Planet Green Holdings Corp. - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2018

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.001-34449

AMERICAN LORAIN CORPORATION
(Exact name of registrant as specified in its charter)

BeihuanZhong Road
Junan County
Shandong, People’s Republic of China, 276600
(Address, including zip code, of principal executive offices)

(86) 539-7317959
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]        No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]        No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]      Accelerated filer [   ]      Non-accelerated filer [   ]      Smaller reporting company [X]      Emerging Growth Company [   ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]        No [X]

The numbers of shares outstanding of the issuer’s class of common stock as of June 30, 2018 was 64,824,490.

FORM 10-Q
For the Quarterly Period Ended June 30, 2018

TABLE OF CONTENTS

Caution Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to the factors described in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission.

In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” or the negative of such terms or other similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

Use of Certain Defined Terms

Except where the context otherwise requires and for the purposes of this report only:

1.    “We,” “us” and “our” refer to ALN, and except where the context requires otherwise, our wholly-owned and majority-owned direct and indirect operating subsidiaries.

2.    “ALN” refers to American Lorain Corporation, a Nevada corporation (formerly known as Millennium Quest, Inc.).

3.    “Athena” refers to Athena*, a limited liability company organized under the laws of France that is majority- owned by Junan Hongrun.

i

4.    “ILH” refers to International Lorain Holding, Inc., a Cayman Islands company that is wholly - owned by ALN.

5.    “Junan Hongrun” refers to Junan Hongrun Foodstuff Co., Ltd.

6.    “Luotian Lorain” refers to Luotian Lorain Co., Ltd.

7.    “Beijing Lorain” refers to Beijing Lorain Co., Ltd.

8.    “Shandong Lorain” refers to Shandong Lorain Co., Ltd.

9.    “Dongguan Lorain” refers to Dongguan Lorain Co., Ltd.

10. “Shandong Greenpia” refers to Shandong Greenpia Foodstuff Co., Ltd.

11. “Shenzhen Lorain**” refers to Lorain Foodstuff (Shenzhen) Co., Ltd.

12. “RMB” refers to Renminbi, the legal currency of China.

13. “U.S. dollar”, “$” and “US$” refer to the legal currency of the United States.

14. “China” and “PRC” refer to the People’s Republic of China (excluding Hong Kong and Macau).

*On August 8, 2015, the Company re-organized its French operations by merging the operations of Conserverie Minerve into its immediate parent and 100% shareholder Athena, and concurrently, Athena wound up and dissolved Conserverie Minerve. Athena subsequently changed its own legal name to Conservie Minerve to continue its business.

**On December 14, 2017, the Company formed Shenzhen Lorain as a limited company under the laws of the PRC. Through Shandong Greenpia, the Company entered into exclusive arrangements with Shenzhen Lorain and its shareholders that give the Company the ability to substantially influence Shenzhen Lorain’s daily operations and financial affairs and appoint its senior executives. The Company is considered the primary beneficiary of Shenzhen Lorain and it consolidates its accounts as a VIE.

ii

ITEM 1. Financial Statements

AMERICAN LORAIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018 AND DECEMBER 31, 2017

(Stated in US Dollars)

F-1

AMERICAN LORAIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2018 AND DECEMBER 31, 2017
(Stated in US Dollars)

See Accompanying Notes to the Financial Statements

F-3

AMERICAN LORAIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(Stated in US Dollars)

See Accompanying Notes to the Financial Statements

F-4

AMERICAN LORAIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(STATED IN US DOLLARS)

See Accompanying Notes to the Financial Statements

F-5

AMERICAN LORAIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018 AND DECEMBER 31, 2017
(Stated in US Dollars)

In 2014, the Company invested $2,100,000 in Athena/Minerve Group whereby the Company controlling shareholder of Minerve. Minerve conducted operations in manufacturing, packaging and sales activities in France and import and storage operations in Portugal. During the years ended December 31, 2015, the financial position and results of operations of Minerve were accounted for as subsidiaries in the Company’s financial statements; however, during the year ended December 31, 2016, Minerve became insolvent and compelled into bankruptcy by creditors, and, ultimately liquidation. Accordingly, the Company lost control of Minerve and wrote off the value of its investment in Minerve. All receivables due by Minerve to subsidiaries still controlled by the Company have been written-off.

Management has eliminated all significant inter-company balances and transactions in preparing the accompanying consolidated financial statements. Ownership interests of subsidiaries that the Company does not wholly-own are accounted for as non-controlling interests.

F-6

American Lorain Corporation
Notes to Financial Statements

Shandong Economic Development Investment Corporation, which is a PRC state-owned entity, holds 19.8% equity interest in Shandong Lorain.

Consolidation of Variable Interest Entity

VIEs are entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision-making ability. Any VIE with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. Management makes ongoing reassessments of whether the Company is the primary beneficiary of Shenzhen Lorain.

On December 14, 2017, the Company formed Shenzhen Lorain as a limited company under the laws of the PRC. Through Shandong Greenpia, the Company entered into exclusive arrangements with Shenzhen Lorain and its shareholders that give the Company the ability to substantially influence Shenzhen Lorain’s daily operations and financial affairs and appoint its senior executives. The Company is considered the primary beneficiary of Shenzhen Lorain and it consolidates its accounts as a VIE. The Company’s arrangements with Shenzhen Lorain consist of the following agreements:

1.    Consultation and Service Agreement, dated December 14, 2017. Under this agreement entered into between Shandong Greenpia Foodstuff Co., Ltd. and Lorain Foodstuff (Shenzhen) Co., Ltd.

2.    Business Cooperation Agreement, dated December 14, 2017. Under this agreement entered into between Shandong Greenpia Foodstuff Co., Ltd. and Lorain Foodstuff (Shenzhen) Co., Ltd.

3.    Equity Pledge Agreement, dated December 14, 2017. Under this agreement entered into between Mingyue Cai, Shandong Greenpia Foodstuff Co., Ltd., and Lorain Foodstuff (Shenzhen) Co., Ltd.

4.    Equity Option Agreement, dated December 14, 2017. Under this agreement entered into between Mingyue Cai, Shandong Greenpia Foodstuff Co., Ltd., and Lorain Foodstuff (Shenzhen) Co., Ltd.

5.    Voting Rights Proxy and Financial Supporting Agreement dated December 14, 2017. Under this agreement entered into between Mingyue Cai, Shandong Greenpia Foodstuff Co., Ltd., and Lorain Foodstuff (Shenzhen) Co., Ltd.

Discontinued operations

In 2017, the Company discontinued the operations in Shandong Lorain Co. Ltd. and Dongguan Lorain Co., Ltd. As a result, the financial results of these two subsidiaries are presented as discontinued operations.

In the first quarter of 2018, the Company’s board of directors resolved to discontinue the operations of Junan Hongrun Foodstuff Co. Ltd.

Use of estimates

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.

F-7

American Lorain Corporation
Notes to Financial Statements

Cash and cash equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Investment securities

The Company classifies securities it holds for investment purposes into trading or available-for-sale. Trading securities are bought and held principally for the purpose of selling them in the near term. All securities not included in trading securities are classified as available-for-sale.

Trading and available-for-sale securities are recorded at fair value. Unrealized holding gains and losses on trading securities are included in the net income. Unrealized holding gains and losses, net of the related tax effect, on available for sale securities are excluded from net income and are reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.

A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged as an expense to the statement of income and comprehensive income and a new cost basis for the security is established. To determine whether impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year end, and forecasted performance of the investee.

Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned.

Trade receivables

Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred.

Inventories

Inventories consist of raw materials and finished goods which are stated at the lower of cost or market value. Finished goods are comprised of direct materials, direct labor, inbound shipping costs, and allocated overhead. The Company applies the weighted average cost method to its inventory.

Advances and prepayments to suppliers

The Company makes advance payment to suppliers and vendors for the procurement of raw materials. Upon physical receipt and inspection of the raw materials from suppliers the applicable amount is reclassified from advances and prepayments to suppliers to inventory.

Plant and equipment

Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. The Company’s typically applies a salvage value of 0% to 10%. The estimated useful lives of the plant and equipment are as follows:

F-8

American Lorain Corporation
Notes to Financial Statements

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts, and any gain or loss are included in the Company’s results of operations. The costs of maintenance and repairs are recognized to expenses as incurred; significant renewals and betterments are capitalized.

Construction in progress and prepayments for equipment

Construction in progress and prepayments for equipment represent direct and indirect acquisition and construction costs for plants, and costs of acquisition and installation of related equipment. Amounts classified as construction in progress and prepayments for equipment are transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. Depreciation is not provided for assets classified in this account.

Land use rights

Land use rights are carried at cost and amortized on a straight-line basis over a specified period. Amortization is provided using the straight-line method over 40-50 years.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. The Company conducts an annual assessment of its goodwill for impairment. If the carrying value of its goodwill exceeds its fair value, then impairment has incurred; accordingly, a charge to the Company’s results of operations will be recognized during the period. Fair value is generally determined using a discounted expected future cash flow analysis.

Accounting for the impairment of long-lived assets

The Company annually reviews its long-lived assets for impairment or whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Impairment may be the result of becoming obsolete from a change in the industry, introduction of new technologies, or if the Company has inadequate working capital to utilize the long-lived assets to generate the adequate profits. Impairment is present if the carrying amount of an asset is less than its expected future undiscounted cash flows.

If an asset is considered impaired, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the asset. Assets to be disposed are reported at the lower of the carrying amount or fair value less costs to sell.

Statutory reserves

Statutory reserves are referring to the amount appropriated from the net income in accordance with laws or regulations, which can be used to recover losses and increase capital, as approved, and are to be used to expand production or operations. PRC laws prescribe that an enterprise operating at a profit must appropriate and reserve, on an annual basis, an amount equal to 10% of its profit. Such an appropriation is necessary until the reserve reaches a maximum that is equal to 50% of the enterprise’s PRC registered capital.

F-9

American Lorain Corporation
Notes to Financial Statements

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 Company’s assets and liabilities are translated into United States dollars from RMB and EUR at year-end exchange rates, and its revenues and expenses are translated at the average exchange rate during the period. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

The RMB is not freely convertible into foreign currencies and all foreign exchange transactions must be conducted through authorized financial institutions.

Revenue recognition

The Company recognizes revenue when persuasive evidence of arrangement exists, the price has been fixed or is determinable, the delivery has been completed and no other significant obligations of the Company exists, and collectability of payment is reasonably assured. Payments received prior to all of the foregoing criteria are recorded as customer deposits. Recorded revenue is derived from the value of goods invoiced less value-added tax (VAT).

Advertising

All advertising costs are expensed as incurred.

Shipping and handling

All outbound shipping and handling costs are expensed as incurred.

Research and development

All research and development costs are expensed as incurred.

Retirement benefits

Retirement benefits in the form of mandatory government sponsored defined contribution plans are charged to the either expenses as incurred or allocated to inventory as part of overhead.

Income taxes

The Company accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future realization is uncertain.

Comprehensive income

The Company uses FASB ASC Topic 220, “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except the changes in paid-in capital and distributions to stockholders due to investments by stockholders.

Earnings per share

The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260, “Earnings per share”. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis from the potential conversion of convertible securities or the exercise of options and or warrants; the dilutive effects of potentially convertible securities are calculated using the as-if method; the potentially dilutive effect of options or warrants are calculated using the treasury stock method. Securities that are potentially an anti-dilutive effect (i.e. those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

F-10

American Lorain Corporation
Notes to Financial Statements

Financial instruments

The Company’s 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:

The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.

Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

Unaudited interim financial information

These unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial reporting and the rules and regulations of the Securities and Exchange Commission that permit reduced disclosure for interim periods. Therefore, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been made. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2018.

The consolidated balance sheets and certain comparative information as of December 31, 2017 are derived from the audited consolidated financial statements and related notes for the year ended December 31, 2017 (“2017 Annual Financial Statements”), included in the Company’s 2017 Annual Report on Form 10-K. These unaudited interim condensed consolidated financial statements should be read in conjunction with the 2017 Annual Financial Statements.

Recent accounting pronouncements

In January 2017, the FASB issued guidance which simplifies the accounting for goodwill impairment. The updated guidance eliminates Step 2 of the impairment test, which requires entities to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value, determined in Step 1. The Company is currently evaluating the impact on the financial statements of this guidance.

F-11

American Lorain Corporation
Notes to Financial Statements

F-12

American Lorain Corporation
Notes to Financial Statements

Depreciation expense for the six months ended June 30, 2018 and 2017 was $295,981 and $754,161, respectively.

F-13

American Lorain Corporation
Notes to Financial Statements

F-14

American Lorain Corporation
Notes to Financial Statements

F-15

American Lorain Corporation
Notes to Financial Statements

The Company began repaying principal and interest on the loan with DEG in semi-annual installments on December 15, 2012. As of June 30, 2018 and December 31, 2017, the Company had not repaid any principal nor interest. The loan was collateralized with the following terms:

The Company is in default of the debentures that were issued by Guoyuan Securities and Daiwa SSC Securities and negotiating with the debenture holders to extend repayment terms.

F-16

American Lorain Corporation
Notes to Financial Statements

The difference between the U.S. federal statutory income tax rate and the Company’s effective tax rate was as follows of June 30, 2018 and 2017:

F-17

American Lorain Corporation
Notes to Financial Statements

F-18

American Lorain Corporation
Notes to Financial Statements

The minimum future lease payments for these properties at June 30, 2018 are as follows:

The outstanding lease commitments for the three greenhouses as of June 30, 2018 was $2,683,189.

Reflected in the balance sheet as current and noncurrent obligations under capital leases of $1,056,976 and $0, respectively.

As of June 30, 2018, the present value of minimum lease payments due within one year is $1,056,976.

F-19

American Lorain Corporation
Notes to Financial Statements

Results of Operations

F-20

American Lorain Corporation
Notes to Financial Statements

The Company’s deposits are made with banks located in the PRC. They do not carry federal deposit insurance and may be subject to loss of the banks become insolvent.

Since the Company’s inception, the age of account receivables has been less than one year indicating that the Company is subject to minimal risk borne from credit extended to customers.

The company is subject to interest rate risk when short term loans become due and require refinancing.

The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by changes in the political, economic, and legal environments in the PRC.

The Company’s 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 Company’s 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.

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.

Management monitors changes in prices levels. Historically inflation has not materially impacted the company’s financial statements; however, significant increases in the price of raw materials and labor that cannot be passed to the Company’s customers could adversely impact the Company’s results of operations.

F-21

American Lorain Corporation
Notes to Financial Statements

On July 12, 2018, the Company entered into a securities purchase agreement with Yunpeng Zhang and Zhongquan Sun, who agreed to invest an aggregate of $750,000 in the Company in exchange for an aggregate of 3,750,000 shares of the Company’s common stock, representing a purchase price of $0.20 per share.

On August 8, 2018, the Company, our chairman, Si Chen, and our direct and indirect subsidiaries, Planet Green Holdings Corp., a British Virgin Islands company that is 100% owned by us (“Planet Green”), Junan Hongrun Foodstuff Co., Ltd., a company incorporated in the PRC (“Junan”), Shandong Lorain Co., Ltd., a company incorporated in the PRC (“Shandong Lorain”), International Lorain Holdings, Inc., a Cayman Islands company that is 100% owned by us (“ILH”), Shandong Greenpia Foodstuff Co., Ltd., a business company incorporated in the PRC (“Shandong Greenpia”), Beijing Lorain Co., Ltd., a business company incorporated in the PRC (“Beijing Lorain”) and Luotian Lorain Co., Ltd., a business company incorporated in the PRC (“Luotian Lorain”), entered into a share exchange agreement (the “Sale Agreement”).

The Sale Agreement provides for:

The Planet Green Shares will be directly owned by Planet Green, and indirectly by us, following the closing of the Sale Transaction.

On August 8, 2018, the Company entered into an amended and restated securities purchase agreement with Yimin Jin, our chief strategy officer and director, and Hongxiang Yu, our chairman nominee and director, pursuant to which the Purchasers agreed to invest an aggregate of $10 million in the Company in exchange for an aggregate of 58,823,530 shares of our common stock, representing a purchase price of $0.17 per share. The agreement contains customary representations and warranties by the Company and customary closing conditions. In addition, the closing of the transaction is conditioned upon (i) the consummation of the Sale Transaction, which transaction is subject to the approval of our stockholders at our 2018 annual meeting, (ii) the re-election of Messrs. Jin and Yu to the Company’s board of directors at our 2018 annual meeting and (iii) the approval of certain amendment to our charter, to change the name of our company and to effect a stock split of the outstanding shares of our common stock, at our 2018 annual meeting. If consummated, the Company expects to use the proceeds of the financing for general corporate purposes. We also believe that, if consummated, the Sale Transaction will improve our balance sheet.

F-22

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview

Overview

We are an integrated food manufacturing company headquartered in Shandong Province, China. We develop, manufacture and sell the following types of food products:

• Chestnut products;
• Convenience foods (including ready-to-cook, or RTC, foods, and, ready-to-eat, or RTE, foods); and
• Frozen food products.

We conduct our production activities in China. Our products are sold in the Chinese domestic markets.

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 on favorable terms, we may not have sufficient liquidity to fund our operating costs and our business could be adversely affected.

The financial statements have been prepared on a going-concern basis. The going-concern basis assumes that assets will be realized and liabilities will be settled in the ordinary course of business in the amounts disclosed in the financial statements. Our ability to continue as a going concern is greatly dependent on our ability to realize its non-cash current assets such as receivables and inventory into cash in order to settle its current obligations. For the six months ended June 30, 2018, the Company incurred a net loss of $768,951. As of June 30, 2018, the Company had a working capital deficit of $59,153,945. These conditions raise substantial doubt as to whether the Company may continue as a going concern.

Our business, operating results or financial condition will be adversely affected in the event of unfavorable economic conditions. 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 June 30, 2018 Compared to Three Months Ended March 31, 2017

The following table summarizes the results of our operations during the three-month periods ended June 30, 2018 and June 30, 2017, respectively and provides information regarding the dollar and percentage increase or (decrease) from the three-month period ended June 30, 2018 compared to the three month period ended June 30, 2017.

2

(All amounts, other than percentages, stated in thousands of U.S. dollars)

Revenue

Net Revenues. Our net revenue for the three months ended June 30, 2018 amounted to $0.6 million, which represents a decrease of approximately $0.6 million, or 50.5%, from the three-month period ended on June 30, 2017, in which our net revenue was $1.2 million. This decrease was attributable to the intense competition in the market and the discontinued operations of our French company, Dongguan Lorain, Shandong Lorain and Junan Hongrun Foodstuff Co., Ltd. The overall decrease was attributable to the decrease in sales of each of our product segments, as reflected in the following table:

Cost of Revenues. During the three months ended June 30, 2018, we experienced a decrease in cost of revenue of $1.43 million, in comparison to the three months ended June 30, 2017, from approximately $1.5 million to $0.07 million, reflecting a decrease of 95.3% . This decrease was attributable to the decrease in sales and expense for operation.

Gross Profit. Our gross profit increased $0.9 million, or 300%, to $0.6 million for the three months ended June 30, 2018 from minus $0.3 million for the three months ended June 30, 2017, attributable to lower cost of revenue.

3

Operating Expenses

Selling and Marketing Expenses. Our selling and marketing expenses increased $0.06 million, or 66.7%, to $0.03 million during the three months ended June 30, 2018, as compared to minus $0.09 million during the three months ended June 30, 2017. The decrease of our selling and marketing expenses is mainly due to the decrease of sales activities.

General and Administrative Expenses. We experienced an increase in general and administrative expense of $0.4 million from $0.2 million to approximately $0.6 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. General and administrative expenses incurred by PRC subsidiaries to maintain our operation in China increased during such periods due to the newly acquired VIE entity Lorain Foodstuff (Shenzhen) Co., Ltd.

Government Subsidy Income

Government subsidy income was $0 million for the three months ended June 30, 2018 compared to $0 million during the three months ended June 30, 2017. Due to poor performance of our operations, we were ineligible to receive subsidies during such period.

Interest Expense

Interest expense, consisting of interest payments with respect to our outstanding loans, was $0 million for the three months ended June 30, 2018, compared to minus $0.7 million during the three months ended June 30, 2017. Such reductions were attributable to our failure to repay interest owed and loan default.

Net Loss

Net loss decreased to $0.7 million for the three months ended June 30, 2018 from $2.9 million for the three months ended June 30, 2017. The main reasons for the decrease of loss were the decreases in our operating expenses and increase of our net revenue as described above.

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017

The following table summarizes the results of our operations during the six-month periods ended June 30, 2018 and June 30, 2017, respectively, and provides information regarding the dollar and percentage increase or (decrease) from the six-month period ended June 30, 2018 compared to the six-month period ended June 30, 2017.

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(All amounts, other than percentages, stated in thousands of U.S. dollars)

Revenue

Net Revenues. Our net revenue for the six months ended June 30, 2018 amounted to $1.6 million, which represents a decrease of approximately $1.4 million, or 43.8%, from the six-month period ended on June 30, 2017, in which our net revenue was $3.0 million. This decrease was attributable to the intense competition in the market and the discontinued operations of our French company, Dongguan Lorain, Shandong Lorain and Junan Hongrun Foodstuff Co., Ltd. The overall decrease was attributable to the decrease in sales of each of our product segments, as reflected in the following table:

Cost of Revenues. During the six months ended June 30, 2018, we experienced a decrease in cost of revenue of $2.0 million, in comparison to the six months ended June 30, 2017, from approximately $3.0 million to $1.0 million, reflecting a decrease of 44.1% . This decrease was attributable to the decrease in sales.

Gross Profit. Our gross profit increased $0.7 million, or 3,200%, to $0.7 million for the six months ended June 30, 2018 from negative $0.02 million for the same period in 2017, attributable to lower cost of revenue.

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Operating Expenses

Selling and Marketing Expenses. Our selling and marketing expenses decreased $2.0 million, or 97.4%, to $0.05 million during the second quarter of 2018, as compared to $2.0 million during the same period last year. Our selling and marketing expenses during such period in 2017 consisted primarily of daily sales expenses.

General and Administrative Expenses. We experienced a decrease in general and administrative expense of $0.7 million from $6.0 million to approximately $5.3 million for the six months ended June 30, 2018, compared to the same period in 2017. General and administrative expenses incurred by PRC subsidiaries to maintain our operation in China decreased during such periods due to the discontinued operations of our French company, Junan Hongrun, Dongguan Lorain, and Shandong Lorain.

Government Subsidy Income

Government subsidy income was $0 million for the six months ended June 30, 2018 compared to $0.6 million during the same period in 2017. Due to poor performance of our operations, we were ineligible to receive subsidies during such period.

Interest Expense

Interest expense, consisting of interest payments with respect to our outstanding loans, was $0 million for the six months ended June 30, 2018, compared to $1.0 million during the same period in 2017. Such reductions were attributable to our failure to repay interest owed and loan default.

Net Loss

Net loss decreased to $0.8 million for the six months ended June 30, 2018 from $18.8 million for the same period of 2017. The main reasons for the decrease of loss were the decreases in our operating expenses as described above.

Liquidity and Capital Resources

In the reporting period in 2018, our primary sources of financing have been cash generated from operations and the private placement. We raised funds in the following three private placements after the first quarter of 2018:

• On April 14, 2018, the Company entered into a securities purchase agreement with the investors name therein, who agreed to invest an aggregate of $1.629 million in the Company in exchange for an aggregate of 9,050,000 shares of the Company’s common stock, representing a purchase price of $0.18 per share.
• On April 24, 2018, the Company entered into a securities purchase agreement with Xiuping Cai, who agreed to invest an aggregate of $1.8 million in the Company in exchange for an aggregate of 10,000,000 shares of the Company’s common stock, representing a purchase price of $0.18 per share.
• On July 12, 2018, the Company entered into a securities purchase agreement with Yunpeng Zhang and Zhongquan Sun, who agreed to invest an aggregate of $750,000 in the Company in exchange for an aggregate of 3,750,000 shares of the Company’s common stock, representing a purchase price of $0.20 per share.

In addition, on May 23, 2018, the Company entered into a securities purchase agreement, pursuant to which each of Yimin Jin, the Chief Strategy Officer and a director of the Company, and Hongxiang Yu, a director of the Company, agreed to invest an aggregate of $5.0 million in the Company in exchange for 29,411,765 shares of the Company’s common stock, or an aggregate of $10.0 million in exchange for 58,823,530 shares, representing a purchase price of $0.17 per share. The parties entered into an amended and restated securities purchase agreement on August 8, 2018, which agreement was approved by our audit committee and our board of directors and remains subject to the approval of our stockholders at our 2018 annual meeting. The agreement contains customary representations and warranties by the Company and customary closing conditions. In addition, the closing of the transaction is conditioned upon (i) the consummation of the transactions contemplated by the share exchange agreement, dated August 8, 2018, entered into by and among the Company, certain subsidiaries of the Company, and Si Chen, the Company’s chairman, pursuant to which the Company has agreed to sell certain assets to Mr. Chen (the “Sale Transaction”), which transaction is subject to the approval of our stockholders at our 2018 annual meeting, (ii) the re-election of Messrs. Jin and Yu to the Company’s board of directors at our 2018 annual meeting and (iii) the approval of certain amendment to our charter, to change the name of our company and to effect a stock split of the outstanding shares of our common stock, at our 2018 annual meeting. If consummated, the Company expects to use the proceeds of the financing for general corporate purposes. We also believe that, if consummated, the Sale Transaction will improve our balance sheet.

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Many of our bank loans have been in default. Such loans were guaranteed by non-related third parties. We are negotiating with these banks. However, we cannot guarantee that we will reach a satisfying settlement with the banks. If we fail, we would expect that the banks would exercise their rights to collect from guarantors or take possession of the assets underlying the business that was part to such loans.

Over the next 12 months, we need significant capital to maintain our normal business operations. If we fail to raise the working capital needed, we may cease to sell more products, shut down our sales offices and terminate employment agreements with most of our employees. As a result, the Company’s financial condition would be worse, which may have a material adverse effect on our listing status. If available liquidity is insufficient 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. There is no assurance that, if required, we will be able to raise additional capital or reduce discretionary spending to provide the required liquidity. We cannot be sure of the availability or terms of any third party financing.

To improve our operation and financial conditions, we are taking several measures: (i) reorganizing our corporate structure by disposing non-performing assets; (ii) financing through private financing in China; (iii) negotiating with the creditors to settle loans outstanding; and (iv) looking for new viable business opportunities.

As of June 30, 2018, we had cash and cash equivalents (including restricted cash) of $4.5 million. Our cash and cash equivalents increased by approximately $3.0 million from June 30, 2017. The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.

Cash Flow (In thousands)

Operating Activities

Net cash used in operating activities was $7.0 million and provided by operating activities was $10.3 million for the six month periods ended June 30, 2018 and 2017, respectively. The decrease of approximately $17.3 million in net cash flows used in operating activities in the first six months of 2018 was primarily due to a decrease of $10.1 million in net loss, $5.5 in accounts and other payables. An increase of $0.7 million in accounts and other receivables, $0.5 million in inventories, and an increase of $0.3 million in advance to suppliers during the current reporting period, $0.2 million in payment.

Investing Activities

Net cash used in investing activities for the six months period ended June 30, 2018 was $0.004 million, representing a decrease of $12.0 million in net cash used in investing activities from $12.0 million for the same period of 2017. The difference was primarily a result of the discontinued operations of our French company, Junan Hongrun, Dongguan Lorain, and Shandong Lorain.

Financing Activities

Net cash provided by financing activities for the six months period ended June 30, 2018 was $2.6 million, representing an increase of $2.4 million in net cash provided by financing activities from $0.2 million for the same period of 2017. The difference was primarily a result of investors input raised from the agreements the Company entered into on December 28, 2017 and April 14, 2018.

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Loan Facilities

As of June 30, 2018, 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 $12.1 million as of June 30, 2018, compared with $23.8 million as of December 31, 2017.

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 those set forth in Note 2 to the financial statements included herein.

Off-Balance Sheet Arrangements

We do not have any off-balance arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

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 SEC’s 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 June 30, 2018. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2018, 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.

The material weakness and significant deficiency identified by our management as of June 30, 2018 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 staff’s 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.

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Changes in Internal Controls over Financial Reporting.

During the six months ended June 30, 2018, 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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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There is a lawsuit currently pending in the Linyi City Intermediate People’s Court of Shandong Province (the “Linyi Court”), 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. Shandong Lorain added Jiangsu Hengan Industrial Investment Group Co., Ltd. ("Heng An Investment") as a co-defendant after the case was first filed at the Linyi Court.

In 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 Hengji and Heng An Investment are required to pay Shandong Lorain a total of RMB 20 million (approximately $3,225,806) fixed return according to the development status of the project developed by Junan Hengji and Heng An Investment. In deciding to bring suit, Shandong Lorain and the Company evaluated the potential claims against Junan Hengji and Heng An Investment, disputes between the parties with respect to out-of-pocket expenses paid by Junan Hengji, as well as the litigation fee that is required to be paid to the court based upon the amount claimed. Ultimately, Shandong Lorain decided to file the lawsuit with Linyi Court to claim a fixed return of RMB 10 million (approximately $1,540,666).

In January 2014, the Linyi Court held its first trial session. During the trial, Heng An Investment filed a counterclaim against Shandong Lorain for repayment of out-of-pocket expenses which would offset the entire fixed return plus additional unpaid expenses of RMB 4,746,927 (approximately $765,633). Shandong Lorain responded that Heng An Investment did not have standing to file the counter-claim because the out-of-pocket payments were made by Junan Hengji. In November 2014, the court held a second trial session and completed its discovery process. On March 21, 2015, Shandong Lorain received the Linyi Court's decision that rejected Shandong Lorain's claim for RMB 10,000,000 against Junan Hengji and Heng An Investment. On April 3, 2015, Shandong Lorain appealed the decision to the Supreme Court of Shandong Province.

In November 2015, the Supreme Court of Shandong Province vacated the decision of the Linyi Court and remanded the case back to the Linyi Court for a retrial. The retrial took place on April 25, 2016, at the Linyi City Intermediate People’s Court, and the decision thereon is currently pending. As of March 31, 2018, the court has not reached a final outcome.

Shandong Lorain, a subsidiary of the Company, withdrew the lawsuit in 2018.

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

Sale Agreement

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On August 8, 2018, the Company, our chairman, Si Chen, and our direct and indirect subsidiaries, Planet Green Holdings Corp., a British Virgin Islands company that is 100% owned by us (“Planet Green”), Junan Hongrun Foodstuff Co., Ltd., a company incorporated in the PRC (“Junan”), Shandong Lorain Co., Ltd., a company incorporated in the PRC (“Shandong Lorain”), International Lorain Holdings, Inc., a Cayman Islands company that is 100% owned by us (“ILH”), Shandong Greenpia Foodstuff Co., Ltd., a business company incorporated in the PRC (“Shandong Greenpia”), Beijing Lorain Co., Ltd., a business company incorporated in the PRC (“Beijing Lorain”) and Luotian Lorain Co., Ltd., a business company incorporated in the PRC (“Luotian Lorain”), entered into a share exchange agreement (the “Sale Agreement”).

The Sale Agreement provides for:

The Planet Green Shares will be directly owned by Planet Green, and indirectly by us, following the closing of the Sale Transaction.

Amended and Restated Securities Purchase Agreement

On August 8, 2018, the Company entered into an amended and restated securities purchase agreement with Yimin Jin, our chief strategy officer and director, and Hongxiang Yu, our chairman nominee and director, pursuant to which the Purchasers agreed to invest an aggregate of $10 million in the Company in exchange for an aggregate of 58,823,530 shares of our common stock, representing a purchase price of $0.17 per share. The agreement contains customary representations and warranties by the Company and customary closing conditions. In addition, the closing of the transaction is conditioned upon (i) the consummation of the Sale Transaction, which transaction is subject to the approval of our stockholders at our 2018 annual meeting, (ii) the re-election of Messrs. Jin and Yu to the Company’s board of directors at our 2018 annual meeting and (iii) the approval of certain amendment to our charter, to change the name of our company and to effect a stock split of the outstanding shares of our common stock, at our 2018 annual meeting. If consummated, the Company expects to use the proceeds of the financing for general corporate purposes. We also believe that, if consummated, the Sale Transaction will improve our balance sheet.

Departure of Certain Directors

Effective August 9, 2018, Si Chen and Maoquan Wei, two of the directors serving on our Board of Directors, informed the Board of Directors that they have decided not to be candidates for an additional term as director, due to personal professional reasons and not due to any disagreements with the Board, management or the Company.

ITEM 6. EXHIBITS

The following exhibits are filed as part of this Report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 14, 2018

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