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Planet Green Holdings Corp. - Quarter Report: 2008 June (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2008

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

Commission File No. 0-31619

AMERICAN LORAIN CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

 

87-0430320

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

Beihuan Road
Junan County
Shandong, China 276600

(Address, including zip code, of principal executive offices)

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

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 Q            No ¨

 

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

 

Large accelerated filer ¨              Accelerated filer ¨              Non-accelerated filer ¨          Smaller reporting company Q

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨         No Q

The numbers of shares outstanding of each of the issuer's classes of common equity, as of August 14, 2008, are as follows:

Class of Securities

Shares Outstanding

Common Stock, $0.001 par value

935,421

   

 

Table of Contents

 

  Page

 

   

PART I FINANCIAL INFORMATION

1

 

   

ITEM 1.

FINANCIAL STATEMENTS 1

 

   

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24

 

   

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 35

 

   

ITEM 4.

CONTROLS AND PROCEDURES 36

 

   

PART II OTHER INFORMATION

36

 

   

ITEM 1.

LEGAL PROCEEDINGS 36

 

   

ITEM 1A.

RISK FACTORS 36

 

   

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 36

 

   

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES 36

 

   

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 36

 

   

ITEM 5.

OTHER INFORMATION 36

 

   

ITEM 6.

EXHIBITS 37

 

   

SIGNATURES

   

 


PART I        FINANCIAL INFORMATION

ITEM 1.          FINANCIAL STATEMENTS.

AMERICAN LORAIN CORPORATION
CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2008 AND DECEMBER 31, 2007
(Stated in U.S. Dollars)

         

(Audited)

 

Note

 

6/30/2008

 

12/31/2007

ASSETS

         

Current Assets

         

Cash and Cash equivalents

2(m)

$

8,494,358

$

6,769,973

Restricted Cash

3

 

4,252,007

 

2,021,839

Short-term Investment

   

7,276

 

7,246

Trade accounts receivable

4

 

20,730,615

 

32,859,688

Other receivables

   

7,266,259

 

7,552,976

Inventory

2(j), 5

 

19,358,049

 

17,903,344

Advance to Suppliers

   

3,615,626

 

5,357,951

Prepaid Expenses and Taxes

   

2,143,719

 

916,774

Total Current Assets

 

$

65,867,909

$

73,389,790

           

Non-Current Assets

         

Long-term Investment

   

1,589,355

 

-

Property, plant and equipment, net

2(f), 6

 

29,442,995

 

24,022,181

Land use rights, net

7

 

3,995,251

 

3,047,021

           

TOTAL ASSETS

 

$

100,895,510

$

100,458,992

           

LIABILITIES AND STOCKHOLDERS' EQUITY

   

Current Liabilities

         

Short-term bank loans

8

$

    24,944,797

$

24,077,504

Notes payable

9

 

      6,548,503

 

2,734,444

Accounts payable

   

      2,607,516

 

6,251,833

Income tax payable

   

         732,134

 

1,121,528

Accrued liabilities and other payables

   

      6,728,839

 

16,784,108

Customers deposits

   

      1,994,139

 

957,642

Total Current Liabilities

 

$

43,555,927

$

51,927,058

           

Long-term Liabilities

         

Long-term bank loans

10

 

568,221

 

102,542

           

TOTAL LIABILITIES

 

$

44,124,148

$

52,029,600

           
         

(Audited)

 

Note

 

6/30/2008

 

12/31/2007

           

Minority interests

11

$

4,332,557

$

3,887,021

           

STOCKHOLDERS' EQUITY

         

Common Stock, $0.001 par value, 200,000,000 shares authorized; 24,923,178 shares issued and outstanding as of June 30, 2008 and December 31, 2007

12

 

24,923

 

24,923

Additional paid-in-capital

   

24,187,268

 

24,187,268

Statutory reserves

   

6,106,809

 

4,497,647

Retained earnings

   

17,834,901

 

13,985,824

Accumulated other comprehensive income

   

4,284,904

 

1,846,708

   

$

52,438,805

$

44,542,370

           

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

100,895,510

$

100,458,992


1

 


 

AMERICA LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)

     

Three months ended June 30,

 

Six months ended June 30,

 

Note

 

2008

 

2007

 

2008

 

2007

Net revenues

 

$

21,524,427

$

13,343,209

$

 38,952,726

$

25,242,021

Cost of revenues

   

(16,338,272)

 

(10,388,680)

 

(29,818,596)

 

(19,341,479)

    Gross profit

   

5,186,155

 

2,954,529

 

9,134,130

 

5,900,542

     

 

 

 

 

 

 

 

Operating expenses

   

 

 

 

 

 

 

 

Selling and marketing expenses

   

  (616,050)

 

(296,917)

 

 (1,235,018)

 

(422,750)

General and administrative expenses

   

  (1,087,894)

 

(460,141)

 

 (1,632,344)

 

(820,140)

     

 

 

 

 

 

 

 

Operating Income

   

3,482,211

 

2,197,471

 

6,266,768

 

4,657,652

     

 

 

 

 

 

 

 

Investment income

   

 (2,790)

 

-

 

    (2,790)

 

-

Government subsidy income

   

  4,492

 

(7,721)

 

         37,242

 

-

Interest and other income

   

    71,505

 

7,234

 

    110,588

 

33,824

Other expenses

   

  (94,819)

 

(1,329,203)

 

   (104,987)

 

(1,333,429)

Interest expense

   

  (683,401)

 

(737,611)

 

(1,273,698)

 

(1,303,281)

     

 

 

 

 

 

 

 

Earnings before tax

   

2,777,199

 

130,170

 

5,033,124

 

2,054,766

     

 

 

 

 

 

 

 

Income tax

2(r), 13

 

(493,194)

 

(285,597)

 

(883,575)

 

(615,577)

     

 

 

 

 

 

 

 

Income before minority interests

   

2,284,005

 

(155,427)

 

4,149,549

 

1,439,189

     

 

 

 

 

 

 

 

Minority interests

   

(166,631)

 

(54,442)

 

(300,471)

 

(155,837)

     

 

 

 

 

 

 

 

Net income

 

$

2,117,374

$

(209,869)

$

3,849,078

$

1,283,352

Earnings per share

2(v)

 

 

 

 

 

 

 

 

-

Basic

 

$

0.0850

$

  (0.00746)

$

0.1544

$

  0.0636

-

Diluted

 

$

0.0836

$

  (0.00746)

$

0.1517

$

 0.0623

     

 

 

 

 

 

 

 

Weighted average shares outstanding

   

 

 

 

 

 

 

 

-

Basic

   

24,923,178

 

 22,437,703

 

24,923,178

 

 20,185,241

-

Diluted

   

25,320,677

 

 23,255,647

 

25,378,104

 

 20,594,213

 

2

 


 

AMERICA LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTHS AND THREE-MONTHS ENDED JUNE 30, 2008 AND 2007
(Stated in US Dollars)

 

   

Three months ended June 30,

 

Six months ended June 30,

   

2008

 

2007

 

2008

 

2007

Cash flows from operating activities

 

 

 

 

 

 

 

 

   Net income

$

2,111,375

$

(244,510)

$

3,849,078

$

1,283,352

   Minority interest

 

166,631

 

54,442

 

300,471

 

155,837

   Depreciation

 

152,589

 

185,240

 

513,157

 

345,003

   Amortization

 

170,289

 

5,981

 

197,770

 

24,019

   (Increase)/decrease in accounts & other receivables

 

5,344,818

 

(6,173,644)

 

12,415,790

 

(3,178,691)

   (Increase)/decrease in advances to suppliers

 

1,742,325

 

-

 

1,742,325

 

-

   (Increase)/decrease in inventories

 

(4,991,298)

 

(2,565,667)

 

(1,454,705)

 

(1,478,673)

   (Increase)/decrease in prepaid tax

 

(1,226,945)

 

-

 

(1,226,945)

 

-

   Increase/(decrease) in accounts and other payables

 

(3,687,836)

 

(7,514,109)

 

(13,699,587)

 

(6,147,360)

   Increase/(decrease) in tax payable

 

(389,393)

 

-

 

(389,393)

 

-

   Increase/(decrease) in customer deposit

 

1,036,497

 

-

 

1,036,497

 

-

   Net cash (used in)/provided by operating activities

 

429,052

 

(16,252,267)

 

3,284,458

 

(8,996,513)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of plant and equipment

 

(2,420,849)

 

-

 

(5,657,923)

 

-

Sale of plant and equipment

 

-

 

(887,995)

 

-

 

-

Purchase of biological assets

 

115,731

 

(1,031,299)

 

-

 

(1,031,299)

Payment of construction in progress

 

938,022

 

(777,177)

 

(315,133)

 

(777,177)

(Increase)/decrease in restricted cash

 

(2,264,890)

 

(6,209,092)

 

(2,230,168)

 

(3,987,219)

Payment of land use rights

 

(816,295)

 

1,081,811

 

(948,230)

 

-

Investments in securities

 

(816,443)

 

19,930

 

(1,589,385)

 

19,667

Contribution to capital reserve

 

1,609,162

 

-

 

1,609,161

 

-

Net cash used in investing activities

 

(3,655,562)

 

(7,803,822)

 

(9,131,678)

 

(5,776,028)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Bank borrowings

 

266,084

 

-

 

1,332,972

 

-

Bank repayment

 

-

 

(2,618,282)

 

-

 

(5,769,343)

Notes payable

 

3,814,058

 

-

 

3,814,058

 

-

Issue of common stock

 

-

 

103,679

 

-

 

103,679

Increase in additional paid-in capital

 

-

 

20,260,623

 

-

 

20,260,623

Net cash provided by/(used in) financing activities

 

4,080,142

 

17,746,020

 

5,147,030

 

14,594,959

 

 

 

 

 

 

 

 

 

Net Increase/(decrease) of Cash and Cash Equivalents

 

853,632

 

(6,310,069)

 

(700,190)

 

(177,582)

 

 

 

 

 

 

 

 

 

Effect of foreign currency translation on cash

 

 

 

 

 

 

 

 

and cash equivalents

 

1,378,229

 

385,932

 

2,424,575

 

387,585

 

 

 

 

 

 

 

 

 

Cash and cash equivalents–beginning of year

 

6,262,497

 

8,450,565

 

6,769,973

 

2,316,425

 

 

 

 

 

 

 

 

 

Cash and cash equivalents–end of year

$

8,494,358

$

2,526,428

$

8,494,358

$

2,526,428

 

 

 

 

 

 

 

 

 

Supplementary cash flow information:

 

 

 

 

 

 

 

 

Interest received

 

25,710

 

14,134

 

34,412

 

17,187

Interest paid

 

607,641

 

384,206

 

976,719

 

911,416

Taxes paid

$

374,134

$

369,837

$

2,079,565

$

699,817

 

3

 


 

AMERICAN LORAIN CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(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)

Organizational 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.

(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.

4

 


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 14 Capitalization.

(d)

Business activities

The Company develops, manufactures, and sells convenience foods (such as cut fruit and premixed salads, which are known as lightly processed; Ready-to-Cook (or "RTC") meals; Ready-to-Eat (or "RTE") meals and Meals Ready-to-Eat (or "MRE"); chestnut products; and frozen, canned, and bulk foods, in hundreds of varieties. The Company operates through indirect Chinese subsidiaries. The products are sold in 19 provinces and administrative regions in China and 21 foreign countries. Foodproducts are categorized into three types: (1) chestnut products, (2) convenience food, and (3) frozen, canned, and bulk food.

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.

(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 June 30, 2008, the detailed identities of the consolidating subsidiaries are as follows: -

Name of Company

Place of incorporation

Attributable equity interest %

Registered capital

 

Shandong Green Foodstuff Co., Ltd

PRC

80.2

$12,901,823

(RMB 100,860,000)

Luotian Green Foodstuff 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 Green Foodstuff Co., Ltd

PRC

100

$1,279,181

(RMB 10,000,000)

(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.

5

 


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.

(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.

6

 


(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.

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.

7

 


(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 pro forma 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.

(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.

 

6/30/2008

 

3/31/2008

 

12/31/2007

 

6/30/2007

 

3/31/2007

Year end RMB : USD

6.8718

 

7.0222

 

7.3141

 

7.6248

 

7.7409

Average yearly RMB : USD

7.07263

 

7.17568

 

7.6172

 

7.72999

 

7.77136

 

8

 


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 periods ended June 30, 2008 and June 30, 2007, 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)

Commitments and contingencies

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

(x)

Comprehensive income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Company's current component of other comprehensive income is the foreign currency translation adjustment.

9

 


(y)

Recent accounting pronouncements

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted

Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). Statement 162 will become effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles."

In May 2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis.

The Company is currently evaluating the potential impact, if any, of the adoption of the above recent accounting pronouncements on its consolidated results of operations and financial condition.

 

10

 


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.

4.

TRADE ACCOUNTS RECEIVABLE

 

 

6/30/2008

 

12/31/2007

 

 

 

 

 

Trade Account Receivable

 

$   21,046,309

 

$  33,031,997

Less: Allowance for Doubtful Accounts

 

(315,694)

 

(172,309)

 

 

$   20,730,615

 

$  32,859,688

 

 

 

 

 

 

 

 

 

 

 

 

6/30/2008

 

12/31/2007

Allowance for Bad Debt:

 

 

 

 

Beginning Balance

 

$        172,309

 

$       226,881

Additions to Allowance

 

143,385

 

-

Less: Bad Debt Written-off

 

-

 

(54,572)

 

 

$        315,694

 

$       172,309

The Company offers credit terms of between 90 to 180 days to most of their international distributors and between 30 to 90 days for most of their domestic distributors.

5.

INVENTORY

Inventories at June 30, 2008 and December 31, 2007 consisted of the following:

   

6/30/2008

 

12/31/2007

         

Raw Material

 

$     11,220,624

 

$    5,225,248

Finished Goods

 

8,137,425

 

12,678,096

   

$     19,358,049

 

$  17,903,344

 

11

 


6.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment at June 30, 2008 and December 31, 2007 consisted of the following:

   

6/30/2008

 

12/31/2007

At Cost:

 

 

 

 

Buildings

 

$   20,609,716

 

$  15,547,205

Biological Assets

 

2,745,052

 

2,784,136

Machinery and Equipment

 

6,408,913

 

5,732,776

Office Equipment

 

351,062

 

28,520

Motor Vehicles

 

437,353

 

658,547

 

 

$   30,552,096

 

$  24,751,184

 

 

 

 

 

Less: Accumulated Depreciation

 

 

 

 

Buildings

 

(944,742)

 

(698,732)

Biological Assets

 

(0)

 

(1,954,257)

Machinery and Equipment

 

(2,340,387)

 

(15,643)

Office Equipment

 

(194,200)

 

(318,468)

Motor Vehicles

 

(203,002)

 

(2,987,100)

 

 

(3,682,331)

 

(698,732)

 

 

 

 

 

Construction in Progress

 

2,573,230

 

2,258,097

 

 

 

 

 

 

 

$   29,442,995

 

$  24,022,181

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 periods disclosed above.

Biological Assets are chestnut tree investments 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.

7.

LAND USE RIGHTS, NET

Land Use Rights at June 30, 2008 and December 31, 2007 consisted of the following: -

 

 

6/30/2008

 

12/31/2007

 

 

 

 

 

Land Use Rights, at cost

 

$     4,340,154

 

$    3,173,931

Less: Accumulated amortization

 

(344,903)

 

(126,910)

 

 

$     3,995,251

 

$    3,047,021

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.

12

 


8.

SHORT-TERM DEBTS

   

6/30/2008

 

12/31/2007

Loans from Junan County Construction Bank

       

·   Interest rate at 6.264% per annum due 8/31/2007

$

436,567

$

       410,167

·   Interest rate at 6.264% per annum due 9/7/2007

 

365,261

 

       343,173

·   Interest rate at 7.776% per annum due 12/18/2007

     

       261,139

·   Interest rate at 7.776% per annum due 12/18/2007

     

       355,478

·   Interest rate at 8.541% per annum due 3/5/2008

     

       355,478

·   Interest rate at 8.892% per annum due 7/23/2008

 

349,253

 

       328,133

·   Interest rate at 6.314% per annum due 9/17/2008

 

273,218

 

       256,696

·   Interest rate at 7.884% per annum due 6/11/2008

 

87,140

 

       505,872

·   Interest rate at 7.884% per annum due 7/29/2008

 

261,940

   

·   Interest rate at 7.884% per annum due 7/29/2008

 

771,268

   

·   Interest rate at 7.884% per annum due 8/8/2008

 

582,089

   

·   Interest rate at 7.884% per annum due 8/8/2008

 

334,701

   

·   Interest rate at 7.884% per annum due 8/28/2008

 

669,402

   

·   Interest rate at 7.884% per annum due 8/27/2008

 

844,029

   

·   Interest rate at 7.884% per annum due 9/18/2008

 

451,119

   
         

Loan from Junan County Agriculture Bank

       

·   Interest rate at 10.251% per annum due 1/11/2008

$

 

$

       231,061

·   Interest rate at 10.557% per annum due 1/11/2008

     

       345,907

·   Interest rate at 11.016% per annum due 2/21/2008

     

       191,411

·   Interest rate at 11.169% per annum due 6/7/2008

     

       123,050

·   Interest rate at 11.169% per annum due 6/7/2008

     

         41,017

·   Interest rate at 11.169% per annum due 6/29/2008

     

       347,274

·   Interest rate at 11.169% per annum due 6/29/2008

     

       109,378

·   Interest rate at 11.169% per annum due 7/3/2008

     

       505,872

·   Interest rate at 11.169% per annum due 8/13/2008

 

1,018,656

 

1,476,540

·   Interest rate at 11.169% per annum due 9/24/2008

 

945,895

   

·   Interest rate at 11.169% per annum due7/18/2008

 

334,701

   
         

·   Interest rate at 7.884% per annum due 7/18/2008

     

       273,444

·   Interest rate at 11.628% per annum due 7/25/2008

     

       191,411

·   Interest rate at 11.628% per annum due 8/1/2008

 

87,313

 

         82,033

·   Interest rate at 12.393% per annum due 10/30/2008

 

436,567

 

       410,167

·   Interest rate at 12.393% per annum due 11/11/2008

 

254,664

 

       239,264

·   Interest rate at 12.393% per annum due 11/14/2008

 

218,283

 

       205,083

·   Interest rate at 12.393% per annum due 11/14/2008

     

       199,614

·   Interest rate at 12.393% per annum due 11/22/2008

 

436,567

 

       410,167

·   Interest rate at 12.393% per annum due 11/29/2008

 

305,597

 

       287,117

·   Interest rate at 12.393% per annum due 12/4/2008

 

436,567

 

       410,167

·   Interest rate at 12.393% per annum due 12/13/2008

 

436,567

 

       410,167

 

13

 


         
   

6/30/2008

 

12/31/2007

         

·   Interest rate at 12.699% per annum due 1/4/2009

     

               -   

·   Interest rate at 11.169% per annum due 5/20/2008

     

               -   

·   Interest rate at 12.699% per annum due 1/4/2009

 

58,209

 

               -   

·   Interest rate at 12.699% per annum due 1/4/2009

 

87,313

 

               -   

·   Interest rate at 12.699% per annum due 1/4/2009

 

58,209

 

               -   

·   Interest rate at 11.169% per annum due 1/1/2009

 

116,418

   
         

·   Interest rate at 11.169% per annum due 7/18/2008

     

               -   

·   Interest rate at 11.169% per annum due 6/30/2008

     

               -   

·   Interest rate at 11.169% per annum due 2/1/2009

     

               -   

·   Interest rate at 12.70% per annum due 3/20/2009

 

58,209

 

               -   

·   Interest rate at 11.169% per annum due 5/6/2008

     

               -   

·   Interest rate at 11.169% per annum due 6/26/2008

     

               -   

·   Interest rate at 11.169% per annum due 6/12/2008

     

               -   

·   Interest rate at 11.169% per annum due 6/19/2008

     

               -   

·   Interest rate at 11.169% per annum due 6/19/2008

     

               -   

         

Loan from Junan County Industrial and Commercial Bank

       

·   Interest rate at 6.120% per annum due 1/11/2007

$

 

$

       546,889

·   Interest rate at 8.424% per annum due 3/7/2007

     

       806,661

·   Interest rate at 6.120% per annum due 11/10/2007

     

       136,722

·   Interest rate at 8.073% per annum due 12/7/2007

     

    1,278,353

·   Interest rate at 7.956% per annum due 1/18/2008

     

       478,528

·   Interest rate at 7.956% per annum due 1/18/2008

     

       546,889

·   Interest rate at 6.9545% per annum due 2/8/2008

     

       604,299

·   Interest rate at 6.570% per annum due 2/8/2008

     

       546,889

·   Interest rate at 7.956% per annum due 3/5//2008

     

    1,367,222

·   Interest rate at 8.892% per annum due 3/7/2008

     

       410,167

·   Interest rate at 6.12% per annum due 6/30/2008

 

85,752

 

       706,766

·   Interest rate at 7.290% per annum due 6/30/2008

     

       232,428

·   Interest rate at 9.71% per annum due 7/10/2008

 

94,589

 

               -   

·   Interest rate at 9.71% per annum due 8/8/2008

 

49,478

 

               -   

·   Interest rate at 8.541% per annum due 4/20/2008

     

               -   

         

·   Interest rate at 9.711% per annum due 12/22/2008

 

203,731

 

               -   

·   Interest rate at 6.57% per annum due 4/17/2008

     

               -   

·   Interest rate at 8.541% per annum due 4/30/2008

     

               -   

·   Interest rate at 7.47% per annum due 11/1/2008

 

407,462

 

               -   

·   Interest rate at 7.47% per annum due 12/1/2008

 

582,089

 

               -   

·   Interest rate at 8.541% per annum due 6/4/2008

     

               -   

·   Interest rate at LIBOR+1.5% per annum due 6/6/2008

       

·   Interest rate at LIBOR+1.5% per annum due 6/13/2008

       

·   Interest rate at 8.541% per annum due 10/12/2008

 

392,910

   

 

14

 


         
   

6/30/2008

 

12/31/2007

         

·   Interest rate at 8.54% per annum due 7/29/2008

 

72,761

   
         

Loan from Junan County Merchants Bank

       

·   Interest rate at 6.210% per annum due 3/13/2008

$

 

$

    1,367,222

         

Loan from Junan County Agricultural Financial Institution

       

·   Interest rate at 12.15% per annum due 5/20/2008

$

 

$

         25,977

·   Interest rate at 12.420% per annum due 6/20/2008

     

         68,361

·   Interest rate at 10.935% per annum due 10/1/2008

     

    2,597,722

         

Loan from Linyi Commercial Bank

       

·   Interest rate at 10.71% per annum due 2/9/2008

$

 

$

       497,221

·   Interest rate at 13.73% per annum due 12/25/2008

 

145,522

 

       136,722

·   Interest rate at 13.73% per annum due 1/5/2009

 

683,955

 

               -   

·   Interest rate at 13.73% per annum due 1/12/2009

 

654,850

 

               -   

         

Loan from Junan Agricultural Development Bank

       

·   Interest rate at 7.290% per annum due 9/26/2008

$

1,455,223

$

    

·   Interest rate at 6.570% per annum due 9/3/2008

 

87,314

   

·   Interest rate at 6.570% per annum due 9/12/2008

 

97,500

   
         

Loan from China Agricultural Bank, Luotian Branch

       

·   Interest rate at 7.722% per annum due 8/28/2008

$

742,164

$

    1,039,089

         

Bank of China, Junan Branch

       

·   Interest rate at 7.500% per annum due 5/19/2009

$

7,288

$

          9,815

·   Interest rate at 7.840% per annum due 5/17/2009

     

               -   

         

International Trust Co., Ltd.

       

·   Interest rate at 5.76% per annum due 6/13/2008

$

1,455,223

$

    1,367,222

         

United Commercial Bank, China Branch

       

·   Interest rate at 5.494% per annum due 1/14/2009

$

1,044,850

$

               -   

         

Luotian Agricultural Cooperation Development Office

       

·   Interest rate at 2.1% per annum due 12/11/2011

$

 

$

               -   

         

Jinan Merchants Bank, Jinan County

       

·   Interest rate at 15.00% per annum due 10/3/2008

$

1,455,223

$

    

         

Shenzhen Develop Bank

       

·   Interest rate at 7.47% per annum due 11/15/2008

$

1,455,223

$

 
         

15

 


         

 

 

6/30/2008

 

12/31/2007

         
Credit Union, Beijing        

·   Interest rate at 10.935% per annum due 9/29/2008

 

2,764,923

   
         

Bank of Beijing

       

·   Interest rate at 7.884% per annum due 7/18/2008

 

291,045

   
         
 

$

24,944,797

$

24,077,504

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

All overdue loans were extended by its financial institution.

 

 

16

 


9.

NOTES PAYABLE

The notes payable, which are denominated in the functional currency of Renminbi, at June 30, 2008 and December 31, 2007, are presented in US dollars as follows:

   

6/30/2008

 

12/31/2007

         

Notes to Industrial and Commercial Bank,

       

Bank commission charge at 3.99% due December 20, 2007

$

 

$

546,888

Bank commission charge at 3.99% due December 12, 2007

     

1,093,778

Bank commission charge at 3.99% due December 18, 2007

     

1,093,778

Bank commission charge at 7.24% due September 4, 2008

 

582,089

 

-

Bank commission charge at 7.24% due September 4, 2008

 

582,089

 

-

Bank commission charge at 7.24% due September 4, 2008

 

291,045

 

-

Bank commission charge at 7.20% due September 19, 2008

 

582,089

 

-

Bank commission charge at 7.20% due September 19, 2008

 

582,089

 

-

Bank commission charge at 7.20% due September 19, 2008

 

291,045

 

-

         

Notes to Jinan Merchant Bank

       

Bank commission charge at 0.0056%, due October 3, 2008

 

1,455,223

 

-

         

Notes to Shenzhen Develop Bank

       

Bank commission charge at 0.0043%, due November 15, 2008

 

2,182,834

 

-

         
 

$

6,548,503

$

2,734,444

All overdue notes were extended by its financial institution.

17

 


10.

LONG-TERM DEBTS

   

6/30/2008

 

12/31/2007

         

Loan from Agricultural Development Luotian Government,

       

Interest rate at 0.67% per annum due 12/11/2010

$

109,142

$

102,542

Interest rate at 2.10% per annum due 12/11/2011

 

25,466

   
         

Loan from United Commercial Bank, China Branch

       

Interest rate at 5.494% per annum due 1/14/2011

 

433,613

 

-

         

Less: Current maturities of long-term debts

     

-

 

$

568,221

$

102,542

Interest expenses for long-term debt were $11,189 and $687 for the period ended June 30, 2008 and the year ended December 31, 2007.

The Loan from Agricultural Development Luotian Government is due in full at December 11, 2010. There is no current portion at December 31, 2007.

 

18

 


11.

MINORITY INTERESTS

Minority interests represent the 19.8% equity of Shangdong Lorain held by a state-owned enterprise, Shandong Economic Development Investment Corporation.

12.

CAPITALIZATION

As a result of the reverse-merger on May 3, 2007 involving an exchange of shares, the total number of 24,923,178 shares of the Company's common stock issued and outstanding at June 30, 2008 and December 31, 2007 is depicted in the following table:

Name of Shareholder

 

Number of
Share

 

 

Common

Stock Capital

 

Additional

Paid-in
Capital

           

Shareholders of International Lorain Holding Inc. (697,663 Series B preferred shares converted to common shares at one for 23.375 Split

16,307,872

 

$          16,308

 

$                   -

           

Halter Financial Investments LP and other (100,000 Series A preferred shares converted to common shares:

         

100,000 x 428.56 = 42,856,000 / 32.84)

         

Reversed-split

1,304,992

 

1,305

 

-

           

Original Shareholders of Millennium Quest Inc.

         

(Shell) 10,508,643 shares / 32.84

         

reverse-split adjusted for round-down

319,913

 

320

 

-

           

Original additional paid-in capital from the

         

4 PRC subsidiaries

-

 

-

 

6,846,620

           

Issuance of common stock for cash

6,990,401

 

6,990

 

17,340,648

           
 

24,923,178

 

$          24,923

 

$  24,187,268

 

19

 


13.

INCOME TAXES

All of the Group's income before income taxes and related tax expenses are from PRC sources. In accordance with the relevant tax laws and regulations of PRC, the corporation income tax rate was 33% for all periods before December 31, 2007. However, also in accordance with the relevant taxation laws in the PRC, some of the subsidiaries of the Group are eligible for tax exemption. In particular, from the time that a company has its first profitable tax year, the company is exempt from corporate income tax for its first two year and is then entitled to a 50% tax reduction for the succeeding three year. Actual income tax expenses reported in the consolidated statements of income and comprehensive income differ from the amounts computed by applying the PRC statutory income tax rate of 33% to income before income tax for the period from August 4, 2006 (date of incorporation) to December 31, 2007, and 25% for periods thereafter, for the following reasons: -

   

6/30/2008

 

6/30/2007

         

Effect of tax exemption granted

$

5,033,124

$

2,054,766

         

Tax Rate

 

25%

 

33%

Tax at the income tax rate

 

1,258,281

 

678,073

Effect of tax exemption granted

 

374,706

 

62,496

Income tax

$

883,575

$

615,577

   
Per Share Effect of Tax Exemption

 

   

6/30/2008

 

6/30/2007

         

Effect of tax exemption granted

$

374,706

$

62,496

         

Weighted-Average Shares Outstanding

 

24,923,179

 

35,111,908

Per share effect

$

0.0151

$

0.0018

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 taxpayers. 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 that already started tax holidays before January 1, 2008, to continue enjoying the tax holidays until being fully utilized.

Based on the background of each constituent of our group, the income tax rates applicable to the four constituents for 2007, 2008, and 2009 are depicted in the following table.

Income Tax Rate

2007

2008

2009

Junan Hongran

15%

15%

25%

Luotian Lorain

0%

15%

15%

Beijing Lorain

0%

0%

15%

Shangdong Lorain

30%

25%

25%

 

20

 


14.

SALES BY PRODUCT TYPE

Sales by categories of product at June 30, as follow: -

Category

 

6/30/2008

 

6/30/2007

         

Chestnut

$

23,358,314

$

13,825,482

Meat

 

4,710,370

 

1,051,366

Vegetable

 

10,863,603

 

10,321,464

Others

 

20,440

 

43,709

Total

$

38,952,726

$

25,242,021

Revenue by geography at June 30, was as follows: -

Country

 

6/30/2008

 

6/30/2007

         

Belgium

$

839,578

$

           570,658

Canada

 

0

 

             13,832

Chile

 

72,424

 

      

China

 

30,668,181

 

      18,240,283

France

 

380,509

 

32,513

Germany

 

33,355

 

38,518

Hong Kong

 

69,501

 

24,036

Japan

 

2,243,240

 

3,981,326

Korea

 

2,060,488

 

921,705

Kuwait

 

0

 

34,252

Malaysia

 

242,603

 

234,111

Netherlands

 

399,301

 

136,746

Saudi Arabia

 

110,890

 

459,780

Singapore

 

263,666

 

102,874

Spain

 

37,724

 

0

Taiwan

 

605,379

 

0

United Arab Emirates

 

100,942

 

46,265

UK

 

633,446

 

97,201

USA

 

171,499

 

247,710

Syria

     

46,872

Yemen

     

13,338

Total

$

38,952,726

$

      25,242,021

21

 


15.

EARNINGS PER SHARE

   

Three

 

Three

 

Six

 

Six

   

Months Ended

 

Months Ended

 

Months Ended

 

Months Ended

   

June 30, 2008

 

June 30, 2007

 

June 30, 2008

 

June 30, 2007

Net Income (A)

 

2,117,374

 

(244,510)

 

3,849,078

 

1,283,352

                 

Basic Weighted Average Shares Outstanding (B)

 

24,923,178

 

 22,437,703

 

24,923,178

 

 20,185,241

Dilutive Shares:

               

-

Addition to Common Stock from Potential Exercise of Warrants (C)

 

397,498

 

 817,944

 

454,925

 

 408,972

Diluted Weighted Average Shares Outstanding: (D)

 

25,320,677

 

 23,255,647

 

25,378,104

 

 20,594,213

                 

Earnings Per Share

               

-

Basic (A)/(B)

 

0.0850

 

(0.0087)

 

0.1544

 

0.0366

-

Diluted (A)/(D)

 

0.0836

 

(0.0087)

 

0.1517

 

0.0366

                 

Weighted Average Shares Outstanding

               

-

Basic

 

24,923,178

 

 22,437,703

 

24,923,178

 

 20,185,241

-

Diluted

 

25,320,677

 

  23,255,647

 

25,378,104

 

  20,594,213

 

22

 


ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Caution Regarding Forward-Looking Information

This quarterly report on Form 10-Q contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section below entitled "Quantitative and Qualitative Disclosures About Market Risk" and in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007.

In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

Also, forward-looking statements represent our estimates and assumptions only as of the date of this quarterly filing. You should read this quarterly filing and the documents that we reference in this quarterly filing, or that we filed as exhibits to the quarterly filing of which this quarterly filing is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

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

Overview

We are a Delaware corporation that was incorporated on February 4, 1986 as Millennium Quest, Inc. and we are headquartered in Shandong Province, China. From our inception through May 3, 2007, when we completed a recapitalization with International Lorain Holding, Inc., or Lorain Holding, a Cayman Islands company, we did not engage in any active business operations other than search for, and evaluate a potential business opportunity to become an acquiree of ours through a reverse merger transaction.

As an integrated food manufacturing company, our product mix varies by season. We develop, manufacture and sell convenience foods; chestnut products; and frozen, canned and bulk foods, in hundreds of varieties. Food products are categorized into three types:

  • chestnut products,

  • convenience foods, and

  • frozen, canned, and bulk food.

We operate through our indirect Chinese subsidiaries, Junan Hongrun, Shandong Lorain, Luotian Lorain, and Beijing Lorain. Our products are sold in 19 provinces and administrative regions in China and 42 foreign countries.

Background and History of Lorain Holding and its Operating Subsidiaries and Affiliates

Lorain Holding was incorporated in the Cayman Islands on August 4, 2006 and until May 3, 2007, was wholly-owned by Mr. Hisashi Akazawa. We now own 100% of Lorain Holding, as a result of the May 2007 recapitalization. Lorain Holding presently has two direct, wholly-owned Chinese operating subsidiaries: Luotian Lorain and Junan Hongrun; one indirect wholly owned operating subsidiary, Beijing Lorain; and one majority-owned subsidiary, Shandong Lorain, which is 80.2% owned by us (with the state-owned Shandong Economic Development Investment Co. Ltd. owning the remaining 19.8% interest).

23

 


Uncertainties that Affect our Financial Condition

The rising level of consumer prices in China may cause a decrease of our sales and exports which will lower our revenues and profits.

It is expected that the cost of the raw materials we must purchase to make our finished products may increase in light of a general increase in prices in China. We expect decreased export sales as we raise our sale prices to our exports customers to pass along the increased price of raw materials. We expect the decreased sales may lead to lower revenues than if the price increase had not occurred and that our profits may suffer as well.

The anticipated appreciation of RMB may harm our financial condition

Our government has been facing increasing pressure to allow the RMB to appreciate from the world marketplace recently. In 2007, RMB appreciated more than 6.14%. Since July of 2005, the RMB has appreciated 10.24%. The expected appreciation will definitely have a significant impact on our exports and our financial conditions since exports account for about 50% of our revenue. Due to the unpredictability of RMB's appreciation, we have planned efforts to advance our domestic sales and revenues. In 2008, we plan to expend RMB 20 million (approximately U.S. $3 million) to adjust and expand our sales and marketing channels. We are also targeting to establish additional 1,000 food kiosks at different wholesalers and supermarkets and open 100 of our own food retail stores nationally to increase our domestic sales. Further, we have also planned to expend RMB 10 million (approximately U.S. $1.5 million) to further the marketing of our brand and products through different types of media such as TV commercials, newspaper advertising, internet advertising, and market campaigns. Whether or not RMB appreciates, the increased domestic spending will increase our costs and may not lead to any additional revenues. Additionally, the appreciation of the RMB, if it occurs, could lower our international sales.

24

 


Tight monetary policy implemented by the Chinese government in 2008 may impede our ability to obtain credit for working capital in a timely manner.

On December 5, 2007, the central economic work conference determined that a tight monetary policy will be implemented in 2008 to respond to inflationary forces and the excessive growth of monetary credits in China. On December 8, 2007, the People's Bank of China announced it will increase its RMB deposit reserve rate by one percentage point for financial institutions making deposits, resulting in a record high interest rate of 14.5%. After that, on January 16, 2008, March 18, 2008, April 16, 2008 and May 12, 2008 the RMB deposit reserve rate was increased four times by 0.5% and it reached 16.5% after May 12, 2008. Due to this new policy, financial institutions have started to tighten the money supply, reduced credit amounts, delayed loan approvals and restricted credit requirements. Traditionally, our Company has relied on short-term credits as a vehicle to purchase raw materials for our production. This tightened credit policy will impact on our cash management and our financial condition. We have adopted new policy and informed our customers that we will shorten our payment period from 55 days to 30 days. We may be unable to obtain the credit we need to purchase raw materials in the future which may slow our production and ultimately our revenues.

Results of Operations

Three months Ended June 30, 2008 Compared to Three months Ended June 30, 2007

The following table summarizes the results of our operations during the three-month periods ended June 30, 2008 and June 30, 2007, respectively and provides information regarding the dollar and percentage increase or (decrease) from the three-month period ended June 30, 2007 to the three-month period ended June 30, 2008.

 

 

25

 


(All amounts, other than percentages, stated in US dollars)

   

Three months ended June 30,

 

Dollar
($)

Percentage

(%)

   

2008

 

2007

 

Increase
(Decrease)

Increase
(Decrease)

   

(In Thousands)

 

(In Thousands)

     

Net revenues

$

21,524

$

13,343

$

8,181

61%

Cost of revenues

 

(16,338)

 

(10,389)

 

5,950

57%

    Gross profit

 

5,186

 

2,955

 

2,232

76%

Operating expenses

 

 

 

 

 

 

 

Selling and marketing expenses

 

(616)

 

(297)

 

319

107%

General and administrative expenses

 

(1,088)

 

(460)

 

628

136%

Operating Income

 

3,482

 

2,197

 

1,285

58%

Investment income

 

(3)

 

0

 

(3)

 

Government subsidy income

 

4

 

(8)

 

12

158%

Interest and other income

 

72

 

7

 

64

888%

Other expenses

 

(95)

 

(1,329)

 

(1,234)

(93%)

Interest expense

 

(683)

 

(738)

 

(54)

(7%)

Earnings before tax

 

2,777

 

130

 

2,647

2034%

Income tax

 

(493)

 

(286)

 

208

73%

Income before minority interests

 

2,284

 

(155)

 

2,439

1570%

Minority interests

 

(167)

 

(54)

 

112

206%

Net income

$

2,117

$

(210)

$

2,327

1109%

Revenue

Net Revenues. Our net revenue for the three months ended June 30, 2008 amounted to $21.52 million, which is approximately $8.18 million or 61% more than that of the same period ended on June 30, 2007, where we had revenue of $13.34 million. This increase was attributable to an increase of 78% in domestic sales as compared to the same period ended June 30, 2007, as a result of strong domestic chestnut sales combined with more efficient distribution channels. During the quarter, we started transferring domestic sales to agents rather than selling through wholesalers or directly to retailers. In addition, we increased the number of branded counters in supermarkets and showcase stores to a total of approximately 500 retail outlets as of June 30, 2008.

Cost of Revenues. Our cost of goods sold, which consists of raw materials, direct labor and manufacturing overhead expenses, was $16.34 million for the three month period ended June 30, 2008, a increase of $5.95 million or 57%, as compared to $10.39 million for the three month period ended June 30, 2007. This increase was mainly attributable to the increased sales of chestnuts products as a percentage of total sales, since chestnuts have higher gross profit margin.

26

 


Gross Profit. Our gross profit increased $2.24 million, or 76% to $5.19 million for the three months ended June 30, 2008 from $2.95 million for the same period in 2007. This increase was mainly attributable to the fact that we were able to fully transfer rising raw material prices to consumers.

Operating Expenses

Selling and Marketing Expenses. Selling and marketing expenses increased $0.32 million, or 107% to $0.62 million for the three months ended June 30, 2008 from $0.30 million for the same period in 2007. This increase mainly resulted from increased efforts to market our products in our domestic market.

General and Administrative Expenses. General and administrative expenses increased $0.63 million, or 136% to $1.09 million for the three months ended June 30, 2008 from $0.46 million for the same period of 2007. The increase of general and administrative expenses was primarily attributable to expansion of our distribution channels.

Income Before Taxation and Minority Interest

Income before taxation and minority interest increased $2.65 million or 2,034% to $2.78 million for the three months ended June 30, 2008from $0.13 million for the same period of 2007. The increase was primarily attributed to the substantial loss incurred by Beijing Lorain due to the fire in the May of 2007 and increased sales in the second quarter of 2008.

Income Taxes

Income taxes increased $0.20 million or 73% to $0.49 million for the three months ended June 30, 2008 from $0.29 million for the same period of 2007. The increase of tax paid was primarily a result of higher income achieved by all the subsidiaries of American Lorain.

We operate through our three directly or indirectly wholly-owned subsidiaries Junan Hongrun, Luotian Lorain, and Beijing Lorain and one majority-owned subsidiary, Shandong Lorain, in which we own 80.2% of the equity (directly and indirectly). As approved by local tax authorities in the PRC, all four companies were granted a "tax holiday" that allows them to be exempt from both the national and local income taxes for the first two profitable years followed by a 50% tax exemption in the next three years. The four companies started to enjoy the preferential tax policy from 2001, 2004, 2006 and 2007 respectively. The table below shows the detailed income tax rate for the four companies. On March 16, 2007, the National People's Congress of the PRC determined to adopt a new corporate income tax law in its fifth plenary session and the new corporate income tax law effected on January 1, 2008. According to the new corporate income tax law, the applicable income tax rates for our operating subsidiaries are as following:

Income Tax Rate

2007

2008

2009

Junan Hongrun

15%

15%

25%

Luotian Lorain

0%

15%

15%

Beijing Lorain

0%(1)

0%(1)

15%(1)

Shandong Lorain

30%

25%

25%

(1)

We are attempting to obtain a tax holiday with respect to Beijing Lorain that would bring our tax rate to 0%, 0% and 15% for Beijing Lorain for the tax years ending December 31, 2007, 2008 and 2009 respectively.

Net Income.

Net income increased $2.33 million, or 1,109% to $2.12 million for the three months ended June 30, 2008 from ($0.21) million for the same period of 2007. Net loss for the year ago period includes the impact of $1.3 million in non-operational expenses due to a fire at the Company's Beijing Lorain facility.

27

 


Six months Ended June 30, 2008 Compared to Six months Ended June 30, 2007

The following table summarizes the results of our operations during the six-month periods ended June 30, 2008 and June 30, 2007, and provides information regarding the dollar and percentage increase or (decrease) from the six-month period ended June 30, 2007 to the six-month period ended June 30, 2008.

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

   

Six months ended June 30,

 

Dollar
($)

Percentage

(%)

           

Increase

Increase

   

2008

 

2007

 

(Decrease)

(Decrease)

   

(In Thousands)

 

(In Thousands)

     

Net revenues

$

38,953

$

25,242

$

13,711

54%

Cost of revenues

 

(29,819)

 

(19,341)

 

10,477

54%

    Gross profit

 

9,134

 

5,901

 

3,234

55%

Operating expenses

 

 

 

 

 

 

 

Selling and marketing expenses

 

(1,235)

 

(423)

 

812

192%

General and administrative expenses

 

(1,632)

 

(820)

 

812

99%

 

 

 

 

 

 

 

 

Operating Income

 

6,267

 

4,658

 

1,609

35%

 

 

 

 

 

 

 

 

Investment income

 

(3)

 

0

 

(3)

 

Government subsidy income

 

37

 

0

 

37

 

Interest and other income

 

111

 

34

 

77

227%

Other expenses

 

(105)

 

(1,333)

 

(1,228)

(92%)

Interest expense

 

(1,274)

 

(1,303)

 

(30)

(2%)

 

 

 

 

 

 

 

 

Earnings before tax

 

5,033

 

2,055

 

2,978

145%

 

 

 

 

 

 

 

 

Income tax

 

(884)

 

(616)

 

268

44%

 

 

 

 

 

 

 

 

Income before minority interests

 

4,150

 

1,439

 

2,710

188%

 

 

 

 

 

 

 

 

Minority interests

 

(300)

 

(156)

 

145

93%

 

 

 

 

 

 

 

 

Net income

$

3,849

$

1,283

$

2,566

200%

 

28

 


Revenue

Net Revenues. Our net revenue for the six months ended June 30, 2008 amounted to $38.95 million, which is approximately $13.71 million or 54% more than that of the same period ended on June 30, 2007 where we had revenue of $25.24 million. The increased revenues were attributable to the success of the Company's marketing strategies, operational enhancements and expansion of sales markets, both domestically and internationally. During the first quarter of 2008, sales to France, Belgium, Korea, Taiwan and the UK in the aggregate increased approximately 175% compared with the same period last year. During the second quarter of 2008, we started transferring domestic sales to agents rather than selling through wholesalers or directly to retailers. In addition, we increased the number of branded counters in supermarkets and showcase stores to a total of approximately 500 retail outlets as of June 30, 2008.

Cost of Revenues. Our cost of goods sold, which consists of raw materials, direct labor and manufacturing overhead expenses, was $29.82 million for the six month period ended June 30, 2008, an increase of $10.48 million or 54%, as compared to $19.34 million for the six month period ended June 30, 2007. The cost of goods sold increased because the sales in the first six months of 2008 increased as compared to the same period ended June 30, 2007.

Gross Profit. Our gross profit increased $3.23 million, or 55% to $9.13 million for the six months ended June 30, 2008 from $5.90 million for the same period in 2007. This increase was attributable to increased sales and to our ability to fully transfer rising raw material prices to consumers in the second quarter of 2008.

Operating Expenses

Selling and Marketing Expenses. Selling and marketing expenses increased $0.81 million, or 192% to $1.24 million for the six months ended June 30, 2008 from $0.42 million for the same period in 2007. This increase mainly resulted from increased efforts to market our products in our domestic market.

General and Administrative Expenses. General and administrative expenses increased $0.81 million, or 99% to $1.63 million for the six months ended June 30, 2008 from $0.82 million for the same period of 2007. The increase of general and administrative expenses was primarily attributable to increased transportation costs relative to our expanded business, the increased compensation for managerial personnel and expansion of our distribution channels.

Income Before Taxation and Minority Interest

Income before taxation and minority interest increased $2.98 million or 145% to $5.03 million for the six months ended June 30, 2008 from $2.06 million for the same period of 2007. The increase was primarily a result of the higher revenue during the six month period ended on June 30, 2008 as compared to 2007.

Income Taxes

Income taxes increased $0.27 million or 44% to $0.88 million for the six months ended June 30, 2008 from $0.62 million for the same period of 2007. The increase of tax paid was primarily a result of the increase of income in the first six months ended June 30, 2008, as compared to the same period in 2007.

Net Income

Net income increased $2.57million, or 200% to $3.85 million for the six months ended June 30, 2008 from $1.28 million for the same period of 2007. Net loss for the year ago period includes the impact of $1.3 million in nonoperational expenses due to a fire at the Company's Beijing Lorain facility.

Liquidity and Capital Resources

As of June 30, 2008, we had cash and cash equivalents (including restricted cash) of $12.75 million. The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.

29

 


   
 

Cash Flow (in thousands)

 

Six Months Ended June 30,

 

2008

2007

Net cash provided by (used in) operating activities

$

3,284

$

(8,997)

Net cash provided by (used in) investing activities

$

(9,132)

$

(5,776)

Net cash provided by (used in) financing activities

$

5,147

$

14,595

Net cash flow (outflow)

$

(701)

$

(178)

Operating Activities

Net cash provided by operating activities was $3.28 million for the six months period ended June 30, 2008, which is an increase of $12.28 million from ($8.99) million for the same period of 2007. The increase of net cash provided by operating activities was primarily a result of the decrease in accounts and other receivables in the first half of fiscal 2008 of approximately $15.6 million as compared to the same period in 2007. This increase was partially offset by the decrease in accounts and other payables in the first half of fiscal 2008 of approximately $7.6 million as compared to the same period in 2007.

Investing Activities

Our main uses of cash for investment activities are payments for the acquisition of property, plants and equipment.

Net cash used in investing activities for the six months period ended June 30, 2008 was ($9.13) million, which is an increase of $3.35 million from net cash used in investing activities of ($5.78) million for the same period of 2007. The increase was primarily due to the construction, in the amount of approximately $5.7 million, of vegetable tents and of comprehensive workshops for the processing of chestnut and other food products in the first six months of 2008, as compared to the same period of 2007.

Financing Activities

Net cash used in financing activities for the six months period ended June 30, 2008 was ($0.70) million, which is an increase of $0.52 million from ($0.18) million net cash used in financing activities during the same period in 2007. The increase of the net cash used in financing activities was primarily a result of the fact that in 2007 we had additional paid-in capital of approximately $20.26 million in connection with a May 2007 private placement. This increase was partially offset by increased bank borrowings of approximately $1.3 million and notes payable of approximately $3.8 million during the six months ended June 30, 2008 and by approximately $5.8 million of bank repayments during the six months ended June 30, 2007.

Loan Facilities

As of June 30, 2008, the amounts and maturity dates for our bank loans were as follows:

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

Banks

Amounts

Beginning

Ending

Interest Rate

Duration

Beijing rural credit union

2,764.92

9/29/2007

9/29/2008

10.94%

12 months

Bank of Beijing Co., Ltd.

291.05

7/18/2007

7/18/2008

7.88%

12 months

International Trust & Investment Co., Ltd.

1,455.22

6/13/2005

6/13/2008

7.84%

36 months

Junan County Industrial and Commercial Bank

85.75

12/6/2007

6/30/2008

6.12%

7months

Junan County Industrial and Commercial Bank

94.59

1/30/2008

7/10/2008

9.71%

5 months

Junan County Industrial and Commercial Bank

49.48

1/30/2008

8/08/2008

9.71%

6months

 

30

 


Banks

Amounts

Beginning

Ending

Interest Rate

Duration

Junan County Industrial and Commercial Bank

203.73

1/23/2008

12/22/2008

9.71%

11 months

Junan County Industrial and Commercial Bank

407.46

2/03/2008

11/01/2008

7.47%

9 months

Junan County Industrial and Commercial Bank

582.09

2/03/2008

12/01/2008

7.47%

10 months

Junan County Industrial and Commercial Bank

392.91

5/15/2008

10/12/2008

8.54%

5 months

Junan County Industrial and Commercial Bank

72.76

5/08/2008

7/29/2008

8.54%

3 months

Junan County Construction Bank

436.57

8/31/2007

8/31/2008

6.26%

12 months

Junan County Construction Bank

365.26

9/08/2007

9/07/2008

6.26%

12months

Junan County Construction Bank

349.25

7/24/2007

7/23/2008

8.89%

12 months

Junan County Construction Bank

273.22

9/18/2007

9/17/2008

6.31%

12 months

Junan County Construction Bank

261.94

4/30/2008

7/29/2008

7.88%

3 months

Junan County Construction Bank

771.27

4/30/2008

7/29/2008

7.88%

3 months

Junan County Construction Bank

582.09

5/12/2008

8/8/2008

7.88%

3 months

Junan County Construction Bank

87.14

4/22/2008

6/11/2008

7.88%

2 months

Junan County Construction Bank

334.7

5/12/2008

8/8/2008

7.88%

3 months

Junan County Construction Bank

669.4

6/5/2008

8/28/2008

7.88%

3 months

Junan County Construction Bank

844.03

6/5/2008

8/27/2008

7.88%

3 months

Junan County Construction Bank

451.12

6/19/2008

9/18/2008

7.88%

3 months

Junan County Agriculture Bank

58.21

1/05/2008

1/04/2009

12.70%

12 months

Junan County Agriculture Bank

1018.66

5/14/2008

8/13/2008

11.17%

3 months

Junan County Agriculture Bank

87.31

1/05/2008

1/04/2009

12.70%

12 months

Junan County Agriculture Bank

58.21

1/05/2008

1/04/2009

12.70%

12 months

Junan County Agriculture Bank

945.9

6/25/2008

9/24/2008

11.17%

3 months

Junan County Agriculture Bank

334.7

1/28/2008

7/18/2008

11.17%

6 months

Junan County Agriculture Bank

116.42

2/02/2008

1/01/2009

11.17%

11 months

Junan County Agriculture Bank

436.57

10/31/2007

10/30/2008

12.39%

12 months

Junan County Agriculture Bank

254.66

11/12/2007

11/11/2008

12.39%

12 months

Junan County Agriculture Bank

218.28

11/15/2007

11/14/2008

12.39%

12 months

Junan County Agriculture Bank

436.57

11/23/2007

11/22/2008

12.39%

12 months

Junan County Agriculture Bank

305.6

11/30/2007

11/29/2008

12.39%

12 months

Junan County Agriculture Bank

436.57

12/05/2007

12/04/2008

12.39%

12 months

Junan County Agriculture Bank

436.57

12/14/2007

12/13/2008

12.39%

12 months

Junan County Agriculture Bank

87.31

8/02/2007

8/01/2008

11.63%

12 months

Junan County Agriculture Bank

58.21

3/21/2008

3/20/2009

12.70%

12 months

Union Bank (China) Co., Ltd.

1,044.85

1/28/2008

1/14/2009

5.49%

12 months

Linyi Commercial Bank

145.52

12/25/2007

12/25/2008

13.07%

12 months

Linyi Commercial Bank

683.96

2/01/2008

1/05/2009

13.07%

11 months

Linyi Commercial Bank

654.85

2/02/2008

1/12/2009

13.07%

11 months

 

31

 


Banks

Amounts

Beginning

Ending

Interest Rate

Duration

China Agricultural Bank, Luotian Square Branch

742.16

8/30/2007

8/28/2008

7.72%

12 months

Junan Agricultural Development Bank

1,455.22

9/28/2007

9/26/2008

7.29%

12 months

Junan Agricultural Development Bank

87.31

6/4/2008

9/3/2008

6.57%

3 months

Junan Agricultural Development Bank

97.50

6/13/2008

9/12/2008

6.57%

3 months

Bank of China, Junan Branch

7.29

9/19/2006

5/19/2009

7.50%

36 months

Shenzhen Development Bank

1455.22

5/15/2008

11/15/2008

7.47%

6 months

Jinan Merchants Bank

1455.22

4/3/2008

10/3/2008

15.00%

6 months

Agricultural Development Lutian Government

109.14

12/11/2006

12/11/2010

0.67%

4 years

Agricultural Development Lutian Government

25.47

1/11/2008

12/11/2011

2.10%

4 years

Union Commercial Bank (China)

433.61

1/29/2008

1/14/2011

5.49%

3 years

Total

25,513.02

 

 

 

 

As shown in the above table, we have $1.63 million in loans maturing on or before the end of June 30, 2008. Loans listed in the table above whose maturity dates are prior to June 30, 2008 have either been repaid or have been extended by the lending banks for either 6 months or 1 year.

We believe that our currently available working capital, after receiving the aggregate proceeds of the credit facilities referred to above, should be adequate to sustain our operations at our current levels through at least the next twelve months.

Obligations under Material Contracts

We do not have any material contractual obligations as of June 30, 2008.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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:

  • 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.

  • 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.

32


As of June 30, 2008, the particulars of the commonly controlled entities are as follows:

Name of company

 

Place of
incorporation

 

Attributable
equity
interest %

 

Registered
capital

   

Shandong Green Foodstuff Co., Ltd.

 

PRC

 

80.2%

 

$12,901,823

 

RMB 1008,860,000

Luotian Green Foodstuff 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 Green Foodstuff Co., Ltd.

 

PRC

 

1005

 

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.

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 collectibility 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.

Recent accounting pronouncements

In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognizes in its consolidated financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the Company on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, where fair value is the relevant measurement attribute. The standard does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal year beginning after November 15, 2007, and interim periods within those fiscal year.

33

 


In September 2006, the SEC issued SAB No. 108, which provides guidance on the process of quantifying financial statement misstatements. In SAB No. 108, the SEC staff establishes an approach that requires quantification of financial statement errors, under both the iron-curtain and the roll-over methods, based on the effects of the error on each of the Company's financial statements and the related financial statement disclosures. SAB No.108 is generally effective for annual financial statements in the first fiscal year ending after November 15, 2006. The transition provisions of SAB No. 108 permits existing public companies to record the cumulative effect in the first year ending after November 15, 2006 by recording correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings.

The management of the Company does not anticipate that the adoption of these three standards will have a material impact on these consolidated financial statements.

Seasonality

Our operating results and operating cash flows historically have been subject to seasonal variations. Our raw materials are mostly fresh agricultural products. Therefore, we are subject to production seasonality by product, though we are able to maintain overall year-round production. Specifically, the main processing season for chestnut products is from the latter half of August to the next January. During the busy season, our chestnut production lines are running with full capacity. Other than this period, we still maintain a small amount of chestnut production by using frozen chestnuts. However, this pattern may change, as a result of new market opportunities or new product introductions.

Off-Balance Sheet Arrangements

We do not have any off-balance arrangements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although the interest rates are fixed for the terms of the loans, the terms are typically 12 months and interest rates are subject to change upon renewal. Since December 2007, China People's Bank has increased the interest rate of RMB bank loans with a term of 1 year by 0.18%. The new interest rates are 7.47% for RMB bank loans with a term of 1 year. The change in interest rates impacts our bank loans. A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities at December 31, 2007 would decrease net income before provision for income taxes by approximately $125,000 for the six months ended June 30, 2008. Management monitors the banks' interest rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

Foreign Exchange Risk

While our reporting currency is the U.S. Dollar, all of our consolidated revenues and consolidated costs and expenses are denominated in Renminbi. All of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB. If the RMB depreciates against the U.S. Dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. Dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

Inflation

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues, if the selling prices of our products do not increase with these increased costs.

34

 


ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 and Rule 15d-15 promulgated under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2008. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2008, our disclosure controls and procedures were effective to satisfy the objectives for which they are intended.

Changes in Internal Control Over Financial Reporting.

No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act) during the fiscal quarter ended June 30, 2008 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II        OTHER INFORMATION

ITEM 1.         LEGAL PROCEEDINGS

From time to time, we have disputes that arise in the ordinary course of business. Currently, there are no material legal proceedings to which we are a party, or to which any of our property is subject, that we expect to have a material adverse effect on our financial condition.

ITEM 1A.      RISK FACTORS

There have been no material changes to the risk factors disclosed in Item 1A Risk Factors of Part 1 included in our Annual Report on Form 10-K for the year ended December 31, 2007.

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

There were no unregistered sales of equity securities during the quarter ended June 30, 2008.

ITEM 3.         DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon senior securities in the quarter ended June 30, 2008.

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

No matters were submitted to a vote of our security holders during the quarter ended June 30, 2008.

ITEM 5.         OTHER INFORMATION

None.

35

 


ITEM 6.         EXHIBITS

EXHIBITS.

   

31.1

Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

31.2

Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

32.1

Certification of Principal 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 Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

 

36

 


SIGNATURES

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

AMERICAN LORAIN CORPORATION

 

Date:  August 14, 2008

 
 

By:  /s/ Si Chen                                                      

Si Chen

Chief Executive Officer

 

37

 


EXHIBIT INDEX

Exhibit Description
   

31.1

Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

31.2

Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

32.1

Certification of Principal 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 Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

 

 

38