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PINGTAN MARINE ENTERPRISE LTD. - 10-K/A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION(Edgar Glimpses Via Acquire Media NewsEdge) References to the "Company," "us" or "we" refer to Pingtan Marine Enterprise Ltd. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the condensed 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. Special Note Regarding Forward-Looking Statements All statements other than statements of historical fact included in this Form 10-K/A including, without limitation, statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's 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/A, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to us or the Company's 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, the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the SEC. All subsequent written or oral forward-looking statements attributable to us or persons acting on the Company's behalf are qualified in their entirety by this paragraph. Overview We are a marine enterprises group primarily engaging in ocean fishing through our wholly-owned PRC operating subsidiary or VIE, Fujian Provincial Pingtan County Ocean Fishing Group Co., Ltd., or Pingtan Fishing. We harvest a variety of fish species with many of our-owned or licensed vessels operating within the Indian Exclusive Economic Zone and the Arafura Sea of Indonesia. We provide high quality seafood to a diverse group of customers including distributors, restaurant owners and exporters in the PRC. In June 2013, we expanded our fleet from 40 to 86 through a purchase of 46 fishing trawlers from a related party for a total consideration of $410.1 million. We began operating the vessels in the third quarter of 2013 and since then we have been entitled to their net profits from there operation. These vessels are fully licensed to fish in Indonesian waters. Each vessel carries crew of 10 to 15 persons. These vessels have resulted in additional carrying capacity of approximately 45,000 to 50,000 tons for us. In September 2013, we further increased our fleet to 106 vessels with the acquisition of 20 newly-built fishing trawlers, which were initially ordered in September 2012. These vessels have an expected run-in period of 3 - 6 months, during which each is placed into the sea for testing prior to full operation. These vessels are fully licensed to fish in Indian and Indonesian waters. At full operation, each vessel is capable of harvesting 900 to 1,000 tons of fish. We expect that the expansions of our fleet will greatly increase our fish harvest volume and revenue. Subsequent to our fleet expansions, in September 2013, the Ministry of Agriculture of the People's Republic of China ("MOA") issued a notification that it would suspend accepting shipbuilding applications for tuna harvesting vessels, squid harvesting vessels, Pacific saury harvesting vessels, trawlers operating on international waters, seine on international waters, and trawlers operating on the Arafura Sea, Indonesia. We believe the announcement is a positive indicator for long-term stability and balance in China's fishing industry. We believe that this has helped to ensure our fishing productivity in international waters, while also serving as a major barrier to entry for competitors in our industry and strengthening our competitive position in the markets. On December 4, 2013, in connection with the sale of CDGC to Hong Long, we acquired 25-year operating license rights in connection with the lease of 20 fishing vessels for the appraised fair market value of approximately $216.1 million, whereby we are entitled to 100% of the operations and net profits (losses) from the vessels for the term of the lease. The 20 vessels were leased from Hong Long, a related party under common control. Accordingly, the transaction between us and Hong Long was accounted as a common control transaction pursuant to ASC 805-50 and it related subsections. Pursuant to ASC 805-50, we recorded the value of $26,435,403 as the cost of the vessels which was the net historical carrying amount recorded in Hong Long's books at the date of sale of CDGC to Hong Long. Pursuant to our analysis of ASB 840-10-25, we determined that the lease term is over 75% of the estimated economic life of the vessels and the present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90 percent of the excess of the fair value of the leased property from Hong Long at lease inception. Additionally pursuant to ASB 840-10-25-26, leases between related parties shall be classified in accordance with the lease classification criteria of ASB 840-25. Accordingly, we treated the lease for the 20 vessels as a capital lease and recorded $26,435,403 in property and equipment which will be depreciated over the lease term. As of December 31, 2013, we owned 104 trawlers and 2 drifter vessels and have a leased operating license rights to 20 drifter vessels (see details above). Our fleet has an average useful life of approximately 17 years. These vessels are fully licensed to fish in Indonesian or Indian waters. 114 of these vessels are operating in Arafura Sea in Indonesia, and the remaining 12 vessels are operating in the Bay of Bengal in India. Currently we catch nearly 30 different species of fish including ribbon fish, Indian white shrimp, croaker fish, pomfret, Spanish mackerel, conger eel, squid and red snapper. All of our catch is shipped back to China. Our fishing vessels transport frozen catch to a cold storage warehouse at nearby onshore fishing bases. We then arrange periodic charted transportation ships to deliver frozen stocks to its eight cold storage warehouses located in one of China's largest seafood trading centers, Mawei Seafood Market in Fujian Province. 32 We derive our revenue primarily from the sales of frozen seafood products. We sell our products directly to customers including distributors, restaurant owners and exporters, and most of our customers have long-term and trustworthy cooperative relationship with us. Our existing customers also introduce new customers to us from time to time. Our operating results are subject to seasonal variations. Harvest volume is the highest in the fourth quarter of the year and harvest volumes in the second and third quarters are relatively low due to the spawn season of certain fish species, including ribbon fish, cuttlefish, butterfish, and calamari. Based on past experiences, demand for seafood products is the highest from December to January during Chinese New Year. We believe that our profitability and growth are dependent on our ability to expand the customer base. With the expansions of operating capacity and expected increases in harvest volume in the coming years, we will continue to develop new customers from existing and new territories in China. Revenue by Territory Our customers are from the following PRC territories: For the Years Ended December 31, 2013 2012 2011 Guangdong Province 46 % 55 % 45 % Fujian Province 26 % 27 % 39 % Zhejiang Province 17 % 11 % 9 % Shandong Province 4 % 4 % 4 % Liaoning Province 2 % 2 % 2 % Other areas 5 % 1 % 1 % Total 100 % 100 % 100 % Discontinued operations In December 2013, we completed the sale of the China Dredging Group ("CDGC") business, which has been reported as discontinued operations for 2013 and 2012, to Hong Long, a related party owned by the wife of our Chairman and CEO, Mr. Xinrong Zhuo. The consideration received for the sale of CDGC consisted of (i) the offset of our current $155.2 million 4% promissory note due to Hong Long; (ii) the assignment of the 25-year exclusive operating license rights for 20 new fishing vessels to us, with a fair market value of $216.1 million, and (iii) the offset of PME's current accounts payable due to CDGC with amount $172.5 million. In connection with these 20 fishing vessels, Hong Long received subsidies from China's central government budget in 2012, and a recent notification from the Government prohibits the sale or transfer of ownership for a period of 10 years for fishing vessels that have received such subsidies. At the end of the 25-year exclusive operating lease period, which is the estimated operating life of the vessels, the vessels will be returned to Hong Long, since the ownership of such vessels never transferred to the Company. The Board, excluding Mr. Zhuo and our Senior Officer, Mr. Bin Lin, retained our independent financial advisor to provide a fairness opinion on the transaction proposed by Mr. Zhuo. Subsequent to the receipt of the fairness opinion from our independent financial advisor on October 28, 2013, the Board would evaluate potential alternative proposals received during a 30 day period. After receiving no alternative proposals, on December 3, 2013, the Board, excluding Mr. Zhuo and Mr. Lin approved moving forward with the transaction and executed and closed the Share Purchase Agreement. The total consideration of the transaction is approximately $543.8 million with a gain on sale of $117.5 million which was recorded as an adjustment to our equity as it was sold to a related party under common control. Significant Factors Affecting Our Results of Operations ¨ 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 governments. Our inability to obtain, or loss or denial of extensions, to any of its applicable licenses or permits could hamper our ability to generate revenues from its operations. 33 ¨ Resource & Environmental Factors: Our fishing expeditions are based in India and Indonesia. Any earthquake, tsunami, adverse weather or oceanic conditions or other calamities in such areas may result in disruption to our operations and could adversely affect our sales. Adverse weather conditions such as storms, cyclones and typhoons or cataclysmic events may also decrease the volume of fish catches or may even hamper our operations. Our fishing volumes may also be adversely affected by major climatic disruptions such as El Nino, which in the past has caused significant decreases in seafood catch worldwide. Besides weather patterns, other unpredictable factors, such as fish migration, may also have impact our harvest volume. ¨ Fluctuation on Fuel Prices: Our operations may be adversely affected by fluctuations in fuel prices. Changes in fuel prices may ultimately 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 fishing business in the Arafura Sea in Indonesia and the Bay of Bengal in India. Competition within our dedicated fishing areas is not significant as the region is not overfished and regulated by the government, which limits the number of vessels that are allowed to fish in the territories. Competition in the 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 been able to sell our catch at market prices and such market prices were quite stable during 2010 and 2011, but increased significantly during 2012 and 2013. ¨ Fishing Licenses: Each of our fishing vessels requires an approval from the Ministry of Agriculture of the People's Republic of China to carry out ocean fishing projects in foreign territories. These approvals are valid for a period of three to twelve months, and are awarded to us at no cost. We apply for the renewal of the approval prior to expiration to avoid interruptions of our fishing vessels' operations. Each of our fishing vessels operating in Indonesian waters requires a fishing license granted by the authority in Indonesia. Indonesian fishing licenses remain effective for a period of twelve months and we apply for renewal upon expiration. We record cost of Indonesian fishing licenses in prepaid expenses and amortize the cost over the effective period of the licenses. We operate 20 of our fishing vessels under 25-year exclusive operating license rights from our affiliate Hong Long, and the fishing licenses for such vessels are held in the name of Hong Long and are therefore renewed by Hong Long. If Hong Long for any reason fails to renew such licenses, it may have a negative impact on our business. PRINCIPAL INCOME STATEMENT COMPONENTS 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 China, 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 receipt in advance. Cost of Sales Our cost of sales primarily consists of fuel costs, freight, direct labor costs, depreciation, maintenance fees and other overhead costs. Fuel costs generally accounted for the majority of our cost of sales. Gross Profit Our gross profit is affected primarily by changes in production cost. Fuel, freight and labor costs together account for about 83% of cost of sales for the year ended December 31, 2013. The fluctuation of fuel price, freight price and exchange rates may significantly affect the Company's cost level and gross profit. Selling, General and Administrative Expenses Our selling, general and administrative expenses include salaries and staff welfare, professional service fees, traveling expenses for our sales personnel, insurance and other miscellaneous expenses related to our administrative corporate activities. 34 Our sales activities are conducted through direct selling by our internal sales staff. Because of the strong demand for our products and services, we do not have to aggressively market and distribute our products, thus our selling expenses have been relatively small as a percentage of our revenue. We anticipate that our selling, general and administrative expenses will increase with the anticipated growth of our business and continued upgrades to our information technology infrastructure. We expect that our selling, general and administrative expenses will also increase as a result of compliance, investor-relations and other expenses associated with being a publicly listed company. Other Income and Expenses Other income and expenses mainly include interest income from bank deposits, interest expenses of short term and long term borrowings, foreign exchange differences and subsidy income. Income Tax Under the current laws of the Cayman Islands and British Virgin Islands, we are not subject to any income or capital gains tax, and dividend payments we make are not subject to any withholding tax in the Cayman Islands or British Virgin Islands. Under the current laws of Hong Kong, we are not subject to any income or capital gains tax and dividend payments and are not subject to any withholding tax in Hong Kong. The Company's VIE, Pingtan Fishing, is a qualified ocean fishing enterprise certified by the Ministry of Agriculture of the PRC. The qualification is renewed on April 1 each year. Pingtan Fishing is exempt from income tax derived from its ocean fishing operations in the periods it processes a valid Ocean Fishing Enterprise Qualification Certificate issued by the Ministry of Agriculture of the PRC. In addition, Pingtan Fishing is not subject to foreign income taxes for its operations in India and Indonesia Exclusive Economic Zones. Other Comprehensive Income Our comprehensive income consists of net income and foreign currency translation adjustments. We translate our assets and liabilities of foreign operations at the rate of exchange in effect on the balance sheet date. We translate income and expenses at the average rate of exchange prevailing during the period. The year-end rate as of December 31, 2013 for RMB into one U.S. dollar was 6.0537. Average rates for the years ended December 31, 2013, 2012 and 2011 were 6.1412, 6.3116 and 6.4640, respectively. The related translation adjustments are reflected in "Accumulated other comprehensive income" in the equity section of our consolidated balance sheets. Foreign currency gains and losses resulting from transactions are included in earnings. As of December 31, 2013 and 2012, the accumulated foreign currency translation gain was approximately $4.5 million and $22.2 million, respectively. Earnings per Ordinary Share Earnings per ordinary share (basic and diluted) is based on the net income divided by the weighted average number of ordinary shares outstanding during each period. Ordinary share equivalents are not included in the calculation of diluted earnings per ordinary share if their effect would be anti-dilutive.RESULTS OF CONTINUING OPERATIONS YEAR ENDED DECEMBER 31, 2013 COMPARED TO YEAR ENDED DECEMBER 31, 2012 Revenue Revenue is derived from sales of aquatic products. Revenue in 2013 increased by 81.8% to $122.7 million from $67.5 million in 2012, primarily due to increase in sales volume as a result of the addition of 66 fishing vessels in June and September 2013, most of which began operating in the third quarter of the year, and increased unit selling prices. 35 Our top 6 species of fish sold including ribbon fish, Indian white shrimp, croaker fish, pomfret, red fish and threadfin together accounted for about 82% of revenue for 2013. The table below sets forth more detail regarding the revenue breakdown by different species of fish: (Amounts in thousands, except for percentage and per unit data) For the Years Ended December 31, 2013 2012 Average % of Average % of Revenue Volume(KG) price Revenue Revenue Volume(KG) price Revenue Ribbon fish $ 47,169 19,249,641 2.45 38.5 % $ 29,163 15,229,701 1.91 43.2 % Indian white shrimp 20,859 3,041,471 6.86 17.0 % 9,659 1,275,801 7.57 14.3 % Croaker fish 15,242 6,817,575 2.24 12.4 % 8,306 4,740,661 1.75 12.3 % Pomfret 10,022 4,249,796 2.36 8.2 % 2,283 1,318,409 1.73 3.4 % Red fish 3,575 795,835 4.49 2.9 % 726 221,250 3.28 1.1 % Threadfin 3,379 1,025,272 3.30 2.8 % 596 205,560 2.90 0.9 % Others 22,422 7,991,721 2.81 18.2 % 16,728 6,223,249 2.69 24.8 % Total $ 122,668 43,171,311 2.84 100.0 % $ 67,461 29,214,631 2.31 100.0 % Cost of Sales and Gross Margin The following tables set forth our cost of sales and gross profit, both in amounts and as a percentage of revenue for the years ended December 31, 2013 and 2012: (Amounts in thousands, except for percentage) For the Years Ended December 31 Percentage 2013 (As restated) 2012 (As restated) Change % of % of US$ Revenue US$ Revenue % Revenue $ 122,668 100.0 % $ 67,461 100.0 % 81.8 % Cost of sales 74,983 61.1 % 41,570 61.6 % 80.4 % Gross profit $ 47,685 38.9 % $ 25,891 38.4 % 85.0 % For the Years Ended December 31, 2013 (As restated) 2012 (As restated) US$ % of COS % of Revenue US$ % of COS % of Revenue Fuel cost $ 46,562 62.1 % 38.0 % $ 28,113 67.6 % 41.7 % Freight 9,055 12.1 % 7.4 % 4,893 11.8 % 7.2 % Labor cost 6,694 8.9 % 5.4 % 3,072 7.4 % 4.6 % Maintenance fee 3,761 5.0 % 3.0 % 2,675 6.4 % 4.0 % Spare parts 3,759 5.0 % 3.0 % 1,189 2.9 % 1.8 % Depreciation 2,653 3.6 % 2.2 % 135 0.4 % 0.1 % License fee 1,565 2.1 % 1.3 % 1,059 2.5 % 1.6 % Service fee 934 1.2 % 0.8 % 434 1.0 % 0.6 %Total cost of sales $ 74,983 100.0 % 61.1 % $ 41,570 100.0 % 61.6 % Cost of sales for the year ended December 31, 2013 was $75.0 million, representing an increase of 80.4% as compared to $41.6 million in the same period of 2012. The increase was principally due to increase in fuel cost for our fishing vessels as a result of the fleet expansion. Freight, labor cost and maintenance fee also increased which was in line with the increase in revenue. Gross margin increased slightly to 38.9% in the year ended December 31, 2013 from 38.4% in the same period of 2012, primarily due to increase in unit selling price and change in products mix. Gross profit for the year ended December 31, 2013 was $47.7 million, representing an increase of 84.2% as compared to $25.9 million in the same period of 2012 as a result of business expansion. 36 Selling, General and Administrative Expenses The following table sets forth selling, general and administrative (SG&A) expenses, and income from operations both in amounts and as a percentage of revenue for the years ended December 31, 2013 and 2012: (Amounts in thousands, except for percentage) For the Years Ended December 31, Percentage 2013 (As restated) 2012 (As restated) Change % of % of US$ Revenue US$ Revenue % Gross profit $ 47,685 38.9 % $ 25,891 38.4 % 85.0 % Operating Expenses: Selling expenses (1,618 ) (1.3 )% (648 ) (1.0 )% 149.8 % General & administrative expenses Legal and professional fees (1,541 ) (1.3 )% (364 ) (0.5 )% 323.4 % Salaries and staff welfare (637 ) (0.5 )% (179) (0.3 )% 255.4 % Service fee (231 ) (0.2 )% - - - Others (783 ) (0.6 )% 80 0.1 % (1079.6 )% Total G&A expenses (3,192 ) (2.6 )% (463 ) (0.7 )% 588.6 % Total SG&A expenses (4,810 ) (3.9 )% (1,111 ) (1.7 )% 332.8 % Income from operations $ 42,875 35.0 % $ 24,780 36.7 % 74.0 % Total SG&A expenses increased by 332.8% to $4.8 million in the year ended December 31, 2013 from $1.1 million in the same period of 2012. The increase in SG&A expenses was primarily attributable to higher selling expenses including storage and transportation fees, and salaries and staff welfare as a result of our expanded scale of operations, as well as higher administrative costs associated with the company being a publicly listed company. As a percentage of revenue, SG&A expenses were 3.9% in the year ended December 31, 2013, compared to 1.7% in the same period of 2012. Other Income and Expenses Net other income in the year ended December 31, 2013 was $4.3 million, as compared to net other expenses of $0.5 million in the same period of 2012. Included in other income and expenses, there was government subsidy of $7.3 million and $2.4 million in the years ended December 31, 2013 and 2012, respectively. Excluding the impact of subsidy income, net other expenses increased by $0.2 million, mainly due to an increase in interest expenses of $425,000 offset by an increase on foreign exchange gain of $150,000. Income Tax We are exempted from income tax derived from our ocean fishing operations. Net Income from continuing operations Net income from continuing operations for the year ended December 31, 2013 was $47.1 million, or 38.4% of revenue, compared to $24.3 million, or 36.0% of revenue, in the same period of 2012. (Amounts in thousands, except for percentage) For the Years Ended December 31, 2013 (As restated) 2012 (As restated) Revenue Net income Net margin Revenue Net income Net margin $ 122,668 $ 47,136 38.4 % $ 67,461 $ 24,280 36.0 % Foreign Currency Translation Gain During the year ended December 31, 2013, the RMB rose against the US dollar, and we recognized a foreign currency translation gain of $8.2 million. 37 YEAR ENDED DECEMBER 31, 2012 COMPARED TO YEAR ENDED DECEMBER 31, 2011 Revenue Revenue from continuing operations is derived from sales of aquatic products and fishing vessels rental. In the year ended December 31, 2011, revenue from sales of aquatic products and fishing vessels rental were $24.2 million and $1.4 million, respectively. Revenue in 2012 increased by 163.5% to $67.5 million from $25.6 million in 2011, primarily due to increase in sales of aquatic products, which accounted for 100% and 94.6% of the total revenue in the years ended December 31, 2012 and 2011, respectively. In the year ended December 31, 2012, revenue derived from sales of aquatic products increased by 178.6% to $67.5 million from $24.2 million in the same period of 2011, primarily due to increase in sales volume as a result of the addition of 20 fishing vessels in 2012 and increased unit selling prices. Our top 6 species of fish sold including ribbon fish, Indian white shrimp, croaker fish, squid, conger eel and pomfret together accounted for about 83% of revenue for 2012. The table below sets forth more detail regarding the revenue breakdown by different species of fish: (Amounts in thousands, except for percentage and per unit data) For the Years Ended December 31, 2012 2011 Average % of Average % of Revenue Volume(KG) price Revenue Revenue Volume(KG) price Revenue Ribbon fish $ 29,163 15,229,701 1.91 43.2 % $ 12,800 9,522,550 1.34 50 % Indian white shrimp 9,659 1,275,801 7.57 14.3 % 9 1,400 6.43 - Croaker fish 8,306 4,740,661 1.75 12.3 % 3,014 1,958,600 1.54 11.8 % Squid 3,436 1,192,555 2.88 5.1 % 1,532 558,000 2.75 6.0 % Conger eel 2,928 830,115 3.53 4.3 % 1,287 493,500 2.61 5.0 % Pomfret 2,283 1,318,409 1.73 3.4 % 417 286,000 1.46 1.6 % Others 11,686 4,627,389 2.53 17.4 % 5,157 2,279,371 2.26 20.2 % Total $ 67,461 29,214,631 2.31 100.0 % $ 24,216 15,099,421 1.60 94.6 % Cost of Sales and Gross Margin The following tables set forth our cost of sales and gross profit, both in amounts and as a percentage of revenue for the years ended December 31, 2012 and 2011: (Amounts in thousands, except for percentage) For the Years Ended December 31, Percentage 2012 (As restated) 2011 Change % of % of US$ Revenue US$ Revenue % Revenue $ 67,461 100.0 % $ 25,601 100.0 % 163.5 % Cost of sales 41,570 61.6 % 14,601 57.0 % 184.7 % Gross profit $ 25,891 38.4 % $ 11,000 43.0 % 135.4 % For the Years Ended December 31, 2012 (As restated) 2011 US$ % of COS % of Revenue US$ % of COS % of Revenue Fuel cost $ 28,113 67.6 % 41.7 % $ 8,564 58.7 % 33.4 % Freight 4,893 11.8 % 7.2 % 2,017 13.8 % 7.9 % Labor cost 3,072 7.4 % 4.6 % 1,008 6.9 % 3.9 % Maintenance fee 2,675 6.4 % 4.0 % 1,604 11.0 % 6.3 % Spare parts 1,189 2.9 % 1.8 % 770 5.3 % 3.0 % License fee 1,059 2.5 % 1.6 % 122 0.8 % 0.5 % Depreciation 135 0.4 % 0.1 % 438 3.0 % 1.7 % Service fee 434 1.0 % 0.6 % 78 0.5 % 0.3 %Total cost of sales $ 41,570 100.0 % 61.6 % $ 14,601 100.0 % 57.0 % 38 Cost of sales for the year ended December 31, 2012 was $41.6 million, representing an increase of 184.7% as compared to $14.6 million in the same period of 2011. The increase was principally due to increase in fuel cost for our fishing vessels as a result of the fleet expansion. Freight, labor cost and maintenance fee also increased which was in line with the increase in revenue. Gross profit for the year ended December 31, 2012 was $25.9 million, representing an increase of 135.4% as compared to $11.0 million in the same period of 2011 as a result of business expansion. Gross margin decreased to 38.4% in the year ended December 31, 2012 from 43.0% in the same period of 2011, primarily due to the following reasons: (i) 20 newly built vessels were put into operation in succession during 2012. In the initial stage, the equipment and machines of the new vessels also require a certain run-in time to reach design-capacity. Therefore, certain part of the cost incurred since April 2012 was mainly due to the experimental operationof the new vessels; and (ii) the harvest volume of 2012 in Indian was approximately 4,424 tons, approximately 7,183 tons lower than that of 2011, due to an unusually slack season for fishing in India during 2012. Therefore, the much lower harvest volume in 2012 caused the gross margin decrease. Selling, General and Administrative Expenses The following table sets forth selling, general and administrative (SG&A) expenses, and income from operations both in amounts and as a percentage of revenue for the years ended December 31, 2012 and 2011: (Amounts in thousands, except for percentage) For the Years Ended December 31, Percentage 2012 (As restated) 2011 Change % of % of US$ Revenue US$ Revenue % Gross profit $ 25,891 38.4 % $ 11,000 43.0 % 135.4 % Operating Expenses: Selling expenses (648 ) (1.0 )% (384 ) (1.5 )% 68.9 % General & administrative expenses Legal and professional fees (364 ) (0.5 )% (6 ) - 5966.7 % Salaries and staff welfare (179 ) (0.3 )% (23) (0.1 )% 696.2 % Others 80 0.1 % (222 ) (0.9 )% (135.8 )% Total G&A expenses (463 ) (0.7 )% (251 ) (1.0 )% 84.4 % Total SG&A expenses (1,111 ) (1.7 )% (635 ) (2.5 )% 75.1 % Income from operations $ 24,780 36.7 % $ 10,365 (40.5 )% 139.1 % Total SG&A expenses increased by 75.1% to $1.1 million in the year ended December 31, 2012 from $0.6 million in the same period of 2011. The increase in SG&A expenses was primarily attributable to professional fees incurred for business combination and public listing, as well as our expanded scale of operations. As a percentage of revenue, SG&A expenses were 1.7% in the year ended December 31, 2012, compared to 2.5% in the same period of 2011. Other Income and Expenses Net other expenses in the year ended December 31, 2012 was $0.5 million, as compared to net other income of $0.1 million in the same period of 2011. Included in other income and expenses, there was government subsidy of $2.4 million and $0.8 million in the years ended December 31, 2012 and 2011, respectively. Excluding the impact of subsidy income, net other expenses increased by $2.1 million, mainly due to increase in interest expenses of $2.1 million. Income Tax We are exempted from income tax derived from our ocean fishing operations. 39 Net Income from continuing operations Net income from continuing operations for the year ended December 31, 2012 was $24.3 million, or 35.1% of revenue, compared to $10.4 million, or 40.8% of revenue, in the same period of 2011. (Amounts in thousands, except for percentage) For the Years Ended December 31, 2012 (As restated) 2011 Revenue Net income Net margin Revenue Net income Net margin $ 67,461 $ 24,280 36.0 % $ 25,601 $ 10,440 40.8 % Foreign Currency Translation Gain During the year ended December 31, 2012, the RMB rose against the US dollar, and we recognized a foreign currency translation gain of $4.1 million. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2013, we had total cash of $8.2 million, an increase of $1.3 million from cash of continuing operations at December 31, 2012. Approximately $7.9 million is held in our Chinese subsidiary and VIEs. The company has no plans to repatriate these funds. Our current assets totaled $30.0 million as of December 31, 2013 while our current liabilities totaled $49.9 million. We have financed our activities to date primarily through cash generated from operating activities and loans from the banks and related parties, private placementsof our securities. Working capital deficit In spite of net working capital deficit of $20.0 million as of December 31, 2013, we believe that our operating cash flows and available capital will be sufficient to maintain our operations for at least the next 12 months. We expect our operations in 2014 to have increased profitability based on the expanded fleet and operating capacity. We believe that our operating cash inflows from the increased operations will be sufficient to meet the bank interest or principal repayments and other current liabilities as when theyfall due. As of December 31, 2013, we had undrawn borrowing facilities of approximately $23 million available for future operating activities and to settle capital commitments. We have long-term and trustworthy cooperative relationship with major commercial banks in Fujian Province and based on our experience, we did not encounter difficulties in obtaining new bank loans. In additional to bank loans and private placements, we may also consider alternative means of debt and equity financing, to support our future expansions. As part of our efforts to expand our fishing capacity, we are continuing to actively explore opportunities to expand our fleet, and in June 2013, we expanded our fishing fleet from 40 to 86 vessels through a purchase transaction of 46 fishing trawlers from a related party for a total consideration of $410.1 million. We have financed the transaction through i) $200.0 million cash generated from operating activities; ii) the relief of $54.9 million outstanding amount of related party debt to be repaid by Fuzhou Honglong Ocean Fishery Co., Ltd., or "Hong Long", the seller of vessels; and iii) an amount of $155.2 million in accordance with the terms of a promissory note issued by the Company to Hong Long. The total transaction value equals the fair market value of such fishing vessels as determined by management. In September 2013, we further increased our fleet to 106 vessels with the addition of 20 newly-built fishing trawlers. We have financed the vessel production cost of $26.1 million through cash generated from operating activities and financing activities. As of December 31, 2013, we had approximately $8.2 million in cash, an increase of $1.3 million from $6.9 million of cash from continuing operation at December 31, 2012. The following table summarizes our cash flows for each of the periods indicated: 40 (Amounts in thousands) clarify the portions from continuing operations in each of the titles of the following lines For the Years Ended December 31, 2013 (As restated) 2012 (As restated) Net cash provided by operating activities $ 52,267 $ 45,249 Net cash used in investing activities (336,513 ) (77,351 ) Net cash provided by financing activities 31,148 37,151 Net cash provided by discontinued operations 86,299 50,943 Effect of exchange rate on cash and cash equivalents 3,033 1,727 Cash and cash equivalents at beginning of year (1) 171,923 114,204 Cash and cash equivalents at end of year (2) $ 8,157 $ 171,923 (1) Includes cash and cash equivalents of discontinued operations of $165.1 million and $112.4 million at the beginning of the year in 2013 and 2012, respectively. (2) Includes cash and cash equivalents of discontinued operations of $nil and $165.1 million as of December 31, 2013 and 2012, respectively. Operating activities For the year ended December 31, 2013, cash provided by operating activities totaled $52.3 million compared to $45.2 million in the same period of 2012. This was primarily attributable to i) $47.13 million of earnings in 2013; ii) a $16.0 million increase in accounts payable due to the expansion of our fleet and growth of operations; and iii) a $12.7 million decrease in receipt in advance from customers as a result of delivery of our products. Investing activities For the year ended December 31, 2013, we had a net cash outflow of $336.5 million from investing activities. This was primarily attributable to: i) $257.7 million purchases of property, plant and equipment related to the \acquisition of new fishing vessels as a part of our planned expansion; ii) a decrease in cash of $84.9 million due to the sale of subsidiary; offset by $8.3 million in proceeds from deferred income. Financing activities For the year ended December 31, 2013, we had a net cash inflow of $31.1 million from financing activities which was primarily driven by: i) $99.5 million proceeds from term loans, ii) $71.9 million outflow for the repayments of loans and iii) $3.6 million proceeds received in recapitalization. Off-Balance Sheet Arrangements Guarantees and collateral provided to related parties In October 2012, Pingtan Fishing entered into two pledge contracts with China Minsheng Banking Corp., Ltd. Pursuant to the terms of the pledge contracts, Pingtan Fishing assigned 10 fishing vessels, as collateral to secure Hong Long's long-term loans from the financial institution in amount of approximately $10.8 million, which are due on April 18, 2015. In addition to the collateral provided to Hong Long, Pingtan Fishing also guaranteed the repayment of $46.3 million for Hong Long's long-term loans. In August and September 2013, Pingtan Fishing entered into two pledge contracts with China Minsheng Banking Corp., Ltd. Pursuant to the terms of the pledge contracts, Pingtan Fishing assigned 12 fishing vessels, as collateral to provide maximum guarantees of $9.9 million to Hong Long's term loans, which are dueon June 25, 2014. In December 2013, Pingtan Fishing entered into a guarantee agreement with Ping An Bank Co., Ltd. Pursuant to the terms of the guarantee agreement, Pingtan Fishing provide maximum guarantees approximately of $8.3 million to Hong Long's credit line in amount of $16.5 million which is due on December 23, 2014. As of the date of this Form 10-K, Pingtan Fishing did not receive any demand from the lender that collateralized properties are intended to be disposed of or to make any payments under the guarantee. On January 6, 2014, the Company borrowed a short term loan from Industrial & Commercial Bank of China, Fuzhou Dongjiekou Branch, in amount of $1,849,120. The loan is due on March 25, 2014. On January 20 and 21, 2014, the Company borrowed short term loans from Industrial & Commercial Bank of China, Fuzhou Dongjiekou Branch, in amounts of $1,717,040 and $3,501,660 respectively. These loans are due on April 15 and20, 2014 respectively. On Juanuary 15, 2014, the Company borrowed a short term loan from The Export-Import Bank of China, Fujian Branch, in amount of approximately $3,303,765. The loan is due on November 27, 2023. Pursuant to the Shares Purchase Agreement ("the Agreement") dated December 4, 2013, where the Company exited and sold China Dredging Group to Hong Long ("the buyer") (Please see Note 2 of consolidated financial statements included in this report), the Company is required to indemnify the buyer and the same indemnification responsibility applies to the buyer for the events arising out of any breach of the Agreement or the memorandum of agreement in relation to the sale, purchase and delivery of the vessels for two years until December 3, 2015 and will be liable for the full amount of damages that exceed $1,000,000. The amount of damage shall be the amount finally determined by a court of competent jurisdiction or appropriate governmental administrative agency, or the amount agreed to upon settlement in accordance with the terms of the Agreement. Contractual Obligations The Company has employment agreements with certain employees that provided severance payments upon termination of employment under certain circumstances, as defined in the applicable agreements. As of December 31, 2013, the Company's potential minimum cash obligation to these employees was approximately $10,059. 41 On July 1, 2013, the Company entered into a service agreement with Hai Yi Shipping Limited that provided to use of a portion of the premises, and to provide clerical, administrative support and consultation services upon the agreement expires on December 31, 2014. The service fee is approximately $231,000 for the year ended December 31, 2013. Pingtan Fishing leased office from Ping Lin. Pursuant to a rental agreement entered into on July 31, 2012 with three-year term, annual lease is $13,678. The total future minimum lease payments under non-cancellable operating leases with respect to service fee, cold storage warehouse and office as of December 31, 2013 were as follows: Rental expenses and service fee under operating leases for the years ended December 31, 2013, 2012 and 2011 was $827,282, $307,559 and $488,861 respectively, of which $244,281, $212,043 and $488,861 are paid to the related parties. Payments due by period Contractual Obligations Total < 1 year 1 - 3 years 3 - 5 years > 5 years Operating lease obligations - related party transactions $ 483,931 $ 475,837 $ 8,094 $ - $ - - non-related party transactions 244,637 244,637 - - - Term Loan - related party transactions - - - - - - non-related party transactions 83,837,157 29,337,430 48,965,922 3,055,982 2,477,823 Total $ 84,565,725 $ 30,057,904 $ 48,974,016 $ 3,055,982 $ 2,477,823 Recent accounting pronouncements Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company's financial statements. RESULTS OF OPERATIONS-DISCONTINUED OPERATION PERIOD FROM JANUARY 1 TO DECEMBER 4, 2013 COMPARED TO YEAR ENDED DECEMBER 31, 2012 During the year ended December 31, 2013, we determined our Dredging businesses would be exited (see Note 2 - Discontinued Operations) in order to increase the focus on the Company's core operations and to improve overall profitability. In addition, we established certain targets in the areas of internal control in order to enhance the Company's profitability profile. As a result of this business exits, we believe the Company is better positioned to achieve improved future financial results. The sale of our wholly owned subsidiary of CDGC is reflected as discontinued operations. The results of the business operations in prior years have been reclassify to conform with the 2013 presentation. Our operating results for the years ended December 31, 2013, 2012 and 2011 have been adjusted to properly reflect discontinued operation. The transaction involved no cash and the Company's $155.2 million, 4% promissory note due on June 19, 2015 would be forgiven. We do not foresee there should be material impact on our liquidity and financial condition as a result of this disposal. We also do not anticipate there shall be any contingencies which we shall require to accrue and include in our 2013 financials. Revenue is derived from contract revenue of our dredging services. For the period from January 1 to December 4, 2013, revenue from dredging services decreased by 23.0% to $161.5 million from $209.6 million in the year ended December 31, 2012. This decrease was primarily due to decrease of dredging volume as: i) we terminated the leasing agreements of four dredgers in the second half of 2012 because these four dredgers did not fit our new BT project which has higher unit price; ii) four of our dredgers working in a project in northern China were only operated at 30% of their dredging capacity because of the unusually inclement weather in northern China during the first quarter of 2013. As a result, we only completed 63.0 million cubic meters of dredging volume in the period from January 1 to December 4, 2013, compared to 114.7 million cubic meters in the year ended December 31, 2012, representing a decrease of 45.1%. (Amounts in thousands, except for percentage) For the Period from January 1 to December 4, For the Year Ended Percentage 2013 (Disposal) December 31, 2012 Change % of % of US$ Revenue US$ Revenue % Revenues $ 161,497 100.0 % $ 209,619 100.0 % (23.0 )% Cost of revenue 90,352 55.9 % 97,248 46.4 % (7.1 )% Gross profit $ 71,145 44.1 % $ 112,371 53.6 % (36.7 )% 42 Cost of sales for the period from January 1 to December 4, 2013 was $90.4 million, representing a decrease of 7.1% as compared to $97.2 million in the year ended 2012. The decrease was primarily due to decreases in costs of consumable parts and leasing fees for dredgers of $39.0 million which were in line with the drop in revenue of our dredging services; being partly offset by reclamation cost of $29.1 million incurred during the period for the BT project. Gross margin decreased to 44.1% in the period from January 1 to December 4, 2013 from 53.6% in 2012, primarily due to the low gross margin of the BT project which accounted for 27.0% of revenue of our dredging services in the period from January 1 to December 4, 2013. In spite of the relatively high unit price, the BT project has a gross margin of about 20%, which is lower than that of regular dredging contracts. Gross profit for the period from January 1 to December 4, 2013 was $71.1 million, representing a decrease of 36.7% as compared to $112.4 million in the year ended 2012. (Amounts in thousands, except for percentage) For the Period from January 1 to For the Year Ended December Percentage December 4, 2013 (Disposal) 31, 2012 Change US$ % of Revenue US$ % of Revenue % Gross profit 71,145 44.1 % 112,371 53.6 % (36.7 )% Operating Expenses: Total G&A expenses (6,839 ) (4.2 )% (8,761 ) (4.2 )% (21.9 )% Operating income 64,306 39.8 % 103,610 49.4 % (37.9 )% Income before income taxes 67,252 41.6 % 110,805 52.9 % (39.3 )% Income taxes (15,341 ) (9.5 )% (26,311 ) (12.6 )% (41.7 )% Net income 51,911 32.1 % 84,494 40.3 % (38.6 )% Total SG&A expenses decreased by 21.9% to $6.8 million in the period from January 1 to December 4, 2013 from $8.8 million in the year ended December 31, 2012. The decrease in SG&A expenses was primarily attributable to decrease in revenue tax for dredging services as a result of decrease in revenue of dredging services. The tax is calculated as 3% of revenue of dredging services. As a percentage of revenue of dredging services, SG&A expenses were 4.2% in the period ended December 4, 2013, and the year ended December 31, 2012. YEAR ENDED DECEMBER 31, 2012 COMPARED TO YEAR ENDED DECEMBER 31, 2011 Revenue is derived from contract revenue of our dredging services. For the year ended December 31, 2012, revenue from dredging services decreased by 7.6% to $209.6 million from $227.0 million in the year ended December 31, 2011. This decrease was primarily due to decrease of dredging volume as we terminated the leasing agreements of four dredgers in the second half of 2012 because these four dredgers did not fit our new BT project which has higher unit price. As a result, we only completed 114.7 million cubic meters of dredging volume in 2012, compared to 126.6 million cubic meters in 2011, representing a decrease of 9.4%. (Amounts in thousands, except for percentage) For the Year Ended For the Year Ended Percentage December 31, 2012 December 31, 2011 Change % of % of US$ Revenue US$ Revenue % Revenues $ 209,619 100.0 % $ 226,953 100.0 % (7.6 )% Cost of sales 97,248 46.4 % 98,907 43.6 % (1.7 )% Gross profit $ 112,371 53.6 % $ 128,046 56.4 % (12.2 )% Cost of sales for the year ended December 31, 2012 was $97.2 million, representing a decrease of 1.7% as compared to $98.9 million in the year ended December 31, 2011. The decrease was primarily due to decreases in costs of consumable parts and leasing fees for dredgers which were in line with the drop in revenue of our dredging services. 43 Gross margin decreased to 53.6% in 2012 from 56.4% in 2011. In 2012, average unit price increased by 2.2% compared to 2011, while average unit construction cost in 2012 increased by 9.0% compared to 2011. Gross profit in 2012 was $112.4 million, representing a decrease of 12.2% as compared to $128.0 million in 2011. (Amounts in thousands, except for percentage) For the Year Ended December 31, For the Year Ended December Percentage 2012 31, 2011 Change US$ % of Revenue US$ % of Revenue %Gross profit 112,371 53.6 % 128,046 56.4 % (12.2 )% Operating Expenses: Total G&A expenses (8,761 ) (4.2 )% (9,445 ) (4.2 )% (7.2 )% Operating income 103,610 49.4 % 118,601 52.3 % (12.6 )% Income before income taxes 110,805 52.9 % 126,499 55.7 % (12.4 )% Income taxes (26,311 ) (12.6 )% (30,107 ) (13.3 )% (12.6 )% Accretion of discount on Class A Preferred Shares - - (6,135 ) (2.7 )% - Net income 84,494 40.3 % 90,257 39.8 % (6.4 )% Total SG&A expenses decreased by 7.2% to $8.8 million in the year ended December 31, 2012 from $9.4 million in the year ended December 31, 2011. The decrease in SG&A expenses was primarily attributable to decrease in revenue tax for dredging services as a result of decrease in revenue of dredging services. The tax is calculated as 3% of revenue of dredging services. As a percentage of revenue of dredging services, SG&A expenses were 4.2% in 2012 and 2011. |