Planet Green Holdings Corp. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited and stated in U.S. dollars. The company was renamed from American Lorain Corporation and completed a major restructuring near quarter-end.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $744,131 | $875,574 | $2,461,448 | $4,060,100 |
| Gross profit | $169,853 | $623,306 | $844,140 | $579,341 |
| Operating income (loss) | ($582,300) | ($1,643,249) | ($701,608) | ($6,426,106) |
| Net income (loss) | $46,839,980 | $4,304,489 | $46,723,641 | ($13,494,683) |
| Cash from (used in) operations | Not provided separately | Not provided separately | ($8,427,021) | $9,267,088 |
Nine-month revenue fell 39.4% year over year, which management attributed to the disposal of and lower revenue from historical subsidiaries. Gross margin was approximately 34.3% for the nine months, versus 14.3% a year earlier; Q3 gross margin was approximately 22.8%, versus 71.2%. Operating losses narrowed, but the reported nine-month net profit primarily reflects a non-operating $56.7 million gain related to the restructuring/investment. The quarter also included $8.6 million of other expenses, described as related-party receivable write-offs or adjustments, and $713,000 of interest expense. The filing’s statements and MD&A vary in some descriptions and rounded comparisons.
Liquidity, balance sheet and debt
- At September 30, cash and cash equivalents were $109,355; restricted cash was $436,902. The company also held $3.82 million in a short-term debt investment bearing 8% annually and maturing December 19, 2018. The investment is not the same as immediately available cash.
- Current assets were $17.51 million and current liabilities $10.16 million. Total assets were $35.37 million, down from $68.49 million at December 31, 2017. Stockholders’ equity was $25.21 million, compared with a $10.79 million deficiency at year-end.
- Short-term bank loans were $5.05 million. The notes say all such loans were in default at quarter-end and that the company was negotiating renewal or revised repayment terms. The balance sheet shows no current portion of long-term debt, but the debt notes also describe defaults and outstanding obligations related to DEG and debentures. The filing does not clearly reconcile these debt disclosures.
- Operating cash flow was negative $8.43 million, investing cash flow negative $5.43 million, and financing cash flow positive $13.93 million for the nine months. Cash and cash equivalents ended at $109,355.
Material changes, outlook and risks
- On September 28, the company disposed of International Lorain and certain subsidiaries to former chairman Si Chen, while retaining or reacquiring specified interests in other businesses. It also acquired Taishan Muren Agriculture, which grows spice plants and fruit trees, in exchange for 400,000 shares.
- The company established new contractual VIE arrangements for several PRC entities. The notes describe Beijing Lorain as an equity-method investment in one passage, while other disclosures describe it as consolidated under VIE arrangements; the accounting and perimeter should be verified.
- A 25-for-1 reverse stock split took effect September 28. The company reported 3,143,141 shares outstanding at September 30, including shares attributed to the Taishan Muren acquisition.
- Private placements generated proceeds during 2018. A separate $10 million financing with CEO/chairman Hongxiang Yu and director/strategy officer Yimin Jin closed on October 16, after quarter-end, in exchange for 2,352,942 shares.
- Management provided no specific operating guidance. It cited the restructuring and disposal of historical subsidiaries as major drivers of results. Risks include loan defaults/refinancing, limited cash, PRC operating and regulatory exposure, foreign-currency risks, and dependence on VIE contractual arrangements. The company disclosed $2.74 million of future lease commitments.
- Disclosure controls were deemed ineffective due to a material weakness: insufficient accounting personnel with appropriate U.S. GAAP experience. Management said it planned training and recruitment. The filing reported no legal proceedings.
Key investor verification points
- Confirm the basis, valuation and noncash nature of the $56.7 million restructuring-related gain, and assess recurring operating performance apart from it.
- Reconcile the reported bank-loan defaults, DEG and debenture obligations, their transfer or continued liability, and the balance-sheet debt presentation.
- Verify unrestricted liquidity, collection of receivables, and repayment or realization of the short-term investment.
- Confirm which entities were disposed, acquired, consolidated or accounted for under the equity method, including the VIE arrangements and related-party balances.
- Assess dilution and ownership effects from the reverse split, acquisition shares, and the $10 million financing completed after quarter-end.
- Track remediation of the material weakness in financial reporting controls.