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 September 30, 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 November 14, 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.
  
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. 
 
 
 
PINGTAN MARINE ENTERPRISE LTD.
 
TABLE OF CONTENTS
 
PART I.
FINANCIAL INFORMATION
2
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
2
 
 
 
 
Consolidated Balance Sheets at September 30, 2013 (Unaudited) and December 31, 2012
2
 
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)
3
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)
4
 
Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2013 (Unaudited)
5
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
6
 
Notes to Unaudited Consolidated Financial Statements
8
 
 
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
48
 
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
62
 
 
 
ITEM 4.
CONTROLS AND PROCEDURES
62
 
 
 
PART II.
OTHER INFORMATION
63
 
 
 
ITEM 1.
LEGAL PROCEEDINGS
63
ITEM 1A.
RISK FACTORS
63
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
63
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
63
ITEM 4.
MINE SAFETY DISCLOSURES
63
ITEM 5.
OTHER INFORMATION
63
ITEM 6.
EXHIBITS
63
   
 
1

 
PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
(Unaudited)
 
(A)
 
Assets
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
Cash
 
$
10,832,000
 
$
10,426,140
 
Notes receivable (banker's acceptances)
    transferred from related parties
 
 
-
 
 
3,645,817
 
Accounts receivable - third parties
 
 
10,252,829
 
 
11,478,436
 
Other receivables
 
 
11,015
 
 
29,885
 
Advance to related parties
 
 
-
 
 
49,802,821
 
Prepaid expenses
 
 
4,932,497
 
 
410,966
 
Inventories
 
 
5,427,251
 
 
194,331
 
Assets of discontinued operations
 
 
250,209,548
 
 
361,460,444
 
Total current assets
 
 
281,665,140
 
 
437,448,840
 
 
 
 
 
 
 
 
 
Other assets
 
 
 
 
 
 
 
Long-term investment
 
 
3,431,373
 
 
3,328,789
 
Deposit on setting up of Joint Venture
 
 
-
 
 
6,090,302
 
Property, plant and equipment, net
 
 
66,979,281
 
 
37,141,906
 
Other receivables
 
 
3,283,333
 
 
-
 
Total other assets
 
 
73,693,987
 
 
46,560,997
 
 
 
 
 
 
 
 
 
Total assets
 
$
355,359,127
 
$
484,009,837
 
 
 
 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
Accounts payable - third parties
 
$
151,000
 
$
70,732
 
- related parties
 
 
163,303
 
 
5,765,632
 
Receipt in advance - third parties
 
 
476,399
 
 
-
 
- related parties
 
 
-
 
 
12,681,102
 
Short-term loans
 
 
22,363,811
 
 
25,169,260
 
Long-term loans - current portion
 
 
11,413,399
 
 
8,094,308
 
Accrued liabilities and other payables
 
 
3,684,872
 
 
1,033,784
 
Advance from related parties
 
 
115,472
 
 
153,961
 
Deferred income
 
 
1,714,706
 
 
-
 
Liabilities of discontinued operations
 
 
181,463,364
 
 
14,052,751
 
Total current liabilities
 
 
221,546,326
 
 
67,021,530
 
 
 
 
 
 
 
 
 
Other liabilities
 
 
 
 
 
 
 
Long-term loans, net of current portion
 
 
58,431,373
 
 
16,689,321
 
Total other liabilities
 
 
58,431,373
 
 
16,689,321
 
Total liabilities
 
 
279,977,699
 
 
83,710,851
 
 
 
 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
 
 
Ordinary shares, 225,000,000 shares authorized with $0.001 authorized
    with $0.001 per share; 79,055,053 shares issued and outstanding
    as of September 30, 2013 and December 31, 2012
 
 
79,055
 
 
79,055
 
Additional paid-in capital
 
 
26,645,687
 
 
141,381,098
 
Statutory reserves
 
 
19,877,314
 
 
19,386,642
 
Retained earnings
 
 
-
 
 
217,224,220
 
Accumulated other comprehensive income
 
 
28,779,372
 
 
22,227,971
 
Total shareholders’ equity
 
 
75,381,428
 
 
400,298,986
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 
$
355,359,127
 
$
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. Assets and liabilities of discontinued operations are retrospectively restated as of December 31, 2012 after taking into account of the Group’s plan to sell China Dredging Group Co., Ltd. and its subsidiaries to the Company’s Chairman, CEO and major shareholder, Mr Xinrong Zhuo.
 
See accompanying notes to unaudited consolidated financial statements.
 
 
2

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN U.S. DOLLARS)
 
 
 
For the Three Months Ended 
September 30,
 
For the Nine Months Ended 
September 30,
 
 
 
2013
 
2012 (A)
 
2013
 
2012 (A)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
20,609,107
 
$
13,152,223
 
$
61,640,940
 
$
39,039,757
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
 
 
(12,446,879)
 
 
(9,693,182)
 
 
(38,974,488)
 
 
(28,572,398)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
 
8,162,228
 
 
3,459,041
 
 
22,666,452
 
 
10,467,359
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling and marketing expenses
 
 
(361,999)
 
 
(146,641)
 
 
(730,734)
 
 
(608,483)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
 
 
(1,178,035)
 
 
(209,633)
 
 
(2,345,569)
 
 
(578,544)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
 
6,622,194
 
 
3,102,767
 
 
19,590,149
 
 
9,280,332
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income/(expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment income
 
 
218
 
 
20
 
 
69,289
 
 
15,146
 
Interest income
 
 
2,306
 
 
678
 
 
4,861
 
 
2,888
 
Interest expenses
 
 
(1,049,041)
 
 
(1,079,474)
 
 
(2,444,782)
 
 
(2,438,124)
 
Subsidy income
 
 
168,900
 
 
3,783,578
 
 
204,492
 
 
3,783,578
 
Sundry income
 
 
8
 
 
-
 
 
2,021
 
 
-
 
Gain/(Loss) on foreign exchange, net
 
 
194,433
 
 
(21,051)
 
 
(25,972)
 
 
(52,770)
 
Total other income/(expense)
 
 
(683,176)
 
 
2,683,751
 
 
(2,190,091)
 
 
1,310,718
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
 
 
5,939,018
 
 
5,786,518
 
 
17,400,058
 
 
10,591,050
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
 
-
 
 
-
 
 
-
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
 
5,939,018
 
 
5,786,518
 
 
17,400,058
 
 
10,591,050
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income from discontinued operations, net of taxes
 
 
12,362,523
 
 
17,375,250
 
 
39,461,777
 
 
60,773,049
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated net income
 
$
18,301,541
 
$
23,161,768
 
$
56,861,835
 
$
71,364,099
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted earnings per share
 
 
 
 
 
 
 
 
 
 
 
 
 
- From continuing operations
 
$
0.08
 
$
0.07
 
$
0.22
 
$
0.13
 
- From discontinued operations
 
 
0.15
 
 
0.22
 
 
0.50
 
 
0.77
 
- Net income
 
$
0.23
 
$
0.29
 
$
0.72
 
$
0.90
 
Weighted average number of ordinary shares outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
- Basic and diluted
 
 
79,055,053
 
 
79,055,053
 
 
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 Ltd.) 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. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(IN U.S. DOLLARS)
 
 
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
 
 
2013
 
2012 (A)
 
2013
 
2012 (A)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
18,301,541
 
$
23,161,768
 
$
56,861,835
 
$
71,364,099
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation gain
 
 
796,724
 
 
3,870,683
 
 
6,551,401
 
 
942,406
 
Total comprehensive income
 
$
19,098,265
 
$
27,032,451
 
$
63,413,236
 
$
72,306,505
 
 
(A)  Represents the consolidation retrospectively restated as if Pingtan Marine Enterprise Ltd. (formerly known as China Growth Equity Investment Ltd.) 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. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(IN U.S. DOLLARS)
 
 
 
Ordinary Shares,
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
with no Par Value
 
Additional
 
 
 
 
 
 
 
other
 
Total
 
 
 
Number of
 
 
 
paid-in
 
Statutory
 
Retained
 
comprehensive
 
shareholders'
 
 
 
Shares
 
Amount
 
capital
 
reserves
 
earnings
 
income
 
equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2013 (A)
 
 
79,055,053
 
$
79,055
 
$
141,381,098
 
$
19,386,642
 
$
217,224,220
 
$
22,227,971
 
$
400,298,986
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
-
 
 
-
 
 
-
 
 
-
 
 
56,861,835
 
 
-
 
 
56,861,835
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Appropriation to statutory reserves
 
 
-
 
 
-
 
 
-
 
 
490,672
 
 
(490,672)
 
 
-
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation gain
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
6,551,401
 
 
6,551,401
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of fishing vessels from related party
 
 
-
 
 
-
 
 
(114,735,411)
 
 
-
 
 
(273,595,383)
 
 
-
 
 
(388,330,794)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of September 30, 2013
 
 
79,055,053
 
$
79,055
 
$
26,645,687
 
$
19,877,314
 
$
-
 
$
28,779,372
 
$
75,381,428
 
 
(A)  Represents the consolidation retrospectively restated as if Pingtan Marine Enterprise Ltd. (formerly known as China Growth Equity Investment Ltd.) 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.
 
 
5

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN U.S. DOLLARS)
 
 
 
For the Nine Months Ended 
September 30,
 
 
 
2013
 
2012 (A)
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
 
 
 
Net income
 
$
56,861,835
 
$
71,364,099
 
Discontinued operations, net of tax
 
 
(39,461,777)
 
 
(60,773,049)
 
Income from continuing operations
 
 
17,400,058
 
 
10,591,050
 
 
 
 
 
 
 
 
 
Adjustments to reconcile net income to net cash provided by
     operating activities
 
 
 
 
 
 
 
Depreciation of property, plant and equipment
 
 
2,268,063
 
 
2,596,876
 
Short term investment income
 
 
-
 
 
(15,868)
 
 
 
 
 
 
 
 
 
Changes in operating assets and liabilities
 
 
 
 
 
 
 
Accounts receivable - third parties
 
 
1,568,675
 
 
(4,240,254)
 
- related parties
 
 
-
 
 
4,586,762
 
Other receivables
 
 
19,657
 
 
6,766,975
 
Prepaid expenses
 
 
(4,479,159)
 
 
336,543
 
Inventories
 
 
(5,191,641)
 
 
756,413
 
Accounts payable - third parties
 
 
77,561
 
 
2,498,040
 
- related parties
 
 
494,616
 
 
3,443,700
 
Receipt in advance - third parties
 
 
473,183
 
 
(382,150)
 
- related parties
 
 
(12,983,365)
 
 
-
 
Accrued liabilities and other payables
 
 
2,602,770
 
 
1,146,071
 
Net cash provided by operating activities from continuing operations
 
 
2,250,418
 
 
28,084,158
 
 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
 
Payment for long term investment
 
 
-
 
 
(2,995,958)
 
Proceeds from disposition of short-term investment
 
 
-
 
 
808,449
 
Proceeds from deferred income
 
 
6,224,357
 
 
-
 
Purchase of property, plant and equipment
 
 
(216,850,307)
 
 
(6,574,964)
 
Advance to related parties
 
 
(4,044,837)
 
 
(52,772,881)
 
Net cash used in investing activities from continuing operations
 
 
(214,670,787)
 
 
(61,535,354)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
 
 
Proceeds from short-term loans
 
 
43,439,587
 
 
51,478,882
 
Repayment of short-term loans
 
 
(46,996,499)
 
 
(36,078,434)
 
Proceeds from long-term loans
 
 
45,889,055
 
 
26,630,736
 
Repayment of long-term loans
 
 
(1,890,743)
 
 
-
 
Proceeds from additional paid in capital
 
 
-
 
 
13
 
Advance from related parties, net of reception in form of note receivable
 
 
3,847,492
 
 
(10,222,164)
 
Net cash provided by financing activities from continuing operations
 
 
44,288,892
 
 
31,809,033
 
 
 
6

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN U.S. DOLLARS)
 
 
 
For the Nine Months Ended September 30,
 
 
 
2013
 
2012 (A)
 
 
 
 
 
 
 
 
 
Cash flow from discontinued operations
 
 
 
 
 
 
 
Net cash provided by operating activities from discontinued operations
 
 
71,420,962
 
 
73,322,045
 
Net cash provided by investing activities from discontinued operations
 
 
7,624,250
 
 
23,934,193
 
Net cash (used in)/provided by financing activities from discontinued
 
 
 
 
 
 
 
operations
 
 
(560,216)
 
 
168,559
 
Net cash provided by discontinued operations
 
 
78,484,996
 
 
97,424,797
 
 
 
 
 
 
 
 
 
Effect of exchange rate
 
 
1,977,422
 
 
732,443
 
 
 
 
 
 
 
 
 
Net (decrease)/increase in cash
 
 
(87,669,059)
 
 
96,515,077
 
 
 
 
 
 
 
 
 
Cash at the beginning of period (1)
 
 
175,488,715
 
 
114,204,340
 
 
 
 
 
 
 
 
 
Cash at the end of period (2)
 
$
87,819,656
 
$
210,719,417
 
 
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash paid:
 
 
 
 
 
 
 
From discontinued operations
 
 
 
 
 
 
 
Income tax paid
 
$
12,814,679
 
$
23,111,634
 
 
 
 
 
 
 
 
 
From continuing operations
 
 
 
 
 
 
 
Interest paid
 
$
2,325,864
 
$
2,559,454
 
 
 
 
 
 
 
 
 
Supplemental disclosure of non-cash transaction eliminated in above:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note payable-related party
 
$
155,166,195
 
$
-
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment by setting off advances to
 
 
 
 
 
 
 
related parties
 
$
54,882,642
 
$
-
 
Deposit on setting up Joint Venture netted of accounts
 
 
 
 
 
 
 
payable-related parties
 
$
6,090,302
 
$
-
 
 
(1)   Includes cash and cash equivalents of discontinued operations of 165,062,575 and $112,409,544 at the beginning of the year in 2013 and 2012 respectively.
(2)   Includes cash and cash equivalents of discontinued operations of 76,987,656 and $210,552,835 at the nine months ended September 30, 2013 and 2012 respectively.
 
(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.
 
 
7

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
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 Xinggang 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.
 
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”.
 
On October 28, 2013, the Company announced that the independent members of the Company's Board of Directors ("the Board") agreed to sell PME's 100% owned dredging subsidiary, CDGC and its PRC operating subsidiaries, including Fujian Xinggang Port Service Co., Ltd. business and operating assets to an affiliate of the Company's Chairman, CEO and majority shareholder Mr. Xinrong Zhuo.  The transaction is expected to close during the fourth quarter of 2013. Under the terms of the proposed transaction, the consideration to be received by PME is approximately $365.5 million with an expected gain on the sale to be $140.3 million. As the result of this transaction, the activities of CDGC and its PRC operating subsidiaries have been classified as discontinued operations in our statements of operations for all periods presented. The assets and liabilities of CDGC and its subsidiaries have been classified on the balance sheet as assets and liabilities of discontinued operations. The discontinued operations have been disclosed in Note 2.
 
Merchant Supreme, through its PRC VIE, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd. (“Pingtan Fishing”) engages in ocean fishery with many of its self-owned vessels within Indian EEZ and Arafura Sea of Indonesia. Pingtan Fishing is ranked highly as one of the leading private (not state-owned) supplier and trader of oceanic aquatic products in PRC. 
   
8

  
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
1.     DESCRIPTION OF BUSINESS AND ORGANIZATION (…/Cont’d)
 
On June 19, 2013, the Company entered into a master agreement with a related company, Fuzhou Honglong Ocean Fishery Co.,Ltd (“Hong Long”) to acquire 46 fishing vessels with total consideration of $410.1 million that was based on independant valuation reports dated June 6, 2013. The major shareholder of Hong Long is Ms. Ping Lin, spouse of Xingrong Zhuo, the Company’s Chairman and CEO, who holds 66.47% whereas the remaining two shareholders hold 33.53% during the second quarter of 2013. Mr. Zhuo currently holds about 56.2% of PME. The transaction between PME and Hong Long is accounted as common control transaction. Based on Accounting Standards Codification (“ASC”) 805-50, PME recorded the value of $21.8 million (RMB 133,701,821) as the cost of the vessels which was the net carrying amount recorded in Hong Long’s books at the date of transfer. The balance of $388.3 million above carrying amount treated as a return of capital in the equity accounts. $273.6 million was recorded as a reduction in retained earnings and the balance of $114.7 million applied to additional paid-in capital.
 
On September 1, 2013, the Company further entered a Memorandum with Hong Long that Hong Long transferred the operating right of vessels to Fujian Provincial Pingtan County Fishing Group Co., Ltd. (“Pingtan Fishing”). The ownership of fishing vessels belongs to Pingtan Fishing. Pingtan Fishing is entitled to 100% of the net profit reported by each the vessels from September 1, 2013 onwards.
 
On October 28, 2013, the Company announced that 25-year exclusive right of 20 new fishing vessels will be transferred from Xinrong Zhuo, the Company’s CEO and Chairman, to the Company as part of the sale consideration of China Dredging Group Co., Ltd in next quarter. Such operating rights were appraised at $216.1 million by an independent valuation firm.
 
Details of the Company’s subsidiaries and VIEs which are included as continuing operations in these consolidated financial statements as of September 30, 2013 are as follows:
 
Continuing operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Name of subsidiaries
 
Place and date of incorporation
 
Percentage of ownership
 
Principal activities
 
 
 
 
 
 
 
 
 
Merchant Supreme Co., Ltd. (“Merchant Supreme”)
 
BVI, June 25, 2012
 
100% held by PME
 
Intermediate holding company
 
 
 
 
 
 
 
 
 
Prime Cheer Corporation Ltd. (“Prime Cheer”)
 
Hong Kong, May 3, 2012
 
100% held by Merchant Supreme
 
Intermediate holding company
 
 
 
 
 
 
 
 
 
Pingtan Guansheng Ocean Fishing Co., Ltd. ("Pingtan Guansheng")
 
PRC October 12, 2012
 
100% held by Prime Cheer
 
Intermediate holding company
 
 
The following wholly owned or majority owned VIE’s are consolidated into financial statements:
 
Name of VIEs
 
Fujian Provincial Pingtan County Fishing Group Co., Ltd. (“Pingtan Fishing”)
 
Pingtan Dingxin Fishing Information Consulting Co., Ltd. (“Pingtan Dingxin”)
 
Pingtan Duoying Fishing Information Consulting Co., Ltd. (“Pingtan Duoying”)
 
Pingtan Ruiying Fishing Information Consulting Co., Ltd. (“Pingtan Ruiying”)
   
 
9

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
2.    DISCONTINUED OPERATIONS
 
The Company announced on October 28, 2013 that they will exit and sell specialized dredging services currently operated China Dredging to its majority shareholder, Mr. Xinrong Zhuo. The Company anticipates the sale to be completed during the fourth quarter of 2013.
 
Total considerations of the transaction are as followings:
 
(a)   forgiveness of the PME's current $155.2 million 4% promissory note 1 due on June 19, 2015.
(b)  the transfer to PME of the 25-year exclusive operating rights (see description of operating rights below) for 20 new fishing vessels, with such rights appraised at $216.1 million.
(c)   forgiveness of the PME’s current accounts due to China Dredging Group Co., Ltd. with amount $172.1 million.
 
Therefore, with the net asset of China Dredging Group Co., Ltd and its subsidiaries of $397.3 million as at September 30, 2013, this transaction is expected to result in a net gain on disposal of $140.3 million.
 
The following entities represent the discontinued operations:
 
 
 
Name of subsidiaries
 
 
 
China Dredging Group Co., Ltd(“CDGC” or  “China Dredging)
 
 
 
China Dredging (HK) Company Limited  (“China Dredging HK”)
 
 
 
Master Gold Corporation Limited (“Master Gold”)
 
 
 
Fujian Wanggang Dredging Construction Co., Ltd (“Fujian Wanggang”)
 
 
 
Pingtan Xingyi Port Service Co., Ltd (“Pingtan Xingyi”)
 
 
 
Pingtan Zhuoying Dredging Engineering Construction Co., Ltd (“Pingtan Zhuoying”)
 
 
Name of VIEs
 
 
 
Wonder Dredging Engineering LLC (“Wonder Dredging”)
 
 
 
Fujian Xinggang Port Service Co., Ltd. (“Fujian Service”)
 
  
Notes:
 
 
 
1.
Principal amount per the Company’s SEC filings as of June 30, 2013.
 
A summary of the discontinued operations is presented below.
 
The Company has reflected the results of the business as discontinued operations in the consolidated statements of income for the period ended September 30, 2013 and 2012 (Unaudited).
 
 
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
54,323,389
 
$
46,892,465
 
$
131,610,091
 
$
165,986,546
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
 
 
(33,520,993)
 
 
(20,942,489)
 
 
(74,761,710)
 
 
(76,537,718)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
 
20,802,396
 
 
25,949,976
 
 
56,848,381
 
 
89,448,828
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
 
 
(2,200,183)
 
 
(1,900,068)
 
 
(5,614,875)
 
 
(6,544,286)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
 
18,602,213
 
 
24,049,908
 
 
51,233,506
 
 
82,904,542
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income/(expense)
 
 
(1,513,074)
 
 
(577,851)
 
 
431,465
 
 
(1,170,850)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 
17,089,139
 
 
23,472,057
 
 
51,664,971
 
 
81,733,692
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
 
(4,726,616)
 
 
(6,096,807)
 
 
(12,203,194)
 
 
(20,960,643)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income from discontinued operation, net of taxes
 
$
12,362,523
 
$
17,375,250
 
$
39,461,777
 
$
60,773,049
 
 
 
10

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
2.    DISCONTINUED OPEATIONS (…/Cont’d)
 
The assets and liabilities held for sale in the consolidated balance sheet as of September 30, 2013 and December 31, 2012 are comprised of the following:
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
(Unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
Cash
 
$
76,987,656
 
$
165,062,575
 
Accounts receivable - third parties
 
 
4,399,624
 
 
23,446,249
 
Cost and estimated earnings in excess of billings on contracts in progress
 
 
14,208,348
 
 
8,133,021
 
Other receivables
 
 
466,284
 
 
4,189
 
Inventories
 
 
4,415,589
 
 
5,029,653
 
Total current assets
 
 
100,477,501
 
 
201,675,687
 
 
 
 
 
 
 
 
 
Other assets
 
 
 
 
 
 
 
Prepaid other deposits
 
 
-
 
 
4,430
 
Prepaid dredger deposits
 
 
24,190,023
 
 
23,274,105
 
Security deposits
 
 
16,830,065
 
 
25,087,880
 
Deposit for BT project
 
 
68,055,556
 
 
66,852,860
 
Property, plant and equipment, net
 
 
40,656,403
 
 
44,565,482
 
Total other assets
 
 
149,732,047
 
 
159,784,757
 
 
 
 
 
 
 
 
 
Total assets
 
$
250,209,548
 
$
361,460,444
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
Accounts payable - third parties
 
$
10,549,864
 
$
3,690,417
 
Income tax payable
 
 
4,813,797
 
 
5,333,519
 
Accrued liabilities and other payables
 
 
4,011,855
 
 
2,704,350
 
Accrued interest - related party
 
 
1,768,470
 
 
-
 
Receipt in advance - third parties
 
 
5,153,183
 
 
-
 
Advance from related parties
 
 
-
 
 
560,216
 
Derivative liability
 
 
-
 
 
1,764,249
 
Note payable - related party
 
 
155,166,195
 
 
-
 
Total current liabilities
 
$
181,463,364
 
$
14,052,751
 
 
 
11

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
3.
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.
 
In October, 2013 the Company decided to sell its 100% interest in China Dredging Group Co., Ltd. and its subsidiaries to the Company’s Chairman, CEO and major shareholder, Mr. Xinrong Zhuo. As such, China Dredging Group Co., Ltd’s assets and liabilities have been classified on the balance sheet as assets and liabilities of discontinued operations. The operating results of China Dredging Group Co., Ltd have been classified as discontinued operations in our statements of operations for all periods presented. Unless otherwise indicated, all disclosures and amounts in the Notes to the Consolidated Financial Statements relate to the Company’s continuing operations.
 
Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K and in China Dredging’s Annual Report on Form 20-F for the year ended December 31, 2012 filed with the Securities and Exchange Commission on February 6, 2013 and April 27, 2013, respectively. 
 
Reclassifications 
 
Certain prior year information has been reclassified to be comparable with the current period presentation. This reclassification has no effect on previously reported net income.
 
(b)        Consolidation of VIE
 
The Company has no direct or indirect legal or equity ownership interest in Pingtan Fishing. Moreover, another set of VIE agreements have been entered between Pingtan Guansheng and the shareholders of Pingtan Fishing. The shareholders of Pingtan Fishing also have assigned all their rights as shareholders, including voting rights and disposition rights of their equity interest Pingtan Fishing to Pingtan Guansheng, our direct, wholly-owned subsidiary. Accordingly, by virtue of the VIE Agreements, Pingtan Guansheng is the primary beneficiary of Pingtan Fishing as defined by ASC 810 “Consolidation of Variable Interest Entities”. Therefore we consolidate Pingtan Fishing as VIE.
 
 
12

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
3.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)
 
(b)        Consolidation of VIE (…/Cont’d)
 
In accordance with Accounting Standards Codification (“ASC”) 810-10-15-14, Pingtan Fishing is deemed VIEs for two reasons. First, the equity stockholders of Pingtan Fishing do not significantly enjoy the benefits of income or suffer the consequences of losses. Second, the equity stockholders of Pingtan Fishing do not possess the direct or indirect ability through voting or similar rights to make decisions regarding their activities that have a significant effect on the success of Pingtan Fishing. Therefore, in accordance with ASC 810-10-25-38A, the Company is deemed to be the primary beneficiary of Pingtan Fishing and the financial statements of Pingtan Fishing are consolidated in the Company’s consolidated financial statements.
 
The following tables show the assets and liabilities of the Company’s VIEs after eliminating the intercompany balances as of September 30, 2013 and December 31, 2012. The VIEs include Pingtan Fishing Group which comprises of Pingtan Fishing itself and the three subsidiaries; namely Pingtan Dingxin, Pingtan Duoying and Pingtan Ruiying. The creditors of Pingtan Fishing Group do not have recourse against the general creditors of their primary beneficiaries or other Group members.
 
 
 
September 30,
 
December 31,
 
 
 
2013
 
2012
 
 
 
(Unaudited)
 
 
 
ASSETS
 
 
 
 
 
 
 
Cash
 
$
10,678,707
 
$
6,710,472
 
Notes receivable (banker's acceptances)
     transferred from related parties
 
 
-
 
 
3,645,817
 
Accounts receivable - third parties
 
 
10,252,829
 
 
11,478,436
 
Other receivables
 
 
3,294,318
 
 
29,885
 
Advance to related parties
 
 
-
 
 
49,802,897
 
Inventories
 
 
5,427,251
 
 
194,331
 
Prepaid expenses - third parties
 
 
4,908,497
 
 
386,966
 
Long-term investment
 
 
3,431,373
 
 
3,328,789
 
Deposit on setting up Joint Venture
 
 
-
 
 
6,092,302
 
Property, plant and equipment, net
 
 
66,979,281
 
 
37,141,906
 
 
 
$
104,972,256
 
$
118,811,801
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
Accounts payable - third parties
 
$
151,000
 
$
70,732
 
  - related parties
 
 
163,303
 
 
5,765,632
 
Receipt in advance - third parties
 
 
476,399
 
 
-
 
  - related parties
 
 
-
 
 
12,681,102
 
Short-term loans
 
 
22,363,811
 
 
25,169,260
 
Accrued liabilities and other payables
 
 
3,462,405
 
 
1,033,640
 
Long-term loans
 
 
69,844,772
 
 
24,783,629
 
 
 
$
96,461,690
 
$
69,503,995
 
   
 
13

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)
 
(b)       Consolidation of VIE (…/Cont’d)
 
The following tables show the revenue and cost of revenues, and net income of the Company’s VIEs after eliminating the intercompany balances for the three and nine months ended September 30, 2013 and 2012.
 
 
 
For the Three Months Ended 
September 30,
 
For the Nine Months Ended 
September 30
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
20,609,107
 
$
13,152,223
 
$
61,640,940
 
$
39,039,757
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
 
$
(12,446,879)
 
$
(9,693,182)
 
$
(38,974,488)
 
$
(28,572,398)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to the Company
 
$
6,868,193
 
$
5,789,531
 
$
19,102,412
 
$
10,594,063
 
 
 
14

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)
   
(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.
 
(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:
 
 
15

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)
 
(d)
   Foreign currency translation (…/Cont’d)
 
 
 
September 30, 
2013
 
December 31, 
2012
 
Balance sheet items, except for equity accounts
 
RMB6.12=$1
 
RMB6.3086=$1
 
 
 
HKD7.7551=$1
 
HKD7.7507=$1
 
 
 
 
For the Three Months Ended
September 30,
 
 
 
2013
 
2012
 
Items in statements of income and cash flows
 
RMB6.1226=$1
 
RMB6.2923=$1
 
 
 
HKD7.7551=$1
 
HKD7.7546=$1
 
 
 
 
For the Nine Months Ended 
September 30,
 
 
 
2013
 
2012
 
Items in statements of income and cash flows
 
RMB6.1616=$1
 
RMB6.3085=$1
 
 
 
HKD7.7575=$1
 
HKD7.7575=$1
 
 
(e)        Cash
 
Cash consists of cash on hand and at banks.
 
(f)         Accounts receivable
 
Merchant Supreme only grants credit terms to established customers who are deemed to be financially responsible. Credit periods to independent customers are within 180 days after customers received the purchased goods.
 
Merchant Supreme maintains allowances for doubtful accounts for estimated losses. 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 and nine months ended September 30, 2013 and 2012, respectively. Merchant Supreme collected a majority of receivable balances from third party customers as of September 30, 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.
 
16

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)
 
(g)
    Revenue recognition
 
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 delivery to customers occur at Merchant Supreme’s cold storage warehouse, after payment is received by Merchant Supreme or credit sale is approved by Merchant Supreme for recurring customers who have history of financial responsibility. 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.
 
(h)
   Government grant
 
Government grants are recognized at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognized as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to the cost of the asset and is released to the income statement over the expected useful life in a consistent manner with the depreciation method for the relevant asset.
 
(i)
   Deferred income
 
Deferred income represents income collected but not earned as of the report date. This is primarily composed of payments of the government grants to construct new fishing vessels. Upon the completion of the construction of the fishing vessels, the grant would be deducted from the gross cost of the fishing vessels.
 
(j)
   Fishing licenses
 
Each of the Merchant Supreme’s fishing vessels requires an approval from Ministry of Agriculture of the People's Republic of China to carry out ocean fishing projects in foreign territories. These approvals are valid for a period from three to twelve months, and are awarded to 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 Supreme’s fishing vessels operated in Indonesia water requires a fishing license granted by the authority in Indonesia. Indonesia fishing licenses remain effective for a period of twelve months and 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.
 
17

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)
 
(k)
   Inventories
 
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 ensuring twelve-month period. Cost of frozen fish and other marine catches at period-ends is calculated using the weighted average method.
 
(l)
   Property, plant and equipment
 
Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and betterments are capitalized. Depreciation of property, plant and equipment is computed by the straight-line method over the assets estimated useful lives.
 
Upon sale or retirement of property, plant 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
 
Fishing vessel
 
10-20
 
Major improvement on fishing vessel
 
4-20
 
Motor vehicle
 
3-5
 
Ship and office equipments
 
3-5
 
 
Expenditures for repairs and maintenance, which do not extend the useful life of the assets, are expensed as incurred.
 
(m)      Capitalized Interest
 
Interest associated with the construction of a fishing vessel is capitalized and included in the cost of the fishing vessels. When no debt is incurred specifically for the construction of a fishing vessel, interest is capitalized on amounts expended on the construction using weighted-average cost of the 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. Merchant Supreme capitalized interest of $482,671 and $40,694 for the three months ended September 30, 2013 and 2012, respectively; $507,891 and $124,218 for the nine months ended September 30, 2013 and 2012, respectively in the fishing vessels under construction.
 
 
18

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)
 
(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.
 
(o)
   Income taxes
 
Merchant Supreme's VIE, Pingtan Fishing, is a qualified ocean fishing enterprise certified by the Ministry of Agriculture of the PRC. The qualification is renewed on April 1 each year. Pingtan Fishing is exempt from income tax derived from its ocean fishing operations in the periods it processes a valid Ocean Fishing Enterprise Qualification Certificate issued by the Ministry of Agriculture of the PRC.
 
In addition, Pingtan Fishing is not subject to foreign income taxes for its operations in India and Indonesia Exclusive Economic Zones.
 
 
19

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)
 
(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.
 
As of September 30, 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 September 30, 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.
 
The Company’s management has evaluated all such proceedings and claims that existed as of September 30, 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.
 
20

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)
 
(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
 
Cost for pension and employee benefits of Merchant Supreme was $9,498 and $14,766 for the three and nine months ended September 30, 2013 respectively and $nil for the three and nine months ended September 30, 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 currently has only one segment, all of the Company’s continuing operations and customers are in the PRC and all income is derived from ocean fishery.
 
(u)
   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 earnings per share to reflect the business combination held on February 25, 2013.
 
 
21

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (…/Cont’d)
 
(u)      Earnings per ordinary share (…/Cont’d)
 
The following table sets forth the computation of basic and diluted net income per ordinary share:
 
 
 
For the Three Months Ended 
September 30,
 
For the Nine Months Ended 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
18,301,541
 
$
23,161,768
 
$
56,861,835
 
$
71,364,099
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of
     ordinary shares outstanding
     (Basic and diluted)
 
 
79,055,053
 
 
79,055,053
 
 
79,055,053
 
 
79,055,053
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per ordinary share
    (Basic and diluted)
 
 
 
 
 
 
 
 
 
 
 
 
 
- From continuing operations
 
$
0.08
 
$
0.07
 
$
0.22
 
$
0.13
 
- From discontinued operations
 
 
0.15
 
 
0.22
 
 
0.50
 
 
0.77
 
- Net income
 
$
0.23
 
$
0.29
 
$
0.72
 
$
0.90
 
 
For the three and nine months ended September 30, 2013 and 2012, the number of securities convertible into common shares not included in diluted EPS because the effect would have been anti-dilutive consists of the following:
 
 
 
For the Three Months Ended 
 
For the Nine Months Ended 
 
 
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Warrants to purchase common stock
 
8,966,667
 
8,966,667
 
8,966,667
 
8,966,667
 
 
 
22

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
4.
CASH
 
PME
 
Cash is classified by geographical areas is set out as follows:
 
 
 
September 30, 2013
 
 
December 31, 2012
 
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Hong Kong
 
$
-
 
$
3,565,355
 
 
 
 
 
 
 
 
 
Maximum exposure to credit risk
 
$
-
 
$
3,565,355
 
 
Cash is denominated in the following currency:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
USD
 
$
-
 
$
3,565,355
 
 
 
23

 
PINGTAN MARINE ENTERPRISE LTD. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
 
4.
CASH (…/Cont’d)
 
Merchant Supreme
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Hong Kong
 
$
678
 
$
862
 
The PRC
 
 
10,831,322
 
 
6,859,923
 
 
 
$
10,832,000
 
$
6,860,785
 
 
 
 
 
 
 
 
 
Maximum exposure to credit risk
 
$
10,832,000
 
$
6,860,785
 
 
Cash is denominated in the following currencies: 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
USD
 
$
150,057
 
$
150,001
 
RMB
 
 
10,681,265
 
 
6,709,922
 
HKD
 
 
678
 
 
862
 
 
 
$
10,832,000
 
$
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.

5.
ACCOUNTS RECEIVABLE - THIRD PARTIES
 
Merchant Supreme
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
(Unaudited)