10-Q 1 form10q.htm 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, 2012

[   ] 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.)

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

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

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

Yes [X]                             No [__]

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

Yes [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]

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 14, 2012 was 34,507,874.


Table of Contents

    Page
  Part I - Financial Information  
Item 1 Financial Statements 1
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3 Quantitative and Qualitative Disclosures about Market Risk 38
Item 4 Controls and Procedures 38
     
  Part II - Other Information  
Item 1 Legal Proceedings 35
Item 1A Risk Factors 38
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 38
Item 3 Defaults Upon Senior Securities 38
Item 4 Mine Safety Disclosure 38
Item 5 Other Information 38
Item 6 Exhibits 38
Signatures 39

i


PART I FINANCIAL INFORMATION

AMERICAN LORAIN CORPORATION

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012 AND DECEMBER 31, 2011

(Stated in US Dollars)


AMERICAN LORAIN CORPORATION

 

CONTENTS PAGES
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 3
   
CONSOLIDATED BALANCE SHEETS 4 – 5
   
CONSOLIDATED STATEMENTS OF INCOME 6
   
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
   
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY 8
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  9 – 29


 

 

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, 2012 and December 31, 2011, and the related statements of income, stockholders’ equity, and cash flows for the three and six months ended June 30, 2012 and 2011. These interim consolidated financial statements are the responsibility of the Company's management.

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

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

 

 

San Mateo, California WWC, P.C.
August 7, 2012 Certified Public Accountants


AMERICAN LORAIN CORPORATION
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

            (Audited)  
  Note   At June 30,     At December 31,  
ASSETS     2012     2011  
   Current assets              
       Cash and cash equivalents 2 (d) $  19,568,782   $  17,353,494  
       Restricted cash 3   14,888,602     13,017,371  
       Trade accounts receivable 4   33,445,492     41,469,880  
       Other receivables 5   5,847,682     6,147,550  
       Inventory 6   40,035,394     34,348,997  
       Advance to suppliers     12,621,820     15,772,736  
       Prepaid expenses and taxes     862,282     132,710  
       Deferred tax asset     165,524     164,394  
     Security deposits and other Assets     16,485     16,373  
                     Total current assets   $  127,452,063   $  128,423,505  
               
   Non-current assets              
     Investment     475,519     472,270  
     Property, plant and equipment, net 7   83,334,810     84,377,306  
     Land use rights, net 8   5,379,070     5,425,252  
TOTAL ASSETS   $  216,641,462   $  218,698,333  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY              
 Current liabilities              
       Short-term bank loans 9 $  27,817,845   $  36,018,450  
       Long-term debt – current portion 12   57,459     57,066  
       Accounts payable     3,339,638     3,900,317  
       Taxes payable 10   2,931,872     4,237,142  
       Accrued liabilities and other payables 11   1,190,180     1,938,759  
       Customers deposits     189,129     -  
                     Total current liabilities   $  35,526,123   $  46,151,734  
               
 Long-term liabilities              
       Long-term bank loans 12   15,705,131     15,597,831  
               
TOTAL LIABILITIES   $  51,231,254   $  61,749,565  

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



            (Audited)  
      At June 30,     At December 31,  
  Note            
      2012     2011  
               
               
STOCKHOLDERS’ EQUITY              
   Preferred Stock, $.001 par value, 5,000,000 shares authorized;
        0 shares issued and outstanding at March 31, 2012 and 
        December 31, 2011, respectively
    -     -  
               
   Common stock, $0.001 par value, 200,000,000 shares
         authorized; 34,507,874 shares issued and outstanding
         as of June 30, 2012 and December 31, 2011, respectively
13   34,508     34,508  
 Additional paid-in capital     53,067,243     53,015,636  
 Statutory reserves 2 (r)   14,658,073     13,976,899  
 Retained earnings     72,852,157     65,939,713  
 Accumulated other comprehensive income     15,761,267     15,353,885  
 Non-controlling interests 14   9,036,960     8,628,127  
               
TOTAL STOCKHOLDER’S EQUITY   $ 165,410,208   $  156,948,768  
               
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY   $ 216,641,462   $  218,698,333  

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


AMERICAN LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS PERIODS ENDED JUNE 30, 2012 AND 2011
(Stated in US Dollars)

      Three months ended June 30,     Six months ended June 30,  
  Note   2012     2011     2012     2011  
                           
Net revenues 2 (t),15 $  40,816,760   $  35,726,650   $  77,957,791   $  66,176,455  
Cost of revenues     (32,316,135 )   (28,070,066 )   (61,999,361 )   (51,744,961 )
Gross profit   $  8,500,625   $  7,656,584   $  15,958,430   $  14,431,494  
                           
Operating expenses                          
Selling and marketing expenses     (1,416,531 )   (1,088,768 )   (2,787,806 )   (2,451,454 )
General and administrative expenses     (1,458,359 )   (1,593,366 )   (2,760,513 )   (3,069,313 )
      (2,874,890 )   (2,682,134 )   (5,548,319 )   (5,520,767 )
                           
Operating income   $  5,625,735   $  4,974,450   $  10,410,111   $  8,910,727  
                           
Government subsidy income     219,193     302,260     854,356     595,353  
Interest income     131,058     7,795     189,190     10,271  
Other income     -     94,577     54,307     139,186  
Other expenses     (341,290 )   (21,483 )   (17,662 )   (181,055 )
Interest expense     (665,416 )   (610,111 )   (1,574,884 )   (1,263,235 )
                           
                           
Earnings before tax   $  4,969,280   $  4,747,488   $  9,915,418   $  8,211,247  
                           
Income tax 2 (q),16   (1,406,931 )   (1,277,553 )   (2,594,141 )   (2,173,421 )
                           
Net income   $  3,562,349   $  3,469,935   $  7,321,277   $  6,037,826  
                           
Other comprehensive income:                          
Foreign currency translation gain     487,845     1,875,108     407,382     3,107,991  
Comprehensive Income     4,050,194     5,345,043     7,728,659     9,145,817  
Net income attributable to:                          
                           
-Common stockholders   $  3,330,079   $  3,262,451   $  6,912,444   $  5,688,739  
-Non-controlling interest     232,270     207,484     408,833     349,087  
    $  3,562,349   $  3,469,935   $  7,321,277   $  6,037,826  
                           
                           
Earnings per share 2 (u), 17                        
   -    Basic   $  0.10   $  0.09   $  0.20   $  0.17  
   -    Diluted   $  0.10   $  0.09   $  0.20   $  0.16  
                           
Weighted average shares outstanding                          
   -    Basic     34,507,874     34,427,582     34,507,874     34,427,582  
   -    Diluted     34,507,874     35,030,343     34,507,874     35,030,343  

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

6


AMERICAN LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE AND SIX MONTHS PERIODS ENDED JUNE 30, 2012 AND 2011
(Stated in US Dollars)

    Three months ended June 30     Six months ended June 30  
    2012     2011     2012     2011  
Cash flows from operating activities                        
Net income $  3,562,349   $  3,469,935   $  7,321,277 $     6,037,826  
   Stock and share based compensation   -     131,671     51,607     305,373  
   Depreciation of fixed assets   297,017     669,969     1,170,049     1,141,935  
   Amortization of intangible assets   39,811     49,549     94,820     94,435  
   Write down/(gain) of short-term investments   -     (92,673 )   -     (47,763 )
   Adjustment to statutory reserve   3,000     -     681,175     -  
   (Increase)/decrease in accounts & other receivables   3,794,787     (5,627,103 )   11,664,302     6,371,808  
   (Increase)/decrease in inventories   (4,134,898 )   (2,366,929 )   (5,686,397 )   (11,290,660 )
   Decrease/(increase) in prepayment   (597,661 )   (77,666 )   (729,572 )   (315,679 )
   Decrease/(increase) in deferred tax asset   (87 )   (1,411 )   (1,130 )   (2,388 )
   Increase/(decrease) in accounts and other payables   (305,552 )   (1,583,873 )   (2,614,528 )   (3,974,205 )
   Net cash (used in)/provided by operating activities   2,658,766     (5,428,531 )   11,951,603     (1,679,318 )
                         
Cash flows from investing activities                        
   Proceeds from short-term investment   -     467,879     -     2,166,220  
   Purchase of plant and equipment   478,828     (1,567,871 )   (127,553 )   (2,347,391 )
   Payment of construction in progress   -     (90,840 )   -     (471,105 )
   Payment for the purchase of land use rights   (1,309 )   (76,740 )   (48,638 )   (128,642 )
   (Increase)/decrease in restricted cash   181,954     (2,205,347 )   (1,871,230 )   (4,755,229 )
   Decrease (Increase) in deposit   (9 )   (154,032 )   (113 )   (84,754 )
   Net cash used in investing activities   659,464     (3,626,951 )   (2,047,534 )   (5,620,901 )
                         
Cash flows from financing activities                        
   Repayment of bank borrowings   (3,838,330 )   (9,406,948 )   (8,448,382 )   (20,980,396 )
   Proceeds from bank borrowings   106,480     6,733,544     355,469     18,183,012  
   Notes Payable   -     763,346     -     3,816,736  
   Issuance of common stock   -     25     -     25  
   Net cash provided by/(used in) financing activities $  (3,731,850 ) $  (1,910,033 ) $  (8,092,913 )   1,019,377  
                         
Net Increase/(decrease) of Cash and Cash Equivalents   (413,620 )   (10,965,515 )   1,811,156     (6,280,842 )
                         
Effect of foreign currency translation on cash and cash equivalents   484,594     1,967,781     404,132     3,155,754  
                         
Cash and cash equivalents–beginning of period   19,497,808     18,603,272     17,353,494     12,730,626  
Cash and cash equivalents–end of period $  19,568,782   $  9,605,538     19,568,782     9,605,538  

See Accompanying Notes to the Financial Statements and Accountant’s Report
7


AMERICAN LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE AND SIX MONTHS PERIODS ENDED JUNE 30, 2012 AND 2011
(Stated in US Dollars)

Supplementary cash flow information:                        
         Interest received $  131,058   $  7,879     189,190     10,355  
         Interest paid $  672,577   $  610,675     1,832,091     1,263,799  
         Income taxes paid $  1,183,839   $  1,816,289     3,787,928     3,845,257  

See Accompanying Notes to the Financial Statements and Accountant’s Report
8


AMERICAN LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE PERIOD ENDED JUNE 30, 2012 AND THE YEAR ENDED DECEMBER 31, 2011
(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, 2011 34,419,709 $ 34,420 $52,371,481 $11,340,739 $48,688,375 $9,475,745 $ 7,431,697 $129,342,457
Issuance of share based compensation 88,165 88 644,155 - - - - 644,243
Net income - - - - 21,083,928 - - 21,083,928
Appropriations to statutory reserves - - - 2,636,160 (2,636,160) - - -
Allocation to non-controlling interests - - - - (1,196,430) - 1,196,430 -
Unrealized gain (loss) on investment - - - - - (94,058) - (94,058)
Foreign currency translation adjustment - - - - - 5,972,198 - 5,972,198
                 
Balance, December 31, 2011 34,507,874 34,508 53,015,636 13,976,899 65,939,713 15,353,885 8,628,127 156,948,768
                 
Balance, January 1, 2011 34,507,874 34,508 53,015,636 13,976,899 65,939,713 15,353,885 8,628,127 156,948,768
Issuance of share based compensation - - 51,607 - - - - 51,607
Net income - - - - 7,321,277 - - 7,321,277
Appropriations to statutory reserves - - - 681,174 - - - 681,174
Allocation to non-controlling interests - - - - (408,833) - 408,833 -
Foreign currency translation adjustment - - - - - 407,382 - 407,382
                 
Balance, June 30, 2012 34,507,874 34,508 53,067,243 14,658,073 72,852,157 15,761,267 9,036,960 165,410,208

See Accompanying Notes to the Financial Statements and Accountant’s Report
9


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

1.

ORGANIZATION, BASIS OF PRESENTATION, AND PRINCIPAL ACTIVITIES

     
(a)

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

     

American Lorain Corporation (the “Company” or “ALN”) was originally a Delaware corporation incorporated on February 4, 1986. From inception through May 3, 2007, the Company did not engage in any active business operations other than in search and evaluation of potential business opportunity to become an acquiree of a reverse-merger deal. On May 3, 2007, the Company entered into a share exchange agreement as described under “Reverse-Merger” below. 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 $2,100,000 to 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.

     
(c)

Reverse-Merger

     

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

     

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

     

Accordingly, the accompanying consolidated financial statements are those of the accounting acquirer, ILH. The historical stockholders’ equity of the accounting acquirer prior to the share exchange has been retroactively restated as if the share exchange transaction occurred as of the beginning of the first period presented. See also Note 13 Capitalization.

10


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

  (d)

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


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 period ended June 30, 2012 in order to be consistent with the presentation provided for the year ended December 31, 2011. There was no impact in earnings for the regrouping.

     
(b)

Principles of consolidation

     

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

     

As of June 30, 2012, the detailed identities of the consolidating subsidiaries are as follows:


    Place of Attributable equity Registered
  Name of Company incorporation interest % capital
  Shandong Lorain Co., Ltd PRC 80.2 $ 12,812,525
  Luotian Lorain Co., Ltd PRC 100 4,014,773
  Junan Hongrun Foodstuff Co., Ltd PRC 100 47,425,066
  Beijing Lorain Co., Ltd PRC 100 1,585,062
  Shandong Greenpia Foodstuff Co.,Ltd PRC 100 2,434,656
  Dongguan Lorain Co,,Ltd PRC 100 158,506
  International Lorain Holding Inc. Cayman Islands 100 49,325,160

  (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.

11


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

  (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 etc. 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 category 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.

12


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

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


Buildings 40 years
Landscaping, plant and tree 30 years
Machinery and equipment 10 years
Motor vehicles 10 years
Office equipment 5 years

 

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

     
  (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 2011 and 2012 (through March).

     
  (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.

13


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

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

     
 

Effective January 1, 2008, PRC government implemented a new 25% tax rate across the board for all enterprises regardless of whether domestic or foreign enterprise without any tax holiday which is defined as "two-year exemption followed by three-year half exemption" hitherto enjoyed by tax payers. As a result of the new tax law of a standard 15% tax rate, tax holidays terminated as of December 31, 2007. However, PRC government has established a set of transition rules to allow enterprises already started tax holidays before January 1, 2008, to continue enjoying the tax holidays until being fully utilized.

     
 

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


  Taxable Income  
Rate Over But Not Over Of Amount Over
15% 0 50,000 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 $2,636,160 and $681,175 from retained earnings to statutory reserves during 2011 and the period ended June 30, 2012. 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.

14


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

  (s)

Foreign currency translation

     
 

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


      6/30/2012     3/31/2012     12/31/2011     6/30/2011     3/31/2011  
  Year end RMB : US$ exchange rate   6.3089     6.3122     6.3523     6.463     6.5501  
  Average yearly RMB : US$ exchange rate   6.3027     6.2976     6.4544     6.5316     6.5713  

 

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.

     
 

The Company gradually switched its sales model from direct sales to third party distributor model and issues 1% sales incentive to distributors. The Company modified it accounting policy for the recognition of revenue accordingly. Given the circumstances of how the Company conducts its incentive program, the Company books the payments settled in cash as a contra account to Gross Revenue, and includes the amount in its reported “net revenue”. The Company has considered the guidance in FASB ASC 605-50 (EITF 01-9) and will account for its sales incentive program accordingly.

     
  (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, 2012, no warrants were issued nor options were 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. 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 Statement of Financial Accounting Standards No. 128, “Earnings per share” (“SFAS No. 128”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

15


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

  (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, the carrying amounts 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, 2012 and December 31, 2011, the Company did not identify any assets and liabilities that were required to be presented on the balance sheet 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 March 31, 2012 and 2011 included net income and foreign currency translation adjustments.

16


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

  (y)

Recent accounting pronouncements

     
 

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement will not have a material impact on its financial statements.

     
 

As of June 30, 2012, there are no other recently issued accounting standards not yet adopted that would 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 savings account that pay interest at the prescribed national daily savings account rate. For funds that underline notes payable, the cash is deposited in six month time deposits that pay interest at the national time deposit rate.

   
4.

TRADE ACCOUNTS RECEIVABLE


    6/30/2012     12/31/2011  
Trade accounts receivable $  33,827,796   $  41,849,573  
Less: Allowance for doubtful accounts   (382,304 )   (379,693 )
  $  33,445,492   $  41,469,880  
             
Allowance for bad debt:   6/30/2012     12/31/2011  
Beginning balance $  (379,693 ) $  (335,902 )
Additions to allowance   (2,611 )   (43,791 )
Bad debt written-off   -     -  
Ending balance $  (382,304 ) $  (379,693 )

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, 2012 and December 31, 2011:


    6/30/2012     12/31/2011  
Advances to employees for job/travel disbursements   215,490     577,237  
Amount due by a non-related enterprise   373,798     157,424  
Other non-related receivables   158,507     319,639  
Other related receivables   242,464     213,128  
Short-term investment sale receivable   4,857,424     4,880,122  
$ 5,847,682   $  6,147,550  

17


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

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 every available employee 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, 2012.

Related party receivable consisted of the following as of June 30, 2012 and December 31, 2011:

    6/30/2012     12/31/2011  
Chen, Si $  130,925   $  133,070  
Lu, Yundong   131     896  
Liu, Lihua   79,253     78,712  
You, Huadong   31,701     -  
Junan Hot & Roll Fast Food   454     450  
  $  242,464   $  213,128  

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. Chen, Si and Ms. Liu, Lihua to purchase life insurance.

   

Related party receivable amounts are disclosed as other related receivables in other receivables.

   

On March 13, 2011, the Company entered into an agreement with Jiangsu Heng An Industrial Investment Group Co., Ltd. to sell the Company’s short-term investment in the amount of $ 7,764,577 (RMB 49,604,000) of a parcel of land located in Junan Town, Shandong Province, to construct residential buildings. The land was sold to Jiangsu Heng An at a total sale price of RMB 69,604,000 and a guaranteed gross profit of RMB 20,000,000 without consideration of profit/loss of the residential building project. The gain on the sale of the short-term investment excluding taxes payable is recorded as other income on the statements of income and comprehensive income. Title of the land transferred from the Company to Jiangsu Heng An with receipt of an initial deposit of RMB 15,000,000. As of June 30, 2012, a total of RMB 38,355,000 has been paid and RMB 30,645,000 (USD 4,857,424) is classified as Other Receivable. According to the contract, the Company will be entitled to receive RMB 9,000,000 within 5 days after the title transfer and construction approval is complete, and RMB 27,000,000 within 5 days after the residential building main frame is completed

   
6.

INVENTORIES

   

Inventories consisted of the following as of June 30, 2012 and December 31, 2011:


    6/30/2012     12/31/2011  
Raw materials $  13,543,769   $  10,470,187  
Finished goods   26,491,625     23,878,810  
  $  40,035,394   $  34,348,997  

18


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

7.

PROPERTY, PLANT AND EQUIPMENT

   

Property, plant, and equipment consisted of the following as of June 30, 2012 and December 31, 2011:


    6/30/2012     12/31/2011  
At Cost:            
     Buildings $  76,034,213   $  75,509,164  
     Landscaping, plant and tree   7,933,784     7,879,579  
     Machinery and equipment   11,172,740     10,976,564  
     Office equipment   627,124     618,558  
     Motor vehicles   470,630     467,415  
  $  96,268,490   $  95,451,279  
Less: Accumulated depreciation            
     Buildings   (5,029,753 )   (4,141,133 )
     Landscaping, plant and tree   (1,709,365 )   (1,303,707 )
     Machinery and equipment   (5,471,117 )   (4,988,873 )
     Office equipment   (427,751 )   (391,272 )
     Motor vehicles   (265,694 )   (248,987 )
    (12,903,680 )   (11,073,972 )
             
Construction in Progress   -     -  
  $  83,334,810   $  84,377,306  

Landscaping, plants, and trees accounts 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.

   
8.

LAND USE RIGHTS, NET

   

Land use rights consisted of the following as of June 30, 2012 and December 31, 2011:


    6/30/2012     12/31/2011  
Land use rights, at cost $  6,291,168   $  6,242,530  
   Less: Accumulated amortization   (912,098 )   (817,278 )
  $  5,379,070   $  5,425,252  

All lands are 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. The land use rights are then amortized over the period of usage. Amortization expense for the periods ended June 30, 2012 and 2011 were $94,820 and $94,435, respectively.

19


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

9.

SHORT-TERM BANK LOANS

   

Short-term bank loans consisted of the following as of June 30, 2012 and December 31, 2011:


      Remark     6/30/2012     12/31/2011  
  Loans from Junan County Construction Bank,                  
         •    Interest rate at 6.710% per annum due 1/25/2012         -     1,479,779  
         •    Interest rate at 6.100% per annum due 2/19/2012         -     944,540  
         •    Interest rate at 6.710% per annum due 5/2/2012         -     -  
         •    Interest rate at 7.015% per annum due 6/7/2012         -     3,337,374  
         •    Interest rate at 6.435% per annum due 9/11/2012         443,817     -  
         •    Interest rate at 6.666% per annum due 11/5/2012         1,093,693     1,086,221  
         •    Interest rate at 6.666% per annum due 11/23/2012         792,531     787,116  
         •    Variable interest rate; due 11/30/2012         1,585,062     -  
                     
  Loan from Junan County Agriculture Bank,                  
         •    Interest rate at 7.320% per annum due 1/10/2012   A     -     3,148,466  
                     
  Loan from Junan County Industrial and Commercial Banks,                  
         •    Interest rate at 6.405% per annum due 4/9/2012   B     -     1,023,251  
         •    Interest rate at 6.405% per annum due 4/24/2012   B     -     550,982  
         •    Interest rate at 6.410% per annum due 4/24/2012   B     -     629,693  
         •    Interest rate at 6.410% per annum due 5/10/2012   B     -     1,338,098  
         •    Interest rate at 6.410% per annum due 6/12/2012   B     -     1,574,233  
         •    Interest rate at 6.405% per annum due 6/21/2012   B     -     -  
         •    Interest rate at 6.405% per annum due 7/10/2012   B     1,030,291     -  
         •    Variable interest rate; due 10/10/2012         1,109,544     -  
         •    Interest rate at 6.71% per annum due 10/23/2012         1,030,291     -  
         •    Interest rate at 6.71% per annum due 10/23/2012         634,025        
         •    Variable interest rate; due 12/14/2012         1,347,303     -  
                     
  Loan from Linyi Commercial Bank,                  
         •    Interest rate at 12.201% per annum due 1/10/2012         -     708,405  
         •    Interest rate at 11.152% per annum due 12/11/2012         3,170,125     3,148,466  
         •    Interest rate at 12.201% per annum due 12/13/2012         792,531     787,116  
         •    Interest rate at 12.136% per annum due 12/29/2012         713,278     708,405  
         •    Interest rate at 13.776% per annum due 12/10/2012         792,531     -  
         •    Interest rate at 12.136% per annum due 1/10/2013         713,278     -  

20


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

  Loan from China Minsheng Bank Corporation, Linyi Branch            
         •    Interest rate at 8.203% per annum due 4/14/2012   -     2,361,349  
               
  Loan from China Agricultural Bank, Luotian Branch            
         •    Interest rate at 6.372% per annum due 9/12/2012   792,531     944,540  
               
  Bank of Beijing,            
         •    Interest rate at 6.672% per annum due 11/16/2012   634,025     629,693  
               
  Shenzhen Development Bank,            
         •    Interest rate at 6.710% per annum due 2/13/2012         236,135  
         •    Interest rate at 6.710% per annum due 3/15/2012         787,116  
         •    Interest rate at 6.435% per annum due 6/8/2012         2,361,349  
         •    Interest rate at 6.588% per annum due 9/6/2012   792,531     -  
         •    Interest rate at 7.37% per annum due 11/29/2012   2,377,594     -  
               
  Luotian Sanliqiao Credit Union,            
         •    Interest rate at 9.360% per annum due 1/6/2013   951,037     -  
               
  Beijing Rural Commercial Bank, Shilibao Branch,            
         •    Interest rate at 7.434% per annum due 9/6/2012   1,585,062     2,046,503  
               
  China Agricultural Bank, Shandong Branch            
         •    Interest rate at 7.544% per annum due 12/23/2012   1,585,062     1,574,233  
         •    Interest rate at 7.544% per annum due 12/29/2012   681,577     676,920  
               
  China Everbright Bank, Qingdao Branch            
         •    Interest rate at 7.930% per annum due 11/9/2012   3,170,125     3,148,467  
  $ 27,817,845   $ 36,018,450  

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

Remark:
A: A parcel of 12,726 square meters land use right and an 8,162 square meters building was used as collateral for this loan.
B: Accounts Receivable in the amount of $1,650,000 was used as collateral for this loan

21


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

10.

TAXES PAYABLES

   

Taxes payable consisted of the following as of June 30, 2012 and December 31, 2011:


      6/30/2012     12/31/2011  
  Value added tax payable $  78,087   $  255,327  
  Corporate income tax payable   1,652,652     2,822,321  
  Employee payroll tax withholding   3,807     6,105  
  Property tax payable   67,246     46,192  
  Stamp tax payable   1,439     9,369  
  Business tax payable   153,921     152,869  
  Land use tax payable   52,265     23,988  
  Import tariffs   140     4,956  
  Capital gain tax payable   922,316     916,015  
    $  2,931,872   $  4,237,142  

11.

ACCRUED EXPENSES AND OTHER PAYABLE

   

Accrued expenses and other payables consisted of the following as of June 30, 2012 and December 31, 2011:


      6/30/2012     12/31/2011  
  Accrued salaries and wages $  7,990   $  774,206  
  Accrued utility expenses   214,731     74,927  
  Accrued interest expenses   32,953     303,701  
  Accrued transportation expenses   202,998     172,094  
  Other accruals   34,000     95,371  
  Business and other taxes   398,472     422,100  
  Disbursement payable   66,522     38,804  
  Accrued staff welfare   232,513     57,554  
    $  1,190,180   $  1,938,759  

12.

LONG-TERM DEBT

   

Current portions of long-term debt consisted of the following as of June 30, 2012 and December 31, 2011:


      6/30/2012     12/31/2011  
  Loans from Luotian Agricultural Development Bank            
   •    Interest rate at 0.6700% per annum were due 12/11/2010   57,459     57,066  
  $    57,459   $ 57,066  

Although the above loans are past due, the bank has not requested the Company to repay its loan.

Non-current portions of long-term debt consisted of the following as of June 30, 2012 and December 31, 2011:

      6/30/2012     12/31/2011  
  Loans from Deutsche Investitions-und            
  Entwicklungsgesellschaft mbH (“DEG”)            
   •    Interest rate at 5.510% per annum due 9/16/2016   15,705,131     15,597,831  
  $ 15,705,131   $  15,597,831  

22


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

The Company’s loan with DEG will be repaid in semi-annual installments beginning September 15, 2012. 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 shares in the sponsor in the amount of about USD 12,000,000 and being the majority shareholder in the sponsor 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.


As of June 30, 2012, the value of the pledged shares has not fulfilled the required amount; therefore, the borrower and sponsor are in breach of the loan agreement and security contracts. Despite these breaches, DEG has not accelerated the loan.

   
13.

CAPITALIZATION

   

Dating back to May 3, 2007, the Company underwent a reverse-merger and a concurrent financing transaction that resulted in 24,923,178 shares of outstanding common stock that remained unchanged until through December 31, 2007. 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 warrant. 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. As detailed in the table below, the total number of outstanding shares at June 30, 2012 was 34,507,874.

   

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.

   

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.

   

For the year 2010, the Company transferred 5,161,176 from retained earnings to additional paid up capital and 2,445,262 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.

   

The total number of shares issued and outstanding is 34,507,874 as of December 31, 2011. For the period ended December 31, 2011, the Company transferred 2,636,160 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.

23


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

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
Common stock at 6/30/2012     34,507,874

   Number of warrants      
Warrants and options or options Issuance date Expiration date
Warrants issued to investors in 2007 PIPE 1,037,858 5/3/2007 5/2/2010
Warrants issued to placement agent in 2007 PIPE 489,330 5/3/2007 5/2/2010
Employee stock options 1,334,573 7/28/2009 7/27/2014
Warrants issued to investors in 2009 PIPE - Series A 1,753,909 10/28/2009 4/28/2015
Warrants issued to investors in 2009 PIPE - Series B 501,115 10/28/2009 10/28/2012
Issued to service provider A during 2010 50,722 1/5/2010 1/2/2014
Issued to service provider B during 2010 20,289 1/5/2010 1/2/2014
Issued to service provider C during 2010 10,144 1/5/2010 1/2/2014
Total warrants and options 5,197,940    

14.

NON-CONTROLLING INTERESTS

   

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

24


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

15.

SALES BY PRODUCT TYPE

   

Sales by categories of product consisted of the following as of June 30, 2012 and 2011:


                           Category   6/30/2012     6/30/2011  
Chestnut $  35,955,765   $  32,770,230  
Convenience food   27,758,470     22,811,418  
Frozen food   14,243,556     10,594,807  
Total $  77,957,791   $  66,176,455  

Revenue by geography consisted of the following as of June 30, 2012 and 2011:

                             Country   6/30/2012     6/30/2011  
Australia $  12,733   $  48,689  
Belgium   1,852,680     767,229  
Canada   -     50,148  
China   60,146,581     51,328,475  
Denmark   53,928     20,566  
France   764,297     458,427  
Germany   171,115     818,205  
Hong Kong   79,441     23,446  
Indonesia   79,184     20,812  
Israel   -     213,869  
Japan   7,655,194     6,802,126  
Malaysia   722,011     771,216  
Netherlands   52,361     294,904  
Philippines   124,001     135,783  
Poland   154,329     108,237  
Portugal   711,081     -  
Singapore   350,646     318,812  
South Korea   3,659,027     1,777,782  
Spain   96,575     273,656  
Taiwan   203,896     940,374  
Thailand   75,214     -  
United Kingdom   875,773     896,995  
United States   117,724     73,272  
Others         33,432  
Total $  77,957,791   $  66,176,455  

25


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

16.

INCOME TAXES

   

All of the Company’s operations are in the PRC, and in accordance with the relevant tax laws and regulations of PRC, the corporate income tax rate is 25%.

   

The following tables provide the reconciliation of the differences between the statutory and effective tax expenses for the periods ended June 30, 2012 and 2011:


    6/30/2012     6/30/2011  
Income attributed to PRC $  10,038,395   $  8,713,111  
Loss attributed to US*   (122,977 )   (501,865 )
Income before tax   9,915,418     8,211,247  
             
          8888  
PRC Statutory Tax at 25% Rate   2,594,141     2,173,421  
Effect of tax exemption granted   -     -  
Income tax $  2,594,141   $  2,173,421  
             
Per Share Effect of Tax Exemption            
    6/30/2012     6/30/2011  
Effect of tax exemption granted $     $  -  
Weighted-Average Shares Outstanding Basic   34,507,874     34,427,582  
Per share effect $  34,507,874   $  34,427,582  

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 June 30, 2012 and 2011:

    2012     2011  
U.S. federal statutory income tax rate   35%     35%  
Lower rates in PRC, net   -10%     -10%  
Tax holiday for foreign investments   1.16%     -0.86%  
The Company’s effective tax rate   26.16%     25.86%  

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, PRC government has established a set of transition rules to allow enterprises already started tax holidays before January 1, 2008, to continue enjoying the tax holidays until being fully utilized.

The Company has accrued a deferred tax asset as a result of its net operating loss in 2009 because the Company 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 asset. Accordingly the Company has not provided a valuation allowances for the accrued tax asset.

The Company’s has detailed the tax rates for its subsidiaries for 2012 and 2011 in the following table.

Income Tax Rate 2012 2011
International Lorain 0% 0%
Junan Hongran 25% 25%
Luotian Lorain 25% 25%
Beijing Lorain 25% 15%
Shandong Lorain 25% 25%
Shandong Greenpia 25% 25%
Dongguan Lorain 25% 25%

26


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)


17.

EARNINGS PER SHARE

   

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


      3 months ended June 30     6 months ended June 30  
      2012     2011     2012     2011  
                           
  Basic Earnings Per Share Numerator                        
           Net Income $  3,330,079   $ 3,262,451   $  6,912,444   $  5,688,739  
                           
           Income Available to Common Stockholders $  3,330,079   $ 3,262,451   $  6,912,444   $  5,688,739  
                           
  Diluted Earnings Per Share Numerator                        
           Income Available to Common Stockholders $  3,330,079   $ 3,262,451   $  6,912,444   $  5,688,739  
                           
  Income Available to Common Stockholders on Converted Basis $  3,330,079   $ 3,262,451   $  6,912,444   $  5,688,739  
                           
  Original Shares:                        
  Additions from Actual Events                        
  -Issuance of Common Stock   34,507,874     34,427,582     34,507,874     34,427,582  
  Basic Weighted Average Shares Outstanding   34,507,874     34,427,582     34,507,874     34,427,582  
                           
  Dilutive Shares:                        
  Additions from Potential Events                        
  -Exercise of Investor Warrants & Placement Agent                        
  Warrants   -     -     -     -  
  - Exercise of Employee & Director Stock Options   -     602,761     -     602,761  
  Diluted Weighted Average Shares Outstanding:   34,507,874     35,030,343     34,507,874     35,030,343  
                           
  Earnings Per Share                        
  - Basic $  0.10   $ 0.09   $  0.20   $  0.17  
  - Diluted $  0.10   $ 0.09   $  0.20   $  0.16  
                           
  Weighted Average Shares Outstanding                        
  - Basic   34,507,874     34,427,582     34,507,874     34,427,582  
  - Diluted   34,507,874     35,030,343     34,507,874     35,030,343  

18.

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

27


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

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

During the period ended June 30, 2012 and December 31, 2011, the Company recorded a total of $51,607 and $644,243 stock option and its related general and administrative expenses.

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

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

No tax benefit has yet to be accrued or realized. For the period ended June 30, 2012 the Company has yet to repatriate its earnings, accordingly it has not recognized any deferred tax assets or liability in regards to benefits derived from the issuance of stock options.

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

Weighted-average fair value of grants: $  1.1551  
Risk-free interest rate:   1.04%  
Expected volatility:   4.48%  
Expected life in months:   36.00  

19.

LEASE COMMITMENTS

   

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, 2012 are shown in the following table:


From   To     Lease payment  
7/1/2012   12/31/2012   $  31,574  
1/1/2013   12/31/2013     87,536  
1/1/2014   12/31/2014     92,685  
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  
        $  546,491  

The outstanding lease commitment as of December 31, 2011 was $578,066.

28


AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)

The minimum future lease payments for this property at December 31, 2011 are shown in the following table:

From   To     Lease payment  
1/1/2012   12/31/2012   $  84,259  
1/1/2013   12/31/2013     87,536  
1/1/2014   12/31/2014     92,685  
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  
        $  599,176  

The outstanding lease commitment as of December 31, 2011 was $599,176.

   
20.

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 subject to the interest rate risk when their 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.

29


ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Caution Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to the factors described in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 201 filed with the Securities and Exchange Commission.

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

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

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

Overview

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

 . chestnut products,
 . convenience foods (including ready-to-cook foods, ready-to-eat foods, and meals ready-to-eat); and
 . frozen foods.

We conduct our production activities in China. Our products are sold in 26 provinces and administrative regions in China and 42 foreign countries. We believe that we are the largest processed chestnut foods manufacturer in China. We have developed brand equity for our chestnut products in China, Japan and South Korea over the past 10 to 15 years. We produced over 50 high value-added processed chestnut products in the second quarter of 2012. We derive most of our revenues from sales in China, Japan and South Korea. Our primary strategy for 2012 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, North America, Europe and the Middle East. We currently have limited sales and marketing activity in the United States, although our long-term plan is to significantly expand our activities there.

Sales in the second quarter of 2012 benefited from continued growth in the domestic market as well as strong export sales, with domestic sales accounting for 77.2% for the first six months of 2012, as compared to 77.6% over same period of last year. In the coming quarters, we anticipate higher demand for our traditional chestnut product line along with our fast growing convenience business line, including the bean products, lunch boxes, and pickle vegetables.

Frozen foods sold primarily to select export markets in Europe and supermarkets and wholesale customers in China contributed approximately 18.3% in revenues for the six months ended June 30, 2012 as compared to 16.0% in the same period of 2011, primarily driven by strong sales of frozen vegetable and fruit products.

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 2012, the cost of our raw materials increased from $25.4 million to $29.5 million, as compared to the second quarter of 2011, for a increase of approximately 16.1% . 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. 

30


Seasonality

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

We have also been working to reduce the seasonality in our business primarily by expanding sales of our convenience food business line. The percentage revenue contribution from convenience food increased from 34.5% in the first six months of 2011 to 35.6% in the first six months of 2012, while revenue contribution from chestnuts declined from 49.5% to 46.1% over the same period of time.

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 30.3% of our working capital from the proceeds of short-term loans from Chinese banks in the second quarter of 2012, as compared to 22.0% 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, 2012 was approximately $27.8 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 completed two private placement financings in September 2010 and October 2009 with net proceeds of $9.0 million and $10.9 million, respectively, the proceeds of which were primarily used as working capital. We also secured a $15 million loan from Deutsche Investitions- und Entwicklungsgesellshaft (“DEG”) in May 2010, which we have fully drawn down as of December 2011.We can provide no assurances that we will be able to enter into any future financing or refinancing agreements on terms favorable to us, especially considering the current instability of the capital markets.

We anticipate that our existing capital resources and cash flows from operations and current and expected short-term bank loans will be adequate to satisfy our liquidity requirements for the next 12 months. However, if available liquidity is not sufficient to meet our operating and loan obligations as they come due, our plans include obtaining alternative financing arrangements or further reducing expenditures as necessary to meet our cash requirements. However, there is no assurance that, if required, we will be able to raise additional capital or reduce discretionary spending to provide the required liquidity. Currently, the capital markets for small capitalization companies are extremely difficult and banking institutions have become stringent in their lending requirements. Accordingly, we cannot be sure of the availability or terms of any third party financing.

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, as more fully described in the Company’s Annual Report on Form 10-K.

The crisis of the financial and credit markets worldwide in the second half of 2008 has led to a severe economic recession worldwide. Furthermore, the European countries experienced severe debt crisis during 2010 and 2011 which further weighed on the global economy as well as the financial market. The outlook for 2012 is still uncertain, but continuation or worsening of unfavorable economic conditions, including the ongoing global economy and capital markets disruptions, could have an adverse impact on our business, operating results or financial condition in a number of ways. For example, we may experience declines in revenues, profitability and cash flows as a result of reduced orders, delays in receiving orders, delays or defaults in payment or other factors caused by the economic problems of our customers and prospective customers. We may experience supply chain delays, disruptions or other problems associated with financial constraints faced by our suppliers and subcontractors. In addition, changes and volatility in the equity, credit and foreign exchange markets and in the competitive landscape make it increasingly difficult for us to predict our revenues and earnings into the future.

In 2008 and 2009, some of our customers, including some of our large supermarket customers, delayed their payments for up to 60 to 90 days beyond their term. Our cash flow suffered while waiting for such payments. Consequently, at times we had to delay payments to our suppliers and to postpone business expansion as a result of these delayed payments. Starting in 2008 and through 2011, we gradually shortened credit terms for many of our international and domestic customers from between 30 and 180 days to between 30 and 60 days. Our large customers may fail to meet these shortened credit terms, in which case we may not have sufficient cash flow to fund our operating costs and our business could be adversely affected.

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Results of Operations

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

The following table summarizes the results of our operations during the three-month periods ended June 30, 2012 and June 30, 2011, respectively and provides information regarding the dollar and percentage increase or (decrease) from the three-month period ended June 30, 2012 compared to the three-month period ended June 30, 2011.

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

    Three months ended June 30,     Increase /     Increase /  
                Decrease     Decrease  
           (In Thousands of USD)   2012     2011     ($)     (%)  
                         
Net revenues   40,817     35,727     5,090     14.2%  
Cost of revenues   (32,316 )   (28,070 )   (4,246 )   15.1%  
Gross profit   8,501     7,657     844     11.0%  
                         
Operating expenses                        
Selling and marketing expenses   (1,417 )   (1,089 )   (328 )   30.1%  
General and administrative         (1,593 )   135     -8.5%  
expenses   (1,458 )                  
                         
Operating Income   5,626     4,974     651     13.1%  
                         
Government subsidy income   219     302     (83 )   -27.5%  
Interest and other income   131     102     29     28.0%  
Other expenses   (341 )   (21 )   (320 )   1488.7%  
Interest expense   (665 )   (610 )   (55 )   9.1%  
                         
Earnings before tax   4,969     4,747     222     4.7%  
                         
Income tax   (1,407 )   (1,278 )   (129 )   10.1%  
                         
Income before minority interests   3,562     3,470     92     2.7%  
                         
Minority interests   232     207     25     11.9%  
                         
Net income   3,330     3,262     68     2.1%  

Revenue

Net Revenues. Our net revenue for the three months ended June 30, 2012 amounted to $40.8 million, which represents an increase of approximately $5.1 million, or 14.2%, from the three-month period ended on June 30, 2011, in which our net revenue was $35.7 million. This increase was attributable to the increased revenues generated from sales of each of our product segments, as reflected in the following table:

    Three months ended              
(in thousands of U.S. dollars)   6/30/2012     6/30/2011     Increase     Increase  
Chestnut   19,950,606     17,719,637     2,230,969     12.6%  
Convenience food   14,915,661     12,807,758     2,107,903     16.5%  
Frozen food   5,950,493     5,199,255     751,238     14.4%  
Total   40,816,760     35,726,650     5,090,110     14.2%  

Cost of Revenues. During the three months ended June 30, 2012, we experienced an increase in cost of revenue, which consists of raw materials, direct labor and manufacturing overhead expenses, of $4.2 million, in comparison to the three months ended June 30, 2011, from approximately $28.1 million to $32.3 million, reflecting an increase of approximately 15.1% . Approximately 91.1%, or $4.1 million, of this increase was attributable to an increase in raw material costs, which increased from $25.4 million during the three months ended June 30, 2011 to $29.5 million during the three months ended June 30, 2012, for an increase of approximately16.1%.

The factors that contributed to the remaining 8.9% increase in cost of revenues were: an increase in wage expense for factory workers, an increase in depreciation expenses for capital equipment and an increase in the cost of consumables used in conjunction with capital equipment.

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Gross Profit. Our gross profit increased $844,041, or 11.0%, to $8.5 million for the three months ended June 30, 2012 from $7.7 million for the same period in 2011 as a result of higher revenues, offset by higher costs of revenues, for the reasons indicated immediately above. Our gross margins decreased slightly from 21.4% to 20.8% due to inflation pressure in the Chinese domestic market. Gross profit margins by product segment for the three months ended June 30, 2012 were: 23-26% for chestnuts, 20-23% for convenience foods and 16-18% for frozen foods.

Operating Expenses

Selling and Marketing Expenses. Our selling and marketing expenses increased $327,763, or 30.1%, to $1.4 million in the second quarter of 2012 as compared to $1.1 million in the second quarter of 2011. The following table reflects the main factors that contributed to this increase as well as the dollar amount that each factor contributed to this increase.

  Dollar Increase  
  (in U.S. dollars)  
Wages (sales personnel)   100,667  
Rental Fees   155,293  
Port Fees   134,075  

Selling and marketing expenses increased as we make continuous efforts to expand our distribution channels in China as well as to build up our brand recognition in the China market for our chestnut and convenience food products.

General and Administrative Expenses. We experienced a decrease in general and administrative expense of $135,007 from $1.6 million to approximately $1.5 million for the three months ended June 30, 2012, compared to the same period in 2011. The following table reflects the main factors that contributed to this decrease as well as the dollar amount that each factor contributed to this decrease:

Factor   Dollar Decrease  
    (in U.S. dollars)  
Social Security   (69,029  
Land Using Tax   (97,466 )
Property Tax   (48,769 )

The decreases listed in the table above were partially offset by increases in dollar amount of other factors, including property insurance, customer entertainment and office expenses, etc.

Income Before Taxation and Minority Interest

Income before taxation and minority interest increased $221,792, or 4.7%, to $5.0 million for the three months ended June 30, 2012 from $4.7 million for the same period of 2011. The increase was mainly attributable to the increase of our sales revenue, partially offset by increase in cost of revenue and operating expenses in the three months ended June 30, 2012 as compared to the three months ended June 30, 2011.

Income Taxes

Income taxes increased $129,378, or 10.1%, to $1.4 million in the second quarter of 2012, as compared to $1.3 million in the second quarter of 2011. This increase was attributable to the higher earnings before tax and a higher income tax rate in 2012 as compared to 2011.

Effective January 1, 2008, the PRC government implemented a new 25% tax rate across the board for all enterprises, without any tax holiday. However, the PRC government has established a set of transition rules to allow enterprises that already started tax holidays before January 1, 2008 to continue utilizing such tax holidays until they are fully utilized.

The income tax rates applicable to our Chinese operating subsidiaries in 2012 and 2011 are depicted in the following table:

    2012     2011  
Junan Hongrun   25%     25%  
Luotian Lorain   25%     25%  
Beijing Lorain   25%     15%  
Shandong Lorain   25%     25%  
Dongguan Lorain   25%     25%  
Shandong Greenpia   25%     25%  

Net Income

Net income increased $67,628, or 2.1%, to $3,330,079 for the three months ended June 30, 2012 from $3,262,451 for the same period of 2011. The increase was primarily attributable to increased sales revenue, and was partially offset by increased cost of goods sold, operating expenses, and higher income tax in the three months ended June 30, 2012 as compared to the three months ended June 30, 2011.

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Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

The following table summarizes the results of our operations during the six-month periods ended June 30, 2012 and June 30, 2011, respectively and provides information regarding the dollar and percentage increase or (decrease) from the six-month period ended June 30, 2012 compared to the six-month period ended June 30, 2011.

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

    Six months ended June 30,     Increase /     Increase /  
                Decrease     Decrease  
           (In Thousands of USD)   2012     2011     ($)     (%)  
                         
Net revenues   77,958     66,176     11,781     17.8%  
Cost of revenues   (61,999 )   (51,745 )   (10,254 )   19.8%  
Gross profit   15,958     14,431     1,527     10.6%  
                         
Operating expenses                        
Selling and marketing expenses   (2,788 )   (2,451 )   (336 )   13.7%  
General and administrative         (3,069 )   309     -10.1%  
expenses   (2,761 )                  
                         
Operating Income   10,410     8,911     1,499     16.8%  
                         
Government subsidy income   854     595     259     43.5%  
Interest and other income   243     149     94     62.9%  
Other expenses   (18 )   (181 )   163     -90.2%  
Interest expense   (1,575 )   (1,263 )   (312 )   24.7%  
                         
Earnings before tax   9,915     8,211     1,704     20.8%  
                         
Income tax   (2,594 )   (2,173 )   (421 )   19.4%  
                         
Income before minority interests   7,321     6,038     1,283     21.3%  
                         
Minority interests   409     349     60     17.1%  
                         
Net income   6,912     5,689     1,224     21.5%  

Revenue

Net Revenues. Our net revenue for the six months ended June 30, 2012 amounted to $78.0 million, which represents an increase of $11.8 million, or 17.8%, over the same period ended on June 30, 2011 where we had revenue of $66.2 million. This increase was attributable to the increased revenues generated from sales of each of our product segments, as reflected in the following table:

    Six months ended              
(in thousands of U.S. dollars)   6/30/2012     6/30/2011     Increase     Increase  
Chestnut   35,955,765     32,770,230     3,185,535     9.7%  
Convenience food   27,758,470     22,811,418     4,947,052     21.7%  
Frozen food   14,243,556     10,594,807     3,648,749     34.4%  
Total   77,957,791     66,176,455     11,781,336     17.8%  

Cost of Revenues. Our cost of revenues, which consists of raw materials, direct labor and manufacturing overhead expenses, was $62.0 million for the six month period ended June 30, 2012, representing an increase of $10.3 million, or 19.8%, as compared to $51.7 million for the six month period ended June 30, 2011. Approximately 93.2%, or $9.6million, of this increase was attributable to an increase in raw material costs, which increased from $46.7 million during the six months ended June 30, 2011 to $56.3 million during the six months ended June 30, 2012, for an increase of approximately 20.6%.

The factors that contributed to the remaining 6.8% increase in cost of revenues were: an increase in wage expense for factory workers, an increase in depreciation expenses for capital equipment and an increase in the cost of consumables used in conjunction with capital equipment.

34


Gross Profit. Our gross profit increased $1.5 million, or 10.6% to $16.0 million for the six months ended June 30, 2012 from $14.4 million for the same period in 2011. This increase was attributable to increased sales revenue, offset by higher cost as described above. Our gross margins decreased from 21.8% to 20.5% due to inflation pressure in the Chinese domestic market. Gross profit margins by product segment for the six months ended June 30, 2012 were: 23-26% for chestnuts, 20-23% for convenience foods and 16-18% for frozen foods.

Operating Expenses

Selling and Marketing Expenses. Selling and marketing expenses increased $336,352, or 13.7% to $2.8 million for the six months ended June 30, 2012 from $2.5 million for the same period in 2011. Selling and marketing expenses increased as we continue to expand our distribution channels and build up brand recognition for our products in China.

General and Administrative Expenses. General and administrative expenses decreased $308,800, or 10.1% to $2.8 million for the six months ended June 30, 2012 from $3.1 million for the same period of 2011. The decrease of general and administrative expenses was primarily attributable to our efforts to control costs related to compensation and benefits for managerial personnel and costs related to expansion of our distribution channels.

Income Before Taxation and Minority Interest

Income before taxation and minority interest increased $1.7 million, or 20.8%, to $9.9 million for the six months ended June 30, 2012 from $8.2 million for the same period of 2011. The increase was primarily a result of the higher sales revenue, partially offset by higher cost of revenue and higher interest expenses during the six month period ended on June 30, 2012 as compared to 2011.

Income Taxes

Income taxes increased $420,720, or 19.4%, to $2.6 million for the six months ended June 30, 2012 from $2.2 million for the same period of 2011. The increase of tax paid was primarily a result of the increase of income as well as higher tax rate in the first six months ended June 30, 2012, as compared to the same period in 2011.

Net Income

Net income increased $1.2 million, or 21.5% to $6.9 million for the six months ended June 30, 2012 from $5.7 million for the same period of 2011. The increase was primarily a result of higher sales revenue, partially offset by higher cost of goods sold and higher interest expenses.

Liquidity and Capital Resources

As of June 30, 2012, we had cash and cash equivalents (excluding restricted cash) of $19.6 million. Our cash and cash equivalents increased by approximately $2.2 million from December 31, 2011, primarily due to decrease in accounts and other receivables. The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.

    Six Months Ended  
    June 30,  
                                                                                                                                                                      2012     2011  
Net cash provided by (used in) operating activities   11,952     (1,679 )
Net cash provided by (used in) investing activities   (2,048 )   (5,621 )
Net cash provided by (used in) financing activities   (8,093 )   1,019  
Net cash flow (outflow)   1,811     (6,281 )

Operating Activities

Net cash provided by operating activities was $12.0 million for the six months period ended June 30, 2012 and net cash used in operating activities in the first two quarters of 2011 was approximately $1.7 million. The increase of approximately $13.6 million in net cash flows provided by operating activities in the first half of fiscal 2012 was primarily a result of higher decrease in accounts and other receivables of approximately $5.3 million and lower increase in inventory of approximately $5.6 million.

Investing Activities

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

Net cash used in investing activities for the six months period ended June 30, 2012 was $2.0 million, which is a decrease of $3.6 million from net cash used in investing activities of $5.6 million for the same period of 2011. The decrease was primarily due to fewer purchases of equipment and plant in 2012 and lower increase in restricted cash.

Financing Activities

Net cash used in financing activities for the six months period ended June 30, 2012 was $8.1 million, which is a decrease of $9.1 million from $1.0 million net cash provided by financing activities during the same period in 2011. The decrease of the net cash provided by financing activities was primarily a result of decreased net short term bank borrowing in 2012.

35


Loan Facilities

As of June 30, 2012, 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 $27.8 million as of June 30, 2012, compared with $36.0 million as of December 31, 2011. In addition, we are also carrying a long term loan of $15 million from DEG due in March 2016, with eight equal semi-annual principal payments commencing September 2012.

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

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.

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 minority investors are recorded as minority interests.

As of June 30, 2012, the details pertaining to our subsidiaries were as follows:

    Place of     Attributable equity     Registered  
                           Name of Company   incorporation     interest %     capital  
Shandong Lorain Co., Ltd   PRC     80.2   $  12,812,525  
Luotian Lorain Co., Ltd   PRC     100     4,014,773  
Junan Hongrun Foodstuff Co., Ltd   PRC     100     47,425,066  
Beijing Lorain Co., Ltd   PRC     100     1,585,062  
Shandong Greenpia Foodstuff Co.,Ltd   PRC     100     2,434,656  
Dongguan Lorain Co,,Ltd   PRC     100     158,506  
International Lorain Holding Inc.   Cayman Islands     100     49,325,160  

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, no other significant obligations of ours exist 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. No product return or sales discount allowance is made as products delivered and accepted by customers are normally not returnable and sales discount is normally not granted after products are delivered.

36


Recent Accounting Pronouncements

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement will not have a material impact on its 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, 2012. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2012, 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 material weakness in our internal control over financial reporting described below.

Internal Controls Over Financial Reporting

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

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that, as of December 31, 2011, our internal controls over financial reporting are not effective.

The material weakness and significant deficiency identified by our management as of December 31, 2011 relates to the ability of the Company to record transactions and provide disclosures in accordance with U.S. GAAP. We did not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of US GAAP commensurate with our financial reporting requirements. For example, our staff members do not hold licenses such as Certified Public Accountant or Certified Management Accountant in the U.S., have not attended U.S. institutions for training as accountants, and have not attended extended educational programs that would provide sufficient relevant education relating to U.S. GAAP. Our staff needs substantial training to meet the demands of a U.S. public company and our staff’s understanding of the requirements of U.S. GAAP-based reporting are inadequate.

Remediation Initiative

We plan to provide U.S. GAAP training sessions to our accounting team. The training sessions will be organized to help our corporate accounting team gain experience in U.S. GAAP reporting and to enhance their awareness of new and emerging pronouncements with potential impact over our financial reporting. We also plan to engage a certified public accounting firm in the United States to act as a consultant to provide advice regarding U.S. GAAP and internal controls over financial reporting.

Changes in Internal Controls over Financial Reporting.

During the three months ended June 30, 2012, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal year covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

37


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

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

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 DISCLOSURE

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No. Description
31.1 Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Actof 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.

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SIGNATURES

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

Date: August 14, 2012

AMERICAN LORAIN CORPORATION

/s/ Si Chen                                                      
Si Chen
Chief Executive Officer

/s/ David She                                                 
David She
Chief Financial Officer

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