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PME > SEC Filings for PME > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for PINGTAN MARINE ENTERPRISE LTD.

Form 10-Q for PINGTAN MARINE ENTERPRISE LTD.


7-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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-Q 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-Q, 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.

We currently operate 126 fishing vessels and is the second largest China based fishery company operating its vessels outside of Chinese waters.

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. The transaction is subject to the receipt of government approvals; however we began operating the vessels in the third quarter of 2013 and since then we have been entitled to their net profits from their operation. These vessels are fully licensed to fish in Indonesian waters. Each vessel carries a crew of 10 to 15 persons. These vessels have resulted in additional carrying capacity of approximately 45,000 to 50,000 tons for us.

In September 2013, we further increased our fleet to 106 vessels with the addition 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 became fully operational in the first quarter of 2014. The 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.

In December 2013, we further expanded our fleet to 126 vessels with the addition of the 25-year exclusive operating rights for 20 new fishing drifters from a related party.

In January 2014, we entered into a strategic cooperation framework agreement with China Co-op (Hainan) Industry Development Co., Ltd. As part of this agreement, the two companies will jointly construct a fish processing plant and our fishing products will then be sold to China Co-op's numerous supermarket locations across China. We believe this partnership will accelerate our progress to becoming a vertically integrated seafood provider and also enhances our market competitiveness as our products would reach to both inland and remote areas through China Co-op's massive sales network.

As of March 31, 2014, we own 104 trawlers and 2 drifters and have operating license rights to 20 drifters. Our fleet has an average useful life of approximately 17 years. These vessels are fully licensed to fish in Indonesian or Indian waters. Among the 126 fishing vessels, 114 vessels are operating in the 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.

We derive our revenue primarily from the sale of frozen seafood products. We sell our products directly to customers including distributors, restaurant owners and exporters, 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 the 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.

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, to Hong Long, a related party owned by the wife of our Chairman and CEO, Mr. Xinrong Zhuo.

In July 2013, we received an offer from Mr. Zhuo to acquire the business and operating assets of our wholly-owned dredging subsidiary, CDGC and its PRC operating subsidiaries in exchange for (i) offset of our current $155.2 million 4% promissory note due to Hong Long matures on June 19, 2015; (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) offset of PME's current accounts due to CDGC with an amount of $172.5 million. The value of the operating license rights of $216.1 million is being amortized over the license term of 25 years. These 20 fishing vessels 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.

On December 3, 2013, the Board, excluding Mr. Zhuo and Mr. Lin approved moving forward with the sale and executed and closed the transaction. The total consideration for the transaction is approximately $543.8 million and a gain on sale of $134.7 million 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.

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. 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 have been increasing significantly since 2012.

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.

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 and amortization, 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 80% of cost of sales for the quarter ended March 31, 2014. The fluctuation of fuel price, freight price and exchange rates may significantly affect our cost level and gross profit.

Sales, General and Administrative Expenses

Our sales, 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.

Our sales activities are conducted through direct sales 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 sales expenses have been relatively small as a percentage of our revenue.

We anticipate that our sales, 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 sales, 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.

Our 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 period-end rate as of March 31, 2014 for RMB into one U.S. dollar was 6.2164. Average rates for the quarter ended March 31, 2014 and 2013 were 6.1401 and 6.2169, 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 March 31, 2014 and December 31, 2013, the accumulated foreign currency translation gain was approximately $29.1 million and $30.4 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

THREE MONTHS ENDED MARCH 31, 2014 COMPARED TO THREE MONTHS ENDED MARCH 31, 2013

Revenue

Revenue is derived from sales of aquatic products. Our top 6 species of fish sold including ribbon fish, pomfret, Indian white shrimp, croaker fish, threadfin and conger eel together accounted for about 81% of revenue for the three months ended March 31, 2014. 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)

                                                         Three Months Ended March 31,
                                       2014                                                         2013
                                             Average          % of                                        Average          % of
              Revenue      Volume (KG)        price         revenue        Revenue      Volume (KG)        price         revenue
Ribbon
fish         $  17,462        6,861,449           2.54           26.6 %   $   7,797        4,501,244           1.73           39.6 %
Pomfret         11,320        4,734,886           2.39           17.3 %       1,504          785,005           1.92            7.6 %
India
white
shrimp          11,159        1,280,570           8.71           17.0 %       2,679          525,322           5.10           13.6 %
Croaker
fish             8,179        3,069,061           2.66           12.5 %       3,808        2,274,969           1.67           19.4 %
Threadfin        2,488          787,173           3.16            3.8 %         287          110,756           2.59            1.5 %
Conger eel       2,408          953,072           2.53            3.7 %         240           77,400           3.10            1.2 %
Others          12,567        5,160,233           2.44           19.1 %       3,354        1,253,068           2.68           17.1 %
Total        $  65,583       22,846,444           2.87          100.0 %   $  19,669        9,527,764           2.06          100.0 %

Revenue in the three months ended March 31, 2014 increased by 233.4% to $65.6 million from $19.7 million in the three months ended March 31, 2013, 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 were operating at full capacity in the first quarter of 2014; and the addition of the operating license rights of 20 new fishing vessels in December 2013, which began operating in the current period. Sales volumes in the first quarter of 2014 rose by 139.8% to 22,846 tons from 9,528 tons in the same period of 2013. Average unit selling prices also increased by 39.3% in the first quarter of 2014 compared to the same period of 2013, which was driven by the higher demand for natural seafood in China.

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 three months ended March 31, 2014 and 2013:

(Amounts in thousands, except for percentage)

                                                              Three Months Ended March 31,
                                                   2014                                           2013
                                  US$         % of COS       % of Revenue        US$         % of COS       % of Revenue
Fuel cost                       $ 24,607           59.2 %             37.5 %   $  8,966           62.7 %             45.6 %
Freight                            4,799           11.6 %              7.3 %      1,946           13.6 %              9.9 %
Labor cost                         3,347            8.1 %              5.1 %      1,007            7.1 %              5.1 %
Depreciation and amortization      3,089            7.4 %              4.7 %        742            5.2 %              3.8 %
Maintenance fee                    2,168            5.2 %              3.3 %        593            4.1 %              3.0 %
Spare parts                        2,036            4.9 %              3.1 %        592            4.1 %              3.0 %
License fee and agency fee         1,496            3.6 %              2.3 %        446            3.2 %              2.3 %
Total cost of sales             $ 41,542          100.0 %             63.3 %   $ 14,292          100.0 %             72.7 %

Cost of sales for the three months ended March 31, 2014 was $41.5 million, representing an increase of 190.7% as compared to $14.3 million in the same period of 2013. The increase was principally due to the increase in fuel cost for our fishing vessels of $15.6 million as a result of the fleet expansion. Depreciation and amortization increased by $2.3 million due to amortization of operating license rights of the 20 new fishing vessels added in December 2013. Freight, labor cost and maintenance fee also increased, which was in line with the increase in revenue.

                                Three Months Ended March 31,                     Percentage
                             2014                           2013                   Change
                    US$        % of revenue        US$        % of revenue           %
Revenue           $ 65,583             100.0 %   $ 19,669             100.0 %          233.4 %
Cost of revenue   $ 41,542              63.3 %   $ 14,292              72.7 %          190.7 %
Gross profit      $ 24,041              36.7 %   $  5,377              27.3 %          347.1 %

Gross margin increased to 36.7% in the first quarter of 2014 from 27.3% in the same period of 2013, primarily due to an increase of 39.3% in average unit sales price, change in product mix and a tighter control on cost of revenue. Gross profit for the first quarter of 2014 was $24.0 million, representing an increase of 347.1% as compared to $5.4 million in the same period of 2013 as a result of business expansion.

Sales, General and Administrative Expenses

The following table sets forth sales, general and administrative (SG&A) expenses and income from operations both in amounts and as a percentage of revenue for the three months ended March 31, 2014 and 2013:

(Amounts in thousands, except for percentage)

                                                Three Months Ended March 31,                         Percentage
                                          2014                               2013                      Change
                                 US$          % of Revenue          US$          % of Revenue            %
Gross profit                  $   24,041               36.7 %    $    5,377               27.3 %           347.1 %
Operating Expenses:
Selling and marketing
expenses                            (671 )             (1.0 )%         (195 )             (1.0 )%          244.1 %
General & administrative
expenses
Legal and professional fees         (112 )             (0.2 )%         (214 )             (1.1 )%          (47.7 )%
Salaries and staff welfare          (210 )             (0.3 )%          (25 )             (0.1 )%          740.0 %
Service fee                         (115 )             (0.2 )%            -                  -             100.0 %
Others                              (184 )             (0.3 )%          (62 )             (0.3 )%          196.8 %
Total G&A expenses                  (621 )             (1.0 )%         (301 )             (1.5 )%          106.3 %
Total SG&A expenses               (1,292 )             (2.0 )%         (496 )             (2.5 )%          160.5 %
Income from operations        $   22,749               34.7 %    $    4,881               24.8 %           366.1 %

Total SG&A expenses increased by 160.5% to $1.3 million in the three months ended March 31, 2014 from $0.5 million in the same period of 2013. The increase in SG&A expenses was primarily attributable to higher sales 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 remained constant with 2.0% and 2.5% in the first quarter of 2014 and 2013.

Other Income and Expenses

Net other expenses increased by 143.3% to $1.1 million in the three months ended March 31, 2014 from $0.4 million in the same period of 2013. The increase was primarily driven by an increase in interest expenses of $0.7 million and an increase in foreign currency exchange loss of $0.4 million, being partially offset by an increase in subsidy income of $0.5 million.

Income Tax

We are exempted from income tax derived from our ocean fishing operations.

Net Income



(Amounts in thousands, except for percentage)



                           Three Months Ended March 31,
                  2014                                        2013
                                                                              Net
Revenue       Net income      Net margin      Revenue       Net income      margin
$ 65,583     $     21,681            33.1 %   $ 19,669     $      4,442        22.6 %

Net income for the three months ended March 31, 2014 was $21.7 million, or 33.1% of revenue, compared to $4.4 million, or 22.6% of revenue, in the same period of 2013.

Foreign Currency Translation Gain

During the three months ended March 31, 2014, we recognized a foreign currency translation loss of $1.3 million, as a result of Renminbi depreciation.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2014, we had total cash of $26.0 million, an increase of $17.9 million from $8.1 million at December 31, 2013. Approximately $25.6 million was held by our Chinese subsidiaries and VIEs. Our intent is to permanently reinvest these funds in the PRC and we have no plans to repatriate these funds.

Our current assets totaled $55.2 million as of March 31, 2014 while our current liabilities totaled $52.8 million. We have financed our activities to date primarily through cash generated from operating activities and loans from banks. We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months.

The following table summarizes our cash flows for continuing operations for each of the periods indicated:

(Amounts in thousands)

                                                                Three Months Ended March 31,
                                                                 2014                 2013
Net cash provided by operating activities                    $      10,328       $         7,407
Net cash provided by/(used in) investing activities                  1,602               (12,592 )
Net cash provided by financing activities                            6,381                 4,078
Effect of exchange rate                                               (429 )                 107
Cash and cash equivalents at beginning of period                     8,157                 6,860
Cash and cash equivalents at end of period                   $      26,039       $         5,860

Operating activities

For the three months ended March 31, 2014, cash provided by operating activities totaled $10.3 million compared to $7.4 million in the same period of 2013. This increase was primarily attributable to i) $21.7 million of earnings in the first . . .

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