UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
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[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended: December 31, 2009
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ______________ to
________________
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Commission File Number: 001-34449
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AMERICAN LORAIN CORPORATION
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(Exact name of registrant as specified in
its charter)
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Nevada
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87-0430320
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification Number)
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Beihuan Zhong Road
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Junan County
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Shandong, Peoples Republic of China,
276600
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(Address of principal executive office and zip
code)
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(86) 539-7318818
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(Registrants telephone number, including area
code)
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(Former name, former address and former fiscal year, if changed
since last report)
Securities to be registered pursuant to
Section 12(b) of the Act.
Title of each class to
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Name of each exchange on
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be so registered
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which each class is to be registered
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Common Stock, $0.001 par value
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NYSE Amex LLC
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Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Yes
[ ]
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No [X]
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Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the
Act.
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Yes
[ ]
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No [X]
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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.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
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 the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
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Smaller reporting company [X]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-2 of the Act). Yes [ ] No [X]
The number of shares and aggregate market value of common stock
held by non-affiliates as of the last business day of the registrants most
recently completed second fiscal quarter were 8,820,471and $21,521,959.24
respectively.
There were 30,242,202 shares of common stock outstanding as of
March 22, 2010.
DOCUMENTS INCORPORATED BY REFERENCE:
Information required by Part III will either be included in the
registrants definitive information statement filed with the Securities and
Exchange Commission or in an amendment to this Form 10-K no later than 120 days
after the end of the registrants fiscal year, to the extent required by the
Securities Exchange Act of 1934, as amended.
AMERICAN LORAIN CORPORATION
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FORM 10-K
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For the Fiscal Year Ended December 31, 2009
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TABLE OF CONTENTS
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Part I
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1
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Item 1.
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BUSINESS
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1
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Item 1A.
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RISK FACTORS
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15
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Item 1B.
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UNRESOLVED STAFF COMMENTS
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25
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Item 2.
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PROPERTIES
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25
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Item 3.
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LEGAL PROCEEDINGS
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26
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Item 4.
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
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26
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Part II
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26
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Item 5.
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
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26
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Item 6.
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SELECTED FINANCIAL DATA
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27
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Item 7.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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27
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Item 7A.
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QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
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38
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Item 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY
FINANCIAL DATA
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38
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Item 9.
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CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
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38
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Item 9A
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CONTROLS AND PROCEDURES.
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38
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Item 9B.
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OTHER INFORMATION.
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39
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Part III
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40
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Item 10.
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DIRECTORS, EXECUTIVE OFFICERS
OF AND CORPORATE GOVERNANCE
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40
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Item 11
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EXECUTIVE COMPENSATION
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40
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Item 12.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
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40
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Item 13.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
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40
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Item 14.
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PRINCIPAL ACCOUNTING FEES AND
SERVICES.
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40
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Part IV
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40
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Item 15.
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Exhibits And Financial
Statement Of Schedules
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40
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i
PART I
Item 1.
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BUSINESS
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Conventions
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In this annual report on Form 10-K:
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•
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We, us and our refer to the combined
business of ALN, ILH and their direct and indirect Chinese operating
subsidiaries.
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ALN refers to American Lorain Corporation, a
Nevada corporation (formerly known as Millennium Quest, Inc.).
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ILH refers to International Lorain Holding,
Inc., a Cayman Islands company that is wholly- owned by ALN.
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Junan Hongrun refers to Junan Hongrun
Foodstuff Co., Ltd.
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Luotian Lorain refers to Luotian Green
Foodstuff Co., Ltd.
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•
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Beijing Lorain refers to Beijing Green
Foodstuff Co., Ltd.
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•
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Shandong Lorain refers to Shandong Green
Foodstuff Co., Ltd.
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•
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RMB refers to Renminbi, the legal currency of
China.
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U.S. dollar, $ and US$ refer to the legal
currency of the United States.
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China and PRC refer to the Peoples
Republic of China.
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Overview of Our Business
We are an integrated food manufacturing company with
headquarters in Shandong Province, China. We develop, manufacture and sell the
following types of food products:
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chestnut products,
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convenience foods (including ready-to-cook, or
RTC, foods, ready-to-eat, or RTE, foods and meals ready-to-eat, or MRE);
and
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•
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frozen food products.
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We conduct our production activities in China. Our products are
sold in 26 provinces and administrative regions in China and 42 foreign
countries. We derive most of our revenues from sales in China, Japan and South
Korea. In 2009, our primary strategy was to focus on increasing sales of our
chestnut products in the domestic Chinese market and increasing the number of
domestic sales to third party distributors. Our primary strategy for 2010 is to
expand our brand equity in the Chinese market for our convenience food products.
We are also working to expand our brand recognition in China for our chestnut
products and frozen products. In addition, we are working to expand our
marketing efforts in Asia, 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.
1
Organizational Structure
ALN is a Nevada corporation that was incorporated on February
4, 1986 and was formerly known as Millennium Quest, Inc. Prior to May 3, 2007,
when ALN completed a recapitalization, or reverse merger, with ILH, ALN did not
engage in active business operations other than to search for a potential
acquisition target. Effective November 16, 2009, ALN reincorporated in Nevada
from Delaware.
ALN owns 100% of ILH. ILH wholly owns two Chinese operating
subsidiaries, Luotian Lorain and Junan Hongrun, directly. In addition, together
with Junan Hongrun, ILH wholly owns Beijing Lorain and owns approximately 80% of
Shandong Lorain (Shandong Economic Development Investment Co. Ltd. owns
approximately 20%). We sometimes refer to our four Chinese operating
subsidiaries throughout this annual report on Form 10-K as the Lorain Group
Companies. Below is an organizational chart of ALN, ILH and the Lorain Group
Companies:
Products
Our products are categorized into the following three
segments:
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chestnut products,
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convenience food products, and
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frozen food products.
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2
We produced 230 products in 2009, including 19 new products in
our convenience foods segment. We also discontinued 23 products in 2009,
primarily in our frozen food segment.
Our chestnut products and convenience foods were our main
profit centers in 2009. Our convenience foods segment has been the fastest
growing portion of our business and was one of the main catalysts of our growth
during 2009. Frozen food products accounted for a smaller portion of our
revenues in 2009 as compared with 2008 because we have been more focused on
generating revenues from higher margin chestnut and convenience food products.
Chestnut Products
We believe that we are the largest chestnut processing
manufacturer in China. We have developed brand equity for our chestnut products
in China, Japan and South Korea over the past 10 to 15 years. We produced 52
high value-added processed chestnut products in 2009. In 2008 and 2009, this
segment contributed 62.7% and 60.7% of our total revenues, respectively.
Our best selling products in 2009 included our aerated
open-bottom chestnuts, which are chestnuts packaged with nitrogen; sweetheart
chestnuts, which are sweet preserved chestnuts; chestnuts in syrup, which are
very popular in Japan and South Korea; and golden chestnut kernels. The majority
of our chestnut products are natural and do not contain chemical additives.
The chestnut, in contrast to many other tree nuts, contains
small quantities of oil and is very high in complex carbohydrates. This makes
them useful for a wider food range than other common nuts. Chestnuts are
commonly steamed, boiled, sugar stir-fried, roasted or added into dishes or
desserts as an ingredient.
China is the largest grower of chestnuts, followed by South
Korea and Japan. In recent years, the chestnut production in South Korea and
Japan has declined. This has been attributed to the increasing labor costs and
operational costs incurred in growing chestnuts. Because of the declining
domestic production, South Korean and Japanese customers have grown to rely more
on imported chestnut products. Our strategy is to take advantage of these
trends.
We differentiate our chestnut products based on flavor, size
and method of packaging. For instance, some of our chestnut products that are
sold in Japan are packaged in plastic bags or tin cans, each considered a
different product. Similarly, some of our chestnut products are processed with
hot water or cold water, each considered a different product.
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.
Convenience Foods
Our convenience food products are characterized as follows:
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Ready-to-cook, or RTC, food products,
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Ready-to-eat, or RTE, food products and
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Meals ready-to-eat, or MRE, food products.
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3
These products are intended to meet the current demands of our
customers for safe, wholesome and tasty foods that are easily prepared.
RTCs can be served after a few easy cooking procedures.
Typically, when preparing a RTC, customers need only to heat the food in a
microwave or boil it for several minutes before eating. Our best selling RTCs in
2009 were beef and lamb products.
RTEs can be served without any cooking. Our best selling RTEs
in 2009 were various pickle products. Other RTEs include spiced belt fish,
cherry tomato, spicy pork fillet, pork and egg roll, pears and pineapples.
MREs are meal kits with self-heating devices. Our MREs are used
in both military and civilian uses, such as camping, traveling and other
situations in which a person does not have access to traditional cooking
supplies and equipment, such as a stove or microwave. In 2009 we also introduced
to market new MRE products that are microwaveable and used by people who do not
have time or means to cook or to eat at a restaurant.
We produce various MREs based on Chinese cuisine, the best
sellers of which were our pork with garlic sauce over rice and kungpao chicken
with rice in 2009. Other MREs are based on other styles of food, such as Italian
cuisine. Many of our convenience products are natural and do not contain
chemical additives.
We produced 117 convenience food products in 2009, including 16
new products such as candied bean products and MRE microwaveable rice products.
In 2008 and 2009, this segment contributed 19.4% and 23.6%, respectively, of our
total revenues.
Our convenience foods segment has been the fastest growing
portion of our business and was one of the main catalysts of our growth during
2009. We expect our convenience foods segment to continue to be an important
area of growth for our business in the future.
Frozen Food Products
We produce a variety of frozen foods, including frozen
vegetables, frozen fruits, frozen fish, and frozen meats. We produced 61 frozen
food products in 2009. Our best selling frozen foods in 2009 were frozen
asparagus and frozen corn.
Our frozen food business allows us to mitigate the significant
production seasonality of chestnut products and to increase the utilization rate
of our production capacity. Historically, our frozen food division has been a
significant portion of our business. With the growth of our convenience food
segment, however, revenues and profits from our frozen food products as percentage to
total revenue have decreased. In 2008 and 2009, this segment contributed 17.8%
and 15.7%, respectively, of our total revenues. Gross margins in this segment
are lower than the margins for chestnut products and convenience foods. We
expect that the proportionate contribution of this business segment to our total
revenues will continue to decline.
Our Manufacturing Facilities
General
We currently manufacture our products in five facilities in
China, two of which are located in Junan County, Shandong Province, one in
Luotian County, Hubei Province, one in Miyun County, Beijing City and one leased
facility in Dongguan, Guandong Province. The following table indicates the year
that operations commenced at each of the facilities and the size of the
facilities.
4
Production Lines
We currently manufacture our products using 24 production
lines. Each production line is used to produce between 10 and 50 products. We
currently run three types of product lines:
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Year Operations
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Construction Size
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Facility
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Commenced
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(square meters)
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Junan Hongrun
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2002
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25,665
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Shandong Lorain
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1995
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15,392
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Luotian Lorain
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2003
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9,558
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Beijing Lorain
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2003
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21,000
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Dongguan
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2008
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5,500
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•
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deep-freezing lines, which are used to freeze raw materials for year-round
production and to produce frozen food;
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•
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canning lines, which are used to produce canned products, including
chestnut products; and
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•
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convenience food lines, which are used for producing RTCs, RTEs and MREs,
all of which have nitrogen preservation capacity.
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The production process for our chestnut products initially
involves sorting and cleaning the raw chestnuts purchased during the chestnut
season. We then store the raw chestnuts in our refrigerated storage facilities
throughout the year. Once we obtain a purchase order, we remove the chestnuts
from storage and process them by steaming, decladding and deep-freezing the
chestnuts, depending on the particular product. We then package and ship the
processed chestnuts within one day of production.
The production process of our convenience products generally
involves various steps, including soaking, boiling, coating, drying, deep
freezing, packing, sealing and sterilizing.
The following table shows the number and types of production
lines, the types of products produced and the production capacity at each
facility:
Facilities
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Production Lines
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Product Portfolio
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2010 Capacity
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Shandong Lorain
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1 Deep-freezing line
1 Convenience food line
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Chestnut products,
convenience foods, frozen
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Multi-purpose
production lines with 14,000 tons of production capacity and 3,500 tons of
cold and frozen storage
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Junan Hongrun
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1 Deep-freezing line
3
Convenience food lines
4 Canning lines
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Chestnut products, frozen foods,
beans, bean paste
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Multi-purpose production lines with
44,000 tons of production capacity and 11,400 tons of cold and frozen
storage
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Beijing Lorain
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6 Convenience food
lines
1 Deep-freezing line
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Chestnut products,
frozen foods
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Multi-purpose
production lines with 34,000 tons of production capacity and 4,650 tons of
cold and frozen storage
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Luotian Lorain
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3 Convenience food lines
2
Deep-freezing lines
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Chestnut products, convenience
foods, frozen
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Multi-purpose production lines with
24,000 tons of production capacity and 6,500 tons of cold and frozen
storage
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Dongguan factory
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2 Convenience food
lines
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Convenience food
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Multi-purpose
production lines with 3,000 tons of production capacity and 1,250 tons of
cold and frozen storage
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We allocate our production lines based upon the location of our
facilities to take advantage of efficiencies in the transportation of required
raw materials. For example, Junan Hongrun and Shandong Lorain, which manufacture
primarily chestnut and frozen products, are located in Shandong Province, which
is Chinas largest supplier of fresh products by volume. Shandong Province is
also a major chestnut producing region. Likewise, all of our fish products are
manufactured by Luotian Lorain, because the Luotian region is an area that has
an abundance of the fish that we use as raw material.
Our production lines and facilities have all been designed to
meet the standards and requirements of our largest customers in Japan, which is
our largest export market. We employ advanced methods of quality control and have obtained various certifications for many of
our products, packages and processes, including ISO 9000 or ISO 9001
certification for certain of our chestnut and frozen vegetable products, BRC
certification for certain of our frozen fruit and vegetable products and HACCP
certification for certain of our frozen vegetable, fruit and chestnut products
and our bottom-open chestnuts. We believe that our quality controls and
standards of products distinguish our products both in domestic and
international markets. The import approvals that we have obtained from the
Japanese government for our chestnuts and other convenience foods have been
helpful in advocating with the Chinese government for domestic approvals to
increase our product offerings.
5
With limited exception, we operate our production lines year
round. In the past, when our production was focused almost exclusively on
chestnuts, we experienced seasonal underutilization of our product lines.
However, our current facilities have a multiple-function design, allowing us to
use our production lines for our convenience and frozen products when we are not
producing chestnuts at full capacity. Consequently, as we have increased our
processed and convenience food offerings over the last several years, we have
generally been able to run our production lines at close to full capacity
throughout the year.
Previously, most of our processed and convenience foods were
produced at our Beijing Lorain plant. With the introduction of bean products in
2009, we expanded our facility in Junan Hongrun with the addition of three
convenience food production lines designed specifically for bean products. This
will increase production capacity for beans by approximately 28,000 metric tons
per year. The new production lines started full operation in February 2010.
We believe our facilities are adequate for our current levels
of production. We anticipate, however, that we will require additional
facilities and/or product lines as our business grows. We are exploring the
possibility of alliances with one or more OEM partners for the production, in
the short-term, of some of our frozen products should our facilities be
inadequate to meet increasing demand. We are also reaching exploring
the possibility of leasing additional production lines to expand our production
capacity. In 2008, we leased two new convenience foods production lines in Dongguan, Guangdong Province, which increased production capacity by
approximately 1,250 metric tons per year to meet our short-term needs. Given the
relatively low cost to lease, we may continue to lease additional facilities in
2010, if needed. In the long-term, we plan to increase our own production
capacity by acquiring or building new facilities, subject to the availability of
adequate sources of funding.
Storage Capacity
Storage of our raw materials and inventory is a critical
element of our business. Our raw materials and partially finished products need
to be preserved in frozen storages (-18ºC to -20ºC) or constant temperature
storages (-5ºC to 5ºC). Storage is particularly critical for our chestnut
products because chestnuts are a seasonal fruit.
The following table illustrates on a facility by facility basis
the type and capacity of our storage resources:
Facility
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Storage Type
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Number of
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Capacity
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Storage Units
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(metric tons)
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Junan Hongrun
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Frozen Storage
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13
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6,600
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Constant Temperature
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8
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4,800
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Shandong Lorain
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Frozen Storage
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5
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2,000
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Constant Temperature
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3
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1,500
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Luotian Lorain
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Frozen Storage
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8
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4,500
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Constant Temperature
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4
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2,000
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Beijing Lorain
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Frozen Storage
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6
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2,850
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Constant Temperature
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3
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1,800
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Dongguan
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Frozen Storage
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2
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800
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Constant Temperature
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1
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450
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TOTAL
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53
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27,300
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6
As we have expanded our production capacity, we have also
expanded our storage capacity. All of our storage facilities, other than the
facility in Dongguan, are owned by us. In 2009, we expanded our storage capacity
in Junan Hongrun by an additional 3,600 metric tons.
Agricultural Operations
We grow and self-supply a small portion of our chestnut, fruit
and vegetable products. We self-supplied approximately 4% and less than 1% of
our raw materials needed in 2008 and 2009, respectively (See Raw Materials
below). We believe, however, that development of agricultural facilities is a
good strategy for the long-term. We anticipate that self grown agricultural
products will enable us to assure adequacy of supply, promote quality and reduce
cost, particularly for our high margin offerings. For example, by growing Korean
cultivar chestnuts domestically, we expect to significantly reduce our supply
costs for this premium product, while ensuring superior quality.
Lands in which we grow our agricultural products for such
products are shown in the following table.
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Area
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Location
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Harvest
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(acres)
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(PRC)
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Chestnut (South Korean, Japanese,
Australian cultivar)
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329
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Shandong
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Chestnut (Japanese cultivar)
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165
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Beijing
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Sticky Corn
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342
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Beijing
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Green Pea & Sweet Corn
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165
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Beijing
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Pumpkin
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197
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Heilongjiang
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Organic Chestnut
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165
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Beijing
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Mixed Vegetables
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650
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Hebei
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Japanese Pumpkin
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329
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Inner Mongolia
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Strawberry
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392
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|
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Shandong
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Broccoli
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165
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Beijing
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Green Asparagus
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591
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|
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Beijing
|
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White Asparagus
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263
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|
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Shandong
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Peach
|
|
329
|
|
|
Beijing
|
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Apricot
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|
411
|
|
|
Beijing
|
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Pear
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329
|
|
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Beijing
|
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Blackberry
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165
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Beijing
|
|
We began growing chestnuts in 2003. Unlike most vegetables and
fruits, chestnut trees have a 3-5 year growing phase before they can be
harvested. Our current chestnut planting base has been self-supplying some
chestnuts to our production since 2007. By 2010, our current chestnut
agricultural operations are projected to harvest approximately 700 metric tons
of high-end chestnuts based on the number of trees currently planted and our
planned expansion.
7
We began growing strawberries in 2008 in Shandong and peach,
apricot, pear and blackberry in 2009 in Beijing. We use these fruits in some of
our frozen fruit products. We plan to continue to expand our agricultural
operations over the next few years. Among other things, we plan to increase our
self-production in China of Korean cultivar chestnuts. We expect to obtain
funding for this expansion through a combination of commercial and government
loans, including loans under Chinese government programs to promote agricultural
industrialization. There is no assurance, however, that adequate funding for
these purposes will be available to us.
Raw Materials
In 2008 and 2009, approximately 94% of our raw materials
consisted of agricultural products, including primarily chestnuts and
vegetables, approximately 4% and 3%, respectively, consisted of packaging
materials and approximately 2% and 3%, respectively, consisted of condiments
such as sugar, salt and flour.
Our Supply Sources
Our business depends on obtaining a reliable supply of various
agricultural products, including chestnuts, vegetables, red meat, fish, eggs,
rice and flour. Because of the diversity of available sources of these raw
materials, we believe that our raw materials are currently in adequate supply
and will continue to be so in the future.
We obtain our agricultural raw materials from three sources:
domestic procurement (excluding self-supply), overseas markets, and self-supply.
Domestic procurement accounted for 93.8% and 97% of our total raw material costs
in 2008 and 2009, overseas procurement accounted for 3.2% and 2% and self-supply
accounted for the remaining 4% and 1%, respectively.
In 2008 and 2009, respectively, we procured approximately
55,643 and 69,364 metric tons of chestnuts and approximately 28,773 and 48,380
metric tons of vegetables and other raw materials from a number of third party
suppliers, domestic and overseas, and produced approximately 693 and 49 metric
tons of chestnuts from our own agricultural operations.
We select suppliers based on price and product quality. We
typically rely on numerous domestic and international suppliers, including some
with whom we have a long-term relationship. Our top 10 suppliers accounted for
21.3% and 29.3%, respectively, of the total procurement in 2009 and 2008 in
value terms. We purchase from suppliers and farmers pursuant to supply contracts
and underlying purchase orders. We have not entered into any long-term contracts
with any of our suppliers.
Our suppliers generally include wholesale agricultural product
companies, agricultural associations and distributors. Some raw materials must
be imported at higher costs, however. Occasionally, we also work directly with
farmers. For instance, we operate an initiative which involves a series of
cooperation and lease agreements between Shandong Lorain, Beijing Lorain and
local farmers. This initiative involves approximately 1,000 acres of land which
is used primarily to produce Japanese and Korean style chestnuts, sticky corn
and pumpkins for our operations.
Procurement Cost and Quality Control
To control procurement costs, we have located our facilities
near domestic sources of agricultural raw materials. For example, Junan Hongrun
and Shandong Lorain are located in Shandong Province, which is Chinas largest
supplier of fresh products by volume. Shandong Province is also a major chestnut producing region. Likewise, all of our fish products are
manufactured by Luotian Lorain, because the Luotian region is an area that has
an abundance of the fish that we use as raw material. Local procurement reduces
our costs, especially transportation costs. It also gives us first-hand harvest
and market information, which provides us with an advantage in price
negotiations with suppliers.
8
Some raw materials must be imported at higher cost. As
discussed, we have begun to develop our agricultural capabilities in order to
control costs, particularly with respect to imported raw materials such as
Korean-style chestnuts.
Pricing for agricultural products reflects several external
factors, such as weather conditions and commodity market fluctuations, which are
beyond our control. We obtain contemporaneous information on local harvests and
collect daily reported price information on harvests in other markets from which
we procure our products. We also attempt to predict harvest yields in advance
based on our information gathering. We use this harvest information to negotiate
best pricing with our suppliers.
We impose strict standards on our suppliers. During the harvest
season, our internal procurement function may visit our sources of supply to
assure that the products we are purchasing comply with our standards.
Our Customers
We sell our products in 26 provinces and administrative regions
in China and 42 foreign countries globally. In 2008 and 2009, approximately 67%
and 70.5%, respectively, of our sales were made domestically and approximately
33% and 29.5%, respectively, were to international customers, primarily Japan
and South Korea.
Our top ten customers contributed 29.3% and 26.2% of our total
revenues in 2008 and 2009. Approximately 12% and 6.1% of total revenue in 2008,
and 11.2% and 2.7% of total revenues in 2009 were attributable to revenues from
Shandong Lvan Import & Export Co., Ltd., a food trading company in China
that distributes a significant portion of our exported products, and Shinsei
Foods, a Japanese company and our top customer, respectively.
Domestic
In China, we sell our products through our own sales team and
through third-party distributors. We have 36 sales offices in 26 provinces in
China. In 2008 and 2009, we sold approximately 87% and 82%, respectively, of our
products directly to our Chinese customers and approximately 13% and 18% through
third-party distributors.
We sell our products in all first-tier cities in China,
including Beijing, Shanghai, Tianjin and Guangzhou, through our own sales
efforts in order to capture the profit margin that would otherwise go to
intermediate wholesalers and to enhance our brand recognition. Our sales team
sells our products directly to supermarket chains, mass merchandisers, large
wholesalers and others in these markets. In second-tier and third-tier cities,
we currently sell our products to third-party distributors, such as food
companies or trading companies with established distribution channels in such
regions, rather than through our own sales team, in order to enable us to
penetrate such markets more quickly without spending significant capital. We
also sell to small customers through independent sales representatives.
Generally, our direct sales customers are required to pay us on
30 to 60 day credit terms. Third-party distributors, however, generally do not
pay on credit, allowing us to obtain quicker payment terms and thereby decrease
our accounts receivables.
9
The terms of a typical sales contract between us and our
distributors provide that we are responsible for transportation costs and the
distributors are responsible for storage costs. Furthermore, the distributors
have the right to return products that fail to satisfy specified quality
standards, at our cost. The majority of such contracts require the distributors
to pay us in cash in full upon delivery, and the remaining contracts provide for
short-term credit, usually two to three weeks. In addition, we typically offer
distributors performance-based incentives, such as a cash bonus equal to 1% of
total revenues generated by such distributor which exceed previously established
sales targets.
We plan to gradually increase the portion of sales to third
party distributors in order to access new markets in China in a cost effective
manner and to improve our cash position. Such plans are subject to our
ability to restructure the sales force and manage the increased number of
distributors without compromising our profit margins.
International
Our export sales destinations include:
•
|
Asia, primarily Japan, South
Korea and Malaysia, but also Singapore and Taiwan.
|
•
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Europe, primarily Belgium and the
United Kingdom, but also France, Germany, the Netherlands, Spain, and
Sweden;
|
•
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the Middle East, primarily Saudi
Arabia, Kuwait and the United Arab Emirates; and
|
•
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North America, including the
United States and Canada.
|
In 2008 and 2009, respectively, approximately 93.5% and 79.7%
of our international sales were in Asia and approximately 6% and 14.7% were in
Europe.
We sell our products to international markets through Shandong
Lvan, a food trading company in China, other export companies in China, and our
own sales team located in China. Our sales team sells directly to wholesalers,
food processors and mass merchandisers. Many of our customers are well known in
their local food market. We have established long-term relationships with many
international customers, especially in Japan and South Korea. We currently have
no sales offices outside of China and do not use alternative methods to sell our
products outside of China. We attend trade shows in Europe and other
international markets in order to promote our products.
Prior to our reorganization into a U.S. entity, we had sales to
several countries that are the subject of trade sanctions imposed by the United
States government. Following our reorganization, we ceased all sales activities
to these countries. We actively review the destination countries for our
products, including products resold by our customers, to assure that we are not
in violation of applicable U.S. trade sanctions.
Our Sales and Marketing Efforts
We seek to expand our customer base by:
•
|
direct sales communications with our larger
customers;
|
•
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sales through distributors to new customer
bases;
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•
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referrals from existing customers; and
|
•
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participation in domestic and international
food exhibitions and trade conferences.
|
We have not spent a significant amount of capital on
advertising in the past, and our advertising budget continues to be limited. In
October 2009 we raised approximately $12 million in a private placement
transaction in the U.S. Part of the funds raised were used on marketing and branding efforts, including supermarket advertising, internet advertising and contract with a local celebrity to promote certain convenience food products. As more capital
becomes available for these purposes, we intend to increase our advertising and branding efforts. For the near future, our marketing efforts will continue to focus primarily on the domestic Chinese market for our chestnut and convenience food
products.
10
Competition and Market Position
The overall food market is diverse, both globally and in China. We do not have a significant market share in any of our business segments.
Chestnut Products
We compete in the chestnut market primarily on the basis of the uniqueness of our products, quality, price and brand recognition. We also utilize our proprietary, patented and patent-pending technology in the production of our chestnut products to
our competitive advantage.
The world market for chestnut products is highly fragmented. Our principal competitors in the chestnut product market are currently Hebei Liyun, a Chinese company, and Foodwell Corporation, a South Korean company.
Convenience Food Products
Convenience food products market competition is based mostly upon quality and product variety. We attempt to use our modern food processing technology, such as nitrogen preservation, to produce a wide variety of high quality convenience foods.
The convenience food market in China is highly fragmented and we do not face competitive pressure from any particular competitor or small group of competitors.
Frozen Food Products
In the frozen food product market, competition is based primarily upon quality, ability to provide a reliable product supply and customer relationships.
Our strongest competitors in the frozen food products market are currently Weitang Langdong, Yuyao Hongji Food Co. Ltd. and Yantai Pengshun Food Co. Ltd., all of which are located in China.
Competitive Advantages
We believe that we enjoy a number of competitive advantages, both domestically and internationally.
We have developed brand equity for our chestnut products in China, Japan and South Korea over the past 10 to 15 years. Our customers are willing to pay a premium for some of our chestnut products because of our brand equity. In addition, we believe
that we have a strong distribution channel for our products in the markets in which we currently operate.
We believe that we are able to provide our customers with greater selection and a more reliable supply than many of our competitors, which is especially important for our supermarket chain and large wholesaler customers. We produced 52 chestnut
products in 2009. We believe that we are the sole provider of certain bottom-open chestnut and sweetheart chestnut products in China.
Labor is a large portion of total operating costs for food companies. We believe that we have a lower labor cost structure and a more abundant labor supply than many of our international competitors.
11
We are focused on managing our costs in other ways as well. We
seek to locate our production facilities in close proximity to our main domestic
sources of raw materials supply to reduce transportation costs and give us
first-hand knowledge of market factors affecting our cost of raw material
supply. Our agricultural self-supply program, while modest at present, is
expected to grow and to become a significant element of our cost containment
efforts.
We use modern food processing technology and innovation in our
formulations and manufacturing processes to create high quality products.
Nitrogen preservation in particular, used in the production of convenience
foods, is an innovative technology which has not been widely applied in China.
In 2008, we submitted an application for patent protection in
the PRC for two of our technologies which support the production of our chestnut
and convenience food products. These applications are still pending approval.
(See Intellectual Property below.) We believe that our technology gives us an
advantage over our Chinese competitors, allowing us to produce chestnut and
convenience food products that are superior in quality and to offer more
products varieties.
We believe that our reputation for quality also contributes to
our competitiveness. We maintain high food safety standards, in order to satisfy
both domestic and international requirements. We regularly test our products for
quality and compliance with standards.
Intellectual Property
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|
|
|
|
|
Trademarks
|
|
|
|
|
|
We use the trademarks
TM
and
TM
on all of our products sold in
China.
|
Patents
We have developed the following three proprietary technologies
to support our chestnut and convenience food production:
•
|
The sweetheart chestnut is a premium product
that is more expensive, and yields greater profit margins than our other
chestnut products. Our proprietary technology relates to the process for
evenly distributing throughout the chestnuts the syrup used to preserve
the chestnuts. This technology enhances the texture of the chestnuts,
preserves the natural form of the chestnuts and promotes the stability and
uniformity of the chestnuts sweetness. In 2008, our patent application
for this technology was approved by the State Intellectual Property Office
of the PRC and is protected by PRC patent law for 20 years. We expect this
technology to contribute to the growth of our sales of sweetheart
chestnuts, which had been increasing at an annual rate of 25% over the
past several years and which increased at an annual rate of 32% in 2009.
|
|
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•
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Oden is a popular traditional Japanese dish,
typically consisting of boiled eggs, daikon radish, konnyaku and processed
fish cakes stewed in a light, soy-flavored dashi broth. Our technology
relates to the process used to control the sterilization of the packaging
for oden eggs. Our technology enables us to deliver convenience food
products with unique freshness and authentic taste. This technology has
been an important factor in expanding the market for our convenience foods
products, particularly in Japan. We are currently waiting for approval for
patent protection in the PRC for this technology.
|
|
|
•
|
We have developed technology that allows us to produce an extract from the
chestnuts inner skin. In the past, the chestnuts inner skin had been
discarded as a waste product. Our technology allows us to produce an extract
that can then be sold to other food processors, all of whom are currently
based in Japan where the chestnut is popular as a nutritional supplement.
These processors package and sell the extract for use as a food and drink
additive. We are currently waiting for approval for patent protection in the
PRC for this technology.
|
12
We take reasonable steps to protect our proprietary information
and trade secrets, such as limiting disclosure of proprietary plans, methods and
the like on a need-to-know basis and requiring employees with access to our
proprietary technology to enter into confidentiality arrangements. We believe
that our proprietary technology and trade secrets are adequately protected.
Our Employees
As of December 31, 2009, we had a total of 1,544 full-time
employees and 287 part-time employees. 427 of our full-time employees are
directly employed by our Shandong Lorain subsidiary and the remainder are
employed by Linyi Zhifu Labor Service Company, an outside company that leases
employees to us to meet our staffing needs. As required by Chinese law, all
employees are party to a written employment contract. We compensate the
employees leased from Linyi Zhifu directly and pay Linyi Zhifu a service fee.
Linyi Zhifu is responsible for the pension and social insurance benefits of the
leased employees, as described below.
The following table sets forth the allocation of employees,
both direct and leased, by job function.
Department
|
|
Number of Employees
|
|
|
|
|
|
Production
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|
1323
|
|
Quality Control
|
|
34
|
|
Domestic Sales
|
|
35
|
|
Human Resources
|
|
5
|
|
Research and Development
|
|
28
|
|
International Sales
|
|
23
|
|
Finance
|
|
24
|
|
Sourcing
|
|
18
|
|
Administration
|
|
29
|
|
Strategic planning
|
|
6
|
|
Storage and Distribution
|
|
16
|
|
Employee Relations
|
|
3
|
|
Total
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|
1544
|
|
We believe that the relationship between management and our
employees is good. We have not experienced any significant problems or
disruption to our operations due to labor disputes, nor have we experienced any
difficulties in recruitment and retention of experienced staff.
13
Our Shandong Lorain subsidiary has an employee relations
department for the purpose of advancing employee welfare, encouraging employee
participation in decision making and enhancing relations among employees and
between employees and our management team.
We compensate our production line employees by unit produced
(piece work) and compensate other employees with a base salary and bonus based
on performance. We also provide training for our staff from time to time to
enhance their technical and product knowledge, including knowledge of industry
quality standards.
Our employees in China participate in a state pension scheme
organized by Chinese municipal and provincial governments. We were required to
contribute to the scheme on behalf of our direct employees at a rate of 24% of
the average monthly salary for the years ended December 31, 2009 and 2008. In
addition, we are required by Chinese law to cover our employees with various
types of social insurance. We made contributions to the social insurance scheme
on behalf of our direct employees at a rate of 4% of the average monthly salary
for each employee for the years ended December 31, 2009, 2008, and 2007. As
indicated above, Linyi Zhifu is responsible for contributions on behalf of the
leased employees.
Our Research and Development Activities
Our research and development efforts are focused on three
objectives:
-
Superior product safety and quality;
-
Reduction of operating costs; and
-
Sustaining growth through the development of new products.
We have research and development staff at each of our
facilities. In total, 28 employees are dedicated to research and development.
We rely heavily on customer feedback to assist us in the
modification and development of our products. We also utilize customer feedback
to assist us in the development of new products. Over the past several years, on
average, we added 10 to 20 new varieties to our product portfolio each year. In
2009, we added 19 new products, most in our convenience foods segment. In 2009,
we discontinued 23 products, 12 of which were new rice products introduced in
2009 to test the market and the rest of which were primarily in our frozen foods
segment.
The amount we spent on research and development activities
during the years ended December 31, 2009 and 2008 was not a material portion of
our total expenses for those years.
Government Regulation
As a manufacturer and distributor of food products, we are
subject to regulations of Chinas Agricultural Ministry. This regulatory scheme
governs the manufacture (including composition and ingredients), labeling,
packaging and safety of food. It also regulates manufacturing practices,
including quality assurance programs, for foods through its current goods
manufacturing practices regulations, and specifies the standards of identity for
certain foods, including the products sold by us, and prescribes the format and
content of many of the products sold by us, prescribes the format and content of
certain nutritional information required to appear on food products labels and
approves and regulates claims of health benefits of food products.
We have obtained approvals from Chinese authorities for the
production of certain categories of products, including chestnuts, frozen
vegetables and fruits, fish, and canned products. Production of new products
that do not fall into approved categories of products would require separate
approval from the appropriate Chinese authorities. We have consistently obtained
such approvals for our newly developed products in the past and do not
anticipate any difficulties in obtaining new approvals in the future if
needed.
14
In addition, we are required to obtain governmental approval,
and to register with the State Administration for Industry and Commerce, in
order to open a new facility in China. We have consistently obtained such
approvals, and made such registrations, for our new facilities in the past and
do not anticipate any difficulties in obtaining new approvals, filing new
registrations, in the future if needed.
Under the relevant Provisions of the PRC on Sanitation of Food
for Export (for Trial Implementation), unless an exporters products are
exempted from inspection, products must be inspected in accordance with the Law
of the PRC on Import and Export Commodity Inspection. We have not been exempted
from inspection. In the past, we were authorized by the relevant authorities to
conduct self-inspection of certain of our export products. However, currently,
the relevant authorities have imposed tighter food safety control in China, and
as a result, all of our exported food products must be inspected by qualifying
government agencies. We believe that all of our exported products are currently
in compliance with such requirements and we do not anticipate any difficulties
in complying with such rules in the future.
In addition, we are required to obtain a license from the local
branch of the Entry-Exit Inspection and Quarantine Bureau of China for our
exported products. We have consistently obtained such licenses in the past and
we do not anticipate any difficulties in obtaining such licenses in the future.
RISK FACTORS
From time to time, information provided by us, including but
not limited to statements in this report, or other statements made by or on our
behalf, may contain forward-looking information within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements involve a
number of risks, uncertainties, and contingencies, many of which are beyond our
control, which may cause actual results, performance, or achievements to differ
materially from those anticipated. Set forth below are important factors that
could cause our results, performance, or achievements to differ materially from
those in any forward-looking statements made by us or on our behalf.
Business Risks
We may not be able to obtain an adequate supply of high
quality raw materials.
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 2009, the cost of our raw
materials increased from $64,980,230 to $81,501,168 for an increase of
approximately 25.4% . 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.
15
The prices that we have paid for our raw materials recently have experienced significant fluctuation. If these price fluctuations continue, our profit margins may be materially adversely affected.
The average price that we paid for chestnuts in 2008 and 2009 was approximately $727 per metric ton and $868 per metric ton, respectively, excluding value added taxes. We do not currently hedge against changes in our raw material prices.
Consequently, if the costs of our raw materials increase further, and we are unable to offset these increases by raising the prices of our products, our profit margins and financial condition could be adversely affected.
Our sales and reputation may be affected by product liability claims, litigation or, product recalls in relation to our products.
The sale of products for human consumption involves an inherent risk of injury to consumers. We face risks associated with product liability claims, litigation, or product recalls, if our products cause injury or become adulterated or misbranded.
Our products are subject to product tampering and contamination, such as mold, bacteria, insects, shell fragments and off-flavor contamination, during any of the procurement, production, transportation and storage processes. If any of our products
were to be tampered with, or become tainted in any of these respects, and we were unable to detect this, our products could be subject to product liability claims or product recalls. Our ability to sell products could be reduced if certain
pesticides, herbicides or other chemicals used by growers have left harmful residues on portions of our raw materials or if our raw materials have been contaminated by other agents.
We have never had a product recall in the past but we have experienced product liability claims that were made by our customers. The amounts of such claims were immaterial. However, claims of product defect or product liability for material amounts,
individually or in the aggregate, may be made in the future.
We have not procured a product liability or general liability insurance policy for our business, as the insurance industry in China is still in an early stage of development. To the extent that we suffer a loss of a type which would normally be
covered by product liability or general liability insurance in the United States, we would incur significant expenses in defending any action against us and in paying any claims that result from a settlement or judgment against us. Product liability
claims and product recalls could have a material adverse effect on the demand for our products and on our business goodwill and reputation. Adverse publicity could result in a loss of consumer confidence in our products.
We may be unable to manage future rapid growth.
We have grown rapidly over the last few years. Our sales increased by 429% from $27,735,833 in 2004 to $146,772,442 in 2009. The number of product types we sold increased from approximately 100 in 2004 to approximately 230 in 2009. We intend
to continue to expand the volume and variety of products we offer, as well as the geographical scope of our sales and production facilities. Our business growth could place a significant strain on our managerial, operational and financial resources.
Our ability to manage future growth will depend on our ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage our workforce. Our personnel,
systems, procedures and controls may not be adequate to support our future growth. Failure to effectively manage our expansion may lead to increased costs, a decline in sales and reduced profitability.
Our expansion strategy may not prove successful and could adversely affect our existing business.
Our growth strategy includes the expansion of our manufacturing operations, including new production lines and agricultural operations. We plan to expand our sales in China and internationally. We will need to engage in various forms of promotional
and marketing activities in order to further develop the branding of our products and to increase our market share in new and existing markets. The
implementation of this strategy may involve large transactions and present financial, managerial and operational challenges. We could also experience financial or other setbacks if any of our growth strategies incur problems of which we are not
presently aware. If we fail to generate sufficient sales in new markets or increase our sales in existing markets, we may not be able to recover the production, distribution, promotional and marketing expenses, as well as administrative costs we
have incurred in developing such markets.
16
The acquisition of other businesses could pose risks to our profitability.
We may try to grow through acquisitions in the future. Any proposed acquisition could result in accounting charges, potentially dilutive issuances of equity securities, and increased debt and contingent liabilities, any of which could have a
material adverse effect on our existing business and the market price of our common stock. Acquisitions, in general, entail many risks, including risks relating to the failed integration of the acquired operations, diversion of managements
attention, and the potential loss of key employees of the acquired organizations. We may be unable to successfully integrate businesses or the personnel of any business that might be acquired in the future, and our failure to do so could have a
material adverse effect on our business and on the market price of our common stock.
We are subject to risks of doing business internationally. If the international market does not grow as we expect, our business and financial condition may be adversely affected.
We conduct a substantial amount of business internationally. Our export sales destinations include countries in Asia, Europe, the Middle East and North America. Our international operations are subject to a number of inherent risks, including:
-
chestnut products may not be widely recognized internationally, especially in Western countries;
-
local economic and political conditions, including disruptions in trading markets;
-
restrictive foreign governmental actions, including restrictions on transfers of funds and trade;
-
protection measures, including export duties and quotas and customs tariffs;
-
currency exchange rate fluctuations;
-
earthquakes, tsunamis, floods or other major disasters may limit the imported food products; and
-
unexpected incidents related to food safety.
Any of the foregoing risks could have a material and adverse effect on our operating results.
A significant amount of our revenues is dependent on a limited number of customers and the loss of any one of our major customers could materially and adversely affect our growth and our revenues.
A significant portion of our revenues has historically been derived from a limited number of customers, particularly in our chestnut products segment. Sales to our five largest customers accounted for approximately 25% and 21% of our total revenues
in 2008 and 2009 respectively. The loss of any one of these customers, or a material decrease in purchases by any one of these customers, could adversely impact our revenues.
We rely primarily on distributors to sell our products. Any delays in delivery or poor handling by our distributors or third-party transport operators may affect our sales and damage our reputation.
In 2009, we sold our products through over 30 distribution service providers. The services provided could be suspended and could cause interruption to the supply of our products to domestic or overseas
customers. Delivery disruptions may occur for various reasons beyond our control, including poor handling by service providers or third party transport operators, transportation bottlenecks, natural disasters and labor strikes, and could lead to
delayed, damaged or lost deliveries. If our products are not delivered in a timely manner, our reputation could be harmed. If our products are damaged in the process of being delivered, we may be liable to pay for such damages incurred.
17
Failure of the market to accept our new products, or failure to obtain regulatory approval for our new products, may cause us to lose our competitive position in the food industry.
We introduced 52 new products in 2008 and 19 new products in 2009. We plan to introduce approximately 15 to 25 new products in 2010. The success of the new products we introduce depends on our ability to anticipate the tastes and dietary habits of
consumers and to offer products that appeal to their preferences. We intend to introduce new products as well as alternative flavors, sizes and packaging for our existing products. We may not be able to gain market acceptance for our new products.
Consumer preferences change, and any new products that we introduce may fail to meet the particular tastes or requirements of consumers, or may be unable to replace their existing preferences. Our failure to anticipate, identify or react to these
particular tastes or changes could result in reduced demand for our products, which could in turn cause us to be unable to recover our development, production and marketing costs.
We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our research and development, operations and revenue.
The Lorain Group Companies were founded in 1995 by Si Chen, our Chairman and Chief Executive Officer. Mr. Chen, together with other senior management, has been a key driver of our strategy and has been fundamental to our achievements to date. The
successful management of our business is, to a considerable extent, dependent on the services of Mr. Chen and other senior management. We compete for qualified personnel with other food processing companies, food retailers and research institutions.
Consequently, we may either lose key employees to our competitors or we may need to significantly increase the compensation of such employees in order to retain them. The loss of the services of any key management employee or failure to recruit a
suitable or comparable replacement could have a significant impact upon our ability to manage our business effectively, and our business and future growth may be adversely affected.
We face increasing competition from domestic and foreign companies.
The food industry in China is fragmented. Our ability to compete against other national and international enterprises is, to a significant extent, dependent on our ability to distinguish our products from those of our competitors by providing large
volumes of high quality products that appeal to consumers tastes and preferences at reasonable prices. Some of our competitors have been in business longer than we have and are more established. Our competitors may provide products comparable
or superior to those we provide or adapt more quickly than we do to evolving industry trends or changing market requirements. Increased competition may result in price reductions, higher raw materials prices, reduced margins and loss of market
share, any of which could materially adversely affect our profit margins.
An increase in the cost of energy could affect our profitability.
Recently, we have experienced significant increases in energy costs, and energy costs could continue to rise, which would result in higher distribution, freight and other operating costs. Our future operating expenses and margins will be dependent
on our ability to manage the impact of cost increases.
18
Our products are subject to counterfeiting or imitation, which could impact our reputation.
To date, we have experienced limited counterfeiting and imitation of our products. However, counterfeiting or imitation of our products may occur in the future and we may not be able to detect it and deal with it effectively. Any occurrence of
counterfeiting or imitation could impact negatively upon our reputation, particularly if the counterfeit or imitation products cause sickness, or injury to consumers. In addition, counterfeit or imitation products could result in our need to incur
costs with respect to the detection or prosecution of such activities.
We rely on an outside contractor to provide a majority of our labor.
We have hired Linyi Zhifu Labor Service Company to provide employees to our production facilities. Should Linyi Zhifu Labor Service Company be unable to continue to provide the number of employees we need, our production could be disrupted. In
addition, Linyi Zhifu Labor Service Company could raise their service fees or terminate their relationship with us in the future, which may result in increased production costs.
Regulatory Risks
We are subject to extensive regulations by the Chinese government.
The food industry is subject to extensive regulations by Chinese government agencies. Among other things, these regulations govern the manufacturing, importation, processing, packaging, storage, exportation, distribution and labeling of our
products. New or amended statutes and regulations, increased production at our existing facilities, and our expansion into new operations and jurisdictions may require us to obtain new licenses and permits and could require us to change our methods
of operations at costs that could be substantial.
Our failure to comply with PRC environmental laws may require us to incur significant costs.
We carry on our business in an industry that is subject to PRC environmental protection laws and regulations. These laws and regulations require enterprises engaged in manufacturing and construction that may cause environmental waste to adopt
effective measures to control such waste. In addition, such enterprises are required to pay fines, or to cease operations entirely under extreme circumstances, should they discharge waste substances. The Chinese government may also change the
existing laws or regulations or impose additional or stricter laws or regulations, compliance with which may cause us to incur significant capital expenditures, which we may be unable to pass on to our customers through higher prices for our
products.
Our failure to comply with PRC hygiene laws may require us to incur significant costs.
Manufacturers in the Chinese food industry are subject to compliance with PRC food hygiene laws and regulations. These food hygiene laws require all enterprises engaged in the production of chestnuts and various vegetables and fruits to obtain a
hygiene license for each of their production facilities. Such laws also require manufacturers to comply with regulations with respect to food, food additives, packaging, and food production sites, facilities and equipment. Failure to comply with PRC
food hygiene laws may result in fines, suspension of operations, loss of hygiene licenses and, in more extreme cases, criminal proceedings against an enterprise and its management. The Chinese government may also change the existing laws or
regulations or impose additional or stricter laws or regulations, compliance with which may cause us to incur significant capital expenditures, which we may be unable to pass on to our customers through higher prices for our products.
19
Financial Risks
Our operations are cash intensive, and our business could be adversely affected if we fail to maintain sufficient levels of working capital.
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, do not allow us to pay on
credit. However, some of the suppliers with whom we have a long-standing business relationship allow us to pay on credit. In 2009, we paid for approximately 48% of our raw materials on credit. We fund the majority of our working capital requirements
out of cash flow generated from operations. If we fail to generate sufficient sales, or if our suppliers stop offering us credit terms, we may not have sufficient liquidity to fund our operating costs and our business could be adversely
affected.
We also fund approximately 37% of our working capital requirements from the proceeds of short-term loans from Chinese banks. We expect to continue to do so in the future. Such loans are generally secured by our fixed assets, receivables and/or
guarantees by third parties. Our average loan balance from short-term bank loans in 2009 was approximately $32.7 million. The term of almost all such loans is one year or less. Historically, we have rolled over such loans on an annual basis.
However, we may not have sufficient funds available to pay all of our borrowings upon maturity. Failure to roll over our short-term borrowings at maturity or to service our debt could result in the imposition of penalties, including increases in
rates of interest, legal actions against us by our creditors, or even insolvency. In addition, in 2007, 2008 and 2009, we funded approximately $8.8 million, in the aggregate, of our working capital requirements from the proceeds of two private
placement transactions conducted in May 2007 and October 2009. 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.
Management anticipates 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 through 2010. However, if available liquidity is not
sufficient to meet our operating and loan obligations as they come due, our plans include considering pursuing 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 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 current economic and financial crisis may have a material adverse effect on our results.
The crisis of the financial and credit markets worldwide in the second half of 2008 has led to a severe economic recession worldwide, and the outlook for 2010 is still uncertain. A continuation or worsening of unfavorable economic conditions,
including the credit and capital markets disruptions, could have an adverse impact on our business, operating results or financial condition in a number of ways. For example, we may experience declines in revenues, profitability and cash flows as a
result of reduced orders, delays in receiving orders, delays or defaults in payment or other factors caused by the economic problems of our customers and prospective customers. We may experience supply chain delays, disruptions or other problems
associated with financial constraints faced by our suppliers and subcontractors. In addition, changes and volatility in the equity, credit and foreign exchange markets and in the competitive landscape make it increasingly difficult for us to predict
our revenues and earnings into the future.
20
We are subject to credit risk in respect of account receivables.
In 2008 and 2009, some of our customers, including some of our large supermarket customers, delayed their payments for up to 60 to 90 days beyond their term. Our cash flow suffered while waiting for such payments. Consequently, at times we had to
delay payments to our suppliers and to postpone business expansion as a result of these delayed payments. Starting from 2008 and into 2009, we gradually shortened credit terms for many of our international and domestic customers from between 30 and
180 days to between 30 and 60 days. Our large customers may fail to meet these shortened credit terms, in which case we may not have sufficient cash flow to fund our operating costs and our business could be adversely affected.
The discontinuation of any preferential tax treatment or other incentives currently available to us in the PRC could materially and adversely affect our business, financial condition and results of operations.
Our subsidiaries are entitled to certain special or preferential tax treatments regarding foreign enterprise income tax in accordance with the Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises and
related rules.
Accordingly, we have been entitled to tax concessions whereby the profit for the first two financial years beginning with the first profit-making year (after setting off tax losses carried forward from prior years) is exempt from income tax in the
PRC and the profit for each of the subsequent three financial years is taxed at 50% of the prevailing tax rates set by the relevant tax authorities. However, on March 16, 2007, the PRCs National Peoples Congress passed a new corporate
income tax law, which became effective on January 1, 2008. This new corporate income tax unifies the corporate income tax rate, cost deduction and tax incentive policies for both domestic and foreign-invested enterprises. According to the new
corporate income tax law, the applicable corporate income tax rate of our operating subsidiaries has been increased to a rate of 25% over a five-year grandfather period. This tax rate increase applies across the board, for all enterprises whether
domestic or foreign. 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 the tax holidays until fully utilized. The discontinuation of any
such special or preferential tax treatment or other incentives could have an adverse affect on our business, financial condition and results of operations.
In addition, under current PRC tax law, regulations and rulings, dividends from our operations in China paid to us are not currently subject to PRC income tax. If these distributions become subject to tax in the future, our net income would be
adversely affected.
We may enter into additional financing agreements which may have a dilutive effect to our earnings per share and the rights of certain stockholders.
Additional financings could result in significant dilution to our earnings per share or the issuance of securities with rights superior to our current outstanding securities. For instance, we may grant registration rights to investors purchasing our
equity or debt securities in the future.
We may be unable to raise additional capital.
If we are unable to raise additional financing, we may be unable to implement our long-term business plan, develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures on a timely basis, if
at all. In addition, a lack of additional financing could force us to substantially curtail or cease operations.
21
We may be exposed to potential risks relating to our internal control over financial reporting and our ability to have such controls attested to by our independent auditors.
The SEC, under Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to provide in their annual reports on Form 10-K a report by management with respect to the companys disclosure controls and procedures and
internal control over financial reporting. We are currently required to comply with this requirement. In addition, such rules require the independent registered public accounting firm auditing a companys financial statements to attest to the
operating effectiveness of such companys internal controls. However, we are not subject to the requirements of SOX 404(b) until our fiscal year ended December 31, 2010. We can provide no assurance that we will comply with all of the
requirements imposed thereby. Further, we cannot assure that we will receive a positive attestation from our independent auditors. Investors and others may lose confidence in the reliability of our financial statements in the event we identify
significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or if we are unable to receive a positive attestation from our independent auditors with respect to our internal controls.
Risks Related To Doing Business In China
Changes in Chinas political or economic situation could harm us and our operating results.
Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country. However, the Chinese government could change these economic reforms at any time. Such changes could negatively impact our
operations and profitability.
The structure of the Chinese economy may inhibit our ability to expand our business.
The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in several ways. For example, state-owned enterprises constitute a large portion of the Chinese
economy. In addition, weak corporate governance practices and the lack of flexible currency exchange policies continue to persist. As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the
Chinese economy were similar to those of the OECD member countries.
Our business is largely subject to the uncertain legal environment in China.
The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used. Laws, regulations and legal requirements relating to foreign
investments in China are still evolving, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to foreign investors, such as the right of foreign enterprises to hold required
business licenses and permits.
It may be difficult for our stockholders to affect service of process against our subsidiaries or our officers and directors.
Our operating subsidiaries were organized under the laws of China and substantially all of their assets are located outside the U.S. In addition, our executive officers and directors are residents of China and substantially all of their assets are
located outside the U.S. As a result, it could be difficult for our stockholders to affect service of process in the U.S., or to enforce a judgment obtained in the U.S., against our officers and directors.
22
Inflation in China may inhibit our ability to conduct business profitably in China.
In recent years, the Chinese economy has experienced periods of rapid expansion. During the past ten years, the rate of inflation in China has been as high as 5.8% and as low as -1.4% . These factors have led to the adoption by the Chinese
government, from time to time, of various corrective measures designed to limit inflation. High inflation in the future may cause the Chinese government to impose controls on credit or prices, or to take other actions which could inhibit economic
activity in China, and thereby harm the market for our products.
Likewise, negative inflation could have an unfavorable effect on our business profitability in China. Negative inflation may cause a period where consumers are reluctant to spend, as consumers anticipate lower prices for products in the future. In
the event of negative inflation, the Chinese government may impose controls on credit or prices, or take other actions which could inhibit economic activity, harming the market for our products.
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
The majority of our revenues are settled in Renminbi and U.S. dollars, and any future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future business activities outside China or to make
dividends or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current account transactions, significant restrictions still remain. For instance,
foreign enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents at banks in China authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including
direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. The Chinese regulatory authorities may impose more stringent
restrictions on the convertibility of the Renminbi in the future.
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may have negative effects on our company.
In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China,
generally referred to as Circular 75, which required PRC residents to register with the local SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing
outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), further expanded the reach of Circular 75.
ILH acquired certain interests in the Lorain Group Companies controlled by Si Chen, our Chairman and Chief Executive Officer. Pursuant to Notice No. 75 and Notice 106, if a PRC resident has completed a round-trip investment through its established
SPV but has not yet completed the required procedures of SAFE registration for offshore investment of the SPV, he must retroactively register the SPV with SAFE.
In order to avoid such SAFE registration requirements, a Japanese individual, Hisashi Akazawa, was designated as a nominee holder of ILH when ILH was established. Mr. Akazawa granted an option to our Chairman and Chief Executive Officer, Mr. Chen,
allowing Mr. Chen to buy 90% of Mr. Akazawas interest in the Company at a fixed price at a future time in accordance with the terms of an option agreement between the two parties. On December 22, 2008, Mr. Chen exercised this option. In
addition, on that date, Mr. Chen acquired all of the remaining shares of our company held by Mr. Akazawa. As a
result, Mr. Chen is the beneficiary of ILH and may be required to register with and obtain approvals from SAFE or its agency in connection with respect to the direct offshore investment activities related to the acquisition of the Lorain Group
Companies.
23
If the failure to identify and characterize Mr. Chen as a beneficial owner of ILH is determined by the PRC authorities to be a serious violation of the requirements of the PRC Company Law and the PRC Regulation of Registration of Companies, the
Lorain Group Companies may be ordered by the company registration authority in the PRC to make corrections on its filed registration, to be fined an amount no less than RMB 5,000 and no more than RMB 50,000 or, in the worse scenario, to have its
company registration certificate revoked or its business licenses canceled.
Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies, such as our present and
prospective PRC subsidiaries ability to conduct foreign exchange activities including the remittance of dividends and foreign currency-denominated borrowings. In addition, our PRC resident beneficial holders may be subject to compliance with
Circular 75. Such holders may not be able to complete the necessary registration procedures required by Circular 75.
Our financial condition is affected by the foreign exchange rate between the U.S. dollar and the Renminbi.
Our financial condition is affected by the foreign exchange rates, primarily the rate between the U.S. dollar and the Renminbi. In the event that the Renminbi appreciates against the U.S. dollar, our costs will increase.
Risks Related To the Market For Our Stock
Certain of our stockholders have the ability to delay or prevent adoption of important business decisions based on their ownership of a significant percentage of our outstanding voting securities.
Mr. Chen is the record owner of approximately 54% of our outstanding voting securities. As a result, he possesses significant influence over our business. For instance, Mr. Chen may elect our board of directors, authorize significant corporate
transactions or prevent a future change in control of our company.
Certain provisions of our Certificate of Incorporation may make it more difficult for a third party to effect a change- in-control.
Our Certificate of Incorporation authorizes our board of directors to issue up to 5,000,000 shares of preferred stock without stockholder approval. The preferred stock may be issued in one or more series, the terms of which may be determined at the
time of issuance by the board of directors without further action by the stockholders. These terms may contain voting rights, including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion
rights and redemption rights provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders
of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult to acquire our company and could negatively affect
the market price of our common stock.
24
The exercise of outstanding warrants issuable for shares of our common stock may cause dilution to existing shareholders.
There are currently warrants outstanding to purchase up to an
aggregate of 4,082,892 shares of our common stock. The term of 1,527,197 of
these warrants expires in May 2010, the term of 2,054,580 of these warrants
expires in April 2012 and the term of 501,115 of these warrants expires in
October 2014. The exercise prices of these warrants range from $3.70 to $4.25
per share, subject to adjustment. If holders of these warrants exercise the
warrants in exchange for shares of our common stock, such issuances may have a
dilutive effect on the stock ownership of existing shareholders and may harm the
market price of our stock. Furthermore, if we were to attempt to obtain
additional financing during the term of these warrants, the terms on which we
obtain such financing may be adversely affected by the existence of these
warrants.
We do not expect to pay dividends in the future, and any
return on your investment may be limited to the value of the shares you
acquire.
Other than a special cash dividend which we paid to holders of
our common stock as of April 16, 2007, we have never declared or paid cash
dividends. We do not anticipate paying any cash dividends on our common stock in
the foreseeable future and any return on your investment may be limited to the
value of the shares of our common stock that you acquire. We currently intend to
retain and use any future earnings for the development and expansion of our
business.
Item 1B.
|
UNRESOLVED STAFF COMMENTS
|
|
|
None.
|
|
|
|
Item 2.
|
PROPERTIES
|
Our primary facilities, which are owned except where otherwise
indicated, are as follows:
|
|
|
|
Facility
|
Location
|
Approximate
Size
(Square Meters)
|
Owned or Leased
|
|
|
|
|
Shandong Lorain
|
Junan County, Shandong
Province, PRC
|
31,459
|
Owned
|
Junan Hongrun
|
Junan County, Shandong Province, PRC
|
171,931
|
Owned
|
Luotian Lorain
|
Luotian County, Hubei Province,
PRC
|
54,251
|
Owned
|
Beijing Lorain
|
Miyun County, Beijing Province, PRC
|
22,677
|
Owned
|
Dongguan Lorain
|
Dongguan County, Guandong
Province, PRC
|
5,472
|
Leased
|
|
|
|
|
We also own or lease space for additional facilities, including
refrigerated storage facilities, and smaller offices, including sales offices,
located in China.
In the aggregate, we currently have land use rights to, or
lease, 72 properties with approximately 285,791 square meters in the aggregate,
consisting of manufacturing facilities, office buildings and land reserved for
future expansion. We believe our current facilities provide adequate capacity
for our current and projected needs.
25
All land in China is owned by the State. Individuals and
companies are permitted to acquire rights to use land or land use rights for
specific purposes. In the case of land used for industrial purposes, the land
use rights are granted for a period of up to 50 years. This period may be
renewed at the expiration of the initial and any subsequent terms. Granted land
use rights are transferable and may be used as security for borrowings and other
obligations.
Item 3.
|
LEGAL PROCEEDINGS
|
From time to time, we may become involved in various lawsuits
and legal proceedings which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these
or other matters may arise from time to time that may harm our business. We are
currently not aware of any such legal proceedings or claims that we believe will
have a material adverse affect on our business, financial condition or operating
results.
Item 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of our security holders
during the fourth quarter of 2009.
PART II
Item 5.
|
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Market for our Common Stock
Our common stock is quoted on the NYSE AMEX under the symbol
ALN. As of March 28, 2010 the closing price for our common stock was $3.60 per
share.
The following table sets forth, for the periods indicated, the
high and low bid prices of our common stock. These prices reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions. Shares of our common stock were sparsely traded until May
2008.
|
|
Bid Prices
|
|
|
|
High
|
|
|
Low
|
|
Fiscal Year Ended December 31, 2009
|
|
|
|
|
|
|
First Quarter
|
$
|
1.06
|
|
$
|
0.51
|
|
Second Quarter
|
$
|
2.52
|
|
$
|
0.52
|
|
Third Quarter
|
$
|
2.95
|
|
$
|
2.25
|
|
Fourth Quarter
|
$
|
3.34
|
|
$
|
2.37
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2008
|
|
|
|
|
|
|
First Quarter
|
$
|
23.00
|
|
$
|
7.90
|
|
Second Quarter
|
|
19.50
|
|
|
2.00
|
|
Third Quarter
|
|
3.25
|
|
|
2.10
|
|
Fourth Quarter
|
|
2.15
|
|
|
0.80
|
|
Approximate Number of Holders of Our Common
Stock
On March 22, 2010, there were 322 stockholders of record of our
common stock.
26
Dividend Policy
Pursuant to a Preferred Stock Purchase Agreement with Halter
Financial Investments, L.P., dated April 5, 2007, we paid a special cash
dividend in the aggregate amount of $415,000, or $0.18 per share, to holders of
common stock outstanding on April 16, 2007.
Other than noted above, we have never declared or paid cash
dividends. Any future decisions regarding dividends will be made by our board of
directors. We currently intend to retain and use any future earnings for the
development and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
Information for our equity compensation plans in effect as of
the end of fiscal year 2009 is as follows:
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Plan category
|
|
Number of securities to
be issued
upon exercise
of outstanding options,
warrants and
rights
|
|
|
Weighted-average
exercise price
of
outstanding options,
warrants and rights
|
|
|
Number of securities
remaining
available for
future issuance under
equity compensation
plans
(excluding securities
reflected in column (a))
|
|
Equity compensation plans approved by
security holders
|
|
[1,334,573]
|
|
|
[1.58]
|
|
|
[1,165,427]
|
|
Equity compensation plans not approved by security holders
|
|
0
|
|
|
N/A
|
|
|
0
|
|
Total
|
|
[1,334,573]
|
|
|
[1.58]
|
|
|
[1,165,427]
|
|
Item 6.
|
SELECTED FINANCIAL DATA
|
Not applicable.
Item 7.
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
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, or RTC, foods, ready-to-eat,
or RTE, foods and meals ready-to-eat, or MRE); and
|
•
|
frozen food products.
|
We conduct our production activities 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 chestnut processing manufacturer
in China. We have developed brand equity for our chestnut products in China,
Japan and South Korea over the past 10 to 15 years. We produced 52 high
value-added processed chestnut products in 2009. We derive most of our revenues
from sales in China, Japan and South Korea. Our primary
strategy for 2010 is to expand our brand equity in the Chinese market for our convenience food products. We are also working to expand our brand recognition in China for our chestnut products and frozen products. In addition, we are working to
expand our marketing efforts in Asia, 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.
27
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 2009, the cost of our raw materials increased from
$64,980,230 to $81,501,168, for an increase of approximately 25.4% . 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.
The average price that we paid for chestnuts in 2008 and 2009 was approximately $727 per metric ton and $868 per metric ton, respectively, excluding value added taxes. We do not currently hedge against changes in our raw material prices.
Consequently, if the costs of our raw materials increase further and we are unable to offset these increases by raising the prices of our products, our profit margins and financial condition could be adversely affected.
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 pay for their
supplies in cash on the same day that such supplies are delivered to us. However, some of the suppliers with whom we have a long-standing business relationship allow us to pay on credit. In 2009, we paid for approximately 48% of our raw materials on
credit. We fund the majority of our working capital requirements out of cash flow generated from operations. If we fail to generate sufficient sales, or if our suppliers stop offering us credit terms, we may not have sufficient liquidity to fund our
operating costs and our business could be adversely affected.
We also fund approximately 37% of our working capital requirements from the proceeds of short-term loans from Chinese banks. We expect to continue to do so in the future. Such loans are generally secured by our fixed assets, receivables and/or
guarantees by third parties. Our average loan balance from short-term bank loans in 2009 was approximately $32.7 million. The term of almost all such loans is one year or less. Historically, we have rolled over such loans on an annual basis.
However, we may not have sufficient funds available to pay all of our borrowings upon maturity. Failure to roll over our short-term borrowings at maturity or to service our debt could result in the imposition of penalties, including increases in
rates of interest, legal actions against us by our creditors, or even insolvency. In addition, in 2007, 2008 and 2009, we funded approximately $8.8 million, in the aggregate, of our working capital requirements from the proceeds of two private
placement transactions conducted in May 2007 and October 2009. 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.
28
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 through 2010. However, if available liquidity is not sufficient to
meet our operating and loan obligations as they come due, our plans include considering pursuing 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 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 crisis of the financial and credit markets worldwide in the second half of 2008 has led to a severe economic recession worldwide, and the outlook for 2010 is still uncertain. A continuation or worsening of unfavorable economic conditions,
including the ongoing credit and capital markets disruptions, could have an adverse impact on our business, operating results or financial condition in a number of ways. For example, we may experience declines in revenues, profitability and cash
flows as a result of reduced orders, delays in receiving orders, delays or defaults in payment or other factors caused by the economic problems of our customers and prospective customers. We may experience supply chain delays, disruptions or other
problems associated with financial constraints faced by our suppliers and subcontractors. In addition, changes and volatility in the equity, credit and foreign exchange markets and in the competitive landscape make it increasingly difficult for us
to predict our revenues and earnings into the future.
In 2008 and 2009, some of our customers, including some of our large supermarket customers, delayed their payments for up to 60 to 90 days beyond their term. Our cash flow suffered while waiting for such payments. Consequently, at times we had to
delay payments to our suppliers and to postpone business expansion as a result of these delayed payments. Starting from 2008 and into 2009, we gradually shortened credit terms for many of our international and domestic customers from between 30 and
180 days to between 30 and 60 days. Our large customers may fail to meet these shortened credit terms, in which case we may not have sufficient cash flow to fund our operating costs and our business could be adversely affected.
Results of Operations
The following tables set forth key components of our results of operations for the periods indicated, and the differences between the two periods expressed in dollars and percentages:
29
|
|
2009
|
|
|
2008
|
|
|
Increase/Decrease
|
|
|
Increase/Decrease
|
|
(in thousands of U.S. dollars)
|
|
|
|
|
|
|
|
($)
|
|
|
(% )
|
|
Revenue
|
|
146,772
|
|
|
132,360
|
|
|
14,412
|
|
|
10.9%
|
|
Cost of Revenue
|
|
(114,064
|
)
|
|
(101,213
|
)
|
|
(12,851
|
)
|
|
12.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
32,708
|
|
|
31,147
|
|
|
1,561
|
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and Marketing
|
|
(6,455
|
)
|
|
(6,166
|
)
|
|
(289
|
)
|
|
4.7%
|
|
General and administrative
|
|
(3,647
|
)
|
|
(4,048
|
)
|
|
401
|
|
|
-9.9%
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
|
|
22,606
|
|
|
20,933
|
|
|
1,673
|
|
|
8.0%
|
|
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.0%
|
|
Government grant
|
|
356
|
|
|
329
|
|
|
27
|
|
|
8.2%
|
|
Interest income
|
|
73
|
|
|
99
|
|
|
(26
|
)
|
|
-26.3%
|
|
Other income
|
|
175
|
|
|
251
|
|
|
(76
|
)
|
|
-30.3%
|
|
Other expense
|
|
(327
|
)
|
|
(162
|
)
|
|
(165
|
)
|
|
101.9%
|
|
Interest Expense
|
|
(3,352
|
)
|
|
(2,770
|
)
|
|
(582
|
)
|
|
21.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
19,531
|
|
|
18,681
|
|
|
850
|
|
|
4.6%
|
|
Income Taxes
|
|
(4,223
|
)
|
|
(3,003
|
)
|
|
(1,220
|
)
|
|
40.6%
|
|
Income before Minority
|
|
15,308
|
|
|
15,678
|
|
|
(370
|
)
|
|
-2.4%
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interest
|
|
(900
|
)
|
|
(974
|
)
|
|
74
|
|
|
-7.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
14,408
|
|
|
14,703
|
|
|
(295
|
)
|
|
-2.0%
|
|
Year Ended December 31, 2009Compared to Year Ended December
31, 2008
Revenue
Net Revenues
. Net revenues increased by $14.4 million,
or approximately 10.9%, to $146.8 million in 2009 from $132.4 million in 2008.
This increase was attributable to the increased revenues generated from sales of
each of our product segments, as reflected in the following table:
(in thousands of U.S.
dollars)
|
|
2009 Revenues
|
|
|
2008 Revenues
|
|
|
Increase
|
|
|
Increase
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(%)
|
|
Chestnut Products
|
|
89,117
|
|
|
83,028
|
|
|
6,089
|
|
|
7.3%
|
|
Convenience Products
|
|
34,624
|
|
|
25,737
|
|
|
8,887
|
|
|
34.5%
|
|
Frozen Products
|
|
23,031
|
|
|
23,596
|
|
|
(565
|
)
|
|
-2.4%
|
|
Total
|
|
146,772
|
|
|
132,360
|
|
|
14,914
|
|
|
11.3%
|
|
30
The greatest increase in volume sold in 2009, as compared to
2008, was in the domestic PRC market. Revenues from sales in the Chinese
domestic market increased by approximately $12.1 million, or approximately 13%,
in 2009. As a percentage of total revenues, revenues from sales in the domestic
PRC market increased to approximately 71% from approximately 69% in 2008.
In addition, in 2009, revenues from sales to Belgium, Hong
Kong, Saudi Arabia, Singapore, South Korea, Taiwan and the United States
increased, in the aggregate, approximately $8.3 million, or 67.0%, compared to
2008, partially offset by a decrease of an aggregate of $6.5 million, or 22.7%,
of sales to France, Germany, Holland, Japan, Malaysia and United Kingdom
compared to 2008. See Note 18 to the financial statements contained elsewhere in
this report for more information on the breakdown of our sales per geographic
region.
Cost of Revenues.
Our cost of revenues increased $12.9
million, or approximately 12.7%, to $114.1 million in 2009 from $101.2 million
in 2008. This increase was attributable to the following factors, by percentage:
Category
|
|
Allocation of
Increase in Cost
of
Revenues
(%)
|
|
Raw Materials
|
|
25.4
|
|
Currency (RMB) Appreciation
|
|
-1.7
|
|
Other Allocated Overhead (utilities,
|
|
-9.4
|
|
freight, equipment consumables)
|
|
|
|
Wages
|
|
-3.7
|
|
Depreciation
|
|
2.0
|
|
Raw material costs increased to $81,501,168, or approximately
25.4%, in 2009 from $64,980,230 in 2008. This increase was attributable to the
increase by approximately 23% and 53%, respectively, in the volume of raw
chestnuts and raw vegetables and fruits purchased in 2009, when compared to
2008. This increase was offset by a decrease of approximately 62% in the volume
of raw meats purchased in 2009, when compared to 2008. We purchased a
significantly higher volume of raw vegetables and fruits for use in our
convenience products because our sales of such products increased significantly
in 2009. We purchased a significantly lower volume of raw meat for use in our
convenience food products as we focused more on other types of foods in this
category.
The following table reflects the changes in our cost of
revenues in 2008 as compared to 2007 among our different segments:
(thousands of U.S.
dollars)
|
|
2009 Cost of Revenues
|
|
|
2008 Cost of Revenues
|
|
|
Increase/ (Decrease)
|
|
|
|
($)
|
|
|
($)
|
|
|
(%)
|
|
Chestnut Products
|
|
68,263
|
|
|
62,092
|
|
|
9.7
|
|
Convenience Products
|
|
26,947
|
|
|
20,258
|
|
|
33.0
|
|
Frozen Products
|
|
18,854
|
|
|
18,863
|
|
|
-0.05
|
|
Total
|
|
114,064
|
|
|
101,213
|
|
|
12.6%
|
|
31
Gross Profit
. Our gross profit increased $1.6 million,
or 5.0%, to $32.7 million in 2009 from $31.1 million in 2008 as a result of
higher net revenues, partially offset by higher cost of revenues, for the
reasons indicated above.
Operating Expenses
Selling and Marketing Expenses
. Our selling and
marketing expenses increased approximately $0.3 million, or 4.7%, to $6.5
million in 2009 from $6.2 million in fiscal year 2008. 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:
(in U.S. dollars)
|
|
Increase in
costs in 2009
over 2008
|
|
Shipping and inspection fees
|
|
529,256
|
|
Port surcharges
|
|
6,632
|
|
Commissions
|
|
100,397
|
|
Supermarket fees
|
|
142,020
|
|
Wages (sales personnel)
|
|
419,463
|
|
The increases listed in the table above were partially offset
by an aggregate of $897,768 decreases of other factors, including customer
lodging, phone, postage and courier charges, toll road expense, warehousing
costs and expenses for professional movers.
General and Administrative Expenses.
Our general and
administrative expenses decreased approximately $0.4 million, or 9.9%, to $3.6
million in 2009 from $4.0 million in 2008. The following table reflects the main
factors that contributed to this decrease as well as the dollar amount that each
factor contributed to this increase:
(in U.S. dollars)
|
|
Decrease in
costs in 2009
over 2008
|
|
Personnel Benefits (non-wage benefits)
|
|
(530,533
|
)
|
Consultation fees
|
|
(269,249
|
)
|
Travel Expenses
|
|
(95,662
|
)
|
Insurance fees
|
|
(45,866
|
)
|
Agent fees
|
|
(20,213
|
)
|
Government Subsidy Income
Government subsidy income increased from approximately $329,000
million in 2008 to approximately $356,000 in 2009, representing grants received
from the Hubei government, Junan County government and Miyun County government
to assist us in our research and business development.
32
Income Before Taxation and Minority Interest
Income before taxation and minority interest increased $0.85 million, or
4.6%, to $19.5 million in 2009 from $18.7 million in 2008 as a result of higher
revenues, partially offset by higher costs of revenues and operating expenses,
for the reasons indicated above.
Income Taxes
Income taxes increased $1.2 million, or 40.6%, to $4.2 million
in 2009, as compared to $3.0 million in 2008. This increase was attributable to
the higher income earned in 2009 as compared to 2008. 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 2008, 2009, and 2010 are depicted in the following
table:
Income Tax
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
Junan Hongrun
|
|
15%
|
|
|
25%
|
|
|
25%
|
|
Luotian Lorain
|
|
15%
|
|
|
15%
|
|
|
25%
|
|
Beijing Lorain
|
|
0%
|
|
|
15%
|
|
|
15%
|
|
Shangdong Lorain
|
|
25%
|
|
|
25%
|
|
|
25%
|
|
Minority Interest.
The Company holds 80.2% of the equity of its subsidiary
Shandong Lorain, which is reflected in the minority interest of $0.90 million in
2009 and $0.97 million in 2008.
Net Income
.
Net income decreased $0.3 million, or 2.0%, to $14.4 million in
2009 from $14.7 million in fiscal year 2008, as a result of the factors
described above.
Liquidity and Capital Resources
General
Our primary capital needs have been to fund the working capital
requirements necessitated by our sales growth, adding new products and expansion
of our facilities. In the past, our primary sources of financing have been cash
generated from operations and short-term loans from banks in China. In October
2009, we obtained approximately $12 million from a private placement
transaction. Proceeds from such transaction, together with cash generated from
operations and short-term bank loans, have been used to fund our working capital
needs. We used part of the proceeds of the private placement in 2009 to
advertise and market our chestnut and convenience food products in China. At
December 31, 2009, total unused proceeds from the private placement were
approximately $7 million. At December 31, 2009, cash and cash equivalents (including restricted cash) were $13.4
million, as compared to $6.6 million at December 31, 2008.
33
We expect to continue to finance our operations and working
capital needs in 2010 from cash generated from operations and short-term bank
loans. In addition, we currently plan to finance or refinance approximately
$20.2 million in the form of short-term bank loans in 2010. Currently, we have
negotiated loans with certain banks in China for an aggregate of $42.2 million.
We expect that anticipated cash flows from operations and short-term bank loans
will be sufficient to fund our operations through at least the next twelve
months.
If available liquidity is not sufficient to meet our operating
and loan obligations as they come due, our plans include pursuing alternative
financing arrangements or reducing expenditures as necessary to meet our cash
requirements. However, there is no assurance that we will be able to raise
additional capital or reduce discretionary spending to provide required
liquidity. Currently, the capital markets for small capitalization companies are
difficult. Accordingly, we cannot be sure of the availability or terms of any
alternative financing arrangements.
The following table provides detailed information about our net
cash flow for all financial statements periods presented in this report.
Cash Flows Data:
|
(in thousands of U.S. dollars)
|
|
For year ended December
31
,
|
|
|
|
2009
|
|
|
2008
|
|
Net cash flows provided by (used in)
operating activities
|
|
(10,843
|
)
|
|
19,508
|
|
Net cash flows provided by (used in) investing activities
|
|
(7,280
|
)
|
|
(20,316
|
)
|
Net cash flows provided by (used in)
financing activities
|
|
26,503
|
|
|
(6,714
|
)
|
Operating Activities
Net cash used in operating activities for 2009 was $10.8
million and net cash provided by operating activities for 2008 was $19.5
million. The increase of approximately $30.3 million in net cash flows used in
operating activities resulted primarily from an additional increase in accounts
and other receivable of approximately $11.6 million, an additional decrease in
accounts and other payables of approximately $3.1 million and an additional
increase in prepayments of approximately $20.8 million, partially offset by less
inventory increase of approximately $5.3 million. In 2009, we were required to
increase our prepayments and pay our suppliers on shorter terms, thereby
decreasing our accounts payable.
Investing Activities
Our uses of cash for investment activities are primarily
purchase of land for short-term investment.
Net cash used in investing activities for 2009 was $7.28
million and $20.3 million, respectively, for 2009 and 2008. The decrease of
approximately $13.0 million resulted primarily from a decrease of $12.0 million
as a result of the purchase of plant and equipment in 2009.
Financing Activities
Net cash provided by financing activities for 2009 was $26.5
million and net cash used in financing activities for 2008 was $6.7 million. The
increase of approximately $33.2 million in net cash provided by financing
activities resulted primarily from an increase of $10.9 million in paid-in
capital provided in connection with a private placement in October 2009 and an
increase of approximately $72.7 million in bank borrowings, partially offset by
an increase of approximately $50.4 million in repayment of bank borrowings and
notes.
34
Loan Facilities
As of December 31, 2009, the amounts and maturity dates for our
bank loans were as follows:
All amounts, other than percentages, in thousands of U.S.
dollars.
Banks
|
|
Maturity
|
|
|
Interest Rate
|
|
|
Amount (US$)
|
|
Beijing Miyun County Shilipu Rural Financial Institution
|
|
01/20/10
|
|
|
7.434%
|
|
|
1,462,587
|
|
Beijing Miyun
County Shilipu Rural Financial Institution
|
|
09/30/10
|
|
|
6.903%
|
|
|
2,831,918
|
|
China Merchants Bank, Beijing
|
|
03/29/10
|
|
|
5.310%
|
|
|
731,294
|
|
HSBC Miyun Branch
|
|
04/08/10
|
|
|
6.804%
|
|
|
292,517
|
|
Bank of Beijing
|
|
07/29/10
|
|
|
6.903%
|
|
|
292,517
|
|
China Agricultural
Bank, Luotian Branch
|
|
08/25/10
|
|
|
6.372%
|
|
|
1,901,363
|
|
Junan County Agricultural Financial Institution
|
|
01/22/10
|
|
|
10.939%
|
|
|
1,170,070
|
|
Junan County
Industrial and Commercial Banks
|
|
01/08/10
|
|
|
5.346%
|
|
|
438,776
|
|
Junan County Industrial and Commercial Banks
|
|
01/14/10
|
|
|
5.346%
|
|
|
541,157
|
|
Junan County
Industrial and Commercial Banks
|
|
01/25/10
|
|
|
5.346%
|
|
|
614,287
|
|
Junan County Industrial and Commercial Banks
|
|
03/15/10
|
|
|
3.240%
|
|
|
463,640
|
|
Junan County
Agriculture Bank
|
|
03/17/10
|
|
|
7.965%
|
|
|
3,363,950
|
|
Junan County Agriculture Bank
|
|
08/23/10
|
|
|
7.965%
|
|
|
1,608,846
|
|
Junan County
Agriculture Bank
|
|
09/23/10
|
|
|
7.290%
|
|
|
1,447,961
|
|
Junan County Agriculture Bank
|
|
11/22/10
|
|
|
7.965%
|
|
|
643,538
|
|
Junan County
Agriculture Bank
|
|
03/03/10
|
|
|
6.804%
|
|
|
1,462,587
|
|
Junan County Agriculture Bank
|
|
03/08/10
|
|
|
6.804%
|
|
|
1,755,104
|
|
Junan County
Agriculture Bank
|
|
03/11/10
|
|
|
6.804%
|
|
|
2,193,881
|
|
Linyi Commercial Bank
|
|
01/19/10
|
|
|
9.293%
|
|
|
658,164
|
|
Linyi Commercial
Bank
|
|
12/21/10
|
|
|
8.496%
|
|
|
687,416
|
|
Linyi Commercial Bank
|
|
06/16/10
|
|
|
9.293%
|
|
|
1,462,587
|
|
Linyi Commercial
Bank
|
|
06/15/10
|
|
|
9.293%
|
|
|
1,462,587
|
|
Junan County Construction Bank
|
|
01/07/10
|
|
|
5.346%
|
|
|
1,462,587
|
|
Junan County
Construction Bank
|
|
09/01/10
|
|
|
5.346%
|
|
|
1,117,070
|
|
Junan County Construction Bank
|
|
01/22/10
|
|
|
5.346%
|
|
|
394,899
|
|
Junan County
Construction Bank
|
|
01/12/10
|
|
|
5.346%
|
|
|
475,340
|
|
Junan County Construction Bank
|
|
01/28/10
|
|
|
5.346%
|
|
|
153,572
|
|
Junan County
Construction Bank
|
|
01/18/10
|
|
|
5.346%
|
|
|
212,075
|
|
Junan County Construction Bank
|
|
01/10/10
|
|
|
5.346%
|
|
|
394,898
|
|
Junan County
Construction Bank
|
|
03/08/10
|
|
|
5.346%
|
|
|
153,571
|
|
Junan County Construction Bank
|
|
03/25/10
|
|
|
5.346%
|
|
|
153,572
|
|
Junan County
Construction Bank
|
|
12/27/10
|
|
|
5.841%
|
|
|
716,667
|
|
Junan County Construction Bank
|
|
01/24/10
|
|
|
5.346%
|
|
|
144,796
|
|
United Commercial
Bank, China Branch
|
|
01/14/10
|
|
|
5.494%
|
|
|
1,050,137
|
|
Shenzhen Development Bank
|
|
12/29/10
|
|
|
5.558%
|
|
|
1,462,587
|
|
Luotian
Agricultural Development Bank
|
|
12/11/10
|
|
|
0.670%
|
|
|
109,694
|
|
Total
|
|
|
|
|
|
|
|
35,488,212
|
|
|
|
|
|
|
|
|
|
|
|
Luotian Agricultural Development Bank
|
|
12/11/11
|
|
|
2.100%
|
|
|
25,595
|
|
United Commercial
Bank, China Branch
|
|
01/14/11
|
|
|
5.494%
|
|
|
269,278
|
|
Total
|
|
|
|
|
|
|
|
294,873
|
|
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 the financial statements, including the
notes thereto, and related disclosures of commitments and contingencies, if any.
We consider our critical accounting policies to be those that require the more
significant judgments and estimates in the preparation of financial statements,
including the following:
35
-
Method of Accounting --
We maintain our general ledger and journals
with the accrual method accounting for financial reporting purposes. The
financial statements and notes are representations of management. Accounting
policies adopted by us conform to generally accepted accounting principles in
the United States of America and have been consistently applied in the
presentation of financial statements, which are compiled on the accrual basis
of accounting.
-
Use of estimates --
The preparation of the financial statements in
conformity with generally accepted accounting principles in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the
time the estimates are made; however, actual results could differ materially
from those estimates.
The use of estimates is critical to carrying value of
asset accounts such as accounts receivable, inventory, fixed assets, and
intangible assets. We use estimates to account for the related bad debt
allowance, inventory impairment charges, depreciation and amortization of our
assets. In the food processing industry these accounts have a significant
impact on the valuation of our balance sheet and the results of our
operations.
-
Principles of consolidation --
The consolidated financial
statements are presented in US Dollars and include the accounts of the Company
and its commonly controlled entity. All significant inter-company balances and
transactions are eliminated in combination.
As of December 31, 2009, the particulars of the commonly
controlled entities are as follows:
Name of Company
|
|
Place of
Incorporation
|
|
|
Attributable
Equity
Interest
%
|
|
|
Registered
Capital
|
|
|
|
|
Shandong Lorain Co., Ltd
|
|
PRC
|
|
|
80.2
|
|
$
|
12,901,823
|
|
|
(RMB 100,860,000
|
)
|
Luotian Lorain Co., Ltd
|
|
PRC
|
|
|
100
|
|
$
|
1,279,181
|
|
|
(RMB 10,000,000
|
)
|
Junan Hongrun Foodstuff Co., Ltd
|
|
PRC
|
|
|
100
|
|
$
|
2,430,445
|
|
|
(RMB 19,000,000
|
)
|
Beijing Lorain Co., Ltd
|
|
PRC
|
|
|
100
|
|
$
|
1,279,181
|
|
|
(RMB 10,000,000
|
)
|
-
Accounting for the Impairment of Long-Lived Assets
-- The
long-lived assets held and used by us are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of assets
may not be recoverable. It is reasonably possible that these assets could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
36
During the reporting years, there was no impairment loss.
-
Revenue recognition --
Our revenue recognition policies are in
compliance with Staff Accounting Bulletin (SAB) 104. Sales revenue is
recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, we have
no other significant obligations and 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 (VAT). No product return or sales discount allowance is made as
products delivered and accepted by customers are normally not returnable and
sales discount is normally not granted after products are delivered.
We believe that when custody and title of goods has been passed
to our customers, or third party transporters revenue is recognized. Our
industry does not call for revenue recognition under multiple deliverable
arrangements.
Our financial instruments are cash and cash equivalents,
accounts receivable, other receivable, advances to suppliers, advances to
employees, bank loans and notes, accounts payable, other payable, accrued
liabilities, and long-term liabilities. The recorded values of cash and cash
equivalents, accounts receivable, other receivable, advances to suppliers,
advances to employees, bank loans and notes, accounts payable, other payable,
and accrued liabilities approximate their fair values based on their short-term
nature. The recorded values of long-term liabilities approximate their fair
values, as interest approximates market rates.
We have the accounting policy regarding financial instruments
for our financial statements in 2009. We consider it critical because our
business is becoming more global in nature and the use of fair value for
financial instruments has been widely adopted by accounting bodies around the
globe. With financial statements that are widely accepted and comparable in many
jurisdictions we will have greater access to capital locally.
Recent accounting pronouncements
In June 2009, FASB issued FASB Statement No. 166, Accounting
for Transfers for Financial Assets (FASB ASC 860 Transfers and Servicing) and
FASB Statement No. 167 (FASB ASC 810 Consolidation), a revision to FASB
Interpretation No. 46 (Revised December 2003), Consolidation of Variable
Interest Entities (FASB ASC 810 Consolidation).
Statement 166 is a revision to FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities (FASB ASC 860 Transfers and Servicing), and will require more
information about transfers of financial assets, including securitization
transactions, and where entities have continuing exposure to the risks related
to transferred financial assets. It eliminates the concept of a qualifying
special-purpose entity, changes the requirements for derecognizing financial
assets, and requires additional disclosures. Statement No. 166 (FASB ASC 860
Transfers and Servicing) must be applied as of the beginning of each reporting
entitys first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. Earlier application is prohibited. This
Statement must be applied to transfers occurring on or after the effective date.
The Company is still evaluating the impact of the above pronouncement.
37
Statement 167 is a revision to FASB Interpretation No. 46
(Revised December 2003), Consolidation of Variable Interest Entities (FASB ASC
810 Consolidation), and changes how a reporting entity determines when an entity
that is insufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. The determination of whether a reporting
entity is required to consolidate another entity is based on, among other
things, the other entitys purpose and design and the reporting entitys ability
to direct the activities of the other entity that most significantly impact the
other entitys economic performance. Statement No. 167 (FASB ASC 810
Consolidation) shall be effective as of the beginning of each reporting entitys
first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period, and for interim and annual
reporting periods thereafter. Earlier application is prohibited. The Company is
still evaluating the impact of the above pronouncement.
On June 30, 2009, FASB issued FASB Statement No. 168,
Accounting Standards Codification ( FASB ASC 105 Generally Accepted Accounting
Principles) a replacement of FASB Statement No. 162 the Hierarchy of Generally
Accepted Accounting Principles. On the effective date of this standard, FASB
Accounting Standards Codification (ASC) became the source of authoritative U.S.
accounting and reporting standards for nongovernmental entities, in addition to
guidance issued by the Securities and Exchange Commission (SEC). This statement
is effective for financial statements issued for interim and annual periods
ending after September 15, 2009. If an accounting change results from the
application of this guidance, an entity should disclose the nature and reason
for the change in accounting principle in their financial statements. This new
standard flattens the GAAP hierarchy to two levels: one that is authoritative
(in FASB ASC) and one that is non-authoritative (not in FASB ASC). Exceptions
include all rules and interpretive releases of the SEC under the authority of
federal securities laws, which are sources of authoritative GAAP for SEC
registrants, and certain grandfathered guidance having an effective date before
March 15, 1992. Statement No. 168 is the final standard that will be issued by
FASB in that form. There will no longer be, for example, accounting standards in
the form of statements, staff positions, Emerging Issues Task Force (EITF)
abstracts, or AICPA Accounting Statements of Position.
Off-Balance Sheet Arrangements
We do not have any off-balance arrangements.
Item 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
|
|
Not applicable.
|
|
|
|
Item 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY
FINANCIAL DATA
|
The full text of our audited consolidated financial statements
as of December 31, 2009 begins on page F-2 of this Annual Report on Form 10-K.
Item 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
|
|
|
None.
|
|
|
|
Item 9A
|
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 that would be required to be disclosed in
Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SECs 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.
38
As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls
and procedures as of December 31, 2008. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2009, 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 effective to satisfy the objectives for which they are intended.
Internal Controls Over Financial Reporting
Managements 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
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting is effective, as of
December 31, 2009.
Changes in Internal Controls over Financial Reporting.
During the fiscal year ended December 31, 2009, 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.
Attestation Report
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation
by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only managements report in this annual report.
Item 9B
|
OTHER INFORMATION.
|
None.
39
PART III
Item 10.
|
DIRECTORS, EXECUTIVE OFFICERS OF AND
CORPORATE GOVERNANCE
|
Information required under this Item will be contained in our
definitive information statement or in an amendment to this Annual Report on
Form 10-K, which will be filed within 120 days of December 31, 2009, our most
recent fiscal year end, and is incorporated herein by reference.
Item 11
|
EXECUTIVE COMPENSATION
|
Information required under this Item will be contained in our
definitive information statement or in an amendment to this Annual Report on
Form 10-K, which will be filed within 120 days of December 31, 2009, our most
recent fiscal year end, and is incorporated herein by reference.
Item 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|
Information required under this Item will be contained in our
definitive information statement or in an amendment to this Annual Report on
Form 10-K, which will be filed within 120 days of December 31, 2009, our most
recent fiscal year end, and is incorporated herein by reference.
Item 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
Information required under this Item will be contained in our
definitive information statement or in an amendment to this Annual Report on
Form 10-K, which will be filed within 120 days of December 31, 2009, our most
recent fiscal year end, and is incorporated herein by reference.
Item 14.
|
PRINCIPAL ACCOUNTING FEES AND SERVICES.
|
Information required under this Item will be contained in our
definitive information statement or in an amendment to this Annual Report on
Form 10-K, which will be filed within 120 days of December 31, 2009, our most
recent fiscal year end, and is incorporated herein by reference.
PART IV
Item 15.
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
1. The financial statements contained in the Audited Financial
Statements beginning on page F-2 of this Annual Report on Form 10-K.
40
Exhibit No.
|
Description
|
|
|
3.1
|
Restated Certificate of Incorporation of the
registrant as filed with the Secretary of State of Delaware. Incorporated
by reference to Exhibit 3.1 to the registrants current report on Form 8-K
filed on May 9, 2007.
|
3.2
|
Bylaws of the registrant, adopted on March 31,
2000. Incorporated by reference to Exhibit 3.2 to the registrants
registration statement on Form 10SB12G filed on October 19, 2001.
|
4.1
|
Certificate of Designation of Series A Voting
Convertible Preferred Stock of the registrant as filed with the Secretary
of State of Delaware on April 9, 2007. Incorporated by reference to
Exhibit 4.1 to the registrants current report on Form 8-K filed on May 9,
2007 in commission file number 0- 31619.
|
4.2
|
Certificate of Designation of Series B Voting
Convertible Preferred Stock of registrant as filed with the Secretary of
State of Delaware on April 30, 2007. Incorporated by reference to Exhibit
4.2 to the registrants current report on Form 8-K filed on May 9, 2007.
|
4.3
|
Form of Series A Warrant. Incorporated by
reference to Exhibit 4.1 to the registrants current report on Form 8-K
filed on October 29, 2009.
|
4.4
|
Form of Series B Warrant. Incorporated by
reference to Exhibit 4.2 to the registrants current report on Form 8-K
filed on October 29, 2009.
|
4.5
|
Registration Rights Agreement, dated as of
October 28, 2009. Incorporated by reference to Exhibit 4.3 to the
registrants current report on Form 8-K filed on October 29, 2009.
|
10.1
|
Employment Agreement, effective September 22,
2008, by and between American Lorain Corporation and Yilun Jin.
Incorporated by reference to Exhibit 10.1 to the registrant's current
report on Form 8-K filed on September 18, 2008.
|
10.2
|
Securities Purchase Agreement dated as of
October 28, 2009, by and between American Loan Corporation and the Selling
Stockholders. Incorporated by reference to Exhibit 10.1 to the
registrants current report on Form 8-K filed on October 29, 2009.
|
14
|
Business Ethics Policy and Code of Conduct,
adopted on April 30, 2007. Incorporated by reference to Exhibit 14 to the
registrants current report on Form 8-K filed on May 9, 2007.
|
21
|
List of subsidiaries of the registrant.
Incorporated by reference to Exhibit 21 to the registrants current report
on Form 8-K filed on May 9, 2007.
|
24
|
Power of Attorney (set forth on the signature
page of the original filing).
|
31.1
|
Certification of Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
|
31.2
|
Certification of Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
|
32.1
|
Certification of Chief 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 Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 *
|
*
Filed herewith
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
AMERICAN LORAIN CORPORATION
|
|
|
|
|
|
|
|
|
|
By:/s/ Si Chen
|
|
|
March 29, 2010
|
|
Si Chen
|
|
|
(Date Signed)
|
|
President, Director and Chief Executive
|
|
|
|
|
Officer
|
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this annual report has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints Si Chen, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him or her and in
his or her name, place and stead, in any and all capacities, to sign any and all
amendments to this annual report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the SEC, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Signature
|
|
Capacity
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
/s/ Si Chen
|
|
President , Director and Chief Executive
Officer
(Principal Executive Officer)
|
|
March 29, 2010
|
Si Chen
|
|
|
|
|
|
|
|
|
|
/s/ Yilun Jin
|
|
Chief Financial Officer
(Principal
Financial Officer and Principal
Accounting Officer)
|
|
March 29, 2010
|
Yilun Jin
|
|
|
|
|
|
|
|
|
|
/s/ Yundong Lu
|
|
Chief Operating Officer and Director
|
|
March 29, 2010
|
Yundong Lu
|
|
|
|
|
|
|
|
|
|
/s/ Dekai Yin
|
|
Director
|
|
March 29, 2010
|
Dekai Yin
|
|
|
|
|
|
|
|
|
|
/s/ Yongjun Li
|
|
Director
|
|
March 29, 2010
|
Yongjun Li
|
|
|
|
|
|
|
|
|
|
/s/ Maoquan Wei
|
|
Director
|
|
March 29, 2010
|
Maoquan Wei
|
|
|
|
|
|
|
|
|
|
/s/ Tad M.
Ballantyne
|
|
Director
|
|
March 29, 2010
|
Tad M. Ballantyne
|
|
|
|
|
42
AMERICAN LORAIN CORPORATION
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND
2008
(Stated in US Dollars)
AMERICAN LORAIN CORPORATION
CONTENTS
|
PAGES
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
|
1
|
CONSOLIDATED BALANCE SHEETS
|
2 3
|
CONSOLIDATED STATEMENTS OF INCOME
|
4
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
5
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
6
|
NOTES TO FINANCIAL STATEMENTS
|
7 23
|
REPORT OF REGISTERED INDEPENDENT PUBLIC
ACCOUNTING FIRM
|
|
|
To:
|
The Board of Directors and Stockholders of
|
|
American Lorain Corporation
|
We have audited the accompanying consolidated balance sheets of
American Lorain Corporation as of December 31, 2009 and 2008 and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
American Lorain Corporation as of December 31, 2009 and 2008 and the results of
its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
South San Francisco, California
|
Samuel H. Wong & Co., LLP
|
March 11, 2010
|
Certified Public Accountants
|
AMERICAN LORAIN CORPORATION
|
|
CONSOLIDATED BALANCE SHEETS
|
AS OF DECEMBER 31, 2009 AND 2008
|
(Stated in US Dollars)
|
|
|
Note
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
|
$
|
12,111,532
|
|
$
|
2,841,339
|
|
Restricted cash
|
|
3
|
|
|
1,299,889
|
|
|
3,715,998
|
|
Short-term investment
|
|
|
|
|
7,320,248
|
|
|
113,069
|
|
Trade accounts receivable
|
|
4
|
|
|
23,025,772
|
|
|
25,293,326
|
|
Other
receivables
|
|
5
|
|
|
7,837,675
|
|
|
5,107,719
|
|
Related party receivable
|
|
6
|
|
|
603,116
|
|
|
-
|
|
Inventory
|
|
7
|
|
|
26,400,117
|
|
|
24,827,922
|
|
Advance to suppliers
|
|
|
|
|
16,938,872
|
|
|
415,009
|
|
Prepaid expenses
and taxes
|
|
|
|
|
905,266
|
|
|
1,228,648
|
|
Deferred tax asset
|
|
|
|
|
199,867
|
|
|
-
|
|
Total current assets
|
|
|
|
$
|
96,642,354
|
|
$
|
63,543,030
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipment,
net
|
|
8
|
|
|
41,280,407
|
|
|
40,201,686
|
|
Land use rights,
net
|
|
9
|
|
|
3,871,547
|
|
|
3,950,927
|
|
Deposit
|
|
|
|
|
16,088
|
|
|
-
|
|
TOTAL ASSETS
|
|
|
|
$
|
141,810,396
|
|
$
|
107,695,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Short-term bank
loans
|
|
10
|
|
$
|
35,488,212
|
|
$
|
14,414,996
|
|
Notes payable
|
|
11
|
|
|
-
|
|
|
5,208,485
|
|
Accounts payable
|
|
|
|
|
2,614,515
|
|
|
6,072,883
|
|
Taxes payable
|
|
12
|
|
|
2,235,341
|
|
|
2,926,793
|
|
Accrued
liabilities and other payables
|
|
13
|
|
|
6,422,492
|
|
|
10,291,237
|
|
Customers deposits
|
|
|
|
|
13,842
|
|
|
748,732
|
|
Total current liabilities
|
|
|
|
$
|
46,774,402
|
|
$
|
39,663,126
|
|
|
|
|
|
|
|
|
|
|
|
Long-term bank
loans
|
|
14
|
|
|
294,873
|
|
|
576,975
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
|
$
|
47,069,275
|
|
$
|
40,240,101
|
|
F-2
See Accompanying Notes to the Financial Statements and
Accountants Report
|
|
Note
|
|
|
12/31/2009
|
|
|
12/31/2008
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred Stock, $.001 par value, 5,000,000
shares authorized; 0 shares issued and outstanding at December 31, 2009
and 2008
|
|
|
|
|
-
|
|
|
-
|
|
Common stock, $0.001 par value, 200,000,000 shares
authorized; 30,240,202 and 25,172,640 shares issued and outstanding as of
December 31, 2009 and 2008, respectively
|
|
16
|
|
|
30,240
|
|
|
25,172
|
|
Additional paid-in capital
|
|
|
|
|
35,268,603
|
|
|
24,187,019
|
|
Statutory reserves
|
|
|
|
|
8,895,477
|
|
|
5,438,723
|
|
Retained earnings
|
|
|
|
|
38,455,349
|
|
|
27,503,991
|
|
Accumulated other comprehensive income
|
|
|
|
|
6,068,569
|
|
|
5,178,616
|
|
Non-controlling interests
|
|
15
|
|
|
6,022,883
|
|
|
5,122,021
|
|
|
|
|
|
$
|
94,741,121
|
|
$
|
67,455,542
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
$
|
141,810,396
|
|
$
|
107,695,643
|
|
F-3
See Accompanying Notes to the Financial Statements and
Accountants Report
AMERICAN LORAIN CORPORATION
|
|
CONSOLIDATED STATEMENTS OF INCOME
|
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
(Stated in US Dollars)
|
|
|
Note
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
18
|
|
$
|
146,772,442
|
|
$
|
132,360,317
|
|
Cost of revenues
|
|
|
|
|
(114,064,067
|
)
|
|
(101,213,340
|
)
|
Gross profit
|
|
|
|
$
|
32,708,375
|
|
$
|
31,146,977
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
|
|
(6,454,953
|
)
|
|
(6,166,248
|
)
|
General and administrative expenses
|
|
|
|
|
(3,646,815
|
)
|
|
(4,047,988
|
)
|
|
|
|
|
|
(10,101,768
|
)
|
|
(10,214,236
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
$
|
22,606,607
|
|
$
|
20,932,741
|
|
|
|
|
|
|
|
|
|
|
|
Government subsidy income
|
|
|
|
|
355,656
|
|
|
328,687
|
|
Interest income
|
|
|
|
|
73,186
|
|
|
99,411
|
|
Other income
|
|
|
|
|
175,117
|
|
|
251,317
|
|
Other expenses
|
|
|
|
|
(327,281
|
)
|
|
(161,726
|
)
|
Interest expense
|
|
|
|
|
(3,351,606
|
)
|
|
(2,769,597
|
)
|
|
|
|
|
|
(3,074,928
|
)
|
|
(2,251,908
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings before tax
|
|
|
|
$
|
19,531,679
|
|
$
|
18,680,833
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
|
|
17
|
|
|
(4,222,705
|
)
|
|
(3,003,265
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
$
|
15,308,974
|
|
$
|
15,677,568
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to:
|
|
|
|
|
|
|
|
|
|
- Common stockholders
|
|
|
|
|
14,408,112
|
|
|
14,703,378
|
|
- Non-controlling interests
|
|
|
|
|
900,862
|
|
|
974,190
|
|
|
|
|
|
|
15,308,974
|
|
|
15,677,568
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
|
$
|
0.55
|
|
$
|
0.58
|
|
- Diluted
|
|
|
|
|
0.55
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
|
|
26,075,413
|
|
|
25,172,640
|
|
- Diluted
|
|
|
|
|
26,264,794
|
|
|
25,172,640
|
|
F-4
See Accompanying Notes to the Financial Statements and
Accountants Report
AMERICAN LORAIN CORPORATION
|
|
STATEMENT OF STOCKHOLDERS EQUITY
|
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
(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, 2008
|
|
24,923,178
|
|
$
|
24,923
|
|
$
|
24,187,268
|
|
$
|
4,497,647
|
|
$
|
13,985,824
|
|
$
|
1,846,708
|
|
$
|
3,887,021
|
|
$
|
48,429,391
|
|
Prior period adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(244,135
|
)
|
|
|
|
|
|
|
|
(244,135
|
)
|
Issuance of common stock
|
|
249,455
|
|
|
249
|
|
|
(249
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Share adjustment to match transfer agent
|
|
7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15,677,568
|
|
|
-
|
|
|
-
|
|
|
15,677,568
|
|
Appropriations to statutory reserves
|
|
-
|
|
|
-
|
|
|
-
|
|
|
941,076
|
|
|
(941,076
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Allocation to non-controlling interests
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(974,190
|
)
|
|
-
|
|
|
974,190
|
|
|
-
|
|
Foreign currency translation adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,331,908
|
|
|
260,810
|
|
|
3,592,718
|
|
Balance, December 31, 2008
|
|
25,172,640
|
|
$
|
25,172
|
|
$
|
24,187,019
|
|
$
|
5,438,723
|
|
$
|
27,503,991
|
|
$
|
5,178,616
|
|
$
|
5,122,021
|
|
$
|
67,455,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2009
|
|
25,172,640
|
|
$
|
25,172
|
|
$
|
24,187,019
|
|
$
|
5,438,723
|
|
$
|
27,503,991
|
|
$
|
5 ,178,616
|
|
$
|
5,122,021
|
|
$
|
67,455,542
|
|
Issuance of share based compensation
|
|
56,393
|
|
|
57
|
|
|
166,341
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
166,398
|
|
Issuance of common stock for cash
|
|
5,011,169
|
|
|
5,011
|
|
|
12,002,150
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12,007,161
|
|
Issuance cost of common stock
|
|
|
|
|
|
|
|
(1,086,907
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,086,907
|
)
|
Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15,308,974
|
|
|
-
|
|
|
-
|
|
|
15,308,974
|
|
Appropriations to statutory reserves
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,456,754
|
|
|
(3,456,754
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Allocation to non-controlling interests
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(900,862
|
)
|
|
-
|
|
|
900,862
|
|
|
-
|
|
Foreign currency translation adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
889,953
|
|
|
-
|
|
|
889,953
|
|
Balance, December 31, 2009
|
|
30,240,202
|
|
$
|
30,240
|
|
$
|
35,268,603
|
|
$
|
8,895,477
|
|
$
|
38,455,349
|
|
$
|
6,068,569
|
|
$
|
6,022,883
|
|
$
|
94,741,120
|
|
F-5
See Accompanying Notes to the Financial Statements and
Accountants Report
AMERICAN LORAIN CORPORATION
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
(Stated in US Dollars)
|
|
|
Note
|
|
|
2009
|
|
|
2008
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
$
|
15,308,974
|
|
$
|
15,677,568
|
|
Stock and share based compensation
|
|
19
|
|
|
166,398
|
|
|
-
|
|
Depreciation
|
|
|
|
|
1,270,783
|
|
|
1,273,935
|
|
Amortization
|
|
|
|
|
202,539
|
|
|
158,428
|
|
(Increase)/decrease in accounts & other
receivables
|
|
|
|
|
(1,800,407
|
)
|
|
9,802,709
|
|
(Increase)/decrease in inventories
|
|
|
|
|
(1,572,195
|
)
|
|
(6,924,578
|
)
|
(Increase)/decrease in prepayments
|
|
|
|
|
(16,200,484
|
)
|
|
4,631,069
|
|
Decrease/(increase) in deferred tax asset
|
|
|
|
|
(199,867
|
)
|
|
-
|
|
Prior year adjustment
|
|
|
|
|
-
|
|
|
(244,135
|
)
|
Increase/(decrease) in accounts and other
payables
|
|
|
|
$
|
(8,018,565
|
)
|
|
(4,866,556
|
)
|
Net cash (used in)/provided by operating
activities
|
|
|
|
|
(10,842,825
|
)
|
$
|
19,508,440
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
Purchase of plant and equipment
|
|
|
|
|
(1,868,300
|
)
|
|
(13,928,921
|
)
|
Payment of construction in progress
|
|
|
|
|
(481,203
|
)
|
|
(3,524,520
|
)
|
Decrease/(increase) in restricted cash
|
|
|
|
|
2,416,109
|
|
|
(1,694,159
|
)
|
Payments for the purchase of land use rights
|
|
|
|
|
(123,157
|
)
|
|
(1,062,334
|
)
|
Payments for rental deposit
|
|
|
|
|
(16,088
|
)
|
|
-
|
|
Purchase of land for short-term investment
|
|
|
|
|
(7,312,935
|
)
|
|
--
|
|
Sales/(purchase) of securities
|
|
|
|
|
105,756
|
|
|
(105,823
|
)
|
Net cash used in investing activities
|
|
|
|
$
|
(7,279,819
|
|
$
|
(20,315,757)
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Issue of common stock
|
|
|
|
|
10,920,254
|
|
|
-
|
|
Payment of notes
|
|
|
|
|
(5,208,485
|
)
|
|
-
|
|
Proceeds from notes
|
|
|
|
|
-
|
|
|
2,474,041
|
|
Proceeds from bank borrowings
|
|
|
|
|
73,132,782
|
|
|
474,433
|
|
Repayment of bank borrowings
|
|
|
|
|
(52,341,668
|
)
|
|
(9,662,508
|
)
|
Net cash provided by/(used in) financing
activities
|
|
|
|
$
|
26,502,883
|
|
$
|
(6,714,034
|
)
|
|
|
|
|
|
|
|
|
|
|
Net in cash and cash equivalents (used)/sourced
|
|
|
|
|
8,380,239
|
|
|
(7,521,351
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash and cash
equivalents
|
|
|
|
|
889,953
|
|
|
3,592,717
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsbeginning of year
|
|
|
|
|
2,841,339
|
|
|
6,769,973
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalentsend of year
|
|
|
|
$
|
12,111,532
|
|
$
|
2,841,339
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest received
|
|
|
|
|
73,186
|
|
|
99,411
|
|
Interest paid
|
|
|
|
|
3,351,606
|
|
|
2,769,597
|
|
Income taxes paid
|
|
|
|
$
|
4,174,385
|
|
$
|
3,003,265
|
|
F-6
See Accompanying Notes to the Financial Statements and
Accountants Report
AMERICAN LORAIN CORPORATION
|
|
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND
2008
|
(Stated in US Dollars)
|
1.
|
ORGANIZATION, BASIS OF PRESENTATION, AND PRINCIPAL
ACTIVITIES
|
|
|
|
|
(a)
|
Organization history of American Lorain Corporation
(formerly known as Millennium Quest, Inc.)
|
|
|
|
|
|
American Lorain Corporation (the Company or ALC) is a
Delaware corporation incorporated on February 4, 1986. From inception
through May 3, 2007, the Company did not engage in any active business
operations other than in search and evaluation of potential business
opportunity to become an acquiree of a reverse- merger deal.
|
|
|
|
|
(b)
|
Organization History of International Lorain Holding
Inc. and its subsidiaries
|
|
|
|
|
|
International Lorain Holding Inc. (ILH) is a Cayman
Islands company incorporated on August 4, 2006 and was until May 3, 2007
wholly-owned by Mr. Hisashi Akazawa. Through restructuring and acquisition
in 2006, the Company presently has two direct wholly-owned subsidiaries,
Junan Hongrun and Luotian Lorain, and one indirectly wholly-owned
subsidiary through Junan Hongrun, which is Beijing Lorain.
|
|
|
|
|
|
In addition, the Company directly and indirectly has
80.2% ownership of Shandong Lorain. The rest of the 19.8%, which is owned
by the State under the name of Shandong Economic Development Investment
Co. Ltd., is not included as a part of the Group.
|
|
|
|
|
|
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.
|
|
|
|
|
(c)
|
Reverse-Merger
|
|
|
|
|
|
On May 3, 2007, the Company entered into a share exchange
agreement with International Lorain Holding Inc. (ILH) whereby the
Company consummated its acquisition of ILH by issuance of 697,663 Series B
voting convertible preferred shares to the shareholders of ILH in exchange
of 5,099,503 ILH shares. Concurrently on May 3, 2007, the Company also
entered into a securities purchase agreement with certain investors and
Mr. Hisashi Akazawa and Mr. Si Chen (each a beneficial owner) whereby
the Company issued 319,913 (after reverse-split at 32.84 from 10,508,643)
common shares to its shareholders as consideration of the Companys
reverse-merger with Lorain.
|
|
|
|
|
|
The share exchange transaction is referred to hereafter
as the reverse-merger transaction. The share exchange transaction has
been accounted for as a recapitalization of ALC where the Company (the
legal acquirer) is considered the accounting acquiree and ILH (the
acquiree) is considered the accounting acquirer. As a result of this
transaction, the Company is deemed to be a continuation of the business of
ILH.
|
|
|
|
|
|
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 16 Capitalization.
|
|
|
|
|
(d)
|
Business Activities
|
|
|
|
|
|
The Company develops, manufactures, and sells convenience
foods (includes 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.
|
F-7
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL
STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)
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 year ended December 31, 2008 in order to be consistent with
the presentation provided for the year ended December 31, 2009. 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 December 31, 2009, the detailed identities of the
consolidating subsidiaries are as follows:
|
Name of Company
|
|
Place of
incorporation
|
|
|
Attributable
equity
interest
|
|
|
Registered
capital
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
Shandong Lorain Co., Ltd
|
|
PRC
|
|
|
80.2
|
|
$
|
12,901,823
|
|
|
(RMB 100,860,000
|
)
|
Luotian Lorain Co., Ltd
|
|
PRC
|
|
|
100
|
|
$
|
3,240,013
|
|
|
(RMB 25,328,800
|
)
|
Junan Hongrun Foodstuff Co., Ltd
|
|
PRC
|
|
|
100
|
|
$
|
16,245,603
|
|
|
(RMB 127,000,000
|
)
|
Beijing Lorain Co., Ltd
|
|
PRC
|
|
|
100
|
|
$
|
1,279,181
|
|
|
(RMB 10,000,000
|
)
|
Dongguan Lorain Co,,Ltd
|
|
PRC
|
|
|
100
|
|
$
|
146,259
|
|
|
(RMB 1,000,000
|
)
|
International Lorain Holding Inc.
|
|
Cayman Islands
|
|
|
100
|
|
$
|
37,129,099
|
|
|
(RMB 253,859,078
|
)
|
|
(c)
|
Use of estimates
|
|
|
|
|
|
The preparation of the financial statements in conformity
with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Management makes these estimates using the best information
available at the time the estimates are made; however actual results could
differ materially from those estimates.
|
|
|
|
|
(d)
|
Economic and political risks
|
|
|
|
|
|
The Companys operations are conducted in the PRC.
Accordingly, the Companys business, financial condition and results of
operations may be influenced by the political, economic and legal
environment in the PRC, and by the general state of the PRC
economy.
|
The Companys 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 Companys 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.
F-8
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL
STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
|
|
|
|
(e)
|
Lease prepayments
|
|
|
|
|
|
Lease prepayments represent the cost of land use rights in the
PRC. Land use rights are carried at cost and amortized on a straight-line basis
over the period of rights of 50 years.
|
|
|
|
|
(f)
|
Property, plant and equipment
|
|
|
|
|
|
Plant and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over their estimated useful lives, using
the straight-line method. Estimated useful lives of the plant and equipment are
as follows:
|
|
|
|
Buildings
|
|
40 years
|
|
Machinery and equipment
|
|
10 years
|
|
Motor vehicles
|
|
10 years
|
|
Office equipment
|
|
5 years
|
|
|
|
The cost and related accumulated depreciation of assets
sold or otherwise retired are eliminated from the accounts and any gain or
loss is included in the statement of income. The cost of maintenance and
repairs is charged to income as incurred, whereas significant renewals and
betterments are capitalized.
|
|
|
|
|
(g)
|
Accounting for the Impairment of Long-Lived
Assets
|
|
|
|
|
|
The long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. It is
reasonably possible that these assets could become impaired as a result of
technology or other industry changes. Determination of recoverability of
assets to be held and used is by comparing the carrying amount of an asset
to future net undiscounted cash flows to be generated by the
assets.
|
|
|
|
|
|
If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. During the reporting years, there was no
impairment loss.
|
|
|
|
|
(h)
|
Construction in progress
|
|
|
|
|
|
Construction in progress represents direct costs of
construction or acquisition and design fees incurred. Capitalization of
these costs ceases and the construction in progress is transferred to
plant and equipment when substantially all the activities necessary to
prepare the assets for their intended use are completed. No depreciation
is provided until it is completed and ready for intended use.
|
|
|
|
|
(i)
|
Investment securities
|
|
|
|
|
|
The Company classifies its equity securities into trading
or available-for-sale. Trading securities are bought and held principally
for the purpose of selling them in the near term. All securities not
included in trading securities are classified as
available-for-sale.
|
|
|
|
|
|
Trading and available-for-sale securities are recorded at
fair value. Unrealized holding gains and losses on trading securities are
included in the net income. Unrealized holding gains and losses, net of
the related tax effect, on available for sale securities are excluded from
net income and are reported as a separate component of other comprehensive
income until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific-identification
basis.
|
F-9
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL
STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)
|
|
A decline in the market value of any available-for-sale
security below cost that is deemed to be other-than-temporary results in a
reduction in carrying amount to fair value. The impairment is charged as
an expense to the statement of income and comprehensive income and a new
cost basis for the security is established. To determine whether
impairment is other-than-temporary, the Company considers whether it has
the ability and intent to hold the investment until a market price
recovery and considers whether evidence indicating the cost of the
investment is recoverable outweighs evidence to the contrary. Evidence
considered in this assessment includes the reasons for the impairment, the
severity and duration of the impairment, changes in value subsequent to
year end, and forecasted performance of the investee.
|
|
|
|
|
|
Premiums and discounts are amortized or accreted over
the life of the related available-for-sale security as an adjustment to
yield using the effective-interest method. Dividend and interest income
are recognized when earned.
|
|
|
|
|
(j)
|
Inventories
|
|
|
|
|
|
Inventories consisting of finished goods and raw
materials are stated at the lower of cost or market value. Finished goods
are comprised of direct materials, direct labor and an appropriate
proportion of overhead.
|
|
|
|
|
(k)
|
Trade receivables
|
|
|
|
|
|
Trade receivables are recognized and carried at the
original invoice amount less allowance for any uncollectible amounts. An
estimate for doubtful accounts is made when collection of the full amount
is no longer probable. Bad debts are written off as incurred.
|
|
|
|
|
(l)
|
Customer deposits
|
|
|
|
|
|
Customer deposits were received from customers in
connection with orders of products to be delivered in future
periods.
|
|
|
|
|
(m)
|
Cash and cash equivalents
|
|
|
|
|
|
The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
|
|
|
|
|
(n)
|
Advertising
|
|
|
|
|
|
All advertising costs are expensed as incurred.
|
|
|
|
|
(o)
|
Shipping and handling
|
|
|
|
|
|
All shipping and handling are expensed as
incurred.
|
|
|
|
|
(p)
|
Research and development
|
|
|
|
|
|
All research and development costs are expensed as
incurred.
|
|
|
|
|
(q)
|
Retirement benefits
|
|
|
|
|
|
Retirement benefits in the form of contributions under
defined contribution retirement plans to the relevant authorities are
charged to the consolidated statement of income as incurred.
|
|
|
|
|
(r)
|
Income taxes
|
The Company accounts for income tax using an asset and
liability approach and allows for recognition of deferred tax benefits in future
years. Under the asset and liability approach, deferred taxes are provided for
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before the Company is able
to realize their benefits, or that future realization is uncertain.
F-10
AMERICAN LORAIN CORPORATION
|
|
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND
2008
|
(Stated in US Dollars)
|
The Company has implemented Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. Income tax liabilities
computed according to the United States and Peoples 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
|
|
|
|
|
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
|
|
|
-
|
|
|
|
|
|
(s)
|
Statutory reserves
|
|
|
|
|
|
Statutory reserves are referring to the amount
appropriated from the net income in accordance with laws or regulations,
which can be used to recover losses and increase capital, as approved, and
are to be used to expand production or operations.
|
|
|
|
|
(t)
|
Foreign currency translation
|
|
|
|
|
|
The accompanying financial statements are presented in
United States dollars. The functional currency of the Company is the
Renminbi (RMB). The financial statements are translated into United States
dollars from RMB at year-end exchange rates as to assets and liabilities
and average exchange rates as to revenues and expenses. Capital accounts
are translated at their historical exchange rates when the capital
transactions occurred.
|
|
|
2009
|
|
|
2008
|
|
Year end RMB : US$ exchange rate
|
|
6.8372
|
|
|
7.3141
|
|
Average yearly RMB : US$ exchange rate
|
|
6.8408
|
|
|
7.6172
|
|
F-11
AMERICAN LORAIN CORPORATION
|
|
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND
2008
|
(Stated in US Dollars)
|
|
|
The RMB is not freely convertible into foreign currency
and all foreign exchange transactions must take place through authorized
institutions. No representation is made that the RMB amounts could have
been, or could be, converted into US$ at the rates used in translation.
|
|
|
|
|
(u)
|
Revenue recognition
|
|
|
|
|
|
The Company's revenue recognition policies are in
compliance with Staff accounting bulletin (SAB) 104. Sales revenue is
recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no
other significant obligations of the Company exist and collectibility is
reasonably assured. Payments received before all of the relevant criteria
for revenue recognition are satisfied are recorded as unearned
revenue.
|
|
|
|
|
|
The Company's revenue consists of invoiced value of
goods, net of a value-added tax (VAT). No product return or sales discount
allowance is made as products delivered and accepted by customers are
normally not returnable and sales discount is normally not granted after
products are delivered.
|
|
|
|
|
(v)
|
Earnings per share
|
|
|
|
|
|
Basic earnings per share is computed by dividing net
income by the weighted average number of ordinary shares outstanding
during the period. Diluted earnings per share is computed by dividing net
income by the sum of the weighted average number of ordinary shares
outstanding and dilutive potential ordinary shares during the years.
During the years ended 2009 and 2008, no dilutive potential ordinary
shares were issued.
|
|
|
|
|
|
The Company computes earnings per share (EPS) in
accordance with Statement of Financial Accounting Standards No. 128,
Earnings per share (SFAS No. 128), and SEC Staff Accounting Bulletin
No. 98 (SAB 98). SFAS No. 128 requires companies with complex capital
structures to present basic and diluted EPS. Basic EPS is measured as the
income or loss available to common shareholders divided by the weighted
average common shares outstanding for the period. Diluted EPS is similar
to basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., convertible securities, options, and
warrants) as if they had been converted at the beginning of the periods
presented, or issuance date, if later. Potential common shares that have
an anti-dilutive effect (i.e., those that increase income per share or
decrease loss per share) are excluded from the calculation of diluted
EPS.
|
|
|
|
|
(w)
|
Financial Instruments
|
|
|
|
|
|
The Companys financial instruments are cash and cash
equivalents, accounts receivable, other receivable, advances to suppliers,
advances to employees, bank loans and notes, accounts payable, other
payable, dividend payable, accrued liabilities, and long-term liabilities.
The recorded values of cash and cash equivalents, accounts receivable,
other receivable, advances to suppliers, advances to employees, bank loans
and notes, accounts payable, other payable, dividend payable and accrued
liabilities approximate their fair values based on their short-term
nature. The recorded values of long-term liabilities approximate their
fair values, as interest approximates market rates.
|
|
|
|
|
(x)
|
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.
|
|
|
|
|
(y)
|
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 Companys current component of other comprehensive income
is the foreign currency translation adjustment.
|
F-12
AMERICAN LORAIN CORPORATION
|
|
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND
2008
|
(Stated in US Dollars)
|
|
(z)
|
Recent accounting pronouncements
|
|
|
|
|
|
In June 2009, FASB issued FASB Statement No. 166,
Accounting for Transfers for Financial Assets (FASB ASC 860 Transfers and
Servicing) and FASB Statement No. 167 (FASB ASC 810 Consolidation), a
revision to FASB Interpretation No. 46 (Revised December 2003),
Consolidation of Variable Interest Entities (FASB ASC 810
Consolidation).
|
|
|
|
|
|
Statement 166 is a revision to FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (FASB ASC 860 Transfers and Servicing), and
will require more information about transfers of financial assets,
including securitization transactions, and where entities have continuing
exposure to the risks related to transferred financial assets. It
eliminates the concept of a qualifying special-purpose entity, changes
the requirements for derecognizing financial assets, and requires
additional disclosures. Statement No. 166 (FASB ASC 860 Transfers and
Servicing) must be applied as of the beginning of each reporting entitys
first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim
and annual reporting periods thereafter. Earlier application is
prohibited. This Statement must be applied to transfers occurring on or
after the effective date. The Company is still evaluating the impact of
the above pronouncement.
|
|
|
|
|
|
Statement 167 is a revision to FASB Interpretation No. 46
(Revised December 2003), Consolidation of Variable Interest Entities (FASB
ASC 810 Consolidation), and changes how a reporting entity determines when
an entity that is insufficiently capitalized or is not controlled through
voting (or similar rights) should be consolidated. The determination of
whether a reporting entity is required to consolidate another entity is
based on, among other things, the other entitys purpose and design and
the reporting entitys ability to direct the activities of the other
entity that most significantly impact the other entitys economic
performance. Statement No. 167 (FASB ASC 810 Consolidation) shall be
effective as of the beginning of each reporting entitys first annual
reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period, and for interim and annual
reporting periods thereafter. Earlier application is prohibited. The
Company is still evaluating the impact of the above
pronouncement.
|
|
|
|
|
|
On June 30, 2009, FASB issued FASB Statement No. 168,
Accounting Standards Codification ( FASB ASC 105 Generally Accepted
Accounting Principles) a replacement of FASB Statement No. 162 the
Hierarchy of Generally Accepted Accounting Principles. On the effective
date of this standard, FASB Accounting Standards Codification (ASC)
became the source of authoritative U.S. accounting and reporting standards
for nongovernmental entities, in addition to guidance issued by the
Securities and Exchange Commission (SEC). This statement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. If an accounting change results from the application
of this guidance, an entity should disclose the nature and reason for the
change in accounting principle in their financial statements. This new
standard flattens the GAAP hierarchy to two levels: one that is
authoritative (in FASB ASC) and one that is non-authoritative (not in FASB
ASC). Exceptions include all rules and interpretive releases of the SEC
under the authority of federal securities laws, which are sources of
authoritative GAAP for SEC registrants, and certain grandfathered guidance
having an effective date before March 15, 1992. Statement No. 168 is the
final standard that will be issued by FASB in that form. There will no
longer be, for example, accounting standards in the form of statements,
staff positions, Emerging Issues Task Force (EITF) abstracts, or AICPA
Accounting Statements of Position. The Company has adopted the new
accounting standard. There was no material impact on the financial
statements presented herein.
|
|
|
|
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.
|
F-13
AMERICAN LORAIN CORPORATION
|
|
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND
2008
|
(Stated in US Dollars)
|
|
4.
|
TRADE ACCOUNTS RECEIVABLE
|
|
|
|
Trade accounts receivable consisted of the following as of
December 31, 2009 and 2008:
|
|
|
|
|
2009
|
|
|
2008
|
|
Trade accounts receivable
|
$
|
23,293,362
|
|
$
|
25,421,293
|
|
Less
:
Allowance for doubtful accounts
|
|
(267,590
|
)
|
|
(127,967
|
)
|
|
$
|
23,025,772
|
|
$
|
25,293,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for bad debt:
|
|
2009
|
|
|
2008
|
|
Beginning balance
|
$
|
(127,967
|
)
|
$
|
(172,309
|
)
|
Additions to Allowance
|
|
(139,623
|
)
|
|
-
|
|
Less
:
Bad
debt written-off
|
|
-
|
|
|
44,342
|
|
Ending balance
|
$
|
(267,590
|
)
|
$
|
(127,967
|
)
|
The Company offers credit terms of between 30 to 60 days to
most of their international distributors as well as domestic supermarkets and
wholesalers, and between 0 to 15 days for most of their agents.
5.
|
OTHER RECEIVABLES
|
|
|
|
Other receivables consisted of the following as of December 31,
2009 and 2008:
|
|
|
|
|
2009
|
|
|
2008
|
|
Advances to employees for purchases of
materials
|
$
|
4,041,986
|
|
$
|
663,302
|
|
Advances to employees for job/travel disbursements
|
|
23,890
|
|
|
3,160,886
|
|
Amount due by a non-related enterprise
|
|
1,999,671
|
|
|
1,278,501
|
|
Other non-related receivables
|
|
1,772,128
|
|
|
5,030
|
|
|
$
|
7,837,675
|
|
$
|
5,107,719
|
|
6.
|
RELATED PARTY RECEIVABLE
|
|
|
|
Related party receivable consisted of the following as of
December 31, 2009 and 2008:
|
|
|
|
|
2009
|
|
|
2008
|
|
Chen Si
|
$
|
541,245
|
|
$
|
-
|
|
Lu Yundong
|
|
32,358
|
|
|
-
|
|
Liu Gang
|
|
29,513
|
|
|
-
|
|
|
$
|
603,116
|
|
$
|
-
|
|
Related party receivable represent advances issued by
management for the purchase of raw materials in the normal course of business.
The receivables are neither interest-bearing nor collateralized. The receivables
had no impact on earnings. The related parties will repay the outstanding
balances within one operating period.
F-14
AMERICAN LORAIN CORPORATION
|
|
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND
2008
|
(Stated in US Dollars)
|
7.
|
INVENTORY
|
|
|
|
Inventory consisted of the following as
of December 31, 2009 and 2008:
|
|
|
2009
|
|
|
2008
|
|
Raw materials
|
$
|
12,014,402
|
|
$
|
10,779, 500
|
|
Finished goods
|
|
14,385,715
|
|
|
14,048,422
|
|
|
$
|
26,400,117
|
|
$
|
24,827,922
|
|
At December 31, 2008, the Company had classified $1,143,766 of
inventory under the sub-category work-in-progress. At December 31, 2009, the
Company reclassified the amount from work in progress to the subcategories: 1.)
raw materials and, 2.) finished goods. The Company reclassified $1,143,450 to
raw materials, and $316 to finished goods. The reclassification had no impact on
the Companys Statements of Income for the year ended December 31, 2009 and
2008.
8.
|
PROPERTY, PLANT, AND EQUIPMENT
|
Property, plant, and equipment consisted of the following as of
December 31, 2009 and 2008:
|
|
2009
|
|
|
2008
|
|
At cost:
|
|
|
|
|
|
|
Buildings
|
$
|
29,181,372
|
|
$
|
27,798,849
|
|
Landscaping, plant, and tree
|
|
2,758,944
|
|
|
2,752,101
|
|
Machinery and equipment
|
|
7,783,775
|
|
|
7,229,512
|
|
Office equipment
|
|
466,411
|
|
|
859,818
|
|
Motor vehicles
|
|
357,902
|
|
|
39,824
|
|
|
$
|
40,548,404
|
|
$
|
38,680,104
|
|
Less
:
accumulated
depreciation
|
|
|
|
|
|
|
Buildings
|
|
(1,811,423
|
)
|
|
(1,192,855
|
)
|
Machinery and equipment
|
|
(3,226,015
|
)
|
|
(2,628,710
|
)
|
Office equipment
|
|
(264,039
|
)
|
|
(414,478
|
)
|
Motor vehicles
|
|
(230,341
|
)
|
|
(24,992
|
)
|
|
|
(5,531,818
|
)
|
|
(4,261,035
|
)
|
|
|
|
|
|
|
|
Construction in Progress
|
|
6,263,821
|
|
|
5,782,617
|
|
|
$
|
41,280,407
|
|
$
|
40,201,686
|
|
Construction in progress mainly comprises capital expenditures
for construction of the Companys new corporate campus, including offices,
factories and staff dormitories. Capital commitments for the construction are
immaterial for the three years above.
Landscaping, plant and tree is chestnut trees investment in the
development of agricultural operations, which have not been the significant
source of the raw materials needed for the Companys operations to date.
F-15
AMERICAN LORAIN CORPORATION
|
|
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND
2008
|
(Stated in US Dollars)
|
9.
|
LAND USE RIGHTS, NET
|
|
Land use rights consisted of the
following as of December 31, 2009 and 2008:
|
|
|
2009
|
|
|
2008
|
|
Land use rights,
at cost
|
$
|
4,359,423
|
|
$
|
4,236,266
|
|
Less
:
Accumulated
amortization
|
|
(487,876
|
)
|
|
(285,339
|
)
|
|
$
|
3,871,547
|
|
$
|
3,950,927
|
|
Land use rights represent the prepaid land use right. The PRC
government owns the land on which the Companys corporate campus is being
constructed. The Company carries land use rights at cost less accumulated
amortization. Land use rights are amortized straight-line over the useful life
of 50 years.
Short-term debts consisted of the following as of December 31,
2009 and 2008:
|
|
|
|
|
2009
|
|
|
2008
|
|
Loans from Junan County Construction Bank,
|
|
|
|
|
|
|
|
• Interest rate at 5.3460% per
annum due1/18/2010
|
|
$
|
212,075
|
|
$
|
-
|
|
• Interest rate at 5.3460% per annum due
1/24/2010
|
|
|
144,796
|
|
|
-
|
|
• Interest rate at 5.3460% per
annum due 1/28/2010
|
|
|
153,572
|
|
|
-
|
|
• Interest rate at 5.3460% per annum due 3/8/2010
|
|
|
153,571
|
|
|
-
|
|
• Interest rate at 5.3460% per
annum due 3/25/2010
|
|
|
153,572
|
|
|
|
|
• Interest rate at 5.3460% per annum due
1/22/2010
|
|
|
394,899
|
|
|
-
|
|
• Interest rate at 5.3460% per
annum due 1/10/2010
|
|
|
394,898
|
|
|
-
|
|
• Interest rate at 5.3460% per annum due
1/12/2010
|
|
|
475,340
|
|
|
-
|
|
• Interest rate at 5.8410% per
annum due 12/27/2010
|
|
|
716,667
|
|
|
-
|
|
• Interest rate at 5.3460% per annum due 9/1/2010
|
|
|
1,117,070
|
|
|
-
|
|
• Interest rate at 5.3460% per
annum due 1/7/2010
|
|
|
1,462,587
|
|
|
-
|
|
• Interest rate at 7.452% per annum due 2/24/2009
|
|
|
-
|
|
|
102,127
|
|
• Interest rate at 10.452% per
annum due 1/22/2009
|
|
|
-
|
|
|
1,575,676
|
|
• Interest rate at 7.236% per annum due 2/3/2009
|
|
|
-
|
|
|
116,717
|
|
|
|
|
|
|
|
|
|
|
|
Loan from Junan County Agriculture Bank,
|
|
|
|
|
|
|
|
• Interest rate at 7.9650% per
annum due 8/23/2010
|
|
|
1,608,846
|
|
|
-
|
|
• Interest rate at 7.2900% per annum due
9/23/2010
|
|
|
1,447,961
|
|
|
-
|
|
• Interest rate at 6.8040% per
annum due 3/3/2010
|
|
|
1,462,587
|
|
|
-
|
|
• Interest rate at 7.9650% per annum due
11/22/2010
|
|
|
643,538
|
|
|
-
|
|
• Interest rate at 6.8040% per
annum due 3/11/2010
|
|
|
2,193,881
|
|
|
-
|
|
• Interest rate at 6.8040% per annum due
3/08/2010
|
|
|
1,755,104
|
|
|
-
|
|
• Interest rate at 7.9650% per
annum due 3/17/2010
|
|
|
3,363,950
|
|
|
|
|
• Interest rate at 12.699% per annum due 8/6/2009
|
|
|
|
|
|
583,584
|
|
• Interest rate at 12.699% per
annum due 8/18/2009
|
|
|
|
|
|
656,532
|
|
• Interest rate at 12.699% per annum due 8/1/2009
|
|
|
|
|
|
364,740
|
|
• Interest rate at 10.577% per
annum due 3/27/2009
|
|
|
-
|
|
|
1,458,959
|
|
|
|
|
|
|
|
|
|
|
|
Loan from Junan County
Industrial and Commercial Banks,
|
|
|
|
|
|
|
|
• Interest rate at 5.3460% per annum due1/8/2010
|
|
|
438,776
|
|
|
-
|
|
• Interest rate at 5.3460% per
annum due1/14/2010
|
|
|
541,157
|
|
|
-
|
|
• Interest rate at 5.3460% per annum due1/25/2010
|
|
|
614,287
|
|
|
-
|
|
• Interest rate at 3.24% per
annum due 3/15/2010
|
|
|
463,640
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
F-16
AMERICAN LORAIN CORPORATION
|
|
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND
2008
|
(Stated in US Dollars)
|
• Interest rate at 6.120% per annum due 1/10/2009
|
|
-
|
|
|
145,896
|
|
• Interest rate at 8.541% per annum due
3/4/2009
|
|
-
|
|
|
393,919
|
|
• Interest rate at 3.1725% per annum due 2/19/2009
|
|
-
|
|
|
240,035
|
|
• Interest rate at 3.1725% per annum due
2/19/2009
|
|
-
|
|
|
118,161
|
|
• Interest rate at 10.1825% per annum due 2/26/2009
|
|
-
|
|
|
120,762
|
|
• Interest rate at 10.1825% per annum due
3/5/2009
|
|
-
|
|
|
173,670
|
|
|
|
|
|
|
|
|
Loan from Junan County Agricultural
Financial Institution,
|
|
|
|
|
|
|
• Interest rate at 10.939 per annum due 1/22/2010
|
|
1,170,070
|
|
|
-
|
|
Loan from Linyi Commercial Bank,
|
|
|
|
|
|
|
• Interest rate at 9.293% per annum due
1/19/2010
|
$
|
658,164
|
|
$
|
-
|
|
• Interest rate at 9.293% per annum due 12/21/2010
|
|
687,416
|
|
|
-
|
|
• Interest rate at 9.293%per annum due
6/16/2010
|
|
1,462,587
|
|
|
-
|
|
• Interest rate at 9.293% per annum due 6/15/2010
|
|
1,462,587
|
|
|
-
|
|
• Interest rate at 13.073% per annum due
1/5/2009
|
|
-
|
|
|
685,711
|
|
• Interest rate at 13.073% per annum due 1/5/2009
|
|
-
|
|
|
656,532
|
|
• Interest rate at 8.539% per annum due
3/27/2009
|
|
-
|
|
|
1,458,959
|
|
• Interest rate at 8.539% per annum due 3/27/2009
|
|
-
|
|
|
141,885
|
|
|
|
|
|
|
|
|
Loan from Beijing Miyun County Shilipu Rural
|
|
|
|
|
|
|
Financial Institution,
|
|
|
|
|
|
|
• Interest rates at 7.434% per annum due 1/20/2010
|
|
1,462,587
|
|
|
-
|
|
• Interest rates at 6.903% per annum due
9/30/2010
|
|
2,831,918
|
|
|
|
|
• Interest rates at 8.539% per annum due 9/30/2009
|
|
-
|
|
|
2,772,023
|
|
|
|
|
|
|
|
|
Loan from China Merchants Bank, Beijing,
|
|
|
|
|
|
|
• Interest rate at 5.310% per annum due
3/29/2010
|
|
731,294
|
|
|
-
|
|
|
|
|
|
|
|
|
Loan from China Agricultural Bank,
Luotian
|
|
|
|
|
|
|
Branch
|
|
|
|
|
|
|
• Interest rate at 6.372% per annum due
8/25/2010
|
|
1,901,363
|
|
|
-
|
|
• Interest rate at 7.47% per annum due 9/7/2009
|
|
-
|
|
|
817,017
|
|
• Interest rate at 7.47% per annum due
9/7/2009
|
|
-
|
|
|
291,792
|
|
|
|
|
|
|
|
|
Bank of Beijing
|
|
|
|
|
|
|
• Interest rate at 6.903% per annum due 7/29/2010
|
|
292,517
|
|
|
-
|
|
• Interest rate at 7.722% per annum due
7/28/2009
|
|
-
|
|
|
291,792
|
|
|
|
|
|
|
|
|
Bank of China, Junan Branch
|
|
|
|
|
|
|
• Interest rate at 7.500% per annum due 5/19/2009
|
|
-
|
|
|
4,014
|
|
|
|
|
|
|
|
|
United Commercial Bank, China Branch
|
|
|
|
|
|
|
• Interest rate at 5.494% per annum due
1/14/2010
|
|
1,050,137
|
|
|
-
|
|
• Interest rate at 5.494% per annum due 1/14/2009
|
|
-
|
|
|
1,156,955
|
|
|
|
|
|
|
|
|
HSBC Miyun Branch
|
|
|
|
|
|
|
• Interest rate at 6.804% per annum due
4/8/2010
|
|
292,517
|
|
|
-
|
|
|
|
|
|
|
|
|
Credit Union, Junan
|
|
|
|
|
|
|
• Interest rate at 8.5837% per annum due 1/7/2009
|
|
-
|
|
|
43,769
|
|
• Interest rate at 8.5837% per annum due
1/12/2009
|
|
-
|
|
|
43,769
|
|
|
|
|
|
|
|
|
Shenzhen Development Bank
|
|
1,462,587
|
|
|
|
|
• Interest rate at 5.5755% per annum due 12/29/2010
|
|
|
|
|
|
|
F-17
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL
STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)
Luotian Agricultural Development Bank
|
|
|
|
|
|
|
• Interest rate at 0.67% month due 12/11/2010
|
|
109,694
|
|
|
-
|
|
|
$
|
35,488,212
|
|
$
|
14,414,996
|
|
The short-term loans, which are denominated in the functional
currency Renminbi (RMB), were primarily obtained for general working capital.
11.
|
NOTES PAYABLE
|
|
|
|
Notes payable consisted of the following as of
December 31, 2009 and 2008:
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Notes to Junan County Construction Bank,
|
|
|
|
|
|
|
• Bank commission charge at 4%, due
1/12/2009
|
|
-
|
|
|
554,405
|
|
|
|
|
|
|
|
|
Notes to Junan County Agriculture
Bank,
|
|
|
|
|
|
|
• Bank commission charge at 4%, due 1/16/2009
|
|
-
|
|
|
277,202
|
|
|
|
|
|
|
|
|
Loan to Jinan Branch, Shenzhen Development Bank,
|
|
|
|
|
|
|
• Bank charge commission charge at 3.96%,
due 2/6/2009
|
|
-
|
|
|
4,376,878
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
5,208,485
|
|
|
|
2009
|
|
|
2008
|
|
Value added tax payable
|
$
|
328,608
|
|
$
|
1,155,610
|
|
Corporate income tax payable
|
|
1,842,751
|
|
|
1,770,492
|
|
Employee payroll tax withholding
|
|
3,449
|
|
|
205
|
|
Property tax payable
|
|
12,279
|
|
|
-
|
|
Stamp tax payable
|
|
359
|
|
|
-
|
|
Sales tax payable
|
|
-
|
|
|
486
|
|
Land use tax payable
|
|
41,260
|
|
|
-
|
|
Import tariffs
|
|
6,635
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
2,235,341
|
|
$
|
2,926,793
|
|
|
|
|
|
|
|
|
F-18
AMERICAN LORAIN CORPORATION
NOTES TO FINANCIAL
STATEMENTS - DECEMBER 31, 2009 AND 2008
(Stated in US Dollars)
13.
|
ACCRUED EXPENSES AND OTHER PAYABLE
|
Accrued expenses and other payables consisted of the following
as of December 31, 2009 and 2008:
|
|
2009
|
|
|
2008
|
|
Accrued salaries and wages
|
$
|
500,390
|
|
$
|
605,471
|
|
Accrued utility expenses
|
|
263,492
|
|
|
481,678
|
|
Accrued interest expenses
|
|
9,264
|
|
|
-
|
|
Accrued transportation expenses
|
|
344,841
|
|
|
1,103,112
|
|
Other accruals
|
|
184,860
|
|
|
-
|
|
Business and other taxes
|
|
2,344,746
|
|
|
1,979,650
|
|
Purchase disbursement payable
|
|
2,750,547
|
|
|
6,018,057
|
|
Accrued staff welfare
|
|
24,352
|
|
|
103,269
|
|
|
|
|
|
|
|
|
|
$
|
6,422,492
|
|
$
|
10,291,237
|
|
Long-term debt consisted of the following as
of December 31 2009 and 2008:
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Loans from Luotian Agricultural
Development Bank
|
|
|
|
|
|
|
•
Interest rates at 2.10% per annum due 12/11/2011
|
|
25,595
|
|
|
25,532
|
|
Loan from United Commercial Bank,
China Branch
|
|
|
|
|
|
|
•
Interest rates at 5.494% per annum due 1/14/2011
|
|
269,278
|
|
|
551,443
|
|
|
|
|
|
|
|
|
|
$
|
294,873
|
|
$
|
576,975
|
|
15.
|
MINORITY INTEREST
|
|
|
|
This represents the 19.8% equity of Shandong Lorain held
by a state-owned interest, Shandong Economic Development Investment
Corporation.
|
|
|
16.
|
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. During the course of 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; 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 it 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 December 31, 2008 was
25,172,640.
|
|
|
|
During the year of 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. The total number of
shares issued and outstanding is 30,240,202 at December 31,
2009.
|
F-19
AMERICAN LORAIN CORPORATION
|
|
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND
2008
|
(Stated in US Dollars)
|
|
|
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
|
|
Common stock at
12/31/2009
|
|
|
|
|
30,240,202
|
|
|
30,240,202
|
|
|
|
Number of warrants
|
|
|
|
|
|
|
|
Warrants and
options
|
|
or
options
|
|
|
Issuance Date
|
|
|
Expiration date
|
|
Issued to PIPE investors first round
financing
|
|
1,037,858
|
|
|
5/3/2007
|
|
|
5/2/2010
|
|
Issued to placement agent first round financing
|
|
489,330
|
|
|
5/3/2007
|
|
|
5/2/2010
|
|
Employee stock options
|
|
1,334,573
|
|
|
7/28/2009
|
|
|
7/27/2014
|
|
PIPE investors second round financing - Series A
|
|
1,753,909
|
|
|
10/28/2009
|
|
|
4/28/2015
|
|
PIPE investors second round financing -
Series B
|
|
501,115
|
|
|
10/28/2009
|
|
|
10/28/2012
|
|
Total warrants
|
|
5,116,785
|
|
|
|
|
|
|
|
The following tables provide the reconciliation of the
differences between the statutory and effective tax expenses for the years ended
December 31, 2009 and 2008.
|
|
2009
|
|
|
2008
|
|
Income attributed to PRC
|
$
|
20,009,830
|
|
$
|
18,698,215
|
|
Loss attributed to US*
|
|
(478,151
|
)
|
|
(17,382
|
)
|
Income before tax
|
|
19,531,679
|
|
|
18,680,833
|
|
|
|
|
|
|
|
|
PRC Statutory Tax at 25% Rate
|
|
5,002,457
|
|
|
4,674,554
|
|
Effect of tax exemption granted
|
|
(779,752
|
)
|
|
(1,671,289
|
)
|
Income tax
|
$
|
4,222,705
|
|
$
|
3,003,265
|
|
|
|
|
|
|
|
|
Per Share Effect of Tax
Exemption
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Effect of tax exemption granted
|
$
|
(779,752
|
)
|
$
|
(1,671,289
|
)
|
Weighted-Average Shares Outstanding
|
|
26,075,413
|
|
|
25,172,640
|
|
Per share effect
|
$
|
(0.03
|
)
|
$
|
(0.07
|
)
|
The difference between the U.S. federal statutory income tax
rate and the Companys effective tax rate was as follows for the year ended
December 31, 2009 and 2008:
F-20
AMERICAN LORAIN CORPORATION
|
|
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND
2008
|
(Stated in US Dollars)
|
|
|
2008
|
|
|
2009
|
|
U.S. federal statutory income tax rate
|
$
|
35.00%
|
|
$
|
35.00%
|
|
Lower rates in PRC, net
|
|
-10.00%
|
|
|
-10.00%
|
|
Tax holiday for foreign investments
|
|
-3.38%
|
|
|
-8.92%
|
|
The Companys effective tax rate
|
$
|
21.62%
|
|
$
|
16.08%
|
|
Effective January 1, 2008, PRC government implements a new 25%
tax rate across the board for all enterprises regardless of whether domestic or
foreign enterprise without any tax holiday which is defined as two-year
exemption followed by three-year half exemption hitherto enjoyed by tax payers.
As a result of the new tax law of a standard 15% tax rate, tax holidays
terminated as of December 31, 2007. However, PRC government has established a
set of transition rules to allow enterprises already started tax holidays before
January 1, 2008, to continue enjoying the tax holidays until being fully
utilized.
*The Company has accrued a deferred tax asset as a result of
its net operating loss in 2009 because the Company has plans to setup operations
in the United States. The company anticipates that the operations within the
United States will generate income in the future so that it will be able to take
full advantage of the accrued asset. Accordingly the Company has not provided a
valuation allowances for the accrued tax asset.
The Companys has detailed the tax rates for its subsidiaries
for 2009 and 2008 in the following table.
Income Tax Rate
|
|
2009
|
|
|
2008
|
|
International Lorain
|
|
0%
|
|
|
0%
|
|
Junan Hongran
|
|
25%
|
|
|
15%
|
|
Luotian Lorain
|
|
15%
|
|
|
15%
|
|
Beijing Lorain
|
|
15%
|
|
|
0%
|
|
Shangdong Lorain
|
|
25%
|
|
|
25%
|
|
Dongguan Lorain
|
|
25%
|
|
|
N/A
|
|
|
|
18.
|
SALES BY PRODUCT TYPE
|
Sales by categories of product consisted of the following as of
December 31, 2009 and 2008:
Category
|
|
2009
|
|
|
2008
|
|
Chestnut
|
$
|
89,117,729
|
|
$
|
83,027,719
|
|
Convenience food
|
|
34,623,978
|
|
|
25,736,534
|
|
FCB food
|
|
23,030,735
|
|
|
23,596,064
|
|
Total
|
$
|
146,772,442
|
|
$
|
132,360,317
|
|
F-21
AMERICAN LORAIN CORPORATION
|
|
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND
2008
|
(Stated in US Dollars)
|
Revenue by geography consisted of the following as of December
31, 2009 and 2008:
Country
|
|
2009
|
|
|
2008
|
|
Australia
|
$
|
162,213
|
|
$
|
-
|
|
Belgium
|
|
4,093,828
|
|
|
1,893,467
|
|
China
|
|
103,504,689
|
|
|
91,442,654
|
|
France
|
|
973,620
|
|
|
1,579,449
|
|
Germany
|
|
454,225
|
|
|
722,436
|
|
Holland
|
|
251,870
|
|
|
346,140
|
|
Hong Kong
|
|
594,533
|
|
|
189,790
|
|
Japan
|
|
18,898,539
|
|
|
21,764,764
|
|
Malaysia
|
|
944,475
|
|
|
1,395,654
|
|
Saudi Arabia
|
|
1,156,734
|
|
|
32,961
|
|
Singapore
|
|
2,373,203
|
|
|
1,054,239
|
|
Spain
|
|
279,851
|
|
|
-
|
|
South Korea
|
|
11,030,072
|
|
|
8,338,475
|
|
Taiwan
|
|
492,147
|
|
|
331,723
|
|
United Kingdom
|
|
571,247
|
|
|
2,775,230
|
|
United States of America
|
|
854,348
|
|
|
493,335
|
|
Yemen
|
|
136,848
|
|
|
-
|
|
Total
|
$
|
146,772,442
|
|
$
|
132,360,317
|
|
19.
|
SHARE BASED COMPENSATION
|
|
|
|
On July 27, 2009, the Companys 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
Companys common stock that may be issued under the Plan is 2,500,000
shares. The Companys 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.
|
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 year
ended December 31, 2009 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:
|
$
|
0.9655
|
|
Risk-free interest rate:
|
|
2.69%
|
|
Expected volatility:
|
|
6.54%
|
|
Expected life in months:
|
|
54.00
|
|
F-22
AMERICAN LORAIN CORPORATION
|
|
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 2009 AND
2008
|
(Stated in US Dollars)
|
The outstanding lease commitment as of December 31, 2009 is
$767,567.
20.
|
LEASE COMMITMENTS
|
|
|
|
The Company has entered into an operating lease
agreement leasing a factory building located in Dongguan, China. The lease
was signed by Shandong Lorain on behalf of Dongguan Lorain and expires on
August 9, 2018. The minimum future lease payments for this property at
December 31, 2009 are shown in the following table:
|
From
|
|
To
|
|
|
USD
|
|
|
RMB
|
|
1/1/2010
|
|
12/31/2010
|
|
$
|
84,245
|
|
¥
|
576,000
|
|
1/1/2011
|
|
12/31/2011
|
|
|
84,245
|
|
|
576,000
|
|
1/1/2012
|
|
12/31/2012
|
|
|
84,245
|
|
|
576,000
|
|
1/1/2013
|
|
12/31/2013
|
|
|
87,521
|
|
|
598,400
|
|
1/1/2014
|
|
12/31/2014
|
|
|
92,670
|
|
|
633,600
|
|
1/1/2015
|
|
12/31/2015
|
|
|
92,670
|
|
|
633,600
|
|
1/1/2016
|
|
12/31/2016
|
|
|
92,670
|
|
|
633,600
|
|
1/1/2017
|
|
12/31/2017
|
|
|
92,670
|
|
|
633,600
|
|
1/1/2018
|
|
8/9/2018
|
|
|
56,631
|
|
|
387,200
|
|
|
|
|
|
$
|
767,567
|
|
¥
|
5,248,000
|
|
F-23
American Lorain Corp. (AMEX:ALN)
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