ITEM 3. KEY INFORMATION
A. [Reserved]
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Summary Risk Factors
Our business is subject to
numerous risks and uncertainties, including risks that may prevent us from achieving our business objectives or may adversely affect our
business, financial condition, results of operations, cash flows, and prospects. These risks are discussed more fully below and include,
but are not limited to, risks related to:
Risks Related to Our Business and Industry
| ● | actions taken by government regulators or reports
or allegations of illegal activity by us, related parties or those with which we conduct business; |
| ● | material and adverse impact from the COVID-19
pandemic on our business operations; |
| ● | our significant dependence on our Chief Executive
Officer; |
| ● | our need for additional financing in order to
execute our business plan; and |
| ● | regulation of the fishing industry. |
Risks Related to Doing Business in China
| ● | impact from PRC economic, political and social
conditions, as well as changes in any government policies, laws and regulations; |
| ● | uncertainties with respect to the PRC legal system; |
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| ● | PRC government’s significant and arbitrary influence over companies
with China-based operations; |
| ● | us being classified as a PRC resident enterprise
for PRC enterprise income tax purposes; and |
| ● | PRC regulation of loans to and direct investment
in PRC entities by offshore holding companies and governmental control of currency conversion. |
Risks Related to Our Securities
| ● | fail to comply with the continued listing requirements
of Nasdaq; |
| ● | our securities being delisted under the Holding
Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China; |
| ● | ineffective disclosure control and procedures
and internal control over financial reporting; |
| ● | our corporate actions being substantially controlled
by our officers, directors and principal shareholders and their affiliated entities; and |
| ● | volatility of prices at which our ordinary shares
are traded. |
Risks Related to Our Business and Industry
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.
We have 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 share 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 relocate 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 our business
and results of operations.
We face risks related to the novel coronavirus
(COVID-19) pandemic that has, and is expected to continue to have, a material adverse effect on our business, results of operations and
financial condition.
The COVID-19 pandemic has adversely affected the global economy, our
markets in the PRC and our business.
In reaction to the pandemic,
many provinces and municipalities in the PRC, where our business is currently conducted, activated the highest response to the emergency
public health incident. Emergency quarantine measures and travel restrictions have had a significant impact on many sectors across China,
which has also adversely affected our operations, including the fishing industry. We will continue to actively monitor the situation and
may take further actions that alter our business operations as may be required by local authorities or that we determine are in the best
interests of our employees, customers, partners, suppliers, and other stakeholders. If a significant portion of our workforce is affected
directly by COVID-19, or due to government closures, or otherwise, associated work stoppages or facility closures would halt or delay
production, which could have an adverse impact on our business and financial performance.
The pandemic has had and continues
to have an adverse impact on our customers. Some of our customers are fish processing plants that export processed fish products to foreign
countries. These customers reduced or postponed their purchases from us and adjusted their business strategies in relation to exportation
or domestic sale in light of the development of the pandemic. This change in strategy may cause a decrease in our unit selling price,
an increase in inventory and delayed settlement of our accounts receivable. If the economic effects caused by the pandemic continue or
increase in the PRC, overall customer demand may continue to decrease, which could have an adverse effect on our business, results of
operations and financial condition.
We anticipate that our results
of operations will continue to be impacted by this pandemic in 2022. However, the extent of the impact on our financial condition and
results of operations is still highly uncertain and will depend on future developments, such as the ultimate duration and scope of the
pandemic, its continuing impact on our customers, how quickly normal economic conditions, operations, and the demand for our products
can resume and whether the pandemic leads to recessionary conditions in the PRC, the United States or globally. We may continue to experience
the effects of the pandemic even after it has waned, and our business, results of operations and financial condition could continue to
be affected.
We depend significantly on our Chief Executive Officer.
We are dependent on the principal
members of our management staff, and in particular, Mr. Xinrong Zhuo, our Chief Executive Officer. While we have entered into a three-year
employment agreement with Mr. Zhuo in August 2019, 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 as they would be difficult to replace. We do not have
key-man life insurance for any of our executive officers or other employees.
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 global 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, Hong Long. 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
price changes may ultimately result in increases in the cost of our raw materials and the selling prices of products and may, in turn,
adversely affect our sales volume, revenue and operating profit.
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:
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meet capital needs; |
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expand systems effectively or efficiently or in a timely manner; |
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allocate human resources optimally; |
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identify and hire qualified employees or retain valued employees; or |
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effectively incorporate 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 and a
competent workforce who we may not be able to attract and retain. In addition, overall tightening of the labor market or any possible
labor unrest or disputes may affect our reputation and business.
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 our 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 our fishing business.
The key personnel of our fishing
business include Mr. Dong Wang, the general coordinator of the shipping department, and Mr. Weiqiang Xie, the chief supervisor of the
sales department, who is mainly responsible for the wholesale and fresh seafood retail business.
Our success depends on the ability
of our management and other key employees to interpret and respond to economic, market and environmental conditions in its operating areas
correctly. Furthermore, our key personnel may not continue their association or employment, and replacement personnel with comparable
skills may not be available, which may adversely affect our business.
Our existing
operations and future growth require a competent workforce. However, we cannot assure you that we will be able to attract or retain qualified
workforce necessary to support our future growth. In particular, we have observed an overall tightening and increasingly competitive labor
market. We have experienced, and may continue to experience, increases in labor costs due to increases in salary, social benefits and
employee headcount. We compete with other companies in our industry and other labor-intensive industries for labor, and we may not be
able to offer competitive remuneration and benefits compared to them. If we are unable to manage and control our labor costs, our business,
results of operations and financial condition may be materially and adversely affected.
Furthermore,
we cannot assure you that we will not be subject to labor unrest, labor disputes or other labor-related legal or administrative proceedings
in the ordinary course of business in the future. We may fail to manage our relationship with, or the conduct of, our crew members and
other employees, in particular when they are on the high seas. Any disputes between us and our crew members and other employees may divert
managerial and financial resources, negatively impact staff morale, reduce our productivity, or harm our reputation and future recruiting
efforts. Any labor unrest, labor disputes or other labor-related legal or administrative proceedings directed against us, even without
merits, or any perception of unethical labor practice, could directly or indirectly prevent or hinder our normal operating activities,
and, if not resolved in a timely manner, lead to decreases in our revenue.
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 an 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.
Earthquakes, tsunamis, adverse weather or oceanic
conditions or other calamities may disrupt our operations and could adversely affect sales.
We utilize cold storages facilities located in Mawei and Pingtan 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 our cold storage facilities, which could lead to
the 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 had 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 policymakers 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 the marine catch. Due to over-fishing, the stocks of certain species of fish may be dwindling to counteract such
over-fishing, and governments may take action that may be detrimental to our ability to conduct operations. If the solutions 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, which may change the political, economic and social conditions in China and adversely affect
our business.
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 other 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.
We have entered into several agreements pledging
certain 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
to our operations.
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 $392,000 as collateral to secure
Global Deep Ocean’s $13,800,000 long-term loans from the financial institution, which will be due on September 21, 2025.
In September 2020, 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 US$19,900,000 as collateral to secure Global Deep Ocean’s $76,600,000 long-term loans from the financial institution,
which will be due on August 21, 2023.
In February 2021, we entered
into a pledge contract with Industrial and Commercial Bank of China, pursuant to which we pledged 12 fishing vessels with carrying amounts
of approximately $39,500,000 as collateral to secure Hong Long’s $25,400,000 long-term loans from the financial institution, which
will be due on January 23, 2026.
In February 2021, we entered
into a pledge contract with the Export Import Bank of China, pursuant to which we pledged eight fishing vessels with carrying amounts
of approximately $26,700,000 as collateral to secure Hong Long’s $24,500,000 long-term loans from the financial institution, which
will be due on February 21, 2028.
In September 2021, we entered
into a pledge contract with the Export Import Bank of China, pursuant to which we pledged six fishing vessels with carrying amounts of
approximately $3,237,000 as collateral to secure Hong Long’s $3,240,000 long-term loans from the financial institution, which will
be due on August 21, 2027.
In November 2021, we entered
into a pledge contract with the Fujian Haixia Bank, pursuant to which we pledged one fishing vessel with carrying amounts of approximately
$6,300,000 as collateral to secure Hong Long’s $26,700,000 long-term loans from the financial institution, which will be due on
November 2, 2022.
Consequently, if Hong Long
or Global Deep Ocean was to default on the loans, we would lose the vessels, which would be detrimental to our operations. As of the date
of this annual report, we have determined that our risk of loss on the default on the loans are remote.
Risks Related to Doing Business in China
Certain political and economic considerations
relating to PRC could adversely affect us.
The PRC is evolving from a
planned economy to a market economy. The Chinese government has confirmed that economic development will follow a model of a 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 a 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, which could have a negative effect on our business,
results of operations and financial condition.
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 to 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.
The PRC government has significant and arbitrary
influence over companies with China-based operations by enforcing existing rules and regulation, adopting new ones, or changing relevant
industrial policies in a manner that may materially increase our compliance cost, abruptly change relevant industry landscape, or cause
significant changes to, or otherwise intervene or influence, our operations in China at any time, which could result
in material and adverse changes in our operations and cause the value of our securities to significantly decline or become worthless.
The PRC government has significant
and arbitrary influence over China-based operations of any company by allocating resources, providing preferential treatment to particular
industries or companies, or imposing industry-wide policies on certain industries. The PRC government may also amend or enforce existing
rules and regulation, or adopt ones, which could materially increase our compliance cost, abruptly change the relevant industry landscape,
or cause significant changes to, or otherwise intervene or influence, our operations in China at any time. In addition,
the PRC regulatory system is based in part on government policies and internal guidance, some of which are not published on a timely basis
or at all, and some of which may even have a retroactive effect. We may not be aware of all non-compliance incidents at all time, and
may face regulatory investigation, fines and other penalties as a result. As a result of the changes in the industrial policies of the
PRC government, including the amendment to and/or enforcement of the related laws and regulations, companies with China-based operations,
including us, and the industries in which we operate, face significant compliance and operational risks and uncertainties. For example,
on July 24, 2021, Chinese state media, including Xinhua News Agency and China Central Television, announced a broad set of reforms targeting
private education companies providing after-school tutoring services and prohibiting foreign investments in institutions providing such
after-school tutoring services. As a result, the market value of certain U.S. listed companies with China-based operations in the affected
sectors declined substantially. On August 30, 2021, the PRC government imposed restrictions over the provision of online gaming services
to minors, aiming at curbing excessive indulgence in online gaming and protecting minors’ mental and physical health, which could
adversely affect the development of the online gaming industry in China. If any similar regulations applicable to us or our industry are
adopted in China requiring us to significantly curtail our revenue generating operations, we may have to scale down or cease such business
operations, which may adversely affect our business, financial condition and results of operations.
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, we cannot be predicted whether changes in the PRC’s political, economic and social
conditions, laws, regulations and policies will have an adverse effect on our business, financial condition and results of operations.
The PRC legal system is evolving and has inherent
uncertainties regarding the 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,
the CSRC, or other PRC government authorities. If such governmental approval and/or filing is required, we cannot predict whether or
for how long we will be able to obtain such approval or complete such filing.
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 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 from 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.
The application of the M&A
Regulations remains unclear as of the date of this annual report, 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. Furthermore, 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.
Moreover, on July 6, 2021, the relevant PRC government authorities issued Opinions on Strictly Cracking Down
Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to strengthen the administration of illegal
securities activities and the supervision of overseas listings by China-based companies and proposed to take effective measures, such
as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed
companies. As a follow-up, on December 24, 2021, the State Council issued a draft of the Provisions of the State Council on
the Administration of Overseas Securities Offering and Listing by Domestic Companies, or the Draft Provisions, and the CSRC issued a draft
of Administration Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies, or the Draft Administration
Measures, for public comments.
The Draft Provisions and the
Draft Administration Measures propose to establish a new filing-based regime to regulate overseas offerings of stocks, depository receipts,
convertible corporate bonds, or other equity securities, and overseas listing of these securities for trading, by domestic companies.
According to the Draft Provisions and the Draft Administration Measures, an overseas offering and listing by a domestic company, whether
directly or indirectly, shall be filed with the CSRC. Specifically, the examination and determination of an indirect offering and listing
will be conducted on a substance-over-form basis, and an offering and listing shall be considered as an indirect overseas offering and
listing by a domestic company if the issuer meets the following conditions: (1) the operating income, gross profit, total assets, or net
assets of the domestic enterprise in the most recent fiscal year was more than 50% of the relevant line item in the issuer’s audited
consolidated financial statement for that year; and (2) senior management personnel responsible for business operations and management
are mostly PRC citizens or are ordinarily resident in the PRC, and the main place of business is in the PRC or carried out in the PRC.
According to the Draft Administration Measures, the issuer or its affiliated domestic company, as the case may be, shall file with the
CSRC for its initial public offering, follow-on offering and other equivalent offering activities. Particularly, the issuer
shall submit the filing with respect to its initial public offering and listing within three business days after such initial filing and
submit the filing with respect to its follow-on offering within three business days after completion of the follow-on offering.
Failure to comply with the filing requirements may result in fines to the relevant domestic companies, suspension of their businesses,
revocation of their business licenses and operation permits and fines on the controlling shareholder and other responsible persons. The
Draft Administration Measures also sets forth certain regulatory red lines for overseas offerings and listings by domestic enterprises.
The period for which the CSRC solicited comments on the Draft Provisions and the Draft Administration Measures
ended on January 23, 2022. There are uncertainties as to whether the Draft Provisions and the Draft Administration Measures would be further
amended, revised or updated. Substantial uncertainties exist with respect to the enactment timetable and final content of the Draft Provisions
and the Draft Administration Measures. As the CSRC may formulate and publish guidelines for filings in the future, the Draft Administration
Measures does not provide detailed requirements of the substance and form of the filing documents. In a Q&A released on its official
website, the respondent CSRC official indicated that the CSRC would start applying the filing requirements to new offerings and listings.
Only new initial public offerings and refinancing by existing overseas-listed Chinese companies will be required to go through the filing
process. As for the filings for the existing companies, the regulator will grant a transition period adequate to complete their filing
procedures. Nevertheless, it does not specify what relevant domestic laws and regulations are required to be complied with. Given the
substantial uncertainties surrounding the latest CSRC filing requirements at this stage, we cannot reliably determine whether and how
such CSRC filing requirements will affect us and our securities. For instance, if we offer debt or equity securities in the future, we
cannot assure you that we will be able to complete the filings and fully comply with the relevant new rules on a timely basis, if at all.
It may be difficult for overseas regulators to conduct investigations
or collect evidence within China.
Shareholder claims or regulatory investigation
that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China,
there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated
outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities
of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory
authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according
to Article 177 of the PRC Securities Law, which became effective in March 2020, no foreign securities regulator is allowed to directly
conduct investigations or evidence collection activities within the PRC territory. While detailed interpretation of or implementation
rules under Article 177 have yet to be promulgated, the inability for a foreign securities regulator to directly conduct investigations
or evidence collection activities within China may further increase the difficulties you face in protecting your interests.
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 that 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 a PRC resident. As of the date of this annual report, 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
to 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 our shareholders may be materially and adversely affected.
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, interest, rents, 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 on 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 our 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 their 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 subsidiaries
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 the 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.
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 an 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, (1) that all written labor contracts shall contain certain requisite terms; (2) 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; (3) 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 (4) that there are certain restrictions on the circumstances under which employers may terminate labor contracts
as well as the economic compensation 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 payments 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 workforce 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 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 RMB as their functional currency. Substantially all of our revenue and expenses are
in Renminbi. Accordingly, we are subject to the effects of exchange rate fluctuations with respect to the Renminbi. 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 the 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 the Renminbi to the U.S. dollar. Under the new policy, the Renminbi may
fluctuate within a narrow and managed band against a basket of certain foreign currencies. As a result of this policy change, the 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 in the long run, and the Renminbi may not be stable against the U.S. dollar
or any other foreign currency.
The statements of 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 currencies denominated transactions results in reduced revenue, operating expenses
and net income (loss) of our operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation
of these foreign currencies denominated transactions results in increased revenue, operating expenses and net income (loss) of 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 (loss).
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 translation rates applied to the statements of operations and comprehensive income (loss) for the years ended December 31,
2021, 2020 and 2019 were RMB6.3920, RMB6.8976 and RMB6.8985 to $1.00, respectively.
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 currencies for current account items, conversion
of Renminbi into foreign currencies 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 the 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 the 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 shareholders 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
its company registration in violation of the PRC Companies Law by making false statements 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. Furthermore, a company submitting false certificates or concealing material
facts may be fined no less than RMB50,000 but no more than RMB500,000.
Pingtan Fishing was established in February 1998 with registered capital
of RMB10,000,000 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. Furthermore, 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 rights 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.
Due to the historical defect in the state-owned
equity interest transfer in Pingtan Fishing, we and Pingtan Fishing 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. Furthermore, 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 RMB25,000,000. 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 the Pingtan County Government. According to the 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 the Pingtan Government, Pingtan Fishing
believes that it is unlikely that the transfer will be determined to be invalid. However, the government authority may reach a 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 RMB1,000 to RMB10,000, 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 the Ministry of Industry and Information Technology in February 2009, a company that 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 RMB5,000, 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 Sewage Pollution Prevention Certificates. We may be subject to a fine of up to RMB200,000 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 the 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. Furthermore, an enterprise carrying out its ocean fishery business without the approval of the MARA 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.
Pingtan Fishing has not bought the required
social insurance for some of its employees and may be subject to fines imposed by the relevant governmental 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 kinds 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 twice or triple 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. Furthermore, employers have an obligation
to withhold the premium of endowment insurance, medical insurance and unemployment insurance 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 the overdue payments and fines and in turn our financial condition and results of operations may be adversely affected. We are actively
endeavoring to purchase 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, 2021, there had been no fines or penalties
requested by the social insurance authority. Per our estimation, approximately US$10.9 million for social insurance has been accrued as
of December 31, 2021.
We may be subject to fines for the violation
of Fishing Management Regulations.
PRC laws set forth rigorous standards for 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 MARA 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 the 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 MARA and hold a Professional
Sailor Certificate and the Professional Training Qualification. Furthermore, 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 is subject to a fine of not more than three times the related gains and up to RMB30,000 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.
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 RMB10,000 to RMB50,000. 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. In 2021, the amount of housing fund payment is estimated to
be approximately US$1.1 million.
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 Ocean Fishing Co., Ltd. (“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 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 that exceed the difference
between its registered capital and its total investment amount as approved by 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 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 scopes 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 our prior or 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 of an 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.
Risks Related to Our Securities
If we fail to comply with the continued listing
requirements of Nasdaq, we would face possible delisting, which would result in a limited public market for our ordinary shares and make
obtaining future debt or equity financing more difficult for us.
Our ordinary shares are currently
listed for trading on the Nasdaq Capital Market under the symbol “PME”. The Nasdaq Capital Market may delist our ordinary
shares from trading on its exchange for failure to meet the continued listing standards.
As previously disclosed, our
Company received delinquency notification letters from Nasdaq in relation to our delinquent in filing the annual report on Form 10-K for
the fiscal year ended December 31, 2020 and quarterly reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021, respectively.
We have filed the annual report and quarterly reports and regained compliance in this regard.
On December 10, 2021, we filed
a report of foreign private issuer on Form 6-K, under which we determined that we qualify as a “foreign private issuer” as
defined under Rule 3b-4 of the Exchange Act, and by furnishing such report, we had begun reporting under the Exchange Act as a foreign
private issuer.
Additionally, on June 30, 2021, our Company received
a notice from Nasdaq notifying us that the bid price for our Company’s ordinary shares for the last 30 consecutive business days
had closed below the minimum $1.00 per share required for continued listing under Nasdaq Listing Rule 5550(a)(2). The notification letter
does not result in the immediate delisting of our securities. We may regain compliance with the continued listing standards by June 27,
2022. If at any time before June 27, 2022, the closing bid price per ordinary share is at least US$1.00 for a minimum of 10 consecutive
business days, Nasdaq will provide us with a written confirmation of compliance and the matter will be closed.
We have not regained compliance with the minimum
bid price requirement as of the date of annual report. We are closely monitoring the bid price of our ordinary shares, and may consider
available options to achieve compliance. However, we cannot assure you that we will be able to regain compliance with the minimum bid
price requirement in a timely manner. If we fail to regain compliance by June 27, 2022, we may be subject to delisting, or, subject to
certain conditions, transfer the listing of our ordinary shares to the over-the-counter market. The delisting of our ordinary shares or
transfer of listing may significantly reduce the liquidity of our ordinary shares, cause further declines to the market price of our ordinary
shares, and make it more difficult for us to obtain adequate financing to support our continued operation.
If our ordinary shares were
delisted from the Nasdaq Capital Market, we and our shareholders could face significant material adverse consequences, including:
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limited availability of market quotations for our ordinary shares; |
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the determination that our ordinary shares are 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; |
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limited amount of analyst coverage; and |
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our decreased ability to issue additional securities or obtain additional financing in the future. |
Our shares will be prohibited from trading
in the United States under the HFCA Act in 2024 if the PCAOB is unable to inspect or fully investigate our auditors, or as early as 2023
if proposed changes to the law are enacted. The delisting of our shares, or the threat of their being delisted, may materially and adversely
affect the value of your investment.
The HFCA Act, which was signed
into law on December 18, 2020, states that if the SEC determines that we have filed audit reports issued by a registered public accounting
firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares
from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On December
16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB is unable to inspect or investigate completely
registered public accounting firms headquartered in mainland China and Hong Kong. Our financial statements contained in the annual report
on Form 20-F for the fiscal year ended December 31, 2021 have been audited by an independent registered public accounting firm that is
not among the PCAOB-registered public accounting firms headquartered in the PRC or Hong Kong subject to PCAOB’s determination on
December 16, 2021 of having been unable to inspect or investigate completely (the “Determination”). Furthermore, we have not
been identified by the SEC as a commission-identified issuer under the Holding Foreign Company Accountable Act (“HFCA Act”)
as of the date of this annual report.
However, whether the PCAOB
will be able to conduct inspections of our auditor before the issuance of our financial statements on Form 20-F for the year
ending December 31, 2023, which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a number of
factors out of our, and our auditor’s control. If it is later determined that the PCAOB is unable to inspect or investigate our
auditor completely, or if there is any regulatory change or step taken by PRC regulators that does not permit our auditor to provide audit
documentations located in China or Hong Kong to the PCAOB for inspection or investigation, or the PCAOB expands the scope of the Determination
so that we are subject to the HFCA Act, as the same may be amended, you may be deprived of the benefits of such inspection. Any audit
reports not issued by auditors that are completely inspected or investigated by the PCAOB, or a lack of PCAOB inspections or investigations
of audit work undertaken in China that prevents the PCAOB from regularly evaluating our auditors’ audits and their quality control
procedures, could result in a lack of assurance that our financial statements and disclosures are adequate and accurate.
If our shares are prohibited
from trading in the United States, the impact on the market for our shares outside the United States is highly uncertain, and we cannot
guarantee that we will be able to list on additional non-U.S. exchanges to facilitate the trading in our securities. The prohibition would
substantially impair your ability to sell or purchase our shares when you wish to do so, and the risk and uncertainty associated with
delisting would have a negative impact on the price of our shares. Such prohibition would also significantly affect our ability to raise
capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects.
On June 22, 2021, the U.S.
Senate passed a bill, proposing to reduce the number of consecutive non-inspection years required for triggering the prohibitions
under the HFCA Act from three years to two years. On February 4, 2022, the U.S. House of Representatives passed a bill that contained,
among other things, an identical provision. If this provision is enacted into law and the number of consecutive non-inspection years
required for triggering the prohibitions under the HFCA Act is reduced from three years to two years, then our shares could be prohibited
from trading in the United States as early as 2023.
Moreover, the recent developments
would add uncertainties to our filings and we cannot assure you whether the Nasdaq or regulatory authorities would apply additional and
more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures,
adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial
statements. In addition, any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory access
to audit information could create some uncertainty for investors, the market price of our ordinary shares could be adversely affected,
and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement or being required to engage a new audit
firm, which would require significant expense and management time.
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 52.8% 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 management has determined that our Company’s
disclosure control and procedures and internal control over financial reporting were not effective at fiscal year-end.
We are subject to reporting
obligations under 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. Our
management has concluded that our internal control over financial reporting was not effective as of December 31, 2021. However, management
believes that despite our material weakness, our consolidated financial statements for the year ended December 31, 2021 are fairly stated,
in all material respects, in accordance with U.S. GAAP.
The material weakness that
we identified related to failing to maintain a sufficient complement of personnel with an appropriate level of experience and training
in the application of U.S. GAAP commensurate with our financial reporting requirements. We are actively engaged in remediation activities
designed to address the material weakness, but our remediation efforts are not complete and are ongoing. We are in the process of performing
an assessment of our financial organization to determine the sufficiency of resources with the appropriate level of knowledge, experience
and training commensurate with our internal controls and executing any recommendations arising from the assessment; evaluating the need
for the establishment of effective internal audit functions including the consideration of outsourcing the function to an outside party;
expanding our accounting staff through actively recruiting for open positions and anticipate hiring additional qualified accounting and
financial reporting personnel; and re-training our current accounting staff regarding risks, controls and maintaining adequate evidence.
Until we are able to remediate
the material weaknesses identified above, such material weaknesses may materially and adversely affect our ability to accurately report
our financial condition and results of operations in the future in a timely and reliable manner. In addition, although we review and evaluate
our internal control systems to allow management to report on the effectiveness of our disclosure controls and procedures and the sufficiency
of our internal control over financial reporting, we cannot assure you that we will not discover additional weaknesses in the future or
that any corrective actions taken to remediate issues identified during the course of an assessment will be effective. Any such additional
weaknesses or failure to remediate any existing weaknesses could materially adversely affect our financial condition or ability to comply
with applicable financial reporting requirements. 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 shares. 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.
We are a foreign private issuer within the meaning of the rules
under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.
Because we are a foreign private issuer under
the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable
to U.S. domestic issuers, including:
| ● | the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; |
| ● | the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered
under the Exchange Act; |
| ● | the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability
for insiders who profit from trades made in a short period of time; and |
| ● | the selective disclosure rules by issuers of material nonpublic information under Regulation FD. |
We are required to file an annual report on Form
20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press
releases, distributed pursuant to the Nasdaq Stock Market Rules. Press releases relating to financial results and material events will
also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive
and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the
same protections or information, which would be made available to you, were you investing in a U.S. domestic issuer.
As a company incorporated in the Cayman Islands, we are permitted
to adopt certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq corporate governance
listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with Nasdaq corporate
governance listing standards.
As a Cayman Islands exempted company listed on Nasdaq, we are subject
to Nasdaq corporate governance listing standards. However, the Nasdaq Stock Market Rules permit a foreign private issuer like us to follow
the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home
country, may differ significantly from Nasdaq corporate governance listing standards. For instance, we are not required to: (1) have a
majority of the board be independent; (2) have a compensation committee or a nominating and corporate governance committee consisting
entirely of independent directors; or (3) have regularly scheduled executive sessions with only independent directors each year. We intend
to rely on some of these exemptions. As a result, you may not be provided with the benefits of certain corporate governance requirements
of the Nasdaq Capital Market.
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 most 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. Most 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.
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 public company, we are
incurring significant legal, accounting and other expenses that we did not incur as a private company. 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 we 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 trading price of our ordinary shares is likely
to be volatile, which could result in substantial losses to investors.
The trading price of our ordinary
shares is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market
and industry factors, such as the performance and fluctuation of the market prices of other companies with business operations located
mainly in China that have listed their securities in the United States. A number of Chinese companies have listed or are in the process
of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility,
including price declines in connection with their initial public offerings. The trading performances of these Chinese companies’
securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States in general
and consequently may impact the trading performance of our ordinary shares, regardless of our actual operating performance. In addition,
any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters
of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless
of whether we have conducted any inappropriate activities. Furthermore, securities markets may from time to time experience significant
price and volume fluctuations that are not related to our operating performance, which may have a material and adverse effect on the trading
price of our ordinary shares.
In
addition, the price and trading volume for our ordinary shares may be highly volatile for a number of other factors, including the following:
| ● | our
progress in developing and commercializing our products; |
| ● | announcements
of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors; |
| ● | 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 financial estimates by securities analysts; |
| ● | detrimental
adverse publicity about us, our products, our competitors or our industry; |
| ● | fluctuation
of exchange rates; and |
| ● | potential
litigation or regulatory investigations. |
Any
of these factors may result in large and sudden changes in the volume and price at which our ordinary shares will trade.
In
the past, shareholders of public companies have often brought securities class action suits against those companies following periods
of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount
of our management’s attention and other resources from our business and operations and require us to incur significant expenses
to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our
reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be
required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
Techniques employed
by short sellers may drive down the market price of our ordinary shares.
Short
selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention
of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value
of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects
to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security
to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business
prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short
attacks have, in the past, led to selling of shares in the market.
Public
companies listed in the United States that have a substantial majority of their operations in China have been the subject of short selling.
Much of the scrutiny and negative publicity has centered on allegations of a lack of effective internal control over financial reporting
resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto
and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations
into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.
We
have become, and may in the future be, the subject of unfavorable allegations made by short sellers. Any such allegations may be followed
by periods of instability in the market price of our ordinary shares and negative publicity. If and when we become the subject of any
unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources
to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may
be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable
federal or state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming and could distract
our management from growing our business. Even if such allegations are ultimately proven to be groundless, allegations against us could
severely impact our business operations and shareholders’ equity, and the value of any investment in our ordinary shares could
be greatly reduced or rendered worthless.
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
on 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.
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.
We may be
classified as a passive foreign investment company for United States federal income tax purposes, which could result in adverse United
States federal income tax consequences to United States investors in our ordinary shares.
We
will be classified as a “passive foreign investment company,” or PFIC, if, for any particular fiscal year, either (1) 75.0%
or more of our gross income for such year consists of certain types of passive income, or (2) 50.0% or more of the average quarterly
value of our assets during such year produce or are held for the production of passive income. Although the law in this regard is unclear,
we treat our affiliated entities as being owned by us for United States federal income tax purposes, not only because we exercise effective
control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as
a result, we consolidate their results of operation in our financial statements. Assuming that we are the owner of our affiliated entities
for United States federal income tax purposes, and based upon our historical and current income and assets, we do not believe that we
were classified as a PFIC for the fiscal year ended December 31, 2021, and we do not expect to be classified as a PFIC for the current
fiscal year.
The
determination of whether we are or will become a PFIC will depend upon the composition of our income (which may differ from our historical
results and current projections) and assets and the value of our assets from time to time, including, in particular, the value of our
goodwill and other unbooked intangibles (which may depend upon the market value of our ordinary shares from time-to-time and may be volatile).
Among other matters, if our market capitalization declines or does no increase, we may be classified as a PFIC for the current fiscal
year or future fiscal years. It is also possible that the IRS, may challenge our classification or valuation of our goodwill and other
unbooked intangibles, which may result in our company being, or becoming classified as, a PFIC for the current or future taxable years.
It is also possible that the IRS may challenge our classification or valuation of our goodwill and other unbooked intangibles, which
may result in our company being, or becoming classified as, a PFIC for the current or one or more future taxable years.
While
we do not expect to become a PFIC in the current fiscal year, the determination of whether we will be or become a PFIC may also depend,
in part, on how, and how quickly, we use our liquid assets and cash. Under circumstances where we retain significant amounts liquid assets
including cash, our risk of being classified as a PFIC may substantially increase. Because there are uncertainties in the application
of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, we cannot assure
you that we will not be a PFIC for the current taxable year or any future taxable year.
If
we are classified as a PFIC in any taxable year, a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—United
States Federal Income Taxation”) may incur significantly increased United States federal income tax on gain recognized
on the sale or other disposition of our ordinary shares and on the receipt of distributions on our ordinary shares to the extent such
gain or distribution is treated as an “excess distribution” under the United States federal income tax rules, and such holders
may be subject to burdensome reporting requirements. Further, if we are classified as a PFIC for any year during which a U.S. Holder
holds our ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder
holds our ordinary shares. For more information, see “Item 10. Additional Information—E. Taxation—United States Federal
Income Taxation.”
ITEM 4. INFORMATION ON THE COMPANY
A. History and development of the company
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, Fujian Xinggang Port Service Co., Ltd (“Fujian Service”), provided specialized dredging services
exclusively to the PRC marine infrastructure market and was, based on the number and capacity of the dredging vessels it operated, one
of the leading, non-state-owned providers of such services in the PRC.
Merchant Supreme, through
its former PRC variable interest entity, Pingtan Fishing engaged in ocean fishery with its fleet of self-owned vessels and vessels with
exclusive operating license rights within the Indian Exclusive Economic Zone (“EEZ”) and Arafura Sea of Indonesia till 2015.
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 the Share Purchase Agreement dated October 24, 2012. Following the
completion of the business combination on February 25, 2013, CDGC and Merchant Supreme became wholly-owned subsidiaries of our Company
(the “Business Combination”). The ordinary shares of our Company, par value $0.001 per share were listed on the Nasdaq Capital
Market under the symbol “PME”.
In order to place increased
focus on the 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, our Company terminated its then existing variable
interest entity 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 Pingtan Fishing at the relevant time, and 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 RMB400 million (approximately US$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 was no longer a variable interest entity.
On January 14, 2022, China
Agriculture sold all its equity interests in Pingtan Fishing to two unrelated parties, namely, Wuxi Kingway Technology Co., Ltd. and Hefei
Bitu Technology Co., Ltd.
Our
principal executive office is located at 18-19/F, Zhongshan Building A, No. 154 Hudong Road, Fuzhou, zip code 350001, China. Our principal
phone number is (86) 591-8727-9999. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services
Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Investors should submit any inquiries to the address and telephone
number of our principal executive offices. Our website is https://www.ptmarine.com/. The information contained on our website is not a
part of this annual report.
For information regarding
our principal capital expenditures, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital
Resources—Capital Expenditures.”
B. Business Overview
Our Business
We are a marine enterprise group primarily engaging in ocean fishing
through our operating subsidiary, 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 expanded the number of vessels to 135 through the construction of three new vessels, the purchase of 72 licensed vessels and the acquisition
of 20-year exclusive operating rights to 20 vessels. Our fishing fleet consists of vessels of diversified fishing methods, including trawling,
drift netting, light luring seine, longline fishing and squid jigging.
From 2017 to 2018, we purchased
two refrigerated transport vessels and four squid jigging vessels. Of those vessels, the renovation of two transport vessels and two squid
jigging vessels were completed in subsequent years and were deployed to international waters. The ownership transfer of the remaining
two vessels has not completed yet, but our Company is entitled to 100% of the operations and net profits (losses) from the vessels.
In April 2018, 27 vessels
received approval from the Ministry of Agriculture and Rural Affairs of the PRC (“MARA”) to operate in international waters
after the completion of modification and rebuilding projects. The 27 fishing vessels were modified and rebuilt into 20 squid jigging vessels
and seven light luring seine vessels and have been deployed for operation in late 2018 and early 2019.
In 2019, our Company had 30
fishing vessels that received approval from the MARA to operate in international waters after completion of modification and rebuilding.
The 30 vessels were rebuilt and modified into 15 squid jigging vessels and 15 seine vessels. The renovation of the 30 vessels was completed
in 2019, and these vessels were deployed to international waters for operation.
In 2020, our Company had 11
fishing vessels that received approval from the MARA to operate in international waters after completion of modification and rebuilding.
The 11 vessels were rebuilt and modified into 10 squid jigging vessels and one refrigerated transport vessel. The renovation of the 11
vessels was completed in 2020 and these vessels were deployed to international waters for operation. In addition, in 2020, 20 more
vessels also received approval from MARA to operate in international waters after the completion of modification and rebuilding projects.
The 20 vessels were going to be modified and rebuilt into 20 seine vessels.
In 2021, 20 vessels had completed
the modification and rebuilding in batches. On December 27, 2021, we and Huanghai Shipbuilding Co., Ltd. (“Huanghai”) entered
into a termination agreement, specifying that Huanghai would cease the building of a krill fishing vessel and return all amount paid
by us at approximately RMB587.3 million (US$92.1 million).
We catch nearly 20 different species of fish, including Argentina squid,
Indian Ocean squid, Sardine and Peru squid. 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 Mawei and Pingtan, Fujian province. We also purchase and sell Argentina squid
and shrimp.
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 started strategic cooperation with an e-commerce platform 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 the
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.
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 facility located in Mawei.
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 storage facilities located in Maiwei and
Pingtan, Fujian Province. Mawei seafood market is one of the PRC’s largest seafood trading centers. The monthly rent for cold storage
is RMB55 (US$8.6) per square meter, and the leases are renewable annually. The following table sets forth information regarding the cold
storages facilities we rent as of December 31, 2021:
| |
Monthly | |
Cold Storage | |
rent (US$) | |
Jingfu#201-202 | |
| 15,500 | |
Jingfu#203-204 | |
| 15,500 | |
Jingfu#301-302 | |
| 15,500 | |
Jingfu#403-404 | |
| 15,500 | |
Jingfu#501-502 | |
| 15,500 | |
Jingfu#503-504 | |
| 15,500 | |
Jingfu#601-602 | |
| 15,500 | |
Jingfu#603-604 | |
| 15,500 | |
Jingfu#701-702 | |
| 15,500 | |
Jingfu#703-704 | |
| 15,500 | |
Total | |
$ | 155,000 | |
We also rent cold storage
facilities on a temporary basis depending on the quantity of fish, in which case the rent is calculated based on the weight of the fish
and the days of storage.
Sales, Marketing and Distribution
We market, sell and distribute
products all over China, including the Fujian, Shandong and Zhejiang provinces. Argentina squid, Indian Ocean squid, South American white
shrimp, Sardine and Peru squid were the main types of seafood sold for the year ended December 31, 2021, representing approximately 76%
of our sales.
As of December 31, 2021, we
sold our fish to over 100 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, 2021.
Vessels
As of December 31, 2021, we
owned 51 squid jigging vessels, 26 trawlers, 25 seine vessels, 13 drifters, four longline fishing vessels, and three transport vessels
and had exclusive operating license rights to 20 seine vessels.
Among the 142 vessels, 100 were located in international
waters, 12 were located in the Bay of Bengal in India, 13 were located in the PRC, and 17 were located in the Arafura Sea in Indonesia
and not in operation.
See Note 2 of the Report of the Independent Registered Public Accounting
Firm of this annual report for a discussion of the impairment of long-lived assets.
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 seas, which will further diversify the
fish types we harvest. We are also planning to expand our operations to fish processing and trading businesses.
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 also 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.
Seasonality
In most waters where our vessels
operate, autumn and winter are the seasons when the 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.
Properties and Facilities
Our principal
executive offices are located at 18-19/F, Zhongshan Building A, No. 154 Hudong Road, Fuzhou, PRC. On July 2, 2018, we entered into an
office lease agreement with Ping Lin, the wife of Xinrong Zhuo, our Company’s Chairman and Chief Executive Officer, for approximately
100 square meters of space. On July 30, 2021, we renewed the lease with Ping Lin on the same terms with a new contract expiring on December
31, 2023. Annual lease payments were approximately US$13,100 in 2021.
On March 1, 2018, we entered
into lease agreements for 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 our office. On December 9, 2020, the agreements were renewed to February 28, 2023 under the same
conditions. We incurred and paid approximately US$460,000 in 2021.
We lease secured several cold storages facilities located in one of
the PRC’s largest seafood trading centers, the Mawei seafood market. See “—B. Business Overview—Operations—Cold
Storage.”
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.
Legal Proceedings
From time to time, we are subject to legal proceedings,
investigations and claims during the ordinary course of our business. Except as disclosed below, we are not a party to any 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, results of operations or financial condition.
As previously disclosed by the Company, the United States Securities
and Exchange Commission (“SEC”) has initiated an investigation of the Company. The SEC issued a document request and subpoena
for a variety of documents and other information relating to a range of matters. We are cooperating with the SEC in its investigation.
The Company can offer no assurances as to the outcome of this investigation or its potential effect on the Company or its results of operations.
Regulations
PRC Regulations on Fisheries
We operate our business in
China under a legal regime consisting of the National People’s Congress, which is the country’s highest legislative body,
the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies
under its authority, including the MOE, the Ministry of Industry and Information Technology, the State Administration for Market Regulation,
the Ministry of Civil Affairs and their respective local offices. The section summarizes the principal PRC regulations related to our
business.
The Fisheries Law of the PRC,
issued by the Standing Committee of the National People’s Congress on January 20, 1986, imposes a license system for fishing in China.
A fishing license can only be issued when the following requirements are met: (1) that the fishing vessel inspection certificate has been
granted; (2) that the fishing vessel registry certificate has been granted; and (3) that the other requirements imposed by the administrative
department for fisheries under the State Council have been met.
According to the PRC Fishery
Management Regulation promulgated by the 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, it may be subject to penalties by the applicable governmental authority.
Furthermore, an enterprise carrying out its ocean fishery business without the approval of the MARA may be subject to penalties by the
applicable governmental authority pursuant to relevant laws and regulations. The most serious penalty is a permanent suspension of its
fishing business operation.
According to the PRC Fishing
Vessels Inspection Regulation promulgated by the State 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 is subject to a fine between RMB1,000 to RMB10,000, and the annual inspection certificates held by the
company may be temporarily suspended.
According to the PRC Radio
Management Regulations promulgated by the State Council and Central Military Committee of the PRC in September 1993, and the License of
Radio Station Management Regulations promulgated by the Ministry of Industry and Information Technology in February 2009, a company that
sets up or uses a radio station in a vessel must obtain a radio station license. Failing to do so will result in a fine of up to RMB5,000,
and the radio station facilities will be confiscated.
The PRC is a member of the
1973 International Pollution Prevention Convention (the “Convention”), as amended in 1978. According to the Convention and
relevant PRC laws and regulations, the vessels owned by Pingtan Fishing should have sewage pollution prevention certificates. We could
be subject to a fine of up to RMB200,000 once our vessels enter into PRC territorial seas if we lack the certificate and relevant facilities
for pollution prevention.
PRC laws set forth rigorous
standards on 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 promulgated by MARA on April 14, 2003, the PRC Seamen Regulations
promulgated by the State Council on March 28, 2007, Fishing Port Navigation Safety Management Regulations promulgated by State Council
on May 5, 1989, and Provisions of the PRC on Marine and Maritime Administrative Penalty promulgated by Ministry of Communications on July
10, 2003 (collectively, the “Fishing Management Regulations”). 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
should be trained by the professional training institution permitted by MARA and hold a professional sailor certificate and the professional
training qualification. Furthermore, the owners of the company 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 will be ordered to rectify the failure to equip vessels with qualified seaman according to the safety standard. Should there be
any related gains, the owner or operator of the vessel is subject to a fine of not more than three times the related gains and up to RMB30,000
for such violation or for the seamen on such vessels lacking valid certificates of competence.
For a detailed description
of the risk associated with the M&A Rules, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing
Business in China—Certain PRC regulations, including the M&A Rules and national security regulations that may require a
complicated review and approval process, which could make it more difficult for us to pursue growth through acquisitions in China.”
Approval procedures
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 MARA 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 by contracting with third-party vessel manufacturers. During
the period of construction, an 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 MARA 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 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, our 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 has been 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 MARA. 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 declared at PRC customs.
PRC Regulations Relating to Foreign Exchange
Foreign Currency Exchange
Pursuant
to the Foreign Currency Administration Rules, as most recently amended in 2008, and various regulations issued by SAFE and other relevant
PRC government authorities, RMB is freely convertible to the extent of current account items, such as trade-related receipts and payments,
interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, unless expressly
exempted by laws and regulations, still require prior approval from SAFE or its provincial branch for conversion of RMB into a foreign
currency, such as U.S. dollars, and remittance of the foreign currency outside of the PRC.
In
August 2008, SAFE issued the Circular on the 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, regulating the conversion by a foreign-invested
enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated
Circular 45 on November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45,
the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within
the business scope approved by the applicable administrative authority and may not be used for equity investments within the PRC. In addition,
SAFE strengthened its oversight of the flow and use of RMB capital converted from foreign currency registered capital of foreign-invested
enterprises. The use of RMB capital may not be changed without SAFE’s approval, and RMB capital may not, in any case, be used to
repay RMB loans if the proceeds of the loans have not been used.
To
further reform the foreign exchange administration system in order to satisfy and facilitate the business and capital operations of foreign-invested
enterprises, SAFE issued the Circular on the Relevant Issues Concerning the Launch of Reforming Trial of the Administration Model of the
Settlement of Foreign Currency Capital of Foreign-Invested Enterprises in Certain Areas in July 2014, which became effective on August 4,
2014. This circular suspends the application of SAFE Circular 142 in certain areas and allows a foreign-invested enterprise registered
in these areas with a business scope including “investment” to use the RMB capital converted from foreign currency registered
capital for equity investments within the PRC. SAFE released the Notice on the Reform of the Administration Method for the Settlement
of Foreign Exchange Capital of Foreign-invested Enterprises or SAFE Circular 19, in March 2015, which came into force and superseded SAFE
Circular 142 on June 1, 2015. Circular 19 allows foreign-invested enterprises to settle their foreign exchange capital on a discretionary
basis according to the actual needs of their business operation and provides the procedures for foreign-invested companies to use Renminbi
converted from foreign currency-denominated capital for equity investment. Nevertheless, Circular 19 also reiterates the principle that
Renminbi converted from foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for
purposes beyond its business scope.
In
June 2016, SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts,
or Circular 16, which took effect on the same day. Compared to Circular 19, Circular 16 provides that discretionary foreign exchange settlement
applies to foreign exchange capital, foreign debt offering proceeds and remitted foreign listing proceeds, and the corresponding Renminbi
obtained from foreign exchange settlement are not restricted from extending loans to related parties or repaying the intercompany loans
(including advances by third parties). However, there still exist substantial uncertainties with respect to the interpretation and implementation
of Circular 16 in practice.
In
November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Direct Investment,
as amended, which substantially amends and simplifies the foreign exchange procedure. Pursuant to this circular, the opening of various
special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee
accounts, the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by
a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital
accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the
Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors
and the Supporting Documents in May 2013, as amended, which specifies that the administration by SAFE or its local branches over direct
investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business
relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches.
After
a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, became effective
on June 1, 2015, instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas
direct investment from SAFE, entities and individuals will be required to apply for such foreign exchange registrations from qualified
banks. The qualified banks, under the supervision of SAFE, directly examine the applications and conduct the registration.
On
October 23, 2019, SAFE issued the Circular on Further Promoting Cross-border Trade and Investment Facilitation, or SAFE Circular
28. Among others, SAFE Circular 28 relaxes the prior restrictions and allows the foreign-invested enterprises without equity investment
as in their approved business scope to use their capital obtained from foreign exchange settlement to make domestic equity investment
as long as the investments are real and in compliance with the foreign investment-related laws and regulations. In addition, SAFE Circular
28 stipulates that qualified enterprises in certain pilot areas may use their capital income from registered capital, foreign debt and
overseas listing for the purpose of domestic payments without providing authenticity certifications to the relevant banks in advance for
those domestic payments. Payments for transactions that take place within the PRC must be made in RMB. Foreign currency revenues received
by PRC companies may be repatriated into the PRC or retained outside of the PRC in accordance with requirements and terms specified by
SAFE.
Dividend Distribution
Wholly
foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if
any, as determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises may not
pay dividends unless they set aside at least 10% of their respective accumulated profits after-tax each year, if any, to fund certain
reserve funds until such time as the accumulative amount of such fund reaches 50% of the enterprise’s registered capital. In addition,
these companies also may allocate a portion of their after-tax profits based on PRC accounting standards to employee welfare
and bonus funds at their discretion. These reserves are not distributable as cash dividends.
Regulations
governing the abovementioned dividend distribution arrangements have been replaced by the Foreign Investment Law and its implantation
rules, which do not provide specific dividend distribution rules for foreign-invested enterprises. However, the Foreign Investment Law
and its implementation rules provide that after the conversion from a wholly foreign-owned enterprise or Sino-foreign equity joint venture
to a foreign-invested enterprise under the Foreign Investment Law, the distribution method of gains agreed upon in the joint venture agreements
may continue to apply.
Foreign Exchange Registration
of Offshore Investment by PRC Residents
Pursuant
to SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound
Investment via Overseas Special Purpose Vehicles, or SAFE Circular No. 75, issued in October 2005, and a series of implementation
rules and guidance, including the circular relating to operating procedures that came into effect in July 2011, PRC residents, including
PRC resident natural persons or PRC companies, must register with local branches of SAFE in connection with their direct or indirect offshore
investment in an overseas special purpose vehicle, or SPV, for the purposes of overseas equity financing activities, and to update such
registration in the event of any significant changes with respect to that offshore company. SAFE promulgated the Circular on Relevant
Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through
Special Purpose Vehicles, or SAFE Circular No. 37, on July 4, 2014, which replaced SAFE Circular No. 75. SAFE Circular
No. 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control
of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity
interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular No. 37 as a “special purpose
vehicle.” The term “control” under SAFE Circular No. 37 is broadly defined as the operation rights, beneficiary
rights or decision-making rights acquired by the PRC residents in the offshore special purpose vehicles or PRC companies by such means
as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. SAFE Circular No. 37 further requires
an amendment to the registration in the event of any changes with respect to the basic information of the special purpose vehicle, such
as changes in a PRC resident individual shareholder, name or operation period; or any significant changes with respect to the special
purpose vehicle, such as an increase or decrease of capital contributed by PRC individuals, a share transfer or exchange, merger, division
or other material events. If the shareholders of the offshore holding company who are PRC residents do not complete their registration
with the local SAFE branches, the PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in
capital, share transfer or liquidation to the offshore company, and the offshore company may be restricted in its ability to contribute
additional capital to its PRC subsidiaries. Moreover, failure to comply with the SAFE registration and amendment requirements described
above could result in liability under PRC law for evasion of applicable foreign exchange restrictions. We have notified holders of ordinary
shares of our Company whom we know are PRC residents to register with the local SAFE branch and update their registrations as required
under the SAFE regulations described above. After SAFE Notice 13 became effective on June 1, 2015, entities and individuals are required
to apply for foreign exchange registration of foreign direct investment and overseas direct investment, including those required under
SAFE Circular No. 37, with qualified banks, instead of SAFE. The qualified banks, under the supervision of SAFE, directly examine
the applications and conduct the registration. The failure or inability of our PRC resident shareholders to comply with the registration
procedures may subject the PRC resident shareholders to fines and legal sanctions, restrict our cross-border investment activities, or
limit our PRC subsidiaries’ ability to distribute dividends to or obtain foreign exchange dominated loans from our company.
C. Organizational Structure
The following diagram illustrates
our corporate structure as of the date of this annual report:
The following table sets forth the details of our
significant subsidiaries:
Name of subsidiaries |
|
Place and date
of incorporation |
|
Percentage of
ownership |
|
Principal activities |
Merchant Supreme Co., Ltd.
(“Merchant Supreme”) |
|
BVI,
June 25, 2012 |
|
100% held by PME |
|
Intermediate holding company |
|
|
|
|
|
|
|
Prime Cheer Corporation Ltd.
(“Prime Cheer”) |
|
Hong Kong,
May 3, 2012 |
|
100% held by Merchant Supreme |
|
Intermediate holding company |
|
|
|
|
|
|
|
Pingtan Guansheng Ocean Fishing Co., Ltd.
(“Pingtan Guansheng”) |
|
PRC,
October 12, 2012 |
|
100% held by Prime Cheer |
|
Intermediate holding company |
|
|
|
|
|
|
|
Fujian Heyue Marine Fishing Development Co., Ltd.
(“Fujian Heyue”) |
|
PRC,
January 27, 2015 |
|
100% held by Pingtan Guansheng |
|
Seafood trading |
|
|
|
|
|
|
|
Fujian Provincial Pingtan County Fishing Group Co., Ltd.
(“Pingtan Fishing”) |
|
PRC,
February 27, 1998 |
|
92% held by Fujian Heyue |
|
Oceanic fishing |
D. Property, plants and equipment
See “—B. Business
Overview—Properties and Facilities.”
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The
following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated
financial statements and their related notes included in this annual report. This report contains forward-looking statements. See “—G.
Safe Harbor on Forward-Looking Statements.” In evaluating our business, you should carefully consider the information provided
under the caption “Item 3. Key Information—D. Risk Factors” in this annual report. We caution you that our businesses
and financial performance are subject to substantial risks and uncertainties.
A.
Operating Results
Overview
We are a marine enterprise group primarily engaging in ocean fishing
through our operating subsidiary, 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.
As of December 31, 2021, we owned 51 squid jigging vessels, 26 trawlers,
25 seine vessels, 13 drifters, four longline fishing vessels, and three transport vessels and had exclusive operating license rights to
20 seine vessels. Among the 142 vessels, 100 were located in international waters, 12 were located in the Bay of Bengal in India, 13 were
located in the PRC, 17 were located in the Arafura Sea in Indonesia and not in operation.
We catch nearly 20 different species of fish, including Argentina squid,
Indian Ocean squid, Sardine and Peru squid. 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 Mawei and Pingtan, Fujian province. We also purchase and sell Argentina squid
and shrimp.
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 started strategic cooperation with an e-commerce
platform to sell our fish products directly to consumers online, which is not a significant portion of our revenues. The demand for seafood
products is the highest from December to January and/or during the 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.
Major
Factors Affecting Our Results of Operations
|
● |
Continuous impact of the COVID-19 pandemic: A
novel strain of coronavirus (COVID-19) has spread in many countries and continued to affect the global economy. The outbreak and resurgence
of COVID-19 have significantly affected business activities in China.
Emergency quarantine measures and travel restrictions
have had a significant impact on many sectors across the PRC, which has also adversely affected our operations. To reduce the impact on
our production and operation, we implemented certain safety measures to allow us to maintain our operations. We comply with, and require
all employees to comply with, the COVID-19 prevention measures issued by governmental authorities, including disinfecting the outer packaging
of the catch, sampling some of the catch for nucleic acid testing, and requiring employees who come into contact with the catch to wear
masks, get vaccinated, wash their hands frequently for disinfection, and undergo nucleic acid testing. We encourage employees to be vaccinated
and provide them with items for personal protection, such as face masks, medicine, and medicinal alcohol. In 2021, the Chinese government
required a higher frequency of inspection of fish and nucleic acid testing of our warehouse staff, sales staff and crew members, which
prolonged the storage time of the fish, affected the freshness of fish and had a negative impact on the unit price and sales volume of
our products. Moreover, the Chinese government also imposed heightened quarantine measures for crew members who returned to the PRC from
other countries or regions, which increased our staff costs.
Management is focused on mitigating the effects
of COVID-19 on our business operations while protecting the employees’ health and safety. We will continue to actively monitor the
situation and may take further actions that alter our business operations, as may be required by local authorities or that we determine
are in the best interests of our employees, customers, partners, suppliers and other stakeholders.
Some of our customers are fish processing plants
that export processed fish products to foreign countries. These customers reduced or postponed their purchases from us in the initial
stage of the pandemic, but since the middle of the second quarter of 2020, they have adjusted their business strategies in relation to
exportation or domestic sale. Because of the reduction or postponement, our unit selling price decreased, our inventory levels increased
and our accounts receivables were not timely paid as anticipated. |
|
|
The COVID-19 pandemic continues to cause major disruptions to businesses
and markets worldwide as the virus spreads or there is a resurgence in certain jurisdictions. The effects of the outbreak are still evolving,
and the ultimate severity and duration of the pandemic and the implications on global economic conditions remain uncertain. For instance,
in the first half of 2022, the PRC government at different levels imposed stringent measures including lockdowns of certain cities and
districts in light of the resurgence of COVID-19. Therefore, the extent of the impact of the pandemic on our financial condition and results
of operations is still highly uncertain and will depend on future developments, such as the ultimate duration and scope of the outbreak,
its impact on our customers and exporters, how quickly normal economic conditions, operations, and the demand for our products can resume
and whether the pandemic leads to recessionary conditions in the PRC, United States, or globally. |
|
|
|
|
|
|
|
|
|
While we anticipate that our results of operations will continue to be impacted by this pandemic in 2022, we are unable to reasonably estimate the extent of the impact on our full-year results of operations, our liquidity or our overall financial position. |
|
● |
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 applicable licenses or permits, or loss or denial of extensions to
any existing licneses or permits, could hamper our ability to generate revenue from our operations. |
|
● |
Resource
& environmental factors: Our fishing expeditions are based in the Exclusive Economic Zone(“EEZ”), the international
waters. Any earthquake, tsunami, adverse weather or oceanic conditions, or other disasters in such areas may disrupt 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 volume may also be adversely affected by
major climatic disruptions such as El Niño, which in the past has caused a significant decrease in the seafood catch worldwide.
Besides weather patterns, other unpredictable factors, such as fish migration, may also impact our harvest volume. |
|
● |
Fuel
price fluctuations: Our operations may be adversely affected by fuel price fluctuations. 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 finishing in the EEZ, and international waters. 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 the PRC, however,
is high as fish compete with other sources of protein. We also 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 consumer base because
of our pricing advantages. |
|
● |
Fishing licenses: Each of our
fishing vessels requires approval from the MARA 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 the establishment of a joint venture or sole proprietorship to obtain local licenses.
In early December 2014, the Indonesian government
introduced a six-month moratorium on issuing new fishing licenses and renewals so that the country’s Ministry of Maritime Affairs
and Fisheries (“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 the fishing licenses of four vessels operated through PT. The fishery
business licenses of Avona, one of the local companies through which we conduct business in Indonesia, and Dwikarya, the other local company
through which we conduct business in Indonesia, were revoked. 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. As a result of
the above, all local fishing licenses of our vessels in Indonesia are presently inactive.
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.
Our management has determined to shift the
focus of development to international waters and consider obtaining corresponding fishing permits. In response to impairment
triggering events, the Company recorded an impairment in the fourth quarter of 2020 of $66.7 million for 50 fishing vessels and one
krill fishing vessel. We recognized an impairment of $6.3 million for 12 fishing vessels for the year ended 2021. On December 27,
2021, we and Huanghai Ship Construction Co., Ltd. (“Huanghai”) entered into an agreement to terminate the building of a
krill vessel and Huanghai agreed to refund all of the RMB587.3 million (approximately $92.1 million) of prepayment made by us in
four quarterly installments. Due to the issues involving the construction of this ship, the Company had previously recorded
impairment on a portion of the construction in progress. Based upon such impairment amount, we recognized a $26,408,130 of
settlement of contract for the year ended December 31, 2021. During the first quarter of 2022, the Company received RMB147.7 million
(approximately $23.2 million), representing the first quarterly installment payment, from Huanghai. See Note 2 of the consolidated
financial statements included elsewhere in this annual report for further details. |
Key
Components of Results of Operations
Revenue
We
catch different species of fish, ship them back to China and sell the catches to distributors and retailers by acting as a
wholesaler. Marine catch is our only product. The product type, contractual price and quantities are identified in the contracts. We
also purchased fishery products from third parties to sell to our customers to meet their demands. We do not offer promotional
payments, customer coupons, rebates or other cash redemption offers to our customers, and we do not accept returns.
Our revenues are recorded at a point in time. All of our operations are considered by the Company’s Chief Operating Decision
Maker to be aggregated into one reportable operating segment, and our revenue is disaggregated by product type in terms of species
of fish sold pursuant to ASC 606-10-55-91(a).
The
revenue is generated from the sale of frozen fish and other marine catches. We recognize revenue at the amount we expect to be entitled
to be paid, determined when control of the products is transferred to our customers, which occurs upon delivery of and acceptance of
the frozen fish by the customer and we have a right to payment.
We
have identified one performance obligation as when the frozen fish and other marine catches identified in the contract are picked up
by the customers at our cold storage warehouses, with revenue being recognized at a point in time. We initially recognize revenue in
an amount that is estimated based on contractual prices. The receivables under contracts, whereby pricing is based on contractual prices,
are primarily collected within 180 days.
For
the years ended December 31, 2021, 2020 and 2019, our revenue by species of fish was as follows:
| |
Year
Ended December 31, 2021 | |
| |
Revenue | | |
Volume
(KG) | | |
Average
price | | |
Percentage
of revenue | |
Argentine squid | |
$ | 49,127,035 | | |
| 15,279,655 | | |
$ | 3.22 | | |
| 29.9 | % |
Indian Ocean squid | |
| 22,394,010 | | |
| 22,920,501 | | |
| 0.98 | | |
| 13.6 | % |
South American white shrimp | |
| 18,121,563 | | |
| 3,523,536 | | |
| 5.14 | | |
| 11.0 | % |
Sardine | |
| 17,975,661 | | |
| 40,425,215 | | |
| 0.44 | | |
| 11.0 | % |
Peru Squid | |
| 16,877,775 | | |
| 12,698,146 | | |
| 1.33 | | |
| 10.3 | % |
Other | |
| 39,587,000 | | |
| 35,146,479 | | |
| 1.13 | | |
| 24.2 | % |
Total | |
$ | 164,083,044 | | |
| 129,993,532 | | |
$ | 1.26 | | |
| 100.0 | % |
| |
Year
Ended December 31, 2020 | |
| |
Revenue | | |
Volume
(KG) | | |
Average
price | | |
Percentage
of revenue | |
Indian
Ocean squid | |
$ | 33,968,115 | | |
| 41,608,084 | | |
$ | 0.82 | | |
| 38.9 | % |
Peru
squid | |
| 14,709,193 | | |
| 10,700,911 | | |
| 1.37 | | |
| 16.9 | % |
Chub
mackerel | |
| 6,453,289 | | |
| 7,084,126 | | |
| 0.91 | | |
| 7.4 | % |
Cuttle
fish | |
| 6,145,172 | | |
| 1,452,960 | | |
| 4.23 | | |
| 7.0 | % |
Sardine | |
| 4,296,979 | | |
| 11,399,554 | | |
| 0.38 | | |
| 4.9 | % |
Other | |
| 21,667,672 | | |
| 11,939,367 | | |
| 1.81 | | |
| 24.9 | % |
Total | |
$ | 87,240,420 | | |
| 84,185,002 | | |
$ | 1.04 | | |
| 100.0 | % |
| |
Year
Ended December 31, 2019 | |
| |
Revenue | | |
Volume
(KG) | | |
Average
price | | |
Percentage
of revenue | |
Indian
Ocean squid | |
$ | 35,502,599 | | |
| 32,028,789 | | |
$ | 1.11 | | |
| 39.6 | % |
Ribbon
fish | |
| 12,236,897 | | |
| 3,622,444 | | |
| 3.38 | | |
| 13.7 | % |
Cuttle
fish | |
| 10,921,686 | | |
| 2,173,027 | | |
| 5.03 | | |
| 12.2 | % |
Peru
squid(whole) | |
| 7,512,216 | | |
| 4,234,436 | | |
| 1.77 | | |
| 8.4 | % |
Croaker
fish | |
| 4,884,278 | | |
| 2,301,876 | | |
| 2.12 | | |
| 5.4 | % |
Other | |
| 18,564,480 | | |
| 6,433,891 | | |
| 2.89 | | |
| 20.7 | % |
Total | |
$ | 89,622,156 | | |
| 50,794,463 | | |
$ | 1.76 | | |
| 100.0 | % |
Our
customers are from the following PRC territories. The following table sets for the breakdown of our revenue by region as a percentage
of our total revenue for the years ended December 31, 2021, 2020 and 2019:
| |
Year
Ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
Fujian
province | |
| 50 | % | |
| 68 | % | |
| 66 | % |
Shandong
province | |
| 29 | % | |
| 24 | % | |
| 28 | % |
Zhejiang
province | |
| 9 | % | |
| 7 | % | |
| 4 | % |
Guangdong
province | |
| 4 | % | |
| 0 | % | |
| 1 | % |
Liaoning
province | |
| 3 | % | |
| 0 | % | |
| 0 | % |
Other
areas | |
| 5 | % | |
| 1 | % | |
| 1 | % |
Total | |
| 100 | % | |
| 100 | % | |
| 100 | % |
Cost
of revenue
Our
cost of revenue primarily consists of fuel cost, labor cost, depreciation, freight, 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, 2021, 2020 and 2019:
| |
Year
Ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
| |
Amount | | |
% of
cost of revenue | | |
% of
revenue | | |
Amount | | |
%
of cost of
revenue | | |
% of
revenue | | |
Amount | | |
%
of cost of revenue | | |
%
of revenue | |
Fuel
cost | |
$ | 83,009,617 | | |
| 47.0 | % | |
| 50.6 | % | |
$ | 51,084,651 | | |
| 57.0 | % | |
| 58.5 | % | |
$ | 42,593,090 | | |
| 66.1 | % | |
| 47.5 | % |
Purchase
cost | |
| 26,455,814 | | |
| 15.0 | % | |
| 16.1 | % | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Labor
cost | |
| 24,369,262 | | |
| 13.8 | % | |
| 14.9 | % | |
| 13,028,435 | | |
| 14.5 | % | |
| 14.9 | % | |
| 8,499,445 | | |
| 13.2 | % | |
| 9.5 | % |
Depreciation | |
| 13,744,464 | | |
| 7.8 | % | |
| 8.4 | % | |
| 8,452,135 | | |
| 9.4 | % | |
| 9.7 | % | |
| 5,676,238 | | |
| 8.8 | % | |
| 6.3 | % |
Freight | |
| 12,680,337 | | |
| 7.2 | % | |
| 7.7 | % | |
| 7,846,359 | | |
| 8.8 | % | |
| 9.0 | % | |
| 4,701,486 | | |
| 7.3 | % | |
| 5.2 | % |
Inventory reserve | |
| 9,366,467 | | |
| 5.3 | % | |
| 5.7 | % | |
| 5,606,514 | | |
| 6.3 | % | |
| 6.4 | % | |
| - | | |
| 0.0 | % | |
| 0.0 | % |
Spare
parts | |
| 6,210,142 | | |
| 3.5 | % | |
| 3.8 | % | |
| 3,206,824 | | |
| 3.6 | % | |
| 3.7 | % | |
| 1,948,377 | | |
| 3.0 | % | |
| 2.2 | % |
Maintenance
fees | |
| 424,248 | | |
| 0.2 | % | |
| 0.3 | % | |
| 50,527 | | |
| 0.1 | % | |
| 0.1 | % | |
| 184,836 | | |
| 0.3 | % | |
| 0.2 | % |
Other | |
| 464,230 | | |
| 0.2 | % | |
| 0.3 | % | |
| 386,438 | | |
| 0.3 | % | |
| 0.4 | % | |
| 793,099 | | |
| 1.3 | % | |
| 1.0 | % |
Total
cost of revenue | |
$ | 176,724,581 | | |
| 100 | % | |
| 107.8 | % | |
$ | 89,661,883 | | |
| 100 | % | |
| 102.7 | % | |
$ | 64,396,571 | | |
| 100 | % | |
| 71.9 | % |
Results
of Operations
The
following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be
read together with our consolidated financial statements and related notes included elsewhere in this annual report. The results of operations
in any period are not necessarily indicative of the results that may be expected for any future period.
| |
For
the Years Ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
REVENUE | |
$ | 164,083,044 | | |
$ | 87,240,420 | | |
$ | 89,622,156 | |
| |
| | | |
| | | |
| | |
COST
OF REVENUE | |
| 176,724,581 | | |
| 89,661,883 | | |
| 64,396,571 | |
| |
| | | |
| | | |
| | |
GROSS
(LOSS)/ PROFIT | |
| (12,641,537 | ) | |
| (2,421,463 | ) | |
| 25,225,585 | |
| |
| | | |
| | | |
| | |
OPERATING
EXPENSES (INCOME): | |
| | | |
| | | |
| | |
Selling | |
| 7,632,730 | | |
| 4,850,044 | | |
| 2,715,599 | |
General
and administrative | |
| 5,892,080 | | |
| 4,091,729 | | |
| 4,163,873 | |
General
and administrative - depreciation | |
| 836,142 | | |
| 3,066,522 | | |
| 3,726,061 | |
Government
subsidy | |
| (20,449,471 | ) | |
| (13,660,284 | ) | |
| (6,440,299 | ) |
Impairment loss | |
| 6,301,373 | | |
| 67,713,324 | | |
| 7,951,635 | |
Settlement of contract | |
| (26,408,130 | ) | |
| — | | |
| — | |
(Gain)
on fixed assets disposal | |
| — | | |
| — | | |
| (59,432 | ) |
| |
| | | |
| | | |
| | |
Total
Operating Expenses, Net | |
| (26,195,276 | ) | |
| 66,061,335 | | |
| 12,057,437 | |
| |
| | | |
| | | |
| | |
INCOME
(LOSS) FROM OPERATIONS | |
| 13,553,739 | | |
| (68,482,798 | ) | |
| 13,168,148 | |
| |
| | | |
| | | |
| | |
OTHER
INCOME (EXPENSE): | |
| | | |
| | | |
| | |
Interest
income | |
| 371,695 | | |
| 3,745,611 | | |
| 780,604 | |
Interest
(expense) | |
| (17,371,089 | ) | |
| (13,432,919 | ) | |
| (6,055,310 | ) |
Foreign
currency transaction gain (loss) | |
| 1,231,614 | | |
| 607,674 | | |
| (298,304 | ) |
Dividend
income from cost method investment | |
| 612,734 | | |
| 135,338 | | |
| 312,727 | |
(Loss)
on the interest sold | |
| — | | |
| — | | |
| (86,603 | ) |
(Loss)
on equity method investment | |
| (708,020 | ) | |
| (156,085 | ) | |
| (486,803 | ) |
Other
(expense) | |
| (74,223 | ) | |
| (35,401 | ) | |
| (954,394 | ) |
| |
| | | |
| | | |
| | |
Total
Other Expense | |
| (15,937,289 | ) | |
| (9,135,782 | ) | |
| (6,788,083 | ) |
| |
| | | |
| | | |
| | |
(LOSS)
INCOME BEFORE INCOME TAXES | |
| (2,383,550 | ) | |
| (77,618,580 | ) | |
| 6,380,065 | |
| |
| | | |
| | | |
| | |
INCOME
TAXES | |
| 1,749 | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | |
NET
(LOSS) INCOME | |
$ | (2,385,299 | ) | |
$ | (77,618,580 | ) | |
$ | 6,380,065 | |
| |
| | | |
| | | |
| | |
LESS:
NET INCOME (LOSS) ATTRIBUTABLE TO THE NON-CONTROLLING INTEREST | |
| 95,420 | | |
| (4,740,332 | ) | |
| 698,041 | |
| |
| | | |
| | | |
| | |
NET
(LOSS) INCOME ATTRIBUTABLE TO OWNERS OF THE COMPANY | |
$ | (2,480,719 | ) | |
$ | (72,878,248 | ) | |
$ | 5,682,024 | |
| |
| | | |
| | | |
| | |
LESS:
PREFERRED SHARE DIVIDENDS | |
| (300,000 | ) | |
| — | | |
| — | |
| |
| | | |
| | | |
| | |
“NET
(LOSS) INCOME ATTRIBUTABLE TO ORDINARY SHAREHOLDERS OF THE COMPANY” | |
| (2,780,719 | ) | |
| (72,878,248 | ) | |
| 5,682,024 | |
| |
| | | |
| | | |
| | |
COMPREHENSIVE
(LOSS) INCOME: | |
| | | |
| | | |
| | |
NET
(LOSS) INCOME | |
| (2,385,299 | ) | |
| (77,618,580 | ) | |
| 6,380,065 | |
OTHER
COMPREHENSIVE (LOSS) INCOME | |
| | | |
| | | |
| | |
Unrealized
foreign currency translation gain (loss) | |
| 2,895,972 | | |
| 7,156,773 | | |
| (2,861,319 | ) |
COMPREHENSIVE
INCOME (LOSS) | |
$ | 510,673 | | |
$ | (70,461,807 | ) | |
$ | 3,518,746 | |
Less:
comprehensive income (loss) attributable to the non-controlling interest | |
| 342,401 | | |
| (4,095,594 | ) | |
| 469,583 | |
COMPREHENSIVE
INCOME (LOSS) ATTRIBUTABLE TO OWNERS OF THE COMPANY | |
$ | 168,272 | | |
$ | (66,366,213 | ) | |
$ | 3,049,163 | |
| |
| | | |
| | | |
| | |
NET
(LOSS) INCOME PER ORDINARY SHARE ATTRIBUTABLE TO OWNERS OF THE COMPANY | |
| | | |
| | | |
| | |
Basic | |
$ | (0.03 | ) | |
$ | (0.92 | ) | |
$ | 0.07 | |
Diluted | |
| (0.03 | ) | |
| (0.92 | ) | |
| 0.07 | |
| |
| | | |
| | | |
| | |
WEIGHTED
AVERAGE ORDINARY SHARES OUTSTANDING: | |
| | | |
| | | |
| | |
Basic | |
| 84,906,368 | | |
| 79,121,471 | | |
| 79,055,053 | |
Diluted | |
| 84,906,368 | | |
| 79,121,471 | | |
| 79,055,053 | |
Comparison
of results of operations for the year ended December 31, 2021 and 2020
Revenue
Our revenue increased by 88.1% from $87.2 million in 2020 to $164.1
million in 2021, primarily due to the different sales mix, increase in the average unit selling price, and increase in sales volume as more
vessels were put into operation. We also purchased fishery products from third parties to sell to our customers to meet their demands.
The average unit selling price increased by 21.2% from 2020 to 2021. Our sales volume increased by 54.4% from 84,185,002 kg in 2020 to 129,993,532
kg 2021.
Cost
of revenue
Cost
of revenue increased by 97.1% from $89.7 million in 2020 to $176.7 million in 2021, primarily due to the larger number of vessels in
designated waters, which drove up refueling costs and other related costs of revenue. Purchase cost represents the purchase cost of
fishery products from third parties incurred by Fujian Heyue. In an effort to further penetrate the fishery products market, Fujian
Heyue commenced selling fishery products in the first quarter of 2021.
Gross
loss
Our gross profit/loss is affected
primarily by changes in production costs. Fuel cost, labor cost and depreciation together account for about 68.6% and 80.9% of cost of
revenue in 2021 and 2020, respectively. The fluctuation of fuel prices and changes in depreciation significantly affected our costs and gross profit.
The
following table sets forth our gross loss and gross margin for the years ended December 31, 2021 and 2020.
| |
Year
Ended December 31, | |
| |
2021 | | |
2020 | |
Gross (loss) | |
$ | (12,641,537 | ) | |
$ | (2,421,463 | ) |
(Gross loss margin) | |
| (7.7 | )% | |
| (2.8 | )% |
Our gross loss increased
significantly from $2.4 million in 2020 to $12.6 million in 2021, primarily because the increase in cost of revenue, which was due
to the reasons described above, outpaced our revenue growth. As a result, our gross loss margin increased from 2.8% in 2020 to
7.7% in 2021.
Selling
expenses
Our
selling expense primarily consists of 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.
Selling
expense increased by 57.4% from $4.9 million in 2020 to $7.6 million in 2021, primarily due to (1) an increase of $0.8 million in insurance
expense due to the changes in insured fishing vessels mix; (2) an increase of $0.8 million in storage fees, as we had a larger amount
of fish for inventory and therefore expanded our warehouse capacity; (3) an increase of $0.6 million in customs clearance charge, primarily
due to the increase in the number of customs clearances involved; and (4) an increase of $0.5 million in other miscellaneous selling
expenses, primarily due to the increase in satellite communication fees for fishing vessels.
Selling
expense as a percentage of revenue decreased from 5.6% in 2020 to 4.7% in 2021, primarily due to the faster growth of our revenue during
the same period.
Selling
expense for the years ended December 31, 2021 and 2020 consisted of the following:
| |
Year
Ended December 31, | |
| |
2021 | | |
2020 | |
Insurance | |
$ | 2,728,356 | | |
$ | 1,896,216 | |
Storage fees | |
| 2,131,289 | | |
| 1,331,008 | |
Customs clearance charges | |
| 1,348,383 | | |
| 745,842 | |
Shipping and handling fees | |
| 408,590 | | |
| 371,611 | |
Advertising | |
| 15,113 | | |
| 12,178 | |
Other | |
| 1,000,999 | | |
| 493,189 | |
| |
$ | 7,632,730 | | |
$ | 4,850,044 | |
General
and administrative expense
General
and administrative expense decreased by 6.0% from $7.2 million in 2020 to $6.8 million in 2021, primarily due to a decrease of $2.2 million
in depreciation expense, partially offset by an increase in professional fees of $1.3 million due to the increase in accounting fees
and legal fees.
| |
Year
Ended December 31, | |
| |
2021 | | |
2020 | |
Professional fees | |
$ | 2,863,679 | | |
$ | 1,556,286 | |
Compensation and related benefits | |
| 1,177,862 | | |
| 1,094,152 | |
Depreciation | |
| 836,142 | | |
| 3,066,522 | |
Rent and related administrative
service charges | |
| 472,597 | | |
| 473,964 | |
Travel and entertainment | |
| 302,424 | | |
| 120,574 | |
Bad debt expense | |
| 178,243 | | |
| 380,866 | |
Other(1) | |
| 897,275 | | |
| 465,887 | |
| |
$ | 6,728,222 | | |
$ | 7,158,251 | |
(1) | Other
general and administrative expense primarily consists of communication fees, office supplies, miscellaneous taxes, bank service charges,
depreciation, and Nasdaq listing fees. |
Professional
fees primarily consist of legal fees, accounting fees, investor relations charges, valuation service fees, consulting fees, and other
fees associated with being a public company.
We
recorded the depreciation in relation to idle vessels of $836,142 and $3,066,522 as of December 31, 2021 and 2020, respectively, as
a general and administrative expense rather than as a cost of revenue.
Government
subsidy
Our
government subsidy mainly consists of government incentives to encourage the development of the ocean fishing industry to satisfy the
demand for natural seafood and other miscellaneous subsidies from the Chinese government. Our subsidy increased by 49.7% from $13.7 million
2020 to $20.4 million in 2021, primarily due to the government’s subsidy disbursement schedule.
Impairment
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.
We
recognized an impairment of $6.3 million for 12 fishing vessels for the fiscal year ended December 31, 2021. On December 27, 2021,
the Company and Huanghai Ship Construction Co., Ltd. (“Huanghai”) entered into an agreement to terminate the building of
a krill vessel and Huanghai agreed to refund all of the RMB587.3 million (approximately $92.1 million) of prepayment made by the
Company in four quarterly installments. Due to the issues involving the construction of this ship, the Company had previously recorded impairment on a portion of
the construction in progress. Based upon such impairment amount, the Company recognized a $26.4 million of settlement of contract
for the year ended December 31, 2021. During the first quarter of 2022, the Company received RMB147.7 million (approximately $23.2
million), representing the first quarterly installment payment, from Huanghai.
Other
income/expense
Other
income/expense mainly includes interest income from bank deposits, interest expense for bank borrowings, foreign currency transaction
gain, (loss), income on cost method investment, and loss on equity method investment.
Other
expense (net) increased by 74.4% from $9.1 million in 2020 to $15.9 million in 2021, primarily due to the increase in interest expenses
as a result of an increase in bank loans and an decrease in interest income.
Income
taxes
Our subsidiaries in China
are generally subject to enterprise income tax on their taxable income in China at a rate of 25%, except that Pingtan Fishing is exempt
from income taxes for income generated from our ocean fishing operations in China. For the years ended December 31, 2021 and 2020, we
recorded income tax of $1,749 and nil, respectively.
Net
income (loss)
As
a result of the foregoing, our net loss was $2.4 million for the year ended December 31, 2021, compared to a net loss of $77.6
million for the year ended December 31, 2020.
Comparison
of results of operations for the year ended December 31, 2020 and 2019
Revenue
Our revenue decreased by 2.7%
from $89.7 million in 2019 to $87.2 million in 2020, primarily due to the combined impact of the different sales mix and the decrease
in the average unit selling price. While our sales volume increased 65.7% from 50,794,463 kg in 2019 to 84,185,002 kg in 2020, our average
unit selling price decreased by 40.9% from 2019 to 2020. Indian Ocean squid was our major product in 2020 and an increase in the number
of fishing vessels catching Indian Ocean squid on the market led to increased supply, which negatively affected their average unit selling
price. Moreover, COVID-19 had significant impact on consumer sentiment in 2020, leading to the increasing consumption of lower-priced
fish products.
Cost
of revenue
Cost
of revenue increased by 39.2% from $64.4 million in 2019 to $89.7 million in 2020, primarily due to the increase in production activities.
We
recorded a reserve for inventories of $5.6 million in our cost of revenue in 2020, primarily due to (1) the higher inventory level as
of December 31, 2020 compared with December 31, 2019, and (2) the higher inventory cost than the selling price of our major fish species.
Gross
profit
Our
gross profit is affected primarily by changes in production costs. Fuel cost, labor cost and depreciation together account for about
86.4% and 88.1% of cost of revenue in 2020 and 2019, respectively. The fluctuation of fuel price and change in depreciation may significantly
affect our cost level and gross profit.
The
following table sets forth our gross profit/loss and gross margin for the years ended December 31, 2020 and 2019.
| |
Year
Ended December 31, | |
| |
2020 | | |
2019 | |
Gross (loss)/profit | |
$ | (2,421,463 | ) | |
$ | 25,225,585 | |
(Gross loss margin)/gross
profit margin | |
| (2.8 | )% | |
| 28.1 | % |
We
recognized a gross loss of $2.4 million in 2020, compared with a gross profit of $25.2 million in 2019, representing a gross loss margin
of 2.8% in 2020 and gross profit margin of 28.1% in 2021. The change in our gross margin was primarily due to the factors affecting our
revenue and cost of revenue as discussed above.
Selling
expense
Selling
expense increased by 78.6% from $2.7 million in 2019 to $4.9 million in 2020, primarily due to (1) an increase of $0.5 million in insurance
expense, as the 11 vessels that completed their modification and rebuilding projects in the second half of 2020 were insured accordingly;
(2) an increase of $0.9 million in storage fees, as we had a larger amount of fish for inventory and therefore expanded our warehouse
capacity; (3) an increase of $0.5 million in customs clearance charge as a result of the increase in the number of customs clearances
involved; and (4) an increase of $0.3 million in other miscellaneous selling expense as a result of the increase in satellite communication
fees for fishing vessels. Selling expense as a percentage of revenue increased from 3.0% in 2019 to 5.6% in 2020.
Selling
expense for the years ended December 31, 2020 and 2019 consisted of the following:
| |
Year
Ended December 31, | |
| |
2020 | | |
2019 | |
Insurance | |
$ | 1,896,216 | | |
$ | 1,446,095 | |
Storage fees | |
| 1,331,008 | | |
| 428,625 | |
Customs clearance charges | |
| 745,842 | | |
| 173,572 | |
Shipping and handling fees | |
| 371,611 | | |
| 429,091 | |
Advertising | |
| 12,178 | | |
| 22 | |
Other | |
| 493,189 | | |
| 238,194 | |
| |
$ | 4,850,044 | | |
$ | 2,715,599 | |
General
and administrative expense
General
and administrative expense decreased by 9.3% from $7.9 million in 2019 to $7.2 million in 2020, primarily due to (1) a decrease in depreciation
of vessels of $0.7 million, as certain vessels are under modification and rebuilding process and no depreciation expense was recorded
for such vessels; (2) a decrease in compensation and related benefits of $0.3 million due to the impact of COVID-19; and (3) a decrease
in other general and administrative expense of $0.4 million, partially offset by (1) an increase of $0.3 million in professional fees
and (2) an increase of $0.4 million in bad debt expense.
General
and administrative expense for the years ended December 31, 2020 and 2019 consisted of the following:
| |
Year
Ended December 31, | |
| |
2020 | | |
2019 | |
Depreciation | |
$ | 3,066,522 | | |
$ | 3,726,061 | |
Professional fees | |
| 1,556,286 | | |
| 1,235,578 | |
Compensation and related benefits | |
| 1,094,152 | | |
| 1,365,455 | |
Rent and related administrative
service charges | |
| 473,964 | | |
| 519,161 | |
Travel and entertainment | |
| 120,574 | | |
| 179,839 | |
Bad debt expense | |
| 380,866 | | |
| 30,366 | |
Other(1) | |
| 465,887 | | |
| 833,474 | |
| |
$ | 7,158,251 | | |
$ | 7,889,934 | |
(1) | Other
general and administrative expense primarily consists of communication fees, office supplies, miscellaneous
taxes, bank service charge, depreciation, and Nasdaq listing fee. |
Government
subsidy
Our
government subsidy mainly consists of government incentives to encourage the development of the ocean fishing industry to satisfy the
demand for natural seafood and other miscellaneous subsidies from the Chinese government. Our subsidy increased significantly from $6.4
million in 2019 to $13.7 million in 2020, primarily due to the government’s subsidy disbursement schedule.
Impairment
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. As a result of the rebuilding projects, we assessed the recoverability of the 17 fishing vessels in 2019
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 $8.0 million in 2019.
Since
2014, there has been no progress on fishing license renewals as a result of the Indonesian government’s moratorium on foreign companies,
like us, to obtain the renewal of fishing licenses issued by them. Our management determined to shift the focus of development to international
waters and consider obtaining corresponding fishing permits. In response to these impairment triggering events, we recorded an impairment
in the fourth quarter of 2020 of $67.7 million for fishing vessels.
See
Note 2 of the consolidated financial statements included elsewhere in this annual report for further details.
Other
income/expense
Other
income/expense mainly includes interest income from bank deposits, interest expense for bank borrowings, foreign currency transaction
gain, gain from cost method investment, and loss on equity method investment.
Other
expense (net) increased by 34.6%, or $2.3 million, from $6.8 million in 2019 to $9.1 million in 2020, primarily due to the increase in interest expenses
of approximately $7.4 million as a result of an increase in bank loans.
Income
taxes
Generally, our subsidiaries
in China are subject to enterprise income tax on their taxable income in China at a rate of 25%, except that Pingtan Fishing is exempt
from income taxes for income generated from our ocean fishing operations in China. For the years ended December 31, 2020 and 2019, income
tax was nil and nil, respectively.
Net
(loss) income
As
a result of the foregoing, our net loss was $77.6 million for the year ended December 31, 2020, compared to net income of $6.4 million
for the year ended December 31, 2019.
B.
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
have historically relied on cash flow provided by operations and bank loans to supplement our working capital. We also receive government
subsidies as a government incentive for encouraging the development of the ocean fishing industry. Since the outbreak of COVID-19, we
have been paying close attention to the operations of our customers and optimizing the collection of accounts receivable. For new customers,
we have adopted a policy of receiving payment before pick-up. As of December 31, 2021 and 2020, we had cash balances of approximately
$5.8 million and $0.7 million, respectively. A significant portion of these funds are deposited with financial institutions located in
the PRC and will continue to be indefinitely reinvested in our operations in the PRC. In 2021, we received $72.1
million from short-term bank loans, $98.3 million from long-term bank loans, and $18.5 million from government subsidies. The majority
of the bank loans received are for funding working capital. In the same period, we also repaid bank loans of $126.1 million. Hence,
we believe we have enough resources to operate for at least the next 12 months.
On
January 8, 2021, the Company issued 4,000,000 Series A Convertible Preferred Shares, par value $0.001 per share (“Series A Preferred
Shares”), at a purchase price of $1.00 per share and a stated value of $1.10 per share, in a registered direct offering. Each Series
A Preferred Share was convertible into the Company’s ordinary shares at a conversion price per share equal to the lesser of $2.00
or 90% of the lowest volume weighted average price of the ordinary shares on a trading day during the ten trading days prior to the conversion
date, but not lower than $0.44 per share, subject to certain adjustments. Holders of Series A Preferred Shares are entitled to receive
dividends of 8.0% per annum. The net proceeds from this offering were approximately $3.70 million. From January 8, 2021 until May 27,
2021, the purchaser converted Series A Preferred Shares into ordinary shares of the Company pursuant to the terms of the certificate
of designation of the Preferred Shares (the “Certificate of Designation”). The Company failed to timely file its annual report
on Form 10-K for the fiscal year ended December 31, 2020 (as amended, the “10-K”) with the SEC, which ultimately resulted
in the registration statement registering the Series A Preferred Shares and ordinary shares sold in the offering no longer being effective.
This is a triggering event for certain redemption rights of the purchases set forth in the Certificate of Designation. On May 27, 2021,
the Company redeemed 590,922 Series A Preferred Shares and repurchased 793,192 ordinary shares that were converted following the failure
to file the 10-K from the purchaser for aggregate consideration of $1,450,000.
The
following table sets forth a summary of changes in our working capital from December 31, 2020 to December 31, 2021:
| |
| | |
| | |
December
31, 2020 to December 31, 2021 | |
| |
December 31,
2021 | | |
December 31,
2020 | | |
Change | | |
Percentage
Change | |
Total current
assets | |
$ | 240,438,276 | | |
$ | 114,249,453 | | |
$ | 126,188,823 | | |
| 110.5 | % |
Total
current liabilities | |
| 243,384,265 | | |
| 133,364,200 | | |
| 110,020,065 | | |
| 82.5 | % |
Working
capital (deficit): | |
$ | (2,945,989 | ) | |
$ | (19,114,747 | ) | |
$ | 16,168,758 | | |
| (84.6 | )% |
Our working (deficit) decreased
from $19.1 million as of December 31, 2020 to $3.0 million as of December 31, 2021. This decrease in working deficit is primarily attributable
to increases in (1) prepaid expenses of approximately $18.4 million and (2) other receivables of approximately $111.9 million, partially
offset by a decrease in (1) inventories, net of reserves, of approximately $12.6 million, and increases in (2) accounts
payable of approximately $35.4 million, (3) short-term bank loans of approximately $19.9 million, (4) long-term bank loans - current portion
of approximately $36.9 million due to the repayment schedule and (5) accrued liabilities and other payables of approximately $15.4 million.
In
order to mitigate our liquidity risk, we plan to rely on the proceeds from loans from banks and/or other financial institutions to
increase working capital in order to meet capital demands, and the government subsidies for vessel modifications and rebuilding
projects 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.
The
Company meets its day-to-day working capital requirements through cash flows provided by operations, bank loans and related
parties’ advances. 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 that management
has control over the timing and scope of investments in vessel building and operations in international waters and opportunities in
new fishing territories. In recent years, the Company has also upgraded 68 fishing vessels and three transport vessels. The upgraded
fishing vessels and transport vessels have greater working capacities, which would generate more revenue and cash inflows for the
Company. In addition, the Company receives subsidies for modifications and rebuilding projects and reimbursement of certain
operating expenses from the PRC government as an incentive for the development of the ocean fishing industry.
Cash
flows
The
following summarizes the key components of our cash flows for the years ended December 31, 2021 and 2020:
| |
Year
Ended December 31, | |
| |
2021 | | |
2020 | |
Net cash provided by/(used in) operating activities | |
$ | 29,319,709 | | |
$ | (32,578,152 | ) |
Net cash (used in) investing
activities | |
| (66,399,137 | ) | |
| (70,166,436 | ) |
Net cash provided by financing
activities | |
| 46,039,394 | | |
| 101,922,460 | |
Effect
of exchange rate on cash | |
| 1,056,081 | | |
| 1,334,522 | |
Net increase
in cash | |
$ | 10,016,047 | | |
$ | 512,394 | |
Net
cash flow provided by operating activities for the year ended December 31, 2021 primarily reflected our net loss of approximately
$2.4 million, as adjusted by certain non-cash items, mainly consisting of depreciation of approximately $16.1 million, an increase
in reserve for inventories of approximately $9.4 million, an impairment loss of assets of approximately $6.3 million and settlement
of contract of approximately $26.4 million, and changes in operating assets and liabilities, primarily consisting of items that
positively affected operating cashflows, primarily including (1) a decrease in accounts receivable of approximately $5.7 million,
(2) a decrease in inventory of approximately $4.8 million, (3) an increase in accounts payable of approximately $35.8 million and
(4) an increase in accrued liabilities and other payables of approximately $14.1 million, partially offset by items that negatively
affected operating cashflows, primarily including (1) an increase in prepaid expenses of approximately $18.3 million, (2) an
increase in accounts receivable- related party of approximately $5.6 million, (3) an increase in other receivables of approximately $8.0 million,
and (4) a decrease in accounts payable-related parties of approximately $5.2 million.
Net
cash flow used in investing activities was $66.4 million for the year ended December 31, 2021, primarily due to prepayments for long-term
assets of approximately $54.1 million and payments for the purchase of property, plant and equipment of approximately $30.7 million,
partially offset by proceeds received from government subsidies for fishing vessels construction of approximately $18.4 million.
Net
cash flow provided by financing activities was $46.0 million for the year ended December 31, 2021, primarily due to proceeds
from short-term bank loans of approximately $72.1 million, proceeds from long-term bank
loans of approximately $98.3 million, proceeds from issuance of new shares of approximately
$8.0 million, and advances from related party of approximately $7.0 million, partially offset
by the repayments of short-term bank loans of approximately $53.5 million, repayments of
long-term bank loans of approximately $72.6 million and loans issued to related parties
of approximately $11.9 million.
Capital
expenditures
Our
capital expenditures were primarily incurred for the purchase of property, plant and equipment and payments for fishing vessels
construction and improvements. Our capital expenditures were $84.9 million in 2021. We intend to fund our future capital expenditure with our existing
cash balance, bank loans and government subsidies. We will continue to make capital expenditures in the ordinary course of our
business.
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 table summarizes our contractual obligations as of December 31, 2021, 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 obligations | |
$ | 432,718 | | |
$ | 400,557 | | |
$ | 32,161 | | |
$ | — | | |
$ | — | |
Short-term bank loans(1) | |
| 72,305,786 | | |
| 72,305,786 | | |
| — | | |
| — | | |
| — | |
Long-term
bank loans | |
| 317,585,783 | | |
| 76,487,001 | | |
| 176,752,907 | | |
| 58,228,900 | | |
| 6,116,975 | |
Total | |
$ | 390,324,287 | | |
$ | 149,193,344 | | |
$ | 176,785,068 | | |
$ | 58,228,900 | | |
$ | 6,116,975 | |
(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.
C.
Research and Development, Patents and Licenses, etc.
None.
D.
Trend Information
Other
than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for
the 2022 fiscal year that are reasonably likely to have a material adverse effect on our net revenue, income, profitability, liquidity
or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results
or financial condition.
E.
Critical Accounting Estimates
We
prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of financial statements in conformity with
U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. We continually evaluate
these judgments and estimates based on our own experience, knowledge and assessment of current business and other conditions.
Our
expectations regarding the future are based on available information and assumptions that we believe to be reasonable, which together
form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an
integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies
require a higher degree of judgment than others in their application.
An
accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are
highly uncertain at the time such estimate is made and if different accounting estimates that reasonably could have been used, or changes
in the accounting estimates that are reasonably likely to occur, could materially impact the combined and consolidated financial statements.
We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require
us to make significant accounting estimates.
Revenue
Recognition
In accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 606 and its related amendments, 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, etc.), the 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, 2021 and December 31, 2020.
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 warehouses, after payment is
received by us or a 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 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.
A
reserve is established when management determines that certain inventories may not be saleable. If inventory costs exceed net
realizable value due to price decreases, obsolescence or quantities in excess of expected demand, the Company will record a reserve
for the difference between the cost and the net realizable value. These reserves are recorded based on estimates.
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 values.
Impairment
of long-lived assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable. The Company evaluates the impairment by comparing the 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, the Company recognizes
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. See Note 2 of the consolidated financial statements included elsewhere in this annual report for further details.
Investment
in unconsolidated company – Global Deep Ocean
We
use the equity method of accounting for our investment in, and earnings or loss of, companies that we do not control but over which the
Company 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 the 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.
Recently
adopted accounting standards
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 guarantees, the 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 lease 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 did not have a material impact on the accounting
for leases under which we are the lessee.
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 was effective for interim and annual periods beginning after December 15, 2019. We applied the new standard beginning
January 1, 2020.
In January 2020, the FASB
issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives
and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (“ASU 2020-01”) to clarify
the interaction in accounting for equity securities under Topic 321, investments accounted for under the equity method of accounting in
Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU 2020-01 is effective
for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020. We applied the new standard beginning
January 1, 2021.
In December 2019, the FASB
issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which eliminates
certain exceptions to the existing guidance for income taxes related to the approach for intra-period tax allocations, the methodology
for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This
ASU also simplifies the accounting for income taxes by clarifying and amending existing guidance related to the effects of enacted changes
in tax laws or rates in the effective tax rate computation, the recognition of franchise tax and the evaluation of a step-up in the tax
basis of goodwill, among other clarifications. ASU 2019-12 is effective for fiscal years, and for interim periods within those fiscal
years, beginning after December 15, 2020. We applied the new standard beginning January 1, 2021.
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. In November 2019, the FASB issued ASU 2019-10. Financial Instruments — Credit Losses (Topic
326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, finalizes effective date delays for private
companies, not-for-profit organizations, and certain smaller reporting companies applying the credit losses, leases, and hedging
standards. The effective date for SEC filers, excluding smaller reporting companies as defined by the SEC, remains as fiscal years
beginning after December 15, 2019. The new effective date for all other entities is fiscal years beginning after December 15, 2022.
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 the expected credit loss. The Company is currently evaluating the impact of adopting this
standard on its consolidated financial statements.
ITEM 10. ADDITIONAL
INFORMATION
A. Share
Capital
Not
applicable.
B. Memorandum
and Articles of Association
We
incorporate by reference into this annual report our amended and restated memorandum of association filed as Exhibit 3.1 to our
Current Report on Form 8-K (File No. 001-35192) filed with the SEC on March 1, 2013.
C. Material
Contracts
Material
contracts other than in the ordinary course of business are described in Item 4 and Item 7 or elsewhere in this annual report.
D. Exchange
Controls
See
“Item 4. Information on the Company—B. Business Overview—Regulations—PRC Regulations Relating to Foreign
Exchange.”
E. Taxation
The
following discussion of material Cayman Islands, PRC and United States federal income tax consequences of an investment in our ordinary
shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject
to change. This discussion does not deal with all possible tax consequences relating to an investment in our ordinary shares, such as
the tax consequences under state, local and other tax laws.
Cayman
Islands Taxation
The
Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is
no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government
of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the
jurisdiction of, the Cayman Islands. There are no exchange control regulations or currency restrictions in the Cayman Islands.
People’s
Republic of China Taxation
PME
is a holding company incorporated in the Cayman Islands and its income depends primarily on dividends from its PRC subsidiaries. The
PRC enterprise income tax law and its implementation rules provide that an income tax rate of 10.0% will be applicable to dividends
payable by Chinese companies to non-PRC-resident enterprise shareholders unless otherwise exempted or reduced according to treaties or
arrangements between the PRC central government and governments of other countries or regions. Under the Double Tax Avoidance Arrangement,
dividends paid by a foreign-invested enterprise in the PRC to its direct holding company, which is considered a Hong Kong tax resident
and is determined by the PRC tax authority to have satisfied relevant requirements under the Double Tax Avoidance Arrangement between
China and Hong Kong and other applicable PRC laws, will be subject to withholding tax at the rate of 5.0%. Entitlement to a lower tax
rate on dividends according to tax treaties or arrangements between the PRC central government and governments of other countries or
regions is subject to inspection or approval of the relevant tax authorities. Furthermore, the State Administration of Taxation promulgated
Circular 9 to clarify the definition of beneficial owner under PRC tax treaties and tax arrangements. According to Circular 9, a beneficial
owner refers to a party who holds ownership of and control over the income of the entity, or the rights or assets from which such income
is derived. The test to determine whether a resident of the other contracting party to the double taxation treaty or arrangement is a
beneficial owner shall focus on several factors including, among others, (1) whether the applicant is under the obligation to pay
50% or more of the income received to any resident of any third country or region within 12 months upon receipt of the income; and
(2) whether the business activities carried out by the applicant constitutes substantive business activities, which include substantive
manufacturing, distribution, management and other activities.
Under
the PRC enterprise income tax law, enterprises established under the laws of jurisdictions outside China with their “de facto management
body” located within China may be considered to be PRC tax resident enterprises for tax purposes and therefore subject to PRC enterprise
income tax at the rate of 25% on their worldwide income. The implementation rules of the PRC enterprise income tax law define the
term “de facto management body” as a management body which substantially manages, or has control over the business, personnel,
finance and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled
Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22,
2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled
offshore incorporated enterprise is located in China, which include all of the following conditions: (1) the senior management and
core management departments in charge of daily operations are located mainly within China, (2) financial and human resources decision
are subject to determination or approval by persons or bodies in China, (3) major assets, accounting books, company seals and minutes
and files of board and shareholders’ meeting are located or kept within China, and (4) at least half of the enterprise’s
directors with voting rights or senior management reside within China. The State Administration of Taxation issued a bulletin on August 3,
2011 to provide more guidance on the implementation of Circular 82. The bulletin clarifies certain matters relating to resident status
determination, post-determination administration and competent tax authorities. Although both the circular and the bulletin only apply
to offshore enterprises controlled by PRC enterprises and not those by PRC individuals, the determination criteria set forth in the circular
and administration clarification made in the bulletin may reflect the general position of the State Administration of Taxation on how
the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises and
the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals. See
“Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—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.”
United
States Federal Income Tax Considerations
The
following discussion is a summary of United States federal income tax considerations relating to the ownership and disposition of our
ordinary shares by a U.S. Holder, as defined below, who holds our ordinary shares as “capital assets” (generally, as property
held for investment) under the United States Internal Revenue Code of 1986, as amended, or the Code. This discussion is based upon existing
United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect. No ruling
has been sought from the Internal Revenue Service, or the IRS, with respect to any United States federal income tax consequences described
below, and there can be no assurance that the IRS or a court will not take a contrary position. This discussion does not address all
aspects of United States federal income taxation that may be relevant to particular investors in light of their individual circumstances,
including investors subject to special tax rules (such as, for example, banks, financial institutions, insurance companies, regulated
investment companies, real estate investment trusts, grantor trusts, individual retirement and other tax-deferred accounts, broker-dealers,
traders in securities that elect to use a mark-to-market method of accounting, partnerships or other pass-through entities and their
partners or investors, tax-exempt organizations (including private foundations)), investors who are not U.S. Holders, investors who are
former U.S. citizens or long-term residents, investors subject to special accounting rules under Section 451(b) of the
Code, investors that own (directly, indirectly, or constructively) 10% or more of our stock by vote or by value, investors that hold
their ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction, or investors that
have a functional currency other than the U.S. dollar, all of whom may be subject to tax rules that differ significantly from those
summarized below. In addition, this discussion does not address any U.S. federal estate, gift or alternative minimum tax considerations,
any U.S. state, local, or non-United States tax considerations, or the additional Medicare tax on net investment income. Each potential
investor is urged to consult its tax advisor regarding the United States federal, state, local and non-United States income and other
tax considerations of an investment in our ordinary shares.
General
For
purposes of this discussion or arrangement, a “U.S. Holder” is a beneficial owner of our ordinary shares that is, for United
States federal income tax purposes, (1) an individual who is a citizen or resident of the United States, (2) a corporation
(or other entity treated as a corporation for United States federal income tax purposes) created in, or organized under the laws of,
the United States or any state thereof or the District of Columbia, (3) an estate the income of which is includible in gross income
for United States federal income tax purposes regardless of its source, or (4) a trust (a) the administration of which is subject
to the primary supervision of a United States court and which has one or more United States persons who have the authority to control
all substantial decisions of the trust or (b) that has otherwise elected to be treated as a United States person under the Code.
If
a partnership (or other entity or arrangement treated as a partnership for United States federal income tax purposes) is a beneficial
owner of our ordinary shares, the tax treatment of a partner in the partnership will depend upon the status of the partner and the activities
of the partnership. Partnerships and partners of a partnership holding our ordinary shares are urged to consult their tax advisors regarding
an investment in our ordinary shares.
Passive
foreign investment company considerations
A
non-United States corporation, such as our company, will be classified as a “passive foreign investment company,” or PFIC,
for United States federal income tax purposes if, for any particular taxable year, either (1) 75% or more of its gross income
for such year consists of certain types of “passive” income or (2) 50% or more of its average quarterly assets
during such year produce or are held for the production of passive income. For this purpose, cash and cash equivalents are generally
categorized as passive assets and the company’s unbooked intangibles associated with active business activities may generally be
classified as active assets. Passive income generally includes, among other things, dividends, interest, rents, royalties, and gains
from the disposition of passive assets. We will be treated as owning our proportionate share of the assets and earning our proportionate
share of the income of any other non-U.S. corporation in which we own, directly or indirectly, more than 25% (by value) of the stock.
Based
upon our historical and current income and assets, we do not believe that we were classified as a PFIC for the taxable year ending
December 31, 2021.
While
we do not expect to become a PFIC in the current or future taxable years, the determination of whether we are or will become a PFIC
will depend upon the composition of our income (which may differ from our historical results and current projections) and assets and
the value of our assets from time to time, including, in particular the value of our goodwill and other unbooked intangibles (which may
depend upon the market value of our ordinary shares from time-to-time and may be volatile). In estimating the value of our goodwill and
other unbooked intangibles, we have taken into account our market capitalization, which has fluctuated and may continue to fluctuate.
If our market capitalization declines or does not increase, we may be classified as a PFIC for the current or future taxable years.
It is also possible that the IRS may challenge our classification or valuation of our goodwill and other unbooked intangibles, which
may result in our company being, or becoming classified as, a PFIC for the current or one or more future taxable years.
The
determination of whether we are or will be a PFIC may also depend, in part, on how, and how quickly, we use our liquid assets, including
cash. Under circumstances where we retain significant amounts of liquid assets including cash, our risk of being classified as a PFIC
may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual
determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current
taxable year or any future taxable year. If we are classified as a PFIC for any year during which a U.S. holder holds
our ordinary shares, we generally would continue to be treated as a PFIC for all succeeding years during which such U.S. holder
holds our ordinary shares.
The
discussion below under “Dividends” and “Sale or Other Disposition of Ordinary Shares” is written on the basis
that we will not be classified as a PFIC for United States federal income tax purposes. The United States federal income tax rules that
apply if we are classified as a PFIC for the current taxable year or any subsequent taxable year are discussed below under
“Passive Foreign Investment Company Rules.”
Dividends
Subject
to the PFIC rules described below, any cash distributions (including the amount of any PRC tax withheld) paid on our ordinary shares
out of our current or accumulated earnings and profits, as determined under United States federal income tax principles, will generally
be includible in the gross income of a U.S. Holder as dividend income on the day actually or constructively received by the U.S. Holder
in the case of ordinary shares. Because we do not intend to determine our earnings and profits on the basis of United States federal
income tax principles, any distribution will generally be treated as a “dividend” for United States federal income tax purposes.
Under current law, a non-corporate recipient of dividend income will generally be subject to tax on dividend income from a “qualified
foreign corporation” at the lower applicable net capital gains rate rather than the marginal tax rates generally applicable to
ordinary income provided that certain holding period and other requirements are met.
A
non-United States corporation (other than a corporation that is classified as a PFIC for the taxable year in which the dividend
is paid or the preceding taxable year) will generally be considered to be a qualified foreign corporation (1) if it is eligible
for the benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines
is satisfactory for purposes of this provision and which includes an exchange of information program, or (2) with respect to any
dividend it pays on stock which is readily tradable on an established securities market in the United States. Our ordinary shares are
listed on the Nasdaq Capital Market. Accordingly, we believe that our ordinary shares are readily tradable on an established securities
market in the United States and that we will be a qualified foreign corporation with respect to dividends paid on our ordinary shares.
However, there can be no assurance that our shares are or will continue to be considered readily tradable on an established securities
market in later years. In the event we are deemed to be a PRC resident enterprise under the EIT Law, we may be eligible for the
benefits of the Agreement Between the Government of the United States of America and the Government of the People’s Republic of
China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income (the “United States-PRC
income tax treaty”) (which the Secretary of the Treasury of the United States has determined is satisfactory for this purpose),
in which case we would be treated as a qualified foreign corporation with respect to dividends paid on our ordinary shares. U.S. Holders
are urged to consult their tax advisors regarding the availability of the reduced tax rate on dividends in their particular circumstances.
Dividends received on our ordinary shares will not be eligible for the dividends received deduction allowed to corporate shareholders
of a domestic corporation.
For
United States foreign tax credit purposes, dividends paid on our ordinary shares will generally be treated as income from foreign sources
and will generally constitute passive category income. In the event that we are deemed to be a PRC resident enterprise under the EIT
Law, a U.S. Holder may be subject to PRC withholding taxes on dividends paid, if any, on our ordinary shares. A U.S. Holder may be eligible,
subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends
received on our ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead
claim a deduction for United States federal income tax purposes in respect of such withholding, but only for a year in which such
holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex. U.S. Holders
are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Sale
or other disposition of ordinary shares
Subject
to the PFIC rules discussed below, a U.S. Holder will generally recognize capital gain or loss, if any, upon the sale or other disposition
of ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the holder’s adjusted
tax basis in such ordinary shares. Any capital gain or loss will be long-term gain or loss if the ordinary shares have been held for
more than one year and will generally be United States source gain or loss for United States foreign tax credit purposes. Long-term
capital gains of non-corporate taxpayers are currently eligible for reduced rates of taxation. In the event that we are treated as a
PRC resident enterprise under the EIT Law, and gain from the disposition of the ordinary shares is subject to tax in the PRC, such gain
may be treated as PRC source gain for foreign tax credit purposes under the United States-PRC income tax treaty. The deductibility of
a capital loss may be subject to limitations. U.S. Holders are urged to consult their tax advisors regarding the tax consequences if
a foreign tax is imposed on a disposition of our ordinary shares, including the availability of the foreign tax credit under their particular
circumstances.
Passive
Foreign Investment Company Rules
If
we are classified as a PFIC for any taxable year during which a U.S. Holder holds our ordinary shares, unless the U.S. Holder makes
a mark-to-market election (as described below), the U.S. Holder will, except as discussed below, be subject to additional taxes and a
deferred interest charge, regardless of whether we remain a PFIC, on (1) any excess distribution that we make to the U.S. Holder
(which generally means any distribution paid during a taxable year to a U.S. Holder that is greater than 125% of the average annual
distributions paid in the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the ordinary
shares), and (2) any gain realized on the sale or other disposition, including, under certain circumstances, a pledge, of ordinary
shares. Under the PFIC rules:
|
● |
the excess distribution
and/or gain will be allocated ratably over the U.S. Holder’s holding period for the ordinary shares; |
|
● |
the amount allocated to
the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the first taxable year
in which we are classified as a PFIC, or a pre-PFIC year, will be taxable as ordinary income; and |
|
● |
the amount allocated to
each prior taxable year, other than the current taxable year or a pre-PFIC year, will be subject to tax at the highest
tax rate in effect applicable to the individuals or corporations, as appropriate, for that year, and will be increased by an
additional tax equal to interest on the resulting tax deemed deferred with respect to each such other taxable year. |
If
we are a PFIC for any taxable year during which a U.S. Holder holds our ordinary shares and any of our non-United States subsidiaries
is also a PFIC, such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for
purposes of the application of these rules, even though such U.S. Holder would not receive the proceeds of any distributions or dispositions
from such lower-tier PFICs. Each U.S. Holder is advised to consult its tax advisors regarding the application of the PFIC rules to
any of our subsidiaries.
As
discussed above under “Dividends,” dividends that we pay on our ordinary shares will not be eligible for the reduced tax
rate that applies to qualified dividend income if we are classified as a PFIC for the taxable year in which the dividend is paid
or the preceding taxable year. In addition, if a U.S. Holder owns our ordinary shares during any taxable year that we are a
PFIC, the holder must file an annual information return with the IRS. Each U.S. Holder is urged to consult its tax advisor concerning
the United States federal income tax consequences of purchasing, holding, and disposing ordinary shares if we are or become a PFIC, including
the possibility of making a mark-to-market election and the unavailability of the qualified electing fund election.
As
an alternative to the foregoing rules, a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election with
respect to our ordinary shares, provided that the ordinary shares are “regularly traded” (as specially defined) on the Nasdaq
Stock Market. Our ordinary shares will be “marketable” stock as long as they remain regularly traded on a national securities
exchange, such as the Nasdaq Stock Market. Such stock generally will be “regularly traded” for any calendar year during which
such stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. No assurances may be given
regarding whether our ordinary shares qualify or will continue to qualify as being regularly traded in this regard. If a mark-to-market
election is made, the U.S. Holder will generally (1) include as ordinary income for each taxable year that we are a PFIC the
excess, if any, of the fair market value of ordinary shares held at the end of the taxable year over the adjusted tax basis of such
ordinary shares and (2) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ordinary shares over the
fair market value of such ordinary shares held at the end of the taxable year, but only to the extent of the net amount previously
included in income as a result of the mark-to-market election. The U.S. Holder’s adjusted tax basis in the ordinary shares would
be adjusted to reflect any income or loss resulting from the mark-to-market election. If a U.S. Holder makes an effective mark-to-market
election, in each year that we are a PFIC any gain recognized upon the sale or other disposition of the ordinary shares will be
treated as ordinary income and loss will be treated as ordinary loss, but only to the extent of the net amount previously included in
income as a result of the mark-to-market election.
If
a U.S. Holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified
as a PFIC, the U.S. Holder will not be required to take into account the mark-to-market gain or loss described above during any period
that such corporation is not classified as a PFIC.
Because
a mark-to-market election cannot be made for any lower-tier PFICs that a PFIC may own, a U.S. Holder who makes a mark-to-market election
with respect to our ordinary shares may continue to be subject to the general PFIC rules with respect to such U.S. Holder’s
indirect interest in any of our non-United States subsidiaries that is classified as a PFIC.
Alternative
rules to the default PFIC rules set forth above apply if an election is made to treat us as a “Qualified Electing Fund”, or
QEF, under Section 1295 of the Code. A QEF election is available only if the U.S. Holder receives an annual information statement from
the PFIC setting forth its ordinary earnings and net capital gains, as calculated for United States federal income tax purposes. We
do not intend to provide information necessary for U.S. Holders to make qualified electing fund elections, which, if available, would
result in tax treatment different from the general tax treatment for PFICs described above.
Information
reporting and backup withholding
Certain
U.S. Holders may be required to report information to the IRS relating to such holder’s interest in “specified foreign financial
assets,” including shares issued by a non-United States corporation, for any year in which the aggregate value of all specified
foreign financial assets exceeds $50,000 (or a higher dollar amount prescribed by the IRS), subject to certain exceptions (including
an exception for shares held in custodial accounts maintained with a United States financial institution). These rules also impose
penalties if a U.S. Holder is required to submit such information to the IRS and fails to do so. U.S. Holders are urged to consult their
own tax advisors regarding foreign financial asset reporting obligations and their possible application to the holding of ordinary shares.
In
addition, U.S. Holders may be subject to information reporting to the IRS and backup withholding with respect to dividends on and proceeds
from the sale or other disposition of our ordinary shares. Information reporting will apply to payments of dividends on, and to proceeds
from the sale or other disposition of ordinary shares by a paying agent within the United States to a U.S. Holder, other than U.S. Holders
that are exempt from information reporting and properly certify their exemption. A paying agent within the United States will be required
to withhold at the applicable statutory rate, currently 24%, in respect of any payments of dividends on, and the proceeds from the disposition
of ordinary shares within the United States to a U.S. Holder (other than U.S. Holders that are exempt from backup withholding and properly
certify their exemption) if the holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with
applicable backup withholding requirements. U.S. Holders who are required to establish their exempt status generally must provide a properly
completed IRS Form W-9.
Backup
withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder’s U.S. federal
income tax liability. A U.S. Holder generally may obtain a refund of any amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS in a timely manner and furnishing any required information. Each U.S. Holder is
advised to consult with its tax advisor regarding the application of the United States information reporting rules to their particular
circumstances.
F.
Dividends and Paying Agents
Not
applicable.
G. Statement
by Experts
Not
applicable.
H. Documents
on display
We
are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required
to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months
after the end of each fiscal year. Copies of reports and other information, when so filed, may be inspected without charge and may
be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington,
D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding
registrants that make electronic filings with the SEC using its EDGAR system.
As
a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of quarterly reports
and proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing
profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act
to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered
under the Exchange Act.
I. Subsidiary
Information
Not
applicable.