Business context and reporting period
American Lorain Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company operated food businesses in China, selling chestnut, convenience and frozen-food products. The filing describes a post-quarter transaction involving Planet Green Holdings Corp., then a wholly owned subsidiary, and a proposed company name change; the report itself is filed by American Lorain.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $636,387 | $1,176,709 | $1,653,915 | $2,956,972 |
| Gross profit (loss) | $565,469 | $(297,522) | $681,506 | $(21,924) |
| Operating loss | $(43,792) | $(545,190) | $(112,089) | $(8,007,796) |
| Net loss | $(711,434) | $(2,829,954) | $(768,951) | $(17,799,172) |
Revenue declined about 46% in Q2 and 44% in the first half. Management attributed the decline to competition and discontinued operations. First-half sales fell across all three product categories. Lower costs and expenses improved reported losses, but the company remained loss-making. No income tax expense was recorded.
- Cash flow: First-half operating cash use was $7.01 million, investing cash use was $4,836, and financing cash inflow was $2.56 million. The cash-flow statement reports ending cash of $385,324.
- Liquidity: Current assets were $19.49 million and current liabilities $78.64 million, a working-capital deficit of approximately $59.15 million. Total assets were $69.78 million; stockholders’ equity was negative $8.86 million.
- Debt: Short-term bank loans were $12.12 million, and current long-term debt was $9.36 million. The filing says all short-term loans were in default; the company also was in default on bank loans and debentures and was negotiating with lenders. Capital-lease obligations were $1.06 million.
- Discontinued operations: The first-half loss was $652,612. Discontinued operations had $25.44 million of assets and $49.64 million of liabilities classified as held for sale/current liabilities.
- Shares: 64,824,490 common shares were outstanding at June 30, 2018, up from 38,274,490 at year-end 2017.
Changes, outlook and risks
The board resolved in Q1 to discontinue Junan Hongrun; Shandong Lorain and Dongguan Lorain had previously been discontinued. The company cited these actions and lower expenses as factors in improved year-over-year loss comparisons. Management stated that continued operations depend heavily on converting receivables and inventory to cash and that substantial doubt existed about the company’s ability to continue as a going concern.
Management said it needed significant capital over the next 12 months and warned that failure to raise funds could require reduced operations, office closures and employee terminations. Its stated plans included private financing, negotiations with creditors, disposal of non-performing assets and seeking new business opportunities. No operating or earnings guidance was provided. The filing also identifies PRC political, economic, legal and foreign-exchange risks, refinancing risk, and exposure to raw-material and labor cost increases.
Subsequent events included a July agreement for a $750,000 stock investment and August agreements for a proposed asset/share restructuring and a $10 million equity investment. The August investment and restructuring were subject to shareholder and other conditions; the filing does not establish that they were completed. Management expected the financing proceeds to support general corporate purposes and said the restructuring could improve the balance sheet.
Disclosure controls were deemed ineffective because of a material weakness in U.S. GAAP accounting and reporting expertise. Management said it planned training and recruitment. A subsidiary withdrew a pending lawsuit in 2018.
Important facts for investors to verify
- Whether defaulted loans and debentures were extended, settled, or enforced, and the status of collateral and guarantees.
- Whether the proposed $10 million financing and restructuring closed, including their final terms, approvals and effect on the company’s assets, liabilities and ownership.
- The company’s actual available liquidity: the balance sheet reports cash of $385,324, while MD&A refers to $4.5 million of cash including restricted cash; the filing text does not clearly reconcile these figures.
- The recoverability and disposition of assets held for sale and the settlement of discontinued-operation liabilities.
- Progress in remediating the material weakness in financial reporting controls.
- Revenue comparison details: MD&A states Q2 revenue fell 50.5% in one passage, while the reported figures imply a decline of about 45.9%; confirm the correct comparison and underlying reporting.