Planet Green Holdings Corp. - Quarter Report: 2010 June (Form 10-Q)

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2010

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

Commission File No. 001-34449

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

Beihuan Road
Junan County
Shandong, China 276600
(Address, including zip code, of principal executive offices)

(86) 539-7318818
(Registrant’s telephone number, including area code)

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

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

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

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

The numbers of shares outstanding of the issuer’s class of common stock as of June 30, 2010 was 26,750,592.

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS AND ACCOUNTANT’S REPORT

AMERICAN LORAIN CORPORATION

REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

We have reviewed the accompanying interim consolidated balance sheets of American Lorain Corporation (the “Company”) as of June 30, 2010 and December 31, 2009, and the related statements of income, stockholders’ equity, and cash flows for the three-month and six-month periods ended June 30, 2010 and 2009. These interim consolidated financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with U.S. generally accepted accounting principles.

1

AMERICAN LORAIN CORPORATION
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2010 AND DECEMBER 31, 2009
(Stated in US Dollars)

See Accompanying Notes to the Financial Statements and Accountant’s Report
2

AMERICAN LORAIN CORPORATION
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2010 AND DECEMBER 31, 2009
(Stated in US Dollars)

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

3

AMERICAN LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Stated in US Dollars)

See Accompanying Notes to the Financial Statements and Accountant’s Report
4

AMERICAN LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Stated in US Dollars)

See Accompanying Notes to the Financial Statements and Accountant’s Report
5

AMERICAN LORAIN CORPORATION
STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

See Accompanying Notes to the Financial Statements and Accountant’s Report
6

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS – JUNE 30, 2010 AND 2009
(Stated in US Dollars)

7

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

8

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

9

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

10

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future realization is uncertain.

The Company has implemented 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 a 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 that have 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:

11

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

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.

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

12

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

13

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

14

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

Construction in progress is mainly comprised of 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 two years above.

Landscaping, plants, and trees are the Chestnut subsidiary’s 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.

15

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

16

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

17

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

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

Remark:
A: A parcel of 19,840 square meters land use right was used as collateral for this loan.
B: A building and land use right worthy of a total of $1,615,604 was used as collateral for this loan.
C: Account receivable and sales contract of $558,265 was used as collateral for these three loans.
D: A parcel of Land of Shandong Green Garden Food Company was used as collateral for this loan.
E: Machinery of $590,870 was used as collateral for these two loans.
F: A parcel of 19,507 square meters land use right, owned by Sishui Xinlu, was used as collateral for this loan.

18

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

Long-term debt non-current portion consisted of the following as of June 30, 2010 and December 31, 2009:

19

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

20

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

Per Share Effect of Tax Exemption

The difference between the U.S. federal statutory income tax rate and the Company’s effective tax rate was as follows for the six months ended June 30, 2010 and 2009:

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 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 2010 and 2009 in the following table.

21

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

Revenue by geography consisted of the following as of June 30, 2010 and 2009:

22

AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 2010 AND DECEMBER 31, 2009
(STATED IN US DOLLARS)

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

No tax benefit has yet to be accrued or realized. For the period ended June 30, 2010 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:

The outstanding lease commitment as of June 30, 2010 is $725,565.

The minimum future lease payments for this property at December 31, 2009 are shown in the following table:

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

23

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

Caution Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to the factors described in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission.

In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” 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 are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report completely and with the understanding that our actual future results may be materially different from what we expect.

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

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 foods, ready-to-eat foods, and meals ready-to-eat); and
• frozen foods.

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 processed chestnut foods manufacturer in China. We have developed brand recognition for our chestnut products in China, Japan and South Korea over the past 10 to 15 years. We produced over 50 high value-added processed chestnut products in the second quarter of 2010. We derive most of our revenues from sales in China, Japan and South Korea. Our primary strategy for 2010 is to expand our brand recognition in the Chinese market for our convenience foods products. We are also working to expand our brand recognition in China for our Chestnut products and frozen products. In addition, we are seeking distribution partners and local vendors to expand our marketing efforts in Asia, North America, Europe and the Middle East. We currently have immaterial sales and marketing activity in the United States, although our long-term plan is to significantly expand our activities there.

Sales in the first two quarters of 2010 benefited from exports to Korea and Japan and indicated that American Lorain’s key export markets in northeast Asia improved after a soft year in 2009. In the coming quarters, American Lorain sees higher demand for its traditional chestnut product line along with additional sales revenues being generated by frozen chestnut summer promotions in Beijing and Chongqing. On May 3, 2010, American Lorain detailed a summer promotion of frozen chestnuts for sales at Lorain®-branded counters which is expected to contribute additional revenues in 2010. The summer promotion has been well received by retailers in China as well as in other Asian markets. American Lorain plans to increase the number of its branded chestnut counters at retail points to around 2,000 from the current approximately 250 by the end of 2010 in these markets to support summer and winter sales of its chestnut products.

24

Frozen foods sold primarily to select export markets in Europe and wholesale customers like Yums! Foods in China contributed approximately 16.0% in revenues for the first two quarters compared to 25.0% in the first two quarters of 2009. Among the three business segments American Lorain operates, frozen foods have the lowest average gross margin of 16%-18%. Chestnut products and convenience food products have an average gross margin of 25%-28% and 22%-24% respectively. American Lorain has been focusing more resources on the development and sales of higher margin chestnut and convenience food products. Although we plan to continue servicing our frozen food customers for the foreseeable future in order to retain customer relationships we expect that revenue contribution from the frozen foods category as a percentage of total revenue will decline in future. Currently, American Lorain uses mostly outsourced, third party manufacturing facilities for its frozen foods and maintains limited production exposure and contractual obligations in this segment.

Production Factors that Affect our Financial and Operational Condition

Our business depends on obtaining a reliable supply of various agricultural products, including chestnuts, vegetables, fruits, red meat, fish, eggs, rice, flour and packaging products. During the first two quarters of 2010, the cost of our raw materials increased from $32.4 million to $38.0 million, as compared to the first two quarters of 2009, for an increase of approximately 17.3% . During the second quarter of 2010, the cost of our raw materials increased from $17.9 million to $20.8 million, as compared to the second quarter of 2009, for an increase of approximately 16.2% . 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.

We spent approximately $10 million in the second quarter to complete the new frozen storage, new bean production lines as well as the new multi-purpose convenience food production lines in our Shandong and Dongguan facilities. We fund the investment from cash generated from operations. We expect that the new facilities will provide the additional capacity we need to meet the growing convenience food business. We will, however, continue to implement our strategy on production line and storage space lease when external capacity and frozen storage space is needed to support the growing business from time to time. We currently do not anticipate any difficulty in leasing external production lines and storage spaces. However, we cannot guarantee such availability for the future.

On June 28, 2010, we signed a Letter of Intent to acquire 100% ownership of Shandong Greenpia Foodstuff Co., Ltd., a manufacturer of retail-packaged, Korean-style kimchi cold dishes. The acquisition included cash and stock offer of $2.1 million in cash and 731,707 shares of American Lorain common stock, respectively. With the acquisition we will add a total of two kimchi-style cold dish production lines with annual capacity of 3,500 metric tons. We expect to obtain governmental approval on the acquisition and complete the transaction on or before September 30.

Seasonality

Chestnut season in China lasts from September to January. We purchase and produce raw chestnuts during these months and store them in our refrigerated storage facilities throughout the year. Once we obtain a purchase order during the rest of the year, we remove the chestnuts from storage, process them and ship them within one day of production. Since most chestnuts are produced and sold in the fourth quarter, the Company generally performs best in the fourth quarter.

Uncertainties that Affect our Financial Condition

We spend a significant amount of cash on our operations, principally to procure raw materials for our products. Many of our suppliers, including chestnut, vegetable and fruit farmers, and suppliers of packaging materials, require us to prepay for their supplies in cash or pay on the same day that such supplies are delivered to us. However, some of the suppliers with whom we have a long-standing business relationship allow us to pay on credit. In the first two quarters of 2010, we paid for approximately 16.0% of our raw materials on credit. In the second quarter of 2010, we paid for approximately 13.8% 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.

25

We also fund approximately 62.7% of our working capital requirements from the proceeds of short-term loans from Chinese banks. We expect to continue to fund our working capital requirements with such loans in the future. Such loans are generally secured by our fixed assets, receivables and/or guarantees by third parties. Our loan balance from short-term bank loans as of June 30, 2010 was approximately $37.7 million. The term of almost all such loans is one year or less. Historically, our lenders have permitted us to roll over such loans on an annual basis. However, we may not have sufficient funds available to pay all of our borrowings upon maturity, and our lenders may not permit us to roll over the loans in the future. Failure to roll over our short-term borrowings at maturity or to service our debt could result in the imposition of penalties, including increases in rates of interest, legal actions against us by our creditors, or even insolvency.

We anticipate that our existing capital resources and cash flows from operations and current and expected short-term bank loans will be adequate to satisfy our liquidity requirements for the next 12 months. However, if available liquidity is not sufficient to meet our operating and loan obligations as they come due, our plans include obtaining alternative financing arrangements or further reducing expenditures as necessary to meet our cash requirements. However, there is no assurance that, if required, we will be able to raise additional capital or reduce discretionary spending to provide the required liquidity. Currently, the capital markets for small capitalization companies are extremely difficult and banking institutions have become stringent in their lending requirements. Accordingly, we cannot be sure of the availability or terms of any third party financing. However, we successfully consummated a private placement financing of approximately $12.0 million through the sale of common stock and warrants to several accredited investors on November 3, 2009, the proceeds of which are being used to support a planned nationwide commercial campaign to promote our convenience food products in the Chinese market and to increase brand awareness for our Ready-to-Cook foods, Ready-to-Eat foods, and Meals Ready-to-Eat, as well as our chestnut products.

The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

The 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 the remainder of 2010 is 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 2009, we shortened credit terms for many of our international and domestic distributors from between 30 and 180 days to between 30 and 60 days for domestic distributors, and around 90 days for international distributors. 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.

26

In 2009, we introduced to the market several new products, including the series of bean products, cold-dish products and lunch-box products. Such additions to our product family increased the number of suppliers, many of whom were new to us. Most of these new suppliers require prepayment, in part or in full amount, before delivery of the supplies. Our cash flow suffered from these increased advances to suppliers. Our suppliers may not waive or reduce their prepayment requirements, in which case if we fail to find alternative suppliers, we may not have sufficient cash flow to fund our operations and our business could be adversely affected.

Results of Operations

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

The following table summarizes the results of our operations during the three-month periods ended June 30, 2010 and June 30, 2009, respectively and provides information regarding the dollar and percentage increase or (decrease) from the three-month period ended June 30, 2009 compared to the three-month period ended June 30, 2010.

(All amounts, other than percentages, stated in U.S. dollar)

Revenue

Net Revenues. Our net revenue for the three months ended June 30, 2010 amounted to $29.2 million, which represents an increase of approximately $5.3 million, or 21.9%, from the three-month period ended on June 30, 2009, in which our net revenue was $23.97 million. The increased revenues were attributable to increased revenues from sales of our chestnut and convenience food products as a result of 7.3% and 62.6% (or $1.0 million and $4.0 million) increase in sales respectively of such products; due to our effective marketing efforts and well established domestic and international distribution network. Frozen foods sold primarily to select export markets in Europe and wholesale customers like Yums! Foods in China contributed approximately 14.0% in revenues for the quarter compared to 15.8% in the second quarter of 2009.

27

Cost of Revenues. During the three months ended June 30, 2010, we experienced an increase in cost of revenue, which consists of raw materials, direct labor and manufacturing overhead expenses, of $3.8 million, in comparison to the three months ended June 30, 2009, from approximately $18.7 million to $22.5 million, reflecting an increase of approximately 20.5% . Approximately 76.3%, or $2.9 million, of this increase was attributable to an increase in raw material costs, which increased from $17.9 million during the three months ended June 30, 2009 to $20.8 million, or approximately 16.2%, during the three months ended June 30, 2010.

The factors that contributed to the remaining 23.7% increase in cost of revenues were: an increase in wage expense for factory workers, an increase in depreciation expenses for capital equipment and an increase in the cost of consumables used in conjunction with capital equipment.

Gross Profit. Our gross profit increased $1.4 million, or 27.0%, to $6.7 million for the three months ended June 30, 2010 from $5.3 million for the same period in 2009 as a result of higher revenues, offset by higher costs of revenues, for the reasons indicated immediately above. Our gross margins increased from 22.1% to 23.0% because our product mix in the period ended June 30, 2010 consisted of more higher margin chestnuts and convenience foods, and fewer lower margin frozen foods, as compared to the period ended June 30, 2009. Gross profit margins by product segment for the three months ended June 30, 2010 are; 25-28% for chestnuts, 22-24% for convenience foods and 16-18% for frozen foods.

Operating Expenses

Selling and Marketing Expenses. Our selling and marketing expenses decreased approximately $0.025 million, or 2.1%, to $1.19 million in the second quarter of 2010 from $1.22 million in the second quarter of 2009. The following table reflects the main factors that contributed to this decrease as well as the dollar amount that each factor contributed to this decrease. The decreases listed in the table below were partially offset by increases in dollar amount of other selling and marketing expenses, including advertising, supermarket fees, customer lodging, phone, postage and courier charges, toll road expense, warehousing costs and expenses for professional movers.

Selling and marketing expenses stayed flat as we gradually rolled out our marketing activities and controlled our cost very carefully while expanding our distribution channels in China. We might, however, increase our selling and marketing expenses in the second half of 2010 as we continue to build up our brand recognition in the China market for our chestnut and convenience food products.

General and Administrative Expenses. We experienced an increase in general and administrative expense of approximately $0.017 million from approximately $0.91 million to approximately $0.93 million for the three months ended June 30, 2010, compared to the same period in 2009. 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:

28

The increases listed in the table above were partially offset by decreases in dollar amount of other factors, including office expenses, consulting fees and waste water treatment expenses.

Interest Expenses. We experienced an increase in interest expenses of approximately $0.28 million from approximately $0.74 million to $1.02 million for the three months ended June 30, 2010, compared to the same period in 2009. The increase was mainly due to the increase in outstanding balance of our bank loans, which was $37.8 million at the end of June 30, 2010, compared to $32.0 million at the end of June 30, 2009.

Income Before Taxation and Minority Interest

Income before taxation and minority interest increased $1.2 million, or 45.3%, to $3.7 million for the three months ended June 30, 2010 from $2.6 million for the same period of 2009. The increase was mainly attributable to the increase of our sales revenue as described above in the three months ended June 30, 2010 as compared to the three months ended June 30, 2009.

Income Taxes

Income taxes increased $0.25 million, or 42.3%, to $0.86 million in the second quarter of 2010, as compared to $0.60 million in the second quarter of 2009. This increase was attributable to the higher earnings before tax and higher income tax rate in 2010 as compared to 2009.

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 2009 and 2010 are depicted in the following table:

Net Income

Net income increased $0.82 million, or 44.4%, to $2.68 million for the three months ended June 30, 2010 from $1.86 million for the same period of 2009. The increase was attributable to increased sales revenue and was partially offset by increased cost of goods sold, general and administrative expenses, interest expense and higher income tax in the three months ended June 30, 2010 as compared to the three months ended June 30, 2009.

29

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

The following table summarizes the results of our operations during the six-month periods ended June 30, 2010 and June 30, 2009, respectively and provides information regarding the dollar and percentage increase or (decrease) from the six-month period ended June 30, 2009 compared to the six-month period ended June 30, 2010.

Revenue

Net Revenues. Our net revenue for the six months ended June 30, 2010 amounted to $53.8 million, which is approximately $8.6 million or 19.1% more than that of the same period ended on June 30, 2009 where we had revenue of $45.2 million. During the six months ended June 30, 2010, revenues from sales of chestnut products increased by $1.3 million, or 4.8%, and revenues from sales of convenience food products increased by $10.0 million, or 136.3%, and sales of frozen, canned and bulk food products decreased $2.7 million, or 23.8%, compared to the same period in 2009. The increased revenues were attributable to the success of the Company's marketing strategies, operational enhancements and expansion of sales markets, primarily in China. In addition, through third party agents that we contracted with, our products were sold to a total of approximately 5,200 supermarkets in China as of June 30, 2010.

Cost of Revenues. Our cost of revenues, which consists of raw materials, direct labor and manufacturing overhead expenses, was $41.3 million for the six month period ended June 30, 2010, an increase of $6.6 million or 19.1%, as compared to $34.7 million for the six month period ended June 30, 2009. The cost of revenues sold increased because the sales in the first six months of 2010 increased as compared to the same period ended June 30, 2009. Approximately 84.8%, or $5.6 million, of this increase was attributable to an increase in raw material costs, which increased from $32.4 million during the six months ended June 30, 2009 to $38.0 million, or approximately 17.3%, during the six months ended June 30, 2010.

30

The factors that contributed to the remaining 15.2% increase in cost of revenues were: an increase in wage expense for factory workers, an increase in depreciation expenses for capital equipment and an increase in the cost of consumables used in conjunction with capital equipment.

Gross Profit. Our gross profit increased $1.99 million, or 19.0% to $12.4 million for the six months ended June 30, 2010 from $10.5 million for the same period in 2009. This increase was attributable to increased sales revenue.

Operating Expenses

Selling and Marketing Expenses. Selling and marketing expenses increased $0.18 million, or 7.4% to $2.6 million for the six months ended June 30, 2010 from $2.4 million for the same period in 2009. This increase mainly resulted from increased efforts to market our products in our domestic market.

General and Administrative Expenses. General and administrative expenses increased $0.06 million, or 3.0% to $1.95 million for the six months ended June 30, 2010 from $1.90 million for the same period of 2009. 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.

Interest Expenses. We experienced an increase in interest expenses of approximately $0.59 million from approximately $1.35 million to $1.94 million for the six months ended June 30, 2010, compared to the same period in 2009. The increase was mainly due to the increase in outstanding balance of our bank loans, which was $37.8 million at the end of June 30, 2010, compared to $32.0 million at the end of June 30, 2009.

Income Before Taxation and Minority Interest

Income before taxation and minority interest increased $1.4 million or 27.2% to $6.4 million for the six months ended June 30, 2010 from $5.0 million for the same period of 2009. The increase was primarily a result of the higher revenue during the six month period ended on June 30, 2010 as compared to 2009.

Income Taxes

Income taxes increased $0.35 million or 29.2% to $1.5 million for the six months ended June 30, 2010 from $1.2 million for the same period of 2009. The increase of tax paid was primarily a result of the increase of income in the first six months ended June 30, 2010, as compared to the same period in 2009.

Net Income

Net income increased $0.9 million, or 25.7% to $4.5 million for the six months ended June 30, 2010 from $3.6 million for the same period of 2009. The increase was primarily a result of increased revenue, offset by higher interest expense, cost of revenues, selling and marketing and general administrative expenses.

Liquidity and Capital Resources

As of June 30, 2010, we had cash and cash equivalents (including restricted cash) of $11.1 million. Our cash and cash equivalents decreased by approximately $2.3 million from December 31, 2009, due to cash spent on our inventories. The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.

31

Operating Activities

Net cash provided by operating activities was $5.5 million for the six months period ended June 30, 2010 and net cash used by operating activities in the first two quarters of 2009 was approximately $10.3 million. The increase of approximately $15.8 million in net cash flows provided by operating activities in the first half of fiscal 2010 was primarily a result of additional decrease in receivables of approximately $13.5 million and less decrease in payables of approximately $6.7 million, which was partially offset by additional increase in inventories of approximately $5.6 million as compared to the same period in 2009.

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, 2010 was $9.5 million, which is an increase of $8.9 million from net cash used in investing activities of $0.647 million for the same period of 2009. The increase was primarily due to increase in payment for purchase of equipment and plant in 2010.

Financing Activities

Net cash provided by financing activities for the six months period ended June 30, 2010 was $2.3 million, which is a decrease of $11.7 million from $13.947 million net cash provided by financing activities during the same period in 2009. The decrease of the net cash provided by financing activities was primarily a result of decreased short term bank borrowing in 2010, attributable to repayment of bank loans.

Loan Facilities

As of June 30, 2010, the amounts and maturity dates for our short-term bank loans are as set forth in the Notes to the Financial Statements. The total amounts outstanding were $37.8 million as of June 30, 2010, compared with $35.5 million as of December 31, 2009. 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.

On May 31, 2010, Junan Hongrun Foodstuff Co. Ltd. (the “Subsidiary”), a wholly-owned subsidiary of American Lorain Corporation, entered into a Loan Agreement (the “Agreement”) with DEG-Deutsche Investitions-Und Entwicklungsgesellschaft MBH (the “Lender”).

Pursuant to the Agreement, the Subsidiary may borrow from the Lender, in the Lender’s sole discretion, up to $15,000,000 by means of a long-term loan. The Subsidiary intends to use the borrowed funds, if any, in order to expand its production facilities in Hongrun, China. The loan is secured by the Subsidiary’s assets.

32

Subject to certain exceptions, the interest rate for any loans made pursuant to the Agreement shall be at (a) the six month LIBOR rate plus 3.75% for the first disbursement; (b) LIBOR rate determined at the beginning of the respective Interest Period for all subsequent disbursements; or (c) on the Interest Conversion Date, the interest rate shall be converted into a fixed rate of 3.75% per annum plus the DEG Base Rate (currently 2.04% at August 10, 2010) prevailing two banking days prior to the Interest Conversion Date. The loan is secured by the assets of the Company.

All outstanding balances under the loan shall be due no later than March 15, 2016. If an Event of Default occurs, the Lender is entitled to cancel the total outstanding commitment of the Loan, demand immediate repayment of the loan or any part thereof together with accrued interest and other sums due under the Agreement and may terminate the Agreement promptly. A copy of the Agreement is attached hereto as Exhibit 10.1 and is incorporated herein by reference.