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Planet Green Holdings Corp. - Quarter Report: 2015 June (Form 10-Q)

American Lorain Corporation - Form 10-Q - Filed by newsfilecorp.com

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, 2015

[_] 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)

Nevada 87-0430320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]           No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]           No [   ]

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

Large accelerated filer [  ] Accelerated filer                   [  ]
Non-accelerated filer   [  ] Smaller reporting company [X]
(Do not check if a smaller reporting company)  

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 August 12, 2015 was 38,259,490


AMERICAN LORAIN CORPORATION

FORM 10-Q
For the Quarterly Period Ended June 30, 2015

TABLE OF CONTENTS

 

PAGE

PART I - FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

2

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

45

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

55

ITEM 4 CONTROLS AND PROCEDURES

55

 

 

PART II - OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

56

ITEM 1A RISK FACTORS

56

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

56

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

56

ITEM 4 MINE SAFETY DISCLOSURES

56

ITEM 5 OTHER INFORMATION

56

ITEM 6 EXHIBITS

56

SIGNATURES

57


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, 2014 filed with the Securities and Exchange Commission.

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

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

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

Use of Certain Defined Terms

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

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

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

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

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

  • “JunanHongrun” refers to JunanHongrun Foodstuff Co., Ltd.

  • “Luotian Lorain” refers to Luotian Green Foodstuff Co., Ltd.

  • “Beijing Lorain” refers to Beijing Green Foodstuff Co., Ltd.

  • “Shandong Lorain” refers to Shandong Green Foodstuff Co., Ltd.

  • “Dongguan Lorain” refers to Dongguan Green Foodstuff Co., Ltd.

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

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

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


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

* Athena is a holding company which holds all of the capital and the voting shares of Conserverie Minerve, a company organized under French law. Conserverie Minerve specializes in the processing and sale of chestnut and prepared food products in Europe. Conserverie Minerve operates its businesses through the following, direct and indirect, wholly owned subsidiaries:

  • Sojafrais, a company organized under French law;
  • SCI SIAM, a real estate company organized under French law;
  • SCI GIU LONG, a real estate company organized under French law; and
  • CACOVIN, a company organized under Portuguese law

ITEM 1. Financial Statements

AMERICAN LORAIN CORPORATION

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND DECEMBER 31, 2014

(Stated in US Dollars)

AMERICAN LORAIN CORPORATION

CONTENTS

PAGES

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

1

 

 

CONSOLIDATED BALANCE SHEETS

2 – 3

 

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

4

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

5

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

6

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7 – 32


REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

To: The Board of Directors and Stockholders of
  American Lorain Corporation

We have reviewed the accompanying interim consolidated balance sheets of American Lorain Corporation (“the Company”) as of June 30, 2015 and December 31, 2014, and the related statements of income, stockholders’ equity, and cash flows for the three month and six month periods ended June 30, 2015 and 2014. These interim consolidated financial statements are the responsibility of the Company's management.

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

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

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the balance sheets of American Lorain Corporation as of December 31, 2014, and the related statements of income, comprehensive income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated April 10, 2015, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 2014, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

 

San Mateo, California WWC, P.C.
August 14, 2015 Certified Public Accountants


AMERICAN LORAIN CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2015 AND DECEMBER 31, 2014
(Stated in US Dollars)

 

        (Audited)  

 

  At June 30,     At December 31,  

ASSETS

  2015     2014  

   Current assets

           

       Cash and cash equivalents

$  37,267,322   $  30,279,988  

       Restricted cash

  10,127,164     4,195,114  

       Trade accounts receivable

  33,865,407     58,806,466  

       Other receivables

  8,902,466     8,183,485  

       Inventory

  63,113,539     51,648,160  

       Advance to suppliers

  40,529,635     42,479,437  

       Prepaid expenses and taxes

  2,890,026     2,758,334  

       Security deposits and other assets

  3,942,016     3,578,514  

                       Total current assets

$  200,637,575   $  201,929,498  

 

           

   Non-current assets

           

       Investment

  3,284,719     3,258,125  

       Property, plant and equipment, net

  87,815,932     89,148,530  

       Construction in Progress, net

  14,467,051     14,340,145  

       Intangible assets, net

  17,393,842     17,537,868  

       Goodwill

  9,834,522     10,327,553  

TOTAL ASSETS

$  333,433,641   $  336,541,719  

 

           

LIABILITIES AND STOCKHOLDERS’ EQUITY

       

Current liabilities

           

       Short-term bank loans

$  38,092,479   $  41,645,100  

       Notes payable

  2,620,583     6,005,430  

       Convertible promissory note

  -     3,500,000  

       Long-term debt – current portion

  37,881,309     19,226,094  

       Accounts payable

  14,880,157     10,071,009  

       Taxes payable

  2,955,122     4,320,470  

       Accrued liabilities and other payables

  5,453,408     4,153,054  

       Related party payable

  1,785,600     2,433,300  

       Deferred tax liabilities

  21,418     70,545  

       Customers deposits

  208,182     61,428  

                       Total current liabilities

$  103,898,258   $  91,486,430  

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

2


AMERICAN LORAIN CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2015 AND DECEMBER 31, 2014
(Stated in US Dollars)

 

        (Audited)  

 

  At June 30,     At December 31,  

 

  2015     2014  

 

           

   Long-term liabilities

           

   Long-term bank loans

  717,050     2,707,587  

       Notes payable and debenture

  16,423,597     32,581,249  

TOTAL LIABILITIES

$  121,038,905   $  126,775,266  

 

           

COMMITMENTS AND CONTINGENCIES

       

 

           

STOCKHOLDERS’ EQUITY

           

   Preferred Stock, $0.001 par value, 5,000,000 shares authorized; 
           0 shares issued and outstanding at June 30, 2015 and 
           December 31, 2014, respectively

  -     -  

   Common Stock, $0.001 par value, 200,000,000 shares authorized; 
           38,259,490 shares and 34,916,714 shares issued and outstanding 
           as of June 30, 2015 and December 31, 2014, respectively

  38,259     34,917  

   Additional paid-in capital

  57,844,419     53,853,089  

   Statutory reserves

  23,038,917     23,038,917  

   Retained earnings

  98,076,745     99,021,555  

   Accumulated other comprehensive income

  21,901,467     20,796,420  

   Non-controlling interests

  11,494,929     13,021,555  

 

           

TOTAL STOCKHOLDER’S EQUITY

$  212,394,736   $  209,766,453  

 

           

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

$  333,433,641   $  336,541,719  

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

3


AMERICAN LORAIN CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS PERIOD ENDED JUNE 30, 2015 AND 2014
(Stated in US Dollars)

 

  For the three months period     For the six months period  

 

  ended June 30,     ended June 30,  

 

  2015     2014     2015     2014  

 

                       

Net revenues

$  35,547,904   $  32,516,140   $  73,105,215   $  64,205,598  

Cost of revenues

  29,742,316     24,890,826     61,681,921     50,475,064  

Gross profit

$  5,805,588   $  7,625,314   $  11,423,294   $  13,730,534  

 

                       

Operating expenses

                       

Selling and marketing expenses

  1,042,325     1,663,652     3,161,789     2,738,443  

General and administrative expenses

  4,566,094     1,304,841     7,182,298     3,394,381  

 

  5,608,419     2,968,493     10,344,087     6,132,824  

 

                       

Operating income

$  197,169   $  4,656,821   $  1,079,207   $  7,597,710  

 

                       

Government subsidy income

  749,089     300,121     1,006,086     1,808,370  

Interest income

  201,782     41,269     274,605     57,325  

Other income

  268,020     66,612     561,672     155,554  

Other expenses

  (121,540 )   (11,370 )   (502,628 )   (145,511 )

Interest expense

  (1,887,514 )   (1,853,861 )   (3,602,991 )   (3,778,834 )

 

  (790,163 )   (1,457,229 )   (2,263,256 )   (1,903,096 )

 

                       

Earnings/(loss) before tax

$  (592,994 ) $  3,199,592   $  (1,184,049 ) $  5,694,614  

 

                       

Income tax

  807,720     962,352     1,287,387     1,712,216  

 

                       

Net income/(loss)

$  (1,400,714 ) $  2,237,240   $  (2,471,436 ) $  3,982,398  

 

                       

Other comprehensive income/(loss):

                       

Foreign currency translation gain/(loss)

  1,605,842     218,808     1,105,046     (2,103,400 )

Comprehensive Income/(Loss)

  205,128     2,456,048     (1,366,390 )   1,878,998  

 

                       

Net income/(loss) attributable to:

                       

-Common stockholders

$  (447,704 ) $  2,140,436   $  (944,811 ) $  3,730,925  

-Non-controlling interest

  (953,010 )   96,804     (1,526,625 )   251,473  

 

$  (1,400,714 ) $  2,237,240   $  (2,471,436 ) $  3,982,398  

 

                       

Earnings/(loss) per share

                       

- Basic

$  (0.04 ) $  0.06   $  (0.07 ) $  0.11  

- Diluted

$  (0.04 ) $  0.06   $  (0.07 ) $  0.11  

 

                       

Weighted average shares outstanding

                       

- Basic

  36,972,265     34,616,714     35,944,490     34,616,714  

- Diluted

  36,972,265     34,616,714     35,944,490     34,616,714  

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

4


AMERICAN LORAIN CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE AND SIX MONTHS PERIOD ENDED JUNE 30, 2015 AND 2014
(Stated in US Dollars)

 

  For the three months period     For the six months period  

 

  ended June 30,     ended June 30,  

 

  2015     2014     2015     2014  

Cash flows from operating activities

                       

Net income

$  (1,400,714 ) $  2,237,240   $  (2,471,436 ) $  3,982,398  

   Stock compensation expense

  987,500     -     987,500     -  

   Depreciation of fixed assets

  1,051,872     1,033,248     2,014,035     1,832,928  

   Amortization of intangible assets

  100,269     95,427     191,770     186,455  

   Decrease in accounts and other receivables

  854,613     2,244,245     23,900,953     19,339,461  

   (Increase) in inventories

  (2,801,608 )   (9,047,117 )   (9,602,516 )   (20,216,527 )

   Decrease/(increase) in prepayment

  1,014,280     (884,614 )   (134,884 )   (2,309,986 )

   Decrease/(increase) in deferred tax asset

  (13,386 )   (195 )   (25,976 )   1,315  

   Increase in accounts and other payables

  3,584,347     780,755     5,257,025     662,314  

   Increase/(decrease) in related party payable

  18,639     -     (438,101 )   -  

     Net cash (used in)/provided by operating activities

  3,395,812     (3,541,011 )   19,678,370     3,478,358  

 

                       

Cash flows from investing activities

                       

   Payment for acquisition of Athena Group

  -     -     -     (2,100,000 )

   Purchase of plant and equipment

  (139,529 )   (971,146 )   (393,110 )   (1,015,177 )

   Purchase of intangible assets

  (215 )   (19,120 )   (57,257 )   128,921  

   (Increase) in restricted cash

  (2,244,827 )   (902,757 )   (5,874,652 )   (2,642,293 )

   (Increase)/decrease in deposit

  (158,749 )   (3,500 )   (543,950 )   23,598  

   Sales of investments

  159,615     -     159,615     -  

   Net cash (used in) investing activities

  (2,383,705 )   (1,896,523 )   (6,709,354 )   (5,604,951 )

Cash flows from financing activities

                       

   Repayment of bank borrowings

  (6,698,121 )   (4,502,088 )   (19,988,368 )   (8,464,858 )

   Proceeds from bank borrowings and debentures

  12,969,438     5,585,420     20,630,236     14,303,985  

   (Repayment)/proceeds of long-term borrowings and notes payable

  (6,884,847 )   3,632,269     (6,884,847 )   6,749,285  

   Net cash provided by/(used in) financing activities

$  (613,530 ) $  4,715,601   $  (6,242,979 ) $  12,588,412  

 

                       

Net Increase/(decrease) of cash and cash equivalents

  398,577     (721,933 )   6,726,037     10,461,819  

 

                       

Effect of foreign currency translation on cash and cash

                       

equivalents

  122,118     218,808     261,297     (2,103,400 )

 

                       

Cash and cash equivalents–beginning of period

  36,746,627     42,718,737     30,279,988     33,857,193  

Cash and cash equivalents–end of period

$  37,267,322   $  42,215,612   $  37,267,322   $  42,215,612  

 

                       

Supplementary cash flow information:

                       

         Interest received

$  201,782   $  41,269   $  274,605   $  57,325  

         Interest paid

$  590,653   $  794,125   $  1,197,283   $  1,760,950  

         Income taxes paid

$  399,908   $  746,922   $  1,187,697   $  3,041,645  

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

5


AMERICAN LORAIN CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2015 AND YEAR ENDED DECEMBER 31, 2014
(STATED IN US DOLLARS)

 

      Accumulated          

 

Number       Additional     Other Non-  

 

Of Common Paid-in Statutory Retained Comprehensive Controlling  

 

Shares Stock Capital Reserves Earnings        Income    Interests Total

Balance, January 1, 2014

34,616,714 34,617 53,487,389 18,396,513 99,257,837 20,928,244 11,003,908 203,108,508

Net income

- - - - 3,752,524 - - 3,752,524

Increase in non-controlling interests from acquisition of Athena Group

- - - - - - 2,671,245 2,671,245

Issuance of share based compensation

300,000 300 365,700 - - - - 366,000

Appropriations to statutory reserve

- - - 4,642,404 (4,642,404) - - -

Allocation to non-controlling interests

- - - - 653,598 - (653,598) -

Foreign currency translation adjustment

- - - - - (131,824) (131,824)

 

               

Balance, December 31, 2014

34,916,714 34,917 53,853,089 23,038,917 99,021,555 20,796,420 13,021,555 209,766,453

 

               

Balance, January 1, 2015

34,916,714 34,917 53,853,089 23,038,917 99,021,555 20,796,420 13,021,555 209,766,453

Net income/(loss)

- - - - (2,471,436) - - (2,471,436)

Conversion of loan debenture to common stock

2,355,276 2,355 2,708,568 - - - - 2,710,923

Issuance of share based compensation

987,500 987 1,282,762 - - - - 1,283,749

Allocation to non-controlling interests

- - - - 1,526,626 - (1,526,626) -

Foreign currency translation adjustment

- - - - - 1,105,047 - 1,105,047

Balance, June 30, 2015

38,259,490 38,259 57,844,419 23,038,917 98,076,745 21,901,467 11,494,929 212,394,736

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

6



1.

ORGANIZATION, BASIS OF PRESENTATION, AND PRINCIPAL ACTIVITIES

   
(a)

Organization history of American Lorain Corporation (formerly known as Millennium Quest, Inc.)

   
 

American Lorain Corporation (the “Company” or “ALN”) was originally a Delaware corporation incorporated on February 4, 1986. On November 12, 2009, the Company filed a statement of merger in the state of Nevada to transfer the Company’s jurisdiction from Delaware to Nevada.

   
(b)

Organization History of International Lorain Holding Inc. and its subsidiaries

   
 

ALN owns 100% of the equity of International Lorain Holding Inc. (“ILH”). ILH is a Cayman Islands company incorporated on August 4, 2006 and was wholly-owned by Mr. Hisashi Akazawa until May 3, 2007. ILH presently has two direct wholly-owned subsidiaries, Junan Hongrun and Luotian Lorain, and three indirectly wholly-owned subsidiaries through Junan Hongrun, which are Beijing Lorain, Dongguan Lorain, and Shandong Greenpia Foodstuff Co., Ltd. (“Shandong Greenpia”).

   

In addition, the Company directly and indirectly has 80.2% ownership of Shandong Lorain. The rest of the 19.8%, which is owned by the State under the name of Shandong Economic Development Investment Co. Ltd., is not included as a part of the Group.

   

On April 9, 2009, the Company, through its Junan Hongrun subsidiary, invested cash to establish Dongguan Lorain. Dongguan Lorain is indirectly 100% beneficially owned by the Company.

   

On June 28, 2010, the Company signed an equity transfer agreement with Shandong Greenpia. Shandong Greenpia was originally directly owned by Taebong Inc. and Shandong Luan Trade Company. The Company paid $2,100,000to Korean Taebong Inc. for 50% equity of Shandong Greenpia on September 20, 2010. On September 23, 2010, the Company issued 731,707 shares of restricted stock at an agreed price of $2.87 per share to the owner of Shandong Luan Trade Company, Mr. Ji Zhenwei, for the remaining 50% equity of Shandong Greenpia. Since September 23, 2010, Shandong Greenpia was directly owned by both Junan Hongrun and ILH. As a result, Shandong Greenpia is 100% owned by the Company. Accordingly, the Company booked a gain of $383,482 which is included in the statement of income as other income.

   

On February 7, 2014, American Lorain Corporation, through its indirect wholly owned subsidiary, Junan Hongrun entered into two Share Purchase Agreements with Intiraimi, a limited liability company organized under the laws of France and Biobranco II, a company organized under Portuguese law, respectively, to acquire 51% of the share capital of Athena Group. On June 30, 2014, Junan Hongrun officially completed the acquisition and controlled total 51% shares of Athena Group.

   
(c)

Business Activities

   

The Company develops, manufactures, and sells convenience foods (including ready-to- cook (or RTC) foods; ready-to-eat (or RTE) foods and meals ready-to-eat (or MRE); chestnut products; and frozen foods, in hundreds of varieties. The Company operates through indirect Chinese and European subsidiaries. The products are sold in domestic markets as well as exported to foreign countries and regions such as Japan, Korea and Europe.




2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   
(a)

Method of Accounting

   

The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.

   

The Company regrouped certain accounts in its presentation of changes in assets and liabilities in the statement of cash flows for the three month period ended June 30, 2015 in order to be consistent with the presentation provided for the year ended December 31, 2014. There was no impact on earnings for the regrouping.

   
(b)

Principles of consolidation

   

The consolidated financial statements which include the Company and its subsidiaries are compiled in accordance with generally accepted accounting principles in the United States of America. All significant inter-company accounts and transactions have been eliminated. The consolidated financial statements include 100% of assets, liabilities, and net income or loss of those wholly-owned subsidiaries; ownership interests of non- controlling investors are recorded as non-controlling interests.

   

As of June 30, 2015, the detailed identities of the consolidating subsidiaries are as follows:


 

 

  Attributable  
 

 

Place of equity Registered
 

Name of Company

incorporation interest % capital
 

International Lorain Holding Inc.

Cayman Islands 100 $ 51,108,183
 

Junan Hongrun Foodstuff Co., Ltd.

PRC 100 49,139,403
 

Shandong Lorain Co., Ltd.

PRC 80.2 13,285,002
 

Beijing Lorain Co., Ltd.

PRC 100 1,642,360
 

Luotian Lorain Co., Ltd.

PRC 100 4,159,900
 

Shandong Greenpia Foodstuff Co., Ltd.

PRC 100 2,522,665
 

Dongguan Lorain Co., Ltd.

PRC 100 164,236
 

Athena

France 51 14,148
 

Conserverie Minerve

France 51 481,025
 

Sojafrais

France 51 5,659
 

SCI Siam

France 51 863
 

SCI Giu Long

France 51 5,659
 

Cacovin

Portugal 51 311,252



(c)

Use of estimates

   

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

   
(d)

Cash and cash equivalents

   

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

   
(e)

Investment securities

   

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

   

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

   

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

   

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

   
(f)

Trade receivables

   

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




(g)

Inventories

   

Inventories consisting of finished goods and raw materials are stated at the lower of cost or market value. Finished goods are comprised of direct materials, direct labor and an appropriate proportion of overhead.

   
(h)

Customer deposits and advances to suppliers

   

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

   

Advance to suppliers is a good faith deposit paid to the supplier for the purpose of committing the supplier to provide product promptly upon delivery of the Company’s purchase order for raw materials, supplies, equipment, building materials, and other items necessary for our operations. Pursuant to the Company’s arrangements with its suppliers, this deposit is generally 20% of the total amount contracted for. This type of transaction is classified as a prepayment under the account name “Advance to Suppliers” until such time as the Company’s purchase order is delivered, at which point this account is reduced by reclassification of the applicable amount to the appropriate asset account such as inventory or fixed assets or construction in progress.

   
(i)

Property, plant and equipment

   

Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method with a salvage value of 10%. Estimated useful lives of the plant and equipment are as follows:


Buildings

20-40 years

Landscaping, plant and tree

30 years

Machinery and equipment

1-10 years

Motor vehicles

10 years

Office equipment

5 years

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.

   
(j)

Construction in progress

   

Construction in progress represents direct and indirect construction or acquisition costs. The construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until the asset is completed and ready for intended use.

   
(k)

Land Use Rights

   

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




(l)

Accounting for the Impairment of Long-Lived Assets

   

The long-lived assets held by the Company are reviewed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 360-10-35, “Accounting for the Impairment or Disposal of Long-Lived Assets,” for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Impairment is present if carrying amount of an asset is less than its undiscounted cash flows to be generated.

   

If an asset is considered impaired, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.The Company believes no impairment has occurred to its assets during 2015.

   
(m)

Advertising

   

All advertising costs are expensed as incurred.

   
(n)

Shipping and handling

   

All shipping and handling are expensed as incurred.

   
(o)

Research and development

   

All research and development costs are expensed as incurred.

   
(p)

Retirement benefits

   

Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to the consolidated statement of income as incurred.

   
(q)

Income taxes

   

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

   

The Company has implemented ASC Topic 740, “Accounting for Income Taxes.” Income tax liabilities computed according to the United States, People’s Republic of China (PRC), and France tax laws are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize that tax benefit, or that future realization is uncertain.



Effective January 1, 2008, PRC government implemented a new 25% tax rate across the board for all enterprises regardless of whether domestic or foreign enterprise without any tax holiday which is defined as "two-year exemption followed by three-year half exemption" hitherto enjoyed by tax payers. As a result of the new tax law of a standard 25% tax rate, tax holidays terminated as of December 31, 2007. However, PRC government has established a set of transition rules to allow enterprises that were already participating in tax holidays before January 1, 2008, to continue enjoying the tax holidays until they had been fully utilized.

The standard corporate income tax in France is 33.33% except for a small or new business, which may benefit from lower rates. In addition, a 3.3% of social surcharge is charged to the Company’s French subsidiaries if the standard corporate income tax liability exceeds EUR 763,000. Furthermore, a 10.7% temporary surtax applies when a company’s turnover exceeds EUR 250 million.

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

Taxable Income
Rate Over But Not Over Of Amount Over
15% 0 50,000 0
25% 50,000 75,000 50,000
34% 75,000 100,000 75,000
39% 100,000 335,000 100,000
34% 335,000 10,000,000 335,000
35% 10,000,000 15,000,000 10,000,000
38% 15,000,000 18,333,333 15,000,000
35% 18,333,333 - -

(r)

Statutory reserves

   

Statutory reserves are referring to the amount appropriated from the net income in accordance with laws or regulations, which can be used to recover losses and increase capital, as approved, and are to be used to expand production or operations. The Company transferred $0 and $4,642,404 from retained earnings to statutory reserves for the three months ended June 30, 2015 and year ended December 31, 2014. PRC laws prescribe that an enterprise operating at a profit, must appropriate, on an annual basis, an amount equal to 10% of its profit. Such an appropriation is necessary until the reserve reaches a maximum that is equal to 50% of the enterprise’s PRC registered capital.

   
(s)

Foreign currency translation

   

The accompanying financial statements are presented in United States dollars. The functional currencies of the Company are the Renminbi (RMB) and the Euro (EUR). The financial statements are translated into United States dollars from RMB and EUR at year- end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.



 

6/30/2015 3/31/2015 12/31/2014 6/30/2014 3/31/2014

Year end RMB:

6.0888 6.1091 6.1385 6.1552 6.1619

US$ exchange rate

         

Annual/period average RMB: US$ exchange rate

6.1128 6.1358 6.1432 6.1397 6.1156

Year-end EUR:

0.9012 0.9215 0.8826 0.7325 0.7271

US$ exchange rate

         

Annual/period average EUR: US$ exchange rate

0.8958 0.8871 0.7773 0.7294 0.7297

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US Dollars at the rates used in translation.

   
(t)

Revenue recognition

   

The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

   

The Company's revenue consists of invoiced value of goods, net of a value-added tax (VAT). The Company allows its customers to return products if they are defective. However, this rarely happens and amounts returned have been de minimis.


(u)

Earnings per share

   

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of ordinary shares outstanding and potential dilutive securities during the year. During the period ended June 30, 2015, no warrants were issued nor were options granted. For the year ended December 31, 2010, 81,155 warrants were issued to certain service providers. For the year ended December 31, 2009, 1,334,573 stock options were granted to employees pursuant to the Company’s equity incentive plan; 2,255,024 warrants were issued to investors in connection with a PIPE financing. As of June 30, 2015, 1,753,909 shares of Series A warrants have expired and all stock options to employees from the 2009 stock incentive program have expired. These warrants and options could be potentially dilutive if the market price of the Company’s common stock exceeds the exercise price for these securities.

   

The Company computes earnings per share (“EPS”) in accordance with ASC Topic 260, “Earnings per share” and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS.




Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e. those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

   
(v)

Financial Instruments

   

The Company’s financial instruments, including cash and equivalents, accounts and other receivables, accounts and other payables, accrued liabilities and short-term debt, have carrying amounts that approximate their fair values due to their short maturities. ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:


Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.


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

   

As of June 30, 2015 and December 31, 2014, the Company did not identify any assets and liabilities whose carrying amounts were required to be adjusted in order to present them at fair value.

   
(w)

Commitments and contingencies

   

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

   
(x)

Comprehensive income

   

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




The Company uses FASB ASC Topic 220, “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except the changes in paid-in capital and distributions to stockholders due to investments by stockholders. Comprehensive income for the periods ended June 30, 2015 and 2014 included net income and foreign currency translation adjustments.

   
(y)

Goodwill

   

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable assets acquired in a business combination. In accordance with FASB ASC Topic 350, "Goodwill and Other Intangible Assets", goodwill is no longer subject to amortization. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test. Fair value is generally determined using a discounted cash flow analysis.

   
(z)

Recent accounting pronouncements

   

In January 2015, The FASB issued ASU No. 2015-01, “Income Statement— Extraordinary and Unusual Items (Subtopic 225-20)”.This Update eliminates from GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement—Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. Paragraph 225-20-45-2 contains the following criteria that must both be met for extraordinary classification:


  1.

Unusual nature. The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates.

     
  2.

Infrequency of occurrence. The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates.

If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item.

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The effective date is the same for both public business entities and all other entities.



The Company adopted ASU No. 2015-01 prospectively and has applied it to the presentation of the financial statements.

   

As of June 30, 2015, there are no other recently issued accounting standards not yet adopted that would or could have a material effect on the Company’s consolidated financial statements.

   
3.

RESTRICTED CASH

   

Restricted Cash represents interest bearing deposits placed with banks to secure banking facilities in the form of loans and notes payable. The restriction of funds is based on time. The funds that collateralize loans are held for 60 days in a savings account that pays interest at the prescribed national daily savings account rate. For funds that under lie notes payable, the cash is deposited in six month time deposits that pay interest at the national time deposit rate.

   
4.

TRADE ACCOUNTS RECEIVABLE


 

 

  6/30/2015     12/31/2014  
 

Trade accounts receivable

$  39,361,925   $  64,726,091  
 

Less: Allowance for doubtful accounts

  (5,496,518 )   (5,919,625 )
 

 

$  33,865,407   $  58,806,466  

 

Allowance for bad debt:

  6/30/2015     12/31/2014  
 

Beginning balance

$  (5,919,625 ) $  (439,875 )
 

Additions to allowance

  -     (5,479,750 )
 

Bad debt written-off

  423,107     -  
 

Ending balance

$  (5,496,518 ) $  (5,919,625 )

The Company offers credit terms of between 30 to 60 days to most of their domestic customers, including supermarkets and wholesalers, around 90 days to most of their international customers, and between 0 to 15 days for most of the third-party distributors the Company works with.

   
5.

OTHER RECEIVABLES

   

Other receivables consisted of the following as of June 30, 2015 and December 31, 2014:


      6/30/2015     12/31/2014  
 

Advances to employees for job/travel disbursements

  879,605     2,623,067  
 

Amount due by a non-related enterprise

  173,607     162,907  
 

Other non-related receivables

  2,665,094     580,634  
 

Other related party receivables

  1,966,060     1,420,548  
 

Short-term investment sale receivable

  1,642,360     1,629,062  
 

Vendor rebate receivable

  1,575,740     1,767,267  
 

$ 8,902,466   $  8,183,485  


Advances to employees for job/travel disbursements consisted of advances to employees for transportation, meals, client entertainment, commissions, and procurement of certain raw materials. The advances issued to employees may be carried for extended periods of time because employees may spend several months out in the field working to procure new sales contracts or fulfill existing contracts.

Specifically, the company uses available employees of the purchasing department to arrange purchases with desirable chestnut or other raw material growers. However, because many of these growers are in rural farming areas of China where traditional banking and credit arrangements are difficult to implement, the Company must utilize cash purchases and also must contract for its future needs by placing a good faith deposit in cash with the growers. However none of these advances to employees for delivery to the growers on behalf of the Company are “personal loans” to the employees. Advances to employees for purchase of materials in other receivables are adjusted to advances to suppliers as of June 30, 2015.

Related party receivable represented advances issued by management for job or travel disbursement in the normal course of business. The receivable had no impact on earnings. As with other employees, officers sign notes when cash is issued to them as job or travel disbursement. In order to satisfy certain criteria for obtaining the long-term loan with DEG, as noted in footnote 12, Junan Hongrun lent money to Mr. You, Huadong to purchase life insurance. Related party receivable amounts are disclosed as “other related party receivables” in other receivables.

In September 2010, Shandong Lorain and Junan Hengji Real Estate Development Co., Ltd. ("Junan Hengji") entered into a cooperative development agreement (the "Agreement"), and in March 2011, Jiangsu Heng An Industrial Investment Group Co., Ltd. ("Heng An Investment"), an affiliated company of Junan Hengji also entered into the Agreement with Shandong Lorain to jointly develop the project with Junan Hengji. Pursuant to the Agreement, Shandong Lorain agreed to sell the Company’s interest in the amount of $7,764,577 (RMB 49,604,000) in a parcel of land located in Junan Town, Shandong Province, to construct residential buildings by Junan Hengji and Heng An Investment. The land was sold to Junan Hengji and Heng An Investment for a total sales price of RMB 69,604,000 and a guaranteed gross profit of RMB 20,000,000 without consideration of the profit or loss of the residential building project.

As of June 30, 2015, a total of RMB 42,029,955 has been received and there was an unpaid balance of RMB 27,574,045. The Company filed litigation against Junan Hengji and Heng An Investment in 2014 for a claim of RMB 10,000,000, which is half of the original guaranteed profit of RMB 20,000,000. The Company evaluated the potential claims against Junan Hengji and Heng An Investment, disputes between the parties with respect to out of pocket expenses paid by Junan Hengji as well as the litigation fee that is required to be paid to the court by Shandong Lorain first based upon the amount claimed for disputes between the parties. Shandong Lorain decided to file the lawsuit with the Linyi City Intermediate People's Court to claim a fixed return of RMB 10 million (approximately US$1,642,360).

On March 21, 2015, Shandong Lorain received the Linyi City Intermediate People's Court decision that rejected Shandong Lorain's claim for RMB 10 million against Junan Hengji and Heng An Investment. On April 3rd, 2015, Shandong Lorain appealed the decision to the Supreme Court of Shandong Province and the case is still in the process. The balance of the claim was deemed to be uncollectable and was written off as a loss. As of June 30, 2015, RMB 10,000,000 (US$ 1,642,360) is due and payable to the Company since the decision from the lower court doesn't become effective until the appeal procedure is completed or expired.



6.

INVENTORIES

   

Inventories consisted of the following as of June 30, 2015 and December 31, 2014:


 

 

  6/30/2015     12/31/2014  
 

Raw materials

$  32,934,410   $  28,557,607  
 

Finished goods

  30,179,129     23,090,553  
 

 

$  63,113,539   $  51,648,160  

7.

PROPERTY, PLANT AND EQUIPMENT

   

Property, plant, and equipment consisted of the following as of June 30, 2015 and December 31, 2014:


 

 

  6/30/2015     12/31/2014  
 

At Cost:

           
 

       Buildings

$  87,845,816   $  87,751,232  
 

       Land

  212,628     232,946  
 

       Landscaping, plant and tree

  11,012,934     10,923,768  
 

       Machinery and equipment

  21,646,472     21,853,334  
 

       Office equipment

  1,087,001     1,095,590  
 

       Motor vehicles

  641,687     654,324  
 

 

$  122,446,538   $  122,511,194  
 

Less: Accumulated depreciation

           
 

       Buildings

  (15,202,849 )   (14,479,949 )
 

       Landscaping, plant and tree

  (4,534,813 )   (4,021,153 )
 

       Machinery and equipment

  (13,223,990 )   (13,181,519 )
 

       Office equipment

  (1,220,411 )   (1,252,846 )
 

       Motor vehicles

  (448,543 )   (427,197 )
 

 

  (34,630,606 )   (33,362,664 )
 

 

           
 

 

$  87,815,932   $  89,148,530  

Landscaping, plants, and trees account for the orchards that the Company has developed for agricultural operations. These orchards as well as the young trees which were purchased as nursery stock are capitalized into fixed assets. The depreciation is then calculated on a 30-year straight-line method when production in commercial quantities begins. The orchards have begun production in small quantities and the Company has accounted for depreciation commencing July 1, 2010. In 2013, the Company leased three greenhouses to grow seasonal crops in order to lower cost. Depreciation expense for the six month periods ended June 30, 2015 and 2014 was $2,014,035 and $1,832,928, respectively.

   
8.

INTANGIBLE ASSETS, NET

   

Intangible assets consisted of the following as of June 30, 2015 and December 31, 2014:




 

 

  6/30/2015     12/31/2014  
 

 

           
 

Land use rights, at cost

$  17,663,384   $  17,520,374  
 

 

           
 

Utilities rights, at cost

  51,090     50,676  
 

 

           
 

Software, at cost

  476,618     451,863  
 

 

           
 

Patent, at cost

  1,444,070     1,581,891  
 

 

           
 

 

  19,635,162     19,604,804  
 

 

           
 

Less: Accumulated amortization

  (2,241,320 )   (2,066,936 )
 

 

           
 

 

$  17,393,842   $  17,537,868  

All land is owned by the government in China. Land use rights represent the Company’s purchase of usage rights for a parcel of land for a specified duration of time, typically 50 years. Amortization expense for the six month periods ended June 30, 2015 and 2014 was $191,770 and $186,455, respectively.

   
9.

BANK LOANS

   

Bank loans include bank overdrafts, short-term bank loans, and current portion of long- term loans, which consisted of the following as of June 30, 2015 and December 31, 2014:


 

Bank Overdrafts

  6/30/2015     12/31/2014  
 

 

           
  CIC Lorient Enterprises,
Interest rate of EURIBOR+1.70% due within 3 months
$
-
  $
380,106
 
  CIO,
Interest rate of EURIBOR+1.70% due within 3 months
  85,361    
-
 
  Credit Agricole,
Interest rate of EURIBOR+1.70% due within 3 months
  174,674    
214,146
 
  BNP Paribas,
Interest rate of EURIBOR+1.70% due within 3 months
 
217,946
   
-
 
  LCL Banque et Assurance,
Interest rate of EURIBOR+1.70% due within 3 months
  -    
105,508
 
  Société Générale,
Interest rate of EURIBOR+1.70% due within 3 months
 
80,990
   
285,621
 



  Banque Tarneud,
Interest rate of EURIBOR+1.70% due within 3 months
  414,978     548,537  
  BPI France,
Interest rate of EURIBOR+1.70% due within 3 months
  -     1,151,975  
  HSBC,
Interest rate of EURIBOR+1.70% due within 3 months
  3,032     22,963  
  GE,
Interest rate of EURIBOR+1.70% due within 3 months
  166     2,043  
  BES,
Interest rate of EURIBOR+1.70% due within 3 months
  466     263  
  Banco Portugues de Negocios   1,701     1,864  
  Banco Espirito Santo   3,608     3,951  
    $  982,922   $  2,716,977  

Bank overdrafts are collateralized by inventory.

 

Short-term Bank Loans

  6/30/2015     12/31/2014  
 

 

           
 

Loan from Industrial and Commercial Bank of China,

           
 

            • Interest rate at 7.28% per annum; due 3/4/2015

$  -   $  1,466,156  
 

            • Interest rate at 7.125% per annum; due 3/27/2015

  -     4,072,656  
 

            • Interest rate at 1.74% per annum; due 4/10/2015

  -     387,652  
 

            • Interest rate at 1.74% per annum; due 4/24/2015

  -     895,884  
 

            • Interest rate at 7.28% per annum; due 6/5/2015

  -     1,010,019  
 

            • Interest rate at 7.28% per annum; due 7/1/2015

  1,313,888     -  
 

            • Interest rate at 6.50% per annum; due 10/14/2015

  985,416     977,437  
 

            • Interest rate at 6.50% per annum; due 10/14/2015

  4,105,899     -  
 

            • Interest rate at 7.20% per annum; due 11/2/2015

  1,642,360     1,629,062  
 

            • Interest rate at 6.63% per annum; due 11/16/2015

  1,313,888     -  
 

            • Interest rate at 6.72% per annum; due 12/1/2015

  1,642,360     1,629,062  
 

 

           
 

Loan from China Minsheng Bank Corporation, Linyi Branch

       
 

            • Interest rate at 7.8% per annum due 1/17/2015

  -     1,629,062  



 

            • Interest rate at 7.8% per annum due 2/26/2015

  -     814,531  
 

 

           
 

Loan from Agricultural Bank of China, Junan Branch

           
 

            • Interest rate at 7.8% per annum due 8/14/2015

  1,642,360     1,629,062  
 

            • Interest rate at 7.28% per annum due 1/22/2016

  2,348,574     -  
 

 

           
 

Loan from Agricultural Bank of China, Luotian Branch

       
 

            • Interest rate at 7.28% per annum due 3/24/2015

  -     1,629,062  
 

            • Interest rate at 7.8% per annum due 8/25/2015

  2,135,068     2,117,781  
 

 

           
 

China Agricultural Development Bank

           
 

 

           
 

            •Interest rate at 6.0% per annum due 1/7/2015

  -     733,078  
 

            •Interest rate at 6.0% per annum due 9/1/2015

  821,180     814,531  
 

            •Interest rate at 5.6% per annum due 1/6/2016

  821,180     -  
 

 

           
 

Luotian Sanliqiao Credit Union,

           
 

            • Interest rate at 9.36% per annum due 1/21/2015

  -     162,906  
 

            • Interest rate at 9.72% per annum due 2/13/2016

  492,708     -  
 

 

           
 

Bank of Ningbo ,

           
 

            • Interest rate at 7.80% per annum due 10/26/2015

  821,180     1,629,062  
 

 

           
 

Hankou Bank, Guanggu Branch,

           
 

            • Interest rate at 6.95% per annum due 8/24/2015

  1,642,360     1,629,062  
 

 

           
 

Bank of Rizhao,

           
 

            • Interest rate at 7.80% per annum due 1/17/2015

  -     1,629,062  
 

            • Interest rate at 7.28% per annum due 1/19/2016

  1,642,360     -  
 

 

           
 

China Construction Bank,

           
 

            • Interest rate at 6.16% per annum due 2/25/2015

  -     814,531  
 

            • Interest rate at 6.60% per annum due 4/15/2015

  -     798,241  
 

            • Interest rate at 6.60% per annum due 5/11/2015

  -     521,300  
 

            • Interest rate at 6.60% per annum due 11/27/2015

  821,180     814,531  
 

 

           
 

Huaxia Bank,

           
 

            • Interest rate at 7.8% per annum due 5/19/2015

  1,642,360     1,629,062  



City of Linyi Commercial Bank, Junan Branch,

           

            • Interest rate at 9% per annum due 4/30/2015

- -

            • Interest rate at 8.4% per annum due 2/16/2016

  1,642,360     -  

 

   

Ministry of Finance,

           

            • Interest free due 10/2015

1,231,770 -

 

           

Bank of China, Paris Branch

   

            • Interest rate at 2.80% per annum due 11/18/2015

  2,774,079     3,622,666  

            • Interest rate at 2.80% per annum due 2/11/2016

4,438,526 2,954,048

$ 35,921,056   $ 37,639,506  

The short-term loans, which are denominated in the functional currencies Renminbi (RMB) and Euros, were primarily obtained for general working capital. If not otherwise indicated in the below remarks, short-term loans are guaranteed by either companies within the group or personnel who hold a management role within the group.

   
10.

CURRENT PORTION – LONG TERM DEBT

   

Current portions of long-term debt consisted of the following as of June 30, 2015 and December 31, 2014:


  BNP Paribas,            
              • Interest rate at 3.80% per annum due 3/14/2015 $  -   $  21,284  
              • Interest rate at 3.00% per annum due 7/15/2015   -     16,355  
              • Interest rate at 4.20% per annum due 12/20/2016   2,149     73,082  
               
  CIC Lorient Enterprises,            
              • Interest rate at 2.98% per annum due 12/20/2015   -     27,791  
              • Interest rate at 4.20% per annum due 12/20/2016   -     108,864  
               
  CIO,            
              • Interest rate at 2.98% per annum due 12/20/2015   12,778     -  
               
  Credit Agricole,            
              • Interest rate at 4.20% per annum due 12/20/2016   -     108,864  
              • Interest rate at 1.85% per annum due 1/25/2017   -     42,947  
               
  LCL Banque et Assurance,            
              • Interest rate at 4.20% per annum due 12/20/2016   63,249     108,864  
      482,690     -  
               
  Banque Tarneud,            
              • Interest rate at 3.28% per annum due 12/2016   66,467     135,624  



 

            • Interest rate at 2.90% per annum due 12/2016

  123,795     72,818  
 

BPI France,

           
 

            • Interest rate at 3.42% per annum due 12/20/2016

  416,111     547,046  
 

Société Générale,

           
 

            • Interest rate at 2.90% per annum due 5/15/2016

  21,262     25,078  
 

 

$ 1,188,501   $  1,288,617  

Current portions of notes payable and debentures consisted of the following as of June 30, 2015 and December 31, 2014:

 

 

  6/30/2015     12/31/2014  
 

Note payable issued by Shanghai Pudong Development Bank

       
 

            •      Interest rate at 5.9% per annum due 12/28/2015

$  13,138,878   $  13,032,500  
 

 

$ 13,138,878   $  13,032,500  

 

 

  6/30/2015     12/31/2014  
 

Debenture issued by 2 private placement holders underwritten by Daiwa SSC Securities Co. Ltd.

       
 

            •      Interest rate at 9.5% per annum due 11/8/2015

$ 16,423,597   $ -  
 

 

$ 16,423,597   $ -  

Current portions of long-term debt consisted of the following as of June 30, 2015 and December 31, 2014:

 

 

  6/30/2015 12/31/2014  
 

 

           
 

BNP Paribas,

  50,205     -  
              •      Interest rate at 4.20% per annum due 12/20/2016            
               
 

Banque Tarneud,

  58,472     -  
              •      Interest rate at 2.90% per annum due 12/2016            
               
 

Credit Agricole,

  71,412     -  
              •      Interest rate at 1.85% per annum due 1/25/2017            
               
 

LCL Banque et Assurance,

  50,205     -  
              •      Interest rate at 4.20% per annum due 12/20/2016            
 

 

  230,294        
 

Loans from China Development Bank

           
 

            •      Interest rate at 7.07% per annum due 5/20/2015

$ 1,149,652   $  1,140,344  
 

            •      Interest rate at 7.07% per annum due 9/24/2015

  1,313,888     1,303,250  
 

 

           
 

Loans from Deutsche Investitions-und

           
 

Entwicklungsgesellschaft mbH (“DEG”)

           
 

            •      Interest rate at 5.510% per annum due 3/15/2015*

  1,875,000     1,875,000  
 

            •      Interest rate at 5.510% per annum due 9/15/2015

  1,875,000     1,875,000  
 

            •     Interest rate at 5.510% per annum due 3/15/2016

  1,875,000     -  
 

 

$  8,088,540   $  6,193,594  
 

 

           
 

Total

$ 37,881,309   $  19,226,094  

Note:

*

We are in the process of negotiation with DEG to reschedule the all three installment repayments.




11.

NOTES PAYABLE AND CONVERTIBLE PROMISSORY NOTE

   

Notes Payable consisted of the following as of June 30, 2015 and December 31, 2014:


 

 

  6/30/2015     12/31/2014  
 

 

           
 

Notes payable issued by Hankou Bank,

           
 

            •     Interest rate at 5.55% per annum due 3/24/2015

$ -   $ 1,629,062  
 

 

           
 

Notes payable issued by BNP Paribas,

           
 

            •     Interest rate at EURIBOR + 1.7% per annum due within 3 months

  665,781     972,527  
 

 

           
 

Notes payable issued by CIC Lorient Enterprises,

           
 

            •      Interest rate at EURIBOR + 1.7% per annum due within 3 months

  1,018,395     1,434,476  
 

 

           
 

Notes payable issued by Credit Agricole,

           
 

            •      Interest rate at EURIBOR + 1.7% per annum due within 3 months

  482,690     705,081  
 

 

           
 

Notes payable issued by LCL Banque et Assurance,

           
 

            •      Interest rate at EURIBOR + 1.7% per annum due within 1 months

  -     705,081  
 

 

           
 

Notes payable issued by Société Générale,

           
 

            •      Interest rate at EURIBOR + 1.7% per annum due within 1 months

  453,717     559,203  
 

 

           
 

 

$ 2,620,583   $ 6,005,430  


The Notes Payable are guaranteed by third party guarantors.

Convertible Promissory Note consisted of the following as of June 30, 2015 and December 31, 2014:

 

 

  6/30/2015     12/31/2014  
 

 

           
 

Note issued by Jade Lane Group Limited

           
 

            •      Interest rate at 4.50% per annum due 3/13/2015

$  -   $  3,500,000  
 

 

$  -   $  3,500,000  

Under the terms of the Note, interest on the outstanding Principal Amount accrues at a rate of 4.5% per annum, and all accrued but unpaid interest is due and payable on December 31, 2014 and on the last day of each quarter thereafter. If the Note is not converted pursuant to the terms of the Note, additional interest on the outstanding Principal Amount shall accrue at a rate of 4.5% per annum and is payable at the maturity of the Note. Unless the Note is otherwise accelerated or converted, the unpaid Principal Amount of the Note, together with all accrued but unpaid interest, is due and payable, at the election of the Holder, on September 13, 2014 or March 13, 2015 (“Maturity Date”), provided, however, if Holder fails to notify the Company in writing by August 13, 2014 that it elects the maturity date of September 13, 2014, then the Maturity Date will be extended to March 13, 2015. The Company did not receive the notification from the Holder to elect the maturity date of December 31, 2014; therefore, the maturity date will be March 13, 2015. On March 12, 2015, the Company and Jade Lane Group Limited entered into an agreement to repayment terms of the promissory note in the amount of $3,500,000 issued to the Company on March 13, 2014. On April 20, 2015, the Company repaid the promissory note in form of both cash payment of $791,433 and conversion of 2,355,276 shares of common stock at a conversion price of $1.15 per share.

   
12. TAXES PAYABLES
   
  Taxes payable consisted of the following as of June 30, 2015 and December 31, 2014:

 

 

  6/30/2015     12/31/2014  
 

Value added tax payable

$  383,546   $  1,664,596  
 

Corporate income tax payable

  1,153,427     996,629  
 

Employee payroll tax withholding

  167,236     442,382  
 

Property tax payable

  57,382     55,872  
 

Stamp tax payable

  1,512     1,478  
 

Business tax payable

  159,485     158,194  
 

Land use tax payable

  64,728     53,400  
 

Capital gain tax payable

  967,807     947,919  
 

 

$  2,955,122   $  4,320,470  



13.

ACCRUED EXPENSES AND OTHER PAYABLE

   

Accrued expenses and other payables consisted of the following as of June 30, 2015 and December 31, 2014:


 

 

  6/30/2015     12/31/2014  
 

Accrued salaries and wages

$  62,242   $  303,751  
 

Accrued utility expenses

  58,614     25,631  
 

Accrued interest expenses

  3,225,728     1,359,472  
 

Accrued transportation expenses

  845,760     653,935  
 

Other accruals

  2,380     819,775  
 

Business and other taxes

  809,302     505,584  
 

Disbursement payable

  -     108,528  
 

Accrued staff welfare

  449,382     376,378  
 

 

$  5,453,408   $  4,153,054  

14.

LONG-TERM DEBT

   

Non-current portions of long-term debt consisted of the following as of June 30, 2015 and December 31, 2014:


 

 

  6/30/2015     12/31/2014  
 

Loans from Deutsche Investitions-und Entwicklungsgesellschaft mbH (“DEG”)

       
 

•Interest rate at 5.510% per annum due 3/15/2016

$  -   $  1,875,000  
 

 

           
 

BNP Paribas,

           
 

• Interest rate at 4.20% per annum due 12/20/2016

  -     105,863  
 

 

           
 

CIC Lorient Enterprises,

           
 

• Interest rate at 4.20% per annum due 12/20/2015

  89,042     104,394  
 

• Interest rate at 4.20% per annum due 12/20/2016

  65,324        
 

 

           
 

Credit Agricole,

           
 

• Interest rate at 4.20% per annum due 12/20/2016

  97,307     104,394  
 

• Interest rate at 1.85% per annum due 1/25/2017

  35,825     38,887  
 

 

           
 

LCL Banque et Assurance,

           
 

• Interest rate at 4.20% per annum due 12/20/2015

  97,307     104,394  
 

 

           
 

Société Générale,

           
 

• Interest rate at 2.90% per annum due 5/15/2016

  -     10,665  
 

 

           
 

Banco Portugue de Negocios,

           
 

• Interest rate at EURIBOR 3M+spread 2% per annum due 06/2024

  307,666     337,064  
 

 

           
 

Banco Espirito Santo

           
 

• Interest rate at EURIBOR 3M+spread 2% per annum due 06/2024

  24,579     26,926  
 

 

$  717,050   $  2,707,587  


The Company began repaying its loan with DEG in semi-annual installments on September 15, 2012. As of December 31, 2014 and 2013, the Company has repaid $9,375,000 and $5,625,000 in principal. The loan was collateralized with the following terms:

(a.)

Create and register a first ranking mortgage in the amount of about USD 12,000,000 on its land and building in favor of DEG.

(b.)

Undertake to provide a share pledge of Mr. Si Chen, its majority shareholder, or shares as the sponsor in the amount of about USD 12,000,000 in form and substance satisfactory to DEG

(c.)

The total amount of the first ranking mortgage as indicated in the Loan Agreement (Article 12(1)(a)) and the value of the pledged shares of Mr. Si Chen (Loan Agreement (Article 12(1)(a))) should be at least USD 24,000,000.

(d.)

Undertake to provide a guarantee from the Shareholder in form and substance satisfactory to DEG.



Non-current portions of notes payable and debentures consisted of the following as of June 30, 2015 and December 31, 2014:

 

 

  6/30/2015     12/31/2014  
 

Debenture issued by 5 private placement holders underwritten by Guoyuan Securities Co., Ltd.

       
 

            •      Interest rate at 10% per annum due 8/28/2016

  16,423,597     16,290,625  
 

 

           
 

Debenture issued by 2 private placement holders underwritten by Daiwa SSC Securities Co. Ltd.

       
 

            •      Interest rate at 9.5% per annum due 11/8/2015

  -     16,290,624  
 

 

           
 

 

$ 16,423,597   $ 32,581,249  

15.

CAPITALIZATION

   

Dating back to May 3, 2007, the Company underwent a reverse-merger and a concurrent financing transaction that resulted in 24,923,178 shares of outstanding common stock that remained unchanged through December 31, 2007. In connection with the financing, the Company also issued 1,037,858 and 489,330 warrants to the PIPE investors and placement agent, respectively. During 2008, several holders of warrants issued in connection with the financing transaction exercised their rights to purchase shares at the prescribed exercise price. The holders of the warrants exercised the right to purchase a total of 360,207 shares; however, because the holders did not pay in cash for the warrants, 110,752 of those shares were cancelled as consideration in lieu of the warrant holders paying in cash. Ultimately, 249,455 of new shares were issued to those who exercised their warrants. The Company also made an adjustment to its outstanding share count for rounding errors as result of the split and reverse splits made at the time of the reverse merger. The number of shares in the adjustment was an addition of seven shares. The Company believes the adjustment of seven shares is immaterial to both prior and current earnings per share calculation.

   

During the year 2009, the Company issued 56,393 shares of stock to its employees and vendors and 5,011,169 shares to investors. The Company issued 1,334,573 stock options to employees on July 28, 2009; 1,753,909 shares of Series A warrants and 501,115 shares of Series B warrants were issued to investors on October 28, 2009. As of December 31, 2014, 501,115 shares of Series B warrants and all stock options to employees from the 2009 stock incentive program have expired. As of June 30, 2015, 1,753,909 shares of Series A warrants expired.

   

During the year 2010, the Company issued 2,000 shares to a service provider on February 10, 2010 and 81,155 warrants to various service providers on January 5, 2010. The Company issued to investors 3,440,800 shares at an agreed price of $2.80 per share for a PIPE financing on September 10, 2010. This financing brought $8,955,730 net proceeds to the Company. The Company issued 5,000 shares to its employee on September 23, 2010. 731,707 shares of restricted stock were issued to the owner of Shandong Greenpia, Mr. Ji Zhenwei on September 24, 2010 as part of acquisition cost. As of December 31, 2014, 81,155 warrant shares issued to various service providers has expired.



For the years ended December 31, 2014 and 2013, the Company transferred $4,642,404 and $1,474,019 from retained earnings to statutory reserve. These transfers are to be used for future company development, recovery of losses and increase of capital, as approved, to expand production or operations.

For the year ended December 31, 2014, the Company issued 300,000 shares to a consulting company as its financial advisor for management consulting and advisory services.

For the period ended June 30, 2015, the Company issued 987,500 shares as stock compensation to employees and 2,355,276 shares upon conversion of the convertible promissory note to Jade Lane.

As detailed in the table below, the total number of outstanding shares at June 30, 2015 was 38,259,490.

American Lorain Corporation
Capitalization Reconciliation Table

 

Par value authorized Issuance date Shares outstanding

Common stock at 1/1/2009

200,000,000   25,172,640

New shares issued to employees and vendors during 2009

   Various dates 56,393

New shares issued to PIPE investors

   10/28/2009 5,011,169

New shares issued to service provider during 2010

   2/10/2010 2,000

New shares issued to PIPE investors

  9/10/2010 3,440,800

New shares issued to employee

  9/23/2010 5,000

New shares issued as acquisition consideration

   9/24/2010 731,707

New shares issued to service provider during 2011

   5/5/2011 25,000

New shares issued to employees per stock incentive plan

   7/20/2011 27,092

New shares issued to employees per stock incentive plan

   11/21/2011 36,073

New shares issued to employees per stock incentive plan

   10/5/2012 108,840

New shares issued to service provider during 2014

   8/22/2014 300,000

New shares issued upon conversion of convertible debenture

   4/20/2015 2,355,276

New shares issued to employees per stock incentive plan

   6/12/2015 987,500

Common stock at 6/30/2015

    38,259,490



16.

NON-CONTROLLING INTERESTS

     

The non-controlling interest represents the following:

     
(1)

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

     
(2)

49% equity of the Athena Group held by Biobranco II, Alcides Branco, and Nuno Branco.


17.

SALES BY PRODUCT TYPE

   

Sales by categories of product consisted of the following for the periods ended June 30, 2015 and 2014:


Category

  6/30/2015     6/30/2014  

Chestnut

$  31,307,012   $  33,446,347  

Convenience food

  26,549,583     15,793,883  

Frozen food

  15,248,620     14,965,368  

Total

$  73,105,215   $  64,205,598  

Revenue by geography consisted of the following for the periods ended June 30, 2015 and 2014:

Country

  6/30/2015     6/30/2014  

Australia

$  16,884   $  63,615  

Austria

  54,659     -  

Belgium

  1,064,031     1,131,244  

China

  55,505,660     44,203,556  

France

  5,720,346     2,041,754  

Georgia

  88,595     -  

Germany

  152,146     542,938  

Hong Kong

  135,374     48,453  

Israel

  111,303     52,730  

Italy

  180,867     -  

Japan

  4,137,787     4,349,384  

Malaysia

  916,623     1,034,938  

Netherlands

  8,086     -  

Philippines

  -     255,794  

Portugal

  199,281     4,032,019  

Reunion

  46,442     -  

Saudi Arabia

  -     110,943  

Singapore

  1,167,069     708,216  

South Korea

  919,449     3,477,672  

Spain

  232,598     -  

Taiwan

  221,638     286,486  

Thailand

  845,359     493,025  

United Kingdom

  491,766     1,215,981  

United States

  889,252     156,850  

Total

$ 73,105,215    $ 64,205,598   



18.

INCOME TAXES

   

All of the Company’s operations are in the PRC, France, and Portugal, and in accordance with the relevant tax laws and regulations. The corporate income tax rate for each country is as follows:


  PRC tax rate is 25%.
  France tax rate is 33.3%
  Portugal tax rate is 23%.

The following tables provide the reconciliation of the differences between the statutory and effective tax expenses for the periods ended June 30, 2015 and 2014:

 

  6/30/2015     6/30/2014  

Income attributed to PRC & Europe

$  132,590   $  5,884,200  

Loss attributed to US

  (1,316,639 )   (189,586 )

Income/(loss) before tax

  (1,184,049 )   5,694,614  

 

           

 

           

PRC Statutory Tax at 25% Rate

  1,287,387     1,712,217  

Effect of tax exemption granted Income tax

$  1,287,387     - $ 1,712,217  

Per Share Effect of Tax Exemption

 

  6/30/2015     6/30/2014  

 

           

Effect of tax exemption granted

$  -   $  -  

Weighted-Average Shares Outstanding Basic

  35,944,490     34,616,714  

Per share effect

$  -   $  -  

The difference between the U.S. federal statutory income tax rate and the Company’s effective tax rate was as follows for the periods ended December 31, 2014 and 2013:

 

  6/30/2015     6/30/2014  

U.S. federal statutory income tax rate

  35%     35%  

Lower rates in PRC, net

  -10%     -10%  

Tax holiday for foreign investments

  -133.73%     5.07%  

The Company’s effective tax rate

  -108.73%     30.07%  

Effective January 1, 2008, the PRC government implemented a new 25% tax rate across the board for all enterprises regardless of whether domestic or foreign enterprise without any tax holiday which is defined as “two-year exemption followed by three-year half exemption” hitherto enjoyed by tax payers. As a result of the new tax law of a standard 25% tax rate, tax holidays were terminated as of December 31, 2007. However, the PRC government has established a set of transition rules to allow enterprises that were already participating in tax holidays before January 1, 2008, to continue enjoying the tax holidays until being fully utilized.


The Company has accrued a deferred tax asset as a result of its net operating losses as of and before December 31, 2014 because the Company planned to setup operations in the United States. The company anticipates that the operations within the United States will generate income in the future so that it will be able to take full advantage of the accrued tax asset. Accordingly the Company has not provided a valuation allowance for the accrued tax asset.

The Company’s detailed tax rates for its Chinese subsidiaries for 2015 and 2014 in the following table:

  China Income Tax
  Rate
Subsidiary 2015 2014
Junan Hongran        25%        25%
Luotian Lorain        25%        25%
Beijing Lorain        25%        25%
Shandong Lorain        25%        25%
Shandong Greenpia        25%        25%
Dongguan Lorain        25%        25%

19.

EARNINGS PER SHARE

Components of basic and diluted earnings per share were as follows:

 

 

  For the three months     For the six months  
 

 

  ended June 30,     ended June 30,  
 

 

  2015     2014     2015     2014  
 

 

                       
 

Basic Earnings Per Share Numerator

                       
 

         Net Income/(loss)

$  (447,704 ) $  2,140,436   $    (944,811 ) $ 3,730,925  
 

 

                       
 

         Income Available to Common

                       
 

         Stockholders

$  (447,704 ) $  2,140,436   $    (944,811 ) $ 3,730,925  
 

 

                       
 

Diluted Earnings Per Share Numerator

                       
 

         Income Available to Common

                       
 

         Stockholders

$  (447,704 ) $  2,140,436   $    (944,811 ) $ 3,730,925  
 

 

                       
 

Income Available to Common

                       
 

Stockholders on Converted Basis

$  (447,704 ) $  2,140,436   $    (944,811 ) $ 3,730,925  
 

 

                       
 

Original Shares:

                       
 

Additions from Actual Events

                       
 

-Issuance of Common Stock

  3,342,776     -     3,342,776     -  
 

Basic Weighted Average Shares Outstanding

  36,972,265     34,616,714     35,944,490     34,616,714  
 

 

                       
 

Dilutive Shares:

                       
 

Additions from Potential Events

                       
 

-Exercise of Investor Warrants & Placement Agent Warrants

  -     -     -     -  
 

- Exercise of Employee & Director Stock Options

  -     -     -     -  
 

Diluted Weighted Average Shares

  36,972,265     34,616,714     35,944,490     34,616,714  



 

Outstanding:

                       
 

 

                       
 

Earnings Per Share

                       
 

- Basic

$  (0.04 ) $  0.06   $    (0.07 ) $ 0.11  
 

- Diluted

$  (0.04 ) $  0.06   $       (0.07 ) $ 0.11  
 

 

                       
 

Weighted Average Shares Outstanding

                       
 

- Basic

  36,972,265     34,616,714     35,944,490     34,616,714  
 

- Diluted

  36,972,265     34,616,714     35,944,490     34,616,714  

20.

SHARE BASED COMPENSATION

   

On July 27, 2009, the Company’s Board of Directors adopted the American Lorain Corporation 2009 Incentive Stock Plan (the “Plan”). The Plan provides that the maximum number of shares of the Company’s common stock that may be issued under the Plan is 2,500,000 shares. The Company’s employees, directors, and service providers are eligible to participate in the Plan.

   

For the year ended December 31, 2009, the Company recorded a total of $166,346 of shared based compensation expense. The Company issued warrants that upon exercise would result in the issuance of 1,334,573 common shares. These stock options vest over three years, where 33.33% vest annually. The expense related to the stock options was $107,375. The Company also recorded expense of $58,971 for the issuance of 56,393 common shares to participants; these common shares vested immediately. Given the materiality and nature of share based compensation, the entire expense has been recorded as general and administrative expenses. For the year ended December 31, 2010, the Company recorded a total of $890,209 stock option and its related general and administrative expenses.

   

On February 19, 2014 the Company’s board of directors approved the 2014 Equity Incentive Plan (“2014 Plan”), which was approved at the annual stockholders meeting on June 9, 2014. Subject to adjustment as provided in the 2014 Plan, the total number of shares of Common Stock reserved and available for delivery in connection with awards under the 2014 Plan is 3,000,000. As of June 30, 2015, 987,500 shares were issued to employees as stock awards. This 2014 Plan replaced the Company’s 2009 Incentive Stock Plan (the “Prior Plan”) and no additional stock awards shall be granted under the Prior Plan. All outstanding stock awards granted under the Prior Plan shall remain subject to the terms of the Prior Plan with respect to which they were originally granted.

   

No tax benefit has yet been accrued or realized. For the period and year ended June 30, 2015 and December 31, 2014, the Company has yet to repatriate its earnings. Accordingly it has not recognized any deferred tax assets or liability in regards to benefits derived from the issuance of stock options.

   

For the period and year ended June 30, 2015 and December 31, 2014, the Company did not grant any stock options.




21.

LEASE COMMITMENTS


  (a.)

The Company entered into an operating lease agreement leasing a factory building located in Dongguan, China. The lease was signed by Shandong Lorain on behalf of Dongguan Lorain and expires on August 9, 2018.

     
 

The minimum future lease payments for this property at June 30, 2015 are shown in the following table:


From   To   Lease payment  
4/1/2015   12/31/2015   46,342  
1/1/2016   12/31/2016   92,685  
1/1/2017   12/31/2017   92,685  
1/1/2018   8/9/2018   56,641  
      $  288,353  

The outstanding lease commitment as of June 30, 2015 was $311,525.

The minimum future lease payments for this property at December 31, 2014 are shown in the following table:

From   To   Lease payment  
1/1/2015   12/31/2015   92,685  
1/1/2016   12/31/2016   92,685  
1/1/2017   12/31/2017   92,685  
1/1/2018   8/9/2018   56,641  
      $  334,696  

   

The outstanding lease commitment as of December 31, 2014 was $334,696.

     
  (b.)

During the year ended December 31, 2013, the Company entered into three operating lease agreements leasing three plots of land where greenhouses are maintained to grow seasonal crops. The leases were signed by Junan Hongrun Foodstuff Co., Ltd. and expires on April 25, 2033, May 19, 2033, and June 19, 2033, respectively.

     
 

The minimum future lease payments for these properties at June 30, 2015 are shown in the following tables:




From   To     Greenhouse 1     From     To     Greenhouse 2     From     To     Greenhouse 3  
4/1/2015   12/31/2015   $  58,596     4/1/2015     12/31/2015   $  47,557     4/1/2015     12/31/2015   $  5,670  
1/1/2016   12/31/2016     78,128     1/1/2016     12/31/2016     95,114     1/1/2016     12/31/2016     11,339  
1/1/2017   12/31/2017     78,128     1/1/2017     12/31/2017     95,114     1/1/2017     12/31/2017     11,339  
1/1/2018   12/31/2018     78,128     1/1/2018     12/31/2018     95,114     1/1/2018     12/31/2018     11,339  
1/1/2019   12/31/2019     78,128     1/1/2019     12/31/2019     95,114     1/1/2019     12/31/2019     11,339  
1/1/2020   12/31/2020     78,128     1/1/2020     12/31/2020     95,114     1/1/2020     12/31/2020     11,339  
1/1/2021   12/31/2021     78,128     1/1/2021     12/31/2021     95,114     1/1/2021     12/31/2021     11,339  
1/1/2022   12/31/2022     78,128     1/1/2022     12/31/2022     95,114     1/1/2022     12/31/2022     11,339  
1/1/2023   12/31/2023     85,773     1/1/2023     12/31/2023     102,527     1/1/2023     12/31/2023     12,097  
1/1/2024   12/31/2024     89,289     1/1/2024     12/31/2024     105,683     1/1/2024     12/31/2024     12,757  
1/1/2025   12/31/2025     89,289     1/1/2025     12/31/2025     105,683     1/1/2025     12/31/2025     12,757  
1/1/2026   12/31/2026     89,289     1/1/2026     12/31/2026     105,683     1/1/2026     12/31/2026     12,757  
1/1/2027   12/31/2027     89,289     1/1/2027     12/31/2027     105,683     1/1/2027     12/31/2027     12,757  
1/1/2028   12/31/2028     89,289     1/1/2028     12/31/2028     105,683     1/1/2028     12/31/2028     12,757  
1/1/2029   12/31/2029     89,289     1/1/2029     12/31/2029     105,683     1/1/2029     12/31/2029     12,757  
1/1/2030   12/31/2030     89,289     1/1/2030     12/31/2030     105,683     1/1/2030     12/31/2030     12,757  
1/1/2031   12/31/2031     89,289     1/1/2031     12/31/2031     105,683     1/1/2031     12/31/2031     12,757  
1/1/2032   12/31/2032     89,289     1/1/2032     12/31/2032     105,683     1/1/2032     12/31/2032     12,757  
1/1/2033   4/25/2033     42,261     1/1/2033     5/19/2033     50,322     1/1/2033     6/19/2033     5,530  
        $  1,517,595               $  1,817,351               $  217,483  

The outstanding lease commitments for the three greenhouses as of June 30, 2015 was $3,552,429.

The minimum future lease payments for these properties at December 31, 2014 are shown in the following tables:



From   To     Greenhouse 1     From     To     Greenhouse 2     From     To     Greenhouse 3  
1/1/2015   12/31/2015   $  78,128     1/1/2015     12/31/2015   $  95,114     1/1/2015     12/31/2015     11,339  
1/1/2016   12/31/2016     78,128     1/1/2016     12/31/2016     95,114     1/1/2016     12/31/2016     11,339  
1/1/2017   12/31/2017     78,128     1/1/2017     12/31/2017     95,114     1/1/2017     12/31/2017     11,339  
1/1/2018   12/31/2018     78,128     1/1/2018     12/31/2018     95,114     1/1/2018     12/31/2018     11,339  
1/1/2019   12/31/2019     78,128     1/1/2019     12/31/2019     95,114     1/1/2019     12/31/2019     11,339  
1/1/2020   12/31/2020     78,128     1/1/2020     12/31/2020     95,114     1/1/2020     12/31/2020     11,339  
1/1/2021   12/31/2021     78,128     1/1/2021     12/31/2021     95,114     1/1/2021     12/31/2021     11,339  
1/1/2022   12/31/2022     78,128     1/1/2022     12/31/2022     95,114     1/1/2022     12/31/2022     11,339  
1/1/2023   12/31/2023     85,773     1/1/2023     12/31/2023     102,527     1/1/2023     12/31/2023     12,097  
1/1/2024   12/31/2024     89,289     1/1/2024     12/31/2024     105,683     1/1/2024     12/31/2024     12,757  
1/1/2025   12/31/2025     89,289     1/1/2025     12/31/2025     105,683     1/1/2025     12/31/2025     12,757  
1/1/2026   12/31/2026     89,289     1/1/2026     12/31/2026     105,683     1/1/2026     12/31/2026     12,757  
1/1/2027   12/31/2027     89,289     1/1/2027     12/31/2027     105,683     1/1/2027     12/31/2027     12,757  
1/1/2028   12/31/2028     89,289     1/1/2028     12/31/2028     105,683     1/1/2028     12/31/2028     12,757  
1/1/2029   12/31/2029     89,289     1/1/2029     12/31/2029     105,683     1/1/2029     12/31/2029     12,757  
1/1/2030   12/31/2030     89,289     1/1/2030     12/31/2030     105,683     1/1/2030     12/31/2030     12,757  
1/1/2031   12/31/2031     89,289     1/1/2031     12/31/2031     105,683     1/1/2031     12/31/2031     12,757  
1/1/2032   12/31/2032     89,289     1/1/2032     12/31/2032     105,683     1/1/2032     12/31/2032     12,757  
1/1/2033   4/25/2033     42,261     1/1/2033     5/19/2033     50,322     1/1/2033     6/19/2033     5,530  
        $ 1,556,659               $  1,864,908               $  223,152  

The outstanding lease commitments for the three greenhouses as of December 31, 2014 was $3,644,719.

   
22.

CONTINGENCIES AND LITIGATIONS

   

There is a lawsuit currently pending in the Supreme Court of Shandong Province, which was initially filed by Shandong Lorain, a subsidiary of the Company, against Junan Hengji Real Estate Development Co., Ltd. ("Junan Hengji") in November 2013 at Linyi City Intermediate People's Court of Shandong Province (the "Linyi Court"). Shandong Lorain added Jiangsu Hengan Industrial Investment Group Co., Ltd. ("Heng An Investment") as a co-defendant after the case was first filed at Linyi Court.

   
  In September 2010, Shandong Lorain and Junan Hengji entered into a cooperative development agreement (the "Agreement") and in March 2011, Heng An Investment, an affiliated company of Junan Hengji also entered into the Agreement with Shandong Lorain to jointly develop the project with Junan Hengji. Pursuant to the Agreement, Junan Henji and Heng An Investment are required to pay Shandong Lorain a total RMB 20 million (approximately $3,225,806) fixed return according to the development status of the project developed by Junan Hengji and Heng An Investment. The payment was due and unpaid to Shandong Lorain. Shandong Lorain and the Company evaluated the potential claims against Junan Hengji and Heng An Investment, disputes between the parties with respect to out of pocket expenses paid by Junan Hengji, as well as the litigation fee that is required to be paid to the court based upon the amount claimed. Ultimately, Shandong Lorain decided to file the lawsuit with Linyi Court to claim a fixed return of RMB 10 million (approximately $1,636,902) first.
   

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




23. RISKS

  A.

Credit risk

     
 

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

     
  B.

Interest risk

     
 

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

     
  C.

Economic and political risks

     
 

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

     
 

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

     
  D.

Environmental risks

     
 

The Company has procured environmental licenses required by the PRC government.




 

The Company has both a water treatment facility for water used in its production process and secure transportation to remove waste off site. In the event of an accident, the Company has purchased insurance to cover potential damage to employees, equipment, and local environment.

     
  E.

Inflation Risk

     
 

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



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

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

  • Chestnut products;

  • Convenience foods (including ready-to-cook, or RTC, foods, ready-to-eat, or RTE, foods and meals ready- to-eat, or MRE); and

  • Frozen food products.

We conduct our production activities mainly in China and, through our majority-owned subsidiary, in France and Portugal. Our products are sold in Chinese domestic markets as well as exported to foreign countries and regions such as Japan, South Korea and Europe. We derive most of our revenues from sales in China, France, Japan and South Korea. In 2015, our primary strategy is to continue building our brand recognition in China through consistent marketing efforts towards supermarkets, wholesalers, and significant customers, enhancing the cooperation with other manufacturers and factories and enhancing the turnover for our existing chestnut, convenience and frozen food products. In addition, we are working to expand our marketing efforts in Asia and Europe. In terms of new products and business segments, we also entered into the China massive breakfast food market by launching our new products series, such as Lorain Youtiao (fried dough stick). We currently have limited sales and marketing activity in the United States, although our long-term plan is to significantly expand our activities there.

Domestic sales in the second quarter of 2015 accounted for 77.1% as compared to 68.8% over the same period of last year. The increase of the revenue mainly attributable to the fact that the sales of convenience food in domestic market during the period increased. It was benefited from our further penetration into the western provinces and cities in China, and established close partnership with local dealers.

In the coming quarters, American Lorain anticipates that demand for its traditional chestnut product line will remain stable, along with increases in its fast growing convenience business line, including the bean products and lunch boxes, etc.

Outside China, in the six month period ended June 30, 2015 and 2014, respectively, approximately 46.3% and 53.0% of our international sales were in the Asia-Pacific Region and approximately 48.4% and 45.9% were in Europe. We have been giving increasing emphasis in recent years to building a stronger international sales network. Our acquisition in France marks an important step for American Lorain along with our sustained marketing and operating efforts in Japan as well as domestic China.

Frozen foods sold primarily to selected export markets in Europe and supermarkets and wholesale customers in China. It contributed approximately 22.3% in revenues for the second quarter of 2015 compared to 23.3% in the second quarter of 2014.


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 second quarter of 2015, the cost of our raw materials and external purchased finished goods increased from $22.0 million to $24.7 million, as compared to the second quarter of 2014, for an increase of approximately 12.3% . 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.

Seasonality

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

Uncertainties that Affect our Financial Condition

We spend a significant amount of cash on our operations, principally to procure raw materials for our products. Many of our suppliers, including chestnut, vegetable and fruit farmers, and suppliers of packaging materials, require us to prepay for their supplies in cash or pay on the same day that such supplies are delivered to us. However, some of the suppliers with whom we have a long-standing business relationship allow us to pay on credit. We fund the majority of our working capital requirements out of cash flow generated from operations. If we fail to generate sufficient sales, or if our suppliers stop offering us credit terms, we may not have sufficient liquidity to fund our operating costs and our business could be adversely affected.

We funded approximately 39.4% of our working capital from the proceeds of short-term loans from Chinese banks in the second quarter of 2015, as compared to 28.1% over the same period last year. We expect to continue to fund our working capital requirements with such loans in the future. Such loans are generally secured by our fixed assets, receivables and/or guarantees by third parties. Our balance of short-term bank loans as of June 30, 2015 was approximately $38.1 million. The term of almost all such loans is one year or less. Historically, we have rolled over such loans on an annual basis. However, commencing 2010, the Chinese government is implementing more stringent credit policies to curb inflation and soaring property prices, which could negatively impact our ability to obtain or roll over these short term loans, and hence not having sufficient funds available to pay all of our borrowings upon maturity. Failure to roll over our short-term borrowings at maturity or to service our debt could result in the imposition of penalties, including increases in rates of interest, legal actions against us by our creditors, or even insolvency. In addition, we obtained a $15 million loan from Deutsche Investitions- und Entwicklungsgesellshaft (“DEG”) in May 2010 which we had fully drawn down in 2011. We completed three private placement financings in 2012 and 2013 with net proceeds of $13.0 million, $16.3 million and $16.3 million, respectively. In 2014, we issued $3.5 million convertible promissory note to an investor which partially convert to 2,355,276 shares in 2015. Proceeds from cash drawn down from the DEG loan, the private placement transactions and convertible promissory note, together with cash generated from operations and short-term bank loans, have been primarily used to fund our working capital needs, as well as addition to our construction in progress and purchase of fixed assets.


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 2015. However, if available liquidity is not sufficient to meet our operating and loan obligations as they come due, our plans include obtaining alternative financing arrangements or further reducing expenditures as necessary to meet our cash requirements. However, there is no assurance that, if required, we will be able to raise additional capital or reduce discretionary spending to provide the required liquidity. Currently, the capital markets for small capitalization companies are extremely difficult and banking institutions have become stringent in their lending requirements. Accordingly, we cannot be sure of the availability or terms of any third party financing.

Our business, operating results or financial condition will be adversely affected in the event of unfavorable economic conditions, including the ongoing global economy and capital markets disruptions. For example, we may experience declines in revenues, profitability and cash flows as a result of reduced orders, delays in receiving orders, delays or defaults in payment or other factors caused by the economic problems of our customers and prospective customers. We may experience supply chain delays, disruptions or other problems associated with financial constraints faced by our suppliers and subcontractors. In addition, changes and volatility in the equity, credit and foreign exchange markets and in the competitive landscape make it increasingly difficult for us to predict our revenues and earnings into the future.

Results of Operations

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

The following table summarizes the results of our operations during the three month periods ended June 30, 2015 and June 30, 2014, respectively and provides information regarding the dollar and percentage increase or (decrease) from the three month period ended June 30, 2015 compared to the three month period ended June 30, 2014.

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

 

  Three months ended June 30,      Increase/      Increase/  

 

              (Decrease)     (Decrease)  

(In Thousands of U.S. Dollars)

  2015     2014     ($)     (%)  

Net revenues

  35,548     32,516     3,032     9.3%  

Cost of revenues

  29,742     24,891     4,851     19.5%  

Gross profit

  5,806     7,625     (1,819 )   (23.9% )

Operating expenses

                       

Selling and marketing expenses

  1,042     1,664     (622 )   (37.4% )

General and administrative expenses

  4,566     1,305     3,261     249.9%  

Operating Income

  198     4,656     (4,458 )   (95.8% )



Government subsidy income

  749     300     449     149.7%  

Interest and other income

  470     108     362     335.2%  

Other expenses

  122     11     111     1,009.1%  

Interest expense

  1,888     1,854     34     1.8%  

Income before taxation

  (593 )   3,199     (3,792 )   (118.5% )

Income taxes

  808     962     (154 )   (16.0% )

Income before non-controlling interests

  (1,401 )   2,237     (3,638 )   (162.6% )

Non-controlling interests

  (953 )   97     (1,050 )   (1,082.5% )

Net income

  (448 )   2,140     (2,588 )   (120.9% )

Revenue

Net Revenues. Our net revenue for the three months ended June 30, 2015 amounted to $35.5 million, which represents an increase of approximately $3.0 million, or 9.3%, from the three month period ended on June 30, 2014, in which our net revenue was $32.5 million. The overall increase was attributable to the increase in sales of convenience food segment, as reflected in the following table:-

 

  Three months ended     Increase/     Increase/  

(In thousands of U.S. Dollars)

  6/30/2015     6/30/2014     (Decrease)     (Decrease)  

Chestnut

  15,245     16,092     (847 )   (5.3% )

Convenience food  

  12,368     8,363     4,005     47.9%  

Frozen food

  7,935     8,061     (126 )   (1.6% )

Total  

  35,548     32,516     3,032     9.3%  

The increase of revenue was benefited from our further penetration into the western provinces and cities in China, and established close partnership with local dealers which strengthened our market channels and branding.

Cost of Revenues. During the three months ended June 30, 2015, we experienced an increase in cost of revenue of $4.8 million, in comparison to the three months ended June 30, 2014, from approximately $24.9 million to $29.7 million, reflecting an increase of approximately 19.5%. An increase of approximately $2.7 million was attributable to raw material costs and external purchased finished goods, which increased from $22.0 million during the three months ended June 30, 2014 to $24.7 million, or approximately 12.3%, during the three months ended June 30, 2015.

The other factors were: increase in the personnel costs and factory overheads.

Gross Profit. Our gross profit decreased $1.8 million, or 23.9%, to $5.8 million for the three months ended June 30, 2015 from $7.6 million for the same period in 2014 as a result of higher cost of revenue despite the net revenue, being up 9.3% compared to the second quarter of 2014. Our gross margins decreased from 23.5% to 16.3%. In addition to the increase of raw material price, the decrease in gross profit was also attributable to the fact that the Athena Group is under operational restructuring after our acquisition, and we believe its further sales and profitability potential will be realized in future.

Operating Expenses

Selling and Marketing Expenses. Our selling and marketing expenses decreased $0.6 million during the second quarter of 2015, as compared to the same period over last year. The following table reflects the main factors that contributed to the decrease as well as the dollar amount that each factor contributed to this increase:


Decrease in Selling and Marketing Expense in the Three
Months Ended June 30, 2015 over
the Three Months Ended June 30, 2014

(In thousands of U.S. Dollars)

     

Personnel costs

$  286  

Transportation costs

$  254  

Shipping and port costs

$  63  

General and Administrative Expenses. We experienced an increase in general and administrative expense of $3.3 million from approximately $1.3 million to $4.6 million for the three months ended June 30, 2015, compared to the same period in 2014. The increase was mainly due to the consolidation of Athena Group for three months ended June 30, 2015 whose general and administrative expense was $1.7 million. In addition, the Company issued 987,500 shares as stock compensation to employees and directors in the current period, for which we recorded expense amounting to $1.3 million.

Income Before Taxation

Income before taxation and non-controlling interest decreased $3.8 million, to -$0.6 million for the three months ended June 30, 2015 from $3.2 million for the same period of 2014. The decrease was mainly attributable to the increase of our cost of revenue and general and administrative expenses in the three months ended June 30, 2015 as compared to the three months ended June 30, 2014.

Income Taxes

Income taxes decreased $0.2 million or 16.0%, to $0.8 million in the second quarter of 2015, as compared to $1.0 million in the second quarter of 2014, primarily attributable to the lower earnings before tax.

Net Income

Net income decreased $2.5 million to -$0.4 million for the three months ended June 30, 2015 from $2.1 million for the same period of 2014. The decrease was attributable to increased cost of revenue and general and administrative expense in the three months ended June 30, 2015 as compared to the three months ended June 30, 2014.

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

The following table summarizes the results of our operations during the six month periods ended June 30, 2015 and June 30, 2014, respectively and provides information regarding the dollar and percentage increase or (decrease) from the six month period ended June 30, 2015 compared to the six month period ended June 30, 2014.


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

 

  Six months ended June 30,     Increase/     Increase/  

 

              (Decrease)     (Decrease)  

(In Thousands of U.S. Dollars)

  2015     2014     ($)     (%)  

Net revenues

  73,105     64,206     8,899     13.9%  

Cost of revenues

  61,682     50,475     11,207     22.2%  

Gross profit

  11,423     13,731     (2,308 )   (16.8% )

Operating expenses

                       

Selling and marketing expenses

  3,162     2,738     424     15.5%  

General and administrative expenses

  7,182     3,394     3,788     111.6%  

Operating Income

  1,079     7,599     (6,520 )   (85.8% )

Government subsidy income

  1,006     1,808     (802 )   (44.4% )

Interest and other income

  837     213     624     293.0%  

Other expenses

  503     146     357     244.5%  

Interest expense

  3,603     3,779     (176 )   (4.7% )

Income before taxation

  (1,184)     5,695     (6,879 )   (120.8% )

Income taxes

  1,287     1,712     (425 )   (24.8% )

Income before non-controlling interests

  (2,471)     3,983     (6,454 )   (162.0% )

Non-controlling interests

  (1,526)     252     (1,778 )   (705.6% )

Net income

  (945)     3,731     (4,676 )   (125.3% )

Revenue

Net revenues. Our net revenue for the six months ended June 30, 2015 amounted to $73.1 million, which represents an increase of approximately $8.9 million, or 13.9%, from the six month period ended on June 30, 2014, in which our net revenue was $64.2 million. The overall increase was attributable to the increase in sales of our convenience food and frozen food segments, as reflected in the following table:

 

  Six months ended     Increase/     Increase/  

(in thousands of U.S. dollars)

  6/30/2015     6/30/2014     Decrease     Decrease  

Chestnut

  31,307     33,447     (2,140)     (6.4%)  

Convenience food

  26,550     15,794     10,756     68.1%  

Frozen food

  15,248     14,965     283     1.9%  

Total

  73,105     64,206     8,899     13.9%  

Cost of Revenues. During the six months ended June 30, 2015, we experienced an increase in cost of revenue of $11.2 million, in comparison to the six months ended June 30, 2014, from approximately $50.5 million to $61.7 million, reflecting an increase of 22.2%. An increase of approximately $6.2 million was attributable to raw material costs, which increased from $36.1 million during the six months ended June 30, 2014 to $42.3 million, or approximately 17.2%, during the six months ended June 30, 2015.

The increase of cost of revenue was mainly attributable to the increase of raw materials price and lower utilization rate of production capacity of Athena Group which can not efficiently absorb those fixed costs, such as personnel costs, depreciation and production overheads, etc.

Gross Profit. Our gross profit decreased $2.3 million, or 16.8%, to $11.4 million for the six months ended June 30, 2015 from $13.7 million for the same period in 2014 as a result of  higher costs of revenues, for the reasons indicated immediately above. Our gross margins decreased from 21.4% to 15.6%. In addition to the increase of raw material price, the decrease in gross profit was also attributable to the fact that the Athena Group is under operational restructuring after our acquisition, and we believe its further sales and profitability potential will be realized in future.


Operating Expenses

Selling and Marketing Expenses. Our selling and marketing expenses remained stable increasing $0.4 million during the six months ending 2015, as compared to the same period over last year. The following table reflects the main factors that contributed to the increase as well as the dollar amount that each factor contributed to this increase:

Increase in Selling and Marketing Expense in the Six
Months Ended June 30, 2015 over
the Six Months Ended June 30, 2014

(in thousands of U.S. dollars)

     

Personnel costs

$  93.0  

Transportation costs

$  91.6  

Shipping and port costs

$  52.3  

The selling and marketing expense to net revenue ratio for the six months ended June 30, 2015 and 2014 was 4.33% and 4.26%, respectively. Management believes that the expense was reasonably incurred.

General and Administrative Expenses. We experienced an increase in general and administrative expense of $3.8 million from approximately $3.4 million to approximately $7.2 million for the six months ended June 30, 2015, compared to the same period in 2014. It was noted that the general and administrative expenses incurred by PRC subsidiaries remained constant as compared to the same period of 2014. The increase was mainly due to the consolidation of Athena Group for current period whose general and administrative expense was $2.7 million. In addition, the Company issued 987,500 shares as stock compensation to employees and directors in the current period, for which we recorded expense amounting to $1.3 million.

Income Before Taxation

Income before taxation decreased $6.9 million to -$1.2 million for the six months ended June 30, 2015 from $5.7 million for the same period of 2014. The decrease was mainly attributable to the increase of our cost of sales and general and administrative expense in the six months ended June 30, 2015 as compared to the six months ended June 30, 2014.

Income Taxes

Income taxes decreased $0.4 million, or 24.8%, to $1.3 million in the six months ended 2015, as compared to $1.7 million in the six months ended June 30, 2014, primarily attributable to the lower earnings before tax.

Net Income

Net income decreased $4.6 million to -$0.9 million for the six months ended June 30, 2015 from $3.7 million for the same period of 2014. The decrease was attributable to the increase of our cost of sales and general and administrative expense in the six months ended June 30, 2015 as compared to the six months ended June 30, 2014.


Liquidity and Capital Resources

As of June 30, 2015, we had cash and cash equivalents (including restricted cash) of $47.4 million. Our cash and cash equivalents increased by approximately $12.9 million from December 31, 2014 primarily due to cash provided by operating activities, partially offset by cash used in investment activities and financing activities. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report.

Cash Flow

    Six Months Ended  
    June 30,  
(In Thousands of U.S. Dollars)   2015     2014  
Net cash provided by operating activities   19,678     3,478  
Net cash (used in) investing activities   (6,709 )   (5,604 )
Net cash provided by (used in) financing activities   (6,243 )   12,588  
Net cash flow   6,726     10,462  

Operating Activities

Net cash provided by operating activities was $19.7 million for the six months period ended June 30, 2015 and net cash provided by operating activities for the six month period ended June 30, 2014 was approximately $3.5 million. The increase of approximately $16.2 million in net cash flows provided by operating activities in the first half of 2015 was primarily due to a decrease in accounts and other receivables during the period of $23.9 million, as well as an increase in inventory of approximately $9.6 million, as compared to the comparative figures of $19.3 million and $20.2 million, respectively, for the items for same period in 2014.

Investing Activities

Net cash used in investing activities for the six months period ended June 30, 2015 was $6.7 million, representing an increase of $1.1 million in net cash used in investing activities from $5.6 million for the same period of 2014. The difference was primarily a result of increase in restricted cash of $3.2 million.

Financing Activities

Net cash used in financing activities for the six months period ended June 30, 2015 was $6.2 million, representing a decrease of $18.8 million from $12.6 million net cash provided by financing activities during the same period in 2014. The decrease of the net cash generated from financing activities was primarily a result of higher net bank borrowings and issuance of convertible promissory note in first half year of 2014.

Loan Facilities

As of June 30, 2015, 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 $38.1 million as of June 30, 2015, compared with $41.6 million as of December 31, 2014. We also obtained a $15 million loan from Deutsche Investitions- und Entwicklungsgesellshaft (“DEG”) in May 2010, which we had fully drawn down in 2011. In addition, we completed three private placement financings in 2012 and 2013 with net proceeds of $13.1 million, $16.4 million and $16.4 million, respectively, the proceeds of which were primarily used as working capital.


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 for 2015.

Critical Accounting Policies

The preparation of financial statements in conformity with United States generally accepted accounting principles requires our management to make assumptions, estimates and judgments that affect the amounts reported in our financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require significant judgments and estimates in the preparation of financial statements, including the following:

Method of Accounting -- We maintain our general ledger and journals with the accrual method accounting for financial reporting purposes. Accounting policies adopted by us conform to generally accepted accounting principles in the United States and have been consistently applied in the presentation of our financial statements, which are compiled on the accrual basis of accounting.

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

The use of estimates is critical to the carrying value of asset accounts such as accounts receivable, inventory, fixed assets, and intangible assets. We use estimates to account for the related bad debt allowance, inventory impairment charges, depreciation and amortization of our assets. In the food processing industry these accounts have a significant impact on the valuation of our balance sheet and the results of our operations.

Principles of consolidation -- Our consolidated financial statements, which include information about our company and our subsidiaries, are compiled in accordance with generally accepted accounting principles in the United States. All significant inter-company accounts and transactions have been eliminated. Our consolidated financial statements include 100% of assets, liabilities, and net income or loss of our wholly-owned subsidiaries. Ownership interests of non-controlling investors are recorded as non-controlling interests.

As of June 30, 2015, the details pertaining to our subsidiaries were as follows:

 

  Attributable  

 

Place of equity Registered

Name of Company

incorporation interest % capital

International Lorain Holding Inc.

Cayman Islands 100 $ 51,108,183

Junan Hongrun Foodstuff Co., Ltd.

PRC 100 49,139,403

Shandong Lorain Co., Ltd.

PRC 80.2 13,285,002

Beijing Lorain Co., Ltd.

PRC 100 1,642,360

Luotian Lorain Co., Ltd.

PRC 100 4,159,900

Shandong Greenpia Foodstuff Co., Ltd.

PRC 100 2,522,665

Dongguan Lorain Co., Ltd.

PRC 100 164,236

Athena

France 51 14,148



Conserverie Minerve

France 51 481,025

Sojafrais

France 51 5,659

SCI Siam

France 51 863

SCI Giu Long

France 51 5,659

Cacovin

Portugal 51 311,252

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 period, there was no impairment loss.

Revenue recognition -- Our revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, we have no other significant obligations and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

Our revenue consists of invoiced value of goods, net of a value-added tax. The Company allows its customers to return products if they are defective. However, this rarely happens and amounts returned have been de minimis.

Recent Accounting Pronouncements

In January 2015, The FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20)”.This Update eliminates from GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement—Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. Paragraph 225-20-45-2 contains the following criteria that must both be met for extraordinary classification:

 

Unusual nature. The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates.

     
 

Infrequency of occurrence. The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates.



If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item.

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The effective date is the same for both public business entities and all other entities.

The Company adopted ASU No. 2015-01 prospectively and has applied it to the presentation of the financial statements.

As of June 30, 2015, there are no other recently issued accounting standards not yet adopted that would or could have a material effect on the Company’s consolidated financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2015. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2015, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were not effective due to the continuing material weakness in our internal control over financial reporting.

The material weakness and significant deficiency identified by our management as of June 30, 2015 relates to the ability of the Company to record transactions and provide disclosures in accordance with U.S. GAAP. The management has recruited a new interim Chief Financial Officer to instruct and train accountants in our company in October 2014. The aim of the management of the Company is to make it possible that the disclosure of the information of the company is able to be transparent to our shareholders potential investors, and be in compliance with the accounting principles required by FASB. We believe that we will further support and encourage our accounting staffs to attend professional courses related to U.S. GAAP and IFRS accounting principle. We seek to have more of our accountants to hold licenses such as Certified Public Accountant or Certified Management Accountant in the U.S.


We continued to provide U.S. GAAP internal training sessions to our accounting team. The training sessions will be organized to help our corporate accounting team gain experience in U.S. GAAP reporting and to enhance their awareness of new and emerging pronouncements with potential impact over our financial reporting.

Changes in Internal Controls over Financial Reporting.

During the six months ended June 30, 2015, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations Over Internal Controls.

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.


PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There is a lawsuit currently pending in the Supreme Court of Shandong Province, which was initially filed by Shandong Lorain, a subsidiary of the Company, against Junan Hengji Real Estate Development Co., Ltd. ("Junan Hengji") in November 2013 at Linyi City Intermediate People's Court of Shandong Province (the "Linyi Court"). Shandong Lorain added Jiangsu Hengan Industrial Investment Group Co., Ltd. ("Heng An Investment") as a co-defendant after the case was first filed at Linyi Court.

In September 2010, Shandong Lorain and Junan Hengji entered into a cooperative development agreement (the "Agreement") and in March 2011, Heng An Investment, an affiliated company of Junan Hengji also entered into the Agreement with Shandong Lorain to jointly develop the project with Junan Hengji. Pursuant to the Agreement. Junan Henji and Heng An Investment are required to pay Shandong Lorain a total RMB 20 million (approximately $3,225,806) fixed return according to the development status of the project developed by Junan Hengji and Heng An Investment. The payment was due and unpaid to Shandong Lorain. Shandong Lorain and the Company evaluated the potential claims against Junan Hengji and Heng An Investment, disputes between the parties with respect to out of pocket expenses paid by Junan Hengji as well as the litigation fee that is required to be paid to the court based upon the amount claimed. Eventually, Shandong Lorain decided to file the lawsuit with Linyi Court to claim a fixed return of RMB 10 million (approximately $1,636,902) first.

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

ITEM 1A. RISK FACTORS

Not applicable.

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

The following exhibits are filed as part of this Report

Exhibit Description
No.  
   
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.*

   
101.INS

XBRL Instance Document (1)

101.SCH

XBRL Taxonomy Extension Schema (1)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase (1)

101.DEF

XBRL Taxonomy Extension Definition Linkbase (1)

101.LAB

XBRL Taxonomy Extension Label Linkbase (1)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase (1)

* Filed herewith.

(1) XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.


SIGNATURES

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

Date: August 14, 2015

AMERICAN LORAIN CORPORATION
   
  /s/ Si Chen
  Si Chen
  Chief Executive Officer
  (Principal Executive Officer)
   
  /s/ Xiang Zhou
  Xiang Zhou
  Interim Chief Financial Officer
  (Principal Financial Officer and
  Principal Accounting Officer)