Filing identity and reporting period
The supplied filing is American Lorain Corporation’s Form 10-Q for the quarter ended September 30, 2017—not a Planet Green Holdings Corp. filing or a 2017 first-quarter report. The filing describes a China-based food manufacturer and reports three- and nine-month results. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial results and liquidity
| Metric | Three months ended September 30, 2017 | Nine months ended September 30, 2017 |
|---|---|---|
| Revenue | $0.876 million, down 96.8% year over year | $4.060 million, down 94.5% |
| Gross profit / margin | $0.623 million / 71.2% | $0.579 million / 14.3% |
| Operating income (loss) | $(1.643) million | $(6.426) million |
| Net income (loss) | $4.304 million | $(13.495) million |
| Net income (loss) attributable to common shareholders | Statements report $4.571 million; MD&A reports a $(1.764) million loss | $(11.860) million |
| Operating cash flow | Not presented for the quarter | $9.267 million provided |
The quarterly net profit included $6.281 million in other income despite an operating loss and a $0.398 million loss from discontinued operations. The filing does not clearly explain the nature of the quarterly other income in the supplied text. Nine-month discontinued operations recorded a $7.113 million loss; their sales were $0.320 million versus $66.032 million in the prior-year period.
At September 30, cash and cash equivalents were $0.103 million, plus $0.832 million of restricted cash, which was pledged to banking facilities and unavailable for immediate use. Current assets were $50.511 million and current liabilities $84.434 million, a working-capital deficit of approximately $33.923 million. Inventory rose to $23.060 million from $11.841 million, while supplier advances fell to $9.846 million from $29.873 million.
Short-term bank loans were $23.246 million; current maturities of long-term debt were $30.342 million; and current capital-lease obligations were $1.051 million. These disclosed current debt and lease balances total approximately $54.638 million. Total liabilities were approximately $84.434 million, including liabilities of discontinued operations.
Material changes versus the prior comparable period
- Revenue fell sharply across chestnut, convenience-food and frozen-food lines. Management cited insufficient operating capital, reduced raw-material purchases and processing, and competition. The nine-month decline also reflects discontinued operations and the shutdown of facilities.
- Shandong Lorain relocated production to Junan Hongrun in 2016 and stopped production in early 2017; Dongguan Lorain ceased operations at the end of 2016. The French operation had been liquidated in 2016, following issues involving product-origin and certification requirements.
- Nine-month operating results swung from $7.932 million of operating income in 2016 to a $6.426 million loss in 2017. Common-shareholder loss widened from $2.762 million to $11.860 million.
- Cash from operations was positive in 2017, compared with $13.270 million used in the prior-year nine months, but cash and cash equivalents declined to $0.103 million. Investing activities used $9.352 million, primarily for construction in progress.
Outlook, risks and unusual items
- Going concern: The filing and accountant’s review report substantial doubt about the company’s ability to continue as a going concern. Management said it was seeking working capital through private placements of common stock or convertible debt. No assurance of financing is provided.
- Defaults and refinancing: The filing says listed short-term bank loans were unpaid at September 30 and considered in default, with negotiations to renew or modify terms. It also reports defaults on private-placement debentures and DEG loans; the company had not repaid DEG principal, and DEG foreclosed on 10,794,066 pledged shares in December 2016. This should be read alongside the Part II checkbox stating “Defaults upon senior securities: None.”
- Management outlook: Management said available working capital should be adequate to sustain operations at current levels for 2017, while also warning that refinancing, supplier credit and access to new capital were uncertain. No quantitative revenue or earnings guidance is provided.
- Seasonality: Chestnut purchasing and production are concentrated from September to January, and management said the company generally performs best in the fourth quarter.
- Controls and reporting: Management concluded disclosure controls were ineffective because of a continuing material weakness: insufficient skilled accounting personnel with U.S. GAAP experience. The filing describes a correction of prior-period revenue-recognition errors for 2015, including an $8.572 million reduction to previously reported sales.
- Contingency: A lawsuit over a claimed fixed return of RMB 10 million remains pending after remand for retrial; the opposing party had filed a counterclaim. The company expressed confidence in prevailing, but the outcome is unresolved.
- Reporting inconsistencies: The MD&A’s quarterly common-shareholder loss conflicts with the statements’ reported quarterly attributable income. The MD&A cash-flow figures also differ from the cash-flow statement: it cites $9.773 million operating cash flow and $(9.857) million investing cash flow, versus $9.267 million and $(9.352) million in the statements.
Most important facts for investors to verify
- Confirm the issuer and period: the supplied document is American Lorain Corporation’s September 30, 2017 Form 10-Q, not Planet Green Holdings Corp.’s Q1 filing.
- Reconcile quarterly attributable earnings and cash-flow figures between the financial statements and MD&A, and determine the source and sustainability of the $6.281 million quarterly other income.
- Verify the current status, amounts, collateral and creditor remedies for defaulted bank loans, debentures and DEG debt, including the discrepancy with the “None” defaults checkbox.
- Assess near-term liquidity, the recoverability and conversion of inventory and supplier advances into cash, and whether proposed financing was obtained.
- Monitor the going-concern situation, ineffective controls, prior-period revenue correction, discontinued operations and unresolved litigation.