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, 2016 and
December 31, 2015, and the related statements of income,
and cash flows for the three months ended March 31, 2016 and 2015. 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, 2015, 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
April 14, 2016, 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, 2015, is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
San Mateo, California
|
WWC, P.C.
|
May 23, 2016
|
Certified Public Accountants
|
AMERICAN LORAIN CORPORATION
UNAUDITED CONSOLIDATED
BALANCE SHEETS
AT MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
|
At March 31,
|
|
|
At December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
30,446,293
|
|
$
|
20,664,487
|
|
Restricted cash
|
|
11,678,563
|
|
|
11,792,596
|
|
Trade accounts receivable
|
|
34,800,657
|
|
|
62,532,017
|
|
Other receivables
|
|
5,897,569
|
|
|
12,107,256
|
|
Inventories
|
|
50,570,590
|
|
|
43,712,048
|
|
Advance to
suppliers
|
|
36,679,163
|
|
|
34,631,432
|
|
Prepaid expenses and taxes
|
|
2,664,614
|
|
|
1,868,744
|
|
Deferred tax asset
|
|
171,222
|
|
|
-
|
|
Security
deposits and other assets
|
|
3,766,181
|
|
|
3,741,346
|
|
Total current assets
|
$
|
176,674,852
|
|
$
|
191,049,926
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
Investment
|
|
3,101,785
|
|
|
3,081,332
|
|
Property, plant and
equipment,
net
|
|
78,199,042
|
|
|
82,110,315
|
|
Construction in progress, net
|
|
14,124,507
|
|
|
13,890,270
|
|
Intangible assets,
net
|
|
14,766,089
|
|
|
16,186,515
|
|
Goodwill
|
|
-
|
|
|
3,219,172
|
|
TOTAL ASSETS
|
$
|
286,866,275
|
|
$
|
309,537,530
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Short-term bank
loans
|
$
|
29,053,349
|
|
$
|
36,310,826
|
|
Notes payable
|
|
-
|
|
|
2,965,747
|
|
Long-term debt
current portion
|
|
21,133,925
|
|
|
22,197,027
|
|
Accounts payable
|
|
6,821,130
|
|
|
22,463,974
|
|
Taxes payable
|
|
2,404,325
|
|
|
5,863,261
|
|
Accrued liabilities and other payables
|
|
4,476,926
|
|
|
4,740,898
|
|
Related party
payable
|
|
-
|
|
|
1,755,216
|
|
Deferred tax liabilities
|
|
-
|
|
|
5,076
|
|
Customers deposits
|
|
179,691
|
|
|
237,311
|
|
Capital lease current portion
|
|
475,365
|
|
|
464,090
|
|
Total current liabilities
|
$
|
64,544,711
|
|
$
|
97,003,426
|
|
See Accompanying Notes to the Financial Statements and
Accountants Report
2
AMERICAN LORAIN CORPORATION
UNAUDITED CONSOLIDATED
BALANCE SHEETS
AT DECEMBER 31, 2015 AND 2014
(Stated in US
Dollars)
|
|
At March 31,
|
|
|
At December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
(Audited)
|
|
Long-term liabilities
|
|
|
|
|
|
|
Long-term bank loans
|
$
|
-
|
|
$
|
326,591
|
|
Notes
payable and debenture
|
|
9,607,779
|
|
|
9,544,425
|
|
Capital lease current
portion
|
|
691,407
|
|
|
694,989
|
|
TOTAL LIABILITIES
|
$
|
74,843,897
|
|
$
|
107,569,431
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
Preferred Stock, $0.001 par
value, 5,000,000 shares authorized; 0 shares issued and
outstanding at March
31, 2016 and December 31, 2015, respectively
|
$
|
-
|
|
$
|
-
|
|
Common Stock,
$0.001 par value, 200,000,000 shares authorized; 38,259,490
shares
issued
and outstanding as of March 31, 2016 and December 31, 2015, respectively
|
|
38,260
|
|
|
38,260
|
|
Additional paid-in capital
|
|
57,842,064
|
|
|
57,842,064
|
|
Statutory reserves
|
|
24,660,666
|
|
|
24,660,666
|
|
Retained earnings
|
|
98,314,952
|
|
|
101,389,920
|
|
Accumulated other
comprehensive income
|
|
23,194,360
|
|
|
10,196,987
|
|
Non-controlling interests
|
|
7,972,076
|
|
|
7,840,202
|
|
TOTAL STOCKHOLDERS
EQUITY
|
$
|
212,022,378
|
|
$
|
201,968,099
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
|
$
|
286,866,275
|
|
$
|
309,537,530
|
|
See Accompanying Notes to the Financial Statements and
Accountants Report
3
AMERICAN LORAIN CORPORATION
UNAUDITED CONSOLIDATED
STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
FOR THE THREE
MONTHS ENDED MARCH 31, 2016 AND 2015
(Stated in US Dollars)
|
|
For the three months ended March
|
|
|
|
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
31,719,419
|
|
$
|
37,557,311
|
|
Cost of revenues
|
|
25,828,352
|
|
|
31,939,605
|
|
Gross
profit
|
$
|
5,891,067
|
|
$
|
5,617,706
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
2,078,566
|
|
|
2,119,464
|
|
General and administrative
expenses
|
|
1,132,297
|
|
|
2,616,204
|
|
|
|
3,210,863
|
|
|
4,735,668
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
2,680,204
|
|
$
|
882,038
|
|
|
|
|
|
|
|
|
Government subsidy income
|
|
528,692
|
|
|
256,997
|
|
Interest income
|
|
13,166
|
|
|
72,823
|
|
Other income
|
|
384,297
|
|
|
293,654
|
|
Other expenses
|
|
(558
|
)
|
|
(381,089
|
)
|
Interest expense
|
|
(1,173,942
|
)
|
|
(1,715,479
|
)
|
Loss from investment
|
|
(4,607,692
|
)
|
|
-
|
|
|
|
|
|
|
|
|
Earnings before tax
|
$
|
(2,175,833
|
)
|
$
|
(591,056
|
)
|
|
|
|
|
|
|
|
Income tax
|
|
767,262
|
|
|
479,666
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(2,943,095
|
)
|
$
|
(1,070,722
|
)
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
12,997,373
|
|
|
(500,795
|
)
|
Comprehensive Income
|
|
10,054,278
|
|
|
(1,571,517
|
)
|
Net income attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Common stockholders
|
$
|
(3,074,969
|
)
|
$
|
(497,106
|
)
|
-Non-controlling interest
|
|
131,874
|
|
|
(573,616
|
)
|
|
$
|
(2,943,095
|
)
|
$
|
(1,070,722
|
)
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
- Basic
|
$
|
(0.07
|
)
|
$
|
(0.03
|
)
|
- Diluted
|
$
|
(0.07
|
)
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
-
Basic
|
|
38,259,490
|
|
|
34,916,714
|
|
- Diluted
|
|
38,259,490
|
|
|
34,916,714
|
|
See Accompanying Notes to the Financial Statements and
Accountants Report
4
AMERICAN LORAIN CORPORATION
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS
ENDED MARCH 31, 2016 AND 2015
(STATED IN US DOLLARS)
|
|
For the three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
Net loss
|
$
|
(2,943,095
|
)
|
$
|
(1,070,722
|
)
|
Depreciation of
fixed assets
|
|
913,784
|
|
|
962,163
|
|
Amortization of intangible
assets
|
|
91,550
|
|
|
91,500
|
|
Write down of assets
from investment loss from deconsolidation
|
|
(13,279,242
|
)
|
|
-
|
|
Decrease in accounts
and other receivables
|
|
33,941,047
|
|
|
23,046,341
|
|
Increase in inventories
|
|
(6,858,543
|
)
|
|
(6,800,908
|
)
|
Increase in advance
to suppliers
|
|
(2,047,730
|
)
|
|
-
|
|
Increase in prepayment
|
|
(795,869
|
)
|
|
(1,149,165
|
)
|
(Increase) in deferred tax asset
|
|
(176,298
|
)
|
|
(12,590
|
)
|
Increase/(decrease) in accounts and other payables
|
|
(19,423,372
|
)
|
|
1,672,677
|
|
Decrease in related
party payable
|
|
(1,755,216
|
)
|
|
(456,739
|
)
|
Net cash
(used in)/provided by operating activities
|
|
(12,332,984
|
)
|
|
16,282,557
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
114,032
|
|
|
(3,629,825
|
)
|
Purchase of
plant and equipment
|
|
(121,617
|
)
|
|
(253,581
|
)
|
Payment for the purchase of land
use rights
|
|
-
|
|
|
(57,042
|
)
|
Increase in
capital lease
|
|
7,694
|
|
|
-
|
|
Increase/(decrease) in deposits
|
|
3,194,337
|
|
|
(385,201
|
)
|
Net cash used in
investing activities
|
|
3,194,446
|
|
|
(4,325,649
|
)
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
Repayment of bank borrowings
|
|
(2,319,287
|
)
|
|
(13,290,247
|
)
|
Proceeds from
bank borrowings and debentures
|
|
8,242,258
|
|
|
7,660,798
|
|
Net cash provided by/(used in)
financing activities
|
$
|
5,922,971
|
|
$
|
(5,629,449
|
)
|
|
|
|
|
|
|
|
Net Increase/(decrease) of Cash and Cash
Equivalents
|
|
(3,215,567
|
)
|
|
6,327,459
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on
cash and cash
|
|
|
|
|
|
|
equivalents
|
|
12,997,373
|
|
|
139,180
|
|
|
|
|
|
|
|
|
Cash and cash
equivalentsbeginning of period
|
|
20,664,487
|
|
|
30,279,988
|
|
Cash and cash equivalentsend of period
|
$
|
30,446,293
|
|
$
|
36,746,627
|
|
|
|
|
|
|
|
|
Supplementary cash flow
information:
|
|
|
|
|
|
|
Interest received
|
$
|
13,166
|
|
$
|
72,823
|
|
Interest
paid
|
$
|
548,087
|
|
$
|
606,630
|
|
Income taxes paid
|
$
|
2,099,560
|
|
$
|
787,789
|
|
See Accompanying Notes to the Financial Statements and
Accountants Report
5
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
1.
|
ORGANIZATION, BASIS OF PRESENTATION, AND PRINCIPAL
ACTIVITIES
|
|
|
|
|
(a)
|
Organization history of American Lorain Corporation
(formerly known as Millennium Quest, Inc.)
|
|
|
|
|
|
American Lorain Corporation (the Company or ALN) was
originally a Delaware corporation incorporated on February 4, 1986. On
November 12, 2009, the Company filed a statement of merger in the state of
Nevada to transfer the Companys jurisdiction from Delaware to
Nevada.
|
|
|
|
|
(b)
|
Organization history of International Lorain Holding
Inc. and its subsidiaries
|
|
|
|
|
|
ALN owns 100% of the equity of International Lorain
Holding Inc. (ILH). ILH is a Cayman Islands company incorporated on
August 4, 2006 and was wholly-owned by Mr. Hisashi Akazawa until May 3,
2007. ILH presently has two direct wholly-owned subsidiaries, Junan
Hongrun and Luotian Lorain, and three indirectly wholly-owned subsidiaries
through Junan Hongrun, which are Beijing Lorain, Dongguan Lorain, and
Shandong Greenpia Foodstuff Co., Ltd. (Shandong Greenpia).
|
|
|
|
|
|
In addition, the Company directly and indirectly has
80.2% ownership of Shandong Lorain. The rest of the 19.8%, which is owned
by the State under the name of Shandong Economic Development Investment
Co. Ltd., is not included as a part of the Group.
|
|
|
|
|
|
On April 9, 2009, the Company, through its Junan Hongrun
subsidiary, invested cash to establish Dongguan Lorain. Dongguan Lorain is
indirectly 100% beneficially owned by the Company.
|
|
|
|
|
|
On June 28, 2010, the Company signed an equity transfer
agreement with Shandong Greenpia. Shandong Greenpia was originally
directly owned by Taebong Inc. and Shandong Luan Trade Company. The
Company paid $2,100,000to Korean Taebong Inc. for 50% equity of Shandong
Greenpia on September 20, 2010. On September 23, 2010, the Company issued
731,707 shares of restricted stock at an agreed price of $2.87 per share
to the owner of Shandong Luan Trade Company, Mr. Ji Zhenwei, for the
remaining 50% equity of Shandong Greenpia. Since September 23, 2010,
Shandong Greenpia was directly owned by both Junan Hongrun and ILH. As a
result, Shandong Greenpia is 100% owned by the Company. Accordingly, the
Company booked a gain of $383,482 which is included in the statement of
income as other income.
|
|
|
|
|
|
On February 7, 2014, American Lorain Corporation, through its indirect wholly owned subsidiary, Junan Hongrun entered into two Share Purchase Agreements with Intiraimi, a limited liability company organized under the laws of France and Biobranco II, a company organized under Portuguese law, respectively, to acquire 51% of the share capital of Athena Group. On June 30, 2014, Junan Hongrun officially completed the acquisition and controlled total 51% shares of Athena Group. As of March 31, 2016, Athena was deconsolidated from the Company due to loss in control as a result of Athena group going bankrupt after failing to legally reorganize and meet a consensus with its non-controlling shareholders. Please refer to note 24 - subsequent events.
|
|
|
|
|
(c)
|
Business Activities
|
|
|
|
|
|
The Company develops, manufactures, and sells convenience
foods (including ready-to-cook (or RTC) foods; ready-to-eat (or RTE) foods
and meals ready-to-eat (or MRE); chestnut products; and frozen foods, in
hundreds of varieties. The Company operates through indirect Chinese and
European subsidiaries. The products are sold in domestic markets as well
as exported to foreign countries and regions such as Japan, Korea and
Europe.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
|
|
|
|
(a)
|
Method of accounting
|
|
|
|
|
|
The Company maintains its general ledger and journals
with the accrual method accounting for financial reporting purposes. The
financial statements and notes are representations of management.
Accounting policies adopted by the Company conform to generally accepted
accounting principles in the United States of America and have been
consistently applied in the presentation of financial statements, which
are compiled on the accrual basis of accounting.
|
6
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
|
The Company regrouped certain accounts in its
presentation of changes in assets and liabilities in the statement of cash
flows for the three months ended March 31, 2016 in order to be consistent
with the presentation provided for the year ended December 31, 2015. There
was no impact on earnings for the regrouping.
|
|
|
|
|
(b)
|
Principles of consolidation
|
|
|
|
|
|
The consolidated financial statements which include the
Company and its subsidiaries are compiled in accordance with generally
accepted accounting principles in the United States of America. All
significant inter-company accounts and transactions have been eliminated.
The consolidated financial statements include 100% of assets, liabilities,
and net income or loss of those wholly-owned subsidiaries; ownership
interests of non-controlling investors are recorded as non-controlling
interests.
|
|
|
|
|
|
As of March 31, 2016, the detailed identities of the
consolidating subsidiaries are as follows:
|
|
|
Place of
|
Attributable
|
Registered
|
|
Name of Company
|
incorporation
|
equity interest %
|
capital
|
|
International Lorain Holding
Inc.
|
Cayman Islands
|
100
|
$ 47,943,597
|
|
Junan Hongrun Foodstuff Co., Ltd.
|
PRC
|
100
|
46,096,723
|
|
Shandong Lorain Co., Ltd.
|
PRC
|
80.2
|
12,462,403
|
|
Beijing Lorain Co., Ltd.
|
PRC
|
100
|
1,540,666
|
|
Luotian Lorain Co., Ltd.
|
PRC
|
100
|
3,902,322
|
|
Shandong Greenpia Foodstuff Co., Ltd.
|
PRC
|
100
|
2,366,463
|
|
Dongguan Lorain Co., Ltd.
|
PRC
|
100
|
154,067
|
As of March 31, 2016, Athena was deconsolidated from the Company due to loss in control as a result of Athena group going bankrupt after failing to legally reorganize and meet a consensus with its non-controlling shareholders. The audited accounts of Athena at December 31, 2015 have not been deconsolidated and reclassified as a result of the bankruptcy proceedings.
|
(c)
|
Use of estimates
|
|
|
|
|
|
The preparation of the financial statements in conformity
with generally accepted accounting principles in the United States of
America 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.
|
|
|
|
|
(d)
|
Cash and cash equivalents
|
|
|
|
|
|
The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
|
|
|
|
|
(e)
|
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.
|
7
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
|
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.
|
|
|
|
|
(f)
|
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.
|
|
|
|
|
(g)
|
Inventories
|
|
|
|
|
|
Inventories consisting of finished goods and raw
materials are stated at the lower of cost or market value. Finished goods
are comprised of direct materials, direct labor and an appropriate
proportion of overhead.
|
|
|
|
|
(h)
|
Customer deposits and advances to
suppliers
|
|
|
|
|
|
Customer deposits were received from customers in
connection with orders of products to be delivered in future
periods.
|
|
|
|
|
|
Advance to suppliers is a good faith deposit paid to the
supplier for the purpose of committing the supplier to provide product
promptly upon delivery of the Companys purchase order for raw materials,
supplies, equipment, building materials, and other items necessary for our
operations. Pursuant to the Companys arrangements with its suppliers,
this deposit is generally 20% of the total amount contracted for. This
type of transaction is classified as a prepayment under the account name
Advance to Suppliers until such time as the Companys purchase order is
delivered, at which point this account is reduced by reclassification of
the applicable amount to the appropriate asset account such as inventory
or fixed assets or construction in progress.
|
|
|
|
|
(i)
|
Property, 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 with a salvage value of 10%. Estimated
useful lives of the plant and equipment are as
follows:
|
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 is included in the statement of income. The cost of maintenance and
repairs is charged to income as incurred, whereas significant renewals and
betterments are capitalized.
|
|
|
|
|
(j)
|
Construction in progress
|
|
|
|
|
|
Construction in progress represents direct and indirect
construction or acquisition costs. The construction in progress is
transferred to plant and equipment when substantially all the activities
necessary to prepare the assets for their intended use are completed. No depreciation is provided until the asset is completed and ready for intended use.
|
8
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
(k)
|
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.
|
|
|
|
|
(l)
|
Accounting for the impairment of long-lived
assets
|
|
|
|
|
|
The long-lived assets held by the Company are reviewed in
accordance with Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Subtopic 360-10-35, Accounting for the
Impairment or Disposal of Long-Lived Assets, 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.
Impairment is present if carrying amount of an asset is less than its
undiscounted cash flows to be generated.
|
|
|
|
|
|
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 of are reported at the lower of
the carrying amount or fair value less costs to sell. The Company believes
no impairment has occurred to its assets during 2016.
|
|
|
|
|
(m)
|
Advertising
|
|
|
|
|
|
All advertising costs are expensed as incurred.
|
|
|
|
|
(n)
|
Shipping and handling
|
|
|
|
|
|
All shipping and handling are expensed as
incurred.
|
|
|
|
|
(o)
|
Research and development
|
|
|
|
|
|
All research and development costs are expensed as
incurred.
|
|
|
|
|
(p)
|
Retirement benefits
|
|
|
|
|
|
Retirement benefits in the form of contributions under
defined contribution retirement plans to the relevant authorities are
charged to the consolidated statement of income as incurred.
|
|
|
|
|
(q)
|
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.
|
|
|
|
|
|
The Company has implemented ASC Topic 740, Accounting
for Income Taxes. Income tax liabilities computed according to the United
States, Peoples Republic of China (PRC), and France tax laws are provided
for the tax effects of transactions reported in the financial statements
and consist of taxes currently due plus deferred taxes related primarily
to differences between the basis of fixed assets and intangible assets for
financial and tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which
will be either taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for operating
losses that are available to offset future income
taxes.
|
9
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
A valuation allowance is created to
evaluate deferred tax assets if it is more likely than not that these items will
either expire before the Company is able to realize that tax benefit, or that
future realization is uncertain.
Effective January 1, 2008, PRC
government implemented a new 25% tax rate across the board for all enterprises
regardless of whether domestic or foreign enterprise without any tax holiday
which is defined as "two-year exemption followed by three-year half exemption"
hitherto enjoyed by tax payers. As a result of the new tax law of a standard 25%
tax rate, tax holidays terminated as of December 31, 2007. However, PRC
government has established a set of transition rules to allow enterprises that
were already participating in tax holidays before January 1, 2008, to continue
enjoying the tax holidays until they had been fully utilized.
The standard corporate income tax in
France is 33.33% except for a small or new business, which may benefit from
lower rates. In addition, a 3.3% of social surcharge is charged to the Companys
French subsidiaries if the standard corporate income tax liability exceeds EUR
763,000. Furthermore, a 10.7% temporary surtax applies when a companys turnover
exceeds EUR 250 million.
The Company is subject to United States
Tax according to Internal Revenue Code Sections 951 and 957. Corporate income
tax is imposed at progressive rates in the range of: -
Taxable Income
|
Rate
|
Over
|
But Not Over
|
Of Amount Over
|
15%
|
0
|
50,000
|
0
|
25%
|
50,000
|
75,000
|
50,000
|
34%
|
75,000
|
100,000
|
75,000
|
39%
|
100,000
|
335,000
|
100,000
|
34%
|
335,000
|
10,000,000
|
335,000
|
35%
|
10,000,000
|
15,000,000
|
10,000,000
|
38%
|
15,000,000
|
18,333,333
|
15,000,000
|
35%
|
18,333,333
|
-
|
-
|
|
(r)
|
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. The Company did not
make any transfers from retained earnings to statutory reserves for the
three months ended March 31, 2016 and 2015. PRC laws prescribe that an
enterprise operating at a profit, must appropriate, 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.
|
|
|
|
|
(s)
|
Foreign currency translation
|
|
|
|
|
|
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 financial statements are translated
into United States dollars from RMB and EUR at year-end exchange rates as
to assets and liabilities and average exchange rates as to revenues and
expenses. Capital accounts are translated at their historical exchange
rates when the capital transactions occurred.
|
|
|
3/31/2016
|
12/31/2015
|
3/31/2015
|
|
Period/year end RMB: US$
exchange rate
|
6.4479
|
6.4907
|
6.1091
|
|
Period/annual average RMB: US$ exchange rate
|
6.5395
|
6.2175
|
6.1358
|
|
Period/year end EUR: US$
exchange rate
|
0.8805
|
0.9168
|
0.9215
|
|
Period/annual average EUR: US$ exchange rate
|
0.9066
|
0.9011
|
0.8871
|
10
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
|
The RMB is not freely convertible into foreign currency
and all foreign exchange transactions must take place through authorized
institutions. No representation is made that the RMB amounts could have
been, or could be, converted into US Dollars at the rates used in
translation.
|
|
|
|
|
(t)
|
Revenue recognition
|
|
|
|
|
|
The Company's 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, no
other significant obligations of the Company exist and collectibility is
reasonably assured. Payments received before all of the relevant criteria
for revenue recognition are satisfied are recorded as unearned
revenue.
|
|
|
|
|
|
The Company's revenue consists of invoiced value of
goods, net of a value-added tax (VAT). The Company allows its customers to
return products if they are defective. However, this rarely happens and
amounts returned have been de minimis.
|
|
|
|
|
(u)
|
Earnings per share
|
|
|
|
|
|
Basic earnings per share is computed by dividing net
income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed by
dividing net income by the sum of the weighted average number of ordinary
shares outstanding and potential dilutive securities during the year. For
the year ended December 31, 2009, 1,334,573 stock options were granted to
employees pursuant to the Companys equity incentive plan; 2,255,024
warrants were issued to investors in connection with a PIPE financing. For
the year ended December 31, 2010, 81,155 warrants were issued to certain
service providers. For the year ended December 31, 2015, no warrants were
issued nor were options granted. As of December 31, 2015, 1,753,909 shares
of Series A warrants have expired and all stock options to employees
from the 2009 stock incentive program have expired. These warrants and
options could be potentially dilutive if the market price of the Companys
common stock exceeds the exercise price for these securities.
|
|
|
|
|
|
The Company computes earnings per share (EPS) in
accordance with ASC Topic 260, Earnings per share and SEC Staff
Accounting Bulletin No. 98 (SAB 98). SFAS No. 128 requires companies
with complex capital structures to present basic and diluted EPS. 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 is similar to basic EPS but presents the dilutive effect on a
per share basis of potential common shares (e.g., convertible securities,
options, and warrants) as if they had been converted at the beginning of
the periods presented, or issuance date, if later. Potential common shares
that have 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.
|
|
|
|
|
(v)
|
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 are 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.
|
11
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
|
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.
|
|
|
|
|
|
As of March 31, 2016 and December 31, 2015, the Company
did not identify any assets and liabilities whose carrying amounts were
required to be adjusted in order to present them at fair value.
|
|
|
|
|
(w)
|
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.
|
|
|
|
|
(x)
|
Comprehensive income
|
|
|
|
|
|
Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions
to owners. Among other disclosures, all items that are required to be
recognized under current accounting standards as components of
comprehensive income are required to be reported in a financial statement
that is presented with the same prominence as other financial statements.
The Companys current component of other comprehensive income includes the
foreign currency translation adjustment and unrealized gain or
loss.
|
|
|
|
|
|
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. Comprehensive income for the three months ended March 31,
2016 and 2015 included net income and foreign currency translation
adjustments.
|
|
|
|
|
(y)
|
Goodwill
|
|
|
|
|
|
Goodwill represents the excess of the purchase price over
the fair value of the net tangible and identifiable assets acquired in a
business combination. In accordance with FASB ASC Topic 350, "Goodwill and
Other Intangible Assets", goodwill is no longer subject to amortization.
Rather, goodwill is subject to at least an annual assessment for
impairment, applying a fair-value based test. Fair value is generally
determined using a discounted cash flow analysis.
|
|
|
|
|
(z)
|
Recent accounting pronouncements
|
|
|
|
|
|
On January 5, 2016, the FASB issued ASU 2016-01
Financial InstrumentsOverall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities, which amends
the guidance in U.S. GAAP on the classification and measurement of
financial instruments. Although the ASU retains many current requirements,
it significantly revises an entitys accounting related to (1) the
classification and measurement of investments in equity securities and (2)
the presentation of certain fair value changes for financial liabilities
measured at fair value. The ASU also amends certain disclosure
requirements associated with the fair value of financial instruments. The
new standard is effective for fiscal years and interim periods within
those fiscal years beginning after December 15, 2017.
|
|
|
|
|
|
On February 25, 2016, the FASB issued ASU 2016-02 Leases
(Topic 842), its new standard on accounting for leases. ASU 2016-02
introduces a lessee model that brings most leases on the balance sheet.
The new standard also aligns many of the underlying principles of the new
lessor model with those in ASC 606, the FASBs new revenue recognition
standard (e.g., those related to evaluating when profit can be
recognized).
|
|
|
|
|
|
Furthermore, the ASU addresses other concerns related to
the current leases model. For example, the ASU eliminates the requirement
in current U.S. GAAP for an entity to use bright-line tests in determining
lease classification. The standard also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The new model represents a wholesale change to lease accounting. As a result, entities will face significant implementation challenges during the transition period and beyond, such as those related to:
|
12
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
|
Applying judgment and estimating.
|
|
|
Managing the complexities of data collection, storage,
and maintenance.
|
|
|
Enhancing information technology systems to ensure their
ability to perform the calculations necessary for compliance with
reporting requirements.
|
|
|
Refining internal controls and other business processes
related to leases.
|
|
|
Determining whether debt covenants are likely to be
affected and, if so, working with lenders to avoid violations.
|
|
|
Addressing any income tax implications.
|
The new guidance will be effective for
public business entities for annual periods beginning after December 15, 2018
(e.g., calendar periods beginning on January 1, 2019), and interim periods
therein.
On March 15, 2016, the FASB issued ASU
2016-07 InvestmentsEquity Method and Joint Ventures (Topic 323): Simplifying
the Transition to the Equity Method of Accounting, which simplifies the equity
method of accounting by eliminating the requirement to retrospectively apply the
equity method to an investment that subsequently qualifies for such accounting
as a result of an increase in the level of ownership interest or degree of
influence. Consequently, when an investment qualifies for the equity method (as
a result of an increase in the level of ownership interest or degree of
influence), the cost of acquiring the additional interest in the investee would
be added to the current basis of the investors previously held interest and the
equity method would be applied subsequently from the date on which the investor
obtains the ability to exercise significant influence over the investee. The ASU
further requires that unrealized holding gains or losses in accumulated other
comprehensive income related to an available-for-sale security that becomes
eligible for the equity method be recognized in earnings as of the date on which
the investment qualifies for the equity method.
The guidance in the ASU is effective
for all entities for fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years; early adoption is permitted for all
entities. Entities are required to apply the guidance prospectively to increases
in the level of ownership interest or degree of influence occurring after the
ASUs effective date. Additional transition disclosures are not required upon
adoption.
On March 17, 2016, the FASB issued ASU
2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus
Agent Considerations (Reporting Revenue Gross versus Net), which amends the
principal-versus-agent implementation guidance and illustrations in the Boards
new revenue standard (ASU 2014-09). The FASB issued the ASU in response to
concerns identified by stakeholders, including those related to (1) determining
the appropriate unit of account under the revenue standards
principal-versus-agent guidance and (2) applying the indicators of whether an
entity is a principal or an agent in accordance with the revenue standards
control principle. Among other things, the ASU clarifies that an entity should
evaluate whether it is the principal or the agent for each specified good or
service promised in a contract with a customer. As defined in the ASU, a
specified good or service is a distinct good or service (or a distinct bundle
of goods or services) to be provided to the customer. Therefore, for contracts
involving more than one specified good or service, the entity may be the
principal for one or more specified goods or services and the agent for others.
The ASU has the same effective date as
the new revenue standard (as amended by the one-year deferral and the early
adoption provisions in ASU 2015-14). In addition, entities are required to adopt
the ASU by using the same transition method they used to adopt the new revenue
standard.
On March 30, 2016, the FASB issued ASU
2016-09 CompensationStock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting, which simplifies several aspects of the
accounting for employee share-based payment transactions for both public and
nonpublic entities, including the accounting for income taxes, forfeitures, and
statutory tax withholding requirements, as well as classification in the
statement of cash flows.
13
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
The ASU is effective for annual
reporting periods beginning after December 15, 2016, including interim periods
within those annual reporting periods.
As of March 31, 2016, there are no
other recently issued accounting standards not yet adopted that would or could
have a material effect on the Companys consolidated financial statements.
3.
|
RESTRICTED CASH
|
|
|
|
Restricted cash represents interest bearing deposits
placed with banks to secure banking facilities in the form of loans and
notes payable. The restriction of funds is based on time. The funds that
collateralize loans are held for 60 days in a savings account that pays
interest at the prescribed national daily savings account rate. For funds
that under lie notes payable, the cash is deposited in six month time
deposits that pay interest at the national time deposit rate.
|
|
|
4.
|
TRADE ACCOUNTS
RECEIVABLE
|
|
|
|
3/31/2016
|
|
|
12/31/2015
|
|
|
Trade accounts receivable
|
$
|
35,379,362
|
|
$
|
68,433,828
|
|
|
Less
:
Allowance for
doubtful accounts
|
|
(578,705
|
)
|
|
(5,901,811
|
)
|
|
|
$
|
34,800,657
|
|
$
|
62,532,017
|
|
|
Allowance for bad debt:
|
|
3/31/2016
|
|
|
12/31/2015
|
|
|
Beginning balance
|
$
|
(5,901,811
|
)
|
$
|
(5,919,625
|
)
|
|
Additions to allowance
|
|
-
|
|
|
-
|
|
|
Bad debt written-off from
lost in investment
|
|
5,323,106
|
|
|
17,814
|
|
|
Ending balance
|
$
|
(578,705
|
)
|
$
|
(5,901,811
|
)
|
|
The Company offers credit terms of between 30 to 60 days
to most of their domestic customers, including supermarkets and
wholesalers, around 90 days to most of their international customers, and
between 0 to 15 days for most of the third-party distributors the Company
works with.
|
|
|
5.
|
OTHER RECEIVABLES
|
|
|
|
Other receivables consisted of the following as of March
31, 2016 and December 31, 2015:
|
|
|
3/31/2016
|
|
|
12/31/2015
|
|
Advances to employees for job/travel
disbursements
|
|
1,214,429
|
|
|
2,160,303
|
|
Amount due by a non-related enterprise
|
|
155,090
|
|
|
154,067
|
|
Other non-related receivables
|
|
-
|
|
|
1,844,125
|
|
Other related party receivables
|
|
92,214
|
|
|
89,509
|
|
Short-term investment sale receivable
|
|
1,550,892
|
|
|
1,540,666
|
|
Vendor rebate receivable
|
|
-
|
|
|
6,318,586
|
|
Recoverable inventory from loss of
investment
|
|
2,884,944
|
|
|
-
|
|
|
$
|
5,897,569
|
|
$
|
12,107,256
|
|
Advances to employees for job/travel
disbursements consisted of advances to employees for transportation, meals,
client entertainment, commissions, and procurement of certain raw materials. The
advances issued to employees may be carried for extended periods of time because
employees may spend several months out in the field working to procure new sales
contracts or fulfill existing contracts.
Specifically, the company uses
available employees of the purchasing department to arrange purchases with
desirable chestnut or other raw material growers. However, because many of these
growers are in rural farming areas of China where traditional banking and credit arrangements are difficult to implement, the Company must utilize cash purchases and also must contract for its future needs by placing a good faith deposit in cash with the growers. However none of these advances to employees for delivery to the growers on behalf of the Company are "personal loans" to the employees. Advances to employees for purchase of materials in other receivables are adjusted to advances to suppliers as of March 31, 2016.
14
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
Related party receivables represented
advances issued by management for job or travel disbursement in the normal
course of business. The receivables had no impact on earnings. As with other
employees, officers sign notes when cash is issued to them as job or travel
disbursement. In order to satisfy certain criteria for obtaining the long-term
loan with DEG, as noted in footnote 11, Junan Hongrun lent money to Mr. You,
Huadong to purchase life insurance. Related party receivable amounts are
disclosed as other related party receivables in other receivables.
In September 2010, Shandong Lorain and
Junan Hengji Real Estate Development Co., Ltd. ("Junan Hengji") entered into a
cooperative development agreement (the "Agreement"), and in March 2011, Jiangsu
Heng An Industrial Investment Group Co., Ltd. ("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, Shandong Lorain agreed to sell the Companys interest in the amount
of $7,764,577 (RMB 49,604,000) in a parcel of land located in Junan Town,
Shandong Province, to construct residential buildings by Junan Hengji and Heng
An Investment. The land was sold to Junan Hengji and Heng An Investment for a
total sales price of RMB 69,604,000 and a guaranteed gross profit of RMB
20,000,000 without consideration of the profit or loss of the residential
building project.
As of December 31, 2015, a total of RMB
42,029,955 has been received and there was an unpaid balance of RMB 27,574,045.
The Company filed litigation against Junan Hengji and Heng An Investment in 2014
for a claim of RMB 10,000,000, which is half of the original guaranteed profit
of RMB 20,000,000. 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 by Shandong Lorain first based upon the amount
claimed for disputes between the parties. Shandong Lorain decided to file the
lawsuit with the Linyi City Intermediate People's Court to claim a fixed return
of RMB 10 million (approximately US$1,550,893).
On March 21, 2015, Shandong Lorain
received the Linyi City Intermediate People's Court decision that rejected
Shandong Lorain's claim for RMB 10 million against Junan Hengji and Heng An
Investment. On April 3, 2015, Shandong Lorain appealed the decision to the
Supreme Court of Shandong Province. The balance of the claim was deemed to be
uncollectable and was written off as a loss. 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 and Shandong Lorain is waiting for the Linyi City Intermediate People's
Court's decision at this time.
6.
|
INVENTORIES
|
|
|
|
Inventories consisted of the following as of March 31,
2016 and December 31, 2015:
|
|
|
3/31/2016
|
|
|
12/31/2015
|
|
Raw materials
|
$
|
25,455,564
|
|
$
|
23,272,163
|
|
Finished goods
|
|
25,115,026
|
|
|
20,439,885
|
|
|
$
|
50,570,590
|
|
$
|
43,712,048
|
|
15
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
7.
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
Property, plant, and equipment consisted of the following
as of March 31, 2016 and December 31, 2015:
|
|
|
3/31/2016
|
|
|
12/31/2015
|
|
At Cost:
|
|
|
|
|
|
|
Buildings
|
$
|
77,276,801
|
|
$
|
82,678,210
|
|
Land
|
|
-
|
|
|
209,010
|
|
Landscaping, plant and tree
|
|
10,399,595
|
|
|
10,331,020
|
|
Machinery and equipment
|
|
15,212,088
|
|
|
22,188,630
|
|
Office equipment
|
|
796,916
|
|
|
1,059,269
|
|
Motor vehicles
|
|
528,085
|
|
|
592,045
|
|
|
$
|
104,213,485
|
|
$
|
117,058,184
|
|
Less
:
Accumulated
depreciation
|
|
|
|
|
|
|
Buildings
|
|
(11,484,034
|
)
|
|
(15,445,517
|
)
|
Landscaping, plant and
tree
|
|
(4,963,346
|
)
|
|
(4,705,085
|
)
|
Machinery and equipment
|
|
(8,583,375
|
)
|
|
(13,157,839
|
)
|
Office equipment
|
|
(578,803
|
)
|
|
(1,199,028
|
)
|
Motor vehicles
|
|
(404,885
|
)
|
|
(440,400
|
)
|
|
|
(26,014,443
|
)
|
|
(34,947,869
|
)
|
|
|
|
|
|
|
|
|
$
|
78,199,042
|
|
$
|
82,110,315
|
|
|
Landscaping, plants, and trees accounts for the orchards
that the Company has developed for agricultural operations. These orchards
as well as the young trees which were purchased as nursery stock are
capitalized into fixed assets. The depreciation is then calculated on a
30-year straight-line method when production in commercial quantities
begins. The orchards have begun production in small quantities and the
Company has accounted for depreciation commencing July 1, 2010. In 2013,
the Company began leasing three greenhouses to grow seasonal crops in
order to lower cost. Depreciation expense for the three months ended March
31, 2016 and 2015 was $ 913,784 and $962,163, respectively.
|
|
|
8.
|
INTANGIBLE ASSETS, NET
|
|
|
|
Intangible assets consisted of the following as of March
31, 2016 and December 31, 2015:
|
|
|
3/31/2016
|
|
|
12/31/2015
|
|
Land use rights,
at cost
|
|
16,679,665
|
|
|
16,569,679
|
|
Utilities rights,
at cost
|
|
48,244
|
|
|
47,926
|
|
Software,
at cost
|
|
110,663
|
|
|
463,246
|
|
Patent,
at cost
|
|
1,463
|
|
|
1,419,428
|
|
|
$
|
16,840,035
|
|
$
|
18,500,279
|
|
|
|
|
|
|
|
|
Less
:
Accumulated
amortization
|
|
(2,073,946
|
)
|
|
(2,313,764
|
)
|
|
$
|
14,766,089
|
|
$
|
16,186,515
|
|
16
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
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, 2016 and 2015 was $91,550 and
$91,500, 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
Conservie Minerve and currently continues the 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 Conservie
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 years
ended December 31, 2015 and 2014. 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 in its entirety.
|
|
|
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, 2016 and December 31,
2015:
|
|
Bank Overdrafts
|
|
3/31/2016
|
|
|
12/31/2015
|
|
|
CIC Lorient Enterprises,
|
|
|
|
|
|
|
|
Interest rate of EURIBOR+1.70% due within
3
months
Credit Agricole,
|
$
|
-
|
|
$
|
141,210
|
|
|
Interest rate of EURIBOR+1.70% due
within
3
months
LCL Banque et Assurance,
|
|
-
|
|
|
140,453
|
|
|
Interest rate of EURIBOR+1.70% due within
3
months
Société Générale,
|
|
-
|
|
|
3,800
|
|
|
Interest rate of EURIBOR+1.70% due
within
3
months
Banque Tarneud,
|
|
-
|
|
|
83,500
|
|
|
Interest rate of EURIBOR+1.70% due within
3
months
BPI France,
|
|
-
|
|
|
407,917
|
|
|
Interest rate of EURIBOR+1.70% due
within
3
months
BNP Paribas,
|
|
-
|
|
|
-
|
|
|
Interest rate of EURIBOR+1.70% due within
3
months
HSBC,
|
|
-
|
|
|
194,835
|
|
|
Interest rate of EURIBOR+1.70% due
within
3
months
GE,
|
|
-
|
|
|
3,459
|
|
|
Interest rate of EURIBOR+1.70% due within
3
months
BES,
|
|
-
|
|
|
707
|
|
|
Interest rate of EURIBOR+1.70% due
within
3
months
|
|
-
|
|
|
236
|
|
|
Banco Portugues de Negocios
|
|
-
|
|
|
1,672
|
|
|
Banco Espirito Santo
|
|
-
|
|
|
3,545
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
981,334
|
|
Bank overdrafts are collateralized by
inventory.
17
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
Short-term Bank Loans
|
|
3/31/2016
|
|
|
12/31/2015
|
|
|
|
|
|
|
|
|
|
|
Loan from Industrial and Commercial Bank
of China,
|
|
|
|
|
|
|
|
Interest rate at 6.72% per
annum; due 12/1/2015
|
|
-
|
|
|
1,509,061
|
|
|
Interest rate
at 6.305% per annum; due 1/4/2016
|
|
-
|
|
|
1,016,839
|
|
|
Interest rate at 6.955% per
annum; due 4/20/2016*
|
|
3,873,018
|
|
|
3,851,665
|
|
|
Interest rate
at 6.02% per annum; due 7/4/2016
|
|
1,023,589
|
|
|
|
|
|
Interest rate at % per annum;
due 7/27/2016
|
|
1,550,893
|
|
|
-
|
|
|
Interest rate
at 6.02% per annum; due 12/26/2016
|
|
1,550,893
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from China Minsheng Bank Corporation, Linyi
Branch
|
|
|
|
|
|
|
|
Interest rate
at 5.98% per annum due 9/22/2016
|
|
1,550,893
|
|
|
1,540,666
|
|
|
|
|
|
|
|
|
|
|
Loan from Agricultural Bank of China,
Junan Branch
|
|
|
|
|
|
|
|
Interest rate at 7.28% per
annum due 1/22/2016
|
|
-
|
|
|
2,203,152
|
|
|
Interest rate
at 5.52% per annum due 9/5/2016
|
|
3,101,785
|
|
|
3,081,332
|
|
|
Interest rate at 5.655% per
annum due 1/31/2017
|
|
2,217,776
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China Agricultural Development Bank,
|
|
|
|
|
|
|
|
Interest rate at 5.6% per annum
due 1/6/2016
|
|
-
|
|
|
770,333
|
|
|
|
|
|
|
|
|
|
|
Luotian Sanliqiao Credit Union,
|
|
|
|
|
|
|
|
Interest rate
at 9.72% per annum due 2/13/2017
|
|
2,791,607
|
|
|
2,002,866
|
|
|
|
|
|
|
|
|
|
|
Bank of Ningbo,
|
|
|
|
|
|
|
|
Interest rate at 7.80% per
annum due 10/27/2016
|
|
1,240,714
|
|
|
1,232,533
|
|
|
|
|
|
|
|
|
|
|
Hankou Bank, Guanggu Branch,
|
|
|
|
|
|
|
|
Interest rate
at 6.85% per annum due 10/24/2016
|
|
1,550,893
|
|
|
1,540,666
|
|
|
|
|
|
|
|
|
|
|
Postal Savings Bank of China,
|
|
|
|
|
|
|
|
Interest rate at 9.72% per
annum due 7/27/2016
|
|
403,232
|
|
|
400,573
|
|
|
|
|
|
|
|
|
|
|
Bank of Rizhao,
|
|
|
|
|
|
|
|
Interest rate
at 7.28% per annum due 1/19/2016*
|
|
1,219,232
|
|
|
1,540,666
|
|
18
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
China Construction Bank,
|
|
|
|
|
|
|
|
Interest rate at 6.18% per
annum due 11/29/2016
|
|
775,446
|
|
|
770,333
|
|
|
Luotian County Ministry of Finance,
|
|
|
|
|
|
|
|
Interest rate at 6.18% per
annum due 11/29/2016
|
|
-
|
|
|
616,266
|
|
|
|
|
|
|
|
|
|
|
Huaxia Bank,
|
|
|
|
|
|
|
|
Interest rate
at 7.8% per annum due 5/19/2016
|
|
1,550,893
|
|
|
1,540,666
|
|
|
|
|
|
|
|
|
|
|
City of Linyi Commercial Bank, Junan
Branch,
|
|
|
|
|
|
|
|
Interest rate at 8.4% per
annum due 2/16/2016*
|
|
1,550,701
|
|
|
1,540,666
|
|
|
Interest rate
at 7.83% per annum due 7/15/2016
|
|
3,101,784
|
|
|
3,081,332
|
|
|
|
|
|
|
|
|
|
|
Bank of China, Paris Branch
|
|
|
|
|
|
|
|
Interest rate
at 2.80% per annum due 11/18/2015
|
|
-
|
|
|
4,363,002
|
|
|
Interest rate
at 2.80% per annum due 2/11/2016
|
|
-
|
|
|
2,726,875
|
|
|
|
|
|
|
|
|
|
|
|
|
29,053,349
|
|
|
35,329,492
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,053,349
|
|
$
|
36,310,826
|
|
|
The short-term loans, which are denominated in the
functional currencies Renminbi (RMB) and Euros, were primarily obtained
for general working capital. If not otherwise indicated in the below
remarks, short-term loans are guaranteed by either companies within the
group or personnel who hold a management role within the group.
*Note: The short-term loans have not been repaid as of March 31, 2016.
|
|
|
11.
|
CURRENT PORTION LONG TERM DEBT
|
|
|
|
Current portions of notes payable, debentures, and
long-term debt consisted of the following as of March 31, 2016 and
December 31, 2015:
|
|
|
|
3/31/2016
|
|
|
12/31/2015
|
|
|
Debenture issued by 5 private placement holders
underwritten
by Guoyuan Securities Co., Ltd.
|
|
|
|
|
|
|
|
Interest rate at 10% per annum due 8/28/2016
|
$
|
7,754,463
|
|
$
|
7,703,329
|
|
|
|
|
|
|
|
|
|
|
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
|
|
7,754,462
|
|
|
7,703,329
|
|
|
|
|
|
|
|
|
|
|
BNP Paribas,
|
|
|
|
|
|
|
|
Interest rate at 4.20% per annum due 12/20/2016
|
|
-
|
|
|
97,678
|
|
19
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
CIO,
|
|
|
|
|
|
|
|
Interest rate at 4.20% per annum due 12/20/2016
|
|
-
|
|
|
137,733
|
|
|
|
|
|
|
|
|
|
|
Credit Agricole,
|
|
|
|
|
|
|
|
Interest rate at
4.20% per annum due 12/20/2016
|
|
-
|
|
|
129,338
|
|
|
Interest rate at 1.85% per annum due 1/25/2017
|
|
-
|
|
|
50,237
|
|
|
|
|
|
|
|
|
|
|
Banque Tarneud,
|
|
|
|
|
|
|
|
Interest rate at
3.28% per annum due 12/2016
|
|
-
|
|
|
65,336
|
|
|
Interest rate at 2.90% per annum due 12/2016
|
|
-
|
|
|
121,689
|
|
|
|
|
|
|
|
|
|
|
BPI France,
|
|
|
|
|
|
|
|
Interest rate at
3.42% per annum due 12/20/2016
|
|
-
|
|
|
409,031
|
|
|
|
|
|
|
|
|
|
|
Société Générale,
|
|
|
|
|
|
|
|
Interest rate at 2.90% per annum due 5/15/2016
|
|
-
|
|
|
17,142
|
|
|
|
|
|
|
|
|
|
|
LCL,
|
|
|
|
|
|
|
|
Interest rate at
4.20% per annum due 12/20/2016
|
|
-
|
|
|
137,185
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
21,133,925
|
|
|
22,197,027
|
|
The Company began repaying its loan
with DEG in semi-annual installments on September 15, 2012. As of March 31, 2016
and December 31, 2015, the Company has not repaid any principal. The loan was
collateralized with the following terms:
|
(a.)
|
Create and register a first ranking mortgage in the
amount of about USD 12,000,000 on its land and building in favor of DEG.
|
|
(b.)
|
Undertake to provide a share pledge of Mr. Si Chen, its
majority shareholder, or shares as the sponsor in the amount of about USD
12,000,000 in form and substance satisfactory to DEG
|
|
(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 of Mr. Si Chen (Loan Agreement (Article 12(1)(a))) should
be at least USD 24,000,000.
|
|
(d.)
|
Undertake to provide a guarantee from Mr. Si Chen in
form and substance satisfactory to DEG.
|
|
The Company is in the process of negotiation with DEG to
reschedule the three installment repayments.
|
20
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
12.
|
NOTES PAYABLE AND CONVERTIBLE PROMISSORY
NOTE
|
Notes payable consisted of the
following as of March 31, 2016 and December 31, 2015:
|
|
|
3/31/2016
|
|
|
12/31/2015
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued by Hankou Bank,
|
|
|
|
|
|
|
|
Interest rate
at 5.55% per annum due 3/24/2015
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued by BNP Paribas,
|
|
|
|
|
|
|
|
Interest rate at EURIBOR + 1.7% per annum due within 3 months
|
|
-
|
|
|
630,214
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued by CIC Lorient
Enterprises,
|
|
|
|
|
|
|
|
Interest rate
at EURIBOR + 1.7% per annum due within 3 months
|
|
-
|
|
|
929,562
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued by Credit Agricole,
|
|
|
|
|
|
|
|
Interest rate at EURIBOR + 1.7% per annum due within 3 months
|
|
-
|
|
|
443,203
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued by LCL Banque et
Assurance,
|
|
|
|
|
|
|
|
Interest rate
at EURIBOR + 1.7% per annum due within 1 months
|
|
-
|
|
|
516,773
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued by Société Générale,
|
|
|
|
|
|
|
|
Interest rate at EURIBOR + 1.7% per annum due within 1 months
|
|
-
|
|
|
445,995
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
2,965,747
|
|
|
The notes payable are guaranteed by third party
guarantors.
|
|
|
13.
|
TAXES PAYABLES
|
|
|
|
Taxes payable consisted of the following as of March 31,
2016 and December 31, 2015:
|
|
|
|
3/31/2016
|
|
|
12/31/2015
|
|
|
Value added tax payable
|
$
|
23,252
|
|
$
|
2,187,542
|
|
|
Corporate income tax payable
|
|
1,035,361
|
|
|
2,370,952
|
|
|
Employee payroll tax withholding
|
|
14,056
|
|
|
9,561
|
|
|
Property tax payable
|
|
92,095
|
|
|
87,619
|
|
|
Stamp tax payable
|
|
1,581
|
|
|
1,571
|
|
|
Business tax payable
|
|
150,603
|
|
|
149,610
|
|
|
Land use tax payable
|
|
184,944
|
|
|
159,923
|
|
|
Capital gain tax payable
|
|
902,433
|
|
|
896,483
|
|
|
|
$
|
2,404,325
|
|
$
|
5,863,261
|
|
14.
|
ACCRUED EXPENSES AND OTHER PAYABLES
|
|
|
|
Accrued expenses and other payables consisted of the
following as of March 31, 2016 and December 31,
2015:
|
21
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
|
|
3/31/2016
|
|
|
12/31/2015
|
|
|
Accrued salaries and wages
|
$
|
25,334
|
|
$
|
278
|
|
|
Accrued utility expenses
|
|
21,536
|
|
|
331,692
|
|
|
Accrued interest expenses
|
|
2,057,807
|
|
|
1,700,353
|
|
|
Accrued transportation expenses
|
|
900,150
|
|
|
1,029,973
|
|
|
Other accruals
|
|
1,106,080
|
|
|
983,857
|
|
|
Business and other taxes
|
|
50,237
|
|
|
377,957
|
|
|
Accrued staff welfare
|
|
315,782
|
|
|
316,788
|
|
|
|
$
|
4,476,926
|
|
$
|
4,740,898
|
|
15.
|
LONG-TERM DEBT
|
|
|
|
Non-current portions of long-term debt consisted of the
following as of March 31, 2016 and December 31,
2015:
|
|
|
|
3/31/2016
|
|
|
12/31/2015
|
|
|
Loans from Deutsche Investitions-und
Entwicklungsgesellschaft mbH (DEG)
|
|
|
|
|
|
|
|
Interest
rate at 5.510% per annum due 3/15/2016
|
$
|
-
|
|
$
|
1,875,000
|
|
|
|
|
|
|
|
|
|
|
BNP Paribas,
|
|
|
|
|
|
|
|
Interest rate at 4.20% per annum due 12/20/2016
|
|
-
|
|
|
105,863
|
|
|
|
|
|
|
|
|
|
|
CIC Lorient Enterprises,
|
|
|
|
|
|
|
|
Interest rate
at 4.20% per annum due 12/20/2016
|
|
-
|
|
|
104,394
|
|
|
|
|
|
|
|
|
|
|
Credit Agricole,
|
|
|
|
|
|
|
|
Interest rate at 4.20% per annum due 12/20/2016
|
|
-
|
|
|
104,394
|
|
|
Interest rate
at 1.85% per annum due 1/25/2017
|
|
-
|
|
|
38,887
|
|
|
|
|
|
|
|
|
|
|
LCL Banque et Assurance,
|
|
|
|
|
|
|
|
Interest rate at 4.20% per annum due 12/20/2016
|
|
-
|
|
|
104,394
|
|
|
|
|
|
|
|
|
|
|
Société Générale,
|
|
|
|
|
|
|
|
Interest rate
at 2.90% per annum due 5/15/2016
|
|
-
|
|
|
10,665
|
|
|
|
|
|
|
|
|
|
|
Banco Portugue de Negocios,
|
|
|
|
|
|
|
|
Interest rate at EURIBOR 3M+spread 2% per annum due 06/2024
|
|
-
|
|
|
337,064
|
|
|
|
|
|
|
|
|
|
|
Banco Espirito Santo
|
|
|
|
|
|
|
|
Interest rate
at EURIBOR 3M+spread 2% per annum due 06/2024
|
|
-
|
|
|
26,926
|
|
|
|
$
|
-
|
|
$
|
2,707,587
|
|
Non-current portions of notes payable
and debentures consisted of the following as of March 31, 2016 and December 31,
2015:
|
|
|
3/31/2016
|
|
|
12/31/2015
|
|
|
Debenture issued by 5 private placement
holders underwritten
by Guoyuan Securities Co., Ltd.
|
|
|
|
|
|
|
|
Interest rate
at 10% per annum due 8/28/2016
|
|
9,607,779
|
|
|
16,290,625
|
|
|
|
|
|
|
|
|
|
|
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
|
|
-
|
|
|
16,290,624
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,607,779
|
|
$
|
32,581,249
|
|
22
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
16.
|
CAPITALIZATION
|
|
|
|
Dating back to May 3, 2007, the Company underwent a
reverse-merger and a concurrent financing transaction that resulted in
24,923,178 shares of outstanding common stock that remained unchanged
through December 31, 2007. In connection with the financing, the Company
also issued 1,037,858 and 489,330 warrants to the PIPE investors and
placement agent, respectively. During 2008, several holders of warrants
issued in connection with the financing transaction exercised their rights
to purchase shares at the prescribed exercise price. The holders of the
warrants exercised the right to purchase a total of 360,207 shares;
however, because the holders did not pay in cash for the warrants, 110,752
of those shares were cancelled as consideration in lieu of the warrant
holders paying in cash. Ultimately, 249,455 of new shares were issued to
those who exercised their warrant. The Company also made an adjustment to
its outstanding share count for rounding errors as result of the split and
reverse splits made at the time of the reverse merger. The number of
shares in the adjustment was an addition of seven shares. The Company
believes the adjustment of seven shares is immaterial to both prior and
current earnings per share calculation.
|
|
|
|
During the year 2009, the Company issued 56,393 shares of
stock to its employees and vendors and 5,011,169 shares to investors. The
Company issued 1,334,573 stock options to employees on July 28, 2009;
1,753,909 shares of Series A warrants and 501,115 shares of Series B
warrants were issued to investors on October 28, 2009. As of December 31,
2015, 1,753,909 shares of Series A warrants have expired; concurrently,
501,115 shares of Series B warrants and all stock options to employees
from the 2009 stock incentive program have expired.
|
|
|
|
During the year 2010, the Company issued 2,000 shares to
a service provider on February 10, 2010 and 81,155 warrants to various
service providers on January 5, 2010. The Company issued to investors
3,440,800 shares at an agreed price of $2.80 per share for a PIPE
financing on September 10, 2010. This financing brought $8,955,730 net
proceeds to the Company. The Company issued 5,000 shares to its employee
on September 23, 2010. 731,707 shares of restricted stock were issued to
the owner of Shandong Greenpia, Mr. Ji Zhenwei on September 24, 2010 as
part of acquisition cost. As of December 31, 2015, 81,155 warrant shares
issued to various service providers has expired.
|
|
|
|
For the years ended December 31, 2015 and 2014, the
Company transferred $1,621,749 and $4,642,404 from retained earnings to
statutory reserve. These transfers are to be used for future company
development, recovery of losses and increase of capital, as approved, to
expand production or operations.
|
|
|
|
For the year ended December 31, 2014, the Company issued
300,000 shares to a consulting company as its financial advisor for
management consulting and advisory services.
|
|
|
|
For the year ended December 31, 2015, the Company issued
987,500 shares as stock compensation to employees and 2,355,276 shares
upon conversion of the convertible promissory note to Jade Lane.
|
|
|
|
As detailed in the table below, the total number of
outstanding shares at March 31, 2016 was
38,259,490.
|
23
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
American Lorain Corporation
Capitalization Reconciliation
Table
|
Par value authorized
|
Issuance date
|
Shares outstanding
|
Common stock at 1/1/2009
|
200,000,000
|
|
25,172,640
|
New shares issued to employees and vendors during 2009
|
|
Various dates
|
56,393
|
New shares issued to PIPE investors
|
|
10/28/2009
|
5,011,169
|
New shares issued to service provider during 2010
|
|
2/10/2010
|
2,000
|
New shares issued to PIPE investors
|
|
9/10/2010
|
3,440,800
|
New shares issued to employee
|
|
9/23/2010
|
5,000
|
New shares issued as acquisition consideration
|
|
9/24/2010
|
731,707
|
New shares issued to service provider during 2011
|
|
5/5/2011
|
25,000
|
New shares issued to employees per stock incentive plan
|
|
7/20/2011
|
27,092
|
New shares issued to employees per stock incentive plan
|
|
11/21/2011
|
36,073
|
New shares issued to employees per stock incentive plan
|
|
10/5/2012
|
108,840
|
New shares issued to service provider during 2014
|
|
8/22/2014
|
300,000
|
New shares issued upon conversion of convertible debenture
|
|
4/20/2015
|
2,355,276
|
New shares issued to employees per stock incentive plan
|
|
6/12/2015
|
987,500
|
Common stock at 3/31/2016
|
|
|
38,259,490
|
17.
|
NON-CONTROLLING INTERESTS
|
|
|
|
|
The non-controlling interest represents the
following:
|
|
|
|
|
(1)
|
19.8% equity of Shandong Lorain held by the Shandong
Economic Development Investment Corporation, which is a state-owned
interest.
|
18.
|
SALES BY PRODUCT TYPE
|
|
|
|
Sales by categories of product consisted of the following
as of March 31, 2016 and 2015:
|
|
Category
|
|
3/31/2016
|
|
|
3/31/2015
|
|
|
Chestnut
|
$
|
17,151,199
|
|
$
|
16,062,304
|
|
|
Convenience food
|
|
8,506,936
|
|
|
14,181,755
|
|
|
Frozen food
|
|
6,061,284
|
|
|
7,313,252
|
|
|
Total
|
$
|
31,719,419
|
|
$
|
37,557,311
|
|
Revenue by geography consisted of the
following as of March 31, 2016 and 2015:
24
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
Country
|
|
3/31/2016
|
|
|
3/31/2015
|
|
Australia
|
$
|
-
|
|
$
|
11,985
|
|
Belgium
|
|
30,636
|
|
|
470,336
|
|
Brazil
|
|
33,133
|
|
|
|
|
China
|
|
27,820,336
|
|
|
28,318,425
|
|
France
|
|
-
|
|
|
3,935,083
|
|
Germany
|
|
41,017
|
|
|
148,594
|
|
Hong Kong
|
|
-
|
|
|
62,888
|
|
Italy
|
|
-
|
|
|
130,722
|
|
Japan
|
|
1,598,538
|
|
|
2,354,750
|
|
Malaysia
|
|
-
|
|
|
174,152
|
|
Netherlands
|
|
-
|
|
|
2,709
|
|
Portugal
|
|
338,450
|
|
|
125,951
|
|
Reunion
|
|
-
|
|
|
14,647
|
|
Singapore
|
|
8,078
|
|
|
313,547
|
|
South Korea
|
|
1,350,350
|
|
|
524,425
|
|
Spain
|
|
-
|
|
|
109,585
|
|
Taiwan
|
|
150,901
|
|
|
91,898
|
|
Thailand
|
|
176,827
|
|
|
406,470
|
|
United Kingdom
|
|
-
|
|
|
278,626
|
|
United States
|
|
171,153
|
|
|
79,290
|
|
Others
|
|
-
|
|
|
3,228
|
|
Total
|
$
|
31,719,419
|
|
$
|
37,557,311
|
|
19.
|
INCOME TAXES
|
|
|
|
All of the Companys operations are in the PRC, and in
accordance with the relevant tax laws and regulations. The corporate
income tax rate for each country is as
follows:
|
The following tables provide the
reconciliation of the differences between the statutory and effective tax
expenses for the three months ended March 31, 2016 and 2015:
|
|
3/31/2016
|
|
|
3/31/2015
|
|
Income attributed to PRC & Europe
|
$
|
(2,155,832
|
)
|
$
|
(453,372
|
)
|
Loss attributed to US
|
|
(20,000
|
)
|
|
(137,684
|
)
|
Income before tax
|
|
(2,175,832
|
)
|
|
(591,056
|
)
|
|
|
|
|
|
|
|
PRC Statutory Tax at 25% Rate
|
|
767,262
|
|
|
479,666
|
|
Effect of tax exemption granted
|
|
|
|
|
|
|
Income tax
|
$
|
767,262
|
|
$
|
479,666
|
|
|
|
|
|
|
|
|
Per Share Effect of Tax
Exemption
|
|
|
|
|
|
|
|
|
3/31/2016
|
|
|
3/31/2015
|
|
Effect of tax exemption granted
|
$
|
|
|
$
|
-
|
|
Weighted-Average Shares Outstanding Basic
|
|
38,259,490
|
|
|
34,916,714
|
|
Per share effect
|
$
|
-
|
|
$
|
-
|
|
25
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
The difference between the U.S. federal
statutory income tax rate and the Companys effective tax rate was as follows
for the three months ended March 31, 2016 and 2015:
|
|
3/31/2016
|
|
|
3/31/2015
|
|
U.S. federal statutory income
tax rate
|
|
35%
|
|
|
35%
|
|
Lower rates in PRC, net
|
|
-10%
|
|
|
-10%
|
|
Tax holiday for foreign
investments
|
|
-60.26%
|
|
|
-25.00%
|
|
The Companys effective tax rate
|
|
35.26%
|
|
|
0.00%
|
|
Effective January 1, 2008, the PRC
government implemented a new 25% tax rate across the board for all enterprises
regardless of whether domestic or foreign enterprise without any tax holiday
which is defined as two-year exemption followed by three-year half exemption
hitherto enjoyed by tax payers. As a result of the new tax law of a standard 25%
tax rate, tax holidays were terminated as of December 31, 2007. However, PRC
government has established a set of transition rules to allow enterprises that
were already participating in tax holidays before January 1, 2008, to continue
enjoying the tax holidays until being fully utilized.
The Company has accrued a deferred tax
asset as a result of its net operating loss in as of and before December 31,
2015 because the Company planned to setup operations in the United States. The
company anticipates that the operations within the United States will generate
income in the future so that it will be able to take full advantage of the
accrued tax asset. Accordingly the Company has not provided a valuation
allowance for the accrued tax asset.
The Companys detailed tax rates for
its Chinese subsidiaries for 2016 and 2015 in the following table:
|
|
China Income Tax Rate
|
|
Subsidiary
|
|
2016
|
|
|
2015
|
|
Junan Hongran
|
|
25%
|
|
|
25%
|
|
Luotian Lorain
|
|
25%
|
|
|
25%
|
|
Beijing Lorain
|
|
25%
|
|
|
25%
|
|
Shandong Lorain
|
|
25%
|
|
|
25%
|
|
Shandong Greenpia
|
|
25%
|
|
|
25%
|
|
Dongguan Lorain
|
|
25%
|
|
|
25%
|
|
20.
|
EARNINGS PER SHARE
|
|
|
|
Components of basic and diluted earnings per share were
as follows:
|
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share Numerator
|
|
|
|
|
|
|
Net Income
|
$
|
(2,943,095
|
)
|
$
|
(1,070,722
|
)
|
|
|
|
|
|
|
|
Income Available to Common Stockholders
|
$
|
(3,074,969
|
)
|
$
|
(497,106
|
)
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
Numerator
|
|
|
|
|
|
|
Income
Available to Common Stockholders
|
$
|
(3,074,969
|
)
|
$
|
(497,106
|
)
|
|
|
|
|
|
|
|
Income Available to Common Stockholders on
|
|
|
|
|
|
|
Converted Basis
|
$
|
(3,074,969
|
)
|
$
|
(497,106
|
)
|
26
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
Original Shares:
|
|
38,259,490
|
|
|
34,916,714
|
|
Additions from Actual Events
|
|
|
|
|
|
|
-Issuance of Common Stock
|
|
|
|
|
-
|
|
Basic Weighted Average Shares Outstanding
|
|
38,259,490
|
|
|
34,916,714
|
|
|
|
|
|
|
|
|
Dilutive Shares:
|
|
|
|
|
|
|
Additions from Potential
Events
|
|
|
|
|
|
|
-Exercise of Investor Warrants &
Placement Agent
|
|
|
|
|
|
|
Warrants
|
|
-
|
|
|
-
|
|
- Exercise of Employee & Director Stock
Options
|
|
-
|
|
|
-
|
|
Diluted Weighted Average
Shares Outstanding:
|
|
38,259,490
|
|
|
34,916,714
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
|
|
|
|
|
- Basic
|
$
|
(0.07
|
)
|
$
|
(0.03
|
)
|
- Diluted
|
$
|
(0.07
|
)
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
Weighted Average Shares
Outstanding
|
|
|
|
|
|
|
- Basic
|
|
38,259,490
|
|
|
34,916,714
|
|
- Diluted
|
|
38,259,490
|
|
|
34,916,714
|
|
21.
|
SHARE BASED COMPENSATION
|
|
|
|
On July 27, 2009, the Companys Board of Directors
adopted the American Lorain Corporation 2009 Incentive Stock Plan (the
Plan). The Plan provides that the maximum number of shares of the
Companys common stock that may be issued under the Plan is 2,500,000
shares. The Companys employees, directors, and service providers are
eligible to participate in the Plan.
|
|
|
|
For the year ended December 31, 2009, the Company
recorded a total of $166,346 of shared based compensation expense. The
Company issued warrants that upon exercise would result in the issuance of
1,334,573 common shares. These stock options vest over three years, where
33.33% vest annually. The expense related to the stock options was
$107,375. The Company also recorded expense of $58,971 for the issuance of
56,393 common shares to participants; these common shares vested
immediately. Given the materiality and nature of share based compensation,
the entire expense has been recorded as general and administrative
expenses. For the year ended December 31, 2010, the Company recorded a
total of $890,209 stock option and its related general and administrative
expenses.
|
|
|
|
On February 19, 2014 the Companys board of directors
approved the 2014 Equity Incentive Plan (2014 Plan), which was approved
at the annual stockholders meeting on June 9, 2014. Subject to adjustment
as provided in the 2014 Plan, the total number of shares of Common Stock
reserved and available for delivery in connection with awards under the
2014 Plan is 3,000,000. As of December 31, 2015, 987,500 shares were
issued to employees as stock awards. The 2014 Plan replaces the Companys
2009 Incentive Stock Plan (the Prior Plan) and no additional stock
awards shall be granted under the Prior Plan. All outstanding stock awards
granted under the Prior Plan shall remain subject to the terms of the
Prior Plan with respect to which they were originally granted.
|
|
|
|
No tax benefit has yet been accrued or realized. For
years ended December 31, 2015 and 2014, the Company has yet to repatriate
its earnings. Accordingly it has not recognized any deferred tax assets or
liability in regards to benefits derived from the issuance of stock
options.
|
|
|
|
For the three months ended March 31, 2016 and 2015, the
Company did not grant any stock options.
|
27
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
|
(a.)
|
The Company entered into an operating lease agreement
leasing a factory building located in Dongguan, China. The lease was
signed by Shandong Lorain on behalf of Dongguan Lorain and expires on
August 9, 2018.
|
|
|
|
|
|
The minimum future lease payments for this
property at March 31, 2016 are shown in the following table:
|
Period
|
|
Lease payment
|
|
Year 1
|
$
|
92,685
|
|
Year 2
|
|
83,674
|
|
Year 3
|
|
42,481
|
|
|
$
|
218,840
|
|
The minimum future lease payments for
this property at December 31, 2015 are shown in the following table:
Period
|
|
Lease payment
|
|
Year 1
|
$
|
92,685
|
|
Year 2
|
|
92,685
|
|
Year 3
|
|
56,641
|
|
|
$
|
242,011
|
|
|
|
The outstanding lease commitment as of March 31, 2016 and
December 31, 2015 was $218,840 and $242,011.
|
|
|
|
|
(b.)
|
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 expires on April 25, 2033,
May 19, 2033, and June 19, 2033, respectively.
|
|
|
|
|
|
The minimum future lease payments for these properties at
March 31, 2016 are shown in the following tables:
|
Period
|
|
Greenhouse 1
|
|
|
Greenhouse 2
|
|
|
Greenhouse 3
|
|
Year 1
|
$
|
74,800
|
|
$
|
91,062
|
|
$
|
10,856
|
|
Year 2
|
|
74,800
|
|
|
91,062
|
|
|
10,856
|
|
Year 3
|
|
74,800
|
|
|
91,062
|
|
|
10,856
|
|
Year 4
|
|
74,800
|
|
|
91,062
|
|
|
10,856
|
|
Year 5
|
|
74,800
|
|
|
91,062
|
|
|
10,856
|
|
Year 5 and thereafter
|
|
1,008,010
|
|
|
1,205,731
|
|
|
145,682
|
|
|
$
|
1,382,010
|
|
$
|
1,661,041
|
|
$
|
199,962
|
|
The minimum future lease payments for
these properties at December 31, 2015 are shown in the following tables:
28
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
Period
|
|
Greenhouse 1
|
|
|
Greenhouse 2
|
|
|
Greenhouse 3
|
|
Year 1
|
$
|
74,306
|
|
$
|
90,462
|
|
$
|
10,785
|
|
Year 2
|
|
74,306
|
|
|
90,462
|
|
|
10,785
|
|
Year 3
|
|
74,306
|
|
|
90,462
|
|
|
10,785
|
|
Year 4
|
|
74,306
|
|
|
90,462
|
|
|
10,785
|
|
Year 5
|
|
74,306
|
|
|
90,462
|
|
|
10,785
|
|
Year 5 and thereafter
|
|
1,021,243
|
|
|
1,213,069
|
|
|
147,923
|
|
|
$
|
1,392,773
|
|
$
|
1,665,379
|
|
$
|
201,848
|
|
The outstanding lease commitments for
the three greenhouses as of March 31, 2016 and December 31, 2015 was $32,432,013
and $3,260,000.
23.
|
CAPITAL LEASE OBLIGATIONS
|
|
|
|
The Company leases certain machinery and equipment under
leases classified as capital leases. For the three months ended March 31,
2016, 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, 2016:
29
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
Year 1
|
651,326
|
Year 2
|
651,755
|
Year 3
|
83,103
|
Total minimum lease payments
|
1,386,183
|
Less: Amount representing estimated executory costs (such
as taxes, maintenance, and insurance), including profit thereon, included
in total minimum lease payments
|
(101,902)
|
Net minimum lease payments
|
1,284,281
|
Less: Amount representing interest
|
(117,509)
|
Present value of net minimum lease payments
|
1,166,772
|
|
Reflected in the balance sheet as current and noncurrent
obligations under capital leases of $475,365 and $691,407,
respectively.
|
|
|
|
As of December 31, 2015, the present value of minimum
lease payments due within one year is $1,159,079.
|
|
|
24.
|
CONTINGENCIES AND LITIGATION
|
|
|
|
There is a lawsuit currently pending in at Linyi City
Intermediate People's 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 Linyi
Court.
|
|
|
|
In September 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 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 and unpaid to Shandong Lorain. 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 $1,540,666)
first.
|
|
|
|
In January 2014, the Linyi Court had 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
off-set 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 had a second trial session and completed its discovery process. On
March 21, 2015, Shandong Lorain received 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 and Shandong
Lorain is waiting for the Linyi City Intermediate People's Court's
decision at this time.
|
30
AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
MARCH 31, 2016 AND DECEMBER 31, 2015
(Stated in US Dollars)
In March 2015, Centre Technique
Conservation of Produits Agricoles ("CTCPA"), an industry trade association for
canned, preserved and dehydrated food products in France raised issue with
respect to the origin of canned chestnuts sold by Conserverie Minerve ("Minerve",
a former subsidiary of Athena) and Minerve chestnuts come from a Chinese
cultivar, while 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. The Company has since shipped
chestnuts based on the Japanese cultivar grown in China to Minerve and Minerve
has addressed the IFS certification issue and regained IFS certification on
November 5, 2015. We are also still in negotiation with CTCPA with respect to
chestnuts based on the Chinese cultivar. The Company initiated a reorganization
proceeding with the local court in September 2015 in order to have time to
obtain IFS certification and to address the CTCPA cultivar issue. The proceeding
provides Minerve (now Athena) protection from creditors initiating any actions
against Athena. The initial protection period expired in March 2016 and Athena
has applied for an extension of the protection period until September 2016. The
local court has requested Athena to provide proof and guarantee of cash flow
before it can extend the protection period. The Company proposed to acquire the
shares of 49% shareholder of Athena or both shareholders of Athena to make cash
contribution to Athena proportionally so Athena will have enough cash flow to
meet the court requirement. However, the minority shareholder has rejected to
sell its shares to the Company or to contribute any cash to Athena. As a result
of lack of cash flow, the local court has ordered the Athena into the
liquidation process on April 19, 2016.
|
|
|
|
A.
|
Credit risk
|
|
|
|
|
|
Since the Companys inception, the age of account
receivables have 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.
|
|
|
|
|
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 on the Companys customers could adversely
impact the Companys results of operations.
|
31
ITEM 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
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, ready-to-eat, or
RTE, foods and meals ready- to-eat, or MRE); and
-
Frozen food products.
We conduct our production activities in China. Our products are
sold in Chinese domestic markets as well as exported to foreign countries and
regions such as Japan, South Korea and Europe. We derive most of our revenues
from sales in China, Japan and South Korea. In 2016, our primary strategy is to
continue building our brand recognition in China through consistent marketing
efforts towards supermarkets, wholesalers, and significant customers
,
enhancing the cooperation with other manufacturers and factories, and enhancing
the turnover for our existing chestnut, convenience and frozen food products. In
addition, we are working to expand our marketing efforts in Asia and Europe. We
currently have limited sales and marketing activity in the United States,
although our long-term plan is to significantly expand our activities there. In
addition, we are working to developing new products and developing new sales
channels.
Domestic sales in the first quarter of 2016 and 2015 was $28.0
million and $28.5 million, accounted for 88.2% of our sales in this reporting
period as compared to 75.8% over the same period of last year.
Outside China, sales decreased by $5.3 million. The decrease is
mainly due to a decrease in our revenue from Europe as a result of a question
raised by CTCPA, with respect to the origin of canned chestnuts sold by
Conserverie Minerve ("Minerve") and Minerve chestnuts come from a Chinese
cultivar, while 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
In the coming quarters, American Lorain anticipates higher
demand for its traditional chestnut product line along with its fast growing
convenience business line, including the bean products, lunch boxes, and pickle
vegetables. Frozen foods are sold primarily to selected export markets in Europe
and supermarkets and wholesale customers in China. Those sales contributed
approximately 19.1% in revenues for the quarter compared to 19.5% in the first
quarter of 2015.
Production Factors that Affect our Financial and
Operational Condition
Our business depends on obtaining a reliable supply of various
agricultural products, including chestnuts, vegetables, fruits, red meat, fish,
eggs, rice, flour and packaging products. During the first quarter of 2016, the
cost of our raw materials and purchased finished goods decreased from $25.2
million to $20.7 million, as compared to the first quarter of 2015, for a
decrease of approximately 17.9% . We may have to increase the number of our
suppliers of raw materials and expand our own agricultural operations in the
future to meet growing production demands. Despite our efforts to control our
supply of raw materials and maintain good relationships with our suppliers, we
could lose one or more of our suppliers at any time. The loss of several
suppliers may be difficult to replace and could increase our reliance on higher
cost or lower quality suppliers, which could negatively affect our
profitability. In addition, if we have to increase the number of our suppliers
of raw materials in the future to meet growing production demands, we may not be
able to locate new suppliers who could provide us with sufficient materials to
meet our needs. Any interruptions to, or decline in, the amount or quality of
our raw materials supply could materially disrupt our production and adversely
affect our business and financial condition and financial prospects.
39
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 25.9% of our working capital from the
proceeds of short-term loans from Chinese and overseas banks in the first
quarter of 2016, as compared to 39.9% 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, 2016 was approximately $29.1 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.
40
We anticipate that our existing capital resources and cash
flows from operations and current and expected short-term bank loans will be
adequate to satisfy our liquidity requirements for 2016. 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, 2016 Compared to Three Months
Ended March 31, 2015
The following table summarizes the results of our operations
during the three-month periods ended March 31, 2016 and March 31, 2015,
respectively and provides information regarding the dollar and percentage
increase or (decrease) from the three-month period ended March 31, 2016 compared
to the three-month period ended March 31, 2015.
(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)
|
|
2016
|
|
|
2015
|
|
|
($)
|
|
|
(%)
|
|
Net revenues
|
|
31,719
|
|
|
37,558
|
|
|
-5,839
|
|
|
-15.5%
|
|
Cost of revenues
|
|
-25,828
|
|
|
-31,940
|
|
|
-6,112
|
|
|
-19.1%
|
|
Gross profit
|
|
5,891
|
|
|
5,618
|
|
|
273
|
|
|
4.9%
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
-2,079
|
|
|
-2,119
|
|
|
-40
|
|
|
-1.9%
|
|
General and administrative expenses
|
|
-1,132
|
|
|
-2,616
|
|
|
-1,484
|
|
|
-56.7%
|
|
Operating Income
|
|
2,680
|
|
|
883
|
|
|
1,797
|
|
|
203.5%
|
|
Government subsidy income
|
|
529
|
|
|
257
|
|
|
272
|
|
|
105.8%
|
|
Interest and other income
|
|
397
|
|
|
366
|
|
|
31
|
|
|
8.5%
|
|
Other expenses
|
|
-1
|
|
|
-381
|
|
|
-380
|
|
|
-99.7%
|
|
Interest expense
|
|
-1,174
|
|
|
-1,716
|
|
|
-542
|
|
|
-31.6%
|
|
Loss on investment
|
|
-4,608
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Loss before tax
|
|
-2,177
|
|
|
-591
|
|
|
-1,586
|
|
|
-268.4%
|
|
Income tax
|
|
-767
|
|
|
-480
|
|
|
287
|
|
|
59.8%
|
|
Net loss
|
|
-2,944
|
|
|
-1,071
|
|
|
-1,873
|
|
|
-174.9%
|
|
Non-controlling interests
|
|
131
|
|
|
-574
|
|
|
705
|
|
|
122.8%
|
|
Net income of common stockholders
|
|
-3,075
|
|
|
-497
|
|
|
-2,578
|
|
|
-518.7%
|
|
Revenue
Net Revenues
. Our net revenue for the three months ended
March 31, 2016 amounted to $31.7 million, which represents a decrease of
approximately $5.9 million, or 15.5%, from the three-month period ended on March
31, 2015, in which our net revenue was $37.6 million. The overall decrease was
attributable to the increase/decease in sales of each of our product segments,
as reflected in the following table:
41
|
|
Three
|
|
|
|
|
|
|
|
|
|
months
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
3/31/2016
|
|
|
3/31/2015
|
|
|
|
|
|
|
|
Category
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(%)
|
|
Chestnut
|
|
17,151,199
|
|
|
16,062,304
|
|
|
1,088,895
|
|
|
6.8%
|
|
Convenience food
|
|
8,506,936
|
|
|
14,181,755
|
|
|
-5,674,819
|
|
|
-40.0%
|
|
Frozen food
|
|
6,061,284
|
|
|
7,313,252
|
|
|
-1,251,968
|
|
|
-17.1%
|
|
Total
|
|
31,719,419
|
|
|
37,557,311
|
|
|
-5,837,892
|
|
|
-15.5%
|
|
Cost of Revenues.
During the three months ended March
31, 2016, we experienced a decrease in cost of revenue of $6.1 million, in
comparison to the three months ended March 31, 2015, from approximately $31.9
million to $25.8 million, reflecting a decrease of 19.1% . Approximately a
decrease of $4.5 million was attributable to decreasing costs of raw material
and external purchased finished products, which decreased from $25.2 million
during the three months ended March 31, 2015 to $20.7 million, or approximately
17.9%, during the three months ended March 31, 2016.
Gross Profit
. Our gross profit increased $0.3 million,
or 4.9%, to $5.9 million for the three months ended March 31, 2016 from $5.6
million for the same period in 2015, as a result of proportion of revenue from
chestnut products, which were of higher gross profit margin, increased from
42.8% to 54.1% in total net revenue in current reporting period compared to the
same period in 2015. Our gross margins increased from 15.0% to 18.6%
accordingly.
Operating Expenses
Selling and Marketing Expenses
. Our selling and
marketing expenses remained stable during the first quarter of 2016, as compared
to 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, 2016
(In U.S. dollars)
|
|
|
|
Transportation expense
|
|
1,053,593
|
|
Salaries and wages
|
|
724,550
|
|
|
|
|
|
The selling and marketing expense to net revenue ratio for the
three months ended March 31, 2016 and 2015 was 6.6% and 5.6%, respectively.
Management believes that the expense was reasonably incurred.
General and Administrative Expenses.
We experienced a
decrease in general and administrative expense of $1.5 million from $2.6 million
to approximately $1.1 million for the three months ended March 31, 2016,
compared to the same period in 2015. It was noted that the general and
administrative expenses incurred by PRC subsidiaries was remain stable as
compared to the same period of 2015, while that incurred by our French
subsidiaries decreased due to CTCPA policies that negatively influenced on our
sales and we strictly controlled relevant expense.
42
Government Subsidy Income
Government subsidy income increased from approximately $0.3
million for the three months ended March 31, 2015 to $0.5 million for the three
months ended March 31, 2016. 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
Loss before taxation increased $1.6 million to $2.2 million for the three months ended March 31, 2016 from $0.6 million for the same period of 2015. 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
Income taxes decreased $0.3 million, or 60.0%, to $0.8 million
in the first quarter of 2016, as compared to $0.5 million in the first quarter
of 2015. This increase was attributable to the higher income (excluding loss
from investment) earned in current reporting period as compared to the same
period of 2015.
Net Loss
Net loss increased $1.8 million to $2.9 million for the three months ended March 31, 2016 from $1.1 million for the same period of 2015. The main reason for the increase of loss was mainly due to $4.6 million loss for the 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.
Liquidity and Capital Resources
As of March 31, 2016, we had cash and cash equivalents
(including restricted cash) of $42.1 million. Our cash and cash equivalents
increased by approximately $9.6 million from December 31, 2015. 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,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash (used in)/provided by operating
activities
|
|
(12,333
|
)
|
|
16,283
|
|
Net cash provided by/ (used in) investing activities
|
|
3,194
|
|
|
(4,326
|
)
|
Net cash provided by/ (used in) financing
activities
|
|
5,923
|
|
|
(5,629
|
)
|
Net cash flow
|
|
(3,216
|
)
|
|
6,328
|
|
Operating Activities
Net cash used in and provided by operating activities was $12.3
million and $16.3 million for the three month periods ended March 31, 2016 and
2015, respectively. The decrease of approximately $28.6 million in net cash
flows used in operating activities in the first three months of 2016 was
primarily due to a decrease of $19.4 million in accounts and other payable
during the current reporting period.
43
Investing Activities
Net cash provided by investing activities for the three months
period ended March 31, 2016 was $3.2 million, representing an increase of $7.5
million in net cash provided by investing activities from $4.3 million net cash
used in investing activities for the same period of 2015. The difference was
primarily a result of higher increase in restricted cash of $3.7 million and
deposit of $3.6 million.
Financing Activities
Net cash provided by financing activities for the three months
period ended March 31, 2016 was $5.9 million, representing an increase of $11.5
million from $5.6 million net cash used in financing activities during the same
period in 2015. The increase of the net cash provided by financing activities
was primarily a result of less bank borrowing repayment in current reporting
period.
Loan Facilities
As of March 31, 2016, 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 $29.1 million as of March 31, 2016, compared
with $36.3 million as of December 31, 2015. We believe that our currently
available working capital, after receiving the aggregate proceeds of the credit
facilities, should be adequate to sustain our operations at our current levels
for 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.
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.
44
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. Our consolidated financial statements include
100% of assets, liabilities, and net income or loss of our wholly-owned
subsidiaries. Ownership interests of non-controlling investors are recorded as
non-controlling interests.
As of March 31, 2016, 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
|
$ 47,943,597
|
|
Junan Hongrun Foodstuff Co., Ltd.
|
PRC
|
100
|
46,096,723
|
|
Shandong Lorain Co., Ltd.
|
PRC
|
80.2
|
12,462,403
|
|
Beijing Lorain Co., Ltd.
|
PRC
|
100
|
1,540,666
|
|
Luotian Lorain Co., Ltd.
|
PRC
|
100
|
3,902,322
|
|
Shandong Greenpia Foodstuff Co., Ltd.
|
PRC
|
100
|
2,366,463
|
|
Dongguan Lorain Co., Ltd.
|
PRC
|
100
|
154,067
|
In March 2015, Centre Technique Conservation of Produits
Agricoles ("CTCPA"), an industry trade association for canned, preserved and
dehydrated food products in France raised issue with respect to the origin of
canned chestnuts sold by Conserverie Minerve ("Minerve", a former subsidiary of
Athena) and Minerve chestnuts come from a Chinese cultivar, while 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.
The Company has since shipped chestnuts based on the Japanese cultivar grown in
China to Minerve and Minerve has addressed the IFS certification issue and
regained IFS certification on November 5, 2015. We are also still in negotiation
with CTCPA with respect to chestnuts based on the Chinese cultivar. The Company
initiated a reorganization proceeding with the local court in September 2015 in
order to have time to obtain IFS certification and to address the CTCPA cultivar
issue. The proceeding provides Minerve (now Athena) protection from creditors
initiating any actions against Athena. The initial protection period expired in
March 2016 and Athena has applied for an extension of the protection period
until September 2016. The local court has requested Athena to provide proof and
guarantee of cash flow before it can extend the protection period. The Company
proposed to acquire the shares of 49% shareholder of Athena or both shareholders
of Athena to make cash contribution to Athena proportionally so Athena will have
enough cash flow to meet the court requirement. However, the minority
shareholder has rejected to sell its shares to the Company or to contribute any
cash to Athena. As a result of lack of cash flow, the local court has ordered
the Athena into the liquidation process on April 19, 2016. Athena was deconsolidated from the Company for this quarterly report due to loss in control as a result of Athena group going bankrupt after failing to legally reorganize and meet a consensus with its non-controlling shareholders.
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.
45
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
On January 5, 2016, the FASB issued ASU 2016-01 Financial
InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the
classification and measurement of financial instruments. Although the ASU
retains many current requirements, it significantly revises an entitys
accounting related to (1) the classification and measurement of investments in
equity securities and (2) the presentation of certain fair value changes for
financial liabilities measured at fair value. The ASU also amends certain
disclosure requirements associated with the fair value of financial instruments.
The new standard is effective for fiscal years and interim periods within those
fiscal years beginning after December 15, 2017.
On February 25, 2016, the FASB issued ASU 2016-02 Leases
(Topic 842), its new standard on accounting for leases. ASU 2016-02 introduces
a lessee model that brings most leases on the balance sheet. The new standard
also aligns many of the underlying principles of the new lessor model with those
in ASC 606, the FASBs new revenue recognition standard (e.g., those related to
evaluating when profit can be recognized).
Furthermore, the ASU addresses other concerns related to the
current leases model. For example, the ASU eliminates the requirement in current
U.S. GAAP for an entity to use bright-line tests in determining lease
classification. The standard also requires lessors to increase the transparency
of their exposure to changes in value of their residual assets and how they
manage that exposure. The new model represents a wholesale change to lease
accounting. As a result, entities will face significant implementation
challenges during the transition period and beyond, such as those related
to:
-
Applying judgment and estimating.
-
Managing the complexities of data collection, storage, and maintenance.
-
Enhancing information technology systems to ensure their ability to
perform the calculations necessary for compliance with reporting requirements.
-
Refining internal controls and other business processes related to leases.
-
Determining whether debt covenants are likely to be affected and, if so,
working with lenders to avoid violations.
-
Addressing any income tax implications.
The new guidance will be effective for public business entities
for annual periods beginning after December 15, 2018 (e.g., calendar periods
beginning on January 1, 2019), and interim periods therein.
On March 15, 2016, the FASB issued ASU 2016-07
InvestmentsEquity Method and Joint Ventures (Topic 323): Simplifying the
Transition to the Equity Method of Accounting, which simplifies the equity
method of accounting by eliminating the requirement to retrospectively apply the
equity method to an investment that subsequently qualifies for such accounting
as a result of an increase in the level of ownership interest or degree of
influence. Consequently, when an investment qualifies for the equity method (as
a result of an increase in the level of ownership interest or degree of
influence), the cost of acquiring the additional interest in the investee would
be added to the current basis of the investors previously held interest and the
equity method would be applied subsequently from the date on which the investor
obtains the ability to exercise significant influence over the investee. The ASU
further requires that unrealized holding gains or losses in accumulated other
comprehensive income related to an available-for-sale security that becomes
eligible for the equity method be recognized in earnings as of the date on which
the investment qualifies for the equity method.
46
The guidance in the ASU is effective for all entities for
fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years; early adoption is permitted for all entities. Entities are
required to apply the guidance prospectively to increases in the level of
ownership interest or degree of influence occurring after the ASUs effective
date. Additional transition disclosures are not required upon adoption.
On March 17, 2016, the FASB issued ASU 2016-08 Revenue from
Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net), which amends the principal-versus-agent
implementation guidance and illustrations in the Boards new revenue standard
(ASU 2014-09). The FASB issued the ASU in response to concerns identified by
stakeholders, including those related to (1) determining the appropriate unit of
account under the revenue standards principal-versus-agent guidance and (2)
applying the indicators of whether an entity is a principal or an agent in
accordance with the revenue standards control principle. Among other things,
the ASU clarifies that an entity should evaluate whether it is the principal or
the agent for each specified good or service promised in a contract with a
customer. As defined in the ASU, a specified good or service is a distinct good
or service (or a distinct bundle of goods or services) to be provided to the
customer. Therefore, for contracts involving more than one specified good or
service, the entity may be the principal for one or more specified goods or
services and the agent for others.
The ASU has the same effective date as the new revenue standard
(as amended by the one-year deferral and the early adoption provisions in ASU
2015-14). In addition, entities are required to adopt the ASU by using the same
transition method they used to adopt the new revenue standard.
On March 30, 2016, the FASB issued ASU 2016-09
CompensationStock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting, which simplifies several aspects of the
accounting for employee share-based payment transactions for both public and
nonpublic entities, including the accounting for income taxes, forfeitures, and
statutory tax withholding requirements, as well as classification in the
statement of cash flows.
The ASU is effective for annual reporting periods beginning
after December 15, 2016, including interim periods within those annual reporting
periods.
As of March 31, 2016, there are no other recently issued
accounting standards not yet adopted that would or could have a material effect
on the Companys consolidated financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance arrangements.
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, 2016. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that as of March
31, 2016, 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.
47
The material weakness and significant deficiency identified by
our management as of March 31, 2016 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, 2016, 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.
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