Dong Lien Maritime S.A. Panama and Subsidiaries Consolidated Financial Statements for the Years Ended December 31, 2017 and 2016 and Independent Auditors Report
DONG LIEN MARITIME S.A. PANAMA AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2017 AND 2016 (In U.S. Dollars) ASSETS Amount % Amount % CURRENT ASSETS Cash and cash equivalents (Notes 3 and 5) $ 9,507,949 1 $ 5,009,280 1 Trade receivables (Note 3) 1,583,218-2,067,755 - Other receivables from related parties (Note 15) 51,117,503 6 36,107,006 4 Inventories (Note 3) 6,249,887 1 7,570,968 1 Non-current assets classified as held for sale (Notes 3 and 8) 16,150,800 2 - - Other current assets (Note 16) 4,177,634 1 8,653,383 1 Total current assets 88,786,991 11 59,408,392 7 NON-CURRENT ASSETS Financial assets measured at cost (Notes 3 and 6) 26,798-26,798 - Equipment (Notes 3, 4, 9, 15 and 16) 689,911,873 87 788,320,780 91 Refundable deposits (Note 16) 18,297,069 2 18,617,069 2 Other non-current assets 46,917-2,811,458 - Total non-current assets 708,282,657 89 809,776,105 93 TOTAL $ 797,069,648 100 $ 869,184,497 100 LIABILITIES AND EQUITY CURRENT LIABILITIES Short-term borrowings (Notes 10 and 16) $ 3,500,000 1 $ 3,500,000 - Trade payable 10,869,316 1 9,829,102 1 Other payables 9,073,529 1 8,938,696 1 Other payables to related parties (Notes 15 and 16) 8,642,732 1 4,442,570 1 Current portion of long-term borrowings (Notes 10 and 13) 47,029,895 6 9,970,966 1 Other current liabilities 2,027,215-2,848,474 - Total current liabilities 81,142,687 10 39,529,808 4 NON-CURRENT LIABILITIES Long-term borrowings (Notes 10 and 16) 422,803,940 53 469,833,835 54 Other long-term payables to related parties (Notes 15 and 16) 40,784,000 5 48,594,400 6 Other non-current liabilities - - 50,000 - Total non-current liabilities 463,587,940 58 518,478,235 60 Total liabilities 544,730,627 68 558,008,043 64 EQUITY (Note 11) Share capital 72,912,775 9 72,912,775 8 Retained earnings 179,426,246 23 238,263,679 28 Total equity 252,339,021 32 311,176,454 36 TOTAL $ 797,069,648 100 $ 869,184,497 100 The accompanying notes are an integral part of the consolidated financial statements. - 2 -
DONG LIEN MARITIME S.A. PANAMA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In U.S. Dollars) Amount % Amount % OPERATING REVENUES (Notes 3 and 15) Rental revenue $ 84,233,162 81 $ 81,759,091 83 Service revenue 149,381-546,650 1 Cargo revenue 19,624,875 19 15,607,858 16 Total operating revenues 104,007,418 100 97,913,599 100 OPERATING COSTS (Notes 12 and 15) 115,993,582 112 122,419,772 125 GROSS LOSS (11,986,164) (12) (24,506,173) (25) OPERATING EXPENSES (Notes 12 and 15) 2,490,084 2 2,626,616 3 LOSS FROM OPERATIONS (14,476,248) (14) (27,132,789) (28) NON-OPERATING INCOME AND EXPENSES Interest income (Note 3) 35,049-31,203 - Net loss on disposal of equipment (Notes 3 and 15) (1,848,358) (2) - - Impairment loss recognized on equipment (Notes 3, 8 and 9) (31,034,218) (30) - - Net foreign exchange losses (Note 3) (34,316) - (62,090) - Interest expense (Notes 3 and 15) (13,083,175) (13) (9,008,266) (9) Other gains, net 1,603,833 2 3,960,755 4 Total non-operating income and expenses (44,361,185) (43) (5,078,398) (5) NET LOSS FOR THE YEAR (58,837,433) (57) (32,211,187) (33) OTHER COMPREHENSIVE INCOME FOR THE YEAR - - - - TOTAL COMPREHENSIVE LOSS FOR THE YEAR $ (58,837,433) (57) $ (32,211,187) (33) NET LOSS ATTRIBUTABLE TO: Owners of the Parent $ (58,837,433) (57) $ (32,211,187) (33) Non-controlling interests - - - - $ (58,837,433) (57) $ (32,211,187) (33) TOTAL COMPREHENSIVE LOSS ATTRIBUTABLE TO: Owners of the Parent $ (58,837,433) (57) $ (32,211,187) (33) Non-controlling interests - - - - $ (58,837,433) (57) $ (32,211,187) (33) The accompanying notes are an integral part of the consolidated financial statements. - 3 -
DONG LIEN MARITIME S.A. PANAMA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In U.S. Dollars) Share Capital Retained Earnings Total Equity BALANCE AT JANUARY 1, 2016 $ 72,912,775 $ 270,474,866 $ 343,387,641 Net loss for the year ended December 31, 2016 - (32,211,187) (32,211,187) Other comprehensive income for the year ended December 31, 2016 - - - Total comprehensive loss for the year ended December 31, 2016 - (32,211,187) (32,211,187) BALANCE AT DECEMBER 31, 2016 72,912,775 238,263,679 311,176,454 Net loss for the year ended December 31, 2017 - (58,837,433) (58,837,433) Other comprehensive income for the year ended December 31, 2017 - - - Total comprehensive loss for the year ended December 31, 2017 - (58,837,433) (58,837,433) BALANCE AT DECEMBER 31, 2017 $ 72,912,775 $ 179,426,246 $ 252,339,021 The accompanying notes are an integral part of the consolidated financial statements. - 4 -
DONG LIEN MARITIME S.A. PANAMA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In U.S. Dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (58,837,433) $ (32,211,187) Adjustments for: Depreciation expenses 46,592,417 47,396,591 Amortization expenses 4,541 4,540 Interest expense 13,083,175 9,008,266 Interest income (35,049) (31,203) Net loss on disposal of equipment 1,848,357 - Loss on termination of vessel construction contract 901,295 - Impairment loss recognized on equipment 31,034,218 - Changes in operating assets and liabilities Trade receivables 484,537 93,084 Inventories 1,321,081 (263,811) Other receivables from related parties (15,010,497) 2,414,532 Other current assets 4,472,886 (1,482,723) Trade payable 1,040,214 4,669,027 Other payables (149,661) 2,677,930 Other payables to related parties (22,924) 45,209 Other current liabilities (821,259) (1,453,925) Cash generated from operations 25,905,898 30,866,330 Interest received 37,912 29,955 Interest paid (12,824,995) (8,161,869) Net cash generated from operating activities 13,118,815 22,734,416 CASH FLOWS FROM INVESTING ACTIVITIES Payments for equipment (3,856,885) (2,237,065) Proceeds from disposal of equipment 6,640,000 - Refund of prepayments for equipment 2,000,000 - Increase in prepayments for equipment (141,295) - Net cash generated from (used in) investing activities 4,641,820 (2,237,065) CASH FLOWS FROM FINANCING ACTIVITIES Increase in other payables to related parties 4,249,400 1,400,000 (Decrease) increase in other long-term payables to related parties (7,490,400) 10,870,000 Decrease in short-term borrowings - (6,100,000) Proceeds of long-term borrowings 7,000,000 43,432,372 Repayments of long-term borrowings (16,970,966) (79,538,781) (Decrease) increase in other non-current liabilities (50,000) 50,000 Net cash used in financing activities (13,261,966) (29,886,409) (Continued) - 5 -
DONG LIEN MARITIME S.A. PANAMA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In U.S. Dollars) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 4,498,669 $ (9,389,058) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 5,009,280 14,398,338 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 9,507,949 $ 5,009,280 The accompanying notes are an integral part of the consolidated financial statements. (Concluded) - 6 -
DONG LIEN MARITIME S.A. PANAMA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 (In U.S. Dollars, Unless Stated Otherwise) 1. ORGANIZATION AND OPERATIONS Dong Lien Maritime S.A. Panama (the Corporation ) was incorporated in September 1979 under the Company Act of Panama. The Corporation and subsidiaries (collectively, the Group ) mainly provide cargo shipping services, shipping agency, and lease and sells ships. The consolidated financial statements are presented in the Corporation s functional currency, U.S. dollars. 2. APPROVAL OF CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements were approved by the Corporation s management on March 21, 2018. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Statement of compliance The consolidated financial statements have been prepared in accordance with the EAS and related interpretations. b. Basis of preparation The consolidated financial statements have been prepared on the historical cost basis. c. Classification of current and non-current assets and liabilities Current assets include: 1) Assets expected to be realized within 12 months after the reporting period; and 2) Cash and cash equivalents unless the asset is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. Current liabilities include: 1) Liabilities due to be settled within 12 months after the reporting period, even if an agreement to refinance or to reschedule payments on a long-term basis is completed after the reporting period and before the consolidated financial statements are authorized for issue; and 2) Liabilities for which the Corporation and its subsidiaries do not have an unconditional right to defer settlement for at least 12 months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification. Assets and liabilities that are not classified as current are classified as non-current. - 7 -
d. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Corporation and the entities controlled by the Corporation (i.e. its subsidiaries). All intra-group transactions, balances, income and expenses are eliminated in full upon consolidation. See Note 7 for the detailed information of subsidiaries (including the percentage of ownership and main business). e. Foreign currencies In preparing the financial statements of each individual group entity, transactions in currencies other than the entity s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Exchange differences on monetary items arising from settlement or translation are recognized in profit or loss in the period in which they arise. Non-monetary items that are measured at historical cost in a foreign currency are not retranslated. f. Inventories Inventories consist of vessel fuel and are stated at the lower of cost or net realizable value. Inventory write-downs are made by item. g. Equipment Equipment is stated at cost less accumulated depreciation. borrowing costs eligible for capitalization. Cost includes professional fees and Depreciation on equipment is recognized using the straight-line method. Each significant part is depreciated separately. On derecognition of an item of equipment, the difference between the sales proceeds and the carrying amount of the asset is recognized in profit or loss. h. Impairment of assets At the end of each reporting period, the Group review the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered any impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. When it is not possible to estimate the recoverable amount of an individual asset, the Group estimate the recoverable amount of the cash-generating unit to which the asset belongs. The recoverable amount is the higher of fair value less costs to sell and value in use. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount, with the resulting impairment loss recognized in profit or loss. When an impairment loss is subsequently reversed, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but only to the extent that the carrying amount would have been determined as had no impairment loss been recognized for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognized in profit or loss. - 8 -
i. Non-current assets held for sale Non-current assets are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than their previous continuing use. This condition is regarded as met only when the sale is highly probable and the non-current asset is available for immediate sale in its present condition. To met the criteria for the sale being highly probable, the appropriate level of management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within 1 year from the date of classification. Non-current assets classified as held for sale are measured at the lower of carrying amount and fair value less cost to sale. Recognition of depreciation of those assets would cease. j. Financial instruments Financial assets and financial liabilities are recognized when the Group become a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issuance of financial assets and financial liabilities are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. 1) Financial assets All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. a) Measurement category Financial assets are classified into the following categories: Financial assets measured at cost, and receivables i. Financial assets measured at cost Investments in equity instruments under financial assets at fair value through profit or loss that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity instruments are presented as financial assets measured at cost. Therefore, investments in equity instruments with no quoted prices in an active market but with fair values that can be reliably measured are not measured at cost. Financial assets measured at cost are subsequently measured at cost less any identified impairment loss at the end of each reporting period. If, in a subsequent period, the fair value of the financial assets can be reliably measured, the financial assets are remeasured at fair value and classified as financial assets at fair value through profit or loss. The difference between the carrying amount and the fair value is recognized in profit or loss. ii. Receivables Receivables (including trade receivables and cash and cash equivalents) are measured at amortized cost using the effective interest method less any impairment. The straight-line method can be used if there will be no significant difference. Cash equivalents include time deposits which are highly liquid, readily convertible to a known amount of cash, and subject to an insignificant risk of changes in value. These cash equivalents are held for the purpose of meeting short-term cash commitments. - 9 -
b) Impairment of financial assets Financial assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. For financial assets carried at amortized cost, such assets are assessed for impairment on a collective basis even if they were assessed not to be impaired individually. For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet occurred), discounted at the financial asset s original effective interest rate. For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the reversal of the carrying amount of the investment at the date the impairment does not exceed what the amortized cost would have been had the impairment not been recognized. For financial assets that are measured at cost, the amount of the impairment loss is measured as the difference between the asset s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss except for uncollectible trade receivables and other receivables that are written off against the allowance account. c) Derecognition of financial assets The Group derecognize a financial asset only when the contractual rights to the cash flows from the asset expire, when settled, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. At derecognition of a financial asset in its entirety, the difference between the asset s carrying amount and the sum of the consideration received and receivable is recognized in profit or loss. 2) Equity instruments Equity instruments issued by the group entity are recognized at the proceeds received, net of direct issue costs. 3) Financial liabilities a) Subsequent measurement All financial liabilities are measured at amortized cost using the effective interest method. - 10 -
b) Derecognition of financial liabilities The difference between the carrying amount of the financial liability derecognized and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in profit or loss. k. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. 1) Rendering of services Service income is recognized when services are provided. The revenues from vessel operations and leases are recognized over the contract periods. Cargo revenues are recognized when cargo service are complete, i.e., the cargos are transported to the port of discharge. 2) Interest income Interest income from a financial asset is recognized when it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. l. Borrowing costs Borrowing costs directly attributable to an acquisition, construction or production of qualifying assets are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Other than stated above, all other borrowing costs are recognized in profit or loss in the period in which they are incurred. m. Taxation The Group were under the Company Act of Panama. There are no taxes imposed on offshore companies that only engage in business outside of the jurisdiction. 4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Group's accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. - 11 -
Impairment of Equipments At the end of each reporting period, the Group evaluates the carrying amounts of its tangible assets for any indication of impairment loss. In evaluating equipment for potential impairment, the Group makes subjective judgments and assumptions about the scope and way that the assets are used or expected to be used and to evaluate whether changes in the shipping market and the economic environment would have a material adverse impact on the tangible assets. Any changes in judgments and assumptions could affect the evaluation for impairment. 5. CASH AND CASH EQUIVALENTS December 31 Cash on hand $ 923,880 $ 717,551 Checking accounts and demand deposits 6,544,455 2,270,961 Cash equivalent Time deposits with original maturities less than three months 2,039,614 2,020,768 $ 9,507,949 $ 5,009,280 6. FINANCIAL ASSETS MEASURED AT COST December 31 Overseas unlisted ordinary shares Lando Co., Ltd. (investment cost: 3,000,000) $ 26,798 $ 26,798 Management believed that the above unlisted equity investments held by the Group, whose fair value cannot be reliably measured due to the range of reasonable fair value estimates would be significant; therefore, the Group determined that the fair value of the investments are not reliably measurable. 7. SUBSIDIARIES Subsidiaries Included in the Consolidated Financial Statements % of Ownership December 31 Investor Investee Main Business The Corporation Audrey Pescadores S.A. Panama Cargo shipping services and 100.00 100.00 shipping agency Beacon Pescadores S.A. Panama 100.00 100.00 Blossom Pescadores S.A. (Panama) 100.00 100.00 Brave Pescadores S.A. 100.00 100.00 Bright Pescadores S.A. Panama 100.00 100.00 Brilliant Pescadores S.A. 100.00 100.00 Danceflora Pescadores S.A. Panama 100.00 100.00 Dancewood Pescadores S.A. Panama 100.00 100.00 Elegant Pescadores S.A. (Panama) 100.00 100.00 Endurance Pescadores S.A. Panama 100.00 100.00 Eternity Pescadores S.A. Panama 100.00 100.00 (Continued) - 12 -
% of Ownership December 31 Investor Investee Main Business Excellent Pescadores S.A. (Panama) 100.00 100.00 Fair Pescadores S.A. Panama 100.00 100.00 Federal Pescadores S.A. Panama 100.00 100.00 Forever Pescadores S.A. Panama 100.00 100.00 Fourseas Pescadores S.A. Panama 100.00 100.00 Gallant Pescadores S.A. 100.00 100.00 Genius Pescadores S.A. (Panama) 100.00 100.00 Glaring Pescadores S.A. Panama 100.00 100.00 Grand Ocean Navigation (Panama) S.A. 100.00 100.00 Grand Overseas S.A. Panama 100.00 100.00 Grand Pescadores S.A. (Panama) 100.00 100.00 Honor Pescadores S.A. Panama 100.00 100.00 Huge Pescadores S.A. Panama 100.00 100.00 Jackson Steamship S.A. 100.00 100.00 Justicia Pescadores S.A. Panama 100.00 100.00 Leader Pescadores S.A. Panama 100.00 100.00 Modest Pescadores S.A. Panama 100.00 100.00 Moon Bright Shipping Corporation 100.00 100.00 Patriot Pescadores S.A. Panama 100.00 100.00 Penghu Pescadores S.A. Panama 100.00 100.00 Pharos Pescadores S.A. Panama 100.00 100.00 Poseidon Pescadores S.A. Panama 100.00 100.00 Royal Pescadores S.A. (Panama) 100.00 100.00 Shining Pescadores S.A. (Panama) 100.00 100.00 Skyhigh Pescadores S.A. Panama 100.00 100.00 Spinnaker Pescadores S.A. Panama 100.00 100.00 Stamina Pescadores S.A. Panama 100.00 100.00 Summit Pescadores S.A. Panama 100.00 100.00 Sunny Pescadores S.A. (Panama) 100.00 100.00 Superior Pescadores S.A. Panama 100.00 100.00 Trump Pescadores S.A. Panama 100.00 100.00 Unicorn Brilliant S.A. Panama 100.00 100.00 Valor Pescadores S.A. Panama 100.00 100.00 Vigor Pescadores S.A. Panama 100.00 100.00 Well Pescadores S.A. Panama 100.00 100.00 Wise Pescadores S.A. Panama 100.00 100.00 Wonderful Pescadores S.A. Panama 100.00 100.00 (Concluded) 8. NON-CURRENT ASSETS CLASSIFIED AS HELD FOR SALE December 31 Vessel equipment and leased assets $ 16,150,800 $ - In December 2017, the Group decided to dispose of two vessels, which were operated by Well Pescadores S.A. Panama and Poseidon Pescadores S.A. Panama. In January 2018, the Group entered into agreements to sell these vessels. The Group recognized impairment losses of $5,334,218 on the two vessels due to that the expected proceeds on disposals were lower than their net book value. Refer to Note 16 for the carrying amount of equipment pledged by the Corporation and subsidiaries to secure borrowings. - 13 -
9. EQUIPMENT Vessel Equipment Leased Assets Vessel Overhaul Other Equipment Total Cost Balance at January 1, 2016 $ 1,059,974,477 $ - $ 6,517,336 $ 5,266,847 $ 1,071,758,660 Additions - - 2,199,877 17,188 2,217,065 Retirements - - (3,277,915) (416,216) (3,694,131) Reclassification (72,753,024) 74,519,392 (1,025,302) (721,066) 20,000 Balance at December 31, 2016 $ 987,221,453 $ 74,519,392 $ 4,413,996 $ 4,146,753 $ 1,070,301,594 Accumulated depreciation Balance at January 1, 2016 $ 233,505,474 $ - $ 3,282,897 $ 1,489,983 $ 238,278,354 Depreciation expenses 43,039,693 624,283 3,136,826 595,789 47,396,591 Retirements - - (3,277,915) (416,216) (3,694,131) Reclassification (34,232,394) 35,265,209 (629,510) (403,305) - Balance at December 31, 2016 $ 242,312,773 $ 35,889,492 $ 2,512,298 $ 1,266,251 $ 281,980,814 Carrying amounts at December 31, 2016 $ 744,908,680 $ 38,629,900 $ 1,901,699 $ 2,880,502 $ 788,320,780 Cost Balance at January 1, 2017 $ 987,221,453 $ 74,519,392 $ 4,413,996 $ 4,146,753 $ 1,070,301,594 Additions - 278,187 3,558,366 20,332 3,856,885 Disposals (17,303,400) (11,539,794) - - (28,843,194) Retirements - (914,956) (2,871,414) (489,665) (4,276,035) Reclassification (29,123,370) (11,323,172) (713,254) (44,060) (41,203,856) Balance at December 31, 2017 $ 94,0794,683 $ 51,019,657 $ 4,387,694 $ 3,633,360 $ 999,835,394 Accumulated depreciation and impairment Balance at January 1, 2017 $ 242,312,773 $ 35,889,492 $ 2,512,298 $ 1,266,251 $ 281,980,814 Depreciation expenses 39,778,476 3,621,831 2,751,941 440,169 46,592,417 Disposals (13,142,955) (7,211,882) - - (20,354,837) Retirements - (914,956) (2,871,414) (489,665) (4,276,035) Reclassification (17,918,776) (1,381,404) (407,276) (11,382) (19,718,838) Impairment 25,700,000 - - - 25,700,000 Balance at December 31, 2017 $ 276,729,518 $ 30,003,081 $ 1,985,549 $ 1,205,373 $ 309,923,521 Carrying amounts at December 31, 2017 $ 664,065,165 $ 21,016,576 $ 2,402,145 $ 2,427,987 $ 689,911,873 The above items of equipment were depreciated on a straight-line basis over the estimated useful lives as follows: Vessel equipment Leased assets Vessel overhaul Other equipment 15-25 years 2-25 years 2 years 3-10 years Refer to Note 16 for the carrying amount of equipment pledged by the Corporation and subsidiaries to secure borrowings. In October 2017 and September and November 2016, the Group disposed of some vessels to related parties and leased back the same vessels. The lease agreements were identified as finance leases. Therefore, the related vessels were reclassified as leased assets accordingly. Refer to Note 15 for more details. - 14 -
For the years ended December 31, 2017, due to the decline in cargo market, the future cash flows to arise from the vessels were expected to decrease. The Group carried out a review of the recoverable amount of each vessel (including leased assets) and identified that the recoverable amounts of certain vessels werer estimated to be less than their carrying amounts, and impairment losses of $25,700,000 were recognized accordingly. 10. BORROWINGS a. Short-term borrowings December 31 Secured bank loans (Note 16) $ 3,500,000 $ 3,500,000 Interest rate - secured bank loans 2.59% 2.09% b. Long-term borrowings December 31 Secured bank loans (1) (Note 16) $ 465,733,835 $ 475,704,801 Credit bank loans (2) 4,100,000 4,100,000 Less: Current portion (47,029,895) (9,970,966) $ 422,803,940 $ 469,833,835 Interest rate - secured bank loans 1.58%-3.16% 1.09%-3.05% Interest rate - credit bank loans 3.08% 2.58% 1) Secured bank loans are repayable quarterly or in lump sum upon maturity between June 2018 to September 2024. Refer to Note 16 for the information relating to vessels and refundable deposits pledged as collaterals. In 2016, the Group negotiated with certain banks to modify conditions of loan agreements to reduce the principal repayments within two years from the most recent repayment date. 2) Credit bank loans are repayable in installments before June 2018. 11. EQUITY Share Capital December 31 Numbers of shares authorized 72,912,775 72,912,775 Shares authorized (with a par value of $1 each) $ 72,912,775 $ 72,912,775 Number of shares issued and fully paid 72,912,775 72,912,775 Shares issued $ 72,912,775 $ 72,912,775-15 -
12. NET LOSS a. Depreciation and amortization For the Year Ended December 31 An analysis of deprecation by function Operating costs $ 46,592,417 $ 47,396,591 An analysis of amortization by function Operating expenses $ 4,541 $ 4,540 b. Employee benefits expense For the Year Ended December 31 Payroll $ 26,014,370 $ 26,481,823 Labor and health insurance 3,537,757 3,185,316 29,552,127 29,667,139 Other employee benefits 2,300,199 2,377,007 Total employee benefits expense $ 31,852,326 $ 32,044,146 An analysis of employee benefits expense by function Operating costs $ 31,813,526 $ 31,972,496 Operating expenses 38,800 71,650 As of December 31, 2017 and 2016, the Group had 896 and 852 employees, respectively. $ 31,852,326 $ 32,044,146 13. NON-CASH TRANSACTIONS For the years ended December 31, 2017 and 2016, the Group entered into the following non-cash investing and financing activities which were not reflected in the statements of cash flows: a. As of December 31, 2017 and 2016, the Group had reclassified long-term borrowings from the balance sheet date of $47,029,895 and $9,970,966, respectively, to the current portion of long-term borrowings. b. In October 2017 and September and November 2016, the Group disposed of vessels and paid deposits to related parties in accordance with relevant agreements. Please refer to Note 15 for more details. - 16 -
14. FINANCIAL INSTRUMENTS Categories of Financial Instruments December 31 Financial assets Financial assets measured at cost $ 26,798 $ 26,798 Loans and receivables (a) 82,609,505 64,801,281 Financial liabilities Amortized cost (b) 542,703,412 555,159,569 a. The balances included receivables measured at amortized cost, which comprise cash and cash equivalents, trade receivable, other receivables from related parties, other receivables (classified as other current assets) and refundable deposits. b. The balances included financial liabilities measured at amortized cost, which comprise short-term borrowings, trade payable, other payables, other payables to related parties, long-term borrowings (including current portion), other long-term payables to related parties and guarantee deposits received (classified as other non-current liabilities). 15. TRANSACTIONS WITH RELATED PARTIES a. Related parties and their relationships with the Corporation Related Parties Shih Wei Navigation Co., Ltd. (Shih Wei) Fortunate Maritime S.A. Panama (Fortunate) Corebright Maritime S.A. Panama (Corebright) Corebest Maritime S.A. Panama (Corebest) Corediamond Maritime S.A. Panama (Corediamond) Corefortune Maritime S.A. Panama (Corefortune) Corehonor Maritime S.A. Panama (Corehonor) Relationship with the Corporation Parent company Same parent company (Continued) - 17 -
Related Parties Coreocean Maritime S.A. Panama (Corehonor) Coretalent Maritime S.A. Panama (Coretalent) Corewinner Maritime S.A. Panama (Corewinner) Efficiency Ship Management Corporation (Efficiency) Benchmark Pescadores S.A. Panama (Benchmark) Eternal Pescadores S.A. Panama (Eternal) Majestic Pescadores S.A. Panama (Majestic) Benefit Transport S.A. (Benefit) Eternal Pescadores S.A. Panama (Eternal) Coreleader Maritime S.A. Panama (Coreleader) Corepilot Maritime S.A. Panama (Corepilot) Coreshining Maritime S.A. Panama (Coreshining) Coreship Maritime S.A. Panama (Coreship) Coresky Maritime S.A. Panama (Coresky) Relationship with the Corporation Related party in substance of the major stockholder s chairman or his family (related party in substance before June 28, 2017) Related party in substance of the major stockholder s chairman or his family (related party in substance before June 28, 2017) Related party in substance of the major stockholder s chairman or his family (related party in substance before June 28, 2017) Related party in substance of the major stockholder s chairman or his family (related party in substance before June 28, 2017) Related party in substance of the major stockholder s chairman or his family (related party in substance before June 28, 2017) (Continued) - 18 -
Related Parties Corewise Maritime S.A. Panama (Corewise) Transformer Maritime S.A. Panama (Transformer) Relationship with the Corporation Related party in substance of the major stockholder s chairman or his family (related party in substance before June 28, 2017) Related party in substance of the major stockholder s chairman or his family (related party in substance before June 28, 2017) (Concluded) b. Significant related party transactions For the Year Ended December 31 1) Operating revenue Corewise $ 17,123 $ 32,223 Efficiency 16,221 47,412 Benchmark 15,000 18,000 Corebest 13,371 20,766 Coretalent 12,818 26,486 Corewinner 11,563 21,177 Coresky 11,150 49,966 Transformer 10,935 33,067 Coreocean 10,757 30,083 Corebright 10,077 31,072 Corediamond 7,037 56,174 Coreship 6,191 34,302 Corepilot 5,950 27,730 Corefortune 1,625 23,570 Coreshining (434) 40,802 Coreleader (3) 53,822 2) Operating cost $ 149,381 $ 546,652 Shih Wei $ 4,232,000 $ 4,320,000 Corehonor 621,180 4,234,773 Eternal 730,000 736,000 Majestic 365,000 366,000 3) Operating expense $ 5,948,180 $ 9,656,773 Shih Wei $ 1,056,668 $ 1,017,965-19 -
4) Other receivables from related parties For the Year Ended December 31 Agency current accounts Shih Wei $ 31,230,149 $ 29,783,549 Fortunate 4,076,694 2,737,432 $ 35,306,843 $ 32,520,981 In October 2017 and September and November 2016 the Group disposed vessels to related parties, and entered into lease agreements and paid deposits to such related parties. The proceeds, net of payments for deposits, were received by Shih Wei. As of December 31, 2017 and 2016, the balance for the above transactions amounted to $21,888,862 and $20,921,657 recorded under other receivables from related parties, respectively. In November 2017, the Group disposed a vessel operated by Sunny Pescadores S.A. (Panama), and the proceeds were received by Shih Wei. As of December 31, 2017, the balance for the above transaction amounted to $3,252,104 recorded under other receivables from related parties. 5) Trade payable to related parties (classified as trade payable) For the Year Ended December 31 Corehonor $ - $ 69,600 6) Other payables to related parties Agency current accounts Shih Wei $ - $ 244 7) Loans to related parties (classified as other receivable from related parties) December 31 Related Party Shih Wei $ 15,810,660 $ 3,586,025 8) Loans from related parties (classified as other payables to related parties and other long-term payables to related parties) For the Year Ended December 31, 2017 Interest Related Party Ending Balance Interest Rate Payable Interest Expense Benefit* $ 8,500,000 3.50-4.69% $ 12,556 $ 337,116 Corepilot 1,157,000 2.00% 3,279 53,606 Eternal 760,000 2.00% 1,698 27,783 Transformer - 2.00% - 5,495 $ 10,417,000 $ 17,533 $ 424,000-20 -
For the Year Ended December 31, 2016 Interest Related Party Ending Balance Interest Rate Payable Interest Expense Benefit* $ 8,500,000 4.00% $ 7,503 $ 128,624 Corepilot 2,720,000 2.00% 14,474 14,474 Eternal 1,050,000 2.00% 308 308 $ 12,270,000 $ 22,285 $ 143,406 * As of December 31, 2017 and 2016, the Group had pledge vessels with the net carrying amounts of $5,243,881 and $10,936,093 to benefit, respectively. Refer to Note 16 for the information relating to vessel pledged as collaterals. 9) Financial lease payable (classified as other payables to related parties and other long-term payables to related parties) Benefit For the Year Ended December 31 Related Party Minimum lease payments Not later than one year $ 3,158,000 $ 2,825,600 Later than one year and not later than five years 35,684,000 37,724,400 $ 38,842,000 $ 40,550,000 In September and November 2016, the Group entered into sale and purchase agreements with Benefit to dispose of vessels with proceeds of $40,550,000. At the same time, the Group entered into lease agreements with lease terms from October 2016 to September 2021 and December 2016 to November 2021, respectively. Furthermore, the Group committed to repurchase these vessels at the end of the lease terms. The Group deposited and $18,550,000 as collateral in accordance with the agreements. In October 2017, the Group entered into sale and purchase agreements with Benefit to dispose of vessels with proceeds of $5,500,000. At the same time, the Group entered into lease agreements with lease terms from October 2017 to October 2022. Furthermore, the Group committed to repurchase these vessels at the end of the lease terms. The Group deposited $1,000,000 as collateral in accordance with the agreements. In order to dispose one of the above vessels, the Group entered into an agreements with Benefit to request Benefit to sell the vessel to a designated third party on behalf the Group in October 2017. At the same time, the lease agreement and repurchase commitment were cancelled and the Group settled the remaining lease payables of $4,486,000 and deposit of $1,320,000 with Benefit as requested by the sale and purchase agreement. As of December 31, 2017, interest payable were $150,199. The related interest expense and charge fees were $1,195,351 and $10,320 for the year ended December 31, 2017, respectively. As of December 31, 2016, interest payable and charge fees payable were $171,761 and $22,680, respectively. The related interest expense and charge fees were $257,035 and $22,680 for the year ended December 31, 2016, respectively. The above mentioned transactions were classified as finance leases. Therefore, the related vessels were reclassified as leased assets. Refer to Note 9 for more details. - 21 -
16. ASSETS PLEDGED AS COLLATERAL OR FOR SECURITY The following assets were mortgaged or pledged as collaterals for bank guarantee and loans: December 31 Refundable deposits $ 18,230,000 $ 18,550,000 Non-current assets classified as held for sale 15,982,363 - Vessel equipment 664,065,165 744,908,680 Leased assets 21,016,576 38,629,900 Demand deposits (classified as other current assets) 350,711 350,000 $ 719,644,815 $ 802,438,580 17. SIGNIFICANT COMMITMENTS AND CONTINGENCIES As of December 31, 2016, the Group was under the vessel construction contract with the shipbuilding company amounting to US$29,000,000, of which US$2,760,000 had been paid. In December 2017, the Group terminated the vessel construction contract with the shipbuilding company and received a refund of $2,000,000, resulting in a loss of $901,295. - 22 -