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EX-32.1 - EXHIBIT 32.1 - American Lorain CORPexhibit32-1.htm
EX-31.1 - EXHIBIT 31.1 - American Lorain CORPexhibit31-1.htm
EX-32.2 - EXHIBIT 32.2 - American Lorain CORPexhibit32-2.htm
EX-31.2 - EXHIBIT 31.2 - American Lorain CORPexhibit31-2.htm

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

FORM 10-K
 
[ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934       
 
For the fiscal year ended: December 31, 2009
 
[     ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

For the transition period from ______________ to ________________

 
Commission File Number: 001-34449
   
AMERICAN LORAIN CORPORATION
(Exact name of registrant as specified in its charter)
   
Nevada 87-0430320
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
   
Beihuan Zhong Road
Junan County
Shandong, People’s Republic of China, 276600
(Address of principal executive office and zip code)
   
(86) 539-7318818
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities to be registered pursuant to Section 12(b) of the Act.

Title of each class to   Name of each exchange on
be so registered   which each class is to be registered
Common Stock, $0.001 par value   NYSE Amex LLC
 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
   
                                                                                                                                       Yes [  ] No [X]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
   
                                                                                                                                       Yes [  ] No [X]
   


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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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. (Check one):

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

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

The number of shares and aggregate market value of common stock held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter were 8,820,471and $21,521,959.24 respectively.

There were 30,242,202 shares of common stock outstanding as of March 22, 2010.

DOCUMENTS INCORPORATED BY REFERENCE:

Information required by Part III will either be included in the registrant’s definitive information statement filed with the Securities and Exchange Commission or in an amendment to this Form 10-K no later than 120 days after the end of the registrant’s fiscal year, to the extent required by the Securities Exchange Act of 1934, as amended.

 



AMERICAN LORAIN CORPORATION
 
FORM 10-K
 
For the Fiscal Year Ended December 31, 2009
 
TABLE OF CONTENTS

Part I   1
     
Item 1. BUSINESS 1
Item 1A. RISK FACTORS 15
Item 1B. UNRESOLVED STAFF COMMENTS 25
Item 2. PROPERTIES 25
Item 3. LEGAL PROCEEDINGS 26
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
     
Part II   26
     
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. 26
Item 6. SELECTED FINANCIAL DATA 27
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA 38
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 38
Item 9A CONTROLS AND PROCEDURES. 38
Item 9B. OTHER INFORMATION. 39
     
Part III   40
     
Item 10. DIRECTORS, EXECUTIVE OFFICERS OF AND CORPORATE GOVERNANCE 40
Item 11 EXECUTIVE COMPENSATION 40
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. 40
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 40
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. 40
     
Part IV   40
     
Item 15. Exhibits And Financial Statement Of Schedules 40

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PART I

Item 1. BUSINESS
   
Conventions
 
In this annual report on Form 10-K:

“We,” “us” and “our” refer to the combined business of ALN, ILH and their direct and indirect Chinese operating subsidiaries.
“ALN” refers to American Lorain Corporation, a Nevada corporation (formerly known as Millennium Quest, Inc.).
“ILH” refers to International Lorain Holding, Inc., a Cayman Islands company that is wholly- owned by ALN.
“Junan Hongrun” refers to Junan Hongrun Foodstuff Co., Ltd.
“Luotian Lorain” refers to Luotian Green Foodstuff Co., Ltd.
“Beijing Lorain” refers to Beijing Green Foodstuff Co., Ltd.
“Shandong Lorain” refers to Shandong Green Foodstuff Co., Ltd.
“RMB” refers to Renminbi, the legal currency of China.
“U.S. dollar,” “$” and “US$” refer to the legal currency of the United States.
“China” and “PRC” refer to the People’s Republic of China.

Overview of Our Business

We are an integrated food manufacturing company with headquarters 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 26 provinces and administrative regions in China and 42 foreign countries. We derive most of our revenues from sales in China, Japan and South Korea. In 2009, our primary strategy was to focus on increasing sales of our chestnut products in the domestic Chinese market and increasing the number of domestic sales to third party distributors. Our primary strategy for 2010 is to expand our brand equity in the Chinese market for our convenience food products. We are also working to expand our brand recognition in China for our chestnut products and frozen products. In addition, we are working to expand our marketing efforts in Asia, Europe and the Middle East. We currently have limited sales and marketing activity in the United States, although our long-term plan is to significantly expand our activities there.

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Organizational Structure

ALN is a Nevada corporation that was incorporated on February 4, 1986 and was formerly known as Millennium Quest, Inc. Prior to May 3, 2007, when ALN completed a recapitalization, or reverse merger, with ILH, ALN did not engage in active business operations other than to search for a potential acquisition target. Effective November 16, 2009, ALN reincorporated in Nevada from Delaware.

ALN owns 100% of ILH. ILH wholly owns two Chinese operating subsidiaries, Luotian Lorain and Junan Hongrun, directly. In addition, together with Junan Hongrun, ILH wholly owns Beijing Lorain and owns approximately 80% of Shandong Lorain (Shandong Economic Development Investment Co. Ltd. owns approximately 20%). We sometimes refer to our four Chinese operating subsidiaries throughout this annual report on Form 10-K as the Lorain Group Companies. Below is an organizational chart of ALN, ILH and the Lorain Group Companies:

Products

Our products are categorized into the following three segments:

chestnut products,
convenience food products, and
frozen food products.

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We produced 230 products in 2009, including 19 new products in our convenience foods segment. We also discontinued 23 products in 2009, primarily in our frozen food segment.

Our chestnut products and convenience foods were our main profit centers in 2009. Our convenience foods segment has been the fastest growing portion of our business and was one of the main catalysts of our growth during 2009. Frozen food products accounted for a smaller portion of our revenues in 2009 as compared with 2008 because we have been more focused on generating revenues from higher margin chestnut and convenience food products.

Chestnut Products

We believe that we are the largest chestnut processing manufacturer in China. We have developed brand equity for our chestnut products in China, Japan and South Korea over the past 10 to 15 years. We produced 52 high value-added processed chestnut products in 2009. In 2008 and 2009, this segment contributed 62.7% and 60.7% of our total revenues, respectively.

Our best selling products in 2009 included our aerated open-bottom chestnuts, which are chestnuts packaged with nitrogen; sweetheart chestnuts, which are sweet preserved chestnuts; chestnuts in syrup, which are very popular in Japan and South Korea; and golden chestnut kernels. The majority of our chestnut products are natural and do not contain chemical additives.

The chestnut, in contrast to many other tree nuts, contains small quantities of oil and is very high in complex carbohydrates. This makes them useful for a wider food range than other common nuts. Chestnuts are commonly steamed, boiled, sugar stir-fried, roasted or added into dishes or desserts as an ingredient.

China is the largest grower of chestnuts, followed by South Korea and Japan. In recent years, the chestnut production in South Korea and Japan has declined. This has been attributed to the increasing labor costs and operational costs incurred in growing chestnuts. Because of the declining domestic production, South Korean and Japanese customers have grown to rely more on imported chestnut products. Our strategy is to take advantage of these trends.

We differentiate our chestnut products based on flavor, size and method of packaging. For instance, some of our chestnut products that are sold in Japan are packaged in plastic bags or tin cans, each considered a different product. Similarly, some of our chestnut products are processed with hot water or cold water, each considered a different product.

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.

Convenience Foods

Our convenience food products are characterized as follows:

Ready-to-cook, or RTC, food products,
Ready-to-eat, or RTE, food products and
Meals ready-to-eat, or MRE, food products.

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These products are intended to meet the current demands of our customers for safe, wholesome and tasty foods that are easily prepared.

RTCs can be served after a few easy cooking procedures. Typically, when preparing a RTC, customers need only to heat the food in a microwave or boil it for several minutes before eating. Our best selling RTCs in 2009 were beef and lamb products.

RTEs can be served without any cooking. Our best selling RTEs in 2009 were various pickle products. Other RTEs include spiced belt fish, cherry tomato, spicy pork fillet, pork and egg roll, pears and pineapples.

MREs are meal kits with self-heating devices. Our MREs are used in both military and civilian uses, such as camping, traveling and other situations in which a person does not have access to traditional cooking supplies and equipment, such as a stove or microwave. In 2009 we also introduced to market new MRE products that are microwaveable and used by people who do not have time or means to cook or to eat at a restaurant.

We produce various MREs based on Chinese cuisine, the best sellers of which were our pork with garlic sauce over rice and kungpao chicken with rice in 2009. Other MREs are based on other styles of food, such as Italian cuisine. Many of our convenience products are natural and do not contain chemical additives.

We produced 117 convenience food products in 2009, including 16 new products such as candied bean products and MRE microwaveable rice products. In 2008 and 2009, this segment contributed 19.4% and 23.6%, respectively, of our total revenues.

Our convenience foods segment has been the fastest growing portion of our business and was one of the main catalysts of our growth during 2009. We expect our convenience foods segment to continue to be an important area of growth for our business in the future.

Frozen Food Products

We produce a variety of frozen foods, including frozen vegetables, frozen fruits, frozen fish, and frozen meats. We produced 61 frozen food products in 2009. Our best selling frozen foods in 2009 were frozen asparagus and frozen corn.

Our frozen food business allows us to mitigate the significant production seasonality of chestnut products and to increase the utilization rate of our production capacity. Historically, our frozen food division has been a significant portion of our business. With the growth of our convenience food segment, however, revenues and profits from our frozen food products as percentage to total revenue have decreased. In 2008 and 2009, this segment contributed 17.8% and 15.7%, respectively, of our total revenues. Gross margins in this segment are lower than the margins for chestnut products and convenience foods. We expect that the proportionate contribution of this business segment to our total revenues will continue to decline.

Our Manufacturing Facilities

General

We currently manufacture our products in five facilities in China, two of which are located in Junan County, Shandong Province, one in Luotian County, Hubei Province, one in Miyun County, Beijing City and one leased facility in Dongguan, Guandong Province. The following table indicates the year that operations commenced at each of the facilities and the size of the facilities.

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Production Lines

We currently manufacture our products using 24 production lines. Each production line is used to produce between 10 and 50 products. We currently run three types of product lines:

  Year Operations Construction Size
Facility Commenced (square meters)
Junan Hongrun 2002 25,665
Shandong Lorain 1995 15,392
Luotian Lorain 2003 9,558
Beijing Lorain 2003 21,000
Dongguan 2008 5,500

deep-freezing lines, which are used to freeze raw materials for year-round production and to produce frozen food;
canning lines, which are used to produce canned products, including chestnut products; and

convenience food lines, which are used for producing RTCs, RTEs and MREs, all of which have nitrogen preservation capacity.

The production process for our chestnut products initially involves sorting and cleaning the raw chestnuts purchased during the chestnut season. We then store the raw chestnuts in our refrigerated storage facilities throughout the year. Once we obtain a purchase order, we remove the chestnuts from storage and process them by steaming, decladding and deep-freezing the chestnuts, depending on the particular product. We then package and ship the processed chestnuts within one day of production.

The production process of our convenience products generally involves various steps, including soaking, boiling, coating, drying, deep freezing, packing, sealing and sterilizing.

The following table shows the number and types of production lines, the types of products produced and the production capacity at each facility:

Facilities

Production Lines

Product Portfolio

                                           2010 Capacity

Shandong Lorain

1 Deep-freezing line
1 Convenience food line

Chestnut products, convenience foods, frozen

Multi-purpose production lines with 14,000 tons of production capacity and 3,500 tons of cold and frozen storage

Junan Hongrun

1 Deep-freezing line
3 Convenience food lines
4 Canning lines

Chestnut products, frozen foods, beans, bean paste

Multi-purpose production lines with 44,000 tons of production capacity and 11,400 tons of cold and frozen storage

Beijing Lorain

6 Convenience food lines
1 Deep-freezing line

Chestnut products, frozen foods

Multi-purpose production lines with 34,000 tons of production capacity and 4,650 tons of cold and frozen storage

Luotian Lorain

3 Convenience food lines
2 Deep-freezing lines

Chestnut products, convenience foods, frozen

Multi-purpose production lines with 24,000 tons of production capacity and 6,500 tons of cold and frozen storage

Dongguan factory

2 Convenience food lines

Convenience food

Multi-purpose production lines with 3,000 tons of production capacity and 1,250 tons of cold and frozen storage

We allocate our production lines based upon the location of our facilities to take advantage of efficiencies in the transportation of required raw materials. For example, Junan Hongrun and Shandong Lorain, which manufacture primarily chestnut and frozen products, are located in Shandong Province, which is China’s largest supplier of fresh products by volume. Shandong Province is also a major chestnut producing region. Likewise, all of our fish products are manufactured by Luotian Lorain, because the Luotian region is an area that has an abundance of the fish that we use as raw material.

Our production lines and facilities have all been designed to meet the standards and requirements of our largest customers in Japan, which is our largest export market. We employ advanced methods of quality control and have obtained various certifications for many of our products, packages and processes, including ISO 9000 or ISO 9001 certification for certain of our chestnut and frozen vegetable products, BRC certification for certain of our frozen fruit and vegetable products and HACCP certification for certain of our frozen vegetable, fruit and chestnut products and our bottom-open chestnuts. We believe that our quality controls and standards of products distinguish our products both in domestic and international markets. The import approvals that we have obtained from the Japanese government for our chestnuts and other convenience foods have been helpful in advocating with the Chinese government for domestic approvals to increase our product offerings.

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With limited exception, we operate our production lines year round. In the past, when our production was focused almost exclusively on chestnuts, we experienced seasonal underutilization of our product lines. However, our current facilities have a multiple-function design, allowing us to use our production lines for our convenience and frozen products when we are not producing chestnuts at full capacity. Consequently, as we have increased our processed and convenience food offerings over the last several years, we have generally been able to run our production lines at close to full capacity throughout the year.

Previously, most of our processed and convenience foods were produced at our Beijing Lorain plant. With the introduction of bean products in 2009, we expanded our facility in Junan Hongrun with the addition of three convenience food production lines designed specifically for bean products. This will increase production capacity for beans by approximately 28,000 metric tons per year. The new production lines started full operation in February 2010.

We believe our facilities are adequate for our current levels of production. We anticipate, however, that we will require additional facilities and/or product lines as our business grows. We are exploring the possibility of alliances with one or more OEM partners for the production, in the short-term, of some of our frozen products should our facilities be inadequate to meet increasing demand. We are also reaching exploring the possibility of leasing additional production lines to expand our production capacity. In 2008, we leased two new convenience foods production lines in Dongguan, Guangdong Province, which increased production capacity by approximately 1,250 metric tons per year to meet our short-term needs. Given the relatively low cost to lease, we may continue to lease additional facilities in 2010, if needed. In the long-term, we plan to increase our own production capacity by acquiring or building new facilities, subject to the availability of adequate sources of funding.

Storage Capacity

Storage of our raw materials and inventory is a critical element of our business. Our raw materials and partially finished products need to be preserved in frozen storages (-18ºC to -20ºC) or constant temperature storages (-5ºC to 5ºC). Storage is particularly critical for our chestnut products because chestnuts are a seasonal fruit.

The following table illustrates on a facility by facility basis the type and capacity of our storage resources:

Facility Storage Type Number of Capacity
    Storage Units (metric tons)
Junan Hongrun Frozen Storage 13 6,600
  Constant Temperature 8 4,800
Shandong Lorain Frozen Storage 5 2,000
  Constant Temperature 3 1,500
Luotian Lorain Frozen Storage 8 4,500
  Constant Temperature 4 2,000
Beijing Lorain Frozen Storage 6 2,850
  Constant Temperature 3 1,800
Dongguan Frozen Storage 2 800
  Constant Temperature 1 450
TOTAL   53 27,300

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As we have expanded our production capacity, we have also expanded our storage capacity. All of our storage facilities, other than the facility in Dongguan, are owned by us. In 2009, we expanded our storage capacity in Junan Hongrun by an additional 3,600 metric tons.

Agricultural Operations

We grow and self-supply a small portion of our chestnut, fruit and vegetable products. We self-supplied approximately 4% and less than 1% of our raw materials needed in 2008 and 2009, respectively (See “Raw Materials” below). We believe, however, that development of agricultural facilities is a good strategy for the long-term. We anticipate that self grown agricultural products will enable us to assure adequacy of supply, promote quality and reduce cost, particularly for our high margin offerings. For example, by growing Korean cultivar chestnuts domestically, we expect to significantly reduce our supply costs for this premium product, while ensuring superior quality.

Lands in which we grow our agricultural products for such products are shown in the following table.

    Area     Location  
Harvest   (acres)     (PRC)  
Chestnut (South Korean, Japanese, Australian cultivar)   329     Shandong  
Chestnut (Japanese cultivar)   165     Beijing  
Sticky Corn   342     Beijing  
Green Pea & Sweet Corn   165     Beijing  
Pumpkin   197     Heilongjiang  
Organic Chestnut   165     Beijing  
Mixed Vegetables   650     Hebei  
Japanese Pumpkin   329     Inner Mongolia  
Strawberry   392     Shandong  
Broccoli   165     Beijing  
Green Asparagus   591     Beijing  
White Asparagus   263     Shandong  
Peach   329     Beijing  
Apricot   411     Beijing  
Pear   329     Beijing  
Blackberry   165     Beijing  

We began growing chestnuts in 2003. Unlike most vegetables and fruits, chestnut trees have a 3-5 year growing phase before they can be harvested. Our current chestnut planting base has been self-supplying some chestnuts to our production since 2007. By 2010, our current chestnut agricultural operations are projected to harvest approximately 700 metric tons of high-end chestnuts based on the number of trees currently planted and our planned expansion.

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We began growing strawberries in 2008 in Shandong and peach, apricot, pear and blackberry in 2009 in Beijing. We use these fruits in some of our frozen fruit products. We plan to continue to expand our agricultural operations over the next few years. Among other things, we plan to increase our self-production in China of Korean cultivar chestnuts. We expect to obtain funding for this expansion through a combination of commercial and government loans, including loans under Chinese government programs to promote agricultural industrialization. There is no assurance, however, that adequate funding for these purposes will be available to us.

Raw Materials

In 2008 and 2009, approximately 94% of our raw materials consisted of agricultural products, including primarily chestnuts and vegetables, approximately 4% and 3%, respectively, consisted of packaging materials and approximately 2% and 3%, respectively, consisted of condiments such as sugar, salt and flour.

Our Supply Sources

Our business depends on obtaining a reliable supply of various agricultural products, including chestnuts, vegetables, red meat, fish, eggs, rice and flour. Because of the diversity of available sources of these raw materials, we believe that our raw materials are currently in adequate supply and will continue to be so in the future.

We obtain our agricultural raw materials from three sources: domestic procurement (excluding self-supply), overseas markets, and self-supply. Domestic procurement accounted for 93.8% and 97% of our total raw material costs in 2008 and 2009, overseas procurement accounted for 3.2% and 2% and self-supply accounted for the remaining 4% and 1%, respectively.

In 2008 and 2009, respectively, we procured approximately 55,643 and 69,364 metric tons of chestnuts and approximately 28,773 and 48,380 metric tons of vegetables and other raw materials from a number of third party suppliers, domestic and overseas, and produced approximately 693 and 49 metric tons of chestnuts from our own agricultural operations.

We select suppliers based on price and product quality. We typically rely on numerous domestic and international suppliers, including some with whom we have a long-term relationship. Our top 10 suppliers accounted for 21.3% and 29.3%, respectively, of the total procurement in 2009 and 2008 in value terms. We purchase from suppliers and farmers pursuant to supply contracts and underlying purchase orders. We have not entered into any long-term contracts with any of our suppliers.

Our suppliers generally include wholesale agricultural product companies, agricultural associations and distributors. Some raw materials must be imported at higher costs, however. Occasionally, we also work directly with farmers. For instance, we operate an initiative which involves a series of cooperation and lease agreements between Shandong Lorain, Beijing Lorain and local farmers. This initiative involves approximately 1,000 acres of land which is used primarily to produce Japanese and Korean style chestnuts, sticky corn and pumpkins for our operations.

Procurement Cost and Quality Control

To control procurement costs, we have located our facilities near domestic sources of agricultural raw materials. For example, Junan Hongrun and Shandong Lorain are located in Shandong Province, which is China’s largest supplier of fresh products by volume. Shandong Province is also a major chestnut producing region. Likewise, all of our fish products are manufactured by Luotian Lorain, because the Luotian region is an area that has an abundance of the fish that we use as raw material. Local procurement reduces our costs, especially transportation costs. It also gives us first-hand harvest and market information, which provides us with an advantage in price negotiations with suppliers.

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Some raw materials must be imported at higher cost. As discussed, we have begun to develop our agricultural capabilities in order to control costs, particularly with respect to imported raw materials such as Korean-style chestnuts.

Pricing for agricultural products reflects several external factors, such as weather conditions and commodity market fluctuations, which are beyond our control. We obtain contemporaneous information on local harvests and collect daily reported price information on harvests in other markets from which we procure our products. We also attempt to predict harvest yields in advance based on our information gathering. We use this harvest information to negotiate best pricing with our suppliers.

We impose strict standards on our suppliers. During the harvest season, our internal procurement function may visit our sources of supply to assure that the products we are purchasing comply with our standards.

Our Customers

We sell our products in 26 provinces and administrative regions in China and 42 foreign countries globally. In 2008 and 2009, approximately 67% and 70.5%, respectively, of our sales were made domestically and approximately 33% and 29.5%, respectively, were to international customers, primarily Japan and South Korea.

Our top ten customers contributed 29.3% and 26.2% of our total revenues in 2008 and 2009. Approximately 12% and 6.1% of total revenue in 2008, and 11.2% and 2.7% of total revenues in 2009 were attributable to revenues from Shandong Lvan Import & Export Co., Ltd., a food trading company in China that distributes a significant portion of our exported products, and Shinsei Foods, a Japanese company and our top customer, respectively.

Domestic

In China, we sell our products through our own sales team and through third-party distributors. We have 36 sales offices in 26 provinces in China. In 2008 and 2009, we sold approximately 87% and 82%, respectively, of our products directly to our Chinese customers and approximately 13% and 18% through third-party distributors.

We sell our products in all first-tier cities in China, including Beijing, Shanghai, Tianjin and Guangzhou, through our own sales efforts in order to capture the profit margin that would otherwise go to intermediate wholesalers and to enhance our brand recognition. Our sales team sells our products directly to supermarket chains, mass merchandisers, large wholesalers and others in these markets. In second-tier and third-tier cities, we currently sell our products to third-party distributors, such as food companies or trading companies with established distribution channels in such regions, rather than through our own sales team, in order to enable us to penetrate such markets more quickly without spending significant capital. We also sell to small customers through independent sales representatives.

Generally, our direct sales customers are required to pay us on 30 to 60 day credit terms. Third-party distributors, however, generally do not pay on credit, allowing us to obtain quicker payment terms and thereby decrease our accounts receivables.

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The terms of a typical sales contract between us and our distributors provide that we are responsible for transportation costs and the distributors are responsible for storage costs. Furthermore, the distributors have the right to return products that fail to satisfy specified quality standards, at our cost. The majority of such contracts require the distributors to pay us in cash in full upon delivery, and the remaining contracts provide for short-term credit, usually two to three weeks. In addition, we typically offer distributors performance-based incentives, such as a cash bonus equal to 1% of total revenues generated by such distributor which exceed previously established sales targets.

We plan to gradually increase the portion of sales to third party distributors in order to access new markets in China in a cost effective manner and to improve our cash position. Such plans are subject to our ability to restructure the sales force and manage the increased number of distributors without compromising our profit margins.

International

Our export sales destinations include:

Asia, primarily Japan, South Korea and Malaysia, but also Singapore and Taiwan.  
Europe, primarily Belgium and the United Kingdom, but also France, Germany, the Netherlands, Spain, and Sweden;  
the Middle East, primarily Saudi Arabia, Kuwait and the United Arab Emirates; and  
North America, including the United States and Canada.  

In 2008 and 2009, respectively, approximately 93.5% and 79.7% of our international sales were in Asia and approximately 6% and 14.7% were in Europe.

We sell our products to international markets through Shandong Lvan, a food trading company in China, other export companies in China, and our own sales team located in China. Our sales team sells directly to wholesalers, food processors and mass merchandisers. Many of our customers are well known in their local food market. We have established long-term relationships with many international customers, especially in Japan and South Korea. We currently have no sales offices outside of China and do not use alternative methods to sell our products outside of China. We attend trade shows in Europe and other international markets in order to promote our products.

Prior to our reorganization into a U.S. entity, we had sales to several countries that are the subject of trade sanctions imposed by the United States government. Following our reorganization, we ceased all sales activities to these countries. We actively review the destination countries for our products, including products resold by our customers, to assure that we are not in violation of applicable U.S. trade sanctions.

Our Sales and Marketing Efforts

We seek to expand our customer base by:

direct sales communications with our larger customers;
sales through distributors to new customer bases;
referrals from existing customers; and
participation in domestic and international food exhibitions and trade conferences.

We have not spent a significant amount of capital on advertising in the past, and our advertising budget continues to be limited. In October 2009 we raised approximately $12 million in a private placement transaction in the U.S. Part of the funds raised were used on marketing and branding efforts, including supermarket advertising, internet advertising and contract with a local celebrity to promote certain convenience food products. As more capital becomes available for these purposes, we intend to increase our advertising and branding efforts. For the near future, our marketing efforts will continue to focus primarily on the domestic Chinese market for our chestnut and convenience food products.

10


Competition and Market Position

The overall food market is diverse, both globally and in China. We do not have a significant market share in any of our business segments.

Chestnut Products

We compete in the chestnut market primarily on the basis of the uniqueness of our products, quality, price and brand recognition. We also utilize our proprietary, patented and patent-pending technology in the production of our chestnut products to our competitive advantage.

The world market for chestnut products is highly fragmented. Our principal competitors in the chestnut product market are currently Hebei Liyun, a Chinese company, and Foodwell Corporation, a South Korean company.

Convenience Food Products

Convenience food products market competition is based mostly upon quality and product variety. We attempt to use our modern food processing technology, such as nitrogen preservation, to produce a wide variety of high quality convenience foods.

The convenience food market in China is highly fragmented and we do not face competitive pressure from any particular competitor or small group of competitors.

Frozen Food Products

In the frozen food product market, competition is based primarily upon quality, ability to provide a reliable product supply and customer relationships.

Our strongest competitors in the frozen food products market are currently Weitang Langdong, Yuyao Hongji Food Co. Ltd. and Yantai Pengshun Food Co. Ltd., all of which are located in China.

Competitive Advantages

We believe that we enjoy a number of competitive advantages, both domestically and internationally.

We have developed brand equity for our chestnut products in China, Japan and South Korea over the past 10 to 15 years. Our customers are willing to pay a premium for some of our chestnut products because of our brand equity. In addition, we believe that we have a strong distribution channel for our products in the markets in which we currently operate.

We believe that we are able to provide our customers with greater selection and a more reliable supply than many of our competitors, which is especially important for our supermarket chain and large wholesaler customers. We produced 52 chestnut products in 2009. We believe that we are the sole provider of certain bottom-open chestnut and sweetheart chestnut products in China.

Labor is a large portion of total operating costs for food companies. We believe that we have a lower labor cost structure and a more abundant labor supply than many of our international competitors.

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We are focused on managing our costs in other ways as well. We seek to locate our production facilities in close proximity to our main domestic sources of raw materials supply to reduce transportation costs and give us first-hand knowledge of market factors affecting our cost of raw material supply. Our agricultural self-supply program, while modest at present, is expected to grow and to become a significant element of our cost containment efforts.

We use modern food processing technology and innovation in our formulations and manufacturing processes to create high quality products. Nitrogen preservation in particular, used in the production of convenience foods, is an innovative technology which has not been widely applied in China.

In 2008, we submitted an application for patent protection in the PRC for two of our technologies which support the production of our chestnut and convenience food products. These applications are still pending approval. (See “Intellectual Property” below.) We believe that our technology gives us an advantage over our Chinese competitors, allowing us to produce chestnut and convenience food products that are superior in quality and to offer more products varieties.

We believe that our reputation for quality also contributes to our competitiveness. We maintain high food safety standards, in order to satisfy both domestic and international requirements. We regularly test our products for quality and compliance with standards.

Intellectual Property    
     
Trademarks    
     
We use the trademarks TM and  TM on all of our products sold in China.

Patents

We have developed the following three proprietary technologies to support our chestnut and convenience food production:

The sweetheart chestnut is a premium product that is more expensive, and yields greater profit margins than our other chestnut products. Our proprietary technology relates to the process for evenly distributing throughout the chestnuts the syrup used to preserve the chestnuts. This technology enhances the texture of the chestnuts, preserves the natural form of the chestnuts and promotes the stability and uniformity of the chestnuts’ sweetness. In 2008, our patent application for this technology was approved by the State Intellectual Property Office of the PRC and is protected by PRC patent law for 20 years. We expect this technology to contribute to the growth of our sales of sweetheart chestnuts, which had been increasing at an annual rate of 25% over the past several years and which increased at an annual rate of 32% in 2009.
   
Oden is a popular traditional Japanese dish, typically consisting of boiled eggs, daikon radish, konnyaku and processed fish cakes stewed in a light, soy-flavored dashi broth. Our technology relates to the process used to control the sterilization of the packaging for oden eggs. Our technology enables us to deliver convenience food products with unique freshness and authentic taste. This technology has been an important factor in expanding the market for our convenience foods products, particularly in Japan. We are currently waiting for approval for patent protection in the PRC for this technology.
   
We have developed technology that allows us to produce an extract from the chestnut’s inner skin. In the past, the chestnut’s inner skin had been discarded as a waste product. Our technology allows us to produce an extract that can then be sold to other food processors, all of whom are currently based in Japan where the chestnut is popular as a nutritional supplement. These processors package and sell the extract for use as a food and drink additive. We are currently waiting for approval for patent protection in the PRC for this technology.

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We take reasonable steps to protect our proprietary information and trade secrets, such as limiting disclosure of proprietary plans, methods and the like on a need-to-know basis and requiring employees with access to our proprietary technology to enter into confidentiality arrangements. We believe that our proprietary technology and trade secrets are adequately protected.

Our Employees

As of December 31, 2009, we had a total of 1,544 full-time employees and 287 part-time employees. 427 of our full-time employees are directly employed by our Shandong Lorain subsidiary and the remainder are employed by Linyi Zhifu Labor Service Company, an outside company that leases employees to us to meet our staffing needs. As required by Chinese law, all employees are party to a written employment contract. We compensate the employees leased from Linyi Zhifu directly and pay Linyi Zhifu a service fee. Linyi Zhifu is responsible for the pension and social insurance benefits of the leased employees, as described below.

The following table sets forth the allocation of employees, both direct and leased, by job function.

                               Department   Number of Employees  
       
Production   1323  
Quality Control   34  
Domestic Sales   35  
Human Resources   5  
Research and Development   28  
International Sales   23  
Finance   24  
Sourcing   18  
Administration   29  
Strategic planning   6  
Storage and Distribution   16  
Employee Relations   3  
Total   1544  

We believe that the relationship between management and our employees is good. We have not experienced any significant problems or disruption to our operations due to labor disputes, nor have we experienced any difficulties in recruitment and retention of experienced staff.

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Our Shandong Lorain subsidiary has an employee relations department for the purpose of advancing employee welfare, encouraging employee participation in decision making and enhancing relations among employees and between employees and our management team.

We compensate our production line employees by unit produced (piece work) and compensate other employees with a base salary and bonus based on performance. We also provide training for our staff from time to time to enhance their technical and product knowledge, including knowledge of industry quality standards.

Our employees in China participate in a state pension scheme organized by Chinese municipal and provincial governments. We were required to contribute to the scheme on behalf of our direct employees at a rate of 24% of the average monthly salary for the years ended December 31, 2009 and 2008. In addition, we are required by Chinese law to cover our employees with various types of social insurance. We made contributions to the social insurance scheme on behalf of our direct employees at a rate of 4% of the average monthly salary for each employee for the years ended December 31, 2009, 2008, and 2007. As indicated above, Linyi Zhifu is responsible for contributions on behalf of the leased employees.

Our Research and Development Activities

Our research and development efforts are focused on three objectives:

  • Superior product safety and quality;
  • Reduction of operating costs; and
  • Sustaining growth through the development of new products.

We have research and development staff at each of our facilities. In total, 28 employees are dedicated to research and development.

We rely heavily on customer feedback to assist us in the modification and development of our products. We also utilize customer feedback to assist us in the development of new products. Over the past several years, on average, we added 10 to 20 new varieties to our product portfolio each year. In 2009, we added 19 new products, most in our convenience foods segment. In 2009, we discontinued 23 products, 12 of which were new rice products introduced in 2009 to test the market and the rest of which were primarily in our frozen foods segment.

The amount we spent on research and development activities during the years ended December 31, 2009 and 2008 was not a material portion of our total expenses for those years.

Government Regulation

As a manufacturer and distributor of food products, we are subject to regulations of China’s Agricultural Ministry. This regulatory scheme governs the manufacture (including composition and ingredients), labeling, packaging and safety of food. It also regulates manufacturing practices, including quality assurance programs, for foods through its current goods manufacturing practices regulations, and specifies the standards of identity for certain foods, including the products sold by us, and prescribes the format and content of many of the products sold by us, prescribes the format and content of certain nutritional information required to appear on food products labels and approves and regulates claims of health benefits of food products.

We have obtained approvals from Chinese authorities for the production of certain categories of products, including chestnuts, frozen vegetables and fruits, fish, and canned products. Production of new products that do not fall into approved categories of products would require separate approval from the appropriate Chinese authorities. We have consistently obtained such approvals for our newly developed products in the past and do not anticipate any difficulties in obtaining new approvals in the future if needed.

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In addition, we are required to obtain governmental approval, and to register with the State Administration for Industry and Commerce, in order to open a new facility in China. We have consistently obtained such approvals, and made such registrations, for our new facilities in the past and do not anticipate any difficulties in obtaining new approvals, filing new registrations, in the future if needed.

Under the relevant Provisions of the PRC on Sanitation of Food for Export (for Trial Implementation), unless an exporter’s products are exempted from inspection, products must be inspected in accordance with the Law of the PRC on Import and Export Commodity Inspection. We have not been exempted from inspection. In the past, we were authorized by the relevant authorities to conduct self-inspection of certain of our export products. However, currently, the relevant authorities have imposed tighter food safety control in China, and as a result, all of our exported food products must be inspected by qualifying government agencies. We believe that all of our exported products are currently in compliance with such requirements and we do not anticipate any difficulties in complying with such rules in the future.

In addition, we are required to obtain a license from the local branch of the Entry-Exit Inspection and Quarantine Bureau of China for our exported products. We have consistently obtained such licenses in the past and we do not anticipate any difficulties in obtaining such licenses in the future.

Item 1A. RISK FACTORS

RISK FACTORS

From time to time, information provided by us, including but not limited to statements in this report, or other statements made by or on our behalf, may contain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve a number of risks, uncertainties, and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from those anticipated. Set forth below are important factors that could cause our results, performance, or achievements to differ materially from those in any forward-looking statements made by us or on our behalf.

Business Risks

We may not be able to obtain an adequate supply of high quality raw materials.

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 2009, the cost of our raw materials increased from $64,980,230 to $81,501,168 for an increase of approximately 25.4% . 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.

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The prices that we have paid for our raw materials recently have experienced significant fluctuation. If these price fluctuations continue, our profit margins may be materially adversely affected.

The average price that we paid for chestnuts in 2008 and 2009 was approximately $727 per metric ton and $868 per metric ton, respectively, excluding value added taxes. We do not currently hedge against changes in our raw material prices. Consequently, if the costs of our raw materials increase further, and we are unable to offset these increases by raising the prices of our products, our profit margins and financial condition could be adversely affected.

Our sales and reputation may be affected by product liability claims, litigation or, product recalls in relation to our products.

The sale of products for human consumption involves an inherent risk of injury to consumers. We face risks associated with product liability claims, litigation, or product recalls, if our products cause injury or become adulterated or misbranded. Our products are subject to product tampering and contamination, such as mold, bacteria, insects, shell fragments and off-flavor contamination, during any of the procurement, production, transportation and storage processes. If any of our products were to be tampered with, or become tainted in any of these respects, and we were unable to detect this, our products could be subject to product liability claims or product recalls. Our ability to sell products could be reduced if certain pesticides, herbicides or other chemicals used by growers have left harmful residues on portions of our raw materials or if our raw materials have been contaminated by other agents.

We have never had a product recall in the past but we have experienced product liability claims that were made by our customers. The amounts of such claims were immaterial. However, claims of product defect or product liability for material amounts, individually or in the aggregate, may be made in the future.

We have not procured a product liability or general liability insurance policy for our business, as the insurance industry in China is still in an early stage of development. To the extent that we suffer a loss of a type which would normally be covered by product liability or general liability insurance in the United States, we would incur significant expenses in defending any action against us and in paying any claims that result from a settlement or judgment against us. Product liability claims and product recalls could have a material adverse effect on the demand for our products and on our business goodwill and reputation. Adverse publicity could result in a loss of consumer confidence in our products.

We may be unable to manage future rapid growth.

We have grown rapidly over the last few years. Our sales increased by 429% from $27,735,833 in 2004 to $146,772,442 in 2009. The number of product types we sold increased from approximately 100 in 2004 to approximately 230 in 2009. We intend to continue to expand the volume and variety of products we offer, as well as the geographical scope of our sales and production facilities. Our business growth could place a significant strain on our managerial, operational and financial resources. Our ability to manage future growth will depend on our ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage our workforce. Our personnel, systems, procedures and controls may not be adequate to support our future growth. Failure to effectively manage our expansion may lead to increased costs, a decline in sales and reduced profitability.

Our expansion strategy may not prove successful and could adversely affect our existing business.

Our growth strategy includes the expansion of our manufacturing operations, including new production lines and agricultural operations. We plan to expand our sales in China and internationally. We will need to engage in various forms of promotional and marketing activities in order to further develop the branding of our products and to increase our market share in new and existing markets. The implementation of this strategy may involve large transactions and present financial, managerial and operational challenges. We could also experience financial or other setbacks if any of our growth strategies incur problems of which we are not presently aware. If we fail to generate sufficient sales in new markets or increase our sales in existing markets, we may not be able to recover the production, distribution, promotional and marketing expenses, as well as administrative costs we have incurred in developing such markets.

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The acquisition of other businesses could pose risks to our profitability.

We may try to grow through acquisitions in the future. Any proposed acquisition could result in accounting charges, potentially dilutive issuances of equity securities, and increased debt and contingent liabilities, any of which could have a material adverse effect on our existing business and the market price of our common stock. Acquisitions, in general, entail many risks, including risks relating to the failed integration of the acquired operations, diversion of management’s attention, and the potential loss of key employees of the acquired organizations. We may be unable to successfully integrate businesses or the personnel of any business that might be acquired in the future, and our failure to do so could have a material adverse effect on our business and on the market price of our common stock.

We are subject to risks of doing business internationally. If the international market does not grow as we expect, our business and financial condition may be adversely affected.

We conduct a substantial amount of business internationally. Our export sales destinations include countries in Asia, Europe, the Middle East and North America. Our international operations are subject to a number of inherent risks, including:

  • chestnut products may not be widely recognized internationally, especially in Western countries;
  • local economic and political conditions, including disruptions in trading markets;
  • restrictive foreign governmental actions, including restrictions on transfers of funds and trade;
  • protection measures, including export duties and quotas and customs tariffs;
  • currency exchange rate fluctuations;
  • earthquakes, tsunamis, floods or other major disasters may limit the imported food products; and
  • unexpected incidents related to food safety.

Any of the foregoing risks could have a material and adverse effect on our operating results.

A significant amount of our revenues is dependent on a limited number of customers and the loss of any one of our major customers could materially and adversely affect our growth and our revenues.

A significant portion of our revenues has historically been derived from a limited number of customers, particularly in our chestnut products segment. Sales to our five largest customers accounted for approximately 25% and 21% of our total revenues in 2008 and 2009 respectively. The loss of any one of these customers, or a material decrease in purchases by any one of these customers, could adversely impact our revenues.

We rely primarily on distributors to sell our products. Any delays in delivery or poor handling by our distributors or third-party transport operators may affect our sales and damage our reputation.

In 2009, we sold our products through over 30 distribution service providers. The services provided could be suspended and could cause interruption to the supply of our products to domestic or overseas customers. Delivery disruptions may occur for various reasons beyond our control, including poor handling by service providers or third party transport operators, transportation bottlenecks, natural disasters and labor strikes, and could lead to delayed, damaged or lost deliveries. If our products are not delivered in a timely manner, our reputation could be harmed. If our products are damaged in the process of being delivered, we may be liable to pay for such damages incurred.

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Failure of the market to accept our new products, or failure to obtain regulatory approval for our new products, may cause us to lose our competitive position in the food industry.

We introduced 52 new products in 2008 and 19 new products in 2009. We plan to introduce approximately 15 to 25 new products in 2010. The success of the new products we introduce depends on our ability to anticipate the tastes and dietary habits of consumers and to offer products that appeal to their preferences. We intend to introduce new products as well as alternative flavors, sizes and packaging for our existing products. We may not be able to gain market acceptance for our new products. Consumer preferences change, and any new products that we introduce may fail to meet the particular tastes or requirements of consumers, or may be unable to replace their existing preferences. Our failure to anticipate, identify or react to these particular tastes or changes could result in reduced demand for our products, which could in turn cause us to be unable to recover our development, production and marketing costs.

We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our research and development, operations and revenue.

The Lorain Group Companies were founded in 1995 by Si Chen, our Chairman and Chief Executive Officer. Mr. Chen, together with other senior management, has been a key driver of our strategy and has been fundamental to our achievements to date. The successful management of our business is, to a considerable extent, dependent on the services of Mr. Chen and other senior management. We compete for qualified personnel with other food processing companies, food retailers and research institutions. Consequently, we may either lose key employees to our competitors or we may need to significantly increase the compensation of such employees in order to retain them. The loss of the services of any key management employee or failure to recruit a suitable or comparable replacement could have a significant impact upon our ability to manage our business effectively, and our business and future growth may be adversely affected.

We face increasing competition from domestic and foreign companies.

The food industry in China is fragmented. Our ability to compete against other national and international enterprises is, to a significant extent, dependent on our ability to distinguish our products from those of our competitors by providing large volumes of high quality products that appeal to consumers’ tastes and preferences at reasonable prices. Some of our competitors have been in business longer than we have and are more established. Our competitors may provide products comparable or superior to those we provide or adapt more quickly than we do to evolving industry trends or changing market requirements. Increased competition may result in price reductions, higher raw materials prices, reduced margins and loss of market share, any of which could materially adversely affect our profit margins.

An increase in the cost of energy could affect our profitability.

Recently, we have experienced significant increases in energy costs, and energy costs could continue to rise, which would result in higher distribution, freight and other operating costs. Our future operating expenses and margins will be dependent on our ability to manage the impact of cost increases.

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Our products are subject to counterfeiting or imitation, which could impact our reputation.

To date, we have experienced limited counterfeiting and imitation of our products. However, counterfeiting or imitation of our products may occur in the future and we may not be able to detect it and deal with it effectively. Any occurrence of counterfeiting or imitation could impact negatively upon our reputation, particularly if the counterfeit or imitation products cause sickness, or injury to consumers. In addition, counterfeit or imitation products could result in our need to incur costs with respect to the detection or prosecution of such activities.

We rely on an outside contractor to provide a majority of our labor.

We have hired Linyi Zhifu Labor Service Company to provide employees to our production facilities. Should Linyi Zhifu Labor Service Company be unable to continue to provide the number of employees we need, our production could be disrupted. In addition, Linyi Zhifu Labor Service Company could raise their service fees or terminate their relationship with us in the future, which may result in increased production costs.

Regulatory Risks

We are subject to extensive regulations by the Chinese government.

The food industry is subject to extensive regulations by Chinese government agencies. Among other things, these regulations govern the manufacturing, importation, processing, packaging, storage, exportation, distribution and labeling of our products. New or amended statutes and regulations, increased production at our existing facilities, and our expansion into new operations and jurisdictions may require us to obtain new licenses and permits and could require us to change our methods of operations at costs that could be substantial.

Our failure to comply with PRC environmental laws may require us to incur significant costs.

We carry on our business in an industry that is subject to PRC environmental protection laws and regulations. These laws and regulations require enterprises engaged in manufacturing and construction that may cause environmental waste to adopt effective measures to control such waste. In addition, such enterprises are required to pay fines, or to cease operations entirely under extreme circumstances, should they discharge waste substances. The Chinese government may also change the existing laws or regulations or impose additional or stricter laws or regulations, compliance with which may cause us to incur significant capital expenditures, which we may be unable to pass on to our customers through higher prices for our products.

Our failure to comply with PRC hygiene laws may require us to incur significant costs.

Manufacturers in the Chinese food industry are subject to compliance with PRC food hygiene laws and regulations. These food hygiene laws require all enterprises engaged in the production of chestnuts and various vegetables and fruits to obtain a hygiene license for each of their production facilities. Such laws also require manufacturers to comply with regulations with respect to food, food additives, packaging, and food production sites, facilities and equipment. Failure to comply with PRC food hygiene laws may result in fines, suspension of operations, loss of hygiene licenses and, in more extreme cases, criminal proceedings against an enterprise and its management. The Chinese government may also change the existing laws or regulations or impose additional or stricter laws or regulations, compliance with which may cause us to incur significant capital expenditures, which we may be unable to pass on to our customers through higher prices for our products.

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Financial Risks

Our operations are cash intensive, and our business could be adversely affected if we fail to maintain sufficient levels of working capital.

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, do not allow us to pay on credit. However, some of the suppliers with whom we have a long-standing business relationship allow us to pay on credit. In 2009, we paid for approximately 48% of our raw materials 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 also fund approximately 37% of our working capital requirements from the proceeds of short-term loans from Chinese banks. We expect to continue to do so in the future. Such loans are generally secured by our fixed assets, receivables and/or guarantees by third parties. Our average loan balance from short-term bank loans in 2009 was approximately $32.7 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, we may not have 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. In addition, in 2007, 2008 and 2009, we funded approximately $8.8 million, in the aggregate, of our working capital requirements from the proceeds of two private placement transactions conducted in May 2007 and October 2009. 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.

Management anticipates 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 through 2010. However, if available liquidity is not sufficient to meet our operating and loan obligations as they come due, our plans include considering pursuing 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 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.

The current economic and financial crisis may have a material adverse effect on our results.

The crisis of the financial and credit markets worldwide in the second half of 2008 has led to a severe economic recession worldwide, and the outlook for 2010 is still uncertain. A continuation or worsening of unfavorable economic conditions, including the credit and capital markets disruptions, could have an adverse impact on our business, operating results or financial condition in a number of ways. 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.

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We are subject to credit risk in respect of account receivables.

In 2008 and 2009, some of our customers, including some of our large supermarket customers, delayed their payments for up to 60 to 90 days beyond their term. Our cash flow suffered while waiting for such payments. Consequently, at times we had to delay payments to our suppliers and to postpone business expansion as a result of these delayed payments. Starting from 2008 and into 2009, we gradually shortened credit terms for many of our international and domestic customers from between 30 and 180 days to between 30 and 60 days. Our large customers may fail to meet these shortened credit terms, in which case we may not have sufficient cash flow to fund our operating costs and our business could be adversely affected.

The discontinuation of any preferential tax treatment or other incentives currently available to us in the PRC could materially and adversely affect our business, financial condition and results of operations.

Our subsidiaries are entitled to certain special or preferential tax treatments regarding foreign enterprise income tax in accordance with the “Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises” and related rules.

Accordingly, we have been entitled to tax concessions whereby the profit for the first two financial years beginning with the first profit-making year (after setting off tax losses carried forward from prior years) is exempt from income tax in the PRC and the profit for each of the subsequent three financial years is taxed at 50% of the prevailing tax rates set by the relevant tax authorities. However, on March 16, 2007, the PRC’s National People’s Congress passed a new corporate income tax law, which became effective on January 1, 2008. This new corporate income tax unifies the corporate income tax rate, cost deduction and tax incentive policies for both domestic and foreign-invested enterprises. According to the new corporate income tax law, the applicable corporate income tax rate of our operating subsidiaries has been increased to a rate of 25% over a five-year grandfather period. This tax rate increase applies across the board, for all enterprises whether domestic or foreign. The PRC government has established a set of transition rules to allow enterprises that already started tax holidays before January 1, 2008, to continue utilizing the tax holidays until fully utilized. The discontinuation of any such special or preferential tax treatment or other incentives could have an adverse affect on our business, financial condition and results of operations.

In addition, under current PRC tax law, regulations and rulings, dividends from our operations in China paid to us are not currently subject to PRC income tax. If these distributions become subject to tax in the future, our net income would be adversely affected.

We may enter into additional financing agreements which may have a dilutive effect to our earnings per share and the rights of certain stockholders.

Additional financings could result in significant dilution to our earnings per share or the issuance of securities with rights superior to our current outstanding securities. For instance, we may grant registration rights to investors purchasing our equity or debt securities in the future.

We may be unable to raise additional capital.

If we are unable to raise additional financing, we may be unable to implement our long-term business plan, develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures on a timely basis, if at all. In addition, a lack of additional financing could force us to substantially curtail or cease operations.

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We may be exposed to potential risks relating to our internal control over financial reporting and our ability to have such controls attested to by our independent auditors.

The SEC, under Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to provide in their annual reports on Form 10-K a report by management with respect to the company’s disclosure controls and procedures and internal control over financial reporting. We are currently required to comply with this requirement. In addition, such rules require the independent registered public accounting firm auditing a company’s financial statements to attest to the operating effectiveness of such company’s internal controls. However, we are not subject to the requirements of SOX 404(b) until our fiscal year ended December 31, 2010. We can provide no assurance that we will comply with all of the requirements imposed thereby. Further, we cannot assure that we will receive a positive attestation from our independent auditors. Investors and others may lose confidence in the reliability of our financial statements in the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or if we are unable to receive a positive attestation from our independent auditors with respect to our internal controls.

Risks Related To Doing Business In China

Changes in China’s political or economic situation could harm us and our operating results.

Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country. However, the Chinese government could change these economic reforms at any time. Such changes could negatively impact our operations and profitability.

The structure of the Chinese economy may inhibit our ability to expand our business.

The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in several ways. For example, state-owned enterprises constitute a large portion of the Chinese economy. In addition, weak corporate governance practices and the lack of flexible currency exchange policies continue to persist. As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.

Our business is largely subject to the uncertain legal environment in China.

The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used. Laws, regulations and legal requirements relating to foreign investments in China are still evolving, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to foreign investors, such as the right of foreign enterprises to hold required business licenses and permits.

It may be difficult for our stockholders to affect service of process against our subsidiaries or our officers and directors.

Our operating subsidiaries were organized under the laws of China and substantially all of their assets are located outside the U.S. In addition, our executive officers and directors are residents of China and substantially all of their assets are located outside the U.S. As a result, it could be difficult for our stockholders to affect service of process in the U.S., or to enforce a judgment obtained in the U.S., against our officers and directors.

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Inflation in China may inhibit our ability to conduct business profitably in China.

In recent years, the Chinese economy has experienced periods of rapid expansion. During the past ten years, the rate of inflation in China has been as high as 5.8% and as low as -1.4% . These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to limit inflation. High inflation in the future may cause the Chinese government to impose controls on credit or prices, or to take other actions which could inhibit economic activity in China, and thereby harm the market for our products.

Likewise, negative inflation could have an unfavorable effect on our business profitability in China. Negative inflation may cause a period where consumers are reluctant to spend, as consumers anticipate lower prices for products in the future. In the event of negative inflation, the Chinese government may impose controls on credit or prices, or take other actions which could inhibit economic activity, harming the market for our products.

Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.

The majority of our revenues are settled in Renminbi and U.S. dollars, and any future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future business activities outside China or to make dividends or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain. For instance, foreign enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents at banks in China authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. The Chinese regulatory authorities may impose more stringent restrictions on the convertibility of the Renminbi in the future.

Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may have negative effects on our company.

In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC residents to register with the local SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), further expanded the reach of Circular 75.

ILH acquired certain interests in the Lorain Group Companies controlled by Si Chen, our Chairman and Chief Executive Officer. Pursuant to Notice No. 75 and Notice 106, if a PRC resident has completed a round-trip investment through its established SPV but has not yet completed the required procedures of SAFE registration for offshore investment of the SPV, he must retroactively register the SPV with SAFE.

In order to avoid such SAFE registration requirements, a Japanese individual, Hisashi Akazawa, was designated as a nominee holder of ILH when ILH was established. Mr. Akazawa granted an option to our Chairman and Chief Executive Officer, Mr. Chen, allowing Mr. Chen to buy 90% of Mr. Akazawa’s interest in the Company at a fixed price at a future time in accordance with the terms of an option agreement between the two parties. On December 22, 2008, Mr. Chen exercised this option. In addition, on that date, Mr. Chen acquired all of the remaining shares of our company held by Mr. Akazawa. As a result, Mr. Chen is the beneficiary of ILH and may be required to register with and obtain approvals from SAFE or its agency in connection with respect to the direct offshore investment activities related to the acquisition of the Lorain Group Companies.

23


If the failure to identify and characterize Mr. Chen as a beneficial owner of ILH is determined by the PRC authorities to be a serious violation of the requirements of the PRC Company Law and the PRC Regulation of Registration of Companies, the Lorain Group Companies may be ordered by the company registration authority in the PRC to make corrections on its filed registration, to be fined an amount no less than RMB 5,000 and no more than RMB 50,000 or, in the worse scenario, to have its company registration certificate revoked or its business licenses canceled.

Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies, such as our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities including the remittance of dividends and foreign currency-denominated borrowings. In addition, our PRC resident beneficial holders may be subject to compliance with Circular 75. Such holders may not be able to complete the necessary registration procedures required by Circular 75.

Our financial condition is affected by the foreign exchange rate between the U.S. dollar and the Renminbi.

Our financial condition is affected by the foreign exchange rates, primarily the rate between the U.S. dollar and the Renminbi. In the event that the Renminbi appreciates against the U.S. dollar, our costs will increase.

Risks Related To the Market For Our Stock

Certain of our stockholders have the ability to delay or prevent adoption of important business decisions based on their ownership of a significant percentage of our outstanding voting securities.

Mr. Chen is the record owner of approximately 54% of our outstanding voting securities. As a result, he possesses significant influence over our business. For instance, Mr. Chen may elect our board of directors, authorize significant corporate transactions or prevent a future change in control of our company.

Certain provisions of our Certificate of Incorporation may make it more difficult for a third party to effect a change- in-control.

Our Certificate of Incorporation authorizes our board of directors to issue up to 5,000,000 shares of preferred stock without stockholder approval. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the board of directors without further action by the stockholders. These terms may contain voting rights, including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights and redemption rights provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult to acquire our company and could negatively affect the market price of our common stock.

24


The exercise of outstanding warrants issuable for shares of our common stock may cause dilution to existing shareholders.

There are currently warrants outstanding to purchase up to an aggregate of 4,082,892 shares of our common stock. The term of 1,527,197 of these warrants expires in May 2010, the term of 2,054,580 of these warrants expires in April 2012 and the term of 501,115 of these warrants expires in October 2014. The exercise prices of these warrants range from $3.70 to $4.25 per share, subject to adjustment. If holders of these warrants exercise the warrants in exchange for shares of our common stock, such issuances may have a dilutive effect on the stock ownership of existing shareholders and may harm the market price of our stock. Furthermore, if we were to attempt to obtain additional financing during the term of these warrants, the terms on which we obtain such financing may be adversely affected by the existence of these warrants.

We do not expect to pay dividends in the future, and any return on your investment may be limited to the value of the shares you acquire.

Other than a special cash dividend which we paid to holders of our common stock as of April 16, 2007, we have never declared or paid cash dividends. We do not anticipate paying any cash dividends on our common stock in the foreseeable future and any return on your investment may be limited to the value of the shares of our common stock that you acquire. We currently intend to retain and use any future earnings for the development and expansion of our business.

Item 1B. UNRESOLVED STAFF COMMENTS
   
None.  
   
Item 2. PROPERTIES

Our primary facilities, which are owned except where otherwise indicated, are as follows:

 

 

 

 

Facility

Location

Approximate Size
(Square Meters)

Owned or Leased

 

 

 

 

Shandong Lorain

Junan County, Shandong Province, PRC

31,459

Owned

Junan Hongrun

Junan County, Shandong Province, PRC

171,931

Owned

Luotian Lorain

Luotian County, Hubei Province, PRC

54,251

Owned

Beijing Lorain

Miyun County, Beijing Province, PRC

22,677

Owned

Dongguan Lorain

Dongguan County, Guandong Province, PRC

5,472

Leased

 

 

 

 

We also own or lease space for additional facilities, including refrigerated storage facilities, and smaller offices, including sales offices, located in China.

In the aggregate, we currently have land use rights to, or lease, 72 properties with approximately 285,791 square meters in the aggregate, consisting of manufacturing facilities, office buildings and land reserved for future expansion. We believe our current facilities provide adequate capacity for our current and projected needs.

25


All land in China is owned by the State. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for a period of up to 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations.

Item 3.  LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the fourth quarter of 2009.

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market for our Common Stock

Our common stock is quoted on the NYSE AMEX under the symbol “ALN”. As of March 28, 2010 the closing price for our common stock was $3.60 per share.

The following table sets forth, for the periods indicated, the high and low bid prices of our common stock. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. Shares of our common stock were sparsely traded until May 2008.

    Bid Prices  
    High     Low  
Fiscal Year Ended December 31, 2009            
First Quarter $ 1.06   $ 0.51  
Second Quarter $ 2.52   $ 0.52  
Third Quarter $ 2.95   $ 2.25  
Fourth Quarter $ 3.34   $ 2.37  
             
Fiscal Year Ended December 31, 2008            
First Quarter $ 23.00   $ 7.90  
Second Quarter   19.50     2.00  
Third Quarter   3.25     2.10  
Fourth Quarter   2.15     0.80  

Approximate Number of Holders of Our Common Stock

On March 22, 2010, there were 322 stockholders of record of our common stock.

26


Dividend Policy

Pursuant to a Preferred Stock Purchase Agreement with Halter Financial Investments, L.P., dated April 5, 2007, we paid a special cash dividend in the aggregate amount of $415,000, or $0.18 per share, to holders of common stock outstanding on April 16, 2007.

Other than noted above, we have never declared or paid cash dividends. Any future decisions regarding dividends will be made by our board of directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

EQUITY COMPENSATION PLAN INFORMATION

Information for our equity compensation plans in effect as of the end of fiscal year 2009 is as follows:

    (a)     (b)     (c)  
Plan category   Number of securities to be issued upon exercise of outstanding options, warrants and rights     Weighted-average exercise price of outstanding options, warrants and rights     Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))  
Equity compensation plans approved by security holders   [1,334,573]     [1.58]     [1,165,427]  
Equity compensation plans not approved by security holders   0     N/A     0  
Total   [1,334,573]     [1.58]     [1,165,427]  
 
Item 6. SELECTED FINANCIAL DATA

Not applicable.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are an integrated food manufacturing company with headquarters 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 26 provinces and administrative regions in China and 42 foreign countries. We believe that we are the largest chestnut processing manufacturer in China. We have developed brand equity for our chestnut products in China, Japan and South Korea over the past 10 to 15 years. We produced 52 high value-added processed chestnut products in 2009. We derive most of our revenues from sales in China, Japan and South Korea. Our primary strategy for 2010 is to expand our brand equity in the Chinese market for our convenience food products. We are also working to expand our brand recognition in China for our chestnut products and frozen products. In addition, we are working to expand our marketing efforts in Asia, Europe and the Middle East. We currently have limited sales and marketing activity in the United States, although our long-term plan is to significantly expand our activities there.

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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 2009, the cost of our raw materials increased from $64,980,230 to $81,501,168, for an increase of approximately 25.4% . 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.

The average price that we paid for chestnuts in 2008 and 2009 was approximately $727 per metric ton and $868 per metric ton, respectively, excluding value added taxes. We do not currently hedge against changes in our raw material prices. Consequently, if the costs of our raw materials increase further and we are unable to offset these increases by raising the prices of our products, our profit margins and financial condition could be adversely affected.

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 pay for their supplies in cash 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. In 2009, we paid for approximately 48% of our raw materials 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 also fund approximately 37% of our working capital requirements from the proceeds of short-term loans from Chinese banks. We expect to continue to do so in the future. Such loans are generally secured by our fixed assets, receivables and/or guarantees by third parties. Our average loan balance from short-term bank loans in 2009 was approximately $32.7 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, we may not have 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. In addition, in 2007, 2008 and 2009, we funded approximately $8.8 million, in the aggregate, of our working capital requirements from the proceeds of two private placement transactions conducted in May 2007 and October 2009. 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.

28


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 through 2010. However, if available liquidity is not sufficient to meet our operating and loan obligations as they come due, our plans include considering pursuing 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 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.

The crisis of the financial and credit markets worldwide in the second half of 2008 has led to a severe economic recession worldwide, and the outlook for 2010 is still uncertain. A continuation or worsening of unfavorable economic conditions, including the ongoing credit and capital markets disruptions, could have an adverse impact on our business, operating results or financial condition in a number of ways. 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.

In 2008 and 2009, some of our customers, including some of our large supermarket customers, delayed their payments for up to 60 to 90 days beyond their term. Our cash flow suffered while waiting for such payments. Consequently, at times we had to delay payments to our suppliers and to postpone business expansion as a result of these delayed payments. Starting from 2008 and into 2009, we gradually shortened credit terms for many of our international and domestic customers from between 30 and 180 days to between 30 and 60 days. Our large customers may fail to meet these shortened credit terms, in which case we may not have sufficient cash flow to fund our operating costs and our business could be adversely affected.

Results of Operations

The following tables set forth key components of our results of operations for the periods indicated, and the differences between the two periods expressed in dollars and percentages:

29



2009 2008 Increase/Decrease Increase/Decrease
(in thousands of U.S. dollars)               ($)     (% )  
Revenue   146,772     132,360     14,412     10.9%  
Cost of Revenue   (114,064 )   (101,213 )   (12,851 )   12.7%  
                         
Gross profit   32,708     31,147     1,561     5.0%  
                         
Operating Expenses:                        
Selling and Marketing   (6,455 )   (6,166 )   (289 )   4.7%  
General and administrative   (3,647 )   (4,048 )   401     -9.9%  
Operating Income                        
                         
Income from continuing   22,606     20,933     1,673     8.0%  
operations                        
                         
Non-operating Income                        
(Expenses):                        
Investment Income   0     0     0     0.0%  
Government grant   356     329     27     8.2%  
Interest income   73     99     (26 )   -26.3%  
Other income   175     251     (76 )   -30.3%  
Other expense   (327 )   (162 )   (165 )   101.9%  
Interest Expense   (3,352 )   (2,770 )   (582 )   21.0%  
                         
Income before taxes   19,531     18,681     850     4.6%  
Income Taxes   (4,223 )   (3,003 )   (1,220 )   40.6%  
Income before Minority   15,308     15,678     (370 )   -2.4%  
Interest                        
Minority Interest   (900 )   (974 )   74     -7.6%  
                         
Net Income   14,408     14,703     (295 )   -2.0%  

Year Ended December 31, 2009Compared to Year Ended December 31, 2008

Revenue

Net Revenues. Net revenues increased by $14.4 million, or approximately 10.9%, to $146.8 million in 2009 from $132.4 million in 2008. This increase was attributable to the increased revenues generated from sales of each of our product segments, as reflected in the following table:

(in thousands of U.S. dollars)   2009 Revenues     2008 Revenues     Increase     Increase  
    ($)     ($)     ($)     (%)  
Chestnut Products   89,117     83,028     6,089     7.3%  
Convenience Products   34,624     25,737     8,887     34.5%  
Frozen Products   23,031     23,596     (565 )   -2.4%  
Total   146,772     132,360     14,914     11.3%  

30


The greatest increase in volume sold in 2009, as compared to 2008, was in the domestic PRC market. Revenues from sales in the Chinese domestic market increased by approximately $12.1 million, or approximately 13%, in 2009. As a percentage of total revenues, revenues from sales in the domestic PRC market increased to approximately 71% from approximately 69% in 2008.

In addition, in 2009, revenues from sales to Belgium, Hong Kong, Saudi Arabia, Singapore, South Korea, Taiwan and the United States increased, in the aggregate, approximately $8.3 million, or 67.0%, compared to 2008, partially offset by a decrease of an aggregate of $6.5 million, or 22.7%, of sales to France, Germany, Holland, Japan, Malaysia and United Kingdom compared to 2008. See Note 18 to the financial statements contained elsewhere in this report for more information on the breakdown of our sales per geographic region.

Cost of Revenues. Our cost of revenues increased $12.9 million, or approximately 12.7%, to $114.1 million in 2009 from $101.2 million in 2008. This increase was attributable to the following factors, by percentage:

Category  

Allocation of
Increase in Cost
of
Revenues
(%)

 
Raw Materials   25.4  
Currency (RMB) Appreciation   -1.7  
Other Allocated Overhead (utilities,   -9.4  
freight, equipment consumables)      
Wages   -3.7  
Depreciation   2.0  

Raw material costs increased to $81,501,168, or approximately 25.4%, in 2009 from $64,980,230 in 2008. This increase was attributable to the increase by approximately 23% and 53%, respectively, in the volume of raw chestnuts and raw vegetables and fruits purchased in 2009, when compared to 2008. This increase was offset by a decrease of approximately 62% in the volume of raw meats purchased in 2009, when compared to 2008. We purchased a significantly higher volume of raw vegetables and fruits for use in our convenience products because our sales of such products increased significantly in 2009. We purchased a significantly lower volume of raw meat for use in our convenience food products as we focused more on other types of foods in this category.

The following table reflects the changes in our cost of revenues in 2008 as compared to 2007 among our different segments:

(thousands of U.S. dollars)   2009 Cost of Revenues     2008 Cost of Revenues     Increase/ (Decrease)  
    ($)     ($)     (%)  
Chestnut Products   68,263     62,092     9.7  
Convenience Products   26,947     20,258     33.0  
Frozen Products   18,854     18,863     -0.05  
Total   114,064     101,213     12.6%  

 31  



Gross Profit. Our gross profit increased $1.6 million, or 5.0%, to $32.7 million in 2009 from $31.1 million in 2008 as a result of higher net revenues, partially offset by higher cost of revenues, for the reasons indicated above.

Operating Expenses

Selling and Marketing Expenses. Our selling and marketing expenses increased approximately $0.3 million, or 4.7%, to $6.5 million in 2009 from $6.2 million in fiscal year 2008. The following table reflects the main factors that contributed to this increase as well as the dollar amount that each factor contributed to this increase:

(in U.S. dollars)  

Increase in
costs in 2009
over 2008

 
Shipping and inspection fees   529,256  
Port surcharges   6,632  
Commissions   100,397  
Supermarket fees   142,020  
Wages (sales personnel)   419,463  

The increases listed in the table above were partially offset by an aggregate of $897,768 decreases of other factors, including customer lodging, phone, postage and courier charges, toll road expense, warehousing costs and expenses for professional movers.

General and Administrative Expenses. Our general and administrative expenses decreased approximately $0.4 million, or 9.9%, to $3.6 million in 2009 from $4.0 million in 2008. The following table reflects the main factors that contributed to this decrease as well as the dollar amount that each factor contributed to this increase:

(in U.S. dollars)  

Decrease in
costs in 2009
over 2008

 
Personnel Benefits (non-wage benefits)   (530,533 )
Consultation fees   (269,249 )
Travel Expenses   (95,662 )
Insurance fees   (45,866 )
Agent fees   (20,213 )

Government Subsidy Income

Government subsidy income increased from approximately $329,000 million in 2008 to approximately $356,000 in 2009, representing grants received from the Hubei government, Junan County government and Miyun County government to assist us in our research and business development.

32


Income Before Taxation and Minority Interest

Income before taxation and minority interest increased $0.85 million, or 4.6%, to $19.5 million in 2009 from $18.7 million in 2008 as a result of higher revenues, partially offset by higher costs of revenues and operating expenses, for the reasons indicated above.

Income Taxes

Income taxes increased $1.2 million, or 40.6%, to $4.2 million in 2009, as compared to $3.0 million in 2008. This increase was attributable to the higher income earned in 2009 as compared to 2008. Effective January 1, 2008, the PRC government implemented a new 25% tax rate across the board for all enterprises, without any tax holiday. However, the PRC government has established a set of transition rules to allow enterprises that already started tax holidays before January 1, 2008 to continue utilizing such tax holidays until they are fully utilized. The income tax rates applicable to our Chinese operating subsidiaries in 2008, 2009, and 2010 are depicted in the following table:

Income Tax   2008     2009     2010  
Junan Hongrun   15%     25%     25%  
Luotian Lorain   15%     15%     25%  
Beijing Lorain   0%     15%     15%  
Shangdong Lorain   25%     25%     25%  

Minority Interest.

The Company holds 80.2% of the equity of its subsidiary Shandong Lorain, which is reflected in the minority interest of $0.90 million in 2009 and $0.97 million in 2008.

Net Income.

Net income decreased $0.3 million, or 2.0%, to $14.4 million in 2009 from $14.7 million in fiscal year 2008, as a result of the factors described above.

Liquidity and Capital Resources

General

Our primary capital needs have been to fund the working capital requirements necessitated by our sales growth, adding new products and expansion of our facilities. In the past, our primary sources of financing have been cash generated from operations and short-term loans from banks in China. In October 2009, we obtained approximately $12 million from a private placement transaction. Proceeds from such transaction, together with cash generated from operations and short-term bank loans, have been used to fund our working capital needs. We used part of the proceeds of the private placement in 2009 to advertise and market our chestnut and convenience food products in China. At December 31, 2009, total unused proceeds from the private placement were approximately $7 million. At December 31, 2009, cash and cash equivalents (including restricted cash) were $13.4 million, as compared to $6.6 million at December 31, 2008.

33


We expect to continue to finance our operations and working capital needs in 2010 from cash generated from operations and short-term bank loans. In addition, we currently plan to finance or refinance approximately $20.2 million in the form of short-term bank loans in 2010. Currently, we have negotiated loans with certain banks in China for an aggregate of $42.2 million. We expect that anticipated cash flows from operations and short-term bank loans will be sufficient to fund our operations through at least the next twelve months.

If available liquidity is not sufficient to meet our operating and loan obligations as they come due, our plans include pursuing alternative financing arrangements or reducing expenditures as necessary to meet our cash requirements. However, there is no assurance that we will be able to raise additional capital or reduce discretionary spending to provide required liquidity. Currently, the capital markets for small capitalization companies are difficult. Accordingly, we cannot be sure of the availability or terms of any alternative financing arrangements.

The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.

Cash Flows Data:
(in thousands of U.S. dollars)   For year ended December 31,  
    2009     2008  
Net cash flows provided by (used in) operating activities   (10,843 )   19,508  
Net cash flows provided by (used in) investing activities   (7,280 )   (20,316 )
Net cash flows provided by (used in) financing activities   26,503     (6,714 )

Operating Activities

Net cash used in operating activities for 2009 was $10.8 million and net cash provided by operating activities for 2008 was $19.5 million. The increase of approximately $30.3 million in net cash flows used in operating activities resulted primarily from an additional increase in accounts and other receivable of approximately $11.6 million, an additional decrease in accounts and other payables of approximately $3.1 million and an additional increase in prepayments of approximately $20.8 million, partially offset by less inventory increase of approximately $5.3 million. In 2009, we were required to increase our prepayments and pay our suppliers on shorter terms, thereby decreasing our accounts payable.

Investing Activities

Our uses of cash for investment activities are primarily purchase of land for short-term investment.

Net cash used in investing activities for 2009 was $7.28 million and $20.3 million, respectively, for 2009 and 2008. The decrease of approximately $13.0 million resulted primarily from a decrease of $12.0 million as a result of the purchase of plant and equipment in 2009.

Financing Activities

Net cash provided by financing activities for 2009 was $26.5 million and net cash used in financing activities for 2008 was $6.7 million. The increase of approximately $33.2 million in net cash provided by financing activities resulted primarily from an increase of $10.9 million in paid-in capital provided in connection with a private placement in October 2009 and an increase of approximately $72.7 million in bank borrowings, partially offset by an increase of approximately $50.4 million in repayment of bank borrowings and notes.

34


Loan Facilities

As of December 31, 2009, the amounts and maturity dates for our bank loans were as follows:

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

                                                         Banks Maturity Interest Rate Amount (US$)
Beijing Miyun County Shilipu Rural Financial Institution   01/20/10     7.434%     1,462,587  
Beijing Miyun County Shilipu Rural Financial Institution 09/30/10 6.903% 2,831,918
China Merchants Bank, Beijing   03/29/10     5.310%     731,294  
HSBC Miyun Branch 04/08/10 6.804% 292,517
Bank of Beijing   07/29/10     6.903%     292,517  
China Agricultural Bank, Luotian Branch 08/25/10 6.372% 1,901,363
Junan County Agricultural Financial Institution   01/22/10     10.939%     1,170,070  
Junan County Industrial and Commercial Banks 01/08/10 5.346% 438,776
Junan County Industrial and Commercial Banks   01/14/10     5.346%     541,157  
Junan County Industrial and Commercial Banks 01/25/10 5.346% 614,287
Junan County Industrial and Commercial Banks   03/15/10     3.240%     463,640  
Junan County Agriculture Bank 03/17/10 7.965% 3,363,950
Junan County Agriculture Bank   08/23/10     7.965%     1,608,846  
Junan County Agriculture Bank 09/23/10 7.290% 1,447,961
Junan County Agriculture Bank   11/22/10     7.965%     643,538  
Junan County Agriculture Bank 03/03/10 6.804% 1,462,587
Junan County Agriculture Bank   03/08/10     6.804%     1,755,104  
Junan County Agriculture Bank 03/11/10 6.804% 2,193,881
Linyi Commercial Bank   01/19/10     9.293%     658,164  
Linyi Commercial Bank 12/21/10 8.496% 687,416
Linyi Commercial Bank   06/16/10     9.293%     1,462,587  
Linyi Commercial Bank 06/15/10 9.293% 1,462,587
Junan County Construction Bank   01/07/10     5.346%     1,462,587  
Junan County Construction Bank 09/01/10 5.346% 1,117,070
Junan County Construction Bank   01/22/10     5.346%     394,899  
Junan County Construction Bank 01/12/10 5.346% 475,340
Junan County Construction Bank   01/28/10     5.346%     153,572  
Junan County Construction Bank 01/18/10 5.346% 212,075
Junan County Construction Bank   01/10/10     5.346%     394,898  
Junan County Construction Bank 03/08/10 5.346% 153,571
Junan County Construction Bank   03/25/10     5.346%     153,572  
Junan County Construction Bank 12/27/10 5.841% 716,667
Junan County Construction Bank   01/24/10     5.346%     144,796  
United Commercial Bank, China Branch 01/14/10 5.494% 1,050,137
Shenzhen Development Bank   12/29/10     5.558%     1,462,587  
Luotian Agricultural Development Bank 12/11/10 0.670% 109,694
Total               35,488,212  
       
Luotian Agricultural Development Bank   12/11/11     2.100%     25,595  
United Commercial Bank, China Branch 01/14/11 5.494% 269,278
Total               294,873  

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 the 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 the more significant judgments and estimates in the preparation of financial statements, including the following:

35


  • Method of Accounting -- We maintain our 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 us 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.
  • 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.
    The use of estimates is critical to 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 -- The consolidated financial statements are presented in US Dollars and include the accounts of the Company and its commonly controlled entity. All significant inter-company balances and transactions are eliminated in combination.

As of December 31, 2009, the particulars of the commonly controlled entities are as follows:

Name of Company   Place of
Incorporation
    Attributable
Equity Interest
%
    Registered
Capital
     
Shandong Lorain Co., Ltd   PRC     80.2   $ 12,901,823     (RMB 100,860,000 )
Luotian Lorain Co., Ltd   PRC     100   $ 1,279,181     (RMB 10,000,000 )
Junan Hongrun Foodstuff Co., Ltd   PRC     100   $ 2,430,445     (RMB 19,000,000 )
Beijing Lorain Co., Ltd   PRC     100   $ 1,279,181     (RMB 10,000,000 )
  • 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.

36


During the reporting years, 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 (VAT). No product return or sales discount allowance is made as products delivered and accepted by customers are normally not returnable and sales discount is normally not granted after products are delivered.

We believe that when custody and title of goods has been passed to our customers, or third party transporters revenue is recognized. Our industry does not call for revenue recognition under multiple deliverable arrangements.

  • Financial Instruments

Our financial instruments are cash and cash equivalents, accounts receivable, other receivable, advances to suppliers, advances to employees, bank loans and notes, accounts payable, other payable, accrued liabilities, and long-term liabilities. The recorded values of cash and cash equivalents, accounts receivable, other receivable, advances to suppliers, advances to employees, bank loans and notes, accounts payable, other payable, and accrued liabilities approximate their fair values based on their short-term nature. The recorded values of long-term liabilities approximate their fair values, as interest approximates market rates.

We have the accounting policy regarding financial instruments for our financial statements in 2009. We consider it critical because our business is becoming more global in nature and the use of fair value for financial instruments has been widely adopted by accounting bodies around the globe. With financial statements that are widely accepted and comparable in many jurisdictions we will have greater access to capital locally.

Recent accounting pronouncements

In June 2009, FASB issued FASB Statement No. 166, Accounting for Transfers for Financial Assets (FASB ASC 860 Transfers and Servicing) and FASB Statement No. 167 (FASB ASC 810 Consolidation), a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810 Consolidation).

Statement 166 is a revision to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FASB ASC 860 Transfers and Servicing), and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. Statement No. 166 (FASB ASC 860 Transfers and Servicing) must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This Statement must be applied to transfers occurring on or after the effective date. The Company is still evaluating the impact of the above pronouncement.

37


Statement 167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810 Consolidation), and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. Statement No. 167 (FASB ASC 810 Consolidation) shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company is still evaluating the impact of the above pronouncement.

On June 30, 2009, FASB issued FASB Statement No. 168, Accounting Standards Codification™ ( FASB ASC 105 Generally Accepted Accounting Principles) a replacement of FASB Statement No. 162 the Hierarchy of Generally Accepted Accounting Principles. On the effective date of this standard, FASB Accounting Standards Codification™ (ASC) became the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission (SEC). This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. If an accounting change results from the application of this guidance, an entity should disclose the nature and reason for the change in accounting principle in their financial statements. This new standard flattens the GAAP hierarchy to two levels: one that is authoritative (in FASB ASC) and one that is non-authoritative (not in FASB ASC). Exceptions include all rules and interpretive releases of the SEC under the authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants, and certain grandfathered guidance having an effective date before March 15, 1992. Statement No. 168 is the final standard that will be issued by FASB in that form. There will no longer be, for example, accounting standards in the form of statements, staff positions, Emerging Issues Task Force (EITF) abstracts, or AICPA Accounting Statements of Position.

Off-Balance Sheet Arrangements

We do not have any off-balance arrangements.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
   
Not applicable.  
   
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA

The full text of our audited consolidated financial statements as of December 31, 2009 begins on page F-2 of this Annual Report on Form 10-K.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
   
None.  
   
Item 9A 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 that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period 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.

38


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 December 31, 2008. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2009, 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 effective to satisfy the objectives for which they are intended.

Internal Controls Over Financial Reporting

Management’s Annual Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting is effective, as of December 31, 2009.

Changes in Internal Controls over Financial Reporting.

During the fiscal year ended December 31, 2009, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal year covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Attestation Report

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Item 9B OTHER INFORMATION.

None.

39


PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS OF AND CORPORATE GOVERNANCE

Information required under this Item will be contained in our definitive information statement or in an amendment to this Annual Report on Form 10-K, which will be filed within 120 days of December 31, 2009, our most recent fiscal year end, and is incorporated herein by reference.

Item 11 EXECUTIVE COMPENSATION

Information required under this Item will be contained in our definitive information statement or in an amendment to this Annual Report on Form 10-K, which will be filed within 120 days of December 31, 2009, our most recent fiscal year end, and is incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Information required under this Item will be contained in our definitive information statement or in an amendment to this Annual Report on Form 10-K, which will be filed within 120 days of December 31, 2009, our most recent fiscal year end, and is incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Information required under this Item will be contained in our definitive information statement or in an amendment to this Annual Report on Form 10-K, which will be filed within 120 days of December 31, 2009, our most recent fiscal year end, and is incorporated herein by reference.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

Information required under this Item will be contained in our definitive information statement or in an amendment to this Annual Report on Form 10-K, which will be filed within 120 days of December 31, 2009, our most recent fiscal year end, and is incorporated herein by reference.

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

1. The financial statements contained in the “Audited Financial Statements” beginning on page F-2 of this Annual Report on Form 10-K.

3. Exhibits  

40



Exhibit No. Description
   
3.1 Restated Certificate of Incorporation of the registrant as filed with the Secretary of State of Delaware. Incorporated by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed on May 9, 2007.
3.2 Bylaws of the registrant, adopted on March 31, 2000. Incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form 10SB12G filed on October 19, 2001.
4.1 Certificate of Designation of Series A Voting Convertible Preferred Stock of the registrant as filed with the Secretary of State of Delaware on April 9, 2007. Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0- 31619.
4.2 Certificate of Designation of Series B Voting Convertible Preferred Stock of registrant as filed with the Secretary of State of Delaware on April 30, 2007. Incorporated by reference to Exhibit 4.2 to the registrant’s current report on Form 8-K filed on May 9, 2007.
4.3 Form of Series A Warrant. Incorporated by reference to Exhibit 4.1 to the registrant’s current report on Form 8-K filed on October 29, 2009.
4.4 Form of Series B Warrant. Incorporated by reference to Exhibit 4.2 to the registrant’s current report on Form 8-K filed on October 29, 2009.
4.5 Registration Rights Agreement, dated as of October 28, 2009. Incorporated by reference to Exhibit 4.3 to the registrant’s current report on Form 8-K filed on October 29, 2009.
10.1 Employment Agreement, effective September 22, 2008, by and between American Lorain Corporation and Yilun Jin. Incorporated by reference to Exhibit 10.1 to the registrant's current report on Form 8-K filed on September 18, 2008.
10.2 Securities Purchase Agreement dated as of October 28, 2009, by and between American Loan Corporation and the Selling Stockholders. Incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on October 29, 2009.
14 Business Ethics Policy and Code of Conduct, adopted on April 30, 2007. Incorporated by reference to Exhibit 14 to the registrant’s current report on Form 8-K filed on May 9, 2007.
21 List of subsidiaries of the registrant. Incorporated by reference to Exhibit 21 to the registrant’s current report on Form 8-K filed on May 9, 2007.
24 Power of Attorney (set forth on the signature page of the original filing).
31.1 Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2 Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

* Filed herewith

41


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

      AMERICAN LORAIN CORPORATION  
         
      By:/s/ Si Chen  
  March 29, 2010   Si Chen  
  (Date Signed)   President, Director and Chief Executive  
      Officer  

Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed by the following persons in the capacities and on the dates indicated. Each person whose signature appears below constitutes and appoints Si Chen, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this annual report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Signature   Capacity   Date
         
         
/s/ Si Chen   President , Director and Chief Executive Officer
 (Principal Executive Officer)
  March 29, 2010
Si Chen        
         
/s/ Yilun Jin   Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
  March 29, 2010
Yilun Jin        
         
/s/ Yundong Lu   Chief Operating Officer and Director   March 29, 2010
Yundong Lu        
         
/s/ Dekai Yin   Director   March 29, 2010
Dekai Yin        
         
/s/ Yongjun Li   Director   March 29, 2010
Yongjun Li        
         
/s/ Maoquan Wei   Director   March 29, 2010
Maoquan Wei        
         
/s/ Tad M. Ballantyne  

Director

 

March 29, 2010

Tad M. Ballantyne        

42


 

  

AMERICAN LORAIN CORPORATION

AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

 

 



AMERICAN LORAIN CORPORATION

CONTENTS PAGES
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1
CONSOLIDATED BALANCE SHEETS 2 – 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO FINANCIAL STATEMENTS 7 – 23



REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
   
To: The Board of Directors and Stockholders of
  American Lorain Corporation

We have audited the accompanying consolidated balance sheets of American Lorain Corporation as of December 31, 2009 and 2008 and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Lorain Corporation as of December 31, 2009 and 2008 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

South San Francisco, California Samuel H. Wong & Co., LLP
March 11, 2010 Certified Public Accountants
 




AMERICAN LORAIN CORPORATION
 
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

    Note     2009     2008  
ASSETS                  
   Current assets                  
       Cash and cash equivalents       $  12,111,532   $  2,841,339  
       Restricted cash   3     1,299,889     3,715,998  
     Short-term investment         7,320,248     113,069  
       Trade accounts receivable   4     23,025,772     25,293,326  
       Other receivables   5     7,837,675     5,107,719  
       Related party receivable   6     603,116     -  
       Inventory   7     26,400,117     24,827,922  
       Advance to suppliers         16,938,872     415,009  
       Prepaid expenses and taxes         905,266     1,228,648  
       Deferred tax asset         199,867     -  
              Total current assets       $  96,642,354   $  63,543,030  
                   
     Property, plant and equipment, net   8     41,280,407     40,201,686  
     Land use rights, net   9     3,871,547     3,950,927  
     Deposit         16,088     -  
TOTAL ASSETS       $  141,810,396   $  107,695,643  
                   
                   
LIABILITIES AND STOCKHOLDERS’ EQUITY                  
 Current liabilities                  
       Short-term bank loans   10   $  35,488,212   $  14,414,996  
       Notes payable   11     -     5,208,485  
       Accounts payable         2,614,515     6,072,883  
       Taxes payable   12     2,235,341     2,926,793  
       Accrued liabilities and other payables   13     6,422,492     10,291,237  
       Customers deposits         13,842     748,732  
             Total current liabilities       $  46,774,402   $  39,663,126  
                   
       Long-term bank loans   14     294,873     576,975  
                   
TOTAL LIABILITIES       $  47,069,275   $  40,240,101  

F-2

See Accompanying Notes to the Financial Statements and Accountant’s Report



    Note     12/31/2009     12/31/2008  
                   
STOCKHOLDERS’ EQUITY                  
Preferred Stock, $.001 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2009 and 2008 - -
Common stock, $0.001 par value, 200,000,000 shares authorized; 30,240,202 and 25,172,640 shares issued and outstanding as of December 31, 2009 and 2008, respectively 16 30,240 25,172
 Additional paid-in capital         35,268,603     24,187,019  
 Statutory reserves         8,895,477     5,438,723  
 Retained earnings         38,455,349     27,503,991  
 Accumulated other comprehensive income         6,068,569     5,178,616  
 Non-controlling interests   15     6,022,883     5,122,021  
      94,741,121   $  67,455,542  
                   
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY     141,810,396   $  107,695,643  

F-3

See Accompanying Notes to the Financial Statements and Accountant’s Report



AMERICAN LORAIN CORPORATION
 
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(Stated in US Dollars)


    Note     2009     2008  
                   
Net revenues   18   $  146,772,442   $  132,360,317  
Cost of revenues         (114,064,067 )   (101,213,340 )
Gross profit       $  32,708,375   $  31,146,977  
                   
Operating expenses                  
Selling and marketing expenses         (6,454,953 )   (6,166,248 )
General and administrative expenses         (3,646,815 )   (4,047,988 )
          (10,101,768 )   (10,214,236 )
                   
Operating income       $  22,606,607   $  20,932,741  
                   
Government subsidy income         355,656     328,687  
Interest income         73,186     99,411  
Other income         175,117     251,317  
Other expenses         (327,281 )   (161,726 )
Interest expense         (3,351,606 )   (2,769,597 )
          (3,074,928 )   (2,251,908 )
                   
Earnings before tax       $  19,531,679   $  18,680,833  
                   
Income tax   17     (4,222,705 )   (3,003,265 )
                   
Net income       $  15,308,974   $  15,677,568  
                   
Net income attributable to:                  
  - Common stockholders         14,408,112     14,703,378  
  - Non-controlling interests         900,862     974,190  
          15,308,974     15,677,568  
                   
Earnings per share                  
  - Basic       $  0.55   $  0.58  
  - Diluted         0.55     0.58  
                   
Weighted average shares outstanding                  
  - Basic         26,075,413     25,172,640  
  - Diluted         26,264,794     25,172,640  

F-4

See Accompanying Notes to the Financial Statements and Accountant’s Report



AMERICAN LORAIN CORPORATION
 
STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

                                  Accumulated              
    Number           Additional                 Other     Non-        
    Of     Common     Paid-in     Statutory     Retained     Comprehensive     controlling        
    Shares     Stock     Capital     Reserves     Earnings     Income     Interests     Total  
Balance, January 1, 2008   24,923,178   $  24,923   $ 24,187,268   $  4,497,647   $ 13,985,824   $  1,846,708   $  3,887,021   $  48,429,391  
Prior period adjustment                           (244,135 )               (244,135 )
Issuance of common stock   249,455     249     (249 )   -     -     -     -     -  
Share adjustment to match transfer agent   7     -     -     -     -     -     -     -  
Net income   -     -     -     -     15,677,568     -     -     15,677,568  
Appropriations to statutory reserves   -     -     -     941,076     (941,076 )   -     -     -  
Allocation to non-controlling interests   -     -     -     -     (974,190 )   -     974,190     -  
Foreign currency translation adjustment   -     -     -     -     -     3,331,908     260,810     3,592,718  
Balance, December 31, 2008   25,172,640   $  25,172   $ 24,187,019   $  5,438,723   $ 27,503,991   $  5,178,616   $  5,122,021   $ 67,455,542  
                                                 
Balance, January 1, 2009   25,172,640   $  25,172   $ 24,187,019   $  5,438,723   $ 27,503,991   $  5 ,178,616   $  5,122,021   $  67,455,542  
Issuance of share based compensation   56,393     57     166,341     -     -     -     -     166,398  
Issuance of common stock for cash   5,011,169     5,011     12,002,150     -     -     -     -     12,007,161  
Issuance cost of common stock               (1,086,907 )   -     -     -     -     (1,086,907 )
Net income   -     -     -     -     15,308,974     -     -     15,308,974  
Appropriations to statutory reserves   -     -     -     3,456,754     (3,456,754 )   -     -     -  
Allocation to non-controlling interests   -     -     -     -     (900,862 )   -     900,862     -  
Foreign currency translation adjustment   -     -     -     -     -     889,953     -     889,953  
Balance, December 31, 2009   30,240,202   $  30,240   $ 35,268,603   $ 8,895,477   $ 38,455,349   $  6,068,569   $  6,022,883   $  94,741,120  

F-5

See Accompanying Notes to the Financial Statements and Accountant’s Report



AMERICAN LORAIN CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

  Note 2009 2008
Cash flows from operating activities      
Net income     15,308,974   $  15,677,568  
   Stock and share based compensation 19 166,398 -
   Depreciation         1,270,783     1,273,935  
   Amortization   202,539 158,428
   (Increase)/decrease in accounts & other receivables         (1,800,407 )   9,802,709  
   (Increase)/decrease in inventories   (1,572,195 ) (6,924,578 )
   (Increase)/decrease in prepayments         (16,200,484 )   4,631,069  
   Decrease/(increase) in deferred tax asset   (199,867 ) -
   Prior year adjustment         -     (244,135 )
   Increase/(decrease) in accounts and other payables   $ (8,018,565 ) (4,866,556 )
   Net cash (used in)/provided by operating activities       (10,842,825 ) $  19,508,440  
       
Cash flows from investing activities                  
   Purchase of plant and equipment   (1,868,300 ) (13,928,921 )
   Payment of construction in progress         (481,203 )   (3,524,520 )
   Decrease/(increase) in restricted cash   2,416,109 (1,694,159 )
   Payments for the purchase of land use rights         (123,157 )   (1,062,334 )
   Payments for rental deposit   (16,088 ) -
   Purchase of land for short-term investment         (7,312,935 )   --  
   Sales/(purchase) of securities   105,756 (105,823 )
   Net cash used in investing activities     $ (7,279,819   $  (20,315,757) )
       
Cash flows from financing activities                  
   Issue of common stock   10,920,254 -
   Payment of notes         (5,208,485 )   -  
   Proceeds from notes   - 2,474,041
   Proceeds from bank borrowings         73,132,782     474,433  
   Repayment of bank borrowings   (52,341,668 ) (9,662,508 )
   Net cash provided by/(used in) financing activities     26,502,883   $  (6,714,034 )
       
Net in cash and cash equivalents (used)/sourced         8,380,239     (7,521,351 )
       
Effect of foreign currency translation on cash and cash equivalents         889,953     3,592,717  
       
Cash and cash equivalents–beginning of year         2,841,339     6,769,973  
       
Cash and cash equivalents–end of year     $ 12,111,532   $  2,841,339  
       
Supplementary cash flow information:                  
Interest received   73,186 99,411
Interest paid         3,351,606     2,769,597  
Income taxes paid $ 4,174,385 $  3,003,265

F-6

See Accompanying Notes to the Financial Statements and Accountant’s Report



AMERICAN LORAIN CORPORATION
 
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(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 “ALC”) is a Delaware corporation incorporated on February 4, 1986. From inception through May 3, 2007, the Company did not engage in any active business operations other than in search and evaluation of potential business opportunity to become an acquiree of a reverse- merger deal.

     
(b)

Organization History of International Lorain Holding Inc. and its subsidiaries

     

International Lorain Holding Inc. (“ILH”) is a Cayman Islands company incorporated on August 4, 2006 and was until May 3, 2007 wholly-owned by Mr. Hisashi Akazawa. Through restructuring and acquisition in 2006, the Company presently has two direct wholly-owned subsidiaries, Junan Hongrun and Luotian Lorain, and one indirectly wholly-owned subsidiary through Junan Hongrun, which is Beijing Lorain.

     

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.

     
(c)

Reverse-Merger

     

On May 3, 2007, the Company entered into a share exchange agreement with International Lorain Holding Inc. (“ILH”) whereby the Company consummated its acquisition of ILH by issuance of 697,663 Series B voting convertible preferred shares to the shareholders of ILH in exchange of 5,099,503 ILH shares. Concurrently on May 3, 2007, the Company also entered into a securities purchase agreement with certain investors and Mr. Hisashi Akazawa and Mr. Si Chen (each a “beneficial owner”) whereby the Company issued 319,913 (after reverse-split at 32.84 from 10,508,643) common shares to its shareholders as consideration of the Company’s reverse-merger with Lorain.

     

The share exchange transaction is referred to hereafter as the “reverse-merger transaction.” The share exchange transaction has been accounted for as a recapitalization of ALC where the Company (the legal acquirer) is considered the accounting acquiree and ILH (the acquiree) is considered the accounting acquirer. As a result of this transaction, the Company is deemed to be a continuation of the business of ILH.

     

Accordingly, the accompanying consolidated financial statements are those of the accounting acquirer, ILH. The historical stockholders’ equity of the accounting acquirer prior to the share exchange has been retroactively restated as if the share exchange transaction occurred as of the beginning of the first period presented. See also Note 16 Capitalization.

     
(d)

Business Activities

     

The Company develops, manufactures, and sells convenience foods (includes 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 subsidiaries. The products are sold in 26 provinces and administrative regions in China and 42 foreign countries. Food products are categorized into three types: (1) chestnut products, (2) convenience food, and (3) frozen food.

F-7


AMERICAN LORAIN CORPORATION

NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

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.

     

The Company regrouped certain accounts in its presentation of changes in assets and liabilities in the statement of cash flows for the year ended December 31, 2008 in order to be consistent with the presentation provided for the year ended December 31, 2009. There was no impact in 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 minority investors are recorded as minority interests.

     

As of December 31, 2009, the detailed identities of the consolidating subsidiaries are as follows:


Name of Company Place of
incorporation
Attributable
equity interest
Registered
capital
          %              
Shandong Lorain Co., Ltd   PRC     80.2   $ 12,901,823     (RMB 100,860,000 )
Luotian Lorain Co., Ltd   PRC     100   $ 3,240,013     (RMB 25,328,800 )
Junan Hongrun Foodstuff Co., Ltd   PRC     100   $ 16,245,603     (RMB 127,000,000 )
Beijing Lorain Co., Ltd   PRC     100   $ 1,279,181     (RMB 10,000,000 )
Dongguan Lorain Co,,Ltd   PRC     100   $ 146,259     (RMB 1,000,000 )
International Lorain Holding Inc.   Cayman Islands     100   $ 37,129,099     (RMB 253,859,078 )

  (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)

Economic and political risks

     
 

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

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.

F-8


AMERICAN LORAIN CORPORATION

NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     
  (e)

Lease prepayments

     
   

Lease prepayments represent the cost of land use rights in the PRC. Land use rights are carried at cost and amortized on a straight-line basis over the period of rights of 50 years.

     
  (f) 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. Estimated useful lives of the plant and equipment are as follows:
     

Buildings   40 years  
Machinery and equipment   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.

     
  (g)

Accounting for the Impairment of Long-Lived Assets

     
 

The long-lived assets held and used by the Company 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. During the reporting years, there was no impairment loss.

     
  (h)

Construction in progress

     
 

Construction in progress represents direct costs of construction or acquisition and design fees incurred. Capitalization of these costs ceases and 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 it is completed and ready for intended use.

     
  (i)

Investment securities

     
 

The Company classifies its equity securities 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.

F-9


AMERICAN LORAIN CORPORATION

NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(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.
     
  (j)  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.
     
  (k)

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.

     
  (l)

Customer deposits

     
 

Customer deposits were received from customers in connection with orders of products to be delivered in future periods.

     
  (m)

Cash and cash equivalents

     
 

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

     
  (n)

Advertising

     
 

All advertising costs are expensed as incurred.

     
  (o)

Shipping and handling

     
 

All shipping and handling are expensed as incurred.

     
  (p)

Research and development

     
 

All research and development costs are expensed as incurred.

     
  (q)

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.

     
  (r)

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.

F-10



AMERICAN LORAIN CORPORATION
 
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

The Company has implemented Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Income tax liabilities computed according to the United States and People’s Republic of China (PRC) tax laws are provided for the tax effects of transactions reported in the financial statements and consists 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. 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 15% tax rate, tax holidays terminated as of December 31, 2007. However, PRC government has established a set of transition rules to allow enterprises already started tax holidays before January 1, 2008, to continue enjoying the tax holidays until being fully utilized.

The Company is subject to United States Tax according to Internal Revenue Code Sections 951 and 957. Corporate income tax is imposed on progressive rates in the range of: -

    Taxable Income    
Rate   Over     But Not Over     Of Amount Over  
15%   0     50,000        
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     -        

  (s)

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.

     
  (t)

Foreign currency translation

     
    The accompanying financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The financial statements are translated into United States dollars from RMB 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. 

    2009     2008  
Year end RMB : US$ exchange rate   6.8372     7.3141  
Average yearly RMB : US$ exchange rate   6.8408     7.6172  

F-11
 



AMERICAN LORAIN CORPORATION
 
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(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$ at the rates used in translation.
     
  (u)

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). No product return or sales discount allowance is made as products delivered and accepted by customers are normally not returnable and sales discount is normally not granted after products are delivered.

     
  (v)

Earnings per share

     
 

Basic earnings per share is computed by dividing net income by the weighted average number of ordinary shares 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 dilutive potential ordinary shares during the years. During the years ended 2009 and 2008, no dilutive potential ordinary shares were issued.

     
 

The Company computes earnings per share (“EPS”) in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per share” (“SFAS No. 128”), 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.

     
  (w)

Financial Instruments

     
 

The Company’s financial instruments are cash and cash equivalents, accounts receivable, other receivable, advances to suppliers, advances to employees, bank loans and notes, accounts payable, other payable, dividend payable, accrued liabilities, and long-term liabilities. The recorded values of cash and cash equivalents, accounts receivable, other receivable, advances to suppliers, advances to employees, bank loans and notes, accounts payable, other payable, dividend payable and accrued liabilities approximate their fair values based on their short-term nature. The recorded values of long-term liabilities approximate their fair values, as interest approximates market rates.

     
  (x)

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.

     
  (y)

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 Company’s current component of other comprehensive income is the foreign currency translation adjustment.

F-12



AMERICAN LORAIN CORPORATION
 
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

  (z)

Recent accounting pronouncements

     
 

In June 2009, FASB issued FASB Statement No. 166, Accounting for Transfers for Financial Assets (FASB ASC 860 Transfers and Servicing) and FASB Statement No. 167 (FASB ASC 810 Consolidation), a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810 Consolidation).

     
 

Statement 166 is a revision to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FASB ASC 860 Transfers and Servicing), and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. Statement No. 166 (FASB ASC 860 Transfers and Servicing) must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This Statement must be applied to transfers occurring on or after the effective date. The Company is still evaluating the impact of the above pronouncement.

     
 

Statement 167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810 Consolidation), and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. Statement No. 167 (FASB ASC 810 Consolidation) shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company is still evaluating the impact of the above pronouncement.

     
 

On June 30, 2009, FASB issued FASB Statement No. 168, Accounting Standards Codification™ ( FASB ASC 105 Generally Accepted Accounting Principles) a replacement of FASB Statement No. 162 the Hierarchy of Generally Accepted Accounting Principles. On the effective date of this standard, FASB Accounting Standards Codification™ (ASC) became the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission (SEC). This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. If an accounting change results from the application of this guidance, an entity should disclose the nature and reason for the change in accounting principle in their financial statements. This new standard flattens the GAAP hierarchy to two levels: one that is authoritative (in FASB ASC) and one that is non-authoritative (not in FASB ASC). Exceptions include all rules and interpretive releases of the SEC under the authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants, and certain grandfathered guidance having an effective date before March 15, 1992. Statement No. 168 is the final standard that will be issued by FASB in that form. There will no longer be, for example, accounting standards in the form of statements, staff positions, Emerging Issues Task Force (EITF) abstracts, or AICPA Accounting Statements of Position. The Company has adopted the new accounting standard. There was no material impact on the financial statements presented herein.

     
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 savings account that pay interest at the prescribed national daily savings account rate. For funds that underline notes payable, the cash is deposited in six month time deposits that pay interest at the national time deposit rate.

F-13



AMERICAN LORAIN CORPORATION
 
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)
 
4.

 TRADE ACCOUNTS RECEIVABLE

   
 

Trade accounts receivable consisted of the following as of December 31, 2009 and 2008: 

   
    2009     2008  
Trade accounts receivable $  23,293,362   $  25,421,293  
Less: Allowance for doubtful accounts   (267,590 )   (127,967 )
  $  23,025,772   $  25,293,326  
             
             
Allowance for bad debt:   2009     2008  
Beginning balance $  (127,967 ) $  (172,309 )
Additions to Allowance   (139,623 )   -  
   Less: Bad debt written-off   -     44,342  
Ending balance $  (267,590 ) $  (127,967 )

The Company offers credit terms of between 30 to 60 days to most of their international distributors as well as domestic supermarkets and wholesalers, and between 0 to 15 days for most of their agents.

5.

OTHER RECEIVABLES

   
  Other receivables consisted of the following as of December 31, 2009 and 2008:
   
    2009     2008  
Advances to employees for purchases of materials $  4,041,986   $  663,302  
Advances to employees for job/travel disbursements   23,890     3,160,886  
Amount due by a non-related enterprise   1,999,671     1,278,501  
Other non-related receivables   1,772,128     5,030  
  $  7,837,675   $  5,107,719  

6.

RELATED PARTY RECEIVABLE

   
  Related party receivable consisted of the following as of December 31, 2009 and 2008:
   
    2009     2008  
Chen Si $  541,245   $  -  
Lu Yundong   32,358     -  
Liu Gang   29,513     -  
  $  603,116   $  -  

Related party receivable represent advances issued by management for the purchase of raw materials in the normal course of business. The receivables are neither interest-bearing nor collateralized. The receivables had no impact on earnings. The related parties will repay the outstanding balances within one operating period.

F-14



AMERICAN LORAIN CORPORATION
 
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

7. INVENTORY
   
  Inventory consisted of the following as of December 31, 2009 and 2008:

    2009     2008  
Raw materials $  12,014,402   $  10,779, 500  
Finished goods   14,385,715     14,048,422  
  $  26,400,117   $  24,827,922  

At December 31, 2008, the Company had classified $1,143,766 of inventory under the sub-category work-in-progress. At December 31, 2009, the Company reclassified the amount from work in progress to the subcategories: 1.) raw materials and, 2.) finished goods. The Company reclassified $1,143,450 to raw materials, and $316 to finished goods. The reclassification had no impact on the Company’s Statements of Income for the year ended December 31, 2009 and 2008.

8. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following as of December 31, 2009 and 2008:

    2009     2008  
At cost:            
     Buildings $  29,181,372   $  27,798,849  
     Landscaping, plant, and tree   2,758,944     2,752,101  
     Machinery and equipment   7,783,775     7,229,512  
     Office equipment   466,411     859,818  
     Motor vehicles   357,902     39,824  
  $  40,548,404   $  38,680,104  
Less: accumulated depreciation            
     Buildings   (1,811,423 )   (1,192,855 )
     Machinery and equipment   (3,226,015 )   (2,628,710 )
     Office equipment   (264,039 )   (414,478 )
     Motor vehicles   (230,341 )   (24,992 )
    (5,531,818 )   (4,261,035 )
             
Construction in Progress   6,263,821     5,782,617  
  $  41,280,407   $  40,201,686  

Construction in progress mainly comprises capital expenditures for construction of the Company’s new corporate campus, including offices, factories and staff dormitories. Capital commitments for the construction are immaterial for the three years above.

Landscaping, plant and tree is chestnut trees investment in the development of agricultural operations, which have not been the significant source of the raw materials needed for the Company’s operations to date.

F-15



AMERICAN LORAIN CORPORATION
 
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

9. LAND USE RIGHTS, NET
   Land use rights consisted of the following as of December 31, 2009 and 2008:

    2009     2008  
Land use rights, at cost $  4,359,423   $  4,236,266  
   Less: Accumulated amortization   (487,876 )   (285,339 )
  $  3,871,547   $  3,950,927  

Land use rights represent the prepaid land use right. The PRC government owns the land on which the Company’s corporate campus is being constructed. The Company carries land use rights at cost less accumulated amortization. Land use rights are amortized straight-line over the useful life of 50 years.

10. SHORT-TERM DEBTS

Short-term debts consisted of the following as of December 31, 2009 and 2008:

    2009 2008
Loans from Junan County Construction Bank,    
• Interest rate at 5.3460% per annum due1/18/2010   $

 212,075

  $ -  
• Interest rate at 5.3460% per annum due 1/24/2010 144,796 -
• Interest rate at 5.3460% per annum due 1/28/2010     153,572     -  
• Interest rate at 5.3460% per annum due 3/8/2010 153,571 -
• Interest rate at 5.3460% per annum due 3/25/2010     153,572        
• Interest rate at 5.3460% per annum due 1/22/2010 394,899 -
• Interest rate at 5.3460% per annum due 1/10/2010     394,898     -  
• Interest rate at 5.3460% per annum due 1/12/2010 475,340 -
• Interest rate at 5.8410% per annum due 12/27/2010     716,667     -  
• Interest rate at 5.3460% per annum due 9/1/2010 1,117,070 -
• Interest rate at 5.3460% per annum due 1/7/2010     1,462,587     -  
• Interest rate at 7.452% per annum due 2/24/2009 - 102,127
• Interest rate at 10.452% per annum due 1/22/2009     -     1,575,676  
• Interest rate at 7.236% per annum due 2/3/2009 - 116,717
                   
Loan from Junan County Agriculture Bank,    
• Interest rate at 7.9650% per annum due 8/23/2010     1,608,846     -  
• Interest rate at 7.2900% per annum due 9/23/2010 1,447,961 -
• Interest rate at 6.8040% per annum due 3/3/2010     1,462,587     -  
• Interest rate at 7.9650% per annum due 11/22/2010 643,538 -
• Interest rate at 6.8040% per annum due 3/11/2010     2,193,881     -  
• Interest rate at 6.8040% per annum due 3/08/2010 1,755,104 -
• Interest rate at 7.9650% per annum due 3/17/2010     3,363,950        
• Interest rate at 12.699% per annum due 8/6/2009   583,584
• Interest rate at 12.699% per annum due 8/18/2009           656,532  
• Interest rate at 12.699% per annum due 8/1/2009   364,740
• Interest rate at 10.577% per annum due 3/27/2009     -     1,458,959  
       
Loan from Junan County Industrial and Commercial Banks,              
• Interest rate at 5.3460% per annum due1/8/2010 438,776 -
• Interest rate at 5.3460% per annum due1/14/2010     541,157     -  
• Interest rate at 5.3460% per annum due1/25/2010 614,287 -
• Interest rate at 3.24% per annum due 3/15/2010     463,640     -  
     

F-16



AMERICAN LORAIN CORPORATION
 
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

• Interest rate at 6.120% per annum due 1/10/2009   -     145,896  
• Interest rate at 8.541% per annum due 3/4/2009   -     393,919  
• Interest rate at 3.1725% per annum due 2/19/2009   -     240,035  
• Interest rate at 3.1725% per annum due 2/19/2009   -     118,161  
• Interest rate at 10.1825% per annum due 2/26/2009   -     120,762  
• Interest rate at 10.1825% per annum due 3/5/2009   -     173,670  
             

Loan from Junan County Agricultural Financial Institution,

           
• Interest rate at 10.939 per annum due 1/22/2010   1,170,070     -  

Loan from Linyi Commercial Bank,            
• Interest rate at 9.293% per annum due 1/19/2010 $  658,164   $ -  
• Interest rate at 9.293% per annum due 12/21/2010   687,416     -  
• Interest rate at 9.293%per annum due 6/16/2010   1,462,587     -  
• Interest rate at 9.293% per annum due 6/15/2010   1,462,587     -  
• Interest rate at 13.073% per annum due 1/5/2009   -     685,711  
• Interest rate at 13.073% per annum due 1/5/2009   -     656,532  
• Interest rate at 8.539% per annum due 3/27/2009   -     1,458,959  
• Interest rate at 8.539% per annum due 3/27/2009   -     141,885  
             
Loan from Beijing Miyun County Shilipu Rural            
Financial Institution,            
• Interest rates at 7.434% per annum due 1/20/2010   1,462,587     -  
• Interest rates at 6.903% per annum due 9/30/2010   2,831,918        
• Interest rates at 8.539% per annum due 9/30/2009   -     2,772,023  
             
Loan from China Merchants Bank, Beijing,            
• Interest rate at 5.310% per annum due 3/29/2010   731,294     -  
             
Loan from China Agricultural Bank, Luotian            
Branch            
• Interest rate at 6.372% per annum due 8/25/2010   1,901,363     -  
• Interest rate at 7.47% per annum due 9/7/2009   -     817,017  
• Interest rate at 7.47% per annum due 9/7/2009   -     291,792  
             
Bank of Beijing            
• Interest rate at 6.903% per annum due 7/29/2010   292,517     -  
• Interest rate at 7.722% per annum due 7/28/2009   -     291,792  
             
Bank of China, Junan Branch            
• Interest rate at 7.500% per annum due 5/19/2009   -     4,014  
             
United Commercial Bank, China Branch            
• Interest rate at 5.494% per annum due 1/14/2010   1,050,137     -  
• Interest rate at 5.494% per annum due 1/14/2009   -     1,156,955  
             
HSBC Miyun Branch            
• Interest rate at 6.804% per annum due 4/8/2010   292,517     -  
             
Credit Union, Junan            
• Interest rate at 8.5837% per annum due 1/7/2009   -     43,769  
• Interest rate at 8.5837% per annum due 1/12/2009   -     43,769  
             
Shenzhen Development Bank   1,462,587        
• Interest rate at 5.5755% per annum due 12/29/2010            

F-17


AMERICAN LORAIN CORPORATION

NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

Luotian Agricultural Development Bank            
• Interest rate at 0.67% month due 12/11/2010   109,694     -  
$ 35,488,212   $  14,414,996  

The short-term loans, which are denominated in the functional currency Renminbi (RMB), were primarily obtained for general working capital.

11. NOTES PAYABLE
   
  Notes payable consisted of the following as of December 31, 2009 and 2008:

  2009     2008  
Notes to Junan County Construction Bank,            
• Bank commission charge at 4%, due 1/12/2009   -     554,405  
             
Notes to Junan County Agriculture Bank,            
• Bank commission charge at 4%, due 1/16/2009   -     277,202  
             
Loan to Jinan Branch, Shenzhen Development Bank,            
• Bank charge commission charge at 3.96%, due 2/6/2009   -     4,376,878  
             
  $   $ 5,208,485  

12. TAXES PAYABLE

    2009     2008  
Value added tax payable $  328,608   $  1,155,610  
Corporate income tax payable   1,842,751     1,770,492  
Employee payroll tax withholding   3,449     205  
Property tax payable   12,279     -  
Stamp tax payable   359     -  
Sales tax payable   -     486  
Land use tax payable   41,260     -  
Import tariffs   6,635     -  
             
  $  2,235,341   $  2,926,793  
             

F-18


AMERICAN LORAIN CORPORATION

NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

13. ACCRUED EXPENSES AND OTHER PAYABLE

Accrued expenses and other payables consisted of the following as of December 31, 2009 and 2008:

    2009     2008  
Accrued salaries and wages $  500,390   $  605,471  
Accrued utility expenses   263,492     481,678  
Accrued interest expenses   9,264     -  
Accrued transportation expenses   344,841     1,103,112  
Other accruals   184,860     -  
Business and other taxes   2,344,746     1,979,650  
Purchase disbursement payable   2,750,547     6,018,057  
Accrued staff welfare   24,352     103,269  
             
  $ 6,422,492   $  10,291,237  
   
14. LONG-TERM DEBT
   
Long-term debt consisted of the following as of December 31 2009 and 2008:            
    2009     2008  
 Loans from Luotian Agricultural Development Bank            
     • Interest rates at 2.10% per annum due 12/11/2011   25,595     25,532  
 Loan from United Commercial Bank, China Branch            
     • Interest rates at 5.494% per annum due 1/14/2011   269,278     551,443  
             
  $  294,873   $  576,975  

15.

MINORITY INTEREST

   

This represents the 19.8% equity of Shandong Lorain held by a state-owned interest, Shandong Economic Development Investment Corporation.

   
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 until through December 31, 2007. During the course of 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; 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 it 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. As detailed in the table below, the total number of outstanding shares at December 31, 2008 was 25,172,640.

   

During the year of 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. The total number of shares issued and outstanding is 30,240,202 at December 31, 2009.

F-19



AMERICAN LORAIN CORPORATION
 
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

    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  
Common stock at 12/31/2009         30,240,202     30,240,202  

 

Number of warrants    
Warrants and options or options Issuance Date Expiration date
Issued to PIPE investors – first round financing 1,037,858 5/3/2007 5/2/2010
Issued to placement agent – first round financing 489,330 5/3/2007 5/2/2010
Employee stock options   1,334,573     7/28/2009     7/27/2014  
PIPE investors second round financing - Series A 1,753,909 10/28/2009 4/28/2015
PIPE investors second round financing - Series B 501,115 10/28/2009 10/28/2012
Total warrants 5,116,785    

17.

INCOME TAXES

The following tables provide the reconciliation of the differences between the statutory and effective tax expenses for the years ended December 31, 2009 and 2008.

  2009 2008
Income attributed to PRC $  20,009,830    18,698,215  
Loss attributed to US* (478,151 ) (17,382 )
Income before tax   19,531,679     18,680,833  
     
PRC Statutory Tax at 25% Rate   5,002,457     4,674,554  
Effect of tax exemption granted (779,752 ) (1,671,289 )
Income tax $  4,222,705   3,003,265  
     
Per Share Effect of Tax Exemption            
  2009 2008
Effect of tax exemption granted $  (779,752 ) (1,671,289 )
Weighted-Average Shares Outstanding 26,075,413 25,172,640
Per share effect $  (0.03 ) (0.07 )

The difference between the U.S. federal statutory income tax rate and the Company’s effective tax rate was as follows for the year ended December 31, 2009 and 2008:

F-20



AMERICAN LORAIN CORPORATION
 
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

    2008     2009  
U.S. federal statutory income tax rate $  35.00%   $  35.00%  
Lower rates in PRC, net   -10.00%     -10.00%  
Tax holiday for foreign investments   -3.38%     -8.92%  
The Company’s effective tax rate $  21.62%   $  16.08%  

Effective January 1, 2008, PRC government implements 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 15% tax rate, tax holidays terminated as of December 31, 2007. However, PRC government has established a set of transition rules to allow enterprises already started 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 2009 because the Company has plans 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 asset. Accordingly the Company has not provided a valuation allowances for the accrued tax asset.

The Company’s has detailed the tax rates for its subsidiaries for 2009 and 2008 in the following table.

Income Tax Rate 2009 2008
International Lorain   0%     0%  
Junan Hongran 25% 15%
Luotian Lorain   15%     15%  
Beijing Lorain 15% 0%
Shangdong Lorain   25%     25%  
Dongguan Lorain 25% N/A
   
18.

SALES BY PRODUCT TYPE

Sales by categories of product consisted of the following as of December 31, 2009 and 2008:

Category 2009 2008
Chestnut $  89,117,729   $  83,027,719  
Convenience food 34,623,978 25,736,534
FCB food   23,030,735     23,596,064  
Total $  146,772,442 $  132,360,317

F-21



AMERICAN LORAIN CORPORATION
 
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

Revenue by geography consisted of the following as of December 31, 2009 and 2008:

Country   2009     2008  
Australia $  162,213   $  -  
Belgium   4,093,828     1,893,467  
China   103,504,689     91,442,654  
France   973,620     1,579,449  
Germany   454,225     722,436  
Holland   251,870     346,140  
Hong Kong   594,533     189,790  
Japan   18,898,539     21,764,764  
Malaysia   944,475     1,395,654  
Saudi Arabia   1,156,734     32,961  
Singapore   2,373,203     1,054,239  
Spain   279,851     -  
South Korea   11,030,072     8,338,475  
Taiwan   492,147     331,723  
United Kingdom   571,247     2,775,230  
United States of America   854,348     493,335  
Yemen   136,848     -  
Total $  146,772,442   $  132,360,317  

19.

SHARE BASED COMPENSATION

   

On July 27, 2009, the Company’s 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 Company’s common stock that may be issued under the Plan is 2,500,000 shares. The Company’s 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, respectively. The common shares vested immediately. Given the materiality and nature of share based compensation, the entire expense has been recorded as general and administrative expenses.

The range of the exercise prices of the stock options granted since inception of the plan are shown in the following table:

Price Range   Number of Shares  
$0 - $4.99   1,334,573 shares  
$5.00 - $9.99   0 shares  
$10.00 - $14.99   0 shares  

No tax benefit has yet to be accrued or realized. For the year ended December 31, 2009 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.

The Company used the Black-Scholes Model to value the warrants granted. The following shows the weighted average fair value of the grants and the assumptions that were employed in the model:

Weighted-average fair value of grants: $  0.9655  
Risk-free interest rate:   2.69%  
Expected volatility:   6.54%  
Expected life in months:   54.00  

F-22



AMERICAN LORAIN CORPORATION
 
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)

The outstanding lease commitment as of December 31, 2009 is $767,567.

20. LEASE COMMITMENTS
   
The Company has 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 December 31, 2009 are shown in the following table:

From   To     USD     RMB  
1/1/2010   12/31/2010   $  84,245   ¥  576,000  
1/1/2011   12/31/2011     84,245     576,000  
1/1/2012   12/31/2012     84,245     576,000  
1/1/2013   12/31/2013     87,521     598,400  
1/1/2014   12/31/2014     92,670     633,600  
1/1/2015   12/31/2015     92,670     633,600  
1/1/2016   12/31/2016     92,670     633,600  
1/1/2017   12/31/2017     92,670     633,600  
1/1/2018   8/9/2018     56,631     387,200  
        $  767,567   ¥  5,248,000  

F-23