinrong Zhuo and certain of his family members, the ultimate beneficial owners of Merchant Supreme obtained the management rights of the Avona fishing base and another Indonesian enterprise PT. Dwikarya Reksa Abadi (“Kimaan”)’s fishing base. Xinrong Zhuo and his family members also gained influence over Avona’ daily operations, and combined with management rights of the fishing base, they are able to provide ship agency, maintenance and other services to Merchant Supreme’s fishing vessels so that they can legally and efficiently operate in Indonesia waters. Accordingly, Avona is regarded as a related party of Merchant Supreme.
On September 12, 2012, Pingtan Fishing and Avona entered into a Memorandum of Understanding, pursuant to which Pingtan Fishing and Avona reaffirmed the intention to complete Pingtan Fishing’s acquisition of the Avona fishing base’s interest, and establishment of a joint venture company. Avona further confirmed its equity holding structure shall remain unchanged prior to Pingtan Fishing’s successful acquisition of its fishing base interest, and any adjustments to Avona’s registered capital, acquisition or dispose of material properties, and material debt financings are subject to Merchant Supreme’s approval.
33 |
In the first quarter of 2013, Pingtan Fishing and Avona further entered into an agreement, agreeing that the deposit on setting up of joint venture would be used for settling the purchase made by Pingtan Fishing. Should there be any news to confirm that the setting up of the joint venture is approved by the Indonesian Government, both companies would re-start this investment again.
14. | DEPOSIT FOR BT PROJECT |
Deposit for BT project as of March 31, 2013 and December 31, 2012 consisted of the following:
China Dredging | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Investment in a Build-Transfer (BT) project | $ | 67,060,604 | $ | 66,852,860 |
On September 29, 2012, Lianjiang Kemen Port Construction Development Co., Ltd (“LKPC”) and China Gezhouba Group Co., Ltd (“CGGC”) entered into a contract for a BT project in Kemen Industrial Zone of Lianjiang County, Fujian Province, the PRC, with an estimated investment of $2 billion. The BT project undertaken by LKPC involves dredging, reclamation and cofferdam construction, with a reclamation area of 10.3 million square meters, a reclamation volume of 29.3 million cubic meters, a total cofferdam length of 4,545 meters, a total length of pioneer road of 38,948 meters and a construction period of eighteen months. On October 29, 2012, China Dredging's subsidiary PingTan XingYi entered into a supplementary contract with CGGC, Gezhouba Xinjiang Engineering Co., Ltd, which is a subsidiary of CGGC, and Fujian Yihai Investment Ltd, a related company owned and controlled by members of the family of Xinrong Zhuo. Under the supplementary contract, PingTan XingYi is responsible for part of the investment, financing, dredging and reclamation within the scope of the BT project, and will deliver the project to the tenderer LKPC after the project is completed and accepted.
During the fourth quarter of 2012 a deposit of $67 million was placed as China Dredging’s (through its PingTan XingYi subsidiary) portion of the share capital to form a company with CGGC for the sole purpose of completing the BT project for LKPC. The formation of this new company is yet to be completed. The Group will own a 49% interest in the company and will account for its investment using the equity method. CGGC will own the other 51% interest in the company. The Group is under no legal obligation to provide additional capital in the company and it is not expected that additional capital will be needed. If, however, the project eventually requires more than the expected $2 billion, to the extent the additional funds are not provided by LKPC, China Dredging, in consultation and negotiation with CGGC, may decide that it is desirable to provide additional capital.
34 |
15. | DREDGER, FISHING VESSEL, MOTOR VECHICLE, MACHINERY AND EQUIPMENT, NET |
Dredger, fishing vessel, motor vehicle, machinery and equipment as of March 31, 2013 and December 31, 2012 consisted of the following:
China Dredging | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Dredgers | $ | 72,883,316 | $ | 72,657,534 | ||||
Motor vehicles | 560,947 | 85,971 | ||||||
Machinery | 41,363 | 41,235 | ||||||
Office equipment | 8,449 | 7,950 | ||||||
73,494,075 | 72,792,690 | |||||||
Less: Accumulated depreciation | (30,115,183 | ) | (28,227,208 | ) | ||||
$ | 43,378,892 | $ | 44,565,482 |
Total depreciation expenses for the three months ended March 31, 2013, and 2012 were $1,887,975 and $1,846,933, respectively, of which $1,887,597 and $1,846,560, respectively, were included in cost of revenue.
As of March 31, 2013 and December 31, 2012, CDGC owned four dredgers. As of March 31, 2013 and December 31, 2012, the total net book value of the dredgers was $42,814,108 and $44,483,781, respectively.
Merchant Supreme | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Externally purchased fishing vessels | $ | 21,264,538 | $ | 20,934,880 | ||||
Office and other equipment | 136,803 | 134,684 | ||||||
Fishing vessels under construction | 30,591,872 | 17,436,515 | ||||||
51,993,213 | 38,506,079 | |||||||
Less: Accumulated depreciation | (2,146,802 | ) | (1,364,173 | ) | ||||
$ | 49,846,411 | $ | 37,141,906 |
Depreciation expenses of Merchant Supreme was $760,401 and $854,999 for the three months ended March 31, 2013 and 2012, respectively.
As of March 31, 2013 and December 31, 2012, Merchant Supreme had 16 fishing vessels which are fully depreciated with estimate useful lives of 10 years. These fishing vessels were contributed by registered equity owners in exchange for Merchant Supreme's paid-in capital and were recorded at the equity owners' historical cost of $nil at the time of contribution.
As of March 31, 2013 and December 31, 2012, Merchant Supreme had 20 fishing vessels with net carrying amount of approximately of $17,395,161 and $17,334,990 pledge as collateral for term loans of Merchant Supreme and a related party in the amount of approximately $10.5 million.
35 |
16. | TERM LOANS |
Merchant Supreme
As of March 31, 2013 and December 31, 2012, Merchant Supreme's short and long-term loans consisted of the following items:
(a) | Short term loans |
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Classified by financial institutions: | ||||||||
Industrial and Commercial Bank of China | $ | 4,906,680 | $ | 14,390,323 | ||||
Fujian Haixia Bank | 7,113,919 | 7,133,120 | ||||||
China Minsheng Banking Corp. Limited | - | 3,645,817 | ||||||
$ | 12,020,599 | $ | 25,169,260 | |||||
Additional information: | ||||||||
Maximum balance outstanding during the period/year | $ | 25,169,260 | $ | 25,169,260 | ||||
Interest expense for the three months ended March 31, 2013 and 2012 | $ | 283,423 | $ | 414,614 | ||||
Weighted average interest rate for the three months ended March 31, 2013 and 2012 | 0.6 | % | 1.1 | % |
The principal payments for the outstanding short-term loans is as follows:
Name of Banks | Principal amount | Current annualized interest rate |
Terms of loans | Collateral | Outstanding amount as of March 31, 2013 |
|||||||
Industrial & Commercial Bank of China, Fuzhou Dongjiekou Branch | US$1,119,870 | Fixed rate at 1.502% per annum | Due on April 22,2013 | N/A | $ | 1,119,870 | ||||||
Industrial & Commercial Bank of China, Fuzhou Dongjiekou Branch | US$472,153 | Fixed rate at 1.501% per annum | Due on April 29,2013 | N/A | 472,153 | |||||||
Industrial & Commercial Bank of China, Fuzhou Dongjiekou Branch | US$1,925,100 | Fixed rate at 1.989% per annum | Due on May 21, 2013 | N/A | 1,925,100 | |||||||
Industrial & Commercial Bank of China, Fuzhou Dongjiekou Branch | US$1,076,400 | Fixed rate at 2.481% per annum | Due on June 6, 2013 | N/A | 1,076,400 | |||||||
Industrial & Commercial Bank of China, Fuzhou Dongjiekou Branch | US$313,157 | Fixed rate at 2.481% per annum | Due on June 6, 2013 | N/A | 313,157 | |||||||
Fujian Haixia Bank, Fuzhou Hualin Branch | RMB14,183,131 | Fixed rate at 9.184% per annum | Due on April 1, 2013 | Guarantee by Xinrong Zhuo | 2,283,624 | |||||||
Fujian Haixia Bank, Fuzhou Hualin Branch | RMB30,000,000 | Fixed rate at 7.000% per annum | Due on September 21, 2013 | Guarantee by Xinrong Zhuo | 4,830,295 | |||||||
$ | 12,020,599 |
36 |
(b) | Long-term loans |
The current portion of the term loans is shown in the table below:
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Minsheng Bank of China, Fuzhou Branch | $ | 5,888,935 | $ | 6,509,170 | ||||
Fujian Haixia Bank, Fuzhou Hualin Branch | 1,610,099 | 1,585,138 | ||||||
$ | 7,499,034 | $ | 8,094,308 | |||||
Additional information: | ||||||||
Weighted average interest rate for the three months ended March 31, 2013 and 2012 | 1.6 | % | N/A |
The term loan amounts recorded as non-current as of March 31, 2013 and December 31, 2012 consisted of the following:
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Minsheng Bank of China, Fuzhou Branch | $ | 14,454,660 | $ | 13,519,046 | ||||
Fujian Haixia Bank, Fuzhou Hualin Branch | 3,220,197 | 3,170,275 | ||||||
$ | 17,674,857 | $ | 16,689,321 |
Interest expenses of long term loans for the three months ended March 31, 2013 and 2012 amounted to $401,954 and $nil, respectively.
The principal payments for the outstanding term loans during the following three fiscal years is as follows:
Principal payment due during | Total outstanding loan | |||||||||||||||||||
Name of bank | Collateral | Term of loans | 2013 | 2014 | 2015 | amount | ||||||||||||||
Minsheng Bank of China, Fuzhou Branch |
Pingtan Fishing’s and Hong Long's fishing vessels and guaranteed by Xinrong Zhuo | May 4, 2012 to March 16, 2015 | $ | 3,630,772 | $ | 5,941,264 | $ | 2,970,632 | $ | 12,542,668 | ||||||||||
Minsheng Bank of China, Fuzhou Branch |
Pingtan Fishing’s and Hong Long's fishing vessels and guaranteed by Xinrong Zhuo | June 15, 2012 to March 16, 2015 | 885,554 | 1,449,088 | 724,545 | 3,059,187 | ||||||||||||||
Minsheng Bank of China, Fuzhou Branch |
Pingtan Fishing’s and Hong Long's fishing vessels and guaranteed by Xinrong Zhuo | June 29, 2012 to March 16, 2015 | 1,372,609 | 2,246,087 | 1,123,044 | 4,741,740 | ||||||||||||||
Fujian Haixia Bank, Fuzhou Hualin Branch | Guarantee by Xinrong Zhuo | April 25, 2012 to March 22, 2015 | 1,610,099 | 1,610,099 | 1,610,098 | 4,830,296 | ||||||||||||||
$ | 7,499,034 | $ | 11,246,538 | $ | 6,428,319 | $ | 25,173,891 |
37 |
(c) | Guarantees and collaterals provided to related parties |
In May 2012, Merchant Supreme’s VIE, Pingtan Fishing and Hong Long jointly entered into a pledge contract with Fuzhou Rural-Commercial Bank Jianxin Branch. Pursuant to the terms of the pledge contract, Pingtan Fishing put certain fishing vessels as collateral to jointly secure Haoyouli’s short-term loan from the financial institution in amount of approximately $3.8 million which is due on May 27, 2013. In addition to the collateral provided to Haoyouli, Pingtan Fishing also guaranteed the repayment of the $3.8 million short-term loan.
In October 2012, Pingtan Fishing entered into two pledge contracts with China Minsheng Banking Corp., Ltd. Pursuant to the terms of the pledge contracts, Pingtan Fishing put 10 fishing vessels, as collateral to secure Hong Long’s long-term loans from the financial institution in amount of approximately $10.5 million, which are due on April 18, 2015. In addition to the collateral provided to Hong Long, Pingtan Fishing also guaranteed the repayment of $45.1 million long-term loans.
As of the date of these financial statements, Pingtan Fishing had not received any demand from the lender to dispose the collateralized properties or to make any payments under the guarantee.
In September 2012, Pingtan Fishing provided certain guarantees to Hong Long for its short-term loans from China CITIC Bank Corporation Limited, in maximum guarantee amount of approximately $24.1 million. The short-term loans are due on September 21, 2013.
In September 2012, Pingtan Fishing provided certain guarantees to Hong Long for its short-term loans from Huaxia Bank in maximum guarantee amount of approximately $11.3 million. These short-term loans are due on September 5, 2013.
In October 2012, Pingtan Fishing provided certain guarantees to Hong Long for its short-term loans from Shanghai Pudong Development Corporation Limited, Fuzhou Branch, in maximum guarantee amount of approximately $8.1 million. The guaranteed short-term loans are due on September 5, 2013.
In December 2012, Pingtan Fishing provided certain guarantees to Shenzhen Western Coast Fisherman Pier Co., Ltd. for its term loans from China Construction Bank, Shenzhen Branch. The guarantee agreement will expire two years after the first drawdown.
In December 2012, Pingtan Fishing provided a guarantees to Haoyouli for its short-term loan from Fuzhou Rural-Commercial Bank Jianxin Branch, in the amount of approximately $1 million. The short-term loan is due on May 27, 2013.
In January 2013, Pingtan Fishing provided certain guarantees to Hong Long for its term loans from Industrial and Commercial Bank of China, Fuzhou Jinshan Branch, in maximum guarantee amount of approximately $12.9 million. The loans are due on January 28, 2016.
As of the date of these financial statements, Pingtan Fishing was not required to make any payments under these guarantee agreements.
38 |
17. | ACCOUNTS PAYABLE - RELATED PARTIES |
Accounts payable to related parties as of March 31, 2013 and December 31, 2012 consisted of the following:
Merchant Supreme | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
PT. Avona Mina Lestari | $ | 3,299,766 | $ | 5,589,681 | ||||
Fujian Honglong Ocean Fishing Co., Ltd | 599,009 | 175,951 | ||||||
Hongfa Shipping Limited | 574,464 | - | ||||||
Haifeng Dafu Enterprise Company Limited | 482,854 | - | ||||||
$ | 4,956,093 | $ | 5,765,632 |
Accounts payable to related parties are not collateralized, carry no interest, and do not have specific repayment terms.
Deposit on setting up joint venture netted off with accounts payables – related parties.
18. | RECEIPT IN ADVANCE - RELATED PARTIES |
Receipt in advance from related parties as of March 31, 2013 and December 31, 2012, consisted of the following:
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Shenzhen Western Coast Fisherman Pier Co., Ltd | $ | 4,908,426 | $ | 12,681,102 |
19. | ACCRUED EXPENSES AND OTHER PAYABLES |
Accrued expenses and other payables as of March 31, 2013 and December 31, 2012 consisted of the following:
PME | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Other payables | $ | 10,059 | $ | 18 |
39 |
China Dredging | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Accrued salaries and wages | $ | 145,055 | $ | 129,633 | ||||
Accrued staff benefits | 265,132 | 253,178 | ||||||
Other tax payables | 715,847 | 279,126 | ||||||
Accrued outsourced dredger services and labor | 1,569,444 | 1,564,582 | ||||||
Other payables | 258,007 | 477,831 | ||||||
$ | 2,953,485 | $ | 2,704,350 | |||||
Other tax payables represent payables other than income tax which consist of business tax, individual salary tax, stamp duty, embankment tax and other small local taxes. Business tax was 3% - 5% of revenue recognized, as of March 31, 2013 and December 31, 2012, and other tax payables included $703,844 and $265,847 of business tax payable, respectively.
Merchant Supreme | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Accrued salaries and wages | $ | 1,510,662 | $ | 673,234 | ||||
Other payables | 171,476 | 360,532 | ||||||
$ | 1,682,138 | $ | 1,033,766 |
20. | ADVANCE TO/FROM RELATED PARTIES |
Advance to/from related parties as of March 31, 2013 and December 31, 2012 consisted of the following:
(a) | Name and relationship of related parties |
Name of related party | Relationship |
Panxing Zhuo | Father of Xinrong Zhuo, a Family Member |
Honghong Zhuo | Daughter of Xinrong Zhuo |
Qing Lin | Brother-in-law of Xinrong Zhuo, a Family Member |
Ping Lin | Sister of Qing Lin |
Longfei Zhuo | Cousin of Xinrong Zhuo, a Family Member |
Sunqiang Zhou | Brother-in-law of Xinrong Zhuo, a Family Member |
Cheng Chen | Cousin of Xinrong Zhuo, a Family Member |
Chan Kit | One of shareholders of China Dredging Co., Ltd |
Xiaojie Wu | Brother-in-law of Xinrong Zhuo, a Family Member |
Xiaoqin Xu | An employee of an affiliate company |
Xiaomei Yang | An employee of the Company and niece of Xinrong Zhuo |
Xiaofang Zhuo | Cousin of Xinrong Zhuo, a Family Member |
Longhua Zhuo | Sisterof Xinrong Zhuo, a Family Member |
Fujian Yihai Investment Co., Ltd. | An affiliate company majority owned by Longjie Zhuo, sibling of Xinrong Zhuo |
Fuzhou Haifeng Dafu Ocean Fishing Co., Ltd. | An affiliate company owned by Longfei Zhuo and Honghong Zhuo |
Fujian Lutong Highway Engineering Construction Co., Ltd. | An affiliate company majority owned by Xiaojie Wu,brother-in-law of Xinrong Zhuo |
Fujian Haiyi International Shipping Agency Co., Ltd. | An affiliate company to which the Company acted as a trustee equity owner. Haiyi International is ultimately majority owned and controlled by Sunqiang Zhou, brother-in-law of Xinrong Zhuo and a Family Member |
Fujian Xinnong Ocean Fisheries Development Co., Ltd. | An affiliate company to which the Company acted as a trustee equity owner. Xinnong is ultimately owned and controlled by Xiaojie Wu |
Fuzhou Haoyouli Fisheries Development Co., Ltd. | An affiliate company to which the Company acted as trustee equity owner. Haoyouli is ultimately owned and controlled by Sunqiang Zhou |
Fujian Honglong Ocean Fishing Co., Ltd | An affiliate company majority owned and controlled by Ping Lin, spouse of Xinrong Zhuo and a Family Member |
PT. Avona Mina Lestari | An affiliate company controlled by Xinrong Zhuo family domiciled in Indonesia, engaged in fishing base management and fishing vessel service |
PT. Dwikarya Reksa Abadi | An affiliate company controlled by Xinrong Zhuo family domiciled in Indonesia, engaged in fishing base management and fishing vessel service |
Haifeng Dafu Enterprise Company Limited | An affiliate company domiciled in the Hong Kong Special Administrative Region of the PRC (“Hong Kong”) |
Hai Yi Shipping Limited | An affiliate company domiciled in the Hong Kong |
Fuzhou Wanhao Real Estate Property Investment Co., Ltd. | An affiliate company majority-owned and controlled by Qing Lin |
China Communication Materials Central and South Co., Ltd. | An affiliate company majority-owned by Lutong Highway |
Fujian Gangjun Construction Co., Ltd. | An affiliate company ultimately controlled by Xinrong Zhuo |
Fuzhou Baojie Haiyi Ocean Fishing Co., Ltd. | An affiliate company majority-owned and controlled by Xinrong Zhuo |
Fujian International Trading and Transportation Co., Ltd. | An affiliate company owned by Yihai Investment and Longhao Zhuo, sibling of Xinrong Zhuo and a Family Member |
Fuzhou Dongxing Longju Real Estate Co., Ltd. | An affiliate company owned by Xinrong Zhuo |
Shenzhen Western Coast Fisherman Pier Co., Ltd. | An affiliate company owned by Xinrong Zhuo |
Pingtan Heshun Fuel Co., Ltd. | An affiliate company under Xinrong Zhuo’s common control |
Fuzhou Hairong Trading Co., Ltd. | An affiliate company under Xinrong Zhuo’s common control |
Hongfa Shipping Limited | An affiliate company owned by Xinrong Zhuo |
40 |
(b) | Advance to related parties |
China Dredging | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Cheng Chen | $ | 805,049 | $ | - | ||||
Merchant Supreme (eliminated in consolidation) | 272,000 | - | ||||||
$ | 1,077,049 | $ | - |
Advance to related parties represented loans to related parties. These balances are not collateralized, carry no interest, and do not have specific repayment terms.
Merchant Supreme | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Chan Kit ($242,000 eliminated in consolidation) | $ | 203,072 | $ | - | ||||
Honghong Zhuo | 1,668,062 | 1,642,203 | ||||||
Panxing Zhuo | 4,606,144 | 6,196,248 | ||||||
Qing Lin | 102,443 | 100,855 | ||||||
Xiaofang Zhuo | 8,472,855 | 769,251 | ||||||
Xiaomei Yang | 9,327,057 | 7,598,782 | ||||||
China Communication Materials Central and South Co., Ltd | 7,003,929 | 6,895,349 | ||||||
Fujian Haiyi International Shipping Agency Co., Ltd. | 246,946 | 243,117 | ||||||
Fujian Lutong Highway Engineering Construction Co., Ltd. | 2,195,208 | 2,161,177 | ||||||
Fujian Yihai Investment Co., Ltd | 15,031,697 | 13,467,150 | ||||||
Fuzhou Haifeng Dafu Ocean Fishing Co., Ltd. | 971,372 | 956,315 | ||||||
Fuzhou Haoyouli Fisheries Development Co., Ltd. | 7,317,898 | 7,204,451 | ||||||
Fuzhou Wanhao Real Etate Property Investment Co., Ltd | 2,608,360 | 2,567,923 | ||||||
$ | 59,755,043 | $ | 49,802,821 |
Advance to related parties represented loans to related parties. These balances are not collateralized, carry no interest, and do not have specific repayment terms.
(c) | Advance from related parties |
China Dredging
March 31, 2013 | December 31, 2012 | |||||||
Unaudited | ||||||||
Chan Kit (eliminated $242,000 in consolidation) | $ | 752,350 | $ | 560,216 | ||||
Fuzhou Dongxing Longju Real Estate Co., Ltd | 1,610,099 | - | ||||||
Fujian Yihai Investment Co., Ltd | 3,220,197 | - | ||||||
$ | 5,582,646 | $ | 560,216 |
Advance from related parties are not collateralized, carry no interest, and do not have specific repayment terms.
41 |
Merchant Supreme
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Chan Kit | $ | 153,961 | $ | 153,961 | ||||
China Dredging (eliminated in consolidation) | 272,000 | - | ||||||
Fuzhou Dongxing Longju Real Estate Co., Ltd | 805,050 | - | ||||||
Fujian Honglong Ocean Fishing Co., Ltd | 12,847,496 | - | ||||||
$ | 14,078,507 | $ | 153,961 |
Advance from related parties are not collateralized, carry no interest, and do not have specific repayment terms.
21. | CAPITAL |
(a) | Share capital |
On February 25, 2013, CGEI completed its merger with CDGC and the various transactions contemplated by the Agreement and Plan of Merger, (the “Merger Agreement”) dated as of October 24, 2012 among CGEI, CDGC, and China Dredging Sub Ltd. and the share purchase of Merchant Supreme contemplated by the share Purchase Agreement, dated as of October 24, 2012 (the “Share Purchase Agreement”), among CGEI and (collectively, the “Business Combination”) Merchant Supreme. Upon the consummation of the Business Combination, the ordinary shares, par value $0.001 per share of the Company were listed on The NASDAQ Capital Market under the symbol “PME”. Pursuant to the terms of the Merger Agreement, upon completion of the Merger, each share of then-issued outstanding ordinary shares and Class A preferred A shares of CDGC was automatically cancelled and converted into the right to receive 0.82947 Company Ordinary Shares. Pursuant to the terms of the Share Purchase Agreement, all of the issued and outstanding shares of Merchant Supreme capital shares were purchased by the Company for an aggregate of 25,000,000 Company Ordinary Shares. On February 26, 2013, the Company announced that it had completed the Business Combination.
(b) | Retained earnings and statutory reserves |
Fujian Service, Fujian WangGang, Wonder Dredging, PingTan XingYi, PingTan, ZhuoYing Pingtan Guansheng and Pingtan Fishing Group operate in the PRC, are required to transfer 10% of their net profits after income tax, as determined in accordance with the PRC accounting rules and regulations. Appropriation to the statutory reserve by the Company is based on profit arrived at under PRC accounting standards for business enterprises for each year. The statutory reserves of the Company represent the statutory reserves of the above-mentioned companies as required under the PRC law.
The profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory reserve. Appropriation to the statutory reserve must be made before distribution of dividends to shareholders. The appropriation is required until the statutory reserve reaches 50% of the shareholders' equity. This statutory reserve is not distributable in the form of cash dividends.
Retained earnings and statutory reserves as of March 31, 2013 and December 31, 2012 consisted of the following:
China Dredging | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Retained earnings | $ | 192,298,599 | $ | 183,053,524 | ||||
Statutory reserves | $ | 15,481,377 | $ | 15,386,316 |
42 |
(b) | Retained earnings and statutory reserves |
As of March 31, 2013, the statutory reserves of Fujian Service and Wonder Dredging have fulfilled the requirement of PRC accounting rules and regulations. Fujian WangGang and PingTan ZhuoYing had sustained losses since its establishment; therefore no appropriation of net profits to the statutory reserves was required.
Merchant Supreme | ||||||||
March 31, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
Retained earnings | $ | 40,989,561 | $ | 36,537,115 | ||||
</TD |