Company Quick10K Filing
Pingtan Marine Enterprise
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 79 $190
10-K 2020-03-16 Annual: 2019-12-31
10-Q 2019-11-08 Quarter: 2019-09-30
10-Q 2019-08-09 Quarter: 2019-06-30
10-Q 2019-05-09 Quarter: 2019-03-31
10-K 2019-03-15 Annual: 2018-12-31
10-Q 2018-11-08 Quarter: 2018-09-30
10-Q 2018-08-09 Quarter: 2018-06-30
10-Q 2018-05-09 Quarter: 2018-03-31
10-K 2018-03-14 Annual: 2017-12-31
10-Q 2017-11-08 Quarter: 2017-09-30
10-Q 2017-08-09 Quarter: 2017-06-30
10-Q 2017-05-15 Quarter: 2017-03-31
10-K 2017-03-23 Annual: 2016-12-31
10-Q 2016-11-08 Quarter: 2016-09-30
10-Q 2016-08-08 Quarter: 2016-06-30
10-Q 2016-05-10 Quarter: 2016-03-31
10-K 2016-03-09 Annual: 2015-12-31
10-Q 2015-11-09 Quarter: 2015-09-30
10-Q 2015-08-10 Quarter: 2015-06-30
10-Q 2015-05-11 Quarter: 2015-03-31
10-K 2015-03-10 Annual: 2014-12-31
10-Q 2014-11-10 Quarter: 2014-09-30
10-Q 2014-08-06 Quarter: 2014-06-30
10-Q 2014-05-07 Quarter: 2014-03-31
10-K 2014-03-10 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-09 Quarter: 2013-06-30
10-Q 2013-05-14 Quarter: 2013-03-31
10-K 2013-02-06 Annual: 2012-12-31
10-Q 2012-11-14 Quarter: 2012-09-30
10-Q 2012-08-14 Quarter: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-03-31
10-K 2012-03-30 Annual: 2011-12-31
10-Q 2011-11-14 Quarter: 2011-09-30
10-Q 2011-08-15 Quarter: 2011-06-30
8-K 2020-03-16 Earnings, Regulation FD, Exhibits
8-K 2019-12-18 Shareholder Vote
8-K 2019-12-05 Officers, Exhibits
8-K 2019-11-08 Earnings, Regulation FD, Exhibits
8-K 2019-08-09 Earnings, Regulation FD, Exhibits
8-K 2019-05-09 Earnings, Regulation FD, Exhibits
8-K 2019-03-15 Earnings, Regulation FD, Exhibits
8-K 2019-03-08 Regulation FD, Exhibits
8-K 2019-03-05 Regulation FD, Exhibits
8-K 2018-12-27 Regulation FD, Exhibits
8-K 2018-11-20 Regulation FD, Exhibits
8-K 2018-11-20 Shareholder Vote
8-K 2018-11-08 Earnings, Regulation FD, Exhibits
8-K 2018-10-31 Regulation FD, Exhibits
8-K 2018-10-24 Regulation FD, Exhibits
8-K 2018-08-09 Earnings, Regulation FD, Exhibits
8-K 2018-08-03 Regulation FD, Exhibits
8-K 2018-07-17 Regulation FD, Exhibits
8-K 2018-05-31 Regulation FD, Exhibits
8-K 2018-05-09 Earnings, Regulation FD, Exhibits
8-K 2018-05-03
8-K 2018-04-17 Regulation FD, Exhibits
8-K 2018-04-16 Regulation FD, Exhibits
8-K 2018-04-09 Regulation FD, Exhibits
8-K 2018-03-14 Earnings, Regulation FD, Exhibits
8-K 2018-03-05 Regulation FD, Exhibits
8-K 2018-01-24 Regulation FD, Exhibits
8-K 2018-01-10 Regulation FD, Exhibits
8-K 2018-01-04 Regulation FD, Exhibits
PME 2019-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Note 1 - Description of Business and Organization
Note 2 - Summary of Significant Accounting Policies
Note 3 - Accounts Receivable
Note 4 - Inventories
Note 5 - Other Receivables
Note 6 - Cost Method Investment
Note 7 - Equity Method Investment
Note 8 - Prepayment for Long-Term Assets
Note 9 - Property, Plant and Equipment
Note 10 - Related Parties Transactions
Note 11 - Bank Loans
Note 12 - Accrued Liabilities and Other Payables
Note 13 - Shareholders' Equity
Note 14 - Certain Risks and Concentrations
Note 15 - Commitments and Contingencies
Note 16 - Condensed Parent Company Financial Information
Note 1. Basis of Preparation
Note 2. Investments in Subsidiaries
Note 3. Retained Earnings
Note 17 - Selected Quarterly Financial Data (Unaudited)
Note 18 - Subsequent Event
EX-4.2 f10k2019ex4-2_pingtan.htm
EX-23.1 f10k2019ex23-1_pingtan.htm
EX-31.1 f10k2019ex31-1_pingtan.htm
EX-31.2 f10k2019ex31-2_pingtan.htm
EX-32.1 f10k2019ex32-1_pingtan.htm
EX-32.2 f10k2019ex32-2_pingtan.htm

Pingtan Marine Enterprise Earnings 2019-12-31

PME 10K Annual Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
SYBX 73 202 34 1 0 -51 -48 -48 0% 1.0 -25%
FTEO 280 13,843 8,825 0 0 0 0 -282 0%
INB 277 20 17 51 6 2 3 285 13% 95.7 9%
FCAL 248 1,737 1,504 0 0 7 31 198 6.4 0%
PME 168 393 239 55 17 8 10 324 31% 31.0 2%
AIQ 146 654 663 524 226 18 109 666 43% 6.1 3%
SRET 140 698 418 120 4 17 33 510 4% 15.5 2%
MRBK 113 1,127 1,009 0 0 7 25 73 2.9 1%
ASG 114 0 1 0 0 -1 -1 114 26% -136.4 -1,609%
NEWT 102 203 120 38 19 3 7 98 50% 14.4 1%

10-K 1 f10k2019_pingtanmarine.htm ANNUAL REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended: December 31, 2019

 

Or

 

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

 

For the transition period from: _____________ to _____________

 

PINGTAN MARINE ENTERPRISE LTD.

(Exact name of registrant as specified in its charter)

 

Cayman Islands   001-35192   N/A
(State or Other Jurisdiction of   (Commission   (I.R.S. Employer
Incorporation or Organization)   File Number)   Identification No.)

 

18-19/F, Zhongshan Building A,

No. 154 Hudong Road

Fuzhou, P.R.C. 350001

(Address of Principal Executive Office) (Zip Code)

 

(86) 591-8727-1266

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on
which registered
Ordinary Shares, $0.001 par value   PME   The NASDAQ Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: 

None

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

 

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

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

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

 

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

 

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was approximately $93.9 million on June 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter.

 

The number of shares of the registrant’s ordinary shares outstanding as of March 16, 2020 was 79,055,053.

 

 

 

 

   

2019 ANNUAL REPORT ON FORM 10-K

 

TABLE OF CONTENTS

 

    Page
  PART I  
     
Item 1. Business 1
Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 24
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Mine Safety Disclosure 24
     
  PART II  
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 25
Item 6. Selected Financial Data 27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 47
Item 8. Financial Statements and Supplementary Data 49
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures 50
Item 9A. Controls and Procedures 50
Item 9B Other Information 51
     
  PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 52
Item 11. Executive Compensation 57
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 59
Item 13. Certain Relationships and Related Transactions, and Director Independence 60
Item 14. Principal Accounting Fees and Services 62
     
  PART IV  
     
Item 15. Exhibits, Financial Statement Schedules 63
     
Item 16. Form 10-K Summary 64
     
SIGNATURES 65

 

i

 

 

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

 

Statements in this report that are not historical facts or information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,” “forecast,” “plan,” “believe,” “may,” “expect,” “anticipate,” “intend,” “planned,” “potential,” “can,” “expectation” and similar expressions, or the negative of those expressions, may identify forward-looking statements. Such forward-looking statements are based on management’s reasonable current assumptions and expectations. Such forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, levels of activity, performance or achievement to be materially different from any future results expressed or implied by such forward-looking statements, and there can be no assurance that actual results will not differ materially from management’s expectations. Such factors include, among others, the following:

 

  anticipated growth and growth strategies;
     
  need for additional capital;

 

  conducting fishing operations and locating or re-locating vessels, in foreign waters and related license requirements;
     
  actions taken by government regulators, such as the Indonesian moratorium, or reports or allegations of illegal activity by us, related parties or those with which we conduct business;

 

  our ability to successfully manage relationships with customers, distributors and other important relationships;

 

  technological changes;

 

  competition;

 

  demand for our products and services;
     
  operational, mechanical, climatic or other unanticipated issues;

 

  the deterioration of general economic conditions, whether internationally, nationally or in the local markets in which we operate;

 

  global or national health concerns, including the outbreak of pandemic or contagious diseases such as the COVID-19 pandemic;

 

  legislative or regulatory changes that may adversely affect our business; and

 

  other risks, including those described in the “Risk Factors” discussion of this annual report.

 

We undertake no obligation to update any such forward looking statement, except as required by law.

  

ii

 

 

PART I

 

ITEM 1. BUSINESS

 

Reference herein to the “Company,” “PME,” “we,” “our” or “us,” means Pingtan Marine Enterprise Ltd. and includes its subsidiaries, unless the contest requires otherwise.

 

Our Business

 

We are a marine enterprise group primarily engaging in ocean fishing through our operating subsidiary, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd., or Pingtan Fishing, which is organized in the People’s Republic of China (“PRC”). We carry out marine fishing operations in the international waters and the approved waters in access fishing countries with many of our owned vessels or licensed vessels for which we have exclusive operating license rights. We provide high quality seafood to a diverse group of customers including distributors, restaurant owners and exporters in the PRC.

 

We initially had a fishing fleet of 40 vessels in 2013. By June 2015, we have expanded the number of vessels to 135 through construction of 3 new vessels, purchase of 72 licensed vessels and acquisition of 20-year exclusive operation rights to 20 vessels. Our fishing fleet consists of vessels of diversified fishing methods ranging from trawling, drift netting, light luring seine, long line fishing to squid jigging.

 

From 2017 to 2018, we purchased 2 refrigerated transport vessels and 4 squid jigging vessels. Of those vessels, 2 transport vessels and 2 squid jigging vessels finished renovation in subsequent years and were deployed to international waters. The remaining 2 squid vessels’ ownership transfer was not yet completed, but the Company is entitled to 100% of the operations and net profits (losses) from the vessels.

 

In April, 2018, we had 27 fishing vessels that received approval from the MOA to operate in the international waters after completion of the modification and rebuilding projects. The 27 vessels were rebuilt and modified into 20 squid jigging vessels and 7 light luring seine vessels and have been deployed to sea for operations in late 2018 and early 2019.

 

In 2019, the Company had 30 fishing vessels that received approval from the MOA to operate in the international waters after completion of the modification and rebuilding projects. The 30 vessels were rebuilt and modified into 15 squid jigging vessels and 15 light luring seine vessels. All the 30 vessels finished renovation in 2019 and were deployed to the international waters for operations. In late 2019, we further applied to the MOA for permits to modify and rebuild 10 fishing vessels. 

 

1

 

 

As of December 31, 2019, we owned 41 squid jigging vessels, 26 trawlers, 25 seine vessels, 13 drifters, 4 longline fishing vessels, and 2 transport vessels, had exclusive operating license rights to 20 drifters, and also had 10 squid jigging vessels which were in the modification and rebuilding project. 

 

Among the 141 vessels, 69 were located in international waters, 12 were located in the Bay of Bengal in India, 13 were located in the PRC, 37 were located in the Arafura Sea in Indonesia; and the remaining 10 vessels were in the modification and rebuilding projects.

 

We catch nearly 30 different species of fish, including squid, ribbon fish, croaker fish and cuttle fish. All of our catch is shipped back to the PRC. We arrange chartered transportation ships to deliver frozen stocks to cold storage warehouses located in one of the PRC’s largest seafood trading centers, Mawei Seafood Market in Fujian Province.  

 

We derive our revenue primarily from the sale of frozen seafood products. We sell our products directly to customers, including seafood processors, distributors, restaurant owners and exporters. Most of our customers have long-term, cooperative relationships with us. Our existing customers also introduce new customers to us from time to time. In July 2017, we entered into an exclusive strategic cooperation agreement to sell our fish products directly to consumers online. Based on past experiences, demand for seafood products is the highest from December to January, during Chinese New Year. We believe that our profitability and growth are dependent on our ability to deploy our vessels to new fishing grounds and our ability to expand our customer base.

 

2

 

 

Government Permits and Approvals

 

We are required to go through a series of procedures to obtain all approvals necessary to fish in the designated fishing areas.

 

Step one: Obtaining Vessel Building Permits

 

First, we have to file a vessel building application to the relevant governmental authorities in Fujian to obtain the Fishing Vessel and Net Tools Building Permits. Governmental authorities in Fujian verify Pingtan Fishing’s qualifications for pelagic fishing and pass on the verified and approved application documents to affiliates of the MOA for further confirmation. Once confirmed, the certificates are issued to Pingtan Fishing.

 

Step two: Vessels Building and Inspection

 

After obtaining the Fishing Vessel and Net Tools Building Permits, we start building the new vessels through contracting with third party vessel manufacturers. During the period of construction, inspection of the vessels is performed several times by the relevant governmental authorities. Once the construction is completed, a Vessel Inspection Certificate is issued, after which we can apply for certificates of ownership and certificates of nationality for new vessels.

 

Step three: Fishing Project Application

 

Each vessel is required to be licensed by the MOA and, to the extent required, the vessel may also be required to obtain a license from the local government where the vessel conducts fishing operations. For example, in order to conduct fishing operations in the exclusive economic zone of other countries, foreign fishing vessels need to obtain the approval from each of the local departments of fisheries of those other countries. After obtaining all certificates in step two, we file applications to the relevant governmental authorities to obtain approvals for pelagic fishing projects in the specified fishing areas. Meanwhile, we start the application process for obtaining fishing permits from the relevant governmental authorities in the applicable fishing destination countries. In some countries, the Company may be required to obtain licenses through local entities, which are required to also possess a fishery business license.

 

Step four: Preparations Before Departure

 

Once the approval for pelagic fishing projects is issued, we can complete all relevant departure procedures within six months from the time the notification of approval is issued. Departure procedures include obtaining visas for fishing vessels and crew members, submitting required certificates to the PRC customs in Fujian, and obtaining other relevant documents from governmental authorities, such as Vessel Departure Certificates.

 

Step five: Fishing Project Approval and Departure to Fishing Areas

 

After we have submitted all required documents to the relevant governmental authorities and completed all procedures required for departure, we receive confirmation of pelagic fishing project approval from affiliates of the MOA. Once we obtain such confirmation, our vessels can depart to the applicable fishing destination country. Fish caught at the destination may then be shipped back and be declared at the PRC customs.

 

3

 

 

Operations

 

Harvesting Operations

 

The fishing vessels can carry up to one-month of supplies. The captains of the vessels utilize sophisticated technology to identify, among other things, fishing areas, time to cast and draw in the nets, vessel speed and sailing direction allowing the vessels to optimize the catch and resource value. Nearby fishing groups share real-time fishing information through wireless radio equipment. The catch is separated based on species and sizes and is frozen immediately. Once the storage of a fishing vessel is at capacity, the catch is shipped to our cold storage located in Mawei.

 

Seasonality

 

In most waters where our vessels operate, autumn and winter are the seasons when harvest is most productive and summer is relatively a low season. In addition, our annual catches are affected by a number of unpredictable factors, such as weather patterns and fish migration, which are likely to vary from year to year.

 

Cold Storage

 

Fish are stored separately according to different species and sizes for best practices of cold storage management, goods selectivity and delivery.

 

We have secured several cold storages located in one of the PRC’s largest seafood trading centers, MaWei seafood market. The monthly rent for Fuxin cold storage is RMB70 (US$10) per square meter and the leases are renewable annually. The following table sets forth information regarding the cold storages we currently rent as of December 31, 2019:

 

   Monthly 
Cold Storage  rent (US$) 
Fuxin#201  $10,604 
Fuxin#203   10,604 
Fuxin#503   10,604 
Total  $31,812 

 

Sales, Marketing and Distribution

 

We market, sell and distribute products all over China, including the Fujian, Shandong and Zhejiang provinces. Squid, ribbon fish and cuttle fish were the main types of seafood sold for the year ended December 31, 2019, representing 65.5% of our sales.

 

As of December 31, 2019, we sold our fish to over 70 distributors and retailers by acting as a wholesaler. We serve a wide customer base and two customers accounted for more than 10% of our sales for the year ended December 31, 2019.

 

4

 

 

Vessels

 

As of December 31, 2019, we owned 41 squid jigging vessels, 26 trawlers, 25 seine vessels, 13 drifters, 4 longline fishing vessels, and 2 transport vessels, had exclusive operating license rights to 20 drifters, and also had 10 squid jigging vessels which were in the modification and rebuilding project.

 

Among the 141 vessels, 69 were located in international waters, 12 were located in the Bay of Bengal in India, 13 were located in the PRC, 37 were located in the Arafura Sea in Indonesia, and the remaining 10 vessels were in the modification and rebuilding projects.

 

Business Strategy

 

We are committed to developing our business to become a global, integrated seafood company. We plan to enlarge our fishing fleet in the next few years through organic growth and acquisition opportunities of potential targets, domestically and abroad.

 

We are actively seeking opportunities to expand to other fishing grounds worldwide including North America, South America and the High Sea, which will further diversify the fish types we harvest. We are also planning to extend to fish processing and trading business.

 

Competition

 

As vessels with access to the pelagic fishing operations are restricted to a limited number, we believe that competition within our designated fishing areas is not significant.

 

Competition in the consumer market in China is high as fish compete with other sources of protein. We compete with other fishing companies which offer similar and varied products. There is significant demand for fish in the Chinese market. Our catch appeals to a wide segment of consumers because of the low-price points of our products. We have generally been able to sell our catch at market prices.

 

5

 

 

Employees

 

As of December 31, 2019, we had 2,060 employees. The following table sets forth the number of employees by function as of December 31, 2019:

 

   Number of Employees   % of Total 
Management and administrative staff   57    2.8%
Crew members   2,003    97.2%
Total   2,060    100.0%

 

In 2019, we contracted six third-party labor companies to provide crew labor dispatching service. We pay the hiring costs based on the actual fees incurred on monthly basis. Welfare and benefit payments for such personnel are covered by the companies supplying the crew members.

 

Company History

 

China Equity Growth Investment Ltd. (“CGEI”) was incorporated in the Cayman Islands as an exempted limited liability company and a blank check company on January 18, 2010 and changed its name to Pingtan Marine Enterprise Ltd. 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 the British Virgin Islands (“BVI”).

 

China Dredging, through its PRC Variable Interest Entity (“VIE”), Fujian Xinggang Port Service Co., Ltd (“Fujian Service”), provided 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.

 

Merchant Supreme, through its PRC VIE, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd. (“Pingtan Fishing”) engages in ocean fishery with its fleet of self-owned vessels and vessels with exclusive operating license rights within Indian EEZ and Arafura Sea of Indonesia.

 

CGEI and CDGC entered into the Merger Agreement dated October 24, 2012, providing for the combination of CGEI and CDGC. 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 on February 25, 2013, CDGC and Merchant Supreme became the wholly-owned subsidiaries of the Company (the “Business Combination”). The ordinary shares, par value $0.001 per share were listed on The NASDAQ Capital Market under the symbol “PME”. 

 

6

 

 

In order to place increased focus on fishing business and pursue more effective growth opportunities, we decided to exit and sell the specialized dredging services operated by China Dredging, and we completed the sale of CDGC and its subsidiaries on December 4, 2013.

 

On February 9, 2015, we terminated our existing VIE agreements, pursuant to an Agreement of Termination dated February 9, 2015, entered into by and among Ms. Honghong Zhuo, Mr. Zhiyan Lin (each a shareholder of Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd (“Pingtan Fishing”), together the “Pingtan Fishing’s Shareholders”), Pingtan Fishing and Pingtan Guansheng Ocean Fishing Co., Ltd. (“Pingtan Guansheng”). On February 9, 2015, the Pingtan Fishing’s Shareholders transferred 100% of their equity interest in Pingtan Fishing to Fujian Heyue Marine Fishing Development Co., Ltd. (“Fujian Heyue”), pursuant to an Equity Transfer Agreement dated February 9, 2015, entered into by and among the Pingtan Fishing’s Shareholders, Pingtan Fishing and Fujian Heyue. On February 15, 2015, China Agriculture Industry Development Fund Co., Ltd. (“China Agriculture”) invested RMB 400 million (approximately $65 million) into Pingtan Fishing for an 8% equity interest in Pingtan Fishing. After the restructuring transactions described above, Pingtan Fishing and its entities became the 92% equity-owned subsidiaries of our company and our VIE structure was terminated.

 

The following diagram illustrates our corporate structure as of December 31, 2019:

 

 

7

 

 

Available Information

 

Our website address is www.ptmarine.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), are filed with the U.S. Securities and Exchange Commission (“SEC”). We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements, and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge on our website at ir.ptmarine.com when such reports are available on the SEC’s website. We use our ir.ptmarine.com website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor such portions of ir.ptmarine.com, in addition to following SEC filings and public conference calls and webcasts.

 

The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.

 

The contents of the websites referred to above are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only.

 

ITEM 1A. RISK FACTORS

 

You should carefully consider each of the following risks associated with an investment in our publicly traded securities and all of the other information in our 2019 Annual Report. Our business may also be adversely affected by risks and uncertainties not presently known to us or that we currently believe to be immaterial. If any of the events contemplated by the following discussion of risks should occur, our business, prospects, financial condition and results of operations may suffer.

 

Risks Relating to Our Business

 

The Indonesian government’s moratorium on fishing license renewals in 2014 has had and will continue to have a significant negative impact on our results of operations and financial condition.

 

In early December 2014, the Indonesian government introduced a six-month moratorium on issuing new fishing licenses and renewals so that the country’s MMAF could combat illegal fishing and rectify ocean fishing order. In February 2015, we ceased all fishing operations in Indonesia. During the moratorium, we were informed that fishing licenses of four vessels operated through PT. Avona, one of the local companies through which we conduct business in Indonesia, and the fishery business license of PT. Dwikarya, the other local company through which PME conducts business in Indonesia, were revoked. As a result and because license renewal was prohibited due to the general moratorium, all local fishing licenses of the Company’s vessels in Indonesia are presently inactive. The MMAF has not yet restored license issuing or renewal process for vessels built abroad. As the MMAF has not implemented new fishing policies and resumed the license renewal process, we do not know when exactly licensing and renewal will start. Furthermore, due to the general fishing moratorium in Indonesia, no local port is currently permitted to obtain licenses for foreign fishing vessels. Since we derived a majority of our revenue from Indonesia before the moratorium, this ban has caused a significant drop in our production and has had and will continue to have a negative impact on our results of operations and financial condition. 

 

8

 

 

Our business activities for fiscal 2020 are expected to be adversely affected by the COVID-19 pandemic.

 

In December 2019, a novel strain of coronavirus causing respiratory illness, or COVID-19, has surfaced in Wuhan, China, spreading at a fast rate in January and February of 2020, and confirmed cases were also reported in other parts of the world. In reaction to this outbreak, an increasing number of countries imposed travel suspensions to and from China following the World Health Organization’s “public health emergency of international concern” (PHEIC) announcement on January 30, 2020. Since this outbreak, domestic business activities in China have been disrupted by a series of emergency quarantine measures taken by the government. 

 

Emergency quarantine measures and travel restrictions caused business disruptions in many sectors across China, which we expect to seriously slow down our business operation for at least the first quarter of 2020. Our sales have been and will continue to be adversely affected as the results of these measures. The Company rolled out active precaution measures and has gradually resumed work since mid-February to reduce the impact on the Company’s production and operation. 

 

The extent to which COVID-19 negatively impacts our business is highly uncertain and cannot be accurately predicted. We believe that the coronavirus outbreak and the measures taken to control it may have a significant negative impact on economic activities in China. Our sales are conducted in China. The magnitude of this negative effect on the continuity of our business operation in China remains uncertain. These uncertainties impede our ability to conduct our daily operations and could materially and adversely affect our business, financial condition and results of operations.

 

Actions taken by government regulators or reports or allegations of illegal activity by us, related parties or those with which we conduct business could have a material adverse effect on our business and results of operations.

 

The Company has been the subject of media reports alleging that our vessels, the ports we use to conduct our fishing operations and related parties have engaged in illegal activities. Allegations of illegal activity by and actions taken by government regulators against our vessels, related parties and companies with which we conduct business may harm our business reputation, materially and adversely affect our results of operations and cause a decrease in our stock price.  If the local ports and entities through which we conduct our fishing operations are unable to renew or obtain new business licenses, or we are unable to enter into arrangements with other ports and entities for our fishing operations or our fishing vessels are unable to renew or obtain new local licenses, our business and results of operations may be materially and adversely affected.  Furthermore, our business and results of operations may be materially adversely affected if we cannot quickly and efficiently re-locate our vessels or if our vessels are unable to catch and produce as much product prior to relocating. Regulations, actions, and activities taken by government regulators may, directly or indirectly, require us to modify our operations and business strategy, which we may be unable to do in a cost-effective manner, and may result in the suspension or even loss of our licenses or authorizations to operate, detaining of our vessels, or the assessment of penalties or fines, which could have a material adverse effect on business and our results of operations.

 

We depend significantly on our Chief Executive Officer.

 

We are dependent on the principal members of our management staff, and in particular Xinrong Zhuo, our Chief Executive Officer. While we have entered into a three-year employment agreement with Mr. Zhuo, there are circumstances under the agreement in which Mr. Zhuo may elect to terminate his employment. Even if Mr. Zhuo were to terminate employment in breach of his agreement, we would have little or no practical recourse against Mr. Zhuo under PRC law. Mr. Zhuo may not continue to be employed by us for as long as we require his services. In addition, we rely on members of our senior management team with industry experience for important aspects of our operations, and we believe that losing the services of these executive officers could be detrimental to our operations, because they would be difficult to replace. We do not have key-man life insurance for any of our executive officers or other employees.

 

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We will need additional financing in order to execute our business plan, which may not be available to us on commercially reasonable terms.

 

We will need to obtain additional capital in order to execute our business plan to expand our operations by enlarging the fishing vessel fleet, expanding fishing ground worldwide and extending our business to fishmeal processing. Such additional capital may be raised by issuing securities through various financing transactions or arrangements, including joint ventures of projects, debt financing, equity financing or other means. Additional financing may not be available when needed on commercially reasonable terms or at all. The inability to obtain additional capital may reduce our ability to continue to conduct our business operations as currently contemplated.

 

Regulation of the fishing industry may have an adverse impact on our business.

 

For years, the international community has been aware of and concerned with the worldwide problem of depletion of natural fish stocks. In the past, these concerns have resulted in the imposition of quotas that subject individual countries to strict limitations on the amount of fish they are allowed to catch. Environmental groups have been lobbying to have additional limitations on fishing imposed and have even made suggestions that would limit the activities of fish farms. If international organizations or national governments were to impose additional limitations on fishing, this could have a negative impact on our results of operations.

 

The growth of our business depends on our ability to secure fishing licenses directly or through third parties.

 

Fishing is a highly regulated industry. Our operations require licenses, permits and in some cases renewals of licenses and permits from various governmental authorities. For example, commercial fishing operations are subject to government license requirements that permit them to make their catch.

 

We are dependent on affiliates and third parties for our operations.

 

A large portion of our transportation operations are conducted by our related party, Fuzhou Honglong Ocean Fishery Co., Ltd. If for any reason Hong Long became unable or unwilling to continue to provide services to us, this would likely lead to a temporary interruption in transportation at least until we found another entity that could provide these services. Failure to find a suitable replacement, even on a temporary basis, may have an adverse effect on our results of operations.

 

We may be adversely affected by fluctuations in raw material prices and selling prices of products.

 

The products and raw materials we use may experience price volatility caused by events such as market fluctuations, weather conditions or changes in governmental programs. Raw materials consist primarily of bait, including sardines, anchovies, mackerel and other small fish. The market price of these raw materials may also experience significant upward adjustment, if, for instance, there is a material under-supply or over-demand in the market. These prices changes may ultimately result in increases in the selling prices of products, and may, in turn, adversely affect our sales volume, revenue and operating profit.

 

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We may not be able to effectively manage our growth, which may harm our profitability.

 

Our strategy is to expand our business. If we fail to effectively manage this growth, our financial results could be adversely affected. Growth may place a strain on management systems and resources, including business development capabilities, systems and processes and access to financing sources. As we grow, we must continue to hire, train, supervise and manage new employees. In connection with our fishing business, we may not be able to:

 

  meet capital needs;
     
  expand systems effectively or efficiently, or in a timely manner;
     
  allocate human resources optimally;
     
  identify and hire qualified employees or retain valued employees; or
     
  incorporate effectively the components of any business that may be acquired in our effort to achieve growth.

 

If we are unable to manage growth, our operations and financial results could be adversely affected by inefficiency, which could diminish our profitability.

 

Our business requires talented personnel who we may not be able to attract and retain.

 

We depend in large measure on the abilities, expertise, judgment, discretion, integrity and good faith of our management and other personnel in conducting the business of the company. We have a small management team, and the loss of a key individual or inability to attract suitably qualified staff could materially adversely impact the fishing business.

 

The key personnel of our fishing business are Mr. Dong Wang, general coordinator of the shipping department, Mr. Qing Lin, assistant of the chairman of the board of directors, Mr. Longhao Zhuo, chief supervisor of the sales department and an immediate family member of our Chairman and Chief Executive Officer, who is mainly responsible for wholesale and fresh sea food retail business. Mr. Lin assists the Chairman in dealing with daily operating matters, such as developing business plans and managing and supervising related projects.

 

Our success depends on the ability of our management and employees to interpret and respond to economic, market and environmental conditions in its operating areas correctly. Further, our key personnel may not continue their association or employment, which and replacement personnel with comparable skills may not be available, which may adversely affect our business.

 

Our insurance coverage may be inadequate to cover losses that we may incur or to fully replace a significant loss of assets.

 

Our involvement in the fishing industry may result in liability for pollution, property damage, personal injury or other hazards. Although we believe we have obtained insurance in accordance with PRC industry standards to address such risks, such insurance has limitations on liability and/or deductible amounts that may not be sufficient to cover the full extent of such liabilities or losses. In addition, such risks may not, in all circumstances, be insurable or, in certain circumstances, we may choose not to obtain insurance to protect against specific risks due to the high premiums associated with such insurance or for other reasons. The payment of such uninsured liabilities would reduce the funds available to us. If we suffer a significant event or occurrence that is not fully insured, or if the insurer of such event is not solvent, we could be required to divert funds from capital investment or other uses towards covering any liability or loss for such events.

 

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Earthquakes, tsunamis, adverse weather or oceanic conditions or other calamities may disrupt our operations and could adversely affect sales.

 

We have cold storages located in MaWei in the Fujian province on the southeast coast of China. Due to the location of our business, it may be at risk of earthquake or other adverse weather or oceanic conditions. This may result in the breakdown of facilities, such as its cold storage facilities, which could lead to deterioration of products with the potential for spoilage. This could also adversely affect the ability to fulfill sales orders and, accordingly, adversely affect profitability. Adverse weather conditions affecting the fishing grounds where our fishing vessels operate, such as storms, cyclones and typhoons, or cataclysmic events such as tsunamis, may also decrease the volume of fish catches or hamper fishing operations. Our operations may also be adversely affected by major climatic disruptions such as El Nino which in the past has caused significant decreases in seafood catches worldwide.

 

We may be affected by global climate change or by legal, regulatory or market responses to such changes.

 

The growing political and scientific sentiment is that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns. Fresh products, including seafood products, are vulnerable to adverse weather conditions, including windstorms, floods, drought and temperature extremes, which are quite common but difficult to predict and may be influenced by global climate change. Similarly, changing weather patterns, along with the increased frequency or duration of extreme weather conditions, could impact the availability of the fish species we catch.

 

Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas, or GHG, emissions. For example, proposals that would impose mandatory requirements on GHG emissions may be considered by policy makers in the territories in which we operate. Laws enacted that directly or indirectly affect fishing, distribution, packaging, cost of raw materials, fuel, and water could all adversely impact our business and financial results.

 

A dramatic reduction in fish resources may adversely affect our business.

 

We are in the business of catching and selling marine catch. Due to over-fishing, the stocks of certain species of fish may be dwindling and to counteract such over-fishing, governments may take action that may be detrimental to our ability to conduct operations. If the solution proffered or imposed by the governments controlling the fishing grounds were to limit the types, quantities and species of fish that we are able to catch, our operations and prospects may be adversely affected.

 

Changes in the policies of the PRC government impacting the fishing industry may adversely affect our business.

 

The fishing industry in the PRC is subject to policies implemented by the PRC government. The PRC government may impose restrictions on aspects of our business such as regulations for the management and ownership of vessels. If the raw materials used by us or our products become subject to any form of government control, then depending on the nature and extent of the control and our ability to make corresponding adjustments, we may face a material adverse effect on our business and operating results.

 

Separately, our business and operating results also could be adversely affected by changes in policies of the Chinese government such as: changes in laws, regulations or the interpretation thereof; confiscatory taxation; restrictions on currency conversion, imports on sources of supplies; or the expropriation or nationalization of private enterprises. Although the Chinese government has been pursuing economic reform policies for approximately two decades to liberalize the economy and introduce free market aspects, the government may not continue to pursue such policies and such policies may be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC’s political, economic and social life.

 

The cost of complying with governmental regulations in foreign countries may adversely affect our business operations.

 

We may be subject to various governmental regulations in foreign countries. These regulations may change depending on prevailing political or economic conditions. In order to comply with these regulations, we believe that we may be required to obtain permits for our vessels and fishing operations and file reports concerning our operations. These regulations affect how we carry on our business, and in order to comply with them, we may incur increased costs and delay certain activities pending receipt of requisite permits and approvals. If we fail to comply with applicable regulations and requirements, we may become subject to enforcement actions, including orders issued by regulatory or judicial authorities requiring us to cease or curtail our operations, or take corrective measures involving capital expenditures, installation of additional equipment or remedial actions. We may be required to compensate third parties for loss or damage suffered by reason of our activities, and may face civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permits governing our operations and activities could affect us in a materially adverse way and could force us to increase expenditures or abandon or delay certain of our fishing operations.

 

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We have entered into certain pledge agreements pledging 35 fishing vessels as collateral to secure loans to related parties, Hong Long and Global Deep Ocean. The pledge has no beneficial purpose for us and we could lose our fishing vessels if Hong Long or Global Deep Ocean were to default on the loans, which could be detrimental for our operations.

 

In December 2015, we entered into a pledge contract with The Export Import Bank of China pursuant to which we pledged 12 fishing vessels with carrying amounts of approximately $6,960,000, as collateral to secure Hong Long’s $2,700,000 in long-term loans from the financial institution, which are due on November 21, 2021. In November 2019, we entered into another pledge contract with The Export Import Bank of China pursuant to which we pledged 11 fishing vessels with carrying amounts of approximately $19,700,000, as collateral to secure Hong Long’s $25,800,000 in short-term loans from the financial institution, which are due on November 21, 2020. In December 2019, we entered into another pledge contract with the Fujian Haixia Bank pursuant to which we pledged 1 fishing vessels with carrying amounts of approximately $6,400,000, as collateral to secure Hong Long’s $5,700,000 in short-term loans from the financial institution, which are due on December 30, 2020.

 

In March 2018, we entered into a pledge contract with The Export Import Bank of China pursuant to which we pledged 11 fishing vessels with carrying amounts of approximately $7,700,000, as collateral to secure Global Deep Ocean’s $50,170,000 in long-term loans from the financial institution, which are due on September 21, 2025.

  

Consequently, if Hong Long or Global Deep Ocean was to default on the loans and we would lose the vessels, it could be detrimental for our operations. As of December 31, 2019, no accrual is established because we have assessed our risk of loss on the default on the loans to be remote.

 

Risks Relating to Doing Business in the PRC

 

Certain political and economic considerations relating to PRC could adversely affect us.

 

The PRC is passing from a planned economy to a market economy. The Chinese government has confirmed that economic development will follow a model of market economy under socialism. While the PRC government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the PRC economy is still operating under five-year plans and annual state plans adopted by the government that set down national economic development goals. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the economy. Many of the economic reforms are unprecedented or experimental for the PRC government, and are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or our business development. Our operating results may be adversely affected by changes in the PRC’s economic and social conditions as well as by changes in the policies of the PRC government, which we may not be able to foresee, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the rate or method of taxation, and imposition of additional restrictions on currency conversion.

 

The recent nature and uncertain application of many PRC laws applicable to us create an uncertain environment for business operations and they could have a negative effect on us.

 

The PRC legal system is a civil law system. Unlike the common law system, such as the legal system used in the United States, the civil law system is based on written statutes in which decided legal cases have little value as precedents. In 1979, the PRC began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in the PRC and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could have a negative impact on our, business and prospects. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty.

 

13

 

 

The political and economic policies of the PRC government could affect our businesses and results of operations.

 

The economy of the PRC differs from the economies of most developed countries in a number of respects, including the degree of government involvement, control of capital investment, and the overall level of development. Before its adoption of reform and open up policies in 1978, China was primarily a planned economy. In recent years, the PRC government has been reforming the PRC economic system and the government structure. These reforms have resulted in significant economic growth and social progress. Economic reform measures, however, may be adjusted, modified or applied inconsistently from industry to industry or across different regions of the country. As a result, we may not continue to benefit from all, or any, of these measures. In addition, it cannot be predicted whether changes in the PRC’s political, economic and social conditions, laws, regulations and policies will have any adverse effect on our business, financial condition and results of operations.

 

The PRC legal system is evolving and has inherent uncertainties regarding interpretation and enforcement of PRC laws and regulations that could limit the legal protections available to you.

 

Pingtan Fishing, our PRC operating company, is organized under the laws of the PRC. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited weight as precedents. Since 1979, the PRC government has been developing a comprehensive system of commercial laws and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited number and non-binding nature of published cases, the interpretation and enforcement of these laws and regulations involve uncertainties.

 

Our operations and assets in the PRC are subject to significant political and economic uncertainties.

 

Changes in PRC laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. The PRC government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. The PRC government may continue to pursue these policies, and it may significantly alter these policies from time to time without notice.

 

The consummation of the acquisition by the Pingtan Fishing share purchase agreement and the reorganization plan carried out by Pingtan Fishing may require prior approval from MOFCOM or the CSRC, which may subject us to sanctions or adversely affect our business, results of operations, reputation and prospects.

 

On August 8, 2006, six PRC regulatory authorities, including the Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or the CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective on September 8, 2006 and was amended on June 22, 2009 by the MOFCOM, or the M&A Regulations. The M&A Regulations, among other things, require that the approval from MOFCOM be obtained for acquisitions of affiliated domestic entities by foreign entities established or controlled by domestic natural persons or enterprises, and also require that an offshore special purpose vehicle, or SPV, formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals, obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by SPVs. The CSRC approval procedures require the filing of a number of documents with the CSRC.

 

14

 

 

The application of the M&A Regulations remains unclear as of the date of this 10-K submission, with no consensus among leading PRC law firms regarding the scope and applicability of the CSRC approval requirement. Pingtan Fishing’s PRC legal counsel advised, based on its understanding of then-current PRC laws, regulations and rules, that the M&A Regulations were not applicable to the consummation of the acquisition pursuant to the Pingtan Fishing share purchase agreement and the reorganization plan carried out by Pingtan Fishing because Merchant Supreme’s founder and controlling shareholder, Mr. Xinrong Zhuo, is not a mainland PRC natural person. However, the relevant PRC government authorities, including MOFCOM and the CSRC, may reach a different conclusion. If it is decided that the prior approval from MOFCOM or the CSRC was required, we may face sanctions by MOFCOM, the CSRC or other PRC regulatory agencies. Consequently, it is possible that MOFCOM, the CSRC or other PRC regulatory agencies may impose fines and penalties on our operations in the PRC, limit such operations, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects.

 

The Circular of Security Review and the Regulations of Security Review provide that any foreign investor should file an application with MOFCOM for the merger and acquisition of domestic enterprises in sensitive sectors or industries. Further, MOFCOM has, for its inner review process, stipulated a range of the business operation items which are required to be reviewed. With reference to such business items, Pingtan Fishing believes that the Regulations of Security Review do not apply to the business operations of Pingtan Fishing. However, the relevant PRC regulatory authorities may have a different view or interpretation in this regard when implementing the Regulations of Security Review. If it is decided that the acquisition pursuant to the Pingtan Fishing share purchase agreement may materially affect the state security of the PRC, we may be ordered to restore the shareholding structure to the status before the consummation of the said acquisition, which could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects.

 

If SAFE determines that its foreign exchange regulations concerning “round-trip” investment apply to our shareholding structure, a failure by our shareholders or beneficial owners to comply with these regulations may restrict our ability to distribute profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws, which may materially and adversely affect our business and prospects.

 

SAFE Circular No. 75 provides that those domestic individuals who hold a PRC identity card, passport or other legal identity supporting document, or who have no such legal identity in mainland PRC but are habitually residing in PRC for the sake of economic interest, whether they hold a PRC identity supporting document or not, should register with the local SAFE branch prior to their establishment or control of an offshore SPV. In addition, any PRC citizen, resident, or entity which is a direct or indirect shareholder of an SPV is required to update the previously filed registration with the local branch of SAFE, with respect to that SPV, to reflect any material change. Moreover, a PRC subsidiary of an SPV is required to urge its shareholders who are PRC citizens, residents, or entities to update their registration with the local branch of SAFE. If a PRC shareholder with a direct or indirect equity interest in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Failure to comply with the SAFE Circular No. 75 could result in liability under PRC law for violation of the relevant rules relating to transfers of foreign exchange.

 

Our founder and controlling shareholder, Mr. Xinrong Zhuo, obtained his Hong Kong identity card in 2005 and surrendered his PRC identity card subsequently thereto. SAFE Circular No. 75 provides that individuals without PRC identities that habitually reside in mainland China for the sake of economic interest should be considered PRC residents, who are required to register their direct or indirect investments in offshore SPVs with the local branch of SAFE. SAFE Circular No. 75 further provides that individuals who have their permanent domicile in mainland China and have been permanently residing in mainland China after temporary departure should be considered PRC residents, no matter whether they have a PRC identity or not. Although he leaves the PRC from time to time and maintains his Hong Kong identity card, Mr. Xinrong Zhuo has been residing in mainland China for most of the time since the SAFE Circular No. 75 became effective. Accordingly, it is possible that PRC authorities may consider Mr. Zhuo to be PRC resident. As of the date of this 10-K submission, Mr. Zhuo has not made registrations or filings according to SAFE Circular No. 75. Due to uncertainty over how SAFE Circular No. 75 will be interpreted and implemented, we cannot predict how SAFE Circular No. 75 will affect our business operations or future strategies following the business combination. If SAFE Circular No. 75 is determined to apply to us or any of our PRC resident shareholders, none of whom to our knowledge has made registrations or filings according to SAFE Circular No. 75, a failure by any such shareholders or beneficial owners to comply with SAFE Circular No. 75 may subject the relevant shareholders or beneficial owners to penalties under PRC foreign exchange administrative regulations, and may subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure and capital inflow from the offshore entity, which would have a material adverse effect on our business, financial condition, results of operations and liquidity. In addition, we may not be informed of the identities of our beneficial owners and our Chinese resident beneficial owners, if any, may not comply with SAFE Circular No. 75. The failure or inability of our beneficial owners who are PRC citizens, residents or entities to make or amend any required registrations may subject these PRC residents or our PRC subsidiary to fines and legal sanctions, and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’s ability to make distributions or pay dividends to us, as a result of which our business operations and our ability to distribute profits to its shareholders may be materially and adversely affected.

 

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In December 2009, the PRC State Administration for Taxation issued a notice, known as “Circular 698,” addressing PRC income tax issues in connection with transfers of equity by a non-PRC resident enterprise that directly or indirectly holds an interest in a PRC resident enterprise. Circular 698 requires certain tax filings with, and the submission of comprehensive information to, the applicable tax authorities regarding transfers of equity by a non-PRC resident enterprise that directly or indirectly holds an interest in a PRC resident enterprise. The filings and submissions are designed to assist the taxing authorities in evaluating whether the transfer has a reasonable business purpose. If the transfer does not have a reasonable business purpose, Circular 698 provides that the seller is subject to PRC income tax on the gains received from the transfer of the PRC resident enterprise. Although the tax obligations generally apply to the seller, the PRC resident enterprise that is transferred is also subject to certain requirements to assist the PRC tax authorities in collecting the taxes, potentially including withholding agent obligations. Circular 698 is relatively new with limited implementation guidance, and it is uncertain how it will be interpreted, implemented or enforced. For example, there is no clear guidance regarding what constitutes a “reasonable business purpose” or the assistance obligation applicable to the transferred PRC resident enterprise. We cannot predict how Circular 698 will apply to current or future acquisition strategies and business operations. For example, if our affiliated PRC entities are deemed to have been sold through an offshore holding company, we may face comprehensive filing obligations that could result in significant taxes, potential sanctions or other enforcement action, or other adverse considerations, which could have an adverse impact on our ability to consummate such a transaction or expand our business and market share.

   

We may be classified as a PRC “resident enterprise” under the PRC enterprise income tax law, which could result in unfavorable tax consequences for us and our shareholders and have a material adverse effect on our results of operations.

 

Under the Enterprise Income Tax Law of the PRC, or the EIT Law, dividends, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in China to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax. Under the arrangement for avoidance of double taxation between mainland China and Hong Kong, the effective withholding tax applicable to a Hong Kong non-resident company is 5% if it directly owns no less than a 25% stake in the Chinese foreign-invested enterprise.

 

Under the EIT Law, an enterprise established outside China with its “de facto management body” within China is considered a “resident enterprise” in China and is subject to the Chinese enterprise income tax at the rate of 25% on its worldwide income. We may be deemed to be a PRC resident enterprise under the EIT Law and be subject to the PRC enterprise income tax at the rate of 25% on its worldwide income. If the Chinese tax authorities determine that we should be classified as a resident enterprise, foreign securities holders will be subject to a 10% withholding tax upon dividends payable by us and subject to income tax upon gains on the sale of securities under the EIT Law.

 

Due to various restrictions under PRC laws on the distribution of dividends by PRC operating companies or contractual provisions in future debt instruments, we may not be able to pay dividends to our shareholders.

 

The Wholly-Foreign Owned Enterprise Law (1986), as amended, The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended, and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by Wholly-Foreign Owned Enterprises, or WFOEs. Under these regulations, WFOEs may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, they are required to set aside each year 10% of its net profits, if any, based on PRC accounting standards, to fund a statutory surplus reserve until the accumulated amount of such reserve reaches 50% of their respective registered capital. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from the profits of our WFOE.

 

Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the economic value from the operations of our PRC subsidiary through contractual or dividend arrangements, we may be unable to pay dividends on our ordinary shares.

 

Because our principal assets are located outside of the United States and our directors and officers reside outside of the United States, it may be difficult for you to enforce your rights based on the United States federal securities laws against us and our officers and directors in the United States or to enforce foreign judgments or bring original actions in the PRC against us or our management.

 

Most of our officers and directors reside outside of the United States. In addition, our operating subsidiaries are located in the PRC and all of their assets are located outside of the United States. The PRC does not have a treaty with United States providing for the reciprocal recognition and enforcement of judgments of courts. Therefore, it may be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the United States federal securities laws against us in the courts of either the United States or the PRC and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in PRC courts.

 

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In addition, since we are incorporated under the laws of the Cayman Islands and our corporate affairs are governed by the laws of the Cayman Islands, it may not be possible for investors to originate actions against us or our directors or officers based upon PRC laws, and it may be difficult, if possible at all, to bring actions based upon Cayman Islands laws in the PRC in the event that you believe that your rights as a shareholder have been infringed.

 

Our employment practices may be adversely impacted under the labor contract law of the PRC.

 

The PRC National People’s Congress promulgated the Labor Contract Law, which became effective on January 1, 2008. Compared to previous labor laws, the Labor Contract Law provides stronger protection for employees and imposes more obligations on employers. According to the Labor Contract Law, employers have the obligation to enter into written labor contracts with employees to specify the key terms of the employment relationship. The law also stipulates, among other things, (i) that all written labor contracts shall contain certain requisite terms; (ii) that the length of trial employment periods must be in proportion to the terms of the relevant labor contracts, which in any event may not be longer than six months; (iii) that in certain circumstances, a labor contract is deemed to be without a fixed term and thus an employee can only be terminated with cause; and (iv) that there are certain restrictions on the circumstances under which employers may terminate labor contracts as well as the economic compensations to employees upon termination of the employee’s employment.

 

Pingtan Fishing has not entered into employment agreements with some of its employees, basically the root-level employees, none of whom has endowment insurance, basic medical insurance, insurance against injury at work, maternity insurance and unemployment insurance. Due to the lack of these employment arrangements, we may be subject to overdue payment and fines and in turn our financial condition and results of operations may be adversely affected.

 

In addition, if we decide to significantly change or downsize our workforce, the Labor Contract Law could restrict our ability to terminate employee contracts and adversely affect our ability to make such changes to our work force in a manner that is most favorable to our business or in a timely and cost effective manner, which in turn may materially and adversely affect our financial condition and results of operations. If we are subject to severe penalties or incur significant legal fees in connection with labor law disputes or investigations, our business, financial condition and results of operations may be adversely affected.

 

Investors will have limited access to corporate records filed with the relevant PRC government authorities by the PRC operating entities.

 

All of our PRC subsidiaries are companies registered in Fujian Province. The PRC State Administration for Industry and Commerce and its local counterparts, or collectively SAIC, is the PRC government authority governing the market supervision and administrative enforcement of various business licensing laws. According to the relevant SAIC regulations, certain corporate records of a company should be filed with SAIC, for example, the annual financial report, shareholder changes, amendments of articles of association, registered capital changes, capital verification reports and equity interest pledge registration. In Fujian Province, an individual can gain access to information filed with SAIC only with the authorization of the company for which such information is filed. Alternatively, access to information can be granted by an order of a PRC people’s court, provided that the individual requesting the information is a party to litigation involving the company in question. Due to such restrictions, investors will have limited access to corporate records filed with the SAIC by our PRC subsidiaries.

 

Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Renminbi into foreign currencies and, if Renminbi were to decline in value, reducing our revenue in U.S. dollar terms.

 

Our reporting currency is the U.S. dollar and our operations in the PRC use their local currency as their functional currencies. Substantially all of our revenue and expenses are in Renminbi. Accordingly, we are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the Renminbi depends to a large extent on PRC government policies and the PRC’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of Renminbi to the U.S. dollar had generally been stable and the Renminbi had appreciated slightly against the U.S. dollar. However, in July 2005, the PRC government changed its policy of pegging the value of Renminbi to the U.S. dollar. Under the new policy, Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. As a result of this policy change, Renminbi appreciated more than 20% against the U.S. dollar in the following three years. Since July 2008, however, the Renminbi has traded within a narrow range against the U.S. dollar. As a consequence, the Renminbi has fluctuated significantly since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. On June 19, 2010, the People’s Bank of China, or the PBOC, announced that the PRC government would further reform the Renminbi exchange rate regime and increase the flexibility of the exchange rate. It is difficult to predict how this new policy may impact the Renminbi exchange and the Renminbi may not be stable against the U.S. dollar or any other foreign currency.

 

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The statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions results in reduced revenue, operating expenses and net income for our operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income for our operations. We are exposed, to foreign exchange rate fluctuations in converting the financial statements of foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, if we have, assets or liabilities that are denominated in currencies other than the relevant entity’s functional currency, changes in the functional currency value of these assets and liabilities would create fluctuations that lead to a transaction gain or loss. Although our major operations are conducted overseas, our sales are conducted in the PRC and in RMB, which is our functional currency. The average exchange rate used in translating the results of operations and cash flows for the years ended December 31, 2019 and 2018 from RMB to U.S. dollars was 6.8985 and 6.6174, respectively, which represented a 4.25% depreciation from 2018 to 2019 in the value of the RMB against the U.S. dollar. The average exchange rate used in translating the results of operations and cash flows for the years ended December 31, 2018 and 2017 from RMB to U.S. dollars was 6.6174 and 6.7518, respectively, which represented a 1.99% appreciation from 2017 to 2018 in the value of the RMB against the U.S. dollar. We have not entered into agreements or purchased instruments to hedge exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge such exchange rate risks.

 

Although PRC governmental policies were introduced in 1996 to allow the convertibility of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of SAFE, which is under the authority of the PBOC. These approvals, however, do not guarantee the availability of foreign currency conversion. We may not be able to obtain all required conversion approvals for our operations and PRC regulatory authorities may impose greater restrictions on the convertibility of Renminbi. Because we expect a significant amount of our revenue to continue to be in the form of Renminbi, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC, or to repay foreign currency obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations.

 

Due to historical defects in its capital contributions of Pingtan Fishing, we may be subject to administrative liability.

 

The current PRC Companies Law provides that shareholders must make the full amount of capital contribution subscribed to by such shareholder under the articles of association of the company. The form of capital contribution may be currency or non-currency property, such as property, intellectual property rights and land-use rights that can be evaluated in the form of currency and transferred in accordance with the applicable law. Under the PRC Companies Law, the non-currency property to be contributed as capital shall undergo an asset valuation and verification, and shall not be overvalued or undervalued. The property rights of such non-currency property shall be transferred in accordance with legally prescribed procedures. If a company obtains company registration in violation of the PRC Companies Law by making false statement of registered capital, submitting false certificates or by concealing material facts through other fraudulent means, the company shall be ordered to make rectification. In the event false statements regarding registered capital were made, the company shall also be fined no less than five percent but no more than fifteen percent of the amount of registered capital falsely stated. Further, a company submitting false certificates or concealing material facts may be fined no less than RMB 50,000 but no more than RMB 500,000.

 

Pingtan Fishing was established in February 1998 with registered capital of RMB 10,000,000, by three founders, Fujian Pingtan County Fishing Development Co., Fujian Pingtan County Shengfa Pingtan Fishing Co., Ltd. and Fujian Pingtan County Shunda Fishing Co., Ltd., all of whom made in-kind contributions to Pingtan Fishing. However, no information regarding any specific category of in-kind contribution was disclosed in the registration records of Pingtan Fishing in Pingtan County SAIC. Further, no assessment report or materials regarding the title transfer for such in-kind contributions were disclosed in the registration record.

 

In September 2002, Fujian Pingtan County State-owned Asset Operation Co., Ltd., or Pingtan State-owned Co., a PRC state-owned enterprise, injected investment of non-currency property, which was half of its land-use right in an area in Pingtan County, at the price of RMB 7,000,000 and obtained 70% equity interest in Pingtan Fishing. However, the transfer procedure for such land-use right has not been conducted and the registered capital of Pingtan Fishing was never changed.

 

The local government authority for company registration has confirmed that since its establishment no information record has been found regarding the violation of the applicable governmental company management laws by Pingtan Fishing. However, due to the lack of certain documents in the registration record of Pingtan Fishing, if the applicable company registration authority determines that Pingtan Fishing has had one or more deficiencies in its historical capital contributions, we may be subject to the fines.

 

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Due to the defect in the state-owned equity interest transfer in Pingtan Fishing’s past, it, and we, may be subject to a determination of invalidity of such equity interest transfer and may be liable for the applicable administrative liability.

 

According to the Provisional Regulations of Supervision and Administration of State-owned Assets in the Enterprise, promulgated by the State Council on May 27, 2003, and the Provisional Management Measure for the Transfer of the State-owned Equity in an Enterprise, promulgated by State-owned Assets Supervision and Administration Commission and Ministry of Finance on December 31, 2003, or collectively the State-owned Assets Regulations, the State-owned assets supervision and administration authority shall determine the matters of the transfer of its state-owned equity in an enterprise which it has invested. Further, the sale of state-owned equity in a company by a state-owned entity shareholder must be approved by the governmental authority at the same ranking as that of the state-owned entity shareholder, provided that after the transfer the state-owned entity may not hold more than 50% equity interest in such company.

 

On December 10, 2004, Fujian Yihai Investment Co., Ltd and Chen Cheng obtained all the equity interest in Pingtan Fishing by an equity interest transfer from the former shareholders, or the 2004 Equity Transfer, including Pingtan State-owned Co., and the registered capital of Pingtan Fishing increased to RMB 25,000,000. A state-owned asset transfer was involved in the equity interest transfer, as Pingtan State-owned Co. is a state-owned company. According to State-owned Assets Regulations, such equity interest transfer should be determined by the Fuzhou municipal state-owned asset supervising authority and approved by the Fuzhou Municipal Government. However, the applicable approval was not obtained at the time of the 2004 Equity Transfer, which was only approved by Pingtan County Government. According to 1999 PRC Contract Law, a contract shall be null and void under any of the following circumstances: (1) a contract is concluded through the use of fraud or coercion by one party to damage the interests of the state; (2) malicious collusion is conducted to damage the interests of the state, a collective or a third party; (3) an illegitimate purpose is concealed, under the guise of legitimate acts; (4) public interests are damaged; or (5) a violation the compulsory provisions of the laws and administrative regulations. Currently, none of the violations described above have been found with regard to the equity transfer contract for the 2004 Equity Transfer. Given that the 2004 Equity Transfer has been confirmed by Pingtan Government, Pingtan Fishing believes that it is unlikely that the transfer will be determined to be invalid. However, the government authority may reach the different conclusion and we may face an order of rectification, which would be time consuming and our business operations may be adversely affected.

 

We may be subject to certain penalties due to Pingtan Fishing lacking various PRC certificates or licenses and our business may be affected by the failure to renew some such certificates or licenses.

 

According to the PRC Fishing Vessels Inspection Regulation promulgated by PRC National Council in June 2003, if a fishing vessel operates without the Inspection Certificate after the applicable inspection process, such vessel may be confiscated by the relevant authority. The owner of a fishing vessel who does not apply for the required operation inspection for such vessel can be ordered to cease operations and apply for inspection within the time limit required by the relevant authority. In the event that a company fails to apply for an annual inspection, as ordered by the relevant authority, the company may be fined between RMB 1,000 to RMB 10,000 and the Annual Inspection Certificates held by the company may be temporarily suspended.

 

According to PRC Radio Management Regulations promulgated by the PRC National Council and PRC Centre Military Committee in September 1993, as well as the License of Radio Station Management Regulations promulgated by Ministry of Industry and Information Technology in February 2009, a company who sets up or uses a radio station in a vessel must obtain a Radio Station License. Failing to do so may result in a fine of up to RMB 5,000 and the radio station facilities may be confiscated.

 

The PRC is a member of 1973 International Pollution Prevention Convention, amended in 1978. According to the provisions of such convention and relevant PRC laws and regulations, the vessels owned by Pingtan Fishing should have a Sewage Pollution Prevention Certificates. We may be subject to a fine of up to RMB 200,000 once our vessels enter into PRC territorial seas due to lacking the certificate and relevant facilities for pollution prevention.

 

According to the PRC Fishery Management Regulation promulgated by PRC Ministry of Agriculture in April 2003, in the event that an enterprise has not obtained a valid inspection certificate or any other applicable certificates, such company may be subject to penalties imposed by applicable governmental authorities. Further, an enterprise carrying out its ocean fishery business without the approval of the MOA may be subject to penalties imposed by applicable governmental authority pursuant to applicable laws and regulations. The most serious penalty is permanent suspension of its fishing business operation.

 

In addition, under PRC laws and regulations, Pingtan Fishing is required to hold certain certificates or licenses in order to use its vessels to conduct fishing outside PRC territorial seas. Some of the certificates or licenses are subject to renewal on a regular basis. We may not be able to renew such certificates or licenses. Failure to renew such certificates or licenses may cause temporary or even permanent suspension of Pingtan Fishing’s operations, which would have adverse effects on our business and financial condition. In addition, we may face fines pursuant to the above-mentioned laws and regulations.

 

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Pingtan Fishing has not bought the required social insurance for some of its employees and may be the subject of fines by the relevant authority. 

 

The PRC Social Insurance Law provides that the employers should apply for the social insurance registration to the social insurance authority for their employees within thirty days from the employment date. The employees should have the basic endowment insurance, basic medical insurance, work-related injury insurance, unemployment insurance and applicable maternity insurance for its employees. The premium of work-related injury insurance and maternity insurance should be paid by the employers and the premium of the other three kind of insurance should be paid by the employees and employers jointly. Employers who have not managed the application of social insurance registration in time may be ordered by the social insurance authority to make the rectification and may be fined for the twice or triple of the unpaid premium for any delay in such rectification. Employers who have not paid the premium of applicable social insurance for their employees should be ordered to make the payment in time and be charged an overdue fine in the amount of 5/10,000 per day of the unpaid premium from the due date, and, if they have not paid in time as required by such order, may be fined for an amount of twice to triple the unpaid premium. Further, employers have the obligations to withhold the premium of endowment insurance, medical insurance and unemployment insurance and for their employees, and should be charged 5/10,000 per day of the overdue withholding premium by the social insurance authority. Due to this lack of insurance, we may be subject to overdue payment and fines and in turn our financial condition and results of operations may be adversely affected. We are actively endeavouring to purchase the social insurance for these employees and taking other remedial action. However, such actions may not be completed on a timely basis, or at all, and may not avoid fines or other penalties. As of December 31, 2019, there had been no fines nor penalties requested by the social insurance authority. Per our estimation, US$4,679,829 social insurance has been accrued as of December 31, 2019.

  

We may be subject to fines for the violation of Fishing Management Regulations.

 

PRC laws set forth rigorous standards to the amount and qualification of the seamen serving on vessels. The applicable laws include, among other things, the 1983 PRC Navigation Safety Act, Provisions for Administration of Pelagic Fishery which was promulgated by MOA on April 14, 2003, the PRC Seamen Regulations which was promulgated by State Council on March 28, 2007, Fishing Port Navigation Safety Management Regulations which was promulgated by State Council on May 5, 1989, and Provisions of the PRC on Marine and Maritime Administrative Penalty which was promulgated by Ministry of Communications on July 10, 2003. All these laws and regulations, collectively referred to as the Fishing Management Regulations, provide that the vessels should be equipped with qualified seamen, in a number required by the standard criteria to ensure the safety of such vessels and the seamen in Pingtan Fishing’s vessels should be trained by the professional training institution permitted by MOA and hold a Professional Sailor Certificate and the Professional Training Qualification. Further, the owners of the Pingtan Fishing’s enterprises must apply for a Seafarer’s Passport for the seamen on their vessels and the seamen in the voyage or assisting with marine engine work must have a Certificate of Competence. The owner or operator of the vessel may be ordered to rectify the failure to equip vessels with qualified seaman according to the standard quota to ensure the vessels’ safety. Should there be any related gains, the owner or operator of the vessel are subject to a fine of less than three times of the related gains and up to RMB 30,000 for such violation or for the seamen on such vessels lacking valid Certificates of Competence.

 

Pingtan Fishing has not historically had procedures in place to ensure its vessels are equipped with sufficient qualified crews, who have the Seafarer’s Passport and Certificate of Job Qualification or other certificates required by applicable Fishing Management Regulations, to ensure the safety of such vessels. Accordingly, we may be subject to fines for such violations.

 

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Pingtan Fishing has not made past housing fund payments for and on behalf of its employees and we may be required to make such payments and be subject to fines or penalties.

 

Under the Administrative Regulation on Housing Provident Fund, an employer must make a housing fund payment, deposit registration upon its establishment and pay the housing fund for and on behalf of its employees at a percentage between 5% and 12% of the respective employee’s monthly average wage of the preceding year. If an employer fails to make the housing fund payment and deposit registration, the housing fund administration authority may order it to complete the registration within a time limit or be assessed a fine of RMB 10,000 to RMB 50,000. Where an employer is overdue in the payment and deposit of, or underpays, the housing provident fund for and on behalf of its employees, it may be ordered by the housing fund administration authority to deposit the fund within a prescribed time limit, as well as to pay a late payment fee of 0.3% per day of such amount from the due date. Due to inconsistent implementation and interpretation by local authorities in the PRC and different levels of acceptance of the social security system by employees, Pingtan Fishing has not made sufficient housing fund payment and deposit registration or paid the housing fund for and on behalf of its employees. In the future, we may be required to make housing fund payments, for both late fees and fines for non-compliance. For 2019, the amount of housing fund payment is estimated to be US$26,000.

 

PRC regulation of loans to and direct investments in PRC entities by offshore holding companies may delay or prevent us from financing Pingtan Guansheng.

 

Any funds we transfer to Pingtan Guansheng, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration with relevant governmental authorities in China. According to the relevant PRC regulations on foreign invested enterprises in China, capital contributions to Pingtan Guansheng are subject to the approval of the MOFCOM or its local branches and registration with other governmental authorities in China. In addition, (a) any foreign loan procured by Pingtan Guansheng is required to be registered with SAFE or its local branches, and (b) Pingtan Guansheng may not procure loans which exceed the difference between its registered capital and its total investment amount as approved by the MOFCOM or its local branches. Any medium or long term loan to be provided by us to Pingtan Guansheng must be approved by the National Development and Reform Commission and the SAFE or its local branches. We may be unable to obtain these government approvals or complete such registration on a timely basis, if at all, with respect to capital contributions or foreign loans by it to its PRC subsidiaries. If we fail to receive such approvals or complete such registration, the ability to fund our PRC operations may be negatively affected, which could adversely affect our liquidity and ability to fund and expand our business.

 

On August 29, 2008, SAFE promulgated the Circular on Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular 142. SAFE Circular 142 provides that any Renminbi capital converted from registered capital in foreign currency of a foreign invested enterprise may only be used for purposes within the business scope approved by PRC governmental authority and such Renminbi capital may not be used for equity investments within the PRC unless otherwise permitted by the PRC law. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from registered capital in foreign currency of a foreign invested enterprise. The use of such Renminbi capital may not be changed without SAFE approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been utilized. Any violation of SAFE Circular 142 could result in severe monetary or other penalties. As a result, after the consummation of the business combination, we will be required to apply Renminbi funds converted within the business scope of Pingtan Guansheng. SAFE Circular 142 significantly limits our ability to transfer the net proceeds from us prior or any future offering of additional equity securities to Pingtan Guansheng or invest in or acquire any other companies in the PRC. On November 19, 2010 SAFE promulgated the Circular on the Policy of further Improvement and Adjustment of the Administration of the Direct Investment by Foreign Currency, or SAFE Circular 59, requiring SAFE to closely examine the authenticity of settlement of net proceeds from offshore offerings. In particular, it is specifically required that any net proceed settled from offshore offerings shall be applied in the manner described in the offering documents. On November 9, 2011, SAFE promulgated the Notice on Relevant Issues Concerning further Defining and Managing Part of the Foreign Currency Business in Capital Projects, or SAFE Circular 45. SAFE Circular 45 further provides that a foreign-investment enterprise should not use the Renminbi capital converted from registered capital in foreign currency in the equity investment. Due to the fact that the business scope of Pingtan Guansheng does not include equity investment, according to the aforementioned regulations, Pingtan Guansheng may not use Renminbi converted from foreign currency-denominated capital for purposes equity investment, and it must use such capital within its business scope, such as the sales of aquatic products or import and export of various commodities and technologies. Therefore, SAFE Circulars 142, 59 and 45 may significantly limit our ability to convert, transfer and use the net proceeds from our prior or any future offering of equity securities in China, which may adversely affect our business, financial condition and results of operations.

 

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Risks Relating to Our Securities

 

Our corporate actions are substantially controlled by our officers, directors and principal shareholders and their affiliated entities.

 

Our controlling shareholder and Chairman and CEO, Mr. Xinrong Zhuo, owns approximately 57.4% of our issued and outstanding shares. He would control matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions, and he may not act in the best interests of minority shareholders. This concentration of ownership may also discourage, delay or prevent a change in control of us, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our Company. These actions may be taken even if they are opposed by our other shareholders.

 

Our auditor, like other independent registered public accounting firms operating in China, is registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, but has not yet been inspected, and as such, investors currently do not have the benefit of PCAOB oversight.

 

Auditors of companies that are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the PCAOB and are required by U.S. law to undergo regular inspections by the PCAOB to assess their compliance with U.S. law and professional standards in connection with their audits of public company financial statements filed with the SEC. Because our auditor, BDO China Shu Lun Pan Certified Public Accountants LLP, is located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, the audit work and practices of its auditor, like other registered audit firms operating in China, is currently not inspected by the PCAOB. The inability of the PCAOB to conduct inspections of auditors in China also makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. As a result, investors may lose confidence in our reported financial information and procedures and the quality of our financial statements. 

 

If we do not appropriately maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, we may be unable to accurately report our financial results and the market price of our stock may be adversely affected. 

 

We are subject to reporting obligations under the U.S. securities laws. The SEC, as required under Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, an independent registered public accounting firm must attest to and report on the effectiveness of the company’s internal control over financial reporting. Our management has concluded that our internal control over financial reporting was effective as of December 31, 2019. See “Item 9A. Controls and Procedures.” 

 

However, if we fail to maintain effective internal control over financial reporting in the future, our management and our independent registered public accounting firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. This could in turn result in the loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our stock. Furthermore, we have incurred and may need to incur additional costs and use additional management and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements going forward.

 

Shareholders may face difficulties in protecting their interests, and their ability to protect their rights through the United States federal courts may be limited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and all of our directors and officers reside outside the United States.

 

We are incorporated in the Cayman Islands and conduct substantially all of our operations in China through our PRC subsidiaries. All of our directors and officers reside outside the United States and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult or impossible for our shareholders to bring an action against us or these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if shareholders are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

 

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Compliance with rules and requirements applicable to public companies will cause us to incur additional costs, and any failure by us to comply with such rules and requirements could negatively affect investor confidence in us and cause the value of our securities to decline.

 

As a relatively new public company, we are incurring significant legal, accounting and other expenses that we did not incur as a private company, many of which are not reflected in our historical financial statements. In addition, the Sarbanes-Oxley Act, as well as rules adopted by the SEC, has required changes in the corporate governance practices of public companies. We expect these rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. Complying with these rules and requirements may be especially difficult and costly for us because it may have difficulty locating sufficient personnel in China with experience and expertise relating to U.S. GAAP and United States public company reporting requirements, and such personnel may command high salaries. If we cannot employ sufficient personnel to ensure compliance with these rules and regulations, we may need to rely more on outside legal, accounting and financial experts, which may be very costly.

 

The prices at which our ordinary shares are traded will likely be volatile.

 

You should expect the prices at which our ordinary shares are traded to be highly volatile. Our progress in developing and commercializing our products, the impact of government regulations on our products and industry, the potential sale of a large volume of our ordinary shares by shareholders, our quarterly operating results, changes in general conditions in the economy or the financial markets and other developments affecting us or our competitors could cause the market price of our ordinary shares to fluctuate substantially with significant market losses. As a result, this may make it difficult or impossible for holders of our ordinary shares to sell shares when they want and at prices they find attractive.

 

We may sell equity securities in the future, which would cause dilution.

 

We may sell equity securities in the future to obtain funds for general corporate or other purposes. We may sell these securities at a discount to the market price. Any future sales of equity securities will dilute the holdings of existing holders of our ordinary shares, possibly reducing the value of their investment.

 

Although our ordinary shares are currently listed on The NASDAQ Capital Market, there can be no assurance that we will be able to comply with the continued listing standards.

 

The NASDAQ Capital Market may delist our ordinary shares from trading on its exchange for failure to meet the continued listing standards. If our ordinary shares were delisted from The NASDAQ Capital Market, we and our shareholders could face significant material adverse consequences including:

 

  a limited availability of market quotations for our ordinary shares;
     
  a determination that our ordinary shares is a “penny stock” would require brokers trading in our ordinary shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our ordinary shares;

  

  a limited amount of analyst coverage; and
     
  a decreased ability to issue additional securities or obtain additional financing in the future.

 

Our ordinary shares are currently listed for trading on The NASDAQ Capital Market under the symbol “PME”.

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our ordinary shares adversely, the price and trading volume of our securities could decline.

 

Securities and industry analysts do not currently, and may never, publish research on us. If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our ordinary shares adversely, the price and trading volume of our securities could decline. The trading markets for our securities will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. If no securities or industry analysts commence coverage of us, the market price and trading volume of our securities would likely be negatively impacted. If any of the analysts who may cover us change their recommendation regarding our securities adversely, or provide more favorable relative recommendations about our competitors, the price of our securities would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume of our securities to decline.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Our principal executive offices are located at 18-19/F, Zhongshan Building A, No. 154 Hudong Road, Fuzhou, PRC. On July 31, 2012, we entered into an office lease agreement with Ping Lin, the wife of Xinrong Zhuo, the Company’s Chairman and Chief Executive Officer, for approximately 100 square meters of space. Annual lease payments were approximately US$12,200 in 2019.

 

On January 1, 2015, we entered into a service agreement with Hai Yi Shipping Limited, an affiliate company domiciled in Hong Kong, that provided the Company the use of premises of approximately 194 square meters located at Suites 5201-3, 52/F, The Center, 99 Queen’s Road Central, Central, Hong Kong as office, and clerical and administrative support and consultation services. On January 1, 2018, the Service Agreement was renewed to February 28, 2018 under the same conditions. On March 1, 2018, the Company entered into a lease agreement directly with the landlord under the same conditions that expires on February 28, 2021.We incurred and paid approximately US$457,000 in 2019.

 

We have secured several cold storages located in one of the PRC’s largest seafood trading centers, MaWei seafood market. The monthly rent for the cold storage is RMB70 (US$10) per square meter and the leases are renewable annually. The following table sets forth information regarding the cold storages we currently rent as of December 31, 2019:

 

   Monthly 
Cold Storage  rent (US$) 
Fuxin#201  $10,604 
Fuxin#203   10,604 
Fuxin#503   10,604 
Total  $31,812 

 

We believe that our current offices and facilities are adequate to meet our needs, and that additional facilities will be available for lease, if necessary, to meet our future needs.

 

ITEM 3. LEGAL PROCEEDINGS

 

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

 

On June 23, 2017, a purported securities class action complaint, Zheng v. Pingtan Marine Enterprise Ltd., Xinrong Zhuo and Roy Yu, was filed in the U.S. District Court for the Eastern District of New York alleging violations of Section 10(b), and Rule 10b-5 thereunder, and Section 20(a) of the Securities Exchange Act of 1934 (the “Complaint”). The Complaint alleged that the Company and the executive officers made materially false and misleading statements in filings with the SEC regarding the Company’s business operations. The Complaint was brought on behalf of a putative class of persons who purchased or otherwise acquired Pingtan securities between August 8, 2016 and May 10, 2017 and seeks an unspecified amount of compensatory damages. An amended complaint, which expands the putative class period to March 9, 2016 through May 10, 2017, was filed on May 29, 2018 (the “Amended Complaint”). On April 11, 2019, the District Court granted the Company’s motion to dismiss the Amended Complaint, and on August 14, 2019, the U.S. Court of Appeals for the Second Circuit dismissed the plaintiff’s appeal of the District Court’s ruling.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

24

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our ordinary shares are listed on the NASDAQ Capital Market under the symbol “PME.”

 

Holders of Record

 

On March 13, 2020, the closing sale price of our shares of ordinary shares was US$1.15 per share and there were 79,055,053 ordinary shares. On that date, our ordinary shares were held by approximately 200 holders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of our ordinary shares whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.

 

Dividend Policy

 

There were no dividends declared and paid during 2019. For the first three quarters during 2018 and each quarter during 2017, we declared and paid cash dividends of US$0.01 per ordinary share outstanding. Future cash dividends, if any, will be at the discretion of our board of directors and will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors as our board of directors may deem relevant. We can pay dividends only out of our profits or other distributable reserves and dividends or distribution will only be paid or made if we are able to pay our debts as they fall due in the ordinary course of business. Payment of future dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including current financial condition, operating results, current and anticipated cash needs and regulations governing dividend distributions by wholly foreign owned enterprises in China.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

As of the date of this annual report, we have no equity compensations plans for any of our employees, directors and consultants.

 

Purchases of Equity Securities

 

During the quarter ended December 31, 2019, we did not purchase any of our equity securities, nor did any person or entity purchase any of our equity securities on our behalf.

 

Recent Sales of Unregistered Securities and Use of Proceeds

 

None.

 

25

 

 

Stock Performance Graph

 

This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Pingtan Marine Enterprise Ltd. under the Securities Act of 1933, as amended, or the Exchange Act.

 

The following graph compares the cumulative total return on our common stock with the Nasdaq Composite Index (NASDAQ Composite) and the Russell MicroCap Index for the period from December 31, 2014 through December 31, 2019. We use the Russell MicroCap Index because of the relatively limited number of peer companies in the SIC Code 900. These comparisons assume the investment of US$100 on December 31, 2014 and the reinvestment of dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.

 

 

 

 

26

 

 

ITEM 6. SELECTED FINANCIAL DATA

 

The following two tables set forth selected consolidated statement of financial data as of and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015, which are derived from our audited consolidated financial statements. Our consolidated financial statements are prepared in accordance with U.S. GAAP. Our historical results for any period are not necessarily indicative of results to be expected for any future period. You should read the following selected financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report.

 

   Year Ended December 31, 
   2019   % of   2018   % of   2017   % of 
   US$   Revenue   US$   Revenue   US$   Revenue 
   (in thousands, except for percentages, per share and operating data) 
Consolidated Statement of Income Data:                        
                         
Revenue                        
Squid  $35,503    39.6%  $2,935    4.6%  $9,099    14.4%
Ribbon fish   12,237    13.7%   13,327    20.7%   16,913    26.8%
Cuttle fish   10,922    12.2%   1,440    2.2%   691    1.1%
Peru squid(whole)   7,512    8.4%   3,008    4.7%   1,647    2.6%
Croaker fish   4,884    5.4%   11,526    17.9%   23,232    36.8%
Others   18,564    20.7%   32,020    49.9%   11,628    18.3%
Total Revenue   89,622    100%   64,256    100%   63,210    100.0%
                               
Cost of revenue                              
Fuel cost   42,593    47.5%   21,696    65.3%   25,556    62.0%
Labor cost   8,499    9.5%   4,211    12.7%   6,607    16.1%
Depreciation   5,676    6.3%   3,350    10.1%   5,436    13.2%
Freight   4,701    5.2%   2,599    7.8%   1,626    4.0%
Spare parts   1,948    2.2%   1,257    3.8%   1,708    4.2%
Maintenance fee   185    0.2%   127    0.3%   187    0.5%
Fishing license and agent fee   -    -    -    -   7    0.0%
Others   794    1.0%   -    -    -    -
Total Cost of revenue   64,396    71.9%   33,240    51.7%   41,127    65.1%
                               
Gross profit   25,226    28.1%   31,016    48.3%   22,083    34.9%
                               
Selling expenses   (2,715)   (3.0)%   (1,622)   (2.5)%   (1,231)   (1.9)%
General and administrative expenses   (7,890)   (8.8)%   (10,305)   (16.0)%   (9,580)   (15.2)%
Subsidy   6,440    7.2%   8,585    13.4%   22,177    35.1%
Impairment loss   (7,952)   (8.9)%   (9,715)   (15.1)%   -    - 
Gain (loss) on fixed assets disposal   59    0.1%   (2,106)   (3.3)%   (195)   (0.3)%
Operating  income   13,168         15,853         33,254      
Income before income taxes   6,380    7.1%   14,813    23.1%   32,520    51.4%
Income tax   -    -    -    -    -    - 
Net income  $6,380    7.1%  $14,813    23.1%  $32,520    51.4%
Net income per share                              
Basic and diluted  $0.07        $0.17        $0.38      
Other Consolidated Financial Data:                              
Gross margin   28.1%        48.3%        34.9%     
Operating margin   14.7%        24.7%        52.6%     
Net margin   7.1%        23.1%        51.4%     
Consolidated Operating Data:                              
Sales volume (kg)                              
Squid   32,028,789         2,028,995         2,158,906      
Ribbon fish   3,622,444         4,880,638         5,015,877      
Cuttle fish   2,173,027         302,765         128,982      
Peru squid(whole)   4,234,436         1,896,375         884,543      
Croaker fish   2,301,876         5,223,607         6,451,995      
Others   6,433,891         11,958,013         3,345,225      
Average selling price ($ per kg)                              
Squid   1.11         1.45         4.21      
Ribbon fish   3.38         2.73         3.37      
Cuttle fish   5.03         4.76         5.36      
Peru squid(whole)   1.77         1.59         1.86      
Croaker fish   2.12         2.21         3.60      
Others   2.89         2.68         3.48      
Consolidated Balance Sheet Data:                              
Cash  $10,092        $1,967        $2,006      
Accounts receivable, net   9,273         6,307         13,012      
Inventories   30,528         5,840         3,560      
Property, plant and equipment   259,378         199,571         135,042      
Total assets  $404,129        $246,962        $201,138      
Secured short-term bank loans and current portion of long-term bank loans  $67,157        $13,572        $20,570      
Total liabilities and commitments   249,051         95,403         53,633      
Total shareholders’ equity   155,078         151,559         147,505      
Total liabilities and shareholders’ equity  $404,129        $246,962        $201,138      

 

27

 

 

   Year Ended December 31, 
   2016   2015 
   US$   % of Revenue   US$   % of Revenue 
   (in thousands, except for percentages, per share and operating data) 
Consolidated Statement of Income Data:                
                 
Revenue                
Ribbon fish  $10,374    50.5%  $20,346    33.5%
Croaker fish   6,187    30.1%   25,314    41.7%
Squid   695    3.4%   2,359    3.9%
Pomfret   -    -    3,246    5.3%
Spanish mackerel   -    -    2,288    3.8%
Conger eel   -    -    2,039    3.4%
Others   3,285    16.0%   5,108    8.4%
Total Revenue   20,541    100%   60,700    100%
                     
Cost of Revenue                    
Fuel cost   20,200    98.3%   26,049    42.9%
Depreciation   4,709    22.9%   4,999    8.2%
Labor cost   1,981    9.6%   15,914    26.2%
Maintenance fee   707    3.5%   10,364    17.1%
Spare parts   564    2.8%   1,495    2.5%
Freight   477    2.3%   2,600    4.3%
Fishing license & agent fee   29    0.1%   1,489    2.5%
Others   662    3.3%   567    0.9%
Total cost of Revenue   29,329    142.8%   63,477    104.6%
                     
Gross loss   (8,788)   (42.8)%   (2,777)   (4.6)%
                     
Selling expenses   (1,236)   (6.0)%   (1,859)   (3.1)%
General and administrative expenses   (3,969)   (19.3)%   (2,934)   (4.8)%
Loss on fixed asset disposal   -    -    (1,583)   (2.6)%
Subsidy   558    2.7%   33,153    54.6%
Operating (loss) income   (13,435)        24,000      
(Loss) income before income taxes   (14,676)   (71.4)%   19,558    32.2%
Income tax   1    -    -    - 
Net (loss) income   (14,677)   (71.5)%   19,558    32.2%
Net income per share                    
Basic and diluted  $(0.17)       $0.23      
Other Consolidated Financial Data:                    
Gross  margin   (42.8)%        (4.6)%     
Operating  margin   (65.4)%        39.5%     
Net margin   (71.5)%        32.2%     
Consolidated Operating Data:                    
Sales volume (kg)                    
Ribbon fish   3,611,925         7,756,532      
Croaker fish   2,495,291         8,489,607      
Squid   492,844         1,098,442      
Pomfret   -         1,178,101      
Spanish mackerel   -         724,228      
Conger eel   -         922,150      
Others   1,236,663         1,466,809      
Average selling price ($ per kg)                    
Ribbon fish   2.87         2.62      
Croaker fish   2.48         2.98      
Squid   1.41         2.15      
Pomfret   -         2.76      
Spanish mackerel   -         3.16      
Conger eel   -         2.21      
Others   2.66         3.48      
Consolidated Balance Sheet Data:                    
Cash  $820        $11,449      
Accounts receivable, net   11,323         12,575      
Inventories   8,811         2,336      
Property, plant and equipment   122,197         94,555      
Total assets  $226,472        $231,877      
Secured short-term bank loans and current portion of long-term bank loans  $38,853        $34,651      
Total liabilities and commitments   86,760         65,037      
Total shareholders’ equity   139,712         166,840      
Total liabilities and shareholders’ equity  $226,472        $231,877      

 

28

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

 

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

 

Special note regarding forward-looking statements

 

All statements other than statements of historical fact included in this Form 10-K including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-K, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of a number of factors, including those set forth under the risk factors and business sections in this Form 10-K.

 

Overview

 

We are a marine enterprise group primarily engaging in ocean fishing through our operating subsidiary, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd., or Pingtan Fishing, which is organized in the People’s Republic of China (“PRC”). We carry out marine fishing operations in the international waters and the approved waters in access fishing countries with many of our owned vessels or licensed vessels for which we have exclusive operating license rights. We provide high quality seafood to a diverse group of customers including distributors, restaurant owners and exporters in the PRC.

 

We initially had a fishing fleet of 40 vessels in 2013. By June 2015, we have expanded the number of vessels to 135 through construction of 3 new vessels, purchase of 72 licensed vessels and acquisition of 20-year exclusive operation rights to 20 vessels. Our fishing fleet consists of vessels of diversified fishing methods ranging from trawling, drift netting, light luring seine, long line fishing to squid jigging.

 

From 2017 to 2018, we purchased 2 refrigerated transport vessels and 4 squid jigging vessels. Of those vessels, 2 transport vessels and 2 squid jigging vessels finished renovation in subsequent years and were deployed to international waters. The remaining 2 vessels’ ownership transfer was not yet completed, but the Company is entitled to 100% of the operations and net profits (losses) from the vessels.

 

In April 2018, we had 27 vessels received approval from the MOA to operate in the international waters after completion of the modification and rebuilding project. The 27 fishing vessels were modified and rebuilt into 20 squid jigging vessels and 7 light luring seine vessels and have been deployed to sea for operation in late 2018 and early 2019.

 

29

 

 

In 2019, the Company had 30 fishing vessels that received approval from the MOA to operate in the international waters after completion of modification and rebuilding. The 30 vessels were rebuilt and modified into 15 squid jigging vessels and 15 seine vessels. All the 30 vessels finished renovation in 2019 and were deployed to international waters for operation. In late 2019, we further applied to the MOA for permits to modify and rebuild 10 fishing vessels.

 

As of December 31, 2019, we owned 41 squid jigging vessels, 26 trawlers, 25 seine vessels, 13 drifters, 4 longline fishing vessels, and 2 transport vessels, had exclusive operating license rights to 20 drifters, and also had 10 squid jigging vessels which were in the modification and rebuilding project.

 

Among the 141 vessels, 69 were located in international waters, 12 were located in the Bay of Bengal in India, 13 were located in the PRC, 37 were located in the Arafura Sea in Indonesia, and the remaining 10 vessels were in the modification and rebuilding projects.

 

We catch nearly 30 different species of fish, including squid, ribbon fish, croaker fish and cuttle fish. All of our catch is shipped back to the PRC. We arrange chartered transportation ships to deliver frozen stocks to cold storage warehouses located in one of the PRC’s largest seafood trading centers, Mawei Seafood Market in Fujian Province.

 

We derive our revenue primarily from the sale of frozen seafood products. We sell our products directly to customers, including seafood processors, distributors, restaurant owners and exporters. Most of our customers have long-term, cooperative relationships with us. Our existing customers also introduce new customers to us from time to time. In July 2017, we entered into an exclusive strategic cooperation agreement to sell our fish products directly to consumers online. Based on past experiences, demand for seafood products is the highest from December to January, during Chinese New Year. We believe that our profitability and growth are dependent on our ability to deploy our vessels to new fishing grounds and our ability to expand our customer base.

 

Revenue by territory

 

Our customers are from the following PRC territories:

 

   Year Ended December 31, 
   2019   2018   2017 
Fujian province   66%   58%   61%
Shandong province   28%   15%   9%
Zhejiang province   4%   3%   2%
Guangdong province   1%   24%   28%
Other areas   1%   0%   0%
Total   100%   100%   100%

 

Significant factors affecting our results of operations

 

 

COVID-19 pandemic:  In December 2019, a novel strain of coronavirus causing respiratory illness, or COVID-19, has surfaced in Wuhan, China, spreading at a fast rate in January and February of 2020 and confirmed cases were also reported in other parts of the world. In reaction to this outbreak, an increasing number of countries imposed travel suspensions to and from China following the World Health Organization’s “public health emergency of international concern” (PHEIC) announcement on January 30, 2020. Since this outbreak, domestic business activities in China have been disrupted by a series of emergency quarantine measures taken by the government.

 

Emergency quarantine measures and travel restrictions cause business disruptions in many sectors across China, which we expect to seriously slow down our business operation for at least the first quarter of 2020. Our sales have been and will continue to be adversely affected as the results of these measures. The Company rolled out active precaution measures and has gradually resumed work since mid-February to reduce the impact on the Company’s production and operation.

 

The extent to which COVID-19 negatively impacts our business is highly uncertain and cannot be accurately predicted. We believe that the coronavirus outbreak and the measures taken to control it may have a significant negative impact on economic activities in China. Our sales are conducted in China. The magnitude of this negative effect on the continuity of our business operation in China remains uncertain. These uncertainties impede our ability to conduct our daily operations and could materially and adversely affect our business, financial condition and results of operations.

 

30

 

 

  Governmental policies:  Fishing is a highly regulated industry and our operations require licenses and permits. Our ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to changes in regulations and policies and is at the discretion of the applicable government agencies. Our inability to obtain, or loss or denial of extensions to, any of our applicable licenses or permits could hamper our ability to generate revenue from our operations.

 

  Resource & environmental factors: Our fishing expeditions are based in the EEZ, the international waters and the Arafura Sea of Indonesia. Any earthquake, tsunami, adverse weather or oceanic conditions, or other disasters in such areas may result in disruption to our operations and could adversely affect our sales. Adverse weather conditions such as storms, cyclones and typhoons or cataclysmic events may also decrease the volume of fish catches or may even hamper our operations. Our fishing volumes may also be adversely affected by major climatic disruptions such as El Nino, which in the past has caused significant decreases in seafood catch worldwide. Besides weather patterns, other unpredictable factors, such as fish migration, may also impact our harvest volume.

 

  Fluctuation on fuel prices:  Our operations may be adversely affected by fluctuations in fuel prices. Changes in fuel prices may result in increases in the selling prices of our products, and may, in turn, adversely affect our sales volume, revenue and operating profit.

 

  Competition: We engage in the business in the EEZ, the international waters, and the Arafura Sea of Indonesian. Competition within our designated fishing areas is not currently significant as the region is not overfished or regulated by government limits on the number of vessels that are allowed to fish in the territories; however, there is no guarantee that competition will not become more intense. Competition in the consumer market in China, however, is keen. We compete with other fishing companies that offer similar and varied products. There is significant demand for fish in the Chinese market. We believe our catch appeals to a wide segment of consumers because of the low price points of our products.

 

 

Fishing licenses:  Each of our fishing vessels requires approval from the MOA to carry out ocean fishing projects in international waters and foreign territories. Different countries may have different policies for foreign cooperation in fisheries. Some countries require fishing licenses issued by the accessed country; some others may require establishment of a joint venture or sole proprietorship to obtain local licenses. During the Indonesian moratorium, we were informed that the fishing licenses of four vessels operated through PT. Avona, one of the local companies through which we conduct business in Indonesia, and the fishery business license of PT. Dwikarya, the other local company through which we conduct business in Indonesia, were revoked. In September 2017, we were informed that the fishing licenses of the 13 vessels operating in the Indo-Pacific waters of Timor-Leste were suspended; and these vessels have returned to the PRC for regular maintenance.

 

In early December 2014, the Indonesian government introduced a six-month moratorium on issuing new fishing licenses and renewals so that the country’s MMAF could combat illegal fishing and rectify ocean fishing order. In February 2015, we ceased all fishing operations in Indonesia. Although, in November 2015, the Indonesian government announced that the moratorium had concluded, the MMAF has neither implemented new fishing policies nor resumed the license renewal process. We have been paying close attention to any new trends in fishing policy and have been actively exploring other business operations and redeploying vessels to other locations.

 

In October 2016, we deployed 13 vessels, which were granted fishing licenses by the Ministry of Agriculture and Fisheries of the Democratic Republic of Timor-Leste (“MAF”), to operate in the Indo-Pacific waters of the country. In September 2017, we were informed that the fishing licenses of these 13 vessels were suspended and the vessels were docked in the port by the MAF. The 13 vessels have returned to the PRC.

 

31

 

 

RESULTS OF OPERATIONS

 

Comparison of results of operations for the year ended December 31, 2019 and 2018

 

Revenue

 

We recognize revenue when a sales arrangement with a customer exists (e.g., contract, purchase orders, others), transaction price is fixed or determinable and we have satisfied our performance obligation per the sales arrangement. Most of our revenue originates from contracts with a single performance obligation to deliver products. Our performance obligations are satisfied when control of the product is transferred to the customer per the arranged shipping terms.

 

With respect to the sales to third party customers, the majority of whom are sole proprietor regional wholesalers in the PRC, we recognize revenue when customers receive purchased goods at our cold storage warehouse, after payment is received or credit sale is approved for recurring customers who have a history of financial responsibility.

 

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

 

For the years ended December 31, 2019 and 2018, our revenue by species of fish was as follows (dollars in thousands, except for average price):

 

   Year Ended December 31, 2019 
   Revenue   Volume (KG)   Average price   Percentage of revenue 
Squid  $35,503    32,028,789   $1.11    39.6%
Ribbon fish   12,237    3,622,444    3.38    13.7%
Cuttle fish   10,922    2,173,027    5.03    12.2%
Peru squid(whole)   7,512    4,234,436    1.77    8.4%
Croaker fish   4,884    2,301,876    2.12    5.4%
Others   18,564    6,433,891    2.89    20.7%
Total  $89,622    50,794,463   $1.76    100.0%

  

   Year Ended December 31, 2018 
   Revenue   Volume (KG)   Average price   Percentage of revenue 
Ribbon fish  $13,327    4,880,638   $2.73    20.7%
Croaker fish   11,526    5,223,607    2.21    17.9%
Argentina squid(whole)   9,360    2,533,700    3.69    14.6%
Peru squid(whole)   3,008    1,896,375    1.59    4.7%
Squid   2,935    2,028,995    1.45    4.6%
Chub mackerel   2,593    2,858,082    0.91    4.0%
Others   21,507    6,868,996    3.13    33.5%
Total  $64,256    26,290,393   $2.44    100.0%

 

For the year ended December 31, 2019, we had revenue of $89,622,156, as compared to revenue of $64,256,088 for the year ended December 31, 2018, an increase of $25,366,068, or 39.5%. Sales volumes in the year ended December 31, 2019 increased 93.2% to 50,794,463 kg from 26,290,393 kg in the year ended December 31, 2018. The increase was mainly attributable to more vessels in operation. Average unit sale price decreased by 27.9% in the year ended December 31, 2019 as compared to the year ended December 31, 2018, the decrease was mainly attributable to the fish species with highest sales volume being sold at lower selling prices, which pulled down the average unit sale price. For the year ended December 31, 2019, our increase in revenue was primarily attributable to more vessels in operation, which caused the sales volume to increase, and due to the different sales mix, average unit sale price decreased, as compared to the year ended December 31, 2018.

 

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Cost of revenue

 

Our cost of revenue primarily consists of fuel cost, labor cost, depreciation, fishing vessels maintenance fee, and other overhead costs. Fuel cost, labor cost and depreciation generally accounted for the majority of our cost of revenue. The following table sets forth our cost of revenue information, both in amounts and as a percentage of revenue for the years ended December 31, 2019 and 2018 (dollars in thousands):

 

   Year Ended December 31, 
   2019   2018 
   Amount   % of cost of revenue   % of revenue   Amount   % of cost of revenue   % of revenue 
Fuel cost  $42,593    66.1%   47.5%  $21,696    65.3%   33.8%
Labor cost   8,499    13.2%   9.5%   4,211    12.7%   6.6%
Depreciation   5,676    8.8%   6.3%   3,350    10.1%   5.2%
Freight   4,701    7.3%   5.2%   2,599    7.8%   4.0%
Spare parts   1,948    3.0%   2.2%   1,257    3.8%   2.0%
Maintenance fee   185    0.3%   0.2%   127    0.3%   0.2%
Other   794    1.3%   1.0%   -    -   -
Total cost of revenue  $64,396    100%   71.9%  $33,240    100%   51.8%

 

Cost of revenue for the year ended December 31, 2019 was $64,396,571, representing an increase of $31,156,989 or 93.7% as compared to $33,239,582 for the year ended December 31, 2018. The increase was primarily attributable to the increase in our production activities.

 

Gross profit

 

Our gross profit is affected primarily by changes in production costs. Fuel cost, labor cost and depreciation together account for about 88.1% and 88.1% of cost of revenue for the years ended December 31, 2019 and 2018, respectively. The fluctuation of fuel price and change in depreciation may significantly affect our cost level and gross profit.

 

The following table sets forth information as to our revenue, cost of revenue, gross profit and gross margin for the years ended December 31, 2019 and 2018.

 

   Year Ended December 31, 
   2019   2018 
Revenue  $89,622,156   $64,256,088 
Cost of revenue  $64,396,571   $33,239,582 
Gross profit  $25,225,585   $31,016,506 
Gross margin   28.1%   48.3%

 

Gross profit for the year ended December 31, 2019 was $25,225,585, representing a change of $5,790,921 or 18.7% as compared to gross profit of $31,016,506 for the year ended December 31, 2018. The decrease was due to the decrease in our average unit sale price and our unit production cost of fish remained at a consistent level.

 

Gross margin decreased to 28.1% for the year ended December 31, 2019 from 48.3% for the year ended December 31, 2018. The decrease in gross margin for the year ended December 31, 2019 as compared to the year ended December 30, 2018 was primarily attributable to a drop of average unit sale price by 27.9% as a result of new fishing vessels being deployed in different waters of high seas and harvesting different catch mix.

  

Selling expense

 

Our selling expense mainly includes shipping and handling fees, insurance, customs clearance charge, storage fees and advertising expenses. Our sales activities are conducted through direct selling by our internal sales staff. Because of the strong demand for our products and services, we typically do not aggressively market and distribute our products.

   

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Selling expense totalled $2,715,599 for the year ended December 31, 2019, as compared to $1,622,451 for the year ended December 31, 2018, an increase of $1,093,148 or 67.4%. Selling expense as a percentage of revenue for the year ended December 31, 2019 increased slight to 3.0% from 2.5% for the year ended December 31, 2018. Selling expense for the years ended December 31, 2019 and 2018 consisted of the following:

 

   Year Ended December 31, 
   2019   2018 
Insurance  $1,446,095   $397,287 
Shipping and handling fees   429,091    395,344 
Storage fees   428,625    521,763 
Customs clearance charge   173,572    167,411 
Advertising   22    20,151 
Other   238,194    120,495 
   $2,715,599   $1,622,451 

 

 

For the year ended December 31, 2019, insurance expense increased by $1,048,808, or 264.0%, as compared to the year ended December 31, 2018. The change was mainly attributable to more vessels are insured in 2019. 

 

  For the year ended December 31, 2019, shipping and handling fees increased by $33,747, or 8.5%, as compared to the year ended December 31, 2018. The increase in fees was mainly attributable to the number of deliveries from ports to the warehouse in China.

 

  For the year ended December 31, 2019, storage fees decreased by $93,138, or 17.9%, as compared to the year ended December 31, 2018. These changes were mainly attributable to warehouse space that was rented for inventory according to fish volume that was delivered.

 

  For the year ended December 31, 2019, customs clearance charge increased slightly by $6,161, or 3.7%, as compared to the year ended December 31, 2018. The change was mainly attributable to the numbers of customs declaration.

 

  For the year ended December 31, 2019, advertising expenses decreased by $20,129, or 99.9%, as compared to the year ended December 31, 2018. The change was mainly due to no advertising activities occurring during the period.  

 

  Other miscellaneous selling expense for the year ended December 31, 2019 increased by $117,699, or 97.7%, as compared to the year ended December 31, 2018. The increase in fees was mainly attributable to satellite communication fees and pilotage fees occurring during the period.

 

General and administrative expense

 

General and administrative expense totalled $15,846,569 for the year ended December 31, 2019, as compared to $20,019,808 for the year ended December 31, 2018, a decrease of $4,173,239 or 20.8%. General and administrative expense for the years ended December 31, 2019 and 2018 consisted of the following:

  

   Year Ended December 31, 
   2019   2018 
Impairment  $7,951,635   $9,715,058 
Depreciation   3,726,061    5,791,557 
Compensation and related benefits   1,365,455    1,563,065 
Professional fees   1,235,578    1,550,285 
Rent and related administrative service charge   519,161    489,259 
Travel and entertainment   179,839    103,369 
Bad debt recovery   30,366    (66,532)
Other   833,474    873,747 
   $15,841,569   $20,019,808 

 

 

Impairment loss represents the impairment loss on the vessels whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recovered. In 2019, we dismantled 1 transport vessel and deregistered 16 fishing vessels and applied to the MOA for rebuilding 17 new vessels. In 2018, we deregistered 24 fishing vessels and applied to the MOA for building 24 new fishing vessels. As a result of the rebuilding projects, we assessed the recoverability of the 17 fishing vessels and 24 fishing vessels for the year ended 2019 and 2018 based on the undiscounted future cash flow that the fishing vessels are expected to generate as less than the carrying amount, and recognized an impairment loss. The Impairment loss on vessels was $7,951,635 and $9,715,058 for the year ended 2019 and 2018, respectively.

 

  We recorded the depreciation in relation to vessels that are not operating as operation expense rather than cost of revenue. For the year ended December 31, 2019, depreciation expense decreased by $2,065,496, or 35.7%, as compared to the year ended December 31, 2018.

 

  For the year ended December 31, 2019, compensation and related benefits decreased by $197,610, or 12.6% as compared to the year ended December 31, 2018. The change was mainly attributable to booking the salaries of the crews that are not in operation in East Timor into G&A expenses in 2018, and we have no such costs in 2019 as these non-operation vessels shipped back to China.

  

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  Professional fees, which primarily consist of legal fees, accounting fees, investor relations services charge, valuation service fees, consulting fees, and other fees associated with being a public company, for the year ended December 31, 2019, decreased by $314,707, or 20.3%, as compared to the year ended December 31, 2018. The decrease in the year ended December 31, 2019 was primarily attributable to a decrease in legal fees of approximately $259,000, a decrease in consulting service charge of approximately $67,000, a decrease in transfer agent fees of approximately $18,000, and a decrease in investor relations services charges of approximately $17,000, offset by an increase in accounting fees of approximately $46,000.

 

  Rent and related administrative service charge increased slightly by $29,902, or 6.1% for the year ended December 31, 2019 as compared to the year ended December 31, 2018.

 

  For the year ended December 31, 2019, travel and entertainment expense increased by $76,470, or74.0% as compared to the year ended December 31, 2018. The increase was mainly attributable to an increase in entertainment expense of approximately $83,000 and offset by a decrease in travel expense of approximately $6,000.

 

  For the year ended December 31, 2019, we recorded bad debt of $30,366 as compared to bad debt recovery of $66,532 for the year ended December 31, 2018. Based on our periodic review of accounts receivable balances, we adjusted the allowance for doubtful accounts after considering management’s evaluation of the collectability of individual receivable balances, including the analysis of subsequent collections, and customers’ collection history, and recent economic events.

 

  Other general and administrative expense, primarily consists of communication fees, office supplies, miscellaneous taxes, bank service charge, depreciation, and NASDAQ listing fee.  For the year December 31, 2019, other general and administrative expense decreased slightly by $40,273, or 4.6%, as compared to the year ended December 31, 2018.

 

Subsidy 

 

The subsidy mainly consists of an incentive granted by the Chinese government to encourage the development of the ocean fishing industry in order to satisfy the demand of natural seafood in China and other miscellaneous subsidy from the Chinese government. For the year ended December 31, 2019, grant income decreased by $2,144,432, or 25.0% as compared to the year ended December 31, 2018. The change was mainly due to the government’s subsidy disbursement schedule. 

 

Gain or Loss on fixed assets disposal 

 

Gain or loss on fixed assets disposal represents the gain or loss on the disposal of fixed assets we recorded as it incurred. The gain on fixed assets disposal was $59,432 for the year ended 2019 in comparison to the loss on fixed assets disposal was $2,105,960 for the year ended 2018, respectively. This was mainly due to 27 fishing vessels being dismantled for modification and rebuilding project in 2018.

 

Income from operations 

 

As a result of the factors described above, for the year ended December 31, 2019, income from operations amounted to $13,168,148, as compared to income from operations of $15,853,018 for the year ended December 31, 2018, a change of $2,684,870, or 16.9%.

 

Other income/expense 

 

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

 

For the year ended December 31, 2019, other expense, net, amounted to $6,788,083 as compared to other expense, net, of $1,040,320 for the year ended December 31, 2018, an increase of $5,747,763, or 552.5%, which was primarily attributable to an increase in interest expense of approximately $4,844,000 as a result of increase in bank loans, an increase in foreign currency transaction loss of approximately $140,000, an increase in loss on equity method investment of approximately $294,000, an increase in loss on the interest sold of approximately $87,000, an decrease in gain from cost method investment of approximately $70,000 and increase in other expenses of approximately $1,052,000, offset by an increase in interest income of approximately $739,000.

 

Income taxes

 

We are exempted from income taxes for income generated from our ocean fishing operations in China for the years ended December 31, 2019 and 2018. 

 

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Net income

 

As a result of the factors described above, our net income was $6,380,065 for the year ended December 31, 2019, compared to net income of $14,812,698 for the year ended December 31, 2018, a change of $8,432,633 or 56.9%. Excluding the impact of the non-recurring, non-cash impairment loss of $7,951,635 regarding the deregistration of 17 fishing vessels, the net income would be $14,331,700.

 

Net income attributable to owners of the Company 

 

The net income attributable to owners of the Company was $5,682,024 , or $0.07 per ordinary share (basic and diluted), for the year ended December 31, 2019, compared to net income attributable to owners of the Company of $13,397,301, or $0.17 per ordinary share (basic and diluted), for the year ended December 31, 2018, a change of $7,715,277 or 57.6%.

 

Foreign currency translation adjustment

 

Our reporting currency is the U.S. dollar. The functional currency of our parent company and subsidiaries of Merchant Supreme and Prime Cheer is the U.S. dollar and the functional currency of the Company’s subsidiaries incorporated in China is the Chinese Renminbi (“RMB”). The financial statements of our subsidiaries incorporated in China are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenue, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and comprehensive income (loss). As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $2,861,319 for the year ended December 31, 2019, as compared to a foreign currency translation loss of $8,387,092 for the year ended December 31, 2018. This non-cash loss had the effect of increasing/decreasing our reported comprehensive loss/gain and this non-cash gain had the effect of decreasing/increasing our reported comprehensive loss/gain.

 

Comprehensive income

 

As a result of our foreign currency translation adjustment, we had comprehensive income for the year ended December 31, 2019 of $3,518,746, compared to comprehensive income of $6,425,606 for the year ended December 31, 2018.

 

Comparison of results of operations for the year ended December 31, 2018 and 2017

 

Revenue

 

We recognize revenue from sales of frozen fish and other marine catches when persuasive evidence of an arrangement exists, delivery has occurred, the price to the customer is fixed or determinable, and collection of the resulting receivable is reasonably assured. 

 

With respect to the sales to third party customers, the majority of whom are sole proprietor regional wholesalers in the PRC, we recognize revenue when customers receive purchased goods at our cold storage warehouse, after payment is received or credit sale is approved for recurring customers with excellent payment histories. 

 

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

 

For the years ended December 31, 2018 and 2017, our revenue by species of fish was as follows (dollars in thousands, except for average price):

 

   Year Ended December 31, 2018 
   Revenue   Volume (KG)   Average price   Percentage of revenue 
Ribbon fish  $13,327    4,880,638   $2.73    20.7%
Croaker fish   11,526    5,223,607    2.21    17.9%
Argentina squid(whole)   9,360    2,533,700    3.69    14.6%
Peru squid(whole)   3,008    1,896,375    1.59    4.7%
Squid   2,935    2,028,995    1.45    4.6%
Chub mackerel   2,593    2,858,082    0.91    4.0%
Others   21,507    6,868,996    3.13    33.5%
Total  $64,256    26,290,393   $2.44    100.0%

 

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   Year Ended December 31, 2017 
   Revenue   Volume (KG)   Average price   Percentage of revenue 
Croaker fish  $23,232    6,451,995   $3.60    36.8%
Ribbon fish   16,913    5,015,877    3.37    26.8%
Squid   9,099    2,158,906    4.21    14.4%
Reefcod   2,293    586,425    3.91    3.6%
Peru squid   1,960    1,028,843    1.91    3.1%
Conger eel   1,315    460,006    2.86    2.1%
Others   8,398    2,283,476    3.68    13.2%
Total  $63,210    17,985,528   $3.51    100.0%

 

For the year ended December 31, 2018, we had revenue of $64,256,088, as compared to revenue of $63,209,687 for the year ended December 31, 2017, a slight increase of $1,046,401, or 1.7%. Sales volumes in the year ended December 31, 2018 increased 46.2% to 26,290,393 kg from 17,985,528 kg in the year ended December 31, 2017. The increase was mainly attributable to more landings of catch delivered to warehouse. However, average unit sale price decreased by 30.5% in the year ended December 31, 2018 as compared to the year ended December 31, 2017. The decrease was mainly due to catching more smaller fish, which have lower unit selling prices during the year ended December 31, 2018.

 

Cost of revenue

 

Our cost of revenue primarily consists of fuel cost, labor cost, depreciation, fishing vessels maintenance fee, and other overhead costs. Fuel cost, labor cost and depreciation generally accounted for the majority of our cost of revenue. The following table sets forth our cost of revenue information, both in amounts and as a percentage of revenue for the years ended December 31, 2018 and 2017 (dollars in thousands):

 

   Year Ended December 31, 
   2018   2017 
   Amount   % of cost
of revenue
   % of revenue   Amount   % of cost
of revenue
   % of revenue 
Fuel cost  $21,696    65.3%   33.8%  $25,556    62.0%   40.4%
Labor cost   4,211    12.7%   6.6%   6,607    16.1%   10.5%
Depreciation   3,350    10.1%   5.2%   5,436    13.2%   8.6%
Freight   2,599    7.8%   4.0%   1,626    4.0%   2.6%
Spare parts   1,257    3.8%   2.0%   1,708    4.2%   2.7%
Maintenance fee   127    0.3%   0.2%   187    0.5%   0.3%
Fishing license and agent fee   -    -    -    7    0%   0%
Total cost of revenue  $33,240    100%   51.7%  $41,127    100%   65.1%

 

Cost of revenue for the year ended December 31, 2018 was $33,239,582, representing a decrease of $7,887,316 or 19.2% as compared to $41,126,898 for the year ended December 31, 2017. The decrease was primarily attributable to the decrease in our unit production cost.

 

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Gross profit

 

Our gross profit is affected primarily by changes in production costs. Fuel cost, labor cost and depreciation together account for about 88.1% and 91.4% of cost of revenue for the years ended December 31, 2018 and 2017, respectively. The fluctuation of fuel price and change in depreciation may significantly affect our cost level and gross profit.

 

The following table sets forth information as to our revenue, cost of revenue, gross profit and gross margin for the years ended December 31, 2018 and 2017.

 

   Year Ended December 31, 
   2018   2017 
Revenue  $64,256,088   $63,209,687 
Cost of revenue  $33,239,582   $41,126,898 
Gross profit  $31,016,506   $22,082,789 
Gross margin   48.3%   34.9%

 

Gross profit for the year ended December 31, 2018 was $31,016,506, representing an increase of $8,933,717 or 40.5% as compared to gross profit of $22,082,789 for the year ended December 31, 2017. The increase was primarily attributable to an increased number of deliveries into warehouse that averaged down unit production cost of fish. 

 

Gross margin increased to 48.3% for the year ended December 31, 2018 from 34.9% for the year ended December 31, 2017. The increase was primarily due to the same reasons described above.

  

Selling expense

 

Our selling expense mainly includes shipping and handling fees, insurance, customs clearance charge, storage fees and advertising expenses. Our sales activities are conducted through direct selling by our internal sales staff. Because of the strong demand for our products and services, we typically do not aggressively market and distribute our products. As a result, our selling expense has been relatively small as a percentage of our revenue.

 

Selling expense totalled $1,622,451 for the year ended December 31, 2018, as compared to $1,231,031 for the year ended December 31, 2017, an increase of $391,420 or 31.8%. Selling expense as a percentage of revenue for the year ended December 31, 2018 increased slight to 2.5% from 1.9% for the year ended December 31, 2017. Selling expense for the years ended December 31, 2018 and 2017 consisted of the following:

 

   Year Ended December 31, 
   2018   2017 
Storage fees  $521,763   $260,020 
Insurance   397,287    481,347 
Shipping and handling fees   395,344    269,702 
Customs clearance charge   167,411    133,729 
Advertising   20,151    74,332 
Other   120,495    11,901 
   $1,622,451   $1,231,031 

 

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  For the year ended December 31, 2018, storage fees increased by $261,743, or 100.7%, as compared to the year ended December 31, 2017. The increase was mainly attributable to larger warehouses were rented as more fish were delivered for inventory.

 

 

For the year ended December 31, 2018, insurance expense decreased by $84,060, or 17.5%, as compared to the year ended December 31, 2017. The change was mainly attributable to the different insured fishing vessels mix.

 

  For the year ended December 31, 2018, shipping and handling fees increased by $125,642, or 46.6%, as compared to the year ended December 31, 2017. The change was mainly attributable to the number of deliveries from customs to the warehouse.

 

  For the year ended December 31, 2018, customs clearance charge increased by $33,682, or 25.2%, as compared to the year ended December 31, 2017. The change was mainly attributable to the amounts of customs declaration.

 

  For the year ended December 31, 2018, advertising expenses decreased by $54,181, or 72.9%, as compared to the year ended December 31, 2017.

 

  Other miscellaneous selling expense for the year ended December 31, 2018 increased by $108,594, or 912.5%, as compared to the year ended December 31, 2017.

 

General and administrative expense

 

General and administrative expense totalled $20,019,808 for the year ended December 31, 2018, as compared to $9,579,404 for the year ended December 31, 2017, an increase of $10,440,404 or 109.0%. General and administrative expense for the years ended December 31, 2018 and 2017 consisted of the following:

  

   Year Ended December 31, 
   2018   2017 
Impairment  $9,715,058   $- 
Depreciation   5,791,557    5,075,609 
Compensation and related benefits   1,563,065    1,199,447 
Professional fees   1,550,285    2,234,776 
Rent and related administrative service charge   489,259    471,833 
Travel and entertainment   103,369    199,894 
Bad debt recovery   (66,532)   (194,278)
Other   873,747    592,123 
   $20,019,808   $9,579,404 

 

 

 

Impairment loss represents the impairment loss on the vessels whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recovered. In the fourth quarter of 2018, we deregistered 24 fishing vessels and applied to the MOA for building 24 new fishing vessels. As a result of the deregistration, we assessed the recoverability of the 24 fishing vessels based on the undiscounted future cash flow that the fishing vessels are expected to generate as less than the carrying amount, and recognized an impairment loss. The Impairment loss on vessels was $9,715,058 and nil for the year ended 2018 and 2017, respectively.

 

 

 

We recorded the depreciation in relation to vessels that are not operating as operation expense rather than cost of revenue. For the year ended December 31, 2018, depreciation expense increased by $715,948, or 14.1%, as compared to the year ended December 31, 2017.

 

  For the year ended December 31, 2018, compensation and related benefits increased by $363,618, or 30.3% as compared to the year ended December 31, 2017. The increase was mainly attributable to booking the salaries of the crews that are not in operation in East Timor and Indonesia into G&A expenses of approximately $353,000 and an increase in benefits for our management staff of approximately $10,000.

  

  Professional fees, which primarily consist of legal fees, accounting fees, investor relations services charge, valuation service fees, consulting fees, and other fees associated with being a public company, for the year ended December 31, 2018, decreased by $684,491, or 30.6%, as compared to the year ended December 31, 2017. The decrease in the year ended December 31, 2018 was primarily attributable to a decrease in legal fees of approximately $636,000, a decrease in valuation services fees of approximately $15,000, a decrease in consulting fees of approximately $65,000, and a decrease in investor relations services charges of approximately $28,000, offset by an increase in accounting fees of approximately $64,000.

 

  Rent and related administrative service charge increased slightly by $17,426, or 3.7%for the year ended December 31, 2018 as compared to the year ended December 31, 2017.

 

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  For the year ended December 31, 2018, travel and entertainment expense decreased by $96,525, or 48.3% as compared to the year ended December 31, 2017. The decrease was mainly attributable to a decrease in travel expense of approximately $26,000 and a decrease in entertainment expense of approximately $70,000.

 

  For the year ended December 31, 2018, we recorded bad debt recovery of $66,532 as compared to bad debt recovery of $194,278 for the year ended December 31, 2017. Based on our periodic review of accounts receivable balances, we maintain allowances for doubtful accounts for estimated losses resulting from the failure of customers to make payments on time, we review the accounts receivable on a periodic basis and make general allowances based on the age of the balance.

 

  Other general and administrative expense primarily consists of insurance, communication fees, office supply, miscellaneous taxes, bank service charge, and NASDAQ listing fee. For the year December 31, 2018, other general and administrative expense increased by $281,624, or 47.6%, as compared to the year ended December 31, 2017. The increase was mainly attributable to an increase in insurance of approximately $127,000, and an increase in bank service charge of approximately $91,000.

 

Subsidy 

The subsidy mainly consists of an incentive granted by the Chinese government to encourage the development of the ocean fishing industry in order to satisfy the demand of natural seafood in China and other miscellaneous subsidy from the Chinese government. For the year ended December 31, 2018, grant income decreased by $13,592,496, or 61.3% as compared to the year ended December 31, 2017. The decrease was mainly due to we received the reimbursement of fuel expenditure for 2017 during the year ended December 31, 2018, and we received the reimbursement of fuel expenditure for 2016 and 2015 during the year ended December 31, 2017 as a result of the delay in the government approval process.

  

Loss on fixed assets disposal

 

Loss on fixed assets disposal represents the loss on the replacement of vessels and disposal of vehicles we recorded as it incurred. The loss on fixed assets disposal was $2,105,960 and $195,375 for the year ended 2018 and 2017, respectively.

 

Income from operations 

 

As a result of the factors described above, for the year ended December 31, 2018, income from operations amounted to $15,853,018, as compared to income from operations of $33,254,206 for the year ended December 31, 2017, a change of $17,401,188, or 52.3%.

 

Other income/expense 

 

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

 

For the year ended December 31, 2018, other expense, net, amounted to $1,040,320 as compared to other expense, net, of $734,075 for the year ended December 31, 2017, an increase of $306,245, or 41.7%, which was primarily attributable to an increase in foreign currency transaction loss of approximately $1,354,000, an increase in loss on equity method investment of approximately $160,000, and a decrease in interest income of approximately $145,000, offset by a decrease in interest expense of approximately $1,192,000 as a result of decrease in bank loans, an increase in gain from cost method investment of approximately $62,000, and an increase in other income of approximately $97,000.

 

Income taxes

 

We are exempted from income taxes for income generated from our ocean fishing operations in China for the years ended December 31, 2018 and 2017. 

 

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Net income

 

As a result of the factors described above, our net income was $14,812,698 for the year ended December 31, 2018, compared to net income of $32,520,131 for the year ended December 31, 2017, a change of $17,707,433 or 54.5%. Excluding the impact of the non-recurring, non-cash impairment loss of $9,715,058 regarding the deregistration of 24 fishing vessels, the net income would be $24,527,756.

 

Net income attributable to owners of the Company 

 

The net income attributable to owners of the Company was $13,397,301, or $0.17 per ordinary share (basic and diluted), for the year ended December 31, 2018, compared to net income attributable to owners of the Company of $29,659,693, or $0.38 per ordinary share (basic and diluted), for the year ended December 31, 2017, a change of $16,262,392 or 54.8%.

 

Foreign currency translation adjustment

 

Our reporting currency is the U.S. dollar. The functional currency of our parent company and subsidiaries of Merchant Supreme and Prime Cheer is the U.S. dollar and the functional currency of the Company’s subsidiaries incorporated in China is the Chinese Renminbi (“RMB”). The financial statements of our subsidiaries incorporated in China are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenue, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and comprehensive income (loss). As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $8,387,092 for the year ended December 31, 2018, as compared to a foreign currency translation gain of $7,760,460 for the year ended December 31, 2017. This non-cash loss had the effect of increasing/decreasing our reported comprehensive loss/gain and this non-cash gain had the effect of decreasing/increasing our reported comprehensive loss/gain.

 

Comprehensive income

 

As a result of our foreign currency translation adjustment, we had comprehensive income for the year ended December 31, 2018 of $6,425,606, compared to comprehensive income of $40,280,591 for the year ended December 31, 2017.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. Our principal liquidity demands are based on the capital needs of Pingtan Fishing related to the acquisition or construction of new fishing vessels and continuously upgrading and renovating existing vessels, and our general corporate purposes. We historically relied on cash flow provided by operations and bank loans to supplement our working capital. We also receive government subsidy as the government incentive for encouraging development of ocean fishing industry. At December 31, 2019 and 2018, we had cash balances of approximately $10,092,205 and $1,966,855, respectively. The significant portion of these funds are located in financial institutions located in the PRC and will continue to be indefinitely reinvested in our operations in the PRC.

 

The following table sets forth a summary of changes in our working capital from December 31, 2018 to December 31, 2019:

 

           December 31, 2018 to
December 31, 2019
 
   December 31,
2019
   December 31,
2018
   Change   Percentage Change 
Working capital (deficit):                
Total current assets  $64,338,693   $15,457,828   $48,880,865    316.2%
Total current liabilities   88,788,156    73,073,227    15,714,929    21.5%
Working capital deficit:  $(24,449,463)  $(57,615,399)  $33,165,936    (57.6)%

 

Our working capital deficit decreased $33,165,936 to working capital deficit of $24,449,463 at December 31, 2019 from working capital deficit of $57,615,399 at December 31, 2018. This decrease in working capital deficit is primarily attributable to an increase in accounts receivable, net of allowance for doubtful accounts, of approximately $2,966,000, an increase in due from related parties of approximately $12,478,000, an increase in inventories, net of reserve for inventories, of approximately $24,688,000 due to our business expansion resulting from more fishing vessels put in operations, an increase in prepaid expenses of approximately $709,000, a decrease in accounts payable of approximately $22,690,000, a decrease in accounts payable - related parties of approximately $1,538,000 and a decrease in due to related parties of approximately $19,387,000, offset by an increase in short-term bank loans of approximately $4,949,000, an increase in long-term bank loans - current portion approximately of $48,635,000 due to the repayment schedule, an increase in accrued liabilities and other payables of approximately $5,369,000 and an increase in lease liability of approximately $376,000 due to the adaptation of ASU 2016-02.

 

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In order to mitigate our liquidity risk, we plan to rely on the proceeds from loans from banks and/or financial institutions to increase working capital in order to meet capital demands, and the government subsidies for modification and rebuilding project and reimbursement of certain operating expenses. In addition, Mr. Zhuo, the Chief Executive Officer and Chairman of the Board, will continue to provide financial support to the Company when necessary. During January and February 2020, we received approximately of $80.25 million in total from bank loan, related party loan repayment and government subsidies.

 

The Company meets its day-to-day working capital requirements through cash flow provided by operations, bank loans and related parties’ advances. The Indonesian government’s moratorium on fishing licenses renewals creates uncertainty over fishing operations in Indonesian waters. The Company’s forecasts and projections show that the Company has adequate resources to continue in operational existence to meet its obligations in the twelve months following the date of this filing, considering operations in Indian waters and international waters and consideration of opportunities in new fishing territories. Also, in the past two years, the Company has upgraded 57 fishing vessels, 2 transport vessels and another 10 fishing vessels are modification and rebuilding project, the deployment of more vessels in operation will generate more revenue and cash inflows to the Company. In addition, the Company received the partial government subsidy for modification and rebuilding project and reimbursement of certain operating expenses amounted to $28.78 million as of February 5, 2020, it expects to receive the remaining government subsidies in 2020 and recover borrowings to related parties in the first half of 2020.

 

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

 

Cash flows for the year ended December 31, 2019 compared to the year ended December 31, 2018

 

The following summarizes the key components of our cash flows for the years ended December 31, 2019 and 2018:

 

   Year Ended December 31, 
   2019   2018 
Net cash (used in) provided by operating activities  $(30,573,780)  $53,302,882 
Net cash used in investing activities   (132,464,184)   (55,706,559)
Net cash provided by financing activities   171,562,601    1,443,061 
Effect of exchange rate on cash   (399,287)   (899,256)
Net increase (decrease) in cash  $8,125,350   $(1,859,872)

 

Net cash flow used in operating activities was $30,573,780 for the year ended December 31, 2019 as compared to net cash flow provided by operating activities was $53,302,882 for the year ended December 31, 2018, a change of $83,876,662. 

 

  Net cash flow used in operating activities for the year ended December 31, 2019 primarily reflected our net income of approximately $6,380,000, and the add-back of non-cash items, mainly consisting of depreciation of approximately $11,309,000, increase in allowance for doubtful accounts of approximately $8,000, an decrease in reserve for inventories of approximately $142,000, gain on sale of fixed assets disposal of approximately $59,000, loss on equity method investment of approximately $487,000, loss on the interest sold of approximately $87,000, impairment loss of fishing vessels of approximately $7,944,000, and changes in operating assets and liabilities primarily consisting of a decrease in other receivables of approximately $75,000, an increase prepaid expenses of approximately $728,000 and an increase in accrued liabilities and other payables of approximately $5,528,000, offset by an increase in accounts receivable of approximately $3,111,000, an increase in inventories of approximately $24,919,000 due to our business expansion resulting from more fishing vessels put in operations, an increase in prepaid expenses of approximately $728,000, a decrease in accounts payable of approximately $22,444,000, a decrease in accounts payable-related parties of approximately $1,502,000 and a decrease in due to related parties of approximately $9,484,000.

 

  Net cash flow provided by operating activities for the year ended December 31, 2018 primarily reflected our net income of approximately $14,813,000, and the add-back of non-cash items, mainly consisting of depreciation of approximately $9,142,000, decrease in allowance for doubtful accounts of approximately $67,000, an increase in reserve for inventories of approximately $429,000, loss on disposal of fixed assets of approximately $2,017,000, loss on equity method investment of approximately $193,000, impairment loss of fishing vessels of approximately $9,715,000, and changes in operating assets and liabilities primarily consisting of a decrease in accounts receivable of approximately $6,374,000 as we intensified more strict collection policy, an increase in accounts payable of approximately $1,045,000, an increase in accounts payable- related parties of approximately $1,584,000, an increase in accrued liabilities and other payables of approximately $996,000 and an increase in due to related parties of approximately $11,080,000, offset by an increase in inventories of approximately $2,971,000, an increase in prepaid expenses of approximately $560,000, an increase in other receivables of approximately $451,000 and a decrease in accrued liabilities and other payables-related party of approximately $37,000.

 

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Net cash flow used in investing activities was $132,464,184 for the year ended December 31, 2019 as compared to $55,706,559 for the year ended December 31, 2018. During the year ended December 31, 2019, we made payments for purchase of property, plant and equipment of approximately $118,469,000 and prepayment made for long-term assets of approximately $49,593,000, offset by proceeds received from government grants for fishing vessel construction of approximately $35,525,000. During the year ended December 31, 2018, we made payments for purchase of property, plant and equipment of approximately $60,930,000, offset by proceeds received from government grants for fishing vessel construction of approximately $5,224,000.

 

Net cash flow provided by financing activities was $171,562,601 for the year ended December 31, 2019 as compared to net cash flow used in financing activities of $1,443,061 for the year ended December 31, 2018. During the year ended December 31, 2019, we received proceeds from short-term bank loan of approximately $10,147,000 and proceeds from long-term bank loan of approximately $208,023,000, offset by the repayments of short-term bank loans of approximately $5,063,000, the repayment of long-term bank loans of approximately $18,881,000, the repayment of advances to related parties of approximately $10,046,010, loans issued to related parties of approximately 12,618,000. During the year ended December 31, 2018, we received advances from related parties of approximately $3,891,000, proceeds from short-term bank loan of approximately $14,961,000 and proceeds from long-term bank loan of approximately $5,479,000, offset by the repayments of short-term bank loans of approximately $14,622,000, the repayment of long-term bank loans of approximately $5,894,000 and cash made for dividend payments of approximately $2,372,000. 

 

Cash flows for the year ended December 31, 2018 compared to the year ended December 31, 2017

 

The following summarizes the key components of our cash flows for the years ended December 31, 2018 and 2017:

 

   Year Ended December 31, 
   2018   2017 
Net cash provided by operating activities  $53,302,882   $68,439,426 
Net cash used in investing activities   (55,706,559)   (43,555,727)
Net cash provided by (used in) financing activities   1,443,061    (23,826,798)
Effect of exchange rate on cash   (899,256)   (962,492)
Net (decrease) increase in cash  $(1,859,872)  $94,409 

 

Net cash flow provided by operating activities was $53,302,882 for the year ended December 31, 2018 as compared to net cash flow provided by operating activities was $68,439,426 for the year ended December 31, 2017, a change of $15,136,544.

 

  Net cash flow provided by operating activities for the year ended December 31, 2018 primarily reflected our net income of approximately $14,813,000, and the add-back of non-cash items, mainly consisting of depreciation of approximately $9,142,000, decrease in allowance for doubtful accounts of approximately $67,000, an increase in reserve for inventories of approximately $429,000, loss on disposal of fixed assets of approximately $2,017,000, loss on equity method investment of approximately $193,000, impairment loss of fishing vessels of approximately $9,715,000, and changes in operating assets and liabilities primarily consisting of a decrease in accounts receivable of approximately $6,374,000 as we intensified more strict collection policy, an increase in accounts payable of approximately $1,045,000, an increase in accounts payable-related parties of approximately $1,584,000, an increase in accrued liabilities and other payables of approximately $996,000 and an increase in due to related parties of approximately $11,080,000, offset by an increase in inventories of approximately $2,971,000, an increase in prepaid expenses of approximately $560,000, an increase in other receivables of approximately $451,000 and a decrease in accrued liabilities and other payables-related party of approximately $37,000.

 

  Net cash flow provided by operating activities for the year ended December 31, 2017 primarily reflected our net income of approximately $32,520,000, and the add-back of non-cash items, mainly consisting of depreciation of approximately $8,966,000, loss on disposal of fixed assets of approximately $195,000 and loss on equity method investment of approximately $33,000, and changes in operating assets and liabilities primarily consisting of a decrease in inventories of approximately $5,607,000 was mainly due to the growth of sales, a decrease in advances to suppliers of approximately $4,078,000 because we have received fishing nets and other on-board consumables which we paid in advance to suppliers in 2016, a significant decrease in other receivables of approximately $32,440,000 mainly due to the refund of prepayment made for fish goods of approximately $31,600,000 received from a third party in January and February 2017, a decrease in other receivables – related party of approximately $1,377,000 resulting from the payments in connection with the termination of the VIE structure were returned in full to the Company, an increase in accounts payable of approximately $3,005,000 due to an increase in fuel demand as a result of the growth in our production, and an increase in accrued liabilities and other payables of approximately $254,000, offset by non-cash item of the decrease in allowance for doubtful accounts of approximately $194,000, an increase in accounts receivable of approximately $766,000 was mainly due to the growth of sales on credit, an increase in prepaid expenses of approximately $99,000, a decrease in accounts payable - related parties of approximately $885,000, and a significant decrease in accrued liabilities and other payables – related party of approximately $18,607,000 due to repayments made to our related party.

 

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Net cash flow used in investing activities was $55,706,559 for the year ended December 31, 2018 as compared to $43,555,727 for the year ended December 31, 2017. During the year ended December 31, 2018, we made payments for purchase of property, plant and equipment of approximately $60,930,000, offset by proceeds received from government grants for fishing vessel construction of approximately $5,224,000. During the year ended December 31, 2017, we made payments for purchase of property, plant and equipment of approximately $49,860,000, and made payments for equity method investment of approximately $296,000, offset by proceeds received from government grants for fishing vessel construction of approximately $6,601,000.

 

Net cash flow provided by financing activities was $1,443,061 for the year ended December 31, 2018 as compared to net cash flow used in financing activities of $23,826,798 for the year ended December 31, 2017. During the year ended December 31, 2018, we received advances from related parties of approximately $3,891,000, proceeds from short-term bank loan of approximately $14,961,000 and proceeds from long-term bank loan of approximately $5,479,000, offset by the repayments of short-term bank loans of approximately $14,622,000, the repayment of long-term bank loans of approximately $5,894,000 and cash made for dividend payments of approximately $2,372,000. During the year ended December 31, 2017, we received proceeds from short-term bank loans of approximately $14,453,000, and received advances from related parties of approximately $4,329,000, offset by the repayments of short-term bank loans of approximately $21,673,000, the repayments of long-term bank loans of approximately $17,773,000, and dividend payments of approximately $3,162,000. 

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual obligations

 

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

 

The following tables summarize our contractual obligations as of December 31, 2019 (dollars in thousands), and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 

   Payments Due by Period 
Contractual obligations:  Total   Less than
1 year
   1-3 years   3-5 years   5+ years 
Office lease obligation  $408   $376   $32   $-   $- 
Short-term bank loans (1)   10,034    10,034    -    -    - 
Long-term bank loans   217,353    57,123    66,369    63,716    30,145 
Total  $227,795   $67,533   $66,401   $63,716   $30,145 

 

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

 

Off-balance sheet arrangements

 

None.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as revenues and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements for the periods in this report.

 

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Revenue Recognition

 

As a result of the adoption of ASC 606 on January 1, 2018, we have changed our accounting policy for revenue recognition. Revenue is recognized when control of the promised goods or services, through performance obligations by the Company, is transferred to the customer in an amount that reflects the consideration it expects to be entitled to in exchange for the performance obligations.

 

We recognize revenue when a sales arrangement with a customer exists (e.g., contract, purchase orders, others), transaction price is fixed or determinable and we have satisfied our performance obligation per the sales arrangement. Our sales arrangements have standard payment terms that do not exceed 180 days. The majority of our revenue originates from contracts with a single performance obligation to deliver products. Our performance obligations are satisfied when control of the product is transferred to the customer per the arranged shipping terms.

 

We also record a contract liability when customers prepay but we have not yet satisfied our performance obligation. We did not have any material unsatisfied performance obligations, contract assets or liabilities as of December 31, 2019 and December 31, 2018.

 

With respect to the sale of frozen fish and other marine catches to third party customers, most of which are sole proprietor regional wholesalers in China, we recognize revenue when customers pick up purchased goods at the Company’s cold storage warehouse, after payment is received by us or credit sale is approved by us for recurring customers who have a history of financial responsibility. We do not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers. We do not accept returns from customers.

 

Inventories

 

Inventories, consisting of frozen fish and marine catches, are stated at the lower of cost or net realizable value utilizing the weighted average method. The cost of inventories is primarily comprised of fuel, freight, depreciation, direct labor, consumables, government levied charges and taxes. Consumables include fishing nets and metal containers used by fishing vessels. Our fishing fleets in Indian waters and the international waters operate throughout the year, although the May to July period demonstrates lower catch quantities compared to the October to January period, which is the peak season.

 

An allowance is established when we determine that certain inventories may not be saleable. If inventory costs exceed net realizable value due to obsolescence or quantities in excess of expected demand, we will record reserve for the difference between the cost and the market value. These reserves are recorded based on estimates. We recorded a reserve for inventories in the amount of $266,405 and $413,893, during the year ended December 31, 2019 and 2018, respectively.

 

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

 

Property, plant and equipment

 

Property, plant and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. We examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

 

The estimated useful lives of the assets are as follows:

 

      Estimated useful life  
Fishing vessels     10 - 20 Years  
Vehicles     5 Years  
Office and other equipment     3 - 5 Years  

 

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

 

Investment in unconsolidated company – Global Deep Ocean

 

We use the equity method of accounting for our investment in, and earning or loss of, companies that it does not control but over which it does exert significant influence. We consider whether the fair value of our equity method investment has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded value may not be recoverable. We review our investments for other-than-temporary impairment whenever events or changes in business circumstances indicate that the carrying value of the investment may not be fully recoverable. Investments identified as having an indication of impairment are subject to further analysis to determine if the impairment is other-than-temporary and this analysis requires estimating the fair value of the investment. The determination of fair value of the investment involves considering factors such as current economic and market conditions, the operating performance of the entities including current earnings trends and forecasted cash flows, and other company and industry specific information. If we consider any decline to be other than temporary (based on various factors, including historical financial results and the overall health of the investee), then a write-down would be recorded to estimated fair value.

 

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Impairment of long-lived assets

 

In accordance with ASC Topic 360, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We evaluate the impairment by comparing carrying amount of the assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets, we recognize an impairment loss based on the excess of the carrying amount of the long-lived assets over their fair value. Impairment loss represents the impairment loss on the vessels whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recovered. In 2019, we dismantled 1 transport vessel and deregistered 16 fishing vessels and applied to the MOA for rebuilding 17 new vessels. In 2018, we deregistered 24 fishing vessels and applied to the MOA for building 24 new fishing vessels. As a result of the rebuilding projects, we assessed the recoverability of the 17 fishing vessels and 24 fishing vessels for the year ended 2019 and 2018 based on the undiscounted future cash flow that the fishing vessels are expected to generate as less than the carrying amount, and recognized an impairment loss. The impairment loss on vessels was $7,951,635 and $9,715,058 for the year ended 2019 and 2018, respectively.

 

Recently Adopted Accounting Standards

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This guidance supersedes current guidance on revenue recognition in Topic 605, “Revenue Recognition.” In addition, there are disclosure requirements related to the nature, amount, timing, and uncertainty of revenue recognition. In August 2015, the FASB issued ASU No. 2015-14 to defer the effective date of ASU No. 2014-09 for all entities by one year. For public business entities that follow U.S. GAAP, the deferral results in the new revenue standard are being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. We applied the new revenue standard beginning January 1, 2018. We have analyzed the Company’s revenue from contracts with customers in accordance with the new revenue standard to determine the impact on the our consolidated financial statements.

 

Codification Improvements to Topic 842, Leases (“ASU 2018-10”) and ASU 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”). The amendments in ASU 2018-10 affect only narrow aspects of the guidance issued in the amendments in ASU 2016-02, including but not limited to lease residual value guarantee, rate implicit in the lease and lease term and purchase option. The amendments in ASU 2018-11 provide an optional transition method for adoption of the new standard, which will allow entities to continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption.

 

Effective January 1, 2019 we adopted the new standard using the modified retrospective approach and implemented internal controls to enable the preparation of financial information upon adoption. We elected to adopt both the transition relief provided in ASU 2018-11 and the package of practical expedients which allowed us, among other things, to retain historical lease classifications and accounting for any leases that existed prior to adoption of the standard. Additionally, we elected the practical expedients allowing us not to separate lease and non-lease components and not record leases with an initial term of twelve months or less (“short-term leases”) on the balance sheet across all existing asset classes.

 

Adoption of the new standard resulted in the recording of right use asset and lease liability of $0.77 million as of January 1, 2019, which primarily relates to our corporate office leases. The standard did not materially impact our condensed consolidated statements of operations or cash flows. Adopting the new standard did not have a material impact on the accounting for leases under which we are the lessee.

   

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Recent accounting pronouncements

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”, which will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): simplifying the test for goodwill impairment”, the guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not the difference between the fair value and carrying amount of good will which was the step 2 test before. The ASU should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” This standard eliminates the current requirement to disclose the amount or reason for transfers between level 1 and level 2 of the fair value hierarchy and the requirement to disclose the valuation methodology for level 3 fair value measurements. The standard includes additional disclosure requirements for level 3 fair value measurements, including the requirement to disclose the changes in unrealized gains and losses in other comprehensive income during the period and permits the disclosure of other relevant quantitative information for certain unobservable inputs. The new guidance is effective for interim and annual periods beginning after December 15, 2019. The Company does not anticipate that the adoption of the new standard will have a material effect on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-15, “Internal-Use Software – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement.” This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement service contract with the guidance to capitalize implementation costs of internal use software. The ASU also requires that the costs for implementation activities during the application development phase be capitalized in a hosting arrangement service contract, and costs during the preliminary and post implementation phase are expensed. The new guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the impact of adoption of this standard, but does not anticipate that the adoption will have a material effect on its consolidated financial statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Commodity Price Risk

 

Oil cost accounts for approximately 66.1% of our total cost of revenue for the year ended December 31, 2019. We are primarily exposed to oil price volatility caused by supply conditions, political and economic variables and other unpredictable factors. We purchase oil used by our vessels at prevailing market prices. We do not have formal long-term purchase contracts with our suppliers and, therefore, we are exposed to the risk of fluctuating oil prices. 

 

We did not have any commodity price derivatives or hedging arrangements outstanding at December 31, 2019 and did not employ any commodity price derivatives in the year ended December 31, 2019.

 

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Foreign currency exchange rate risk 

 

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

 

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

 

If the RMB depreciates against the USD, the value of our RMB revenue, earnings and assets as expressed in our USD financial statements will decline. A 1% average appreciation (depreciation) of the RMB against the USD would decrease (increase) our comprehensive income by $35,000 for the year ended December 31, 2019 based on our revenue, costs and expenses, and assets and liabilities denominated in RMB as of December 31, 2019. To date, we have not entered into any hedging transactions to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure at all.

 

Interest rate risk

 

We are exposed to interest rate risk arising from short-term and long-term variable rate borrowings from time to time. Our future interest expense will fluctuate in line with any change in our borrowing rates. Our bank borrowings amounted to $227.4 million at December 31, 2019. Based on the variable nature of the underlying interest rate, the bank borrowings approximated fair value at that date.

 

A hypothetical 100 basis point change in interest rates would impact our interest on our borrowings by approximately $60,550. The potential change in interest amount is calculated based on the change in the interest amount over a one year period due to an immediate 100 basis point change in interest rates.

 

Inflation risk

 

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

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

   

Financial Statement Schedules (Item 15(a)(2))

 

Financial statement schedules have been omitted because either they are not applicable or the required information is included in the financial statements or the notes thereto.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

  

ITEM 9A. CONTROLS AND PROCEDURES

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Controls and other procedures that are designed to provide reasonable assurance that the information that we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019.

 

We performed additional analyses and other procedures to ensure that our consolidated financial statements included in this Annual Report were prepared in accordance with US GAAP. These measures included, among other things, expansion of our year-end closing procedures, including the consolidation process, and dedication of significant internal resources and external consultants to scrutinize account analyses and reconciliations at a detailed level. As a result, we concluded that the consolidated financial statements included in this Annual Report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with US GAAP.

 

Management’s Report on Internal Control Over Financial Reporting

 

The management of the Company is responsible for establishing, maintaining, and assessing the effectiveness of internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that:

 

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate.

 

Under the supervision of our Chief Executive Officer and Chief Financial Officer, our management conducted an assessment of our internal control over financial reporting as of December 31, 2019, based on the framework and criteria established in Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

Based on this assessment, management determined that we maintained effective internal control over financial reporting as of December 31, 2019.

 

The effectiveness of our company’s internal control over financial reporting as of December 31, 2019 has been audited by BDO China Shu Lun Pan Certified Public Accountants LLP, an independent registered public accounting firm, as stated in their report which is included in Item 8. Financial Statements and Supplementary Data.

 

Changes in Internal Controls over Financial Reporting

  

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Board of Directors and Executive Officers

 

The following table sets the names, positions and ages of our current executive officers and directors. Our directors serve until the annual meeting of shareholders or until their successors are elected and qualified. Our officers are elected by the Board and their terms of office are, except to the extent governed by an employment contract, at the discretion of the Board.

 

Name   Age   Position
Xinrong Zhuo   55   Chief Executive Officer and Chairman of the Board
LiMing Yung   55   Chief Financial Officer
Lin Bao   59   Director
Zengbiao Zhu   70   Director
Xing An Lin   56   Director
Lin Lin   45   Director

 

Directors

 

Xinrong Zhuo has served as chairman of our board since the business combination in February 2013. Prior to that, he served as the chairman of CDGC’s board and as its chief executive officer since August 2010. Mr. Zhuo has served as director of Fujian Road & Bridge Construction Co., Ltd., an infrastructure construction company, since December 2008, has served as the sole director of Tian Yuan Co., Ltd., a real estate investment company, since September 2007, has served as the chairman and legal representative of Fuzhou Dongxing Longju Real Estate Development Co., Ltd., a real estate development company, since March 2007, has served as the vice general manager of Fujian Huashang Real Estate Development Co., Ltd., a real estate development company, since December 2006, and has served as the supervisor of Fuzhou Haiyiyongyu Import & Export Co., Ltd., a trading company, since June 1995. From November 2005 to December 2008, Mr. Zhuo served as the legal representative and the chairman of Fujian Road & Bridge Construction Co., Ltd. From June 2005 to September 2007, Mr. Zhuo served as vice general manager of Tian Yuan Co. Ltd. From February 2002 to September 2009, Mr. Zhuo served as the legal representative and executive director of Fuzhou Baojie Haiyi Pingtan Fishing Co., Ltd., an aquatic products company. From June 1995 to September 2006, Mr. Zhuo served as the supervisor at Fuzhou Honglong Ocean Fishery Co., Ltd., a marine fishery. Mr. Zhuo is qualified to serve on the board of directors due to his experience in the real estate development and trading business, as well as his extensive experience in the fishing industry, his legal background and prior executive experience.

 

Lin Bao has served as a member of the Board since the business combination in February 2013. He has served as the general manager of Fuzhou Honglong Ocean Fishery Co., Ltd., a marine fishery company since February 2013. From April 1989 to January 1997, he served as the general manager of Fuzhou Tang Cheng Plaza, a hotel affiliated to China Railway Construction Corporation Limited. Mr. Bao is the vice chairman of China Fisheries Association since 2012. Mr. Bao received his associate degree in Accounting from Beijing Society Correspondence University in 1989. He obtained the Certificate of Highway Engineer in 2006. Mr. Bao’s background in the fishing industry, as well as his executive experience, led the Board to conclude that he should be nominated to serve another term as a director.

 

Zengbiao Zhu has served as an independent director on our board since the business combination in February 2013. Prior to that he served as a director of CDGC from April 2011. Mr. Zhu has been a member of the National People’s Congress, or NPC, Standing Committee of Fujian Province and a member of the NPC Financial and Economic Committee of Fujian Province since January 2008. From 2004 to December 2009 he served as the director of the China Insurance Regulatory Commission Fujian Bureau, from 2000 to 2004 he first served as the deputy director and then the director of the China Insurance Regulatory Commission Fujian Bureau Fuzhou Office, and from 1995 to 2000 he served as the president of PBOC Fuzhou sub-branch. Mr. Zhu received his bachelor’s degree in Finance from Xiamen University in 1974. Mr. Zhu is qualified to serve on the board of directors due to his extensive political and regulatory background and contacts in the Fujian region.

 

Xing An Lin has served as an independent member of our board since February 2015. Mr. Lin is a Chinese Certified Public Accountant and Certified Tax Agent. He has served as Officer in Pingtan Haixin Tax Accountant Agent Office since December 2005. From January 2000 to November 2005, he served as Project Manager of Fujian Broker Accounting Firm. From November 1991 to December 1999, he served as Project Manager in Pingtan Audit Co., Ltd. From September 1985 to October 1991, he served as Accountant in Pingtan Grain Bureau Commercial Industry Company. Mr. Lin received his associate degree in Accounting from Fujian Xiamen University in 1983. Mr. Lin is qualified to serve on the board of directors due to his extensive accounting and regulatory background.

 

Lin Lin has served as an independent member of our board since February 2015. Mr. Lin is a Certified Tax Agent. He has served as Director in Pingtan Haixin Tax Accountant Agent Office since November 2004. From December 2005 to October 2010, he served as Project Manager of Pingtan Haixin Tax Accountant Agent Office. From October 1990 to November 2005, he served as Financial Controller in Pingtan Pharmaceutical Company. Mr. Lin received his bachelor’s degree in 1998 in Professional Management from the Party School of the CPC Central Committee. Mr. Lin is qualified to serve on the board of directors due to his extensive accounting and regulatory background.

 

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Executive Officers

 

LiMing Yung (Michael) has served as Pingtan’s Senior Vice President since 2015, and as Chief Financial Officer since December 2019. Before joining Pingtan, Mr. Yung served as Managing Director of Terra Nova Natural Resources from 2008 to 2013. He also previously served as Senior Vice President of UBS Paine Webber and as Vice President of Citicorp Investment. Mr. Yung holds a bachelor’s degree in finance from the New York Institute of Technology. 

 

Board Leadership Structure and Corporate Governance

 

In accordance with our Amended and Restated Memorandum and Articles of Association, our Board elects our officers, including Chief Executive Officer, Chief Financial Officer and such other officers as our Board may appoint from time to time. In addition, our Board may appoint a Chairman of the Board. Mr. Zhuo has served as our Chairman and Chief Executive Officer since the consummation of our February 2013 business combination, overseeing our day-to-day operations while also leading our Board. The Board believes that the current model is effective for our continued growth in that the combined position of Chief Executive Officer and Chairman maximizes strategic advantages and Mr. Zhuo’s industry expertise. Mr. Zhuo, given his extensive knowledge of the PRC’s fishing industry, coupled with the fact that he has overseen our operations since inception, is the director most familiar with our business and industry, and is best positioned to set and execute strategic priorities. Mr. Zhuo provides a strong link between management and the Board, which promotes clear communication and enhances strategic planning and implementation of corporate strategies. Mr. Zhuo’s leadership, driven by his deep business and industry expertise, enhances the Board’s exercise of its responsibilities. In addition, this model provides enhanced efficiency and effective decision-making and clear accountability.

 

The Chairman may preside at meetings of our Board. In his absence, any other director or any member of any committee designated by the Board may chair a meeting of the Board or such committee. A director is not required to hold any shares in us by way of qualification. A director may vote with respect to any contract, proposed contract or arrangement in which he is materially interested, provided that the nature of his interest is disclosed by him at or prior to its consideration and any vote by our Board thereon. The directors may exercise all the powers of the company to borrow money and to mortgage or charge its undertaking, property and uncalled capital and to issue debentures, debenture stock, mortgages, bonds and other such securities whether outright or as security for any debt, liability or obligation of the company or of any third party.

 

The Company’s corporate governance serves to ensure that members of the Board are independent from management and that the Board adequately performs its function to ensure that the interests of the Board and management are in alignment with the interests of the shareholders. The Board has adopted Corporate Governance Guidelines to promote effective governance of the Company. The Corporate Governance Guidelines are available on our website at www.ptmarine.com under “Investors — Governance docs.”

 

On an annual basis, each director and executive officer is required to complete a Director and Officer Questionnaire. Within this questionnaire are requirements for disclosure of any transactions with the Company in which the director or executive officer, or any member of his or her immediate family, have a direct or indirect material conflict of interest.

 

Board’s Role in Risk Oversight

 

Risk is inherent in every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including strategic risks, enterprise risks, financial risks, regulatory risks, and others. Management is responsible for the day-to-day management of risks that the company faces, while our Board, as a whole and through its committees, has responsibility for the oversight of risk management, and is tasked with assuring that the long-term interests of our shareholders are being served. In its risk oversight role, our Board has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.

 

Our Board believes that establishing the right “tone at the top,” and full and open communication between management and our Board, are essential for effective risk management and oversight. Our Chairman meets regularly with other senior officers to discuss strategy and the risks we face. Senior management is available to address any questions or concerns raised by our Board on risk management-related and any other matters. Our Chairman holds strategic planning sessions with senior management to discuss strategies, key challenges, and risks and opportunities for us.

 

While our Board is ultimately responsible for risk oversight at our company, our Board committees assist our Board in fulfilling its oversight responsibilities in certain areas of risk as further set forth below. Our Board committees report to our Board on significant risks and other matters.

 

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Executive Sessions

 

The independent members of our Board meet in executive session (without the participation of executive officers or other non-independent directors) at least once a year, after a regularly scheduled Board meeting, and at any other time requested by any independent director. The secretary of the Board is responsible for calling and the independent director who has the most seniority presides over the executive sessions.

 

Committees and Meeting Attendance

 

Our Board held 1 meeting and acted in 4 times by unanimous written consent during the fiscal year ended December 31, 2019. Our Board has an Audit Committee, a Compensation Committee and a Nominating and Governance Committee. The Audit Committee held five meetings during the fiscal year ended December 31, 2019. The Compensation Committee and the Nominating and Governance Committee each held 1 meeting during the fiscal year ended December 31, 2019.

 

During 2019, each member of the Board attended or participated in 100% of the aggregate of (i) the total number of meetings of the Board (held during the period for which such person has been a director) and (ii) the total number of meetings held by all committees of the Board on which such person served (during the periods that such person served). Our Amended and Restated Memorandum and Articles of Association provide that the Chairman of our Board shall preside at all meetings of our shareholders. Each director is expected to make reasonable efforts to attend Board meetings, meetings of committees of which such director is a member and the Annual Meetings of Shareholders. All of our then sitting directors attended the 2019 Annual Meeting of Shareholders.

 

Committee Composition

 

The following table sets forth the current membership of our Audit Committee, Compensation Committee and Nominating and Governance Committee. Each committee conducts its business pursuant to a written charter approved by our Board, copies of which are available on our website at www.ptmarine.com under “Investors — Governance Docs.”

 

Audit Committee  Compensation Committee  Nominating and Governance Committee
       
XingAn Lin*  Zengbiao Zhu*  Lin Lin*
       
Zengbiao Zhu  Lin Lin  XingAn Lin
       
Lin Lin  XingAn Lin  Zengbiao Zhu

 

* Chairman of the committee.

 

Audit Committee. Messrs. XingAn Lin, Zengbiao Zhu and Lin Lin currently serve on the Audit Committee, which is chaired by Mr. XingAn Lin. Our Audit Committee falls within the definition of “audit committee” under Section 3(a)(58)(A) of the Securities Exchange Act of 1934, or the Exchange Act. In addition to meeting The NASDAQ Stock Market’s tests for director independence, directors serving on our Audit Committee must meet two basic criteria set forth in the rules promulgated by the Commission. First, Audit Committee members are barred from accepting, directly or indirectly, any consulting, advisory or other compensatory fee from us or any affiliate of us, other than in the member’s capacity as a member of our Board and any Board committee. Second, a member of our Audit Committee may not be an affiliated person of us or any subsidiary of us, apart from his or her capacity as a member of our Board and any Board committee. Our Board has determined that each member of our Audit Committee meets these independence requirements, in addition to the independence criteria established by The NASDAQ Stock Market. Our Board has determined that each Audit Committee member has sufficient knowledge in financial and auditing matters to serve on the Audit Committee. Our Board has designated Mr. XingAn Lin as an “audit committee financial expert,” as defined in Item 407(d) of Regulation S-K. Our Audit Committee assists our Board in fulfilling its oversight responsibilities with respect to risk management in the areas of financial reporting, internal controls and compliance with legal and regulatory requirements, and, in accordance with The NASDAQ Stock Market requirements, discusses policies with respect to risk assessment and risk management. Our Audit Committee’s primary duties and responsibilities include:

 

  reviewing and discussing our financial statements and financial reports with management and the independent auditor;

 

  reviewing the effectiveness and adequacy of our internal control structure and procedures for financial reporting;

 

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  reviewing management’s assessment of our disclosure controls and monitoring procedures designed to improve the quality and reliability of the disclosure of our financial results and operations;

 

  overseeing the appointment, compensation, evaluation of the qualifications and independence of our independent auditors;

 

  overseeing our compliance with legal and regulatory requirements;

 

  overseeing the adequacy of our internal controls and procedures to promote compliance with accounting standards and applicable laws and regulations;

 

  engaging advisors as necessary; and

 

  determining the funding from us that is necessary or appropriate to carry out the audit committee’s duties.

 

Compensation Committee. Messrs. Xing An Lin, Zengbiao Zhu and Lin Lin currently serve on the Compensation Committee, which is currently chaired by Mr. Zhu. Each member of the Compensation Committee is “independent” as that term is defined in the rules of the Commission and within the meaning of such term as defined under the listing standards of The NASDAQ Stock Market, a “nonemployee director” for purposes of Section 16 of the Exchange Act. Our Compensation Committee assists our Board in fulfilling its oversight responsibilities with respect to the management of risks arising from our compensation policies and programs. The Compensation Committee’s responsibilities include:

 

  reviewing and advising the Board concerning our overall compensation philosophy, policies and plans, including a review of both regional and industry compensation practices and trends;

 

  reviewing and approving corporate and personal performance goals and objectives relevant to the compensation of all executive officers, and make recommendations regarding all executive compensation;

 

  recommending establishment and terms of incentive compensation plans and equity compensation plans, and administer such plans;

 

  making and approving grants of options and other equity awards to all executive officers and directors under our compensation plans;

 

  reviewing and making recommendations to the Board regarding compensation-related matters outside the ordinary course, including but not limited to employment contracts, change-in-control provisions, severance arrangements, and material amendments thereto;

 

  reviewing and discussing with management the disclosures in our “Compensation Discussion and Analysis” and any other disclosures regarding executive compensation to be included in the our public filings or shareholder reports; and

 

  reviewing and discussing with management the risks associated with our compensation policies.

 

For more information regarding our compensation programs and processes, see the discussion below under the heading “Compensation Discussion and Analysis.”

 

Nominating and Governance Committee. Messrs. XingAn Lin, Zengbiao Zhu and Lin Lin currently serve on the Nominating and Governance Committee, which is chaired by Mr. Lin Lin. Each member of the Nominating and Governance Committee is “independent” as that term is defined in the rules of the Commission and within the meaning of such term as defined under the listing standards of The NASDAQ Stock Market.

 

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Our Nominating and Governance Committee makes recommendations to our Board regarding the nomination of candidates to stand for election as members of our Board, evaluates our Board’s performance, and provides oversight of corporate governance and ethical standards. Our Nominating and Governance Committee has the responsibility to develop and review on an ongoing basis the adequacy of, the corporate governance principles applicable to us. Our Nominating and Governance Committee assists our Board in fulfilling its oversight responsibilities with respect to the management of risks associated with Board organization, membership and structure, succession planning for our directors and executive officers, and corporate governance. For more information regarding our director nomination processes, see the discussion below under the heading “Director Nominations.”

  

Director Nominations

 

As noted above, the Board has determined that each member of the Nominating and Governance Committee (referred to in this section as the “Committee”) is independent as defined under the rules of the Commission and within the meaning of such term as defined under the listing standards of The NASDAQ Stock Market.

 

The Committee’s process for considering all candidates for election as directors, including shareholder-recommended candidates, is designed to ensure that the Committee fulfills its responsibility to recommend candidates that are properly qualified and are not serving any special interest groups, but rather the best interest of all of the shareholders.

 

In identifying candidates for membership on the Board, the Committee seeks directors with established strong professional reputations and experience in areas relevant to the strategy and operations of our business. The Committee seeks directors who possess the qualities of integrity and candor, who have strong analytical skills and who are willing to engage management and each other in a constructive and collaborative fashion. The Committee also seeks directors who have the ability and commitment to devote significant time and energy to service on the Board and its committees. Directors should have varied educational and professional experiences and backgrounds that, collectively, provide meaningful guidance and counsel to management.

 

We believe that all of our directors meet the foregoing qualifications. While we do not have a formal policy with respect to diversity, as a company, we are committed to creating and sustaining a culture of inclusion and fairness.

 

If there is a need for a new director because of an open position on the Board or because the Board has determined to increase the total number of directors, the Committee may retain a third-party search firm to locate candidates that meet the needs of the Board at that time. When a search firm is used, the firm typically provides information on a number of candidates for review and discussion by the Committee. If appropriate, the Committee chair and some or all of the members of the Committee may interview potential candidates. If in these circumstances the Committee determines that a potential candidate meets the needs of the Board and possesses the relevant qualifications, the Committee will vote to recommend to the Board the election of the candidate as a director.

 

The Committee will consider director candidates recommended by shareholders if properly submitted to the Committee. Shareholders wishing to recommend persons for consideration by the Committee as nominees for election to the Board can do so by writing to the Nominating and Governance Committee, c/o Mr. Lin Lin, Pingtan Marine Enterprise Ltd., 18-19/F, Zhongshan Building A, No. 154 Hudong Road, Fuzhou, P.R.C. 350001. Recommendations must include the proposed nominee’s name, detailed biographical data, work history, qualifications and corporate and charitable affiliations, as well as a written statement from the proposed nominee consenting to be named as a nominee and, if nominated and elected, to serve as a director. The Committee will then consider the candidate and the candidate’s qualifications using the criteria as set forth above. The Committee may discuss with the shareholder making the nomination the reasons for making the nomination and the qualifications of the candidate. The Committee may then interview the candidate and may also use the services of a search firm to provide additional information about the candidate prior to making a recommendation to the Board. The Company will provide a copy of the code to any person, free of charge, upon receipt of a request made to the Committee.

 

Code of Business Conduct and Ethics

 

We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The most recent version is available on the Investor Relations section of our website at www.ptmarine.com. The information contained on our website is not incorporated by reference into this Annual report. If we make any substantive amendments to the code or grant any waiver from a provision of the code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website, as well as via any other means required by applicable law.

 

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ITEM 11. EXECUTIVE COMPENSATION

 

Compensation Committee Report

 

The following report of the Compensation Committee shall not be deemed to be “soliciting material” or to otherwise be considered “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 (the “Securities Act”) or the Exchange Act except to the extent that the Company specifically incorporates it by reference into such filing.

 

The Compensation Committee has reviewed and discussed with management the disclosures contained in the following section entitled “Compensation Discussion and Analysis.” Based on this review and discussion, the Compensation Committee recommended to the Board that the section entitled “Compensation Discussion and Analysis” be included in this Annual Report.

 

Submitted by the Compensation Committee of the Board of Directors

 

Zengbiao Zhu
Lin Lin

XingAn Lin

 

Compensation Committee Interlocks and Insider Participation

 

Mr. XingAn Lin, Zengbiao Zhu and Lin Lin currently serve on the Compensation Committee, which is currently chaired by Mr. Zhu. No member of the Compensation Committee is one of our executive officers, and no member of the Compensation Committee had any relationships requiring disclosure by us under the Commission’s rules requiring disclosure of certain relationships and related-party transactions. None of our executive officers served as a director or a member of a Compensation Committee (or other committee serving an equivalent function) of any other entity, the executive officers of which served as one of our directors or member of the Compensation Committee during 2019.

 

Compensation Discussion and Analysis

 

Compensation Objectives

 

We operate in a highly competitive and rapidly changing industry. The key objectives of our executive compensation programs are to:

 

  Supervise and review the affairs of the Company as they relate to the compensation and benefits of executive officers and directors of the Company.

 

  Perform any other activities consistent with the Company’s Amended and Restated Memorandum and Articles of Association and governing law, as the Committee or the Board deems necessary or appropriate.

 

Our Compensation Program

 

In carrying out its objectives, the Compensation Committee of our Board reviews all components of executive and director compensation for consistency with our compensation philosophy and with the interests of our shareholders.

 

The compensation program is designed to reward each individual named executive officer for his or her contribution to the advancement of our overall performance and execution of our goals, ideas and objectives. It is designed to reward and encourage exceptional performance at the individual level in the areas of organization, creativity and responsibility while supporting our core values and ambitions. This in turn aligns the interest of our executive officers with the interests of our shareholders, and thus with our interests.

 

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Determining Executive Compensation

 

Our Compensation Committee generally reviews and approves the compensation program for executive officers annually after the close of each year. Reviewing the compensation program at such time allows the Compensation Committee to consider the overall performance of the past year and the financial and operating plans for the upcoming year in determining the compensation program for the upcoming year.

 

A named executive officer’s base salary is determined by an assessment of his sustained performance against individual job responsibilities, including, where appropriate, the impact of his performance on our business results, current salary in relation to the salary range designated for the job, experience and mastery, and potential for advancement. Although we do not engage in benchmarking, the Compensation Committee may also consider compensation levels with comparable positions in the industry to evaluate the total compensation decisions that it makes for our officers.

 

Role of Executive Officers in Determining Executive Compensation

 

The Compensation Committee determines the compensation for our chief executive officer, which is based on various factors, such as level of responsibility and contributions to our performance. Our chief executive officer recommends the compensation for our executive officers (other than the compensation of the chief executive officer) to the Compensation Committee. The Compensation Committee reviews the recommendations made by the chief executive officer and determines the compensation of the chief executive officer and the other executive officers.

 

The Committee reviews on at least an annual basis the scope of responsibilities of the Committee and the Committee’s performance of its duties.

 

Employment Agreements

 

We have entered into employment agreements with our senior executive officers, as described below. Copies of these employment agreements are filed with the Securities and Exchange Commission as exhibits to our registration statements, annual reports and other filings under applicable rules. Our Board may adjust base salaries annually to reflect increases in the cost of living, but it has not done so to date. An executive’s base salary may also be increased if the executive’s workload substantially increases as a result of our business expansion. In addition, an executive’s base salary may be correspondingly adjusted if the salaries of all of our other employees are adjusted.

 

Xinrong Zhuo. We have entered into an employment agreement with Xinrong Zhuo, our chief executive officer for a term of three years ending on August 25, 2022. Pursuant to the employment agreement, Mr. Zhuo receives annual compensation of HKD$312,000, equal to $39,936. In addition, Mr. Zhuo’s employment agreement provides for an annual bonus based on the executive’s performance and our financial performance. Annual bonuses will be determined by us in our sole discretion and will be approved by our Compensation Committee. Mr. Zhuo is eligible for participation in any standard employee benefit plan of the Company that currently exists or may be adopted by the Company in the future, but not limited to, any retirement plan, and travel holiday policy.

 

We may terminate Mr. Zhuo’s employment agreement with cause (as defined in his employment agreement) at any time with one-month written notice. If we dismiss Mr. Zhuo without cause (as defined in his employment agreement), or if he terminates his employment for good reason (as defined in his employment agreement), we will provide Mr. Zhuo with severance payment in cash in an amount equal to three months of his base salary at the then current rate. Under such circumstance, Mr. Zhuo agrees not to make any further claims for compensation for loss of office, accrued remuneration, fees, wrongful dismissal or any other claim whatsoever against the Company or its subsidiaries or the respective officers or employees of any of them. If Mr. Zhuo terminates his employment other than for good reason, he may resign upon three-month prior written notice to the Company.

 

Our employment agreement with Mr. Zhuo provides for the protection of confidential information and contains non-competition and non-solicitation provisions applicable for a term of two years following the termination of his employment.

 

LiMing Yung. We entered into an employment agreement with LiMing Yung effective December 5, 2019. Pursuant to the agreement, Mr. Yung will receive annual compensation equal to $180,000 plus an annual bonus of $20,000. During the course of Mr. Yung’s employment, the Company will reimburse him for any reasonable and necessary fees (travel expenses, accommodation expenses, hospitality expenses and other actual expenses) incurred by him during the fulfilment of his duties under the agreement upon the production of relevant receipts and/or valid documentation of expenditure. 

 

Mr. Yung’s employment can be terminated with two month’s advance written notice by either party. During the term of his employment, Mr. Yung may not engage in any other employment or business without the prior written consent of the Company or engage in any business which is in competition with the business of the Company.

 

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Summary Compensation of Named Executive Officers

 

Pursuant to the terms of the employment agreements that Messrs. Zhuo, Roy and Yung have with the Company, such executive officers are compensated by the Company for services provided to the Company and its subsidiaries. 

 

The following table sets forth information concerning cash and non-cash compensation paid to our named executive officers for 2019, 2018 and 2017, respectively.

  

Name and Position   Year   Salary
($)
    Bonus
($)
    Stock
Awards
($)
    Option Awards
($)
    All other compensation     Total  
Xinrong Zhuo   2019   $ 39,936     $     $     $     $     $ 39,936  
Chief Executive Officer   2018   $ 39,791     $     $     $     $     $ 39,791  
    2017   $ 40,037     $     $     $     $     $ 40,037  
                                                     
Roy Yu(1)   2019   $ 240,000     $ 20,000     $     $     $     $ 260,000  
Former Chief Financial Officer   2018   $ 240,000     $ 20,000     $     $     $     $ 260,000  
    2017   $ 240,000     $ 20,000     $     $     $     $ 260,000  
                                                     

LiMing Yung(2)

Chief Financial Officer

  2019   $     $     $     $     $     $  

 

(1) Mr. Yu resigned as Chief Financial Officer on December 5, 2019.
(2) LiMing Yung was appointed as Chief Financial Officer on December 5, 2019. Prior to such time he served as Senior Vice President. He was not a named executive officer in 2018 and 2017.

 

Outstanding Equity Awards at 2019 Fiscal Year End

 

As of December 31, 2019, there were no outstanding equity awards for our named executive officers.

 

Long-Term Incentive Plans

 

There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers, except that our directors and executive officers may receive stock options at the discretion of our Compensation Committee. Although we do not have a formal broad based bonus plan, we may award bonuses on case-by-case basis depending on the terms of specific of employment agreements and other arrangements based on our financial performance as well as the executive’s performance which are determined by the Board in its sole discretion. We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of our Compensation Committee.

 

As of the date of this annual report, we have no compensatory plan or arrangement with respect to any officer that results or will result in the payment of compensation in any form from the resignation, retirement or any other termination of employment of such officer’s employment with our company, from a change in control of our company or a change in such officer’s responsibilities following a change in control where the value of such compensation exceeds $60,000 per executive officer.

 

Director Compensation

 

We did not pay compensation to any non-employee directors during the fiscal year 2019.

 

Our non-employee directors did not hold any outstanding option awards as of December 31, 2019.

 

We do not pay our directors in connection with attending individual Board meetings, but we reimburse our directors for expenses incurred in connection with such meetings.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table provides information concerning beneficial ownership of our capital stock as of March 16, 2020 by:

 

  each shareholder or group of affiliated shareholders, who owns more than 5% of our outstanding capital stock;

 

  each of our named executive officers;

 

  each of our directors; and

 

  all of our directors and executive officers as a group.

 

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The following table lists the number of shares and percentage of shares beneficially owned based on 79,055,053 our ordinary shares outstanding as of March 16, 2020.

 

Beneficial ownership is determined in accordance with the rules of the SEC, and generally includes voting power and/or investment power with respect to the securities held. Ordinary shares subject to options and warrants currently exercisable or exercisable within 60 days of March 16, 2020 or issuable upon conversion of convertible securities which are currently convertible or convertible within 60 days of March 16, 2020 are deemed outstanding and beneficially owned by the person holding those options, warrants or convertible securities for purposes of computing the number of shares and percentage of shares beneficially owned by that person, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated in the footnotes to this table, and subject to applicable community property laws, the persons or entities named have sole voting and investment power with respect to all of our ordinary shares shown as beneficially owned by them. 

 

Unless otherwise indicated in the footnotes, the principal address of each of the shareholders below is c/o Pingtan Marine Enterprise Ltd., 18-19/F, Zhongshan Building A, No. 154 Hudong Road, Fuzhou, P.R.C. 350001.

  

  Ordinary Shares Beneficially Owned   Percent of Ordinary Shares Outstanding 
Directors and Named Executive Officers:        
Xinrong Zhuo(1)   45,402,355    57.4%
Lin Bao        
Zengbiao Zhu        
Roy Yu(2)        
LiMing Yung   500    0.0%
XingAn Lin        
Lin Lin        
All Officers and Directors as a Group (total of 7 persons)   45,402,855    57.4%

 

(1) Represents 15,780,000 shares held by Heroic Treasure Limited, of which Mr. Zhuo is the controlling shareholder, and 28,079,868 shares held by Mars Harvest Co., Ltd., of which Mr. Zhuo is the sole shareholder and 1,542,487 shares held by Mr. Zhuo directly.
(2) Roy Yu resigned as of December 5, 2019.

 

Change in Control

 

We are not aware of any arrangements including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the registrant.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

We have established procedures for identifying related parties and related party transactions, and for ensuring that any changes in the status of related parties are brought to the attention of the Board and management in a timely manner. For transactions with related parties in the ordinary course of business, such as customer sales, supply purchases, subcontracting or consulting services, we apply the same review and approval process as we would in the context of other commercial agreements. All such transactions with related parties are summarized and provided to our Audit Committee for review. For transactions with related parties outside the ordinary course of business, such as significant capital expenditures, capital raising activities and mergers and acquisitions, the transactions must be approved by our Audit Committee. In accordance with the Company’s Audit Committee charter, the Audit Committee reviews and approves any related-party transactions after reviewing each such transaction for potential conflicts of interests and other improprieties. The Company does not have a separate written policy for related-party transactions; however, such transactions are reported to the Audit Committee or the Company in accordance with the Company’s Code of Ethics.

 

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The following is a summary of the significant related party transactions in which we engaged during the year ended December 31, 2019:

  

From time to time, we made purchase from our related parties vendors. As of December 31, 2019, our outstanding accounts payable for Hong Fa Shipping Limited, which is controlled by our Chief Executive Officer, and Hong Long, which is controlled by an immediate family member of our Chief Executive Officer, amounted to approximately nil and $nil, respectively. 

  

Our Chief Executive Officer and Hong Long, from time to time, have provided advances to us for working capital purposes. The advances are short-term in nature, non-interest bearing, unsecured and payable on demand. By the year end December 31 2019, we owed approximately $150,000 and nil from our Chief Executive Officer and Hong Long, respectively.

 

On July 31, 2012, the Company entered into a lease for office space with Ping Lin, spouse of the Company’s CEO (the “Office Lease”). Pursuant to the Office Lease, the annual rent is RMB 84,000 (approximately $12,200) and the renewed Office Lease expires on July 31, 2021. For the year ended December 31, 2019, rent expense related to the Office Lease amounted to approximately $12,200.

 

On July 1, 2013, the Company entered into a service agreement with Hai Yi Shipping Limited that provided the Company to use a portion of the premises located in Hong Kong as office space and provided related administrative services (the “Service Agreement”). Pursuant to the Service Agreement, the monthly payments are HK$298,500 (approximately $38,000) and the Service Agreement expired on December 31, 2017. On January 1, 2018, the Service Agreement was renewed to February 28, 2018 under the same conditions. On March 1, 2018, the Company entered into a lease agreement directly with the landlord under the same conditions that expires on February 28, 2021. For the year ended December 31, 2019, rent expense and corresponding administrative service charge related to the Service Agreement amounted to approximately $457,100.

 

During the year ended December 31, 2019, we purchased fuel, fishing nets and other on-board consumables from Honglong Ocean Fishery Co., Ltd of approximately $5,021,000.

 

During the year ended December 31, 2019, we purchased vessel maintenance service from Honglong Ocean Fishery Co., Ltd and Huna Lin of approximately nil and $481,119, respectively.

 

During the year ended December 31, 2019, we purchased transportation service from Honglong Ocean Fishery Co., Ltd. of approximately $114,000.

 

In December 2015, we entered into a pledge contract with The Export Import Bank of China pursuant to which we pledged 12 fishing vessels with carrying amounts of approximately $6,960,000, as collateral to secure Hong Long’s $2,700,000 in long-term loans from the financial institution, which are due on November 21, 2021. In November 2019, we entered into another pledge contract with The Export Import Bank of China pursuant to which we pledged 11 fishing vessels with carrying amounts of approximately $19,700,000, as collateral to secure Hong Long’s $25,800,000 in short-term loans from the financial institution, which are due on November 21, 2020. In December 2019, we entered into another pledge contract with the Fujian Haixia Bank pursuant to which we pledged 1 fishing vessels with carrying amounts of approximately $6,400,000, as collateral to secure Hong Long’s $5,700,000 in short-term loans from the financial institution, which are due on December 30, 2020.

 

From time to time, our related parties provided guarantee and collateral for our bank borrowings (See Note 11 – Bank Loans to Notes to Consolidated Financial Statements).

 

Director Independence

 

In accordance with the current listing standards of The NASDAQ Stock Market, our Board, on an annual basis, affirmatively determines the independence of each director or nominee for election as a director. Our Board has determined that, three of our current directors, Zengbiao Zhu, Lin Lin, and XingAn Lin, are “independent directors” as defined under the NASDAQ Rules, constituting a majority of independent directors of our Board as required by the corporate governance rules of NASDAQ. In making these determinations, our Board has concluded that none of those members has an employment, business, family or other relationship which, in the opinion of our Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

 

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Independent Auditor’s Fees

 

The following is a summary of the fees billed to the Company by its principal independent registered accounting firm for professional services rendered for the years ended December 31, 2019 and 2018 (in US dollars):

  

   Year Ended December 31, 
   2019   2018 
Audit Fees  $680,000   $687,158 
Audit-Related Fees   -    - 
Tax Fees   -    - 
All Other Fees   -    - 
TOTAL  $680,000   $687,158 

 

“Audit Fees” consisted of the aggregate fees billed for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements included in our Forms 10-Q and for any other services that were normally provided in connection with our statutory and regulatory filings or engagements.

 

“Audit Related Fees” consisted of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and were not otherwise included in Audit Fees.

 

“Tax Fees” consisted of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. Included in such Tax Fees were fees for preparation of our tax returns and consultancy and advice on other tax planning matters.

 

“All Other Fees” consisted of the aggregate fees billed for products and services provided and not otherwise included in Audit Fees, Audit Related Fees or Tax Fees.

 

Pre-Approval Policies and Procedures

 

Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Board of Directors to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our Board of Directors pre-approved the audit and non-audit service performed by BDO China SHU LUN PAN Certified Public Accountants LLP for our consolidated financial statements as of and for the year ended December 31, 2019.

 

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PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

Financial Statements and Financial Statement Schedules

 

(1) Financial Statements:

 

Financial statements are shown in the Index to Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

(2) Financial Statement Schedules:

 

Financial statement schedules have been omitted because either they are not applicable or the required information is included in the financial statements or the notes thereto.

 

(3) Exhibits

  

Exhibit    
No.   Description
2.1   Agreement and Plan of Merger, dated as of October 24, 2012, by and between China Growth Equity Investment Ltd., China Dredging Group Co., Ltd., China Growth Dredging Sub Ltd., and Xinrong Zhuo (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K (File No. 001-35192) filed with the Securities and Exchange Commission on October 30, 2012).
     
2.2   Share Purchase Agreement, dated as of October 24, 2012, by and among China Growth Equity Investment Ltd, Merchant Supreme Co., Ltd., Prime Cheer Corporation Limited, Xinrong Zhuo, Fujian Provincial Pingtan County Ocean Fishing Group Co., Heroic Treasure Limited and Fuzhou Honglong Ocean Fishery Co., Ltd. (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K (File No. 001-35192) filed with the Securities and Exchange Commission on October 30, 2012).
     
3.1   Amended and Restated Memorandum of Association of Pingtan Marine Enterprise Ltd. filed with the Cayman Islands Registrar on February 26, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-35192) filed with the Securities and Exchange Commission on March 1, 2013).
     
3.2   Articles and Plan of Merger, filed with the Registry of Corporate Affairs of the British Virgin Islands on February 25, 2013 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K (File No. 001-35192) filed with the Securities and Exchange Commission on March 1, 2013).
     
3.3   Certificate of Merger, filed with the Registry of Corporate Affairs of the British Virgin Islands on February 25, 2013 (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K (File No. 001-35192) filed with the Securities and Exchange Commission on March 1, 2013).
     
3.4   Amended and Restated Memorandum of Association of China Dredging Group Co., Ltd. (incorporated by reference to Exhibit 1.1 to China Dredging Group Co., Ltd.’s Annual Report on Form 20-F (File No. 000-53465) filed with the Securities and Exchange Commission on November 2, 2010).
     
3.5   Articles of Association of China Dredging Group Co., Ltd. (incorporated by reference to Exhibit 1.2 to China Dredging Group Co., Ltd.’s Annual Report on Form 20-F (File No. 000-53465) filed with the Securities and Exchange Commission on November 2, 2010).
     
4.1   Specimen Ordinary Share (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 001-35192) filed with the Securities and Exchange Commission on March 1, 2013).
     
4.2   Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.*
     
10.1   Master Agreement by and between Pingtan Marine Enterprise Ltd. and Fuzhou Honglong Ocean Fishery Co., Ltd., dated June 19, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-35192) filed with the Securities and Exchange Commission on June 25, 2013).
     
10.2   Promissory Note issued by Pingtan Marine Enterprise Ltd., dated June 19, 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 001-35192) filed with the Securities and Exchange Commission on June 25, 2013).
     
10.3   Share Purchase Agreement by and between Pingtan Marine Enterprise Ltd. and Fuzhou Honglong Ocean Fishery Co., Ltd., dated December 4, 2013 (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K (File No. 001-35192) filed with Securities and Exchange Commission on March 14, 2018).
     
10.4   Employment Contract between Pingtan Marine Enterprise Ltd. and Roy Yu, dated April 18, 2013. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-35192) filed with the Securities and Exchange Commission on April 19, 2013).**
     
10.5   Employment Agreement between Pingtan Marine Enterprise Ltd. and Xinrong Zhuo, dated August 26, 2016. (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K (File No. 001-35192) filed with the Securities and Exchange Commission on March 14, 2018)**

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10.6   English translation of the Investment Agreement dated February 9, 2015, by and between Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd, China Agriculture Industry Development Fund Co., Ltd, Honghong Zhuo and Xinrong Zhuo (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-35192) filed with the Securities and Exchange Commission on February 13, 2015)
     
10.7   English translation of the Equity Transfer Agreement dated February 9, 2015, by and between Honghong Zhuo, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd and Fujian Heyue Marine Fishing Development Co., Ltd. (incorporated by reference to Exhibit 10.2(a) to the Company’s Current Report on Form 8-K (File No. 001-35192) filed with the Securities and Exchange Commission on February 13, 2015)
     
10.8   English translation of the Equity Transfer Agreement dated February 9, 2015, by and between Zhiyan Lin, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd and Fujian Heyue Marine Fishing Development Co., Ltd (incorporated by reference to Exhibit 10.2(b) to the Company’s Current Report on Form 8-K (File No. 001-35192) filed with the Securities and Exchange Commission on February 13, 2015)
     
10.9   English translation of the Agreement of Termination dated February 9, 2015, by and between Honghong Zhuo, Zhiyan Lin, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd and Pingtan Guansheng Ocean Fishing Co., Ltd. (incorporated by reference to Exhibit 10.3