ITEM 1. Financial Statements
AMERICAN LORAIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017 AND DECEMBER 31, 2016
(Stated in US Dollars)
4
Report of Independent Registered Public Accounting Firm
To:
|
The Board of Directors and
Stockholders of
|
|
American Lorain Corporation
|
We have reviewed the accompanying interim consolidated balance
sheets of American Lorain Corporation (the Company) as of March 31, 2017 and
December 31, 2016, and the related statements of income and cash flows for the
three months ended March 31, 2017 and 2016. These interim consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying interim consolidated
financial statements for them to be in conformity with U.S. generally accepted
accounting principles.
We have previously audited, in accordance with auditing
standards of the Public Company Accounting Oversight Board (United States), the
balance sheets of American Lorain Corporation as of December 31, 2016, and the
related statements of income, comprehensive income, retained earnings, and cash
flows for the year then ended (not presented herein); and in our report dated
October 30, 2017, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed balance sheet as of December 31, 2016, is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
3 to the financial statements, the Company had incurred substantial losses
during the year and had working capital deficit, which raises substantial doubt
about its ability to continue as a going concern. Managements plans in regards
to these matters are also described in Note 3. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
San Mateo, California
|
WWC, P.C.
|
December 11, 2017
|
Certified Public Accountants
|
AERICAN LORAIN CORPORATION
UNAUDITED CONDENSED
CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 2017 AND DECEMBER 31, 2016
(Stated in US Dollars)
|
|
2017
|
|
|
2016
|
|
Assets
|
|
(Unaudited)
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
418,416
|
|
$
|
426,054
|
|
Restricted cash
|
|
803,074
|
|
|
971,471
|
|
Trade receivables, net
|
|
1,341,009
|
|
|
3,253,333
|
|
Inventories
|
|
20,229,226
|
|
|
11,840,748
|
|
Advances and prepayments to suppliers
|
|
14,138,387
|
|
|
29,873,479
|
|
Other receivables and other current assets
|
|
54,463
|
|
|
708,892
|
|
Discontinued operations assets held for
sale
|
|
16,709,496
|
|
|
19,745,847
|
|
Total current assets
|
$
|
53,694,071
|
|
$
|
66,819,824
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
Investment
|
|
-
|
|
|
118,471
|
|
Plant and equipment, net
|
|
53,849,928
|
|
|
51,897,283
|
|
Intangible assets, net
|
|
12,616,581
|
|
|
12,586,515
|
|
Construction in progress, net
|
|
7,813,542
|
|
|
468,501
|
|
Other assets and goodwill
|
|
631,103
|
|
|
-
|
|
Discontinued operations long term assets held for sale
|
|
14,210,506
|
|
|
16,362,855
|
|
Total Assets
|
$
|
142,815,731
|
|
$
|
148,253,449
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Short-term bank loans
|
$
|
22,804,612
|
|
$
|
22,667,482
|
|
Long-term debt current portion
|
|
29,495,170
|
|
|
28,948,300
|
|
Capital lease current portion
|
|
1,014,957
|
|
|
1,007,185
|
|
Accounts payable
|
|
5,049,942
|
|
|
5,514,477
|
|
Taxes payable
|
|
231,266
|
|
|
248,807
|
|
Accrued liabilities and other payables
|
|
14,385,802
|
|
|
8,611,816
|
|
Customers deposits
|
|
1,668,654
|
|
|
1,347,136
|
|
Discontinued operations - liabilities
|
|
15,508,099
|
|
|
13,811,908
|
|
Total current liabilities
|
$
|
90,158,502
|
|
$
|
82,157,111
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
Preferred Stock, $0.001 par value, 5,000,000 shares
authorized; 0 shares issued and outstanding at March 31, 2017 and December
31, 2016, respectively
|
$
|
-
|
|
$
|
-
|
|
Common Stock, $0.001 par value, 200,000,000
shares authorized; 38,274,490 and 38,274,490 shares issued and outstanding
as of March 31, 2017 and December 31, 2016, respectively
|
|
38,275
|
|
|
38,275
|
|
Additional paid-in capital
|
|
57,852,249
|
|
|
57,852,249
|
|
Statutory reserves
|
|
25,103,354
|
|
|
25,103,354
|
|
Retained earnings
|
|
(52,165,673
|
)
|
|
(36,396,455
|
)
|
Accumulated other comprehensive income
|
|
15,674,786
|
|
|
12,171,006
|
|
Non-controlling interests
|
|
6,154,238
|
|
|
7,327,909
|
|
Total Stockholders Equity
|
$
|
52,657,229
|
|
$
|
66,096,338
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
$
|
142,815,731
|
|
$
|
148,253,449
|
|
See Accompanying Notes to the Financial Statements
F-3
AMERICAN LORAIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 201
6
(Stated in US Dollars)
|
|
2017
|
|
|
2016
|
|
Net revenues
|
$
|
1,906,473
|
|
$
|
22,275,087
|
|
Cost of revenues
|
|
1,661,245
|
|
|
17,872,557
|
|
Gross profit
|
|
245,228
|
|
|
4,402,530
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
2,785,069
|
|
|
1,212,020
|
|
General and administrative expenses
|
|
5,915,206
|
|
|
752,589
|
|
Total operating expenses
|
|
8,700,275
|
|
|
1,964,609
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
(8,455,047
|
)
|
|
2,437,921
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
Government subsidy
|
|
580,705
|
|
|
528,692
|
|
Interest income
|
|
39
|
|
|
13,019
|
|
Interest expense
|
|
(722,195
|
)
|
|
(1,080,149
|
)
|
Other income
|
|
211,390
|
|
|
266,525
|
|
Other expenses
|
|
(1,869,115
|
)
|
|
(558
|
)
|
Loss from investments
|
|
-
|
|
|
(4,608,692
|
)
|
|
|
(1,799,176
|
)
|
|
(4,881,163
|
)
|
|
|
|
|
|
|
|
Loss before taxes from continuing operations
|
|
(10,254,223
|
)
|
|
(2,443,242
|
)
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
-
|
|
|
675,909
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(10,254,223
|
)
|
|
(3,119,151
|
)
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
(5,514,995
|
)
|
|
267,409
|
|
Provision for income taxes
|
|
-
|
|
|
91,353
|
|
(Loss) income from discontinued operations,
net of taxes
|
|
(5,514,995
|
)
|
|
176,056
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(15,769,218
|
)
|
$
|
(2,943,095
|
)
|
|
|
|
|
|
|
|
Net (loss) income attributable to:
|
|
|
|
|
|
|
- Common shareholders
|
|
(14,595,547
|
)
|
|
(3,074,969
|
)
|
- Non-controlling interests
|
|
(1,173,671
|
)
|
|
131,874
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
3,503,780
|
|
|
12,997,373
|
|
Comprehensive (loss) income
|
$
|
(12,265,438
|
)
|
$
|
10,054,278
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations
|
|
|
|
|
|
|
- Basic and diluted
|
|
(0.27
|
)
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
Loss (income) per share from discontinued operations
|
|
|
|
|
|
|
- Basic and diluted
|
|
(0.11
|
)
|
|
0.00
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
- Basic and diluted
|
|
(0.38
|
)
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
|
38,274,490
|
|
|
38,259,490
|
|
See Accompanying Notes to the Financial Statements
F-4
AMERICAN LORAIN CORPORATION
UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS
ENDED MARCH 31, 2017 AND 2016
(STATED IN US DOLLARS)
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
(10,254,223
|
)
|
$
|
(2,943,095
|
)
|
Depreciation of fixed assets
|
|
682,580
|
|
|
913,784
|
|
Amortization of intangible assets
|
|
647,110
|
|
|
91,550
|
|
Write down of assets from investment loss from deconsolidation
|
|
-
|
|
|
(13,279,242
|
)
|
Decrease in accounts and other receivables
|
|
2,550,685
|
|
|
33,941,047
|
|
Increase in inventories
|
|
(8,606,263
|
)
|
|
(6,858,543
|
)
|
Decrease/(increase) in advance to suppliers
|
|
17,452,547
|
|
|
(2,047,730
|
)
|
Increase in prepayment
|
|
(892,058
|
)
|
|
(795,869
|
)
|
Increase in deferred tax asset
|
|
-
|
|
|
(176,298
|
)
|
Increase/(decrease) in accounts and other
payables
|
|
5,720,730
|
|
|
(19,423,372
|
)
|
Decrease in taxes payable
|
|
(20,186
|
)
|
|
-
|
|
Increase in customer deposits
|
|
322,714
|
|
|
-
|
|
Decrease in related party payable
|
|
-
|
|
|
(1,755,216
|
)
|
Net cash provided by (used in) operating
activities
|
|
7,603,636
|
|
|
(12,332,984
|
)
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
-
|
|
|
114,032
|
|
Purchase of plant and equipment
|
|
-
|
|
|
(121,617
|
)
|
Payment of construction in progress
|
|
(7,614,969
|
)
|
|
-
|
|
Increase in capital lease
|
|
-
|
|
|
7,694
|
|
Increase in deposits
|
|
-
|
|
|
3,194,337
|
|
Net cash (used in) provided by investing
activities
|
|
(7,614,969
|
)
|
|
3,194,446
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Repayment of bank borrowings
|
|
-
|
|
|
(2,319,287
|
)
|
Proceeds from bank borrowings and
debentures
|
|
-
|
|
|
8,242,258
|
|
Net cash provided by financing activities
|
$
|
-
|
|
$
|
5,922,971
|
|
|
|
|
|
|
|
|
Net decrease of Cash and Cash Equivalents
|
|
(11,333
|
)
|
|
(3,215,567
|
)
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash and cash
equivalents
|
|
3,695
|
|
|
12,997,373
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsbeginning of year
|
|
426,054
|
|
|
20,664,487
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsend of year
|
$
|
418,416
|
|
$
|
30,446,293
|
|
|
|
|
|
|
|
|
Supplementary cash flow information:
|
|
|
|
|
|
|
Interest received
|
$
|
39
|
|
$
|
13,166
|
|
Interest paid
|
$
|
224,370
|
|
$
|
548,087
|
|
Income taxes paid
|
$
|
305,690
|
|
$
|
2,099,560
|
|
See Accompanying Notes to the Financial Statements
F-5
AMERICAN LORAIN CORPORATION
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017 AND
DECEMBER 31, 2016
(Stated in US Dollars)
1.
|
Organization and Principal Activities
|
|
|
|
American Lorain Corporation (the Company or ALN) is
registered as a corporation in the state of Nevada. The Company conducts
its primary business activities through its subsidiaries located in the
Peoples Republic of China. Those subsidiaries develop, manufacture, and
market convenience foods, chestnut products, and frozen foods; these
products are sold to both domestic markets and international
markets.
|
|
|
2.
|
Summary of Significant Accounting
Policies
|
|
|
|
Method of accounting
|
|
|
|
Management has prepared the accompanying financial
statements and these notes in accordance to generally accepted accounting
principles in the United States of America; the Company maintains its
general ledger and journals with the accrual method accounting.
|
|
|
|
Principles of consolidation
|
|
|
|
The accompanying consolidated financial statements
include the assets, liabilities, and results of operations of the Company,
and its subsidiaries, which are listed below:
|
|
|
Place of
|
Attributable equity
|
Registered
|
|
Name of Company
|
incorporation
|
interest %
|
capital
|
|
International Lorain Holding
Inc.
|
Cayman Islands
|
100.0
|
$ 46,659,135
|
|
Junan Hongrun Foodstuff Co., Ltd.
|
PRC
|
100.0
|
44,861,741
|
|
Shandong Lorain Co., Ltd.
|
PRC
|
80.2
|
12,123,985
|
|
Beijing Lorain Co., Ltd.
|
PRC
|
100.0
|
1,540,666
|
|
Luotian Lorain Co., Ltd.
|
PRC
|
100.0
|
3,797,774
|
|
Shandong Greenpia Foodstuff Co., Ltd.
|
PRC
|
100.0
|
2,303,063
|
|
Dongguan Lorain Co., Ltd.
|
PRC
|
100.0
|
149,939
|
In 2014, the Company invested
$2,100,000 in Athena/Minerve Group whereby the Company controlling shareholder
of Minerve. Minerve conducted operations in manufacturing, packaging and sales
activities in France and import and storage operations in Portugal. During the
years ended December 31, 2015, the financial position and results of operations
of Minerve were accounted for as subsidiaries in the Companys financial
statements; however, during the year ended December 31, 2016, Minerve became
insolvent and compelled into bankruptcy by creditors, and, ultimately
liquidation. Accordingly, the Company lost control of Minerve and written of the
value of its investment in Minerve. All receivables due by Minerve to
subsidiaries still controlled by the Company have been written off.
Management has eliminated all
significant inter-company balances and transactions in preparing the
accompanying consolidated financial statements. Ownership interests of
subsidiaries that the Company does not wholly-own are accounted for as
non-controlling interests.
Shandong Economic Development
Investment Corporation, which is a PRC state-owned entity, holds 19.8% equity
interest in Shandong Lorain.
Discontinued operations
In 2017, the Company discontinued the
operations in Shandong Lorain and Dongguan Lorain. As a result, the financial
results of these two subsidiaries are presented as discontinued operations.
Use of estimates
The preparation of the financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Management makes
these estimates using the best information available at the time the estimates
are made; however, actual results could differ materially from those estimates.
F-6
American Lorain Corporation
Notes to Financial
Statements
Cash and cash equivalents
The Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
Investment securities
The Company classifies securities it
holds for investment purposes into trading or available-for-sale. Trading
securities are bought and held principally for the purpose of selling them in
the near term. All securities not included in trading securities are classified
as available-for-sale.
Trading and available-for-sale
securities are recorded at fair value. Unrealized holding gains and losses on
trading securities are included in the net income. Unrealized holding gains and
losses, net of the related tax effect, on available for sale securities are
excluded from net income and are reported as a separate component of other
comprehensive income until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific-identification basis.
A decline in the market value of any
available-for-sale security below cost that is deemed to be other-than-temporary
results in a reduction in carrying amount to fair value. The impairment is
charged as an expense to the statement of income and comprehensive income and a
new cost basis for the security is established. To determine whether impairment
is other-than-temporary, the Company considers whether it has the ability and
intent to hold the investment until a market price recovery and considers
whether evidence indicating the cost of the investment is recoverable outweighs
evidence to the contrary. Evidence considered in this assessment includes the
reasons for the impairment, the severity and duration of the impairment, changes
in value subsequent to year end, and forecasted performance of the investee.
Premiums and discounts are amortized or
accreted over the life of the related available-for-sale security as an
adjustment to yield using the effective-interest method. Dividend and interest
income are recognized when earned.
Trade receivables
Trade receivables are recognized and
carried at the original invoice amount less allowance for any uncollectible
amounts. An estimate for doubtful accounts is made when collection of the full
amount is no longer probable. Bad debts are written off as incurred.
Inventories
Inventories consist of raw materials
and finished goods which are stated at the lower of cost or market value.
Finished goods are comprised of direct materials, direct labor, inbound shipping
costs, and allocated overhead. The Company applies the weighted average cost
method to its inventory.
Advances and prepayments to
suppliers
The Company makes advance payment to
suppliers and vendors for the procurement of raw materials. Upon physical
receipt and inspection of the raw materials from suppliers the applicable amount
is reclassified from advances and prepayments to suppliers to inventory.
Plant and equipment
Plant and equipment are carried at cost
less accumulated depreciation. Depreciation is provided over their estimated
useful lives, using the straight-line method. The Companys typically applies a
salvage value of 0% to 10%. The estimated useful lives of the plant and
equipment are as follows:
F-7
American Lorain Corporation
Notes to Financial
Statements
Buildings
|
20-40 years
|
Landscaping, plant and tree
|
30 years
|
Machinery and equipment
|
1-10 years
|
Motor vehicles
|
10 years
|
Office equipment
|
5 years
|
The cost and related accumulated
depreciation of assets sold or otherwise retired are eliminated from the
accounts, and any gain or loss are included in the Companys results of
operations. The costs of maintenance and repairs are recognized to expenses as
incurred; significant renewals and betterments are capitalized.
Construction in progress and
prepayments for equipment
Construction in progress and
prepayments for equipment represent direct and indirect acquisition and
construction costs for plants, and costs of acquisition and installation of
related equipment. Amounts classified as construction in progress and
prepayments for equipment are transferred to plant and equipment when
substantially all the activities necessary to prepare the assets for their
intended use are completed. Depreciation is not provided for assets classified
in this account.
Land use rights
Land use rights are carried at cost and
amortized on a straight-line basis over a specified period. Amortization is
provided using the straight-line method over 40-50 years.
Goodwill
Goodwill represents the excess of the
purchase price over the fair value of the net identifiable assets acquired in a
business combination. The Company conducts an annual assessment of its goodwill
for impairment. If the carrying value of its goodwill exceeds its fair value,
then impairment has incurred; accordingly, a charge to the Companys results of
operations will be recognized during the period. Fair value is generally
determined using a discounted expected future cash flow analysis.
Accounting for the impairment of
long-lived assets
The Company annually reviews its
long-lived assets for impairment or whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. Impairment
may be the result of becoming obsolete from a change in the industry,
introduction of new technologies, or if the Company has inadequate working
capital to utilize the long-lived assets to generate the adequate profits.
Impairment is present if the carrying amount of an asset is less than its
expected future undiscounted cash flows.
If an asset is considered impaired, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair market value of the asset. Assets to be disposed are reported at the lower
of the carrying amount or fair value less costs to sell.
Statutory reserves
Statutory reserves are referring to the
amount appropriated from the net income in accordance with laws or regulations,
which can be used to recover losses and increase capital, as approved, and are
to be used to expand production or operations. PRC laws prescribe that an
enterprise operating at a profit must appropriate and reserve, on an annual
basis, an amount equal to 10% of its profit. Such an appropriation is necessary
until the reserve reaches a maximum that is equal to 50% of the enterprises PRC
registered capital.
Foreign currency translation
F-8
American Lorain Corporation
Notes to Financial
Statements
The accompanying financial statements
are presented in United States dollars. The functional currencies of the Company
are the Renminbi (RMB) and the Euro (EUR). The Companys assets and liabilities
are translated into United States dollars from RMB and EUR at year-end exchange
rates, and its revenues and expenses are translated at the average exchange rate
during the period. Capital accounts are translated at their historical exchange
rates when the capital transactions occurred.
|
3/31/2017
|
|
12/31/2016
|
|
3/31/2016
|
Period/year end RMB: US$ exchange rate
|
6.8905
|
|
6.9437
|
|
6.4479
|
Period/annual average RMB: US$ exchange rate
|
6.8882
|
|
6.6430
|
|
6.5395
|
The RMB is not freely convertible into
foreign currencies and all foreign exchange transactions must be conducted
through authorized financial institutions.
Revenue recognition
The Company recognizes revenue in
accordance to guidance found in Staff Accounting Bulletin (SAB) 104, where
persuasive evidence of arrangement exists, the price has been fixed or is
determinable, the delivery has been completed and no other significant
obligations of the Company exists, and collectability of payment is reasonably
assured. Payments received prior to all of the foregoing criteria are recorded
as customer deposits. Recorded revenue is derived from the value of goods
invoiced less value-added tax (VAT).
Advertising
All advertising costs are expensed as
incurred.
Shipping and handling
All outbound shipping and handling
costs are expensed as incurred.
Research and development
All research and development costs are
expensed as incurred.
Retirement benefits
Retirement benefits in the form of
mandatory government sponsored defined contribution plans are charged to the
either expenses as incurred or allocated to inventory as part of overhead.
Income taxes
The Company accounts for income tax
using an asset and liability approach and allows for recognition of deferred tax
benefits in future years. Under the asset and liability approach, deferred taxes
are provided for the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future realization
is uncertain.
Comprehensive income
The Company uses FASB ASC Topic 220,
Reporting Comprehensive Income. Comprehensive income is comprised of net
income and all changes to the statements of stockholders equity, except the
changes in paid-in capital and distributions to stockholders due to investments
by stockholders.
Earnings per share
The Company computes earnings per share
(EPS) in accordance with ASC Topic 260, Earnings per share. Basic EPS is
measured as the income or loss available to common shareholders divided by the
weighted average common shares outstanding for the period. Diluted EPS presents
the dilutive effect on a per share basis from the potential conversion of
convertible securities or the exercise of options and or warrants; the dilutive
effects of potentially convertible securities are calculated using the as-if
method; the potentially dilutive effect of options or warrants are calculated
using the treasury stock method. Securities that are potentially an
anti-dilutive effect (i.e. those that increase income per share or decrease loss
per share) are excluded from the calculation of diluted EPS.
F-9
American Lorain Corporation
Notes to Financial
Statements
Financial instruments
The Companys financial instruments,
including cash and equivalents, accounts and other receivables, accounts and
other payables, accrued liabilities and short-term debt, have carrying amounts
that approximate their fair values due to their short maturities. ASC Topic 820,
Fair Value Measurements and Disclosures, requires disclosure of the fair value
of financial instruments held by the Company. ASC Topic 825, Financial
Instruments, defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure
requirements for fair value measures. The carrying amounts reported in the
consolidated balance sheets for receivables and current liabilities each qualify
as financial instruments and are a reasonable estimate of their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The
three levels of valuation hierarchy are defined as follows:
|
|
Level 1 - inputs to the valuation methodology used quoted
prices for identical assets or liabilities in active markets.
|
|
|
Level 2 - inputs to the valuation methodology include
quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument.
|
|
|
Level 3 - inputs to the valuation methodology are
unobservable and significant to the fair value measurement.
|
The Company analyzes all financial
instruments with features of both liabilities and equity under ASC 480,
Distinguishing Liabilities from Equity, and ASC 815.
Commitments and contingencies
Liabilities for loss contingencies
arising from claims, assessments, litigation, fines and penalties and other
sources are recorded when it is probable that a liability has been incurred and
the amount of the assessment can be reasonably estimated.
Unaudited interim financial
information
These unaudited interim condensed
consolidated financial statements have been prepared in accordance with GAAP for
interim financial reporting and the rules and regulations of the Securities and
Exchange Commission that permit reduced disclosure for interim periods.
Therefore, certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted. In the opinion of management, all adjustments of a normal recurring
nature necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented have been made. The results
of operations for the interim periods presented are not necessarily indicative
of the results to be expected for the year ending December 31, 2017.
The consolidated balance sheets and
certain comparative information as of December 31, 2016 are derived from the
audited consolidated financial statements and related notes for the year ended
December 31, 2016 (2016 Annual Financial Statements), included in the
Companys 2016 Annual Report on Form 10-K. These unaudited interim condensed
consolidated financial statements should be read in conjunction with the 2016
Annual Financial Statements.
Recent accounting pronouncements
In January 2017, the FASB issued
guidance which simplifies the accounting for goodwill impairment. The updated
guidance eliminates Step 2 of the impairment test, which requires entities to
calculate the implied fair value of goodwill to measure a goodwill impairment
charge. Instead, entities will record an impairment charge based on the excess of a reporting units carrying amount
over its fair value, determined in Step 1. The Company is currently
evaluating the impact on the financial statements of this
guidance.
F-10
American Lorain Corporation
Notes to Financial
Statements
|
In January 2017, the FASB amended the existing accounting
standards for business combinations. The amendments clarify the definition
of a business with the objective of adding guidance to assist entities
with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. The Company is
currently evaluating the impact on the financial statements of this
guidance.
|
|
|
|
In November 2016, the FASB issued guidance, which
addresses the presentation of restricted cash in the statement of cash
flows. The guidance requires entities to show the changes in the total of
cash, cash equivalents, restricted cash, and restricted cash equivalents
in the statement of cash flows. As a result, entities will no longer
present transfers between cash and cash equivalents and restricted cash
and restricted cash equivalents in the statement of cash flows. The
Company is currently evaluating the timing and the impact of this guidance
on the financial statements.
|
|
|
|
In October 2016, the FASB issued guidance, which amends
the existing accounting for Intra-Entity Transfers of Assets Other Than
Inventory. The guidance requires an entity to recognize the income tax
consequences of intra-entity transfers, other than inventory, when the
transfer occurs The Company is currently evaluating the timing and the
impact of this guidance on the financial statements.
|
|
|
|
In August 2016, the FASB issued guidance, which amends
the existing accounting standards for the classification of certain cash
receipts and cash payments on the statement of cash flows. The Company is
currently evaluating the timing and the impact of this guidance on the
financial statements.
|
|
|
|
In June 2016, the FASB issued guidance, which requires
credit losses on financial assets measured at amortized cost basis to be
presented at the net amount expected to be collected, not based on
incurred losses. Further, credit losses on available-for-sale debt
securities should be recorded through an allowance for credit losses
limited to the amount by which fair value is below amortized cost. The
Company is currently evaluating the timing and the impact of this guidance
on the financial statements.
|
|
|
|
In February 2016, the FASB issued guidance, which amends
the existing accounting standards for leases. Consistent with current
guidance, the recognition, measurement, and presentation of expenses and
cash flows arising from a lease by a lessee primarily will depend on its
classification. Under the new guidance, a lessee will be required to
recognize assets and liabilities for all leases with lease terms of more
than twelve months. The Company is currently evaluating the timing and the
impact of this guidance on the financial statements.
|
|
|
|
In January 2016, the FASB issued guidance, which amends
the existing accounting standards for the recognition and measurement of
financial assets and financial liabilities. The updated guidance primarily
addresses certain aspects of recognition, measurement, presentation, and
disclosure of financial instruments. The Company is currently evaluating
the timing and the impact of this guidance on the financial
statements.
|
|
|
3.
|
Going Concern
|
|
|
|
The accompanying financial statements have been prepared
on a going-concern basis. The going-concern basis assumes that assets will
be realized and liabilities will be settled in the ordinary course of
business in the amounts disclosed in the financial statements. The
Companys ability to continue as a going concern is greatly dependent on
the Companys ability to realize its non-cash current assets such as
receivables and inventory into cash in order to settle its current
obligations. For the three months ended March 31, 2017, the Company
incurred a substantial loss of $15,769,218. As of March 31, 2017, the Company had a working capital deficit of approximately $36,464,432. These conditions raise
substantial doubt as to whether the Company may continue as a going
concern.
|
|
|
|
To improve its solvency, the Company is working to obtain
new working capital through private placements of its common stock or
convertible debt securities to qualified investors.
|
F-11
American Lorain Corporation
Notes to Financial
Statements
|
Restricted cash represents interest bearing deposits
placed with banks to secure banking facilities in the form of loans and
notes payable. The funds are restricted from immediate use and are
designated for settlement of loans or notes when they become
due.
|
|
|
5.
|
Trade Receivables
|
|
|
|
The Company extends credit terms of 15 to 60 days to the
majority of its domestic customers, which include third-party
distributors, supermarkets and wholesalers; international customers are
typically extended 90 days credit.
|
|
|
|
3/31/2017
|
|
|
12/31/2016
|
|
|
Trade accounts receivable
|
$
|
1,549,087
|
|
$
|
3,948,880
|
|
|
Less
:
Allowance for
doubtful accounts
|
|
(208,078
|
)
|
|
(695,547
|
)
|
|
|
$
|
1,341,009
|
|
$
|
3,253,333
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful
accounts:
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
(695,547
|
)
|
$
|
(5,901,810
|
)
|
|
Additions to allowance
|
|
|
|
|
-
|
|
|
Bad debt written-off
|
|
487,469
|
|
|
5,206,263
|
|
|
Ending balance
|
$
|
(208,078
|
)
|
$
|
(695,547
|
)
|
6.
|
Inventories
|
|
|
|
Inventories consisted of the following as of March 31,
2017 and December 31, 2016
|
|
|
|
3/31/2017
|
|
|
12/31/2016
|
|
|
Raw materials
|
$
|
7,552,040
|
|
$
|
-
|
|
|
Packing material
|
|
36,796
|
|
|
-
|
|
|
Inventory of supplies
|
|
9,209
|
|
|
-
|
|
|
Finished goods
|
|
12,631,181
|
|
|
11,840,748
|
|
|
|
$
|
20,229,226
|
|
$
|
11,840,748
|
|
7.
|
Plant and Equipment
|
|
|
|
Property, plant, and equipment consisted of the following
as of March 31, 2017 and December 31, 2016:
|
|
|
|
3/31/2017
|
|
|
12/31/2016
|
|
|
At Cost:
|
|
|
|
|
|
|
|
Buildings
|
$
|
59,916,127
|
|
$
|
58,866,129
|
|
|
Machinery and equipment
|
|
8,183,431
|
|
|
6,917,774
|
|
|
Office
equipment
|
|
392,382
|
|
|
418,048
|
|
|
Motor vehicles
|
|
155,881
|
|
|
154,687
|
|
|
|
$
|
68,647,821
|
|
$
|
66,356,638
|
|
|
|
|
|
|
|
|
|
|
Less
:
Accumulated depreciation
|
|
(14,797,893
|
)
|
|
(14,459,355
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
53,849,928
|
|
$
|
51,897,283
|
|
|
Depreciation expense for the three months ended March 31,
2017 and 2016 was $682,580 and $913,784, respectively.
|
F-12
American Lorain Corporation
Notes to Financial
Statements
|
|
3/31/2017
|
|
|
12/31/2016
|
|
At Cost:
|
|
|
|
|
|
|
Land use rights
|
|
14,993,760
|
|
|
14,208,013
|
|
Utilities rights
|
|
45,145
|
|
|
44,800
|
|
|
$
|
15,038,905
|
|
$
|
14,252,813
|
|
|
|
|
|
|
|
|
Less
: Accumulated
amortization
|
|
(2,422,324
|
)
|
|
(1,666,298
|
)
|
|
$
|
12,616,581
|
|
$
|
12,586,515
|
|
|
All land is owned by the government in China. Land use
rights represent the Companys purchase of usage rights for a parcel of
land for a specified duration of time, typically 50 years. Amortization
expense for the three months ended March 31, 2017 and 2016 was $647,110
and $91,550, respectively.
|
|
|
9.
|
Goodwill
|
|
|
|
On August 8, 2015, the Company re-organized its French
operations by merging the operations of Conserverie Minerve into its
immediate parent Athena, and concurrently, Athena wound up and dissolved
Conserverie Minerve. Athena subsequently changed its own legal name to
Conserverie Minerve and to continue its business. At the date of
acquisition, the net liability of Conserverie Minerve was $3,255,911(EUR
2,968,089); the purchase consideration paid for the Athena (aka
Conserverie Minerve) was $2,100,000. The acquisition of Athena and its
then subsidiaries gave rise to goodwill in the amount of $6,786,928. As of
December 31, 2015, the surviving business entity, Conserverie Minerve, on
a post merged basis, recognized net operating losses during the year ended
December 31, 2015. As of December 31, 2015, the Company was unable to
determine if the Conserverie Minerve would be able to generate future
profit and positive operating cash flows to justify the carrying value of
goodwill in the amount of $6,786,928; accordingly, the Company elected to
write-off the goodwill that it had recognized during its acquisition of
Conserverie Minerve. Conserverie Minerve had a goodwill of its own that
had accumulated over the years as result of its acquisition of
subsidiaries; at December 31, 2015, the outstanding balance was
$3,219,172. As mentioned in Note 2 - Summary of Significant Accounting
Policies-Principles of Consolidation, Conserverie Minerve has been
liquidated and the Company no longer has any interest in Conserverie
Minerve; accordingly, all remaining goodwill has been de-
recognized.
|
|
|
10.
|
Bank Loans
|
|
|
|
Bank loans include bank overdrafts, short-term bank
loans, and current portion of long-term loan, which consisted of the
following as of March 31, 2017 and December 31,
2016:
|
|
Short-term Bank Loans
|
|
3/31/2017
|
|
|
12/31/2016
|
|
|
|
|
|
|
|
|
|
|
Loan from Industrial and Commercial Bank
of China,
|
|
|
|
|
|
|
|
Interest rate at 6.955% per
annum; due 4/20/2016*
|
|
3,616,957
|
|
|
3,596,461
|
|
|
Interest rate
at 4.30% per annum; due 4/30/2017
|
|
1,088,450
|
|
|
1,080,116
|
|
|
Interest rate at 4.30% per
annum; due 6/29/2017
|
|
1,143,599
|
|
|
1,134,842
|
|
|
Interest rate
at 4.30% per annum; due 6/29/2017
|
|
1,088,450
|
|
|
1,080,116
|
|
|
Interest rate at 4.30% per
annum; due 8/2/2017
|
|
957,836
|
|
|
950,502
|
|
|
|
|
|
|
|
|
|
|
Loan from China Minsheng Bank Corporation, Linyi
Branch
|
|
|
|
|
|
|
|
Interest rate
at 5.98% per annum due 9/22/2016*
|
|
1,451,267
|
|
|
1,440,154
|
|
|
|
|
|
|
|
|
|
|
Loan from Agricultural Bank of China,
Luotian Branch
|
|
|
|
|
|
|
|
Interest rate at 5.65% per
annum due 4/22/2017
|
|
1,451,267
|
|
|
1,440,154
|
|
|
|
|
|
|
|
|
|
|
Luotian Sanliqiao Credit Union,
|
|
|
|
|
|
|
|
Interest rate
at 9.72% per annum due 1/14/2017*
|
|
1,451,267
|
|
|
1,440,154
|
|
|
Interest rate at 9.72% per
annum due 2/4/2017*
|
|
435,380
|
|
|
432,046
|
|
|
Interest rate
at 9.72% per annum due 9/7/2017
|
|
435,380
|
|
|
432,046
|
|
F-13
American Lorain Corporation
Notes to Financial
Statements
|
Bank of Ningbo,
|
|
|
|
|
|
|
|
Interest rate at 7.80% per
annum due 10/27/2016*
|
|
1,161,014
|
|
|
1,152,124
|
|
|
|
|
|
|
|
|
|
|
Hankou Bank, Guanggu Branch,
|
|
|
|
|
|
|
|
Interest rate
at 6.85% per annum due 10/24/2016*
|
|
1,326,919
|
|
|
1,347,047
|
|
|
|
|
|
|
|
|
|
|
Postal Savings Bank of China,
|
|
|
|
|
|
|
|
Interest rate at 9.72% per
annum due 7/27/2016*
|
|
377,329
|
|
|
374,440
|
|
|
|
|
|
|
|
|
|
|
China Construction Bank,
|
|
|
|
|
|
|
|
Interest rate
at 6.18% per annum due 11/29/2016*
|
|
725,634
|
|
|
720,077
|
|
|
|
|
|
|
|
|
|
|
Huaxia Bank,
|
|
|
|
|
|
|
|
Interest rate at 5.66% per
annum due 5/19/2017
|
|
1,451,267
|
|
|
1,440,154
|
|
|
|
|
|
|
|
|
|
|
City of Linyi Commercial Bank, Junan Branch,
|
|
|
|
|
|
|
|
Interest rate
at 8.4% per annum due 2/16/2016*
|
|
1,449,809
|
|
|
1,438,707
|
|
|
Interest rate at 8.4% per
annum due 11/24/2016*
|
|
2,902,534
|
|
|
2,880,310
|
|
|
|
|
|
|
|
|
|
|
Hubei Jincai Credit and Financial Services Co. Ltd.
|
|
|
|
|
|
|
|
Interest rate
at 9.00% per annum due 1/12/2017*
|
|
290,253
|
|
|
288,032
|
|
|
|
$
|
22,804,612
|
|
$
|
22,667,482
|
|
|
The short-term loans, which are denominated in Renminbi
and Euros, were primarily obtained for general working capital. If not
otherwise specifically indicated above, short-term bank loans are
guaranteed either by other companies within the group, or by personnel in
senior management positions within the group.
|
|
|
|
* Note: As of March 31, 2017, these loans have not been
repaid and are considered in default. The Company is in negotiations to
renew these loans or modify the repayment terms.
|
|
|
11.
|
Current Portion Long Term Debt
|
|
|
|
Current portions of notes payable, debentures, and
long-term debt consisted of the following as of March 31, 2017 and
December 31, 2016:
|
|
|
|
3/31/2017
|
|
|
12/31/2016
|
|
|
Debenture issued by 5 private placement holders
underwritten by
Guoyuan Securities Co., Ltd.
|
|
|
|
|
|
|
|
Interest rate at 10% per annum due 8/28/2016
|
$
|
8,987,698
|
|
$
|
8,921,756
|
|
|
|
|
|
|
|
|
|
|
Debenture issued by 2 private placement
holders underwritten by
Daiwa SSC Securities Co. Ltd.
|
|
|
|
|
|
|
|
Interest rate at 9.5%
per annum due 11/8/2015
|
|
14,882,472
|
|
|
14,401,544
|
|
|
|
|
|
|
|
|
|
|
Loans from Deutsche Investitions-und
Entwicklungsgesellschaft
mbH (DEG)
|
|
|
|
|
|
|
|
Interest rate at 5.510% per annum due 3/15/2015
|
|
1,875,000
|
|
|
1,875,000
|
|
|
Interest rate at
5.510% per annum due 9/15/2015
|
|
1,875,000
|
|
|
1,875,000
|
|
|
Interest
rate at 5.510% per annum due 3/15/2016
|
|
1,875,000
|
|
|
1,875,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,495,170
|
|
$
|
$28,948,300
|
|
The Company began repaying its loan
with DEG in semi-annual installments on December 15, 2012. As of March 31, 2017
and December 31, 2016, the Company had not repaid any principal. The loan was
collateralized with the following terms:
F-14
|
(a.)
|
A first ranking mortgage in the amount of about USD
$12,000,000 on the Companys land and building in favor of DEG.
|
|
(b.)
|
A share pledge, by Mr. Si Chen (a major shareholder, and
Chairman and CEO of the Company) as the sponsor of the loan, to secure
approximately USD $12,000,000 of the loan.
|
|
(c.)
|
The total amount of the first ranking mortgage as
indicated in the Loan Agreement (Article 12(1)(a)) and the value of the
pledged shares by Mr. Si Chen (Loan Agreement (Article 12(1)(a))) should
be at least USD 24,000,000 in aggregate.
|
|
(d.)
|
A personal guarantee by Mr. Si Chen in form and substance
satisfactory to DEG.
|
|
The Company defaulted on its loan with DEG; accordingly,
on December 7, 2016, DEG exercised its rights to foreclose on 10,794,066
shares pledged by Mr. Si Chen.
|
|
|
|
The Company is in default of the debentures that were
issued by Guoyuan Securities and Daiwa SSC Securities and negotiating with
the debenture holders to extend repayment terms.
|
|
|
12.
|
Taxes Payable
|
|
|
|
Taxes payable consisted of the following as of March 31,
2017 and December 31, 2016:
|
|
|
|
3/31/2017
|
|
|
12/31/2016
|
|
|
Value added tax
|
$
|
|
|
$
|
10,563
|
|
|
Corporate income tax
|
|
16,276
|
|
|
16,151
|
|
|
Employee payroll tax withholdings
|
|
14,420
|
|
|
13,684
|
|
|
Property tax
|
|
70,603
|
|
|
72,245
|
|
|
Stamp duty
|
|
162
|
|
|
161
|
|
|
Land use tax
|
|
128,620
|
|
|
134,827
|
|
|
Local tax
|
|
1,185
|
|
|
1,176
|
|
|
|
$
|
231,266
|
|
$
|
248,807
|
|
13.
|
Equity
|
|
|
|
For the three months ended March 31, 2017, the Company
had not issued shares as stock compensation to employees. There were
38,259,490 shares of common stock outstanding as of December 11,
2017.
|
|
|
|
For the year ended December 31, 2016, the Company issued
15,000 shares as stock compensation to employees.
|
|
|
14.
|
Income Taxes
|
|
|
|
All of the Companys continuing operations are located in
the PRC. The corporate income tax rate in the PRC is 25%.
|
|
|
|
The following tables provide the reconciliation of the
differences between the statutory and effective tax expenses following as
of March 31, 2017 and 2016:
|
|
|
3/31/2017
|
|
|
3/31/2016
|
|
Loss attributed to PRC continuing
operations
|
$
|
(8,704,260
|
)
|
$
|
(2,428,502
|
)
|
Loss attributed to U.S. operations
|
|
(1,549,963
|
)
|
|
(20,000
|
)
|
Income before tax
|
|
(10,254,223
|
)
|
|
(2,448,502
|
)
|
|
|
|
|
|
|
|
PRC Statutory Tax at 25% Rate
|
|
-
|
|
|
767,262
|
|
Effect of tax exemption granted
|
|
-
|
|
|
-
|
|
Income tax
|
$
|
-
|
|
$
|
767,262
|
|
F-15
American Lorain Corporation
Notes to Financial
Statements
Per Share Effect of Tax
Exemption
|
|
|
|
|
|
|
|
|
3/31/2017
|
|
|
3/31/2016
|
|
Effect of tax exemption
granted
|
$
|
-
|
|
$
|
-
|
|
Weighted-Average Shares Outstanding Basic
|
|
38,274,490
|
|
|
38,259,490
|
|
Per share effect
|
$
|
-
|
|
$
|
-
|
|
The difference between the U.S. federal
statutory income tax rate and the Companys effective tax rate was as follows of
March 31, 2017 and 2016:
|
|
3/31/2017
|
|
|
3/31/2016
|
|
U.S. federal statutory income
tax rate
|
|
35%
|
|
|
35%
|
|
Lower rates in PRC, net
|
|
-10%
|
|
|
-10%
|
|
Non-deductible GAAP expenses
in the PRC
|
|
-25%
|
|
|
-56.33%
|
|
The Companys effective tax rate
|
|
0%
|
|
|
-31.33%
|
|
15.
|
Earnings/(Loss) Per Share
|
|
|
|
Components of basic and diluted earnings per share were
as follows:
|
|
|
|
For the three months ended
|
|
|
|
|
March 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Basic and diluted (loss)
earnings per share numerator:
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
(attributable) available to common stockholders
|
$
|
(10,254,223
|
)
|
|
(3,119,155
|
)
|
|
(Loss) income from
discontinued operations (attributable) available to common stockholders
|
|
(4,341,324
|
)
|
|
44,182
|
|
|
(Loss) income (attributable) available to
common stockholders
|
|
(14,595,547
|
)
|
|
(3,074,973
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per share
denominator:
|
|
|
|
|
|
|
|
Original Shares:
|
|
38,274,490
|
|
|
38,259,490
|
|
|
Additions from Actual Events
|
|
|
|
|
|
|
|
-Issuance of Common Stock
|
|
|
|
|
|
|
|
Basic Weighted Average Shares Outstanding
|
|
38,274,490
|
|
|
38,259,490
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per share from continuing
operations
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
(0.27
|
)
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share from
discontinued operations
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
(0.11
|
)
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
(0.38
|
)
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares
Outstanding
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
38,274,490
|
|
|
38,259,490
|
|
F-16
American Lorain Corporation
Notes to Financial
Statements
During the year ended December 31,
2013, the Company entered into three operating lease agreements leasing three
plots of land where greenhouses are maintained to grow seasonal crops. The
leases were signed by Junan Hongrun Foodstuff Co., Ltd. and they expire on April
25, 2033, May 19, 2033, and June 19, 2033.
The minimum future lease payments for
these properties at March 31, 2017 are as follows:
Period
|
|
Greenhouse 1
|
|
|
Greenhouse 2
|
|
|
Greenhouse 3
|
|
Year 1
|
$
|
74,420
|
|
$
|
89,258
|
|
$
|
10,711
|
|
Year 2
|
|
74,420
|
|
|
89,258
|
|
|
10,711
|
|
Year 3
|
|
74,420
|
|
|
89,258
|
|
|
10,711
|
|
Year 4
|
|
74,420
|
|
|
89,258
|
|
|
10,711
|
|
Year 5
|
|
74,420
|
|
|
89,258
|
|
|
10,711
|
|
Year 5 and thereafter
|
|
843,427
|
|
|
1,019,029
|
|
|
123,177
|
|
|
$
|
1,215,527
|
|
$
|
1,465,319
|
|
$
|
176,732
|
|
The outstanding lease commitments for
the three greenhouses as of March 31, 2017 was $2,857,577.
17.
|
Capital Lease Obligations
|
|
|
|
The Company leases certain machinery and equipment under
leases classified as capital leases. For the three months ended March 31,
2017, the Company entered into the following capital
leases:
|
|
(a.)
|
On July 1, 2015, the Company entered into a capital lease
agreement in the amount of RMB 1,057,571, which was approximately USD
166,447, with Lessor A leasing: five production machines, two packaging
machine, one assembly line, and ten vending machines with an interest rate
of 7% for a period of 36 months with an expiration date of June 30, 2018
with an option to buy the leased assets following the lease expiration for
RMB 1.
|
|
(b.)
|
On July 1, 2015, the Company entered into a capital lease
agreement in the amount of RMB 2,805,493, which was approximately USD
441,546, with Lessor A leasing one hundred vending machines with an
interest rate of 7% for a period of 36 months with an expiration date of
June 30, 2018 with an option to buy the leased assets following the lease
expiration for RMB 1.
|
|
(c.)
|
On August 25, 2015, the Company entered into a capital
lease agreement in the amount of RMB 2,163,845, which was approximately
USD 340,539, with Lessor B leasing eight production machines with an
interest rate of 7% for a period of 30 months with an expiration date of
February 25, 2018 with an option to buy the leased assets following the
lease expiration for RMB 100.
|
|
(d.)
|
On August 25, 2015, the Company entered into a capital
lease agreement in the amount of RMB 530,439, which was approximately USD
83,484, with Lessor B leasing four production machines with an interest
rate of 7% for a period of 30 months with an expiration date of February
25, 2018 with an option to buy the leased assets following the lease
expiration for RMB 100.
|
|
(e.)
|
On August 25, 2015, the Company entered into a capital
lease agreement in the amount of RMB 777,228, which was approximately USD
122,325, with Lessor B leasing one assembly line with an interest rate of
7% for a period of 30 months with an expiration date of February 25, 2018
with an option to buy the leased assets following the lease expiration for
RMB 100.
|
|
(f.)
|
On August 25, 2015, the Company entered into a capital
lease agreement in the amount of RMB 1,647,563, which was approximately
USD 259,304, with Lessor B leasing one freezing unit with an interest rate
of 7% for a period of 30 months with an expiration date of February 25,
2018 with an option to buy the leased assets following the lease
expiration for RMB 100.
|
The following is a schedule showing the
future minimum lease payments under capital leases together with the present
value of the net minimum lease payments as of March 31, 2017:
Year 1
|
$
|
1,014,957
|
|
Year 2
|
|
-
|
|
Year 3
|
|
-
|
|
Total minimum lease payments
|
|
1,014,957
|
|
Less
: Amount representing
estimated executory costs (such as taxes, maintenance, and insurance),
including profit thereon, included in total
|
|
|
|
minimum lease payments
|
|
-
|
|
Net minimum lease payments
|
|
1,014,957
|
|
Less
: Amount representing
interest
|
|
|
|
Present value of net minimum lease payments
|
$
|
1,014,957
|
|
F-17
American Lorain Corporation
Notes to Financial
Statements
|
As of March 31, 2017, the present value of minimum lease
payments due within one year is $1,014,957. The Company recorded
impairment on the leased assets that underlie these lease obligations; the
Companys management believes it is appropriate to account for all
remaining lease obligations as current given that these leased assets are
no longer generating long term benefits to the Company.
|
|
|
18.
|
Contingencies and Litigation
|
|
|
|
There is a lawsuit currently pending in the Linyi City
Intermediate Peoples Court of Shandong Province, which was initially
filed by Shandong Lorain, a subsidiary of the Company, against Junan
Hengji Real Estate Development Co., Ltd. ("Junan Hengji") in November 2013
at Linyi City Intermediate People's Court of Shandong Province (the "Linyi
Court"). Shandong Lorain added Jiangsu Hengan Industrial Investment Group
Co., Ltd. ("Heng An Investment") as a co-defendant after the case was
first filed at the Linyi Court.
|
|
|
|
In December 2010, Shandong Lorain and Junan Hengji
entered into a cooperative development agreement (the "Agreement") and in
March 2011, Heng An Investment, an affiliated company of Junan Hengji,
also entered into the Agreement with Shandong Lorain to jointly develop
the project with Junan Hengji. Pursuant to the Agreement, Junan Henji and
Heng An Investment are required to pay Shandong Lorain a total of RMB 20
million (approximately $3,225,806) fixed return according to the
development status of the project developed by Junan Hengji and Heng An
Investment. The payment was due but unpaid in the year. In deciding to
bring suit, Shandong Lorain and the Company evaluated the potential claims
against Junan Hengji and Heng An Investment, disputes between the parties
with respect to out-of-pocket expenses paid by Junan Hengji, as well as
the litigation fee that is required to be paid to the court based upon the
amount claimed. Ultimately, Shandong Lorain decided to file the lawsuit
with Linyi Court to claim a fixed return of RMB 10 million (approximately
$1,499,390).
|
|
|
|
In January 2014, the Linyi Court held its first trial
session. During the trial, Heng An Investment filed a counterclaim against
Shandong Lorain for repayment of out-of-pocket expenses which would offset
the entire fixed return plus additional unpaid expenses of RMB 4,746,927
(approximately $765,633). Shandong Lorain responded that Heng An
Investment does not have standing to file the counter-claim because the
out-of-pocket payments were made by Junan Hengji. In November 2014, the
court held a second trial session and completed its discovery process. On
March 21, 2015, Shandong Lorain received the Linyi Court's decision that
rejected Shandong Lorain's claim for RMB 10,000,000 against Junan Hengji
and Heng An Investment. On April 3, 2015, Shandong Lorain appealed the
decision to the Supreme Court of Shandong Province.
|
|
|
|
In November 2015, the Supreme Court of Shandong Province
vacated the decision of the Linyi Court and remanded the case back to the
Linyi Court for a retrial. The retrial took place on April 25, 2016, at
the Linyi City Intermediate Peoples Court, and the decision thereon is
currently pending. The Company is confident that Shandong Lorain will
prevail on retrial.
|
|
|
19.
|
Discontinued Operations
|
|
|
|
The Company has reclassified the results of operations
and the financial position of Shandong Lorain and Dongguan Lorain as
discontinued operations. Selected details regarding those discontinued
operations are provided below.
|
Results of Operations
|
|
|
|
|
|
|
|
|
For the three
|
|
|
For the three
|
|
|
|
months ended
|
|
|
months ended
|
|
|
|
3/31/2017
|
|
|
3/31/2016
|
|
Sales
|
$
|
178,300
|
|
$
|
9,430,837
|
|
Cost of Sales
|
|
185,605
|
|
|
7,697,186
|
|
Gross Profit
|
|
(7,305
|
)
|
|
1,733,651
|
|
Operating Expenses
|
|
1,601,615
|
|
|
1,410,170
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
(3,906,075
|
)
|
|
40,079
|
|
|
|
|
|
|
|
|
Earnings before Taxes
|
|
(5,514,995
|
)
|
|
363,560
|
|
|
|
|
|
|
|
|
Taxes
|
|
-
|
|
|
90,890
|
|
|
|
|
|
|
|
|
Net Income
|
$
|
(5,514,995
|
)
|
$
|
272,670
|
|
F-18
American Lorain Corporation
Notes to Financial
Statements
Financial Position
|
|
|
|
|
|
|
|
|
At
|
|
|
At
|
|
|
|
3/31/2017
|
|
|
12/31/2016
|
|
Current Assets
|
$
|
16,709,495
|
|
$
|
19,745,847
|
|
Non-Current Assets
|
|
14,210,506
|
|
|
16,362,855
|
|
Total Assets
|
$
|
30,920,001
|
|
$
|
36,108,702
|
|
|
|
|
|
|
|
|
Current Liabilities
|
$
|
15,508,099
|
|
$
|
13,811,908
|
|
Total Long Term Liabilities
|
|
-
|
|
|
-
|
|
Total Liabilities
|
$
|
15,508,099
|
|
$
|
13,811,908
|
|
|
|
|
|
|
|
|
Net Assets
|
$
|
15,411,902
|
|
$
|
22,296,794
|
|
|
|
|
|
|
|
|
Total Liabilities & Net Assets
|
$
|
30,920,001
|
|
$
|
36,108,702
|
|
20.
|
Risks
|
|
|
|
|
A.
|
Credit risk
|
|
|
|
|
|
The Companys deposits are made with banks located in the
PRC. They do not carry federal deposit insurance and may be subject to
loss of the banks become insolvent.
|
|
|
|
|
|
Since the Companys inception, the age of account
receivables has been less than one year indicating that the Company is
subject to minimal risk borne from credit extended to customers.
|
|
|
|
|
B.
|
Interest risk
|
|
|
|
|
|
The company is subject to interest rate risk when short
term loans become due and require refinancing.
|
|
|
|
|
C.
|
Economic and political risks
|
|
|
|
|
|
The Companys operations are conducted in the PRC.
Accordingly, the Companys business, financial condition, and results of
operations may be influenced by changes in the political, economic, and
legal environments in the PRC.
|
|
|
|
|
|
The Companys operations in the PRC are subject to
special considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks
associated with, among others, the political, economic and legal
environment and foreign currency exchange. The Companys results may be
adversely affected by changes in the political and social conditions in
the PRC, and by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion, remittances
abroad, and rates and methods of taxation, among other things.
|
|
|
|
|
D.
|
Environmental risks
|
|
|
|
|
|
The Company has procured environmental licenses required
by the PRC government. The Company has both a water treatment facility for water used in its
production process and secure transportation to remove waste off site. In
the event of an accident, the Company has purchased insurance to cover
potential damage to employees, equipment, and local environment.
|
F-19
American Lorain Corporation
Notes to Financial
Statements
|
E.
|
Inflation Risk
|
|
|
|
|
|
Management monitors changes in prices levels.
Historically inflation has not materially impacted the companys financial
statements; however, significant increases in the price of raw materials
and labor that cannot be passed to the Companys customers could adversely
impact the Companys results of operations.
|
F-20
ITEM 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations Overview
Overview
We are an integrated food manufacturing company headquartered
in Shandong Province, China. We develop, manufacture and sell the following
types of food products:
-
Chestnut products;
-
Convenience foods (including ready-to-cook, or RTC, foods, and,
ready-to-eat, or RTE, foods); and
-
Frozen food products.
We conduct our production activities in China. Our products are
sold in the Chinese domestic markets as well as exported to foreign countries
and regions such as Japan and South Korea. We have developed brand equity for
our chestnut products in China, Japan and South Korea over the past 18 years. We
produced 214 products in 2016. We derive most of our revenues from sales in
China, South Korea and Japan.
Recent Developments
Domestic sales in the first quarter of 2017 and 2016 was $1.2
million and $28.0 million, respectively, accounting for 57.66% of our sales in
this reporting period in 2017 as compared to 88.2% over the same period of last
year. The reasons for the decrease in revenues in China decreased are:
|
o
|
Shandong Lorain was required to move its production lines
to our factory in Junan Hongrun according to a new city zoning plan, so
that Shandong Lorains land can be used for other urban use. Shandong
Lorain started this relocation process in July 2016 and finished this
process in December 2016. During the relocation process, we were unable to
produce our products with full capacity. As a result, the revenue from
sales of chestnuts food products by Shandong Lorain was $0 million and
$30.4 million, respectively, in March 31, 2017 and in 2016, respectively,
decreasing by approximately 100%.
|
|
o
|
The domestic sale of our chestnuts has decreased due to
increased prices of chestnut in Luotian, Hubei, our main chestnut supply
region, because of flooding. As a result, the sales revenue of Luotian
Lorain was deceased by 44.9% in 2016.
|
Outside China, sales decreased by $2.8 million. We
liquidated our French operations in 2016 following an investigation with respect
to the origin of canned chestnuts sold by Conserverie Minerve (Minerve, a
former subsidiary of Athena) issued Centre Technique Conservation of Produits
Agricoles (CTCPA), an industry trade association for canned, preserved and
dehydrated food products in France. CTCPA stated that only chestnuts based on
the European or Japanese cultivars can be used in canned chestnut products sold
in France according to CTCPA policies and that canned chestnut products must
also have received certification from the International Featured Standards
(IFS), a qualified third party certification agency in Europe that certifies
food products, especially for retail industry.
As a result of such liquidation, our exports have decreased
substantially due to weak demand in the international market. Revenue from sales
in international markets decreased by approximately $29.1 million, or
approximately 67.12% . We mainly relied on Athena, our French subsidiary, to
sell our products in European market. But since we suffered a significant loss
from the result of investigation of CTCPA during 2015 and 2016, we decided to
shut down the operation of Athena. As a result, the export amount of chestnuts
to Europe markets decreased markedly by 95.40% in 2016.
Frozen foods are sold primarily to selected export markets in
Europe and supermarkets and wholesale customers in China. Those sales
contributed approximately 35% in revenues for the quarter compared to 32% in the
first quarter of 2017.
5
Seasonality
Chestnut season in China lasts from September to January. We
purchase and produce raw chestnuts during these months and store them in our
refrigerated storage facilities throughout the year. Once we obtain a purchase
order during the rest of the year, we remove the chestnuts from storage, process
them and ship them within one day of production. Since most chestnuts are
produced and sold in the fourth quarter, the Company generally performs best in
the fourth quarter.
Uncertainties that Affect our Financial Condition
We spend a significant amount of cash on our operations,
principally to procure raw materials for our products. Many of our suppliers,
including chestnut, vegetable and fruit farmers, and suppliers of packaging
materials, require us to prepay for their supplies in cash or pay on the same
day that such supplies are delivered to us. However, some of the suppliers with
whom we have a long-standing business relationship allow us to pay on credit. We
fund the majority of our working capital requirements out of cash flow generated
from operations. If we fail to generate sufficient sales, or if our suppliers
stop offering us credit terms, we may not have sufficient liquidity to fund our
operating costs and our business could be adversely affected.
We funded approximately 22.0% of our working capital from the
proceeds of short-term loans from Chinese and overseas banks in the first
quarter of 2017, as compared to 22.9% over the same period last year. We expect
to continue to fund our working capital requirements with such loans in the
future. Such loans are generally secured by our fixed assets, receivables and/or
guarantees by third parties. Our balance of short-term bank loans as of March
31, 2017 was approximately $22.8 million. The term of almost all such loans is
one year or less. Historically, we have rolled over such loans on an annual
basis. However, commencing 2010, the Chinese government is implementing more
stringent credit policies to curb inflation and soaring property prices, which
could negatively impact our ability to obtain or roll over these short term
loans, and hence not having sufficient funds available to pay all of our
borrowings upon maturity. Failure to roll over our short-term borrowings at
maturity or to service our debt could result in the imposition of penalties,
including increases in rates of interest, legal actions against us by our
creditors, or even insolvency. We obtained long term loans, private placement
financing and a convertible promissory note during the period 2011 to 2014. We
can provide no assurances that we will be able to enter into any future
financing or refinancing agreements on terms favorable to us, especially
considering the current instability of the capital markets.
6
The financial statements have been prepared on a going-concern basis. The going-concern basis assumes that assets will be realized and liabilities will be settled in the ordinary course of business in the amounts disclosed in the financial statements. Our ability to continue as a going concern is greatly dependent on our ability to realize its non-cash current assets such as receivables and inventory into cash in order to settle its current obligations. For the three months ended March 31, 2017, the Company incurred a substantial loss of $15,769,218. These conditions raise substantial doubt as to whether the Company may continue as a going concern.
Our primary capital needs have been to fund the working capital
requirements necessitated by our sales growth and loans. In addition, we
obtained long term loans, private placement financing and convertible promissory
note during the period 2011 to 2015. In 2016 and the reporting period in 2017,
our primary sources of financing have been cash generated from operations and
short-term loans from banks in China. However, if available liquidity is not
sufficient to meet our operating and loan obligations as they come due, our
plans include obtaining alternative financing arrangements or further reducing
expenditures as necessary to meet our cash requirements. However, there is no
assurance that, if required, we will be able to raise additional capital or
reduce discretionary spending to provide the required liquidity. Currently, the
capital markets for small capitalization companies are extremely difficult and
banking institutions have become stringent in their lending requirements.
Accordingly, we cannot be sure of the availability or terms of any third party
financing.
Our business, operating results or financial condition will be
adversely affected in the event of unfavorable economic conditions, including
the ongoing global economy and capital markets disruptions. For example, we may
experience declines in revenues, profitability and cash flows as a result of
reduced orders, delays in receiving orders, delays or defaults in payment or
other factors caused by the economic problems of our customers and prospective
customers. We may experience supply chain delays, disruptions or other problems
associated with financial constraints faced by our suppliers and subcontractors.
In addition, changes and volatility in the equity, credit and foreign exchange
markets and in the competitive landscape make it increasingly difficult for us
to predict our revenues and earnings into the future.
Results of Operations
Three Months Ended March 31, 2017 Compared to Three Months
Ended March 31, 2016
The following table summarizes the results of our operations
during the three-month periods ended March 31, 2017 and March 31, 2016,
respectively and provides information regarding the dollar and percentage
increase or (decrease) from the three-month period ended March 31, 2017 compared
to the three-month period ended March 31, 2016.
(All amounts, other than percentages, stated in thousands of
U.S. dollars)
|
|
Three months ended March 31,
|
|
|
Increase /
|
|
|
Increase /
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
(In Thousands of USD)
|
|
2017
|
|
|
2016
|
|
|
($)
|
|
|
(%)
|
|
Net revenues
|
|
1,906
|
|
|
22,276
|
|
|
(20,370
|
)
|
|
(91.4
|
%)
|
Cost of revenues
|
|
1,661
|
|
|
17,873
|
|
|
(16,212
|
)
|
|
(90.7)
|
%
|
Gross profit
|
|
245
|
|
|
4,403
|
|
|
(4,158
|
)
|
|
(94.4)
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
2,785
|
|
|
1,212
|
|
|
1,573
|
|
|
129.8
|
%
|
General and administrative expenses
|
|
5,915
|
|
|
753
|
|
|
5,162
|
|
|
685.5
|
%
|
Total Operating expenses
|
|
8,700
|
|
|
1,965
|
|
|
6,735
|
|
|
324.7
|
%
|
Government subsidy income
|
|
581
|
|
|
529
|
|
|
52
|
|
|
9.8
|
%
|
Interest and other income
|
|
211
|
|
|
280
|
|
|
(69
|
)
|
|
(24.6
|
%)
|
Other expenses
|
|
(1,869
|
)
|
|
(0.6
|
)
|
|
(1,869)
|
|
|
(334,867
|
%)
|
Interest expense
|
|
(722
|
)
|
|
(1,081
|
)
|
|
(358
|
)
|
|
(33.1
|
%)
|
Loss before tax from continuing operations
|
|
(10,254
|
)
|
|
(2,443
|
)
|
|
7,811
|
|
|
319.7
|
%
|
Income tax
|
|
-
|
|
|
91
|
|
|
(91
|
)
|
|
(100.0
|
%)
|
Net loss from continuing operations
|
|
(10,254
|
)
|
|
(3,119
|
)
|
|
7,135
|
|
|
228.8
|
%
|
(loss) income from discontinued operations
|
|
(5,515)
|
|
|
267
|
|
|
(5,782)
|
|
|
(2,165.5
|
%)
|
Income tax
|
|
-
|
|
|
91
|
|
|
(91)
|
|
|
(100
|
%)
|
Net loss
|
|
(15,769)
|
|
|
(2,943)
|
|
|
12,826
|
|
|
435.8
|
%
|
Non-controlling interests
|
|
(1,174
|
)
|
|
132
|
|
|
(1,306)
|
|
|
(989.4
|
%)
|
Net income of common stockholders
|
|
(14,596
|
)
|
|
(3,075
|
)
|
|
11,521
|
|
|
374.7
|
%
|
Revenue
Net Revenues
. Our net revenue for the three months ended March 31, 2017 amounted to $1.9 million, which represents a decrease of approximately $20.4 million, or 91.4%, from the three-month period ended on March 31, 2016, in which our net revenue was $22.3 million. The overall decrease was attributable to the decrease in sales of each of our product segments, as reflected in the following table:
7
|
|
Three
|
|
|
|
|
|
|
|
|
|
months
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
|
|
|
|
|
|
|
3/31/2017
|
|
|
3/31/2016
|
|
|
|
|
|
|
|
Category
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(%)
|
|
Chestnut
|
|
1,163,306
|
|
|
11,131,516
|
|
|
(9, 689, 210)
|
|
|
(89.5%)
|
|
Convenience food
|
|
278,687
|
|
|
5,572,146
|
|
|
(5,293,459)
|
|
|
(95.0%)
|
|
Frozen food
|
|
464,479
|
|
|
5,572,146
|
|
|
(5,107,667)
|
|
|
(91.7%)
|
|
Total
|
|
1,906, 472
|
|
|
22,275,807
|
|
|
(20,369,335)
|
|
|
(91.4%)
|
|
Cost of Revenues.
During the three months ended March 31, 2017, we experienced a decrease in cost of revenue of $16.2 million, in comparison to the three months ended March 31, 2016, from approximately $17.9 million to $1.7 million, reflecting a decrease of 90.7%. Approximately a decrease of $4.9 million was attributable to decreasing costs of raw material and external purchased finished products, which decreased from $20.7 million during the three months ended March 31, 2016 to $15.8 million, or approximately 23.7%, during the three months ended March 31, 2017.
Gross Profit
. Our gross profit decreased $4 million, or 94.4%, to $0.2 million for the three months ended March 31, 2017 from $4.4 million for the same period in 2016, it is mainly attributes to the reason that we ceased to sell convenience foods products since 2016, shut Athena Group and Dongguan Lorain, the cost of chestnuts slightly increased and the sales of chestnuts in China declined.
Operating Expenses
Selling and Marketing Expenses
. Our selling and marketing expenses increased $1.6 million, or 129.8%, to $2.8 million during the first quarter of 2017, as compared to $1.2 million at the same period over last year. The following table reflects the main expense items:
Selling and Marketing Expense in the Three
Months
Ended March 31, 2017
(In U.S. dollars)
|
|
|
|
Transportation expense
|
|
42,058
|
|
Salaries and wages
|
|
79,923
|
|
Bad debt loss
|
|
2,663,088
|
|
The selling and marketing expense to net revenue ratio for the three months ended March 31, 2017 and 2016 was 146.1% and 5.4%, respectively. All of the bad debt loss incurred from Beijing Lorain, the reason of which are mainly due to other receivables that become bad debt include (i) raw materials we paid for but the suppliers did not provide the raw materials ordered by us and refused to refund the advance payment, or we did not agree on the quality of the raw materials and (ii) advance payments made by our procurement department for raw materials, and such salesmen left the company before we could confirm that the goods had been warehoused.
General and Administrative Expenses.
We experienced a increase in general and administrative expense of $5.1 million from $0.8million to approximately $5.9million for the three months ended March 31, 2017, compared to the same period in 2016. It was noted that the general and administrative expenses incurred by PRC subsidiaries to maintain our operation in China.
8
Government Subsidy Income
Government subsidy income increased from approximately $0.53 million for the three months ended March 31, 2016 to $0.58 million for the three months ended March 31, 2017. It represents grants received mostly from the Junan County, Beijing and Luotian government to assist us in our research and business development.
Loss Before Taxation
from continuing operations
Loss before taxation from continuing oprations increased $7.8 million to $10.3 million for the three months ended March 31, 2017 from $2.4 million for the same period of 2016. The increase was mainly attributable to the fact that we provided loss for our investment in French and Portugal subsidiaries due to loss in control of Athena Group which is going bankrupt after failing to legally reorganize and reach a consensus with non-controlling shareholders for a reorganization plan.
Loss Before Taxation
from discontinued operations
Loss before taxation from discontinued operation increased $5.8 million to $5.5 million for the three months ended March 31, 2017 from $0.3 million income for the same period of 2016. The increase was mainly attributable to the fact that we provided loss for our investment in French and Portugal subsidiaries due to loss in control of Athena Group which is going bankrupt after failing to legally reorganize and reach a consensus with non-controlling shareholders for a reorganization plan.
Income Taxes
There is no income tax due to no profit loss for the three months ended March 31, 2017.
Net Loss
Net loss increased $12.8 million to $15.8 million for the three months ended March 31, 2017 from $2.9 million for the same period of 2016. The main reason for the increase of loss was mainly due to the ceased operation of our French company, Dongguan Lorain and the production lines move of Shandong Lorain.
Liquidity and Capital Resources
As of March 31, 2017, we had cash and cash equivalents (including restricted cash) of $4.28 million. Our cash and cash equivalents increased by approximately $2.89 million from December 31, 2016. The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.
Cash Flow (In thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash (used in)/provided by operating
activities
|
|
7,604
|
|
|
(12,333
|
)
|
Net cash provided by/ (used in) investing activities
|
|
(7,615
|
)
|
|
3,194
|
|
Net cash provided by/ (used in) financing
activities
|
|
-
|
|
|
5,923
|
|
Net cash flow
|
|
(11
|
)
|
|
(3,216
|
)
|
Operating Activities
Net cash provided by operating activities was $7.6 million and used in $12.3 million for the three month periods ended March 31, 2017 and 2016, respectively. The increase of approximately $19.9 million in net cash flows provided by operating activities in the first three months of 2017 was primarily due to a decrease of $19.4 million in advance to suppliers during the current reporting period.
9
Investing Activities
Net cash used in investing activities for the three months period ended March 31, 2017 was $7.6 million, representing an decrease of $10.7 million in net cash provided by investing activities from $3.2 million net cash used in investing activities for the same period of 2016. The difference was primarily a result of increase in payment of construction in progress of $7.6 million.
Financing Activities
Net cash provided by financing activities for the three months
period ended March 31, 2017 was $0 million, representing a decrease of $5.9
million from $5.9 million net cash used in financing activities during the same
period in 2016. The decrease of the net cash provided by financing activities
was primarily a result of no bank borrowing repayment and proceeds in current
reporting period.
Loan Facilities
As of March 31, 2017, the amounts and maturity dates for our short-term bank loans are as set forth in the Notes to the Financial Statements. The total amounts outstanding were $22.8 million as of March 31, 2017, compared with $22.7 million as of December 31, 2016.
Critical Accounting Policies
The preparation of financial statements in conformity with
United States generally accepted accounting principles requires our management
to make assumptions, estimates and judgments that affect the amounts reported in
our financial statements, including the notes thereto, and related disclosures
of commitments and contingencies, if any. We consider our critical accounting
policies to be those that require significant judgments and estimates in the
preparation of financial statements, including the following:
Method of
Accounting --
We maintain our general ledger and journals with the accrual
method accounting for financial reporting purposes. Accounting policies adopted
by us conform to generally accepted accounting principles in the United States
and have been consistently applied in the presentation of our financial
statements, which are compiled on the accrual basis of accounting.
Restatement of prior financial statements --
The Company
has discovered errors in the timing of revenues recognized during the year ended
December 31, 2016. The Company recognizes revenue upon shipping of products to
its customers where title of the goods passes upon departure from the Companys
facilities; however, in certain instances, contractual terms dictate that the
customers are afforded seven days after the receipt of goods at their premises
to inspect the goods for defects or spoilage and notify the Company. If the
Company is not contacted within those seven days, the Companys obligation to
the customer are considered fully discharged and revenue should be recognized.
Given the timing of these seven days, the Company believes that certain sales
transactions have been erroneously recognized during the year ended December 31,
2015. The Company has rectified this error and the impact of the Companys
financial position and result of operations are detailed below.
Use of estimates --
The preparation of the financial
statements in conformity with generally accepted accounting principles in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Management makes
these estimates using the best information available at the time the estimates
are made; however, actual results could differ materially from those estimates.
10
The use of estimates is critical to the carrying value of asset
accounts such as accounts receivable, inventory, fixed assets, and intangible
assets. We use estimates to account for the related bad debt allowance,
inventory impairment charges, depreciation and amortization of our assets. In
the food processing industry these accounts have a significant impact on the
valuation of our balance sheet and the results of our operations.
Principles of consolidation --
Our consolidated
financial statements, which include information about our company and our
subsidiaries, are compiled in accordance with generally accepted accounting
principles in the United States. All significant inter-company accounts and
transactions have been eliminated. Ownership interests of non-controlling
investors are recorded as non-controlling interests.
As of March 31, 2017, the details pertaining to our
subsidiaries were as follows:
|
|
Place of
|
Attributable
|
Registered
|
|
Name of Company
|
incorporation
|
equity interest %
|
capital
|
|
International Lorain Holding
Inc.
|
Cayman Islands
|
100
|
$ 46,659,135
|
|
Junan Hongrun Foodstuff Co., Ltd.
|
PRC
|
100
|
44,861,741
|
|
Shandong Lorain Co., Ltd.
|
PRC
|
80.2
|
12,123,985
|
|
Beijing Lorain Co., Ltd.
|
PRC
|
100
|
1,540,666
|
|
Luotian Lorain Co., Ltd.
|
PRC
|
100
|
3,797,774
|
|
Shandong Greenpia Foodstuff Co., Ltd.
|
PRC
|
100
|
2,303,063
|
|
Dongguan Lorain Co., Ltd.
|
PRC
|
100
|
149,939
|
In 2014, the Company invested $2,100,000 in Athena/Minerve
Group whereby the Company controlling shareholder of Minerve. Minerve conducted
operations in manufacturing, packaging and sales activities in France and import
and storage operations in Portugal. During the years ended December 31, 2015,
the financial position and results of operations of Minerve were accounted for
as subsidiaries in the Companys financial statements; however, during the year
ended December 31, 2016, Minerve became insolvent and compelled into bankruptcy
by creditors, and, ultimately liquidation. Accordingly, the Company lost control
of Minerve and written of the value of its investment in Minerve. All
receivables due by Minerve to subsidiaries still controlled by the Company have
been written off. The Companys consolidated financial statements at December
31, 2015 have been recast to provide improved comparability for the Companys
continuing operations.
Management has eliminated all significant inter-company
balances and transactions in preparing the accompanying consolidated financial
statements. Ownership interests of subsidiaries that the Company does not
wholly-own are accounted for as non-controlling interests.
Shandong Economic Development Investment Corporation, which is
a PRC state-owned entity, holds 19.8% equity interest in Shandong Lorain.
Accounting for the Impairment of Long-Lived Assets
--
The long-lived assets held and used by us are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of assets
may not be recoverable. It is reasonably possible that these assets could become
impaired as a result of technology or other industry changes. Determination of
recoverability of assets to be held and used is by comparing the carrying amount
of an asset to future net undiscounted cash flows to be generated by the assets.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
11
During the reporting period, there was no impairment loss.
Revenue recognition --
Our revenue recognition policies
are in compliance with Staff Accounting Bulletin (SAB) 104. Sales revenue is
recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, we have
no other significant obligations and collectability is reasonably assured.
Payments received before all of the relevant criteria for revenue recognition
are satisfied are recorded as unearned revenue.
Our revenue consists of invoiced value of goods, net of a
value-added tax. The Company allows its customers to return products if they are
defective. However, this rarely happens and amounts returned have been de
minimis.
Recent Accounting Pronouncements
In January 2017, the FASB issued guidance which simplifies the accounting for goodwill impairment. The updated guidance eliminates Step 2 of the impairment test, which requires entities to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value, determined in Step 1. The Company is currently evaluating the impact on the financial statements of this guidance.
In January 2017, the FASB amended the existing accounting standards for business combinations. The amendments clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company is currently evaluating the impact on the financial statements of this guidance.
In November 2016, the FASB issued guidance, which addresses the presentation of restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The Company is currently evaluating the timing and the impact of this guidance on the financial statements.
In October 2016, the FASB issued guidance, which amends the existing accounting for Intra-Entity Transfers of Assets Other Than Inventory. The guidance requires an entity to recognize the income tax consequences of intra-entity transfers, other than inventory, when the transfer occurs The Company is currently evaluating the timing and the impact of this guidance on the financial statements.
In August 2016, the FASB issued guidance, which amends the existing accounting standards for the classification of certain cash receipts and cash payments on the statement of cash flows. The Company is currently evaluating the timing and the impact of this guidance on the financial statements.
In June 2016, the FASB issued guidance, which requires credit losses on financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, not based on incurred losses. Further, credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses limited to the amount by which fair value is below amortized cost. The Company is currently evaluating the timing and the impact of this guidance on the financial statements.
In February 2016, the FASB issued guidance, which amends the existing accounting standards for leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize assets and liabilities for all leases with lease terms of more than twelve months. The Company is currently evaluating the timing and the impact of this guidance on the financial statements.
In January 2016, the FASB issued guidance, which amends the existing accounting standards for the recognition and measurement of financial assets and financial liabilities. The updated guidance primarily addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Company is currently evaluating the timing and the impact of this guidance on the financial statements.
12
Off-Balance Sheet Arrangements
We do not have any off-balance arrangements.
Correction of Error
The Company discovered errors in the timing of revenues
recognized during the year ended December 31, 2015. The Company recognizes
revenue upon shipping of products to its customers where title of the goods
passes upon departure from the Companys facilities; however, in certain
instances, contractual terms dictate that the customers are afforded seven days
inspection period after the receipt of goods at their premises to inspect the
goods for defects or spoilage and notify the Company. If the Company is not
contacted within those seven days, the Companys obligation to the customer are
considered fully discharged and revenue should be recognized. Given the timing
of these seven days inspection period, the Company believes that certain sales
transactions have been erroneously recognized during the year ended December 31,
2015. The Company has corrected this error and adjusted for the impact upon the
Companys financial position and result of operations as detailed below, which
include the regrouping of amounts attributable to Discontinued Operations.
The effect of correction of these errors on results of
operations for the above mentioned financial statements is as follows for
2015.
|
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
$
|
215,315,437
|
|
$
|
(8,571,793
|
)
|
$
|
206,743,644
|
|
|
Cost of sales
|
|
179,197,430
|
|
|
(7,076,892
|
)
|
|
172,120,538
|
|
|
Gross profit
|
|
36,118,006
|
|
|
(1,494,900
|
)
|
|
34,623,106
|
|
|
Operating income
|
|
14,052,920
|
|
|
(1,494,900
|
)
|
|
12,558,020
|
|
|
Total other expense
|
|
(10,728,224
|
)
|
|
-
|
|
|
(10,728,224
|
)
|
|
Loss before tax
|
|
3,324,696
|
|
|
(1,494,900
|
)
|
|
1,829,796
|
|
|
Net loss
|
$
|
(1,191,239
|
)
|
$
|
(1,494,900
|
)
|
$
|
(2,686,139
|
)
|
13
The effect of correction of these errors on retained earnings
and significant asset and liability accounts is as follows:
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
62,532,017
|
|
|
(9,269,327
|
)
|
|
53,262,690
|
|
Inventory
|
|
43,712,048
|
|
|
6,779,018
|
|
|
50,491,066
|
|
Total current asset
|
|
191,049,927
|
|
|
(2,449,159
|
)
|
|
188,600,768
|
|
Total asset
|
|
309,537,530
|
|
|
(2,449,159
|
)
|
|
307,088,371
|
|
|
|
|
|
|
|
|
|
|
|
Taxes payable
|
|
5,863,261
|
|
|
(1,017,181
|
)
|
|
4,846,080
|
|
Total current liabilities
|
|
97,003,426
|
|
|
(1,017,181
|
)
|
|
95,986,245
|
|
Total liabilities
|
|
107,569,431
|
|
|
(1,017,181
|
)
|
|
106,552,250
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
101,389,920
|
|
|
(1,370,586
|
)
|
|
100,019,334
|
|
Total stockholders equity
|
|
201,968,099
|
|
|
(1,431,978
|
)
|
|
200,536,121
|
|
Total liabilities and
|
|
|
|
|
|
|
|
|
|
stockholders equity
|
|
309,537,531
|
|
|
(2,449,160
|
)
|
|
307,088,371
|
|
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rule 13a(15(e) under the Exchange Act) that are designed to ensure that
information required to be disclosed in Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated
to our management, including to our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
As required by Rule 13a-15 under the Exchange Act, our
management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2017. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that as of March
31, 2017, and as of the date that the evaluation of the effectiveness of our
disclosure controls and procedures was completed, our disclosure controls and
procedures were not effective due to the continuing material weakness in our
internal control over financial reporting.
14
The material weakness and significant deficiency identified by
our management as of March 31, 2017 relates to the ability of the Company to
record transactions and provide disclosures in accordance with U.S. GAAP. We did
not have sufficient and skilled accounting personnel with an appropriate level
of experience in the application of U.S. GAAP commensurate with our financial
reporting requirements. For example, our staff members do not hold licenses such
as Certified Public Accountant or Certified Management Accountant in the U.S.,
have not attended U.S. institutions for training as accountants, and have not
attended extended educational programs that would provide sufficient relevant
education relating to U.S. GAAP. Our staff will require substantial training to
meet the demands of a U.S. public company and our staffs understanding of the
requirements of U.S. GAAP-based reporting is inadequate.
We plan to provide U.S. GAAP training sessions to our
accounting team. The training sessions will be organized to help our corporate
accounting team gain experience in U.S. GAAP reporting and to enhance their
awareness of new and emerging pronouncements with potential impact over our
financial reporting. We plan to continue to recruit experienced and professional
accounting and financial personnel and participate in educational seminars,
tutorials, and conferences and employ more qualified accounting staff in
future.
C
hanges in Internal Controls over Financial Reporting.
During the three months ended March 31, 2017, there were no
changes in our internal control over financial reporting identified in
connection with the evaluation performed during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Inherent Limitations Over Internal Controls.
Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP. Our internal control over financial reporting includes those policies
and procedures that:
(i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets;
(ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and
directors; and
(iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on the financial
statements.
Management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our internal controls will prevent or
detect all errors and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of internal controls
can provide absolute assurance that all control issues and instances of fraud,
if any, have been detected. Also, any evaluation of the effectiveness of
controls in future periods are subject to the risk that those internal controls
may become inadequate because of changes in business conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
15