Filing summary
Entity and period discrepancy: The supplied filing is for American Lorain Corporation, not Planet Green Holdings Corp. The cover and financial statements identify the quarter ended September 30, 2014, although the table of contents says June 30, 2014. This summary uses the September 30 period shown in the statements.
Business context and reporting period
American Lorain manufactures chestnut, convenience, and frozen foods, primarily in China, with exports to other markets. The report covers the three and nine months ended September 30, 2014, compared with the same periods in 2013. The company completed its acquisition of a 51% interest in France-based Athena Group in June 2014 and consolidated its results.
The interim financial statements were reviewed, not audited. The independent accountant reported that it was not aware of material modifications needed for U.S. GAAP conformity.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $55.3 million | $53.1 million | $119.5 million | $122.0 million |
| Gross profit | $9.2 million | $10.3 million | $22.9 million | $24.7 million |
| Operating income | $2.7 million | $6.7 million | $10.3 million | $14.9 million |
| Net income, consolidated | $0.7 million | $4.5 million | $4.7 million | $9.7 million |
| Operating cash flow | $(2.9) million | $(12.6) million | $0.6 million | $(11.8) million |
- Gross margin fell to 16.6% in Q3 from 19.4%; for the nine months it declined to 19.2% from 20.3%. Operating costs and higher cost of revenue weakened profitability.
- Nine-month basic and diluted EPS were reported as $0.15 and $0.14, respectively, versus $0.27 for both measures in 2013. The income statement reports net income attributable to common stockholders of $4.91 million for the nine months and $1.18 million for Q3, figures that differ from consolidated net income.
- At September 30, cash and cash equivalents were $40.8 million and restricted cash was $4.3 million. Current assets were $230.4 million; current liabilities were $103.7 million.
- Total liabilities were $152.1 million. Interest-bearing borrowings and notes, including the convertible note, totaled approximately $113.3 million, based on the reported current and long-term balances.
- Nine-month investing cash outflow was $19.0 million, mainly reflecting capital expenditures and deposits; financing cash inflow was $24.6 million, primarily from net borrowings. Cash and cash equivalents increased $6.3 million before currency translation effects.
Material changes versus comparable periods
- Q3 revenue rose 4.1%, but cost of revenue rose 7.8%; gross profit declined 11.2% and net income declined 72.3%.
- For the first nine months, revenue declined 2.1% and net income declined 47.1%. Convenience-food revenue fell 13.0%, partly offset by chestnut revenue growth of 3.9% and frozen-food growth of 2.1%.
- Q3 selling and marketing costs rose 40.1%, and general and administrative expenses rose 137.1%. Management attributed increases to sales staff costs, wages, pensions, consulting, and other expenses.
- Compared with December 31, 2013, short-term bank loans increased from $29.4 million to $43.6 million; the company also reported $8.0 million in notes payable and a $3.5 million convertible note. Inventory increased from $42.0 million to $77.5 million.
Outlook, risks, contingencies, and unusual items
- Management expected existing resources, operating cash flows, and bank facilities to cover liquidity needs for at least 12 months, while acknowledging no assurance of obtaining additional financing if needed. It also described continuing reliance on short-term loans, generally due within a year, and risks to refinancing.
- The business is seasonal: chestnut purchasing and production peak from September through January, and management says results generally perform best in Q4. It anticipated slight declines in traditional chestnut and convenience-food demand in mainland China and East Asia, while expecting French-subsidiary chestnut revenue to increase.
- Management cited raw-material supply and price exposure, customer and supplier liquidity risks, refinancing and interest-rate risk, PRC regulatory and currency risks, and possible adverse effects from higher labor or input costs.
- The $3.5 million Jade Lane convertible note bears 4.5% interest, matures March 13, 2015 unless converted or otherwise accelerated, and is convertible at $1.15 per share subject to a 9.99% ownership limit. The CEO and chairman personally guarantees the note.
- The company committed to finance Athena subsidiary Cacovin up to €3 million. It also disclosed operating lease commitments, including approximately $3.7 million for greenhouse land leases.
- Disclosure controls were deemed ineffective as of September 30 due to a continuing material weakness in the ability to record transactions and provide disclosures under U.S. GAAP. The company hired an interim CFO on October 28 and described plans to train accounting staff. No material legal proceedings or off-balance-sheet arrangements were reported.
Most important facts to verify
- Confirm the issuer and reporting period: the filing text identifies American Lorain Corporation and September 30, 2014, not Planet Green Holdings Corp. or June 30.
- Reconcile reported consolidated net income with net income attributable to common stockholders and the related EPS disclosures.
- Review short-term debt maturities, refinancing capacity, and the note payable and convertible-note terms, including subsequent payments or conversions.
- Assess the quality and recoverability of the sharp inventory increase, supplier advances, and receivables, as well as the operating cash-flow improvement that relied partly on higher payables.
- Track remediation of the disclosed material weakness and whether future filings demonstrate effective U.S. GAAP controls.