10-Q 1 d10q.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: September 30, 2012

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

For the transition period from ____________ to _____________

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 Zhong 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 September 30, 2012 was 34,507,874.


Table of Contents

    Page
  Part I - Financial Information  
Item 1 Financial Statements ii
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3 Quantitative and Qualitative Disclosures about Market Risk 36
Item 4 Controls and Procedures 36
     
  Part II - Other Information  
Item 1 Legal Proceedings 37
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 Removed and Reserved 38
Item 5 Other Information 38
Item 6 Exhibits 38
Signatures   39

i


PART I
FINANCIAL INFORMATION

AMERICAN LORAIN CORPORATION
 
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
SEPTEMBER 30, 2012 AND DECEMBER 31, 2011
 
(Stated in US Dollars)

ii


AMERICAN LORAIN CORPORATION

CONTENTS PAGES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1
CONSOLIDATED BALANCE SHEETS 2 – 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5 – 6
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  8 – 28


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 September 30, 2012 and December 31, 2011, and the related statements of income, stockholders’ equity, and cash flows for the three and nine months ended September 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.
November 1, 2012 Certified Public Accountants

1



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

 

              (Audited)  

 

  Note     At September 30,     At December 31,  

ASSETS

        2012     2011  

   Current assets

                 

      Cash and cash equivalents

  2(d)   $  16,731,380   $  17,353,494  

      Restricted cash

  3     14,141,625     13,017,371  

      Trade accounts receivable

  4     52,667,221     41,469,880  

      Other receivables

  5     6,243,500     6,147,550  

      Inventory

  6     51,949,507     34,348,997  

      Advance to suppliers

        12,620,125     15,772,736  

      Prepaid expenses and taxes

        2,315,491     132,710  

      Deferred tax asset

        165,260     164,394  

      Security deposits and other Assets

        18,040     16,373  

         Total current assets

      $  156,852,149   $  128,423,505  

 

                 

   Non-current assets

                 

      Investment

        474,758     472,270  

      Property, plant and equipment, net

  7     85,195,024     84,377,306  

      Land use rights, net

  8     5,330,865     5,425,252  

TOTAL ASSETS

      $  247,852,796   $  218,698,333  

 

                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

                 

   Current liabilities

                 

      Short-term bank loans

  9   $  49,468,885   $  36,018,450  

      Long-term debt – current portion

  12     57,367     57,066  

      Accounts payable

        3,363,447     3,900,317  

      Taxes payable

  10     3,738,859     4,237,142  

      Accrued liabilities and other payables

  11     1,410,070     1,938,759  

      Customers deposits

        229,045     -  

         Total current liabilities

      $  58,267,673   $  46,151,734  

 

                 

   Long-term liabilities

                 

      -term bank loans

  12     18,555,701     15,597,831  

 

                 

TOTAL LIABILITIES

      $  76,823,374   $  61,749,565  

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

2



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

 

              (Audited)  

 

        At September 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 September 30, 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 September 30, 2012 and December 31, 2011, respectively

  13     34,508     34,508  

   Additional paid-in capital

        53,396,140     53,015,636  

   Statutory reserves

  2(r)     14,658,074     13,976,899  

   Retained earnings

        78,104,726     65,939,713  

   Accumulated other comprehensive income

        15,443,869     15,353,885  

   Non-controlling interests

  14     9,392,105     8,628,127  

 

                 

TOTAL STOCKHOLDER’S EQUITY

                      $  171,029,422   $  156,948,768  

 

                 

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

    $  247,852,796   $  218,698,333  

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

3



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

 

        Three months ended September 30,     Nine months ended September 30,  

 

  Note     2012     2011     2012     2011  

 

                             

Net revenues

  2(t),15   $  57,972,627   $  55,642,041   $  135,930,419   $  121,818,496  

Cost of revenues

        (45,583,295 )   (43,291,417 )   (107,582,656 )   (95,036,378 )

   Gross profit

      $  12,389,332   $  12,350,624   $  28,347,763   $  26,782,118  

 

                             

Operating expenses

                             

Selling and marketing expenses

        (2,310,863 )   (2,538,469 )   (5,098,669 )   (4,989,922 )

General and administrative expenses

        (1,627,095 )   (1,611,242 )   (4,387,609 )   (4,680,555 )

 

        (3,937,958 )   (4,149,711 )   (9,486,278 )   (9,670,477 )

 

                             

Operating income

      $  8,451,374   $  8,200,913   $  18,861,485   $  17,111,641  

 

                             

Government subsidy income

        281,374     47,657     1,135,730     643,009  

Interest income

        2,886     26,257     192,076     36,526  

Other income

        44,472     2,109,575     98,779     2,248,762  

Other expenses

        (6,434 )   (54,269 )   (24,098 )   (235,324 )

Interest expense

        (1,128,368 )   (550,657 )   (2,703,251 )   (1,813,891 )

 

                             

 

                             

Earnings before tax

      $  7,645,304   $  9,779,476   $  17,560,721   $  17,990,723  

 

                             

Income tax

  2(q),16     (2,037,590 )   (1,887,950 )   (4,631,730 )   (4,061,371 )

 

                             

Net income

      $  5,607,714   $  7,891,526   $  12,928,991   $  13,929,352  

 

                             

Other comprehensive income:

                             

   Foreign currency translation gain

        (317,398 )   1,664,668     89,984     4,772,659  

Comprehensive Income

        5,290,316     9,556,194     13,018,975     18,702,011  

Net income attributable to:

                             

 

                             

-Common stockholders

      $  5,252,569   $  7,071,288   $  12,165,013   $  12,760,027  

-Non-controlling interest

        355,145     820,238     763,978     1,169,325  

 

      $  5,607,714   $  7,891,526   $  12,928,991   $  13,929,352  

 

                             

 

                             

Earnings per share

  2(u), 17                          

   - Basic

      $  0.15   $  0.21   $  0.35   $  0.37  

   - Diluted

      $  0.15   $  0.20   $  0.35   $  0.37  

 

                             

Weighted average shares outstanding

                             

   - Basic

        34,507,874     34,466,144     34,507,874     34,440,483  

   - Diluted

        34,507,874     34,605,668     34,507,874     34,754,552  

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

4



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

 

  Three months ended     Nine months ended  

 

  September 30     September 30  

 

  2012     2011     2012     2011  

Cash flows from operating activities

                       

Net income

$  5,607,714   $  7,891,526   $  12,928,991    $ 13,929,352  

   Stock and share based compensation

  328,897     146,806     380,504     452,179  

   Depreciation of fixed assets

  847,188     333,588     2,017,237     1,475,523  

   Amortization of intangible assets

  32,464     41,854     127,284     141,997  

   Write down/(gain) of short-term investments

        (30,702 )   -     (78,465 )

   Adjustment to statutory reserve

  -     -     681,175     -  

   (Increase)/decrease in accounts & other receivables

  (19,575,936 )   (13,203,625 )   (7,911,633 )   (6,831,817 )

   (Increase)/decrease in inventories

  (11,914,113 )   6,268,000     (17,600,510 )   (5,022,660 )

   Decrease/(increase) in prepayment

  (1,453,208 )   (2,650,221 )   (2,182,781 )   (2,965,900 )

   Decrease/(increase) in deferred tax asset

  265     (1,237 )   (866 )   (3,625 )

   Increase/(decrease) in accounts and other payables

  1,050,685     2,359,115     (1,563,843 )   (1,615,090 )

   Net cash (used in)/provided by operating activities

  (25,076,044 )   1,155,104     (13,124,442 )   (518,506 )

 

                       

Cash flows from investing activities

                       

   Sale/(Proceeds) from short-term investment

  -     (807,647 )   -     1,358,573  

   Purchase of plant and equipment

  (2,707,402 )   (874,224 )   (2,834,955 )   (3,221,615 )

   Payment of construction in progress

  -     (507,155 )   -     (978,260 )

   Payment for the purchase of land use rights

  15,741     (60,047 )   (32,897 )   (194,397 )

   (Increase)/decrease in restricted cash

  746,976     (1,816,892 )   (1,124,254 )   (6,572,121 )

   Decrease (Increase) in deposit

  (1,556 )   136,099     (1,668 )   51,345  

   Sales/(purchase) of land investment

  -     7,502,344     -     7,502,344  

   Net cash used in investing activities

  (1,946,241 )   3,572,478     (3,993,774 )   (2,054,131 )

 

                       

Cash flows from financing activities

                       

   Repayment of bank borrowings

  -     (5,278,540 )   (7,405,267 )   (22,060,396 )

   Proceeds from bank borrowings

  19,753,932     3,853,879     19,066,286     22,036,891  

   Proceeds from long-term bank borrowings

  4,747,587           4,747,587        

   Repayment of Notes

  -     (3,085,517 )   -     (4,249,977 )

   Proceeds from issuance of notes

  -     -     -     782,656  

   Issuance of common stock

  -     27     -     52  

   Net cash provided by/(used in) financing activities

$  24,501,519   $  (4,510,151 ) $  16,408,606     (3,490,774 )

 

                       

Net Increase/(decrease) of Cash and Cash Equivalents

  (2,520,766 )   217,431     (709,610 )   (6,063,411 )

 

                       

Effect of foreign currency translation on cash and cash equivalents

  (316,636 )   1,616,904     87,496     4,772,659  

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

5



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

Cash and cash equivalents–beginning of period

  19,568,782     9,605,539     17,353,493     12,730,626  

 

                       

Cash and cash equivalents–end of period

$  16,731,380   $  11,439,874     16,731,380     11,439,874  

 

                       

Supplementary cash flow information:

                       

         Interest received

$  2,886   $  26,171   $  192,076   $  36,526  

         Interest paid

$  919,218   $  502,519   $  2,751,309   $  1,766,318  

         Income taxes paid

$  1,348,553   $  1,116,795   $  5,136,481   $  4,962,052  

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

6



AMERICAN LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE PERIOD ENDED SEPTEMBER 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, 2012

  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

  -     -     380,504     -     -     -     -     380,504  

Net income

  -     -     -     -     12,928,991     -     -     12,928,991  

Allocation to non-controlling interests

  -     -     -     -     (763,978 )   -     763,978     -  

Appropriations to statutory reserve

  -     -     -     681,175     -     -     -     681,175  

Foreign currency translation adjustment

  -     -     -     -     -     89,984     -     89,984  

Balance, September 30, 2012

  34,507,874     34,508     53,396,140     14,658,074     78,104,726     15,433,869     9,392,105     171,029,422  

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

7



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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.

8



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 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 September 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   $  12,801,032  
 

Luotian Lorain Co., Ltd

  PRC     100     4,008,356  
 

Junan Hongrun Foodstuff Co., Ltd

  PRC     100     47,349,264  
 

Beijing Lorain Co., Ltd

  PRC     100     1,582,529  
 

Shandong Greenpia Foodstuff Co.,Ltd

  PRC     100     2,430,764  
 

Dongguan Lorain Co,,Ltd

  PRC     100     158,253  
 

International Lorain Holding Inc.

  Cayman Islands     100     49,246,321  

  (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.

9



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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.

10



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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.

11



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 $0 from retained earnings to statutory reserves during 2011 and the period ended September 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.

12



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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.


 

 

9/30/2012 6/30/2012 12/31/2011 9/30/2011 6/30/2011
 

Year end RMB : US$ exchange rate

6.3190 6.3089 6.3523 6.3885 6.463
 

Average yearly RMB : US$ exchange rate

6.3085 6.3027 6.4544 6.4884 6.5316

 

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 September 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.

13



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 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 September 30, 2012 and 2011 included net income and foreign currency translation adjustments.

14



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 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


 

 

  9/30/2012     12/31/2011  
 

Trade accounts receivable

$  53,048,914   $  41,849,573  
 

Less: Allowance for doubtful accounts

  (381,693 )   (379,693 )
 

 

$  52,667,221   $  41,469,880  

 

Allowance for bad debt:

  9/30/2012     12/31/2011  
 

Beginning balance

$  (379,693 ) $  (335,902 )
 

Additions to allowance

  (2,000 )   (43,791 )
 

Bad debt written-off

  -     -  
 

Ending balance

$  (381,693 ) $  (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 September 30, 2012 and December 31, 2011:


 

 

  9/30/2012     12/31/2011  
 

Advances to employees for job/travel disbursements

  707,293     577,237  
 

Amount due by a non-related enterprise

  439,944     157,424  
 

Other non-related receivables

  146,791     319,639  
 

Other related receivables

  99,812     213,128  
 

Short-term investment sale receivable

  4,849,660     4,880,122  
 

$  6,243,500   $  6,147,550  

15



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2012.

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

      9/30/2012     12/31/2011  
  Chen, Si $  67,523   $  133,070  
  Lu, Yundong   187     896  
  Liu, Lihua   -     78,712  
  You, Huadong   31,651     -  
  Junan Hot & Roll Fast Food   453     450  
    $  99,812   $  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 September 30, 2012, a total of RMB 38,355,000 has been paid and RMB 30,645,000 (USD 4,849,660) 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 September 30, 2012 and December 31, 2011:


      9/30/2012     12/31/2011  
  Raw materials $  24,608,937   $  10,470,187  
  Finished goods   27,340,570     23,878,810  
    $  51,949,507   $  34,348,997  

16



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2012 and December 31, 2011:


      9/30/2012     12/31/2011  
  At Cost:            
       Buildings $  78,588,510   $  75,509,164  
       Landscaping, plant and tree   7,921,103     7,879,579  
       Machinery and equipment   11,169,250     10,976,564  
       Office equipment   359,570     618,558  
       Motor vehicles   837,494     467,415  
    $  98,875,927   $  95,451,279  
  Less: Accumulated depreciation            
       Buildings   (5,455,902     (4,141,133 )
       Landscaping, plant and tree   (1,904,660     (1,303,707 )
       Machinery and equipment   (5,602,946     (4,988,873 )
       Office equipment   (211,217     (391,272 )
       Motor vehicles   (506,178 )   (248,987 )
      (13,680,904 )   (11,073,972 )
               
  Construction in Progress         -  
    $  85,195,024   $  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 September 30, 2012 and December 31, 2011:


      9/30/2012     12/31/2011  
  Land use rights, at cost $  6,275,427   $  6,242,530  
     Less: Accumulated amortization   (944,562 )   (817,278 )
    $  5,330,865   $  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 September 30, 2012 and 2011 were $127,284 and $141,997, respectively.

17



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2012 and December 31, 2011:


 

  Remark     9/30/2012     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

        -     -  
 

       • Interest rate at 6.666% per annum due 11/5/2012

        1,091,945     1,086,221  
 

       • Interest rate at 6.666% per annum due 11/23/2012

        791,264     787,116  
 

       • Variable interest rate; due 11/30/2012

        1,582,529     -  
 

       • Variable interest rate; due 12/24/2012

        1012818        
 

 

                 
 

Loan from Junan County Agriculture Bank,

                 
 

       • Interest rate at 7.320% per annum due 1/10/2012

        -     3,148,466  
 

 

                 
 

Loan from Junan County Industrial and Commercial Bank of China,

           
 

       • Interest rate at 6.405% per annum due 4/9/2012

        -     1,023,251  
 

       • Interest rate at 6.405% per annum due 4/24/2012

        -     550,982  
 

       • Interest rate at 6.410% per annum due 4/24/2012

        -     629,693  
 

       • Interest rate at 6.410% per annum due 5/10/2012

        -     1,338,098  
 

       • Interest rate at 6.410% per annum due 6/12/2012

        -     1,574,233  
 

       • Variable interest rate; due 10/10/2012

        1,107,770     -  
 

       • Interest rate at 6.71% per annum due 10/23/2012

        1,028,644     -  
 

       • Interest rate at 6.71% per annum due 10/23/2012

        633,012     -  
 

       • Variable interest rate; due 12/14/2012

        1,345,150     -  
 

       • Interest rate at 6.44% per annum; due 12/27/2012

        1,740,782     -  
 

       • Interest rate at 6.44% per annum; due 1/8/2013

        1,028,644     -  
 

 

                 
 

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

        3,165,058     3,148,466  
 

       • Interest rate at 12.201% per annum due 12/13/2012

        791,264     787,116  
 

       • Interest rate at 12.136% per annum due 12/29/2012

        712,138     708,405  
 

       • Interest rate at 13.776% per annum due 12/10/2012

        791,264     -  

18



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

 

       • Interest rate at 12.136% per annum due 1/10/2013

  712,138     -  
 

 

           
 

Loan from China Minsheng Bank Corporation, Linyi Branch

           
 

       • Interest rate at 7.8% per annum due 8/29/2013

  2,373,793     2,361,349  
 

 

           
 

Loan from China Agricultural Bank, Luotian Branch

           
 

       • Interest rate at 6.372% per annum due 9/12/2012

  1,582,529     944,540  
 

 

           
 

Bank of Beijing,

           
 

       • Interest rate at 6.672% per annum due 11/16/2012

  633,012     629,693  
 

       • Variable Interest rate, due 6/29/2013

  1,266,023     -  
 

 

           
 

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 7.37% per annum due 11/29/2012

  2,373,793        
 

       • Variable Interest rate, due 1/30/2013

  1,107,770     -  
 

       • Interest rate at % per annum due 3/6/2013

  791,264     -  
 

       • Interest rate at 7.2% per annum due 5/24/2013

  633,012     -  
 

 

           
 

Luotian Sanliqiao Credit Union,

           
 

       • Interest rate at 9.360% per annum due 1/6/2013

  949,517     -  
 

 

           
 

Beijing Rural Commercial Bank, Shilibao Branch,

           
 

       • Interest rate at 7.434% per annum due 9/6/2012

  1,344,182     2,046,503  
 

 

           
 

Beijing International Trust Co., Ltd.,

           
 

       • Variable interest rate, due 9/16/2013

  1,582,529     -  
 

 

           
 

Weihai City Commercial Bank,

           
 

       • Interest rate at 6.90% per annum due 3/7/2013

  3,165,058     -  
 

 

           
 

Bank of Ningbo ,

           
 

       • Interest rate at 6.71% per annum due 9/27/2013

  1,582,529     -  

19



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

 

Hankou Bank, Guanshan Branch,

           
 

       • Interest rate at 6.00% per annum due 9/6/2013

  791,264     -  
 

       • Interest rate at 6.60% per annum due 9/14/2013

  1,582,529     -  
 

 

           
 

China Agricultural Bank, Shandong Branch

           
 

       • Interest rate at 7.544% per annum due 12/23/2012

  1,582,529     1,574,233  
 

       • Interest rate at 7.544% per annum due 12/29/2012

  680,487     676,920  
 

       • Interest rate at % per annum due 7/16/2013

  3,165,058     -  
 

       • Interest rate at % per annum due 8/29/2013

  1,582,529     -  
 

 

           
 

China Everbright Bank, Qingdao Branch

           
 

       • Interest rate at 7.930% per annum due 11/9/2012

  3,165,058     3,148,467  
 

                                                                                                                                                                       

$  49,468,885   $  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

   
10.

TAXES PAYABLES

   

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


 

 

  9/30/2012     12/31/2011  
 

Value added tax payable

$  207,923   $  255,327  
 

Corporate income tax payable

  2,340,278     2,822,321  
 

Employee payroll tax withholding

  3,909     6,105  
 

Property tax payable

  58,456     46,192  
 

Stamp tax payable

  1,436     9,369  
 

Business tax payable

  -     152,869  
 

Land use tax payable

  52,339     23,988  
 

Import tariffs

  153,675     4,956  
 

Capital gain tax payable

  920,842     916,015  
 

 

$  3,738,859   $  4,237,142  

11.

ACCRUED EXPENSES AND OTHER PAYABLE

   

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


      9/30/2012     12/31/2011  
  Accrued salaries and wages $  88,013   $  774,206  
  Accrued utility expenses   58,367     74,927  
  Accrued interest expenses   3,165     303,701  
  Accrued transportation expenses   394,558     172,094  
  Other accruals   34,850     95,371  
  Business and other taxes   475,722     422,100  
  Disbursement payable   37,972     38,804  
  Accrued staff welfare   317,423     57,554  
                                                                                                              $  1,410,070   $  1,938,759  

20



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

12.

LONG-TERM DEBT

   

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


 

 

  9/30/2012     12/31/2011  
 

Loans from Luotian Agricultural Development Bank

           
 

 • Interest rate at 0.6700% per annum were due 12/11/2010

  57,367     57,066  
 

                                                                                                                                           

$   57,367   $  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 September 30, 2012 and December 31, 2011:

 

 

  9/30/2012     12/31/2011  
 

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

       
 

 • Interest rate at 5.510% per annum due 9/16/2016

  13,808,114     15,597,831  
 

 

           
 

Loans from China Development Bank

           
 

• Interest rate at RMB benchmark loan interest rate plus 15% annum due 9/24/2015

  4747,587     -  
 

 

$ 18,555,701   $  15,597,831  

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 September 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 September 30, 2012 was 34,507,874.

21



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

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.

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 9/30/2012

    34,507,874

22



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


Warrants and options

Number of warrants
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.

   
15.

SALES BY PRODUCT TYPE

   

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


  Category   9/30/2012     9/30/2011  
  Chestnut $  62,947,404   $  57,238,463  
  Convenience food   50,913,992     45,100,128  
  Frozen food   22,069,023     19,479,905  
  Total $  135,930,419   $  121,818,496  

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

  Country   9/30/2012     9/30/2011  
  Australia $  88,290   $  362,673  
  Belgium   3,521,931     1,635,002  
  Canada   -     110,298  
  China   102,058,747     93,497,740  
  Denmark   53,878     22,853  
  France   1,725,334     1,138,793  
  Germany   1,096,314     1,330,082  
  Hong Kong   92,710     385,454  
  Indonesia         20,950  
  Israel   153,294     238,921  
  Japan   15,262,559     12,295,910  
  Malaysia   1,390,051     1,518,689  
  Netherlands   175,015     584,981  
  Philippines   -     248,615  
  Poland   213,769     145,061  
  Portugal   710,427     -  
  Singapore   668,390     557,151  
  South Korea   6,756,501     2,933,657  
  Spain   194,521     712,327  
  Sweden   33,045     -  
  Taiwan   371,362     1,057,119  
  Thailand   116,272     -  
  United Kingdom   1,068,084     2,583,897  
  United States   179,925     207,144  
  Others   -     33,656  
  Total $  135,930,419   $  121,818,496  

23



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2012 and 2011:


 

 

  9/30/2012     9/30/2011  
 

Income attributed to PRC

$  18,078,289   $  18,674,583  
 

Loss attributed to US*

  (517,568 )   (683,860 )
 

Income before tax

  17,560,721     17,990,723  
 

 

           
 

 

           
 

 

           
 

PRC Statutory Tax at 25% Rate

  4,631,730     4,061,371  
 

Effect of tax exemption granted

  -     -  
 

Income tax

$  4,631,730   $  4,061,371  
 

 

           
 

Per Share Effect of Tax Exemption

           
 

 

  9/30/2012     9/30/2011  
 

 

$     $    
 

Effect of tax exemption granted

  -     -  
 

Weighted-Average Shares Outstanding Basic

  34,507,874     34,440,483  
 

Per share effect

$  -   $  -  

The difference between the U.S. federal statutory income tax rate and the Company’s effective tax rate was as follows for the periods ended September 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

  1.38%     -2.43%  
 

The Company’s effective tax rate

  26.38%     22.57%  

24



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

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%  

17.

EARNINGS PER SHARE

   

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


 

 

  3 months ended     9 months ended  
 

 

  September 30     September 30  
 

 

  2012     2011     2012     2011  
 

 

                       
 

Basic Earnings Per Share Numerator

                       
 

   Net Income

$  5,252,569   $  7,071,288   $  12,165,013   $  12,760,027  
 

 

                       
 

   Income Available to Common Stockholders

$  5,252,569   $  7,071,288   $  12,165,013   $ 12,760,027  
 

 

                       
 

Diluted Earnings Per Share Numerator

                       
 

   Income Available to Common Stockholders

$  5,252,569    $  7,071,288    $ 12,165,013   $ 12,760,027  
 

 

                       
 

Income Available to Common Stockholders on Converted Basis

$  5,252,569   $  7,071,288   $ 12,165,013   $ 12,760,027  
 

 

                       
 

Original Shares:

                       
 

Additions from Actual Events

                       
 

-Issuance of Common Stock

  34,507,874     34,466,144     34,507,874     34,440,483  
 

Basic Weighted Average Shares Outstanding

  34,507,874     34,466,144     34,507,874     34,440,483  
 

 

                       
 

Dilutive Shares:

                       
 

Additions from Potential Events

                       
 

-Exercise of Investor Warrants & Placement Agent

                       
 

Warrants

                       
 

- Exercise of Employee & Director Stock Options

  -     139,524     -     314,068  
 

Diluted Weighted Average Shares Outstanding:

  34,507,874     34,605,668     34,507,874     34,754,552  
 

Earnings Per Share

                       
 

- Basic

$  0.15    $              0.21    $ 0.35   $ 0.37  
 

- Diluted

$  0.15    $              0.20    $ 0.35   $ 0.37  
 

 

                       
 

Weighted Average Shares Outstanding

                       
 

- Basic

  34,507,874     34,466,144     34,507,874     34,440,483  
 

- Diluted

  34,507,874     34,605,668     34,507,874     34,754,552  

25



AMERICAN LORAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)
   
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 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 September 30, 2012 and December 31, 2011, the Company recorded a total of $380,504 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 September 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:

$  1.3629   $  1.1551  
 

Risk-free interest rate:

  0.33%     1.04%  
 

Expected volatility:

  59.93%     4.48%  
 

Expected life in months:

  36     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.

26



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

The minimum future lease payments for this property at September 30, 2012 are shown in the following table:

  From   To     Lease payment  
  7/1/2012   12/31/2012   $  15,787  
  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  
          $  530,704  

The outstanding lease commitment as of September 30, 2012 was $530,704.

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.

27



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

  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.

28


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

Caution Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to the factors described in the section captioned Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission.

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

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

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

Overview

We are an integrated food manufacturing company with headquarters in Shandong Province, China. We develop, manufacture and sell the following types of food products: . chestnut products, . convenience foods (including ready-to-cook foods, ready-to-eat foods, and meals ready-to-eat); and . frozen foods.

We conduct our production activities in China. Our products are sold in 26 provinces and administrative regions in China and 42 foreign countries. We believe that we are the largest processed chestnut foods manufacturer in China. We have developed brand recognition for our chestnut products in China, Japan and South Korea over the past 10 to 15 years. We produced over 50 high value-added processed chestnut products in the third 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 nine months ended September 30, 2012 continue to exhibit steady growth. Sales continue to be heavily concentrated in the Asian regions, with mainland China, Japan and South Korea accounting for 91.3% of total sales during the nine months ended September 30, 2012, as compared to 89.3% over the same period of last year. In the fourth quarter, American Lorain expects to continue seeing higher demand for its chestnut products as we enter traditionally strong quarter, as well as its fast growing convenience food products such as, bean products, lunch boxes and pickle vegetables.

Frozen foods sold primarily to select export markets in Europe and wholesale customers in China contributed approximately 16.2% in revenues for the first nine months of 2012, compared with 16.0% in the same period of 2011.

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 third quarter of 2012, the cost of our raw materials increased from $39.9 million to $42.6 million, as compared to the third quarter of 2011, for an increase of approximately 6.6% due to a combined effect of increased sales and general inflation. China currently faces high domestic inflation pressures, especially in agricultural products and consumer foods. The prolonged continuation or worsening of such pressure may negatively our sales or profitability. 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.

29


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 37.0% in the first nine months of 2011 to 37.5% in the first nine months of 2012, while revenue contribution from chestnuts declined from 47.0% to 46.3% 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 as well as bank loans. If we fail to generate sufficient sales, or if our suppliers stop offering us credit terms, we may not have sufficient liquidity to fund our operating costs and our business could be adversely affected.

We also fund approximately 50.2% of our working capital from the proceeds of short-term loans from Chinese banks in the third quarter of 2012, as compared to 17.7% 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 from short-term bank loans as of September 30, 2012 was approximately $49.5 million. The term of almost all such loans is one year or less. Historically, our lenders have permitted us to roll over such loans on an annual basis. However, we may not have sufficient funds available to pay all of our borrowings upon maturity, and our lenders may not permit us to roll over the loans in the future. Failure to roll over our short-term borrowings at maturity or to service our debt could result in the imposition of penalties, including increases in rates of interest, legal actions against us by our creditors, or even insolvency. 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 on-going European debt crisis is still weighing on the global economic conditions as well as the financial market. The continuation or worsening of unfavorable economic conditions, including the on-going global economy and capital markets disruptions, could have adverse impacts on our business, operating results or financial conditions 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 2010, we shortened credit terms for many of our international and domestic distributors from between 30 and 180 days to between 30 and 60 days for domestic distributors, and around 90 days for international distributors. Our large customers may fail to meet these shortened credit terms, in which case we may not have sufficient cash flow to fund our operating costs and our business could be adversely affected.

30


Results of Operations

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

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

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

    Three months ended              
    September 30,     Dollar($)     Percentage  
                      (%)  
    2012     2011     Increase     Increase  
    (In US     (In US     (Decrease)     (Decrease)  
    Dollar)     Dollar)              
Net revenues   57,972,627     55,642,041     2,330,586     4.2%  
Cost of revenues   (45,583,295 )   (43,291,417 )   (2,291,878 )   5.3%  
Gross profit   12,389,332     12,350,624     38,708     0.3%  
                         
Operating expenses                        
Selling and marketing expenses   (2,310,863 )   (2,538,469 )   227,606     -9.0%  
General and administrative expenses   (1,627,095 )   (1,611,242 )   (15,853 )   1.0%  
                         
Operating income   8,451,374     8,200,913     250,461     3.1%  
                         
Government subsidy income   281,374     47,657     233,717     490.4%  
Interest income   2,886     26,256     (23,370 )   -89.0%  
Other income   44,472     2,109,575     (2,065,103 )   -97.9%  
Other expenses   (6,434 )   (54,269 )   47,835     -88.1%  
Interest expense   (1,128,368 )   (550,657 )   (577,711 )   104.9%  
                         
Earnings before tax   7,645,304     9,779,476     (2,134,172 )   -21.8%  
                         
Income tax   (2,037,590 )   (1,887,950 )   (149,640 )   7.9%  
                         
Income before minority interests   5,607,714     7,891,526     (2,283,812 )   -28.9%  
                         
Net income attributable to:                        
Common stock holders   5,252,569     7,071,288     (1,818,719 )   -25.7%  
Minority interests   355,145     820,238     (465,093 )   -56.7%  

Revenue

Net Revenues. Our net revenue for the three months ended September 30, 2012 amounted to $58.0 million, which represents an increase of approximately $2.3 million, or 4.2%, from the three-month period ended on September 30, 2011, in which our net revenue was $55.6 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              
Category   9/30/2012     9/30/2011     Increase     Increase  
Chestnut   26,991,639     24,468,233     2,523,406     10.3%  
Convenience food   23,155,522     22,288,710     866,812     3.9%  
Frozen food   7,825,467     8,885,098     (1,059,631 )   -11.9%  
Total   57,972,628     55,642,041     2,330,587     4.2%  

Cost of Revenues. During the three months ended September 30, 2012, we experienced an increase in cost of revenue, which consists of raw materials, direct labor and manufacturing overhead expenses, of $2.3 million, in comparison to the three months ended September 30, 2011, from approximately $43.3 million to $45.6 million, reflecting an increase of approximately 5.3% . Our raw material costs increased by 2.7 million from $39.9 million during the three months ended September 30, 2011 to $42.6 million during the three months ended September 30, 2012 due to higher production volume as our business expands, as well as higher prices for chestnut and other agricultural products caused by general inflation. The increase in raw material costs were slightly offset by a decrease in production costs consisted mainly of depreciation expenses for capital equipment and cost of consumables used in conjunction with capital equipment.

31


Gross Profit. Our gross profit increased $38,708, or 0.3%, to $12,389,332 for the three months ended September 30, 2012 from $12,350,624 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 22.2% to 21.4% for the period ended September 30, 2012, as compared to the period ended September 30, 2011 due to inflation pressure in the Chinese domestic market. Gross profit margins by product segment for the three months ended September 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 decreased $227,606, or 9.0%, to $2.3 million in the third quarter of 2012 from $2.5 million in the third quarter of 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. The decreases listed in the table below were partially offset by increases in dollar amount of other selling and marketing expenses, including port fees and warehousing, etc.

(in U.S. dollars)

Decrease in Costs in the
Three Months Ended September 30, 2012 over
the Three Months Ended September 30, 2011
       
Transportation $  (141,250 )
Supermarket Fees   (36,132 )
Commission   (34,355 )
Sea Transportation   (82,316 )

Selling and marketing expenses decreased as we control our costs carefully while continue our expansion in China.

General and Administrative Expenses. We experienced an increase in general and administrative expense of $15,853 from $1,611,242 to $1,627,095 for the three months ended September 30, 2012, compared to the same period in 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. These higher expenses are partially offset by the decrease of other expenses such as employee benefit and land use expenses during the three months ended September 30, 2012 compared to the same period of last year.

(In U.S Dollars)

Increase in Costs in the
Three Months Ended September 30, 2012
over the Three Months Ended September 30, 2011
       
Social Security $  40,788  
Entertainment Expense   30,636  
Depreciation   28,979  

Interest Expenses. We experienced an increase in interest expenses of approximately $0.6 million from approximately $0.6 million to $1.1 million for the three months ended September 30, 2012, compared to the same period in 2011. The increase was mainly due to the increase in outstanding balance of our short term bank loans, which was $49.5 million as of September 30, 2012, compared to $14.8 million as of September 30, 2011.

Income Before Taxation and Minority Interest

Income before taxation and minority interest decreased $2.1 million, or 21.8%, to $7.6 million for the three months ended September 30, 2012 from $9.8 million for the same period of 2011. The decrease was largely attributable to $2.1 million of other income we recognized in the third quarter of 2011 when we sold a parcel of land previously carried on our balance sheet as a short term investment. Without the effect of the land sale, our earnings before tax and minority interest decreased 0.5% to $7,645,304 for the three months ended September 30, 2012 from $7,686,942 in the same period of last year.

Income Taxes

Income taxes increased $149,640, or 7.9%, to $2.0 million in the third quarter of 2012, as compared to $1.9 million in the third quarter of 2011. This increase was attributable to the 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%  

32


Net Income

Net income decreased $1.8 million, or 25.7%, to $5.3 million for the three months ended September 30, 2012 from $7.1 million for the same period of 2011. The decrease was largely attributable to the $2.1 million other income we recognized in the third quarter of 2011 when we sold the land previously carried on our balance sheet as short term investment. Without the effect of the land sale, our net income decreased 2.6% to $5.3 million for the three months ended September 30, 2012 from $5.4 million in the same period of last year.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

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

    Nine months ended              
    September 30,     Dollar($)     Percentage  
                      (%)  
    2012     2011     Increase     Increase  
    (In US Dollar)     (In US Dollar)     (Decrease)     (Decrease)  
Net revenues   135,930,419     121,818,496     14,111,923     11.6%  
Cost of revenues   (107,582,656 )   (95,036,378 )   (12,546,278 )   13.2%  
Gross profit   28,347,763     26,782,118     1,565,645     5.8%  
                         
Operating expenses                        
Selling and marketing expenses   (5,098,669 )   (4,989,922 )   (108,747 )   2.2%  
General and administrative expenses   (4,387,609 )   (4,680,555 )   292,946     -6.3%  
                         
Operating income   18,861,485     17,111,641     1,749,844     10.2%  
                         
Government subsidy income   1,135,730     643,009     492,721     76.6%  
Interest income   192,076     36,526     155,550     425.9%  
Other income   98,779     2,248,762     (2,149,983 )   -95.6%  
Other expenses   (24,098 )   (235,324 )   211,226     -89.8%  
Interest expense   (2,703,251 )   (1,813,891 )   (889,360 )   49.0%  
                         
Earnings before tax   17,560,721     17,990,723     (430,002 )   -2.4%  
                         
Income tax   (4,631,730 )   (4,061,371 )   (570,359 )   14.0%  
                         
Income before minority interests   12,928,991     13,929,352     (1,000,361 )   -7.2%  
                         
Net income attributable to:                        
Common stock holders   12,165,013     12,760,027     (595,014 )   -4.7%  
Minority interests   763,978     1,169,325     (405,347 )   -34.7%  

Revenue

Net Revenues. Our net revenue for the nine months ended September 30, 2012 amounted to $135.9 million, which is approximately $14.1 million, or 11.6%, higher compared with the same time period ended September 30, 2011 where we had revenue of $121.8 million. This increase was attributable to the increased revenues generated from sales of each of our product segments, as reflected in the following table:

33



   

Nine months ended

             
Category   9/30/2012     9/30/2011     Increase     Increase  
Chestnut   62,947,404     57,238,463     5,708,941     10.0%  
Convenience food   50,913,992     45,100,128     5,813,864     12.9%  
Frozen food   22,069,023     19,479,905     2,589,118     13.3%  
Total   135,930,419     121,818,496     14,111,923     11.6%  

Cost of Revenues. Our cost of revenues, which consists of raw materials, direct labor and manufacturing overhead expenses, was $107.6 million for the nine month period ended September 30, 2012, an increase of $12.5 million or 13.2%, as compared to $95.0 million for the nine month period ended September 30, 2011. Approximately 96.8%, or $12.1 million, of this increase was attributable to an increase in raw material costs, which increased from $86.9 million during the nine months ended September 30, 2011 to $99.0 million, or by approximately 13.9%, during the nine months ended September 30, 2012.

The factors that contributed to the remaining 3.2% increase in cost of revenues were: an increase in wage expense for factory workers, an increase in depreciation expenses for capital equipment and an increase in the cost of consumables used in conjunction with capital equipment.

Gross Profit. Our gross profit increased $1.6 million, or 5.8%, to $28.3 million for the nine months ended September 30, 2012 from $26.8 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 22.0% to 20.9% due to inflation pressure in the Chinese domestic market. Gross profit margins by product segment for the six months ended September 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 $108,747, or 2.2%, to $5.1 million for the nine months ended September 30, 2012 from $5.0 million for the same period in 2011. Selling and marketing expenses increased as we enhanced our efforts to expand our distribution channels in China as well as internationally, and to build the brand recognition for our chestnut and convenience food products.

General and Administrative Expenses. General and administrative expenses decreased $292,946, or 6.3% to $4.4 million for the nine months ended September 30, 2012 from $4.7 million for the same period of 2011. The decrease of general and administrative expenses was primarily attributable to decreased land use expenses and employee benefits.

Interest Expenses. We experienced an increase in interest expenses of approximately $0.9 million from approximately $1.8 million to $2.7 million for the nine months ended September 30, 2012, compared to the same period in 2011. The increase was mainly due to the increase in outstanding balance of our bank loans, which was $49.5 million as of September 30, 2012, compared to $14.8 million as of September 30, 2011.

Income Before Taxation and Minority Interest

Income before taxation and minority interest decreased $430,002 or 2.4% to $17.6 million for the nine months ended September 30, 2012 from $18.0 million for the same period of 2011. The decrease was largely attributable to $2.1 million other income we recognized in the third quarter of 2011 when we sold the land previously carried on our balance sheet as short term investment. Without the effect of the land sale, our earnings before tax and minority interest increased 10.5% to $17.6 million for the nine months ended September 30, 2012 from $15.9 million in the same period of last year.

Income Taxes

Income taxes increased approximately $0.6 million, or 14.0% to $4.6 million for the nine months ended September 30, 2012 from $4.1 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 nine months ended September 30, 2012, as compared to the same period in 2011.

Net Income

Net income decreased $0.6 million, or 4.7% to $12.2 million for the nine months ended September 30, 2012 from $12.8 million for the same period of 2011. The decrease was largely attributable to the $2.1 million other income we recognized in the third quarter of 2011 when we sold the land previously carried on our balance sheet as short term investment. Without the effect of the land sale, our net income increased 9.8% to $12.2 million for the nine months ended September 30, 2012 from $11.1 million in the same period of last year.

Liquidity and Capital Resources

As of September 30, 2012, we had cash and cash equivalents (excluding restricted cash) of $16.7 million. Our cash and cash equivalents decreased by approximately $0.6 million from December 31, 2011, primarily due to increase in inventories, receivables and restricted cash. The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.

34



(in thousands of U.S. dollars)            
    Nine Months Ended  
    September 30,  
    2012     2011  
Net cash provided by (used in) operating activities   (13,124 )   (519 )
Net cash provided by (used in) investing activities   (3,994 )   (2,054 )
Net cash provided by (used in) financing activities   16,409     (3,491 )
Net cash flow (outflow)   (710 )   (6,063 )

Operating Activities

Net cash used in operating activities was $13.1 million for the nine months ended September 30, 2012 and net cash used in operating activities for the nine months ended September 30, 2011 was $518,507. The decrease of approximately $12.6 million in net cash flows provided by operating activities in the nine months ended September 30, 2012 was primarily a result of higher increase in inventories as compared to the same period in 2011.

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 nine months period ended September 30, 2012 was $4.0 million and net cash used in investing activities for the nine months ended September 30, 2011 was $2.1 million. The increase of $1.9 million in net cash flows used in investing activities in the nine months ended September 30, 2012 was primarily a result of $7.5 million proceeds in sale of land investment in the third quarter of 2011, offset by $5.4 million less increase in restricted cash for the nine months period ended September 30, 2012 compared to the same period of last year.

Financing Activities

Net cash provided by financing activities for the nine months period ended September 30, 2012 was $16.4 million, which is an increase of $19.9 million from $3.5 million net cash used in financing activities during the same period in 2011. The increase of the net cash provided by financing activities was primarily a result of increased net bank borrowing and decreased repayment of bank notes in the nine months ended September 30, 2012 compared to the same period in 2011.

Loan Facilities

As of September 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 $49.5 million as of September 30, 2012, compared with $36.0 million as of December 31, 2011. We are also carrying a long term loan from DEG due in March 2016, with original face value of $15 million and eight equal semi-annual principal payments commencing September 2012. The current carrying value of this loan is $13.8 million.

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.

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As of September 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   $  12,801,032  
Luotian Lorain Co., Ltd   PRC     100     4,008,356  
Junan Hongrun Foodstuff Co., Ltd   PRC     100     47,349,264  
Beijing Lorain Co., Ltd   PRC     100     1,582,529  
Shandong Greenpia Foodstuff Co.,Ltd   PRC     100     2,430,764  
Dongguan Lorain Co,,Ltd   PRC     100     158,253  
International Lorain Holding Inc.   Cayman Islands     100     49,246,321  

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.

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 September 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

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 our disclosure controls and procedures as of September 30, 2012. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 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.

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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 September 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.

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

On November 8, 2012, the Company received a summons and a complaint against the Company and each of its directors. A class action lawsuit has been filed against the Company and members of its Board of Directors, in connection with the October 9, 2012 non-binding proposal made by the Company’s Chairman, Chief Executive Officer and President Mr. Si Chen, to acquire all of the outstanding ordinary shares of the Company not owned by Mr. Chen at a proposed price of $1.6 per ordinary share, in cash, subject to certain conditions (the “Proposal”). The lawsuit has been filed by Bruce Paul, a Company stockholder, at the Circuit Court, Racine County, State of Wisconsin, and alleges, among other things, that the board of directors has violated its fiduciary duties in connection with the company's potential going private transaction.  Plaintiffs seek, among other relief, to enjoin defendants from consummating the Proposal.

The Company has reviewed the allegations contained in the complaint and believes they are without merit.  The Company intends to defend the litigation vigorously. At this stage of the proceedings, we cannot predict the outcome of this litigation or whether it will have a material effect on our results of operations, liquidity or capital resources.

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ITEM 1A. RISK FACTORS

Not applicable.

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. REMOVED AND RESERVED

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 Act of 2002.
   
31.2 Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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: November 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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