Planet Green Holdings Corp. quarterly report, Q2 FY2014

Business context and reporting period

The supplied filing is American Lorain Corporation’s Form 10-Q for the quarter ended June 30, 2014—not a filing under the requested name Planet Green Holdings Corp. The company manufactures chestnut, convenience, and frozen foods, primarily in China, and exports to markets including Japan, South Korea, and Europe. Amounts below are in U.S. dollars.

Financial performance and position

At June 30, cash and cash equivalents were $42.22 million, with restricted cash of $4.49 million. Current assets were $199.46 million and current liabilities $62.53 million. Total liabilities were $113.07 million. Reported interest-bearing borrowings and notes, including the convertible note, totaled approximately $101.61 million; this is a calculation from the balance-sheet debt and note line items.

Changes versus comparable periods

• Second-quarter revenue declined 4.6% year over year, while net income attributable to common shareholders fell about 14.4%. Gross margin improved to 23.5% from 20.6%, as cost of revenue fell faster than sales.
• First-half revenue declined 6.8%; net income attributable to common shareholders declined about 25.6%. Gross margin edged up to 21.4% from 20.9%, but operating income fell 6.9% and interest expense rose 74.2% to $3.78 million.
• Convenience-food revenue fell 20.1% in Q2 and 25.1% in the first half. Frozen-food revenue rose 18.6% in Q2 and 4.4% in the first half; chestnut revenue was nearly flat for the first half.
• Cash and cash equivalents increased from $33.86 million at year-end to $42.22 million. First-half financing provided $12.59 million, while investing used $5.60 million. Inventories rose to $62.17 million from $41.95 million.
• Short-term bank loans rose to $38.46 million from $29.40 million at year-end. A $3.50 million convertible promissory note and $3.25 million of notes payable were also reported at June 30.

Outlook, risks, and unusual items

• Management expected available resources and anticipated operating cash flow and bank borrowing to cover liquidity needs for at least 12 months, but warned that refinancing may be difficult. Most short-term loans mature within a year or less and the company has historically rolled them over.
• Management anticipated stable demand for traditional chestnut products and a small decline in convenience foods. Frozen foods represented about 23.3% of Q2 revenue, versus 20.8% a year earlier. Chestnut seasonality generally makes the fourth quarter the company’s strongest period. No numerical earnings or revenue guidance was provided.
• The company reported that the proposed acquisition of a 51% interest in France-based Athena remained subject to Shandong provincial approval and was not consolidated. The related agreements contemplated a purchase price and a commitment to finance Athena subsidiary Cacovin up to €3 million.
• The $3.50 million note issued to Jade Lane Group bears 4.5% interest and could be due September 13, 2014 or March 13, 2015, depending on the holder’s election. It may be convertible at $1.15 per share, subject to its terms and ownership limit, and is personally guaranteed by the CEO.
• Management concluded disclosure controls were ineffective because of a continuing material weakness: insufficient personnel with appropriate U.S. GAAP technical accounting expertise. The independent accountant performed an interim review, not an audit.
• Risks cited include reliance on short-term borrowing and supplier prepayments, potential raw-material supply disruptions, PRC political, legal and currency risks, and inability to pass through higher raw-material or labor costs. The filing reported no material legal proceedings and no off-balance-sheet arrangements.

Key facts for investors to verify

• Confirm the issuer identity: the supplied 10-Q is for American Lorain Corporation, despite the request naming Planet Green Holdings Corp.
• Check the status and final economics of the Athena acquisition, required regulatory approval, deferred payment conditions, and the proposed €3 million financing commitment.
• Review maturities, renewal terms, collateral and guarantees for short-term borrowings, as well as the convertible note’s holder election and potential dilution.
• Assess whether inventory growth and the working-capital cash movements are sustainable, particularly given negative operating cash flow in Q2.
• Track remediation of the disclosed material weakness and the company’s ability to produce reliable U.S. GAAP reporting.