American Lorain Corporation - Form 10-K - Prepared By TNT Filings Inc.

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

FORM 10-K

Q  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2008

£  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ____________

Commission File Number: 000-50883

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

Delaware

87-0430320

(State or other jurisdiction of incorporation or organization)

(I.R.S.  Employer Identification Number)
 

Beihuan Zhong Road
Junan County
Shandong, People’s Republic of China, 276600 

(Address of principal executive office and zip code)
 

(86) 539-7318818

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act: None


Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value 0.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

Yes £            No Q

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 

Yes £            No Q

 

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

Yes Q            No £

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 registrant's 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. Q

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  £

Accelerated filer £

Non-accelerated filer £

Smaller reporting company Q

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 

Yes £            No Q

The number of shares and aggregate market value of common stock held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter were 8,627,549 and $28,039,534.25, respectively.

There were 25,177,640 shares of common stock outstanding as of April 9, 2009.

DOCUMENTS INCORPORATED BY REFERENCE:

Information required by Part III will either be included in the registrant’s definitive information statement filed with the Securities and Exchange Commission or filed as an amendment to this Form 10-K no later than 120 days after the end of the registrant’s fiscal year, to the extent required by the Securities Exchange Act of 1934, as amended.


AMERICAN LORAIN CORPORATION
 
FORM 10-K
 
For the Fiscal Year Ended December 31, 2008
 
TABLE OF CONTENTS
     
     
Part I   1
     
Item 1. BUSINESS 1
Item 1A. RISK FACTORS 15
Item 1B. UNRESOLVED STAFF COMMENTS 25
Item 2. PROPERTIES 25
Item 3. LEGAL PROCEEDINGS 26
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
     
Part II   26
     
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER  MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 26
Item 6. SELECTED FINANCIAL DATA 27
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA 38
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 38
Item 9A CONTROLS AND PROCEDURES 38
Item 9B. OTHER INFORMATION 39
     
Part III   39
     
Item 10. DIRECTORS, EXECUTIVE OFFICERS OF AND CORPORATE GOVERNANCE 39
Item 11 EXECUTIVE COMPENSATION 39
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 39
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 39
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 39
     
Part IV   40
     
Item 15. Exhibits And Financial Statement Of Schedules 40

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PART I

Item 1. BUSINESS

Conventions

In this annual report on Form 10-K:

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:

We conduct our production activities in China. Our products are sold in 26 provinces and administrative regions in China and 43 foreign countries. We derive most of our revenues from sales in China, Japan and South Korea. Our primary strategy for 2009 is to expand our brand equity in the Chinese market for our chestnut products. We are also working to expand our brand recognition in China for our convenience products and frozen, canned and bulk 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.

Organizational Structure

ALC is a Delaware corporation that was incorporated on February 4, 1986 and was formerly known as Millennium Quest, Inc. Prior to May 3, 2007, when ALC completed a recapitalization, or reverse merger, with ILH, ALC did not engage in active business operations other than to search for a potential acquisition target.

ALC 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 ALC, ILH and the Lorain Group Companies:

1


Products

Our products are categorized into the following three segments:

We produced 234 products in 2008, including 52 new products in our convenience foods segment. We also discontinued 10 products in 2008, primarily in our frozen, canned and bulk food segment.

Our chestnut products and convenience foods were our main profit centers in 2008. Our convenience foods segment has been the fastest growing portion of our business and was one of the main catalysts of our growth during 2008. Frozen, canned and bulk food products accounted for a substantial portion of our revenues in 2008 but generated lower profit margins than our chestnut and convenience products.

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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 53 high value-added processed chestnut products in 2008. In 2008, this segment contributed 63% of our total revenues.

Our best selling products in 2008 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 chopped 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:

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 2008 were cattle bone soup, beef and lamb.

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RTEs can be served without any cooking. Our best selling RTEs in 2008 were smoked fish and stewed beef with sauce. 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.

We produce various MREs based on Chinese cuisine, the best sellers of which were our stir fried rice and stir fried noodles in 2008. 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 113 convenience food products in 2008, including 52 new products such as red bean paste products and ready-to-eat meal combo products. In 2008, this segment contributed 19% 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 2008. We expect our convenience foods segment to continue to be an important area of growth for our business in the future.

Frozen, Canned and Bulk Food

We produce a variety of frozen, canned and bulk foods, including frozen vegetables, frozen fruits, frozen fish, and frozen meats. We produced 68 frozen, canned and bulk food products in 2008. Our best selling frozen, canned and bulk foods in 2008 were frozen peas, frozen corn and frozen mixed vegetables. Many of our bulk food products are natural and do not contain chemical additives.

Our frozen, canned and bulk 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, canned and bulk food division has been a significant portion of our business. In 2008, this segment contributed 18% of our total revenues. Gross margins in this segment are lower than the margins for chestnut products and convenience foods, however. Because of this, we expect that the proportionate contribution of this business segment to our total revenues will gradually 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 Province 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.

  Year Operations Construction Size
Facility Commenced (square meters)
Junan Hongrun 2002 25,665
Shandong Lorain 1995 15,392
Luotian Lorain 2003 9,558
Beijing Lorain 2003 21,000
Dongguan 2008 5,500

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Production Lines

We currently manufacture our products using 21 production lines. Each production line is used to produce between 10 and 50 products. We currently run three types of product lines:

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:

Facility

Production Lines

Products

Shandong Lorain

1 Deep-freezing line

Chestnut Products

 

1 Convenience food line

Convenience Foods

 

 

Frozen, Canned and Bulk Foods

Junan Hongrun

1 Deep-freezing line

Chestnut Products

 

4 Canning lines

Frozen, Canned and Bulk Foods

Beijing Lorain

6 Convenience food lines

Chestnut Products

 

1 Deep-freezing line

Convenience Foods

 

 

Frozen, Canned and Bulk Foods

Luotian Lorain

3 Convenience food lines

Chestnut Products

 

2 Deep-freezing lines

Convenience Foods

 

 

Frozen, Canned and Bulk Foods

Dongguan factory

2 Convenience food lines

Convenience Foods

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, canned and bulk products, are located in Shandong Province, which is China’s largest supplier of fresh produce by volume. Shandong Providence 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.

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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.

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, canned and bulk 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 full capacity throughout the year.

Currently, most of our processed and convenience foods are produced at our Beijing Lorain plant. In 2008, we expanded this facility with the addition of four convenience foods production lines, which increased production capacity by approximately 6,000 metric tons per year.

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 convenience food products should our facilities be inadequate to meet increasing demand. 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. If needed, we may lease additional facilities in 2009. 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.

 

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The following table illustrates on a facility by facility basis the type and capacity of our storage resources:

Facility Storage Type Number of Capacity
    Storage Units (metric tons)
Junan Hongrun

Frozen Storage

7 3,000
  Constant Temperature 8 4,800
Shandong Lorain Frozen Storage 5 2,000
  Constant Temperature 3 1,500
Luotian Lorain Frozen Storage 8 4,500
  Constant Temperature 4 2,000
Beijing Lorain Frozen Storage 6 2,850
  Constant Temperature 3 1,800
Dongguan Frozen Storage 2 800
  Constant Temperature 1 450
TOTAL   47 23,700

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 2008, we increased our storage capacity by leasing a warehouse in Dongguan with a storage capacity of 1,250 metric tons. Subject to our ability to obtain construction financing, we plan to expand storage capacity in 2009 by an additional 6,000 metric tons.

Agricultural Operations

We grow and self-supply a portion of our chestnut, fruit and vegetable products. We self-supplied approximately 1% of our raw materials needed in 2008. (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.

  Area Location
                                                                                 Harvest (acres) (PRC)
Chestnut (South Korean, Japanese, Australian cultivar) 329

Shandong

Chestnut (Japanese cultivar) 165

Beijing

Sticky Corn 329

Beijing

Green Pea & Sweet Corn 297

Beijing

Pumpkin 82

Heilongjiang

Organic Chestnut 165

Beijing

Mixed Vegetables 494

Hebei

Japanese Pumpkin 329

Inner Mongolia

Strawberry 261

Shandong

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.

We began growing strawberries in 2008 in Shandong. We use these strawberries 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.

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Raw Materials

In 2008, approximately 94% of our raw materials consisted of agricultural products, including primarily chestnuts and vegetables, approximately 4% consisted of packaging materials and approximately 2% 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% of our total raw material costs in 2008, overseas procurement accounted for 5.2% and self-supply accounted for the remaining 1%.

In 2008, we procured approximately 55,643 metric tons of chestnuts and approximately 28,773 metric tons of vegetables and other raw materials from a number of third party suppliers, domestic and overseas, and produced approximately 693 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% of the total procurement in 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 China’s largest supplier of fresh produce by volume. Shandong Providence 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.

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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 produce we are purchasing complies with our standards.

Our Customers

We sell our products in 26 provinces and administrative regions in China and 43 foreign countries globally. In 2008, approximately 67% of our sales were made domestically and approximately 33% were to international customers, primarily Japan and South Korea.

Our top ten customers contributed 29.3% of our total revenues in 2008. Approximately 12% and 6.1% of total revenues in 2008 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, we sold approximately 87% of our products directly to our Chinese customers and approximately 13% through third-party distributors.

We sell our products in 30 first-tier cities, including Beijing, Shanghai 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, other 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.

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 produce that fails 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 a distributor performance-based incentives, such as a cash bonus equal to 1% of total revenues generated by such distributor which exceed previously established sales targets.

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We plan to gradually increase the portion of sales to our direct sales customers in order to capture the profit margin that would otherwise go to intermediate wholesalers and to enhance our brand recognition. Such plans are subject to our customers’ ability to make timely payments, which has been a concern for us. (See “Risk Factors” below.)

International

Our export sales destinations include:

In 2008, approximately 93.5% of our international sales were in Asia and approximately 6% 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 currently 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:

We have not spent a significant amount of capital on advertising in the past, and our advertising budget continues to be limited. 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 products.

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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, Canned and Bulk Food Products

In the frozen, canned and bulk 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, canned and bulk 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 234 products in 2008. 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.

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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, our patent application for our technology used to produce sweetheart chestnuts was approved by the State Intellectual Property Office of the PRC. In addition, we are currently in the process of applying for patent protection in the PRC for two of our technologies which support the production of our chestnut and convenience food products. (See “Intellectual Property” below.) We believe that this 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

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:

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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, 2008, we had a total of 1,353 full-time employees and 260 part-time employees. 362 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 1,171
Quality Control 28
Domestic Sales 26
Human Resources 5
Research and Development 26
International Sales 20
Finance 19
Sourcing 14
Administration 25
Strategic planning 4
Storage and Distribution 13
Employee Relations 2
Total 1,353

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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.

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%, 24% and 20% of the average monthly salary for the years ended December 31, 2008, 2007 and 2006, respectively. 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, 2008, 2007 and 2006. 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:

We have research and development staff at each of our facilities. In total, 26 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 2008, we added 52 new products, all in our convenience foods segment. Over the past several years, on average, we discontinued approximately three to five products each year. In 2008, we discontinued 10 products, primarily in our frozen, canned and bulk food segment.

The amount we spent on research and development activities during the years ended December 31, 2008, 2007 and 2006 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 China’s 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 good 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.

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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.

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 exporter’s 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.

Item 1A. RISK FACTORS

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 2008, the cost of our raw materials increased from $36,920,585 to $64,980,230, for an increase of approximately 76%. 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.

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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 2007 and 2008 was approximately $787 per metric ton and $727 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 377% from $27,735,833 in 2004 to $132,360,317 in 2008. The number of product types we sold increased from approximately 100 in 2004 to approximately 234 in 2008. 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.

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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.

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 management’s 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:

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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 43%, 31% and 25% of our total revenues in 2006, 2007 and 2008, 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 2008, we sold our products through over 30 distribution service providers. The services provided by these providers 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.

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 20 new products in 2007 and 52 new products in 2008. We plan to introduce about 20 new products in 2009. 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.

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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.

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.

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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.

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 2008, we paid for approximately 10% 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 40% 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 2008 was approximately $24 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 and 2008, we funded approximately $3.8 million, in the aggregate, of our working capital requirements from the proceeds of a private placement transaction conducted in May 2007. 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.

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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 2009. 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 extremely difficult and banking institutions have become stringent in their lending requirements. Accordingly, we cannot be sure of the availability or terms of any third party financing.

The 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 2009 is uncertain. A continuation or worsening of unfavorable economic conditions, including the ongoing credit and capital markets disruptions, could have an adverse impact on our business, operating results or financial condition in a number of ways. For example, we may experience declines in revenues, profitability and cash flows as a result of reduced orders, delays in receiving orders, delays or defaults in payment or other factors caused by the economic problems of our customers and prospective customers. We may experience supply chain delays, disruptions or other problems associated with financial constraints faced by our suppliers and subcontractors. In addition, changes and volatility in the equity, credit and foreign exchange markets and in the competitive landscape make it increasingly difficult for us to predict our revenues and earnings into the future.

We are subject to credit risk in respect of account receivables.

In 2007 and 2008, 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. In 2008, we shortened credit terms for many of our international and domestic distributors 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 PRC’s National People’s 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.

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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.

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 company’s 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 company’s financial statements to attest to the operating effectiveness of such company’s internal controls. However, we are not subject to the requirements of SOX 404(b) until our fiscal year ended December 31, 2009. 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 China’s 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.

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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.

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.

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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. Akazawa’s 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.

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.

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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 64.8% 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.

Our common stock is quoted on the OTC Bulletin Board, which may have an unfavorable impact on our stock price and liquidity.

Our common stock is quoted on the OTC Bulletin Board. Liquidity in the OTC Bulletin Board is significantly more limited than U.S. national exchanges. The quotation of our shares on the OTC Bulletin Board may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.

We are subject to penny stock regulations and restrictions.

The SEC has adopted regulations which generally define “penny stocks” to be an equity security that has a market price of less than $5.00 per share. As of April 1, 2009, the closing price for our common stock was $0.88 per share and our recent trading history has also shown prices below $5.00 per share. As a “penny stock,” our common stock is subject to Rule 15g-9 under the Exchange Act of 1934, or the “Penny Stock Rule.” This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

Our common stock may not qualify for exemption from the Penny Stock Rule at all times. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b) (6) of the Securities Exchange Act of 1934, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.

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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.

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 Owned or Leased

 

  (Square Meters)  

 

     

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.

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.

26

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 2008.

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 FINRA Over-the-Counter Bulletin Board under the symbol “ALRC.OB”. As of April 1, 2009, the closing price for our common stock was $0.88 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. In the third quarter of 2007, we effected a one-for-32.84 reverse split of our common stock, reflected in the table below beginning with such quarter. Shares of our common stock were sparsely traded until May 2008.

    Bid Prices  
    High     Low  
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  
             
Fiscal Year Ended December 31, 2007            
First Quarter   N/A     N/A  
Second Quarter   0.95     0.25  
Third Quarter   9.00     0.20  
Fourth Quarter   8.00     3.00  

Approximate Number of Holders of Our Common Stock

On April 9, 2009, there were 155 stockholders of record of our common stock.

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.

27

Item 6. SELECTED FINANCIAL DATA

Not applicable.

Item 7. MANAGEMENT’S 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:

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 53 high value-added processed chestnut products in 2008. We derive most of our revenues from sales in China, Japan and South Korea. Our primary strategy for 2009 is to expand our brand equity in the Chinese market for our chestnut products. We are also working to expand our brand recognition in China for our convenience food products and frozen, canned and bulk food 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.

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 2008, the cost of our raw materials increased from $36,920,585 to $64,980,230, for an increase of approximately 76%. 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 2007 and 2008 was approximately $787 per metric ton and $727 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.

28

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 2008, we paid for approximately 10% 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 40% 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 2008 was approximately $24 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 and 2008, we funded approximately $3.8 million, in the aggregate, of our working capital requirements from the proceeds of a private placement transaction conducted in May 2007. We can provide no assurances that we will be able to enter into any future financing or refinancing agreements on terms favorable to us, especially considering the current instability of the capital markets.

We anticipate that our existing capital resources and cash flows from operations and current and expected short-term bank loans will be adequate to satisfy our liquidity requirements through 2009. 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 extremely difficult and banking institutions have become stringent in their lending requirements. Accordingly, we cannot be sure of the availability or terms of any third party financing.

The 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 2009 is uncertain. A continuation or worsening of unfavorable economic conditions, including the ongoing credit and capital markets disruptions, could have an adverse impact on our business, operating results or financial condition in a number of ways. For example, we may experience declines in revenues, profitability and cash flows as a result of reduced orders, delays in receiving orders, delays or defaults in payment or other factors caused by the economic problems of our customers and prospective customers. We may experience supply chain delays, disruptions or other problems associated with financial constraints faced by our suppliers and subcontractors. In addition, changes and volatility in the equity, credit and foreign exchange markets and in the competitive landscape make it increasingly difficult for us to predict our revenues and earnings into the future.

29

In 2007 and 2008, 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. In 2008, we shortened credit terms for many of our international and domestic distributors 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:

(in thousands of U.S.

              Increase/Decrease     Increase/Decrease  

dollars)

  2008     2007     ($)     (%)  

Revenue

  132,360     82,094     50,266     61%  

Cost of Revenue

  (101,213 )   (61,932 )   (39,281 )   63%  

 

                       

Gross profit

  31,147     20,162     10,985     54%  

 

                       

Operating Expenses:

                       

Selling and Marketing

  (6,166 )   (2,623 )   (3,543 )   135%  

General and administrative

  (4,048 )   (2,865 )   (1,183 )   41%  

 

                       

Income from continuing operations

   20,933     14,674     6,259     43%  

 

                       

Non-operating Income (Expenses):

                       

Investment Income

        5     (5 )   -100%  

Government grant

  329     1,373     (1,044 )   -76%  

Interest income

  99     209     (110 )   -53%  

Other income

  251     155     96     62%  

Other expense

  (162 )   (1,446 )   1,284     -89%  

Interest Expense

  (2,770 )   (2,376 )   (394 )   17%  

 

                       

Income before taxes

  18,681     12,595     6,086     48%  

Income Taxes

  (3,003 )   (2,135 )   (868 )   41%  

Income before Minority Interest

  15,678     10,460     5,218     50%  

Minority Interest

  (974 )   (715 )   (259 )   36%  

 

                       

Net Income

  14,703     9,745     4,958     51%  

30

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Revenue

Net Revenues. Net revenues increased by $50.3 million, or approximately 61.2%, to $132.4 million in 2008 from $82.1 million in 2007. 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) 2008 Revenues 2007 Revenues Increase Increase
  ($) ($) ($) (%)
Chestnut Products 83,028 45,799 37,228 81.3%
Convenience Products 25,737 15,289 10,448 68.3%
Frozen, Canned and Bulk 23,596 21,007 2,589 12.3%
Products        
Total 132,360 82,095 50,265 61.2%

We believe that the increases reflected in the table above are attributable to the following factors, by percentage:

Category

Chestnut Products

Convenience Products

Frozen, Canned and

 

 

 

Bulk Products

Increase in volume sold 62.8% 84.1% -75.6%
Increase in average sales price 18.0% -5.3% 154.0%
Increase in value of the U.S. dollar 19.2% 21.2% 21.6%

The greatest increase in volume sold in 2008, as compared to 2007, was in the domestic PRC market. Revenues from sales in this market increased by approximately $42.9 million, or approximately 88%, in 2008. As a percentage of total revenues, revenues from sales in the domestic PRC market increased to approximately 69% from approximately 59% in 2007.

In addition, in 2008, revenues from sales to Japan, South Korea, France and the UK increased, in the aggregate, approximately $10.1, or 42%, compared to 2007, partially offset by a decrease of an aggregate of $0.57 million, or 54%, of sales to the United States compared to 2007. See Note 16 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 $39.3 million, or approximately 63%, to $101.2 million in 2008 from $61.9 million in 2007. This increase was attributable to the following factors, by percentage:

  Allocation of
  Increase in Cost of
  Revenues
   
Category (%)
Raw Materials 76
Currency (RMB) Appreciation 11
Other Allocated Overhead (utilities, freight, equipment consumables) 6
Wages 6
Depreciation 1

31


Raw material costs increased to $64,980,230, or approximately 76%, in 2008 from $36,920,585 in 2007. This increase was attributable to the increase by approximately 40% and 472%, respectively, in the volume of raw chestnuts and meats purchased in 2008, when compared to 2007. This increase was offset by a decrease of approximately 50% in the volume of raw vegetables and fruits purchased in 2008, when compared to 2007. We purchased a significantly higher volume of raw meat for use in our convenience products because our sales of such products increased significantly in 2008. We purchased a significantly lower volume of raw fruits and vegetables for use in our frozen, canned and bulk products because the price of fruits and vegetables increased significantly in 2008, resulting in less demand for such products.

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) 2008 Cost of Revenues 2007 Cost of Revenues Increase/ (Decrease)
  ($) ($) (%)
Chestnut Products 62,092 33,455 85.6%
Convenience Products 20,258 11,837 71.1%
Frozen, Canned and Bulk 18,863 16,640 13.4%
Products      
Total 101,213 61,932 63.4%

Gross Profit. Our gross profit increased $10.9 million, or 54.5%, to $31.1 million in 2008 from $20.2 million in 2007 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 $3.6 million, or 135%, to $6.2 million in 2008 from $2.6 million in fiscal year 2007. 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 thousands of U.S. dollars) Increase in costs in 2008 over 2007
Shipping and inspection fees 1,437
Port surcharges 1,373
Tariffs 288
Supermarket fees 161
Wages (sales personnel) 59

The increases listed in the table above were partially offset by an aggregate of $114,834 of decreases of other factors, including customer lodging, phone, postage and courier charges, toll road expense, warehousing costs and expenses for professional movers.

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General and Administrative Expenses. Our general and administrative expenses increased approximately $1.1 million, or 41.3%, to $4.0 million in 2008 from $2.9 million in 2007. 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 thousands of U.S. dollars) Increase in costs in 2008 over 2007
Personnel Benefits (non-wage benefits) 1,437
Consultation fees 1,373
Entertainment 288
Insurance fees 161
Research and development fees 59

Government Subsidy Income

Government subsidy income decreased from approximately $1.4 million in 2007 to approximately $329,000 in 2008, representing grants received from the local Beijing County, Junan County and Miyun County governments to assist us in our reconstruction of our Beijing facility following the outbreak of a fire in that facility in May 2007.

Income Before Taxation and Minority Interest

Income before taxation and minority interest increased $6.1 million, or 48.3%, to $18.7 million in 2008 from $12.6 million in 2007 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 $0.87 million, or 40.7%, to $3.0 million in 2008, as compared to $2.1 million in 2007. This increase was attributable to the higher income earned in 2008 as compared to 2007.

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 2007, 2008, and 2009 are depicted in the following table:

Income Tax 2007 2008 2009
Junan Hongrun 15% 15% 25%
Luotian Lorain 0% 15% 15%
Beijing Lorain 0% 0% 15%
Shandong Lorain 30% 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 $0.97 million in 2008 and $0.72 million in 2007.

33

Net Income.

Net income increased $4.9 million, or 50.9%, to $14.7 million in 2008 from $9.7 million in fiscal year 2007, 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 2007, we obtained approximately $19 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 most of the proceeds of the private placement to build infrastructure at several of our facilities. At December 31, 2008, total unused proceeds from the private placement were $0, as compared to approximately $6.5 million at December 31, 2007. At December 31, 2008, cash and cash equivalents (including restricted cash) were $6.6 million, as compared to $8.8 million at December 31, 2007.

We expect to continue to finance our operations and working capital needs in 2009 from cash generated from operations and short-term bank loans. In addition, we currently plan to finance or refinance approximately $23 million in the form of short-term bank loans in 2009. Currently, we have negotiated loans with certain banks in China for an aggregate of $25 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 extremely 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,

  

 

  2008     2007  

Net cash flows provided by (used in) operating activities

  19,508     (3,585 )

Net cash flows provided by (used in) investing activities

  (20,316 )   (12,440 )

Net cash flows provided by (used in) financing activities

  (8,134 )   19,664  

Operating Activities

Net cash provided by operating activities for 2008 was $19.5 million and net cash used in operating activities for 2007 was $3.6 million. The increase of approximately $23.1 million in net cash flows provided by operating activities resulted primarily from an increase in net income of approximately $5.0 million, a decrease in accounts receivable of approximately $38.4 million and a decrease in inventories of approximately $1.6 million, partially offset by a decrease in accounts payable of approximately $21.2 million. In 2008, we increased our direct sales to third-party distributors, who generally do not pay on credit, thereby decreasing our accounts receivables. In addition, we were required to pay our suppliers on shorter terms, thereby decreasing our accounts payable.

34

Investing Activities

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

Net cash used in investing activities for 2008 was $20.3 million and $12.4 million, respectively, for 2008 and 2007. The increase of approximately $7.9 million resulted primarily from an increase of $7.5 million in the construction of refrigerated storage, vegetable tents and of comprehensive workshops for the processing of chestnut and other food products in 2008.

Financing Activities

Net cash used in financing activities for 2008 was $8.1 million and net cash provided by financing activities for 2007 was $19.7 million. The increase of approximately $27.8 million in net cash used by financing activities resulted primarily from a decrease of $17.3 million in paid-in capital provided in connection with a private placement in 2007 and an increase of approximately $22.6 million in bank repayments, partially offset by an increase of approximately $9.7 in bank borrowings and $2.5 million in proceeds from notes.

35

Loan Facilities

As of December 31, 2008, the amounts and maturity dates for our bank loans were as follows:

All amounts, other than percentages, in thousands of U.S. dollars.

                                               Banks

Amounts Beginning Ending Interest Rate Duration

Beijing Miyun County Shilipu Rural Financial Institution

2,772.02 9/30/2008 9/30/2009 8.54% 12 months

Bank of Beijing

291.79 7/28/2008 7/28/2009 7.72% 12 months

Junan County Industrial and Commercial Bank

145.90 1/11/2008 1/10/2009 6.12% 12 months

Junan County Industrial and Commercial Bank

240.04 11/21/2008 2/19/2009 3.17% 3 months

Junan County Industrial and Commercial Bank

393.92 9/12/2008 3/4/2009 8.54% 4 months

Junan County Industrial and Commercial Bank

120.76 11/28/2008 2/26/2009 10.18% 3 months

Junan County Industrial and Commercial Bank

173.67 12/5/2008 3/5/2009 10.18% 3 months

Junan County Industrial and Commercial Bank

118.16 11/21/2008 2/19/2009 3.17% 3 months

Junan County Construction Bank

25.17 9/25/2008 12/24/2008 7.45% 3 months

Junan County Construction Bank

102.13 9/25/2008 2/24/2009 7.45% 5 months

Junan County Construction Bank

1,575.68 10/22/2008 1/22/2009 10.45% 3 months

Junan County Construction Bank

116.72 11/5/2008 2/3/2009 7.24% 3 months

Junan County Agriculture Bank

583.58 8/7/2008 8/6/2009 12.70% 12 months

Junan County Agriculture Bank

656.53 8/22/2008 8/18/2009 12.70% 12 months

Junan County Agriculture Bank

364.74 9/3/2008 8/18/2009 12.70% 12 months

Junan County Agriculture Bank

1,458.96 9/27/2008 3/27/2009 10.56% 6 months

Union Bank (China) Co., Ltd.

1,156.96 1/28/2008 1/14/2009 5.49% 12 months

Linyi Commercial Bank

685.71 2/1/2008 1/5/2009 13.07% 11 months

Linyi Commercial Bank

656.53 2/2/2008 1/12/2009 13.07% 11 months

Linyi Commercial Bank

1,458.96 9/28/2008 1/12/2009 8.58% 4 months

Linyi Commercial Bank

116.72 9/28/2008 1/12/2009 8.58% 4 months

China Agricultural Bank, Luotian Square Branch

817.02 9/8/2008 9/7/2009 7.47% 12 months

China Agricultural Bank, Luotian Square Branch

291.79 9/8/2008 9/7/2009 7.47% 12 months

Bank of China, Junan Branch

4.01 9/19/2006 5/19/2009 7.50% 36 months

Credit union, Junan

43.77 8/6/2008 1/7/2009 8.58% 4 months

Credit union, Junan

43.77 9/11/2008 1/12/2009 8.58% 3 months

Agricultural Development Lutian Government

25.53 1/11/2008 12/11/2011 2.10% 4 years

Union Commercial Bank (China)

551.44 1/29/2008 1/14/2011 5.49% 3 years

Total

14,991.98        

Loans listed in the table above whose maturity dates are prior to the date hereof have either been repaid or have been extended by the lending banks for either 6 months or 1 year.

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:

36

As of December 31, 2008, the particulars of the commonly controlled entities are as follows:

 

  Place of     Attributable equity              

  Name of Company

  Incorporation     interest %        Registered Capital        

Shandong Lorain Co., Ltd.

  PRC     80.20%   $ 12,901,823     RMB 1008,860,000  

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  

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.

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.

Recent accounting pronouncements

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

37

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). Statement 162 will become effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles."

In May 2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis.

In September 2008, FASB issued FSP No. 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees”, an amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This FSP is intended to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives. The provisions of the FSP that amend Statement 133 and FIN 45 are effective for reporting periods (annual or interim) ending after November 15, 2008.

This FSP amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. This FSP also amends FASB Interpretation (FIN) No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. The provisions of the FSP that amend Statement 133 and FIN 45 are effective for reporting periods (annual or interim) ending after November 15, 2008.

Finally, this FSP clarifies the effective date in FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The disclosures required by Statement 161 should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008. For example, an entity with a March 31 fiscal year-end should provide the disclosures for its fourth quarter interim period ending March 31, 2009, in its 2009 annual financial statements. This clarification of the effective date of Statement 161 is effective upon issuance of the FSP.

We are currently evaluating the potential impact, if any, of the adoption of the above recent accounting pronouncements on our consolidated results of operations and financial condition.

38

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, 2008 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 SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

     As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2008. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2008, 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

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

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting is effective, as of December 31, 2008.

39

Changes in Internal Controls over Financial Reporting.

     During the fiscal year ended December 31, 2008, 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. Management’s 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 management’s report in this annual report.

Item 9B. OTHER INFORMATION.

None.

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, 2008, 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, 2008, 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, 2008, 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, 2008, our most recent fiscal year end, and is incorporated herein by reference.

40

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, 2008, 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.

3. Exhibits

Exhibit No. Description
   
2.1 Share Exchange Agreement, dated May 3, 2007, among the registrant, International Lorain Holding, Inc. and its stockholders. Incorporated by reference to Exhibit 2.1 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
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 registrant’s current on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
3.2 Bylaws of the registrant, adopted on March 31, 2000. Incorporated by reference to Exhibit 3.2 to the registrant’s Registration Statement on Form 10SB12G filed October 19, 2001, in commission file 0-31619.
   
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 registrant’s 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 registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
4.3 Option Agreement, dated May 3, 2007, between Mr. Hisashi Akazawa and Mr. Si Chen. Incorporated by reference to Exhibit 4.3 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
4.4 Form of Registration Rights Agreement, dated May 3, 2007. Incorporated by reference to Exhibit to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
4.5 Form of Common Stock Purchase Warrants issued to investors, dated May 3, 2007. Incorporated by reference to Exhibit 4.5 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
4.6 Form of Common Stock Purchase Warrants issued to Sterne Agee & Leach, Inc. and its designee, dated May 3, 2007. Incorporated by reference to Exhibit 4.5 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.

41


10.1 Form of the Securities Purchase Agreement, dated May 3, 2007, by and among the registrant and the investors named therein, and joined by Mr. Akazawa and Mr. Chen as to certain sections. Incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.2 Make Good Escrow Agreement, dated May 3, 2007, by and among the registrant, Sterne Agee & Leach, Inc., Mr. Hisashi Akazawa, Mr. Si Chen and Securities Transfer Corporation. Incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.3 Closing Escrow Agreement, dated May 3, 2007, by and among the registrant, Sterne Agee & Leach, Inc. and Thelen Reid Brown Raysman & Steiner LLP. Incorporated by reference to Exhibit 10.3 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.4 Cancellation and Escrow Agreement, dated May 3, 2007, by and among the registrant, Halter Financial Investments, L.P., Halter Financial Group, L.P. and Security Transfer Corporation. Incorporated by reference to Exhibit 10.4 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.5 Employment Agreement, dated March 2, 2005, by and between Shandong Green Foodstuff CO., LTD and Si Chen. Incorporated by reference to Exhibit 10.5 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.6 Employment Agreement, dated July 2, 2002, by and between Shandong Green Foodstuff CO., LTD and Xiandong Zhou. Incorporated by reference to Exhibit 10.6 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.7 Employment Agreement, dated November 20, 2007, by and between Shandong Green Foodstuff CO., LTD and Jing Thomas Wu. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 21, 2007 in commission file number 0-31619.
   
10.8 Cooperation Agreement, dated May 18, 2006, by and between Beijing Green Foodstuff Co., Ltd. and the Chestnut Cooperation of Zhenzhai Village, Gaoling town, Miyun County. Incorporated by reference to Exhibit 10.8 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.9 Equity Transfer Agreement, dated August 15, 2006, by and between International Lorain Co., Ltd and International Lorain Holding, Inc. Incorporated by reference to Exhibit 10.9 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.10 Credit Facility Agreement, dated September 28, 2006, by and between Beijing Green Foodstuff Co., Ltd. and the Shilibao Branch of Beijing Rural Commercial Bank Co., Ltd. Incorporated by reference to Exhibit 10.10 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.11 Sales contract, dated May 13, 2006, by and between Shandong Green Foodstuff Co., Ltd. and the Shandong Lu An Import & Export Co., Ltd. Incorporated by reference to Exhibit 10.11 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.12 Sales contract, dated September 5, 2006, by and between Shandong Green Foodstuff Co., Ltd. and the Shinsei Foods Co., Ltd. Incorporated by reference to Exhibit 10.12 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.

42


10.13 Sales Contract, dated September 10, 2006, by and between Junan Hongrun Foodstuff Co., Ltd. and the Shinsei Foods Co., Ltd. Incorporated by reference to Exhibit 10.13 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.14 Financial Advisory Agreement, dated February 14, 2007, by and between HFG International, Limited and Shandong Green Foodstuff Co., Ltd. Incorporated by reference to Exhibit 10.14 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.15 Consulting Agreement, dated March 8, 2007, by and between Heritage Management Consultants, Inc. and International Lorain Holding, Inc. Incorporated by reference to Exhibit 10.15 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.16 Equity Transfer Agreement dated September 5, 2006, by and between Junan Hongrun Foodstuff Co., Ltd. and International Lorain Holding, Inc.
   
10.17 Equity Transfer Agreement, dated August 19, 2006, by and between Lihua Liu, Junxia Wang, Shixiang Wang, Yuan Tian, Lantao Li, Yubo Liu, Zhixu Sun, Guangxing Han, Linying Wang, International Lvan Co., as transferors and International Lorain Holding, Inc. as transferee
   
10.18 Equity Transfer Agreement, dated August 27, 2006, by and between Si Chen, Xiaodong Zhou, Shixiang Wang, and International Lvan Co., Ltd., as transferors and International Lorain Holding, Inc. as transferee
   
10.19 Equity Transfer Agreement, dated August 15, 2006, by and between International Lvan Co., Ltd. and International Lorain Holding, Inc.
   
10.20 Employment Agreement, effective September 22, 2008, by and between American Lorain Corporation and Yilun Alan Jin. Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on September 18, 2008 in commission file number 0-31619.
   
10.21 Form of Sales Agreement by and between Shandong Lorain Foodstuff Co., Ltd. and Shandong Lvan Import & Export Co., Ltd.
   
14 Business Ethics Policy and Code of Conduct, adopted on April 30, 2007. Incorporated by reference to Exhibit 14 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
21 List of subsidiaries of the registrant. Incorporated by reference to Exhibit 21 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
24 Power of Attorney (included on the signature page of this annual report).
   
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

43

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
April 13, 2009 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
     
     
       President , Director and Chief Executive  
/s/ Si Chen      Officer (Principal Executive Officer) April 13, 2009
Si Chen    
     
     
       Chief Financial Officer (Principal    
       Financial Officer and Principal     
/s/ Yilun Jin      Accounting Officer) April 13, 2009
Yilun Jin    
     
     
/s/ Yundong Lu      Chief Operating Officer and Director April 13, 2009
Yundong Lu    
     
     
/s/ Hao Chen      Director April 13, 2009
Hao Chen    
     
     
/s/ Yaudoon Chiang      Director April 13, 2009
Yaudoon Chiang    
     
     
/s/ Maoquan Wei      Director April 13, 2009
Maoquan Wei    

44

AMERICAN LORAIN CORPORATION

AUDITED FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007

(Stated in US Dollars)

AMERICAN LORAIN CORPORATION

CONTENTS PAGES
REPORT OF INDEPENDENT REGISTERED PUBLIC  
ACCOUNTING FIRM F1
CONSOLIDATED BALANCE SHEETS F2 – F3
CONSOLIDATED STATEMENTS OF INCOME F4
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY F5
CONSOLIDATED STATEMENTS OF CASH FLOWS F6
NOTES TO FINANCIAL STATEMENTS F7 – F23

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, 2008 and 2007 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, 2008 and 2007 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
February 18, 2009 Certified Public Accountants

F-1

AMERICAN LORAIN CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND 2007
(Stated in US Dollars)

    Note     2008     2007  
ASSETS                  
   Current assets                  
       Cash and Cash equivalents       $  2,841,339   $  6,769,973  
       Restricted Cash   3     3,715,998     2,021,839  
     Short-term Investment         113,069     7,246  
       Trade accounts receivable   4     25,293,326     32,859,688  
       Other receivables   5     5,107,719     7,552,976  
       Inventory   6     24,827,922     17,903,344  
       Advance to Suppliers         415,009     5,357,951  
       Prepaid Expenses and Taxes         1,228,648     916,774  
                   
                       Total current assets       $  63,543,030   $  73,389,790  
                   
     Property, plant and equipment, net   7     40,201,686     24,022,181  
     Land use rights, net   8     3,950,927     3,047,021  
                   
TOTAL ASSETS       $  107,695,643   $  100,458,992  
                   
                   
LIABILITIES AND STOCKHOLDERS’ EQUITY                  
   Current liabilities                  
       Short-term bank loans   9   $  14,414,996   $  24,077,504  
       Notes payable   10     5,208,485     2,734,444  
       Accounts payable         6,072,883     6,251,833  
       Income tax payable         2,682,658     1,121,528  
       Current maturities of long term debts   12     -     -  
       Accrued liabilities and other payables   11     10,291,237     16,784,108  
       Customers deposits         748,732     957,642  
                   
                       Total current liabilities       $  39,418,991   $  51,927,058  
                   
  Long-term bank loans   12     576,975     102,542  
                   
TOTAL LIABILITIES       $  39,995,966   $  52,029,600  

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

F-2

AMERICAN LORAIN CORPORATION
CONSOLIDATED BALANCE SHEETS (Continued)
AS OF DECEMBER 31, 2008 AND 2007
(Stated in US Dollars)

    Note     2008     2007  
                   
Minority interests   13   $  5,122,021   $  3,887,021  
                   
STOCKHOLDERS’ EQUITY                  
   Common Stock, $0.001 par value, 200,000,000                  
         shares authorized; 25,172,640 and 24,923,178                  
         shares issued and outstanding as of December 31,                  
         2008 and 2007, respectively                  
    14     25,172     24,923  
   Additional paid-in-capital         24,187,019     24,187,268  
   Statutory reserves         5,438,723     4,497,647  
   Retained earnings         27,748,126     13,985,824  
   Accumulated other comprehensive Income         5,178,616     1,846,708  
                   
        $  62,577,656   $  44,542,370  
                   
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY       $  107,695,643   $  100,458,992  

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

F-3

AMERICAN LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(Stated in US Dollars)

    Note     2008     2007  
                   
Net revenues $       132,360,317   $  82,094,963  
Cost of revenues         (101,213,340 )   (61,932,474 )
                   
Gross profit $       31,146,977   $  20,162,490  
                   
Operating expenses                  
Selling and marketing expenses         (6,166,248 )   (2,623,138 )
General and administrative expenses         (4,047,988 )   (2,864,813 )
                   
Operating Income $       20,932,741   $  14,674,539  
                   
Investment income         -     4,769  
Government subsidy income         328,687     1,373,280  
Interest income         99,411     209,010  
Other income         251,317     155,467  
Other expenses         (161,726 )   (1,445,780 )
Interest Expense         (2,769,597 )   (2,376,088 )
                   
Earnings before tax $       18,680,833   $  12,595,196  
Income tax   15     (3,003,265 )   (2,134,916 )
                   
Income before minority interests $       15,677,568   $  10,460,279  
Minority interests         (974,190 )   (715,359 )
Net income         14,703,378     9,744,920  
                   
                   
Earnings per share                  
basic $       0.58   $  0.43  
diluted         0.58     0.42  
Weighted average shares outstanding                  
basic         25,172,640     22,554,210  
diluted         25,172,640     23,177,268  

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

F-4

AMERICAN LORAIN CORPORATION
STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(Stated in US Dollars)

                                  Accumulated        
    Number           Additional                 Other        
    of     Common     Paid-in     Statutory     Retained     Comprehensive        
    Shares     Stock     Capital     Reserves     Earnings     Income     Total  
Balance, January 1, 2007   17,932,777   $  17,933   $  6,846,620   $  4,439,604   $  4,298,947   $  1,006,195   $  16,609,299  
Issuance of Common Stock for Cash   6,990,401     6,990     17,340,648     -     -     -     17,347,638  
Net Income   -     -     -     -     9,744,920     -     9,744,920  
Appropriations to Statutory Reserves   -     -     -     58,043     (58,043 )   -     -  
Foreign Currency Translation Adjustment - - - - - 840,513 840,513
Balance, December 31, 2007   24,923,178   $  24,923   $ 24,187,268   $  4,497,647   $ 13,985,824   $  1,846,708   $  44,542,370  
                                           
Balance, January 1, 2008   24,923,178   $  24,923   $ 24,187,268   $  4,497,647   $ 13,985,824   $  1,846,708   $  44,542,370  
Issuance of Common Stock   249,455     249     (249 )   -     -     -     -  
Share Adjustment to Match Transfer Agent 7 - - - - - -
Net Income   -     -     -     -     14,703,378     -     14,703,378  
Appropriations to Statutory Reserves   -     -     -     941,076     (941,076 )   -     -  
Foreign Currency Translation Adjustment - - - - - 3,331,908 3,331,908
Balance, December 31, 2008   25,172,640   $  25,172   $ 24,187,019   $  5,438,723   $ 27,748,126   $  5,178,616   $  62,577,656  

    Comprehensive     Comprehensive        
    Income     Income        
    2008     2007     Total  
Net Income $  14,703,378   $  9,744,920   $  30,376,788  
Foreign Currency Translation Adjustment   3,331,908     840,513     4,680,852  
  $  18,035,286   $  10,585,433   $  34,057,640  

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

F-5

AMERICAN LORAIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(Stated in US Dollars)

    2008     2007  
Cash flows from operating activities            
   Net income $  14,703,377   $  9,744,920  
   Minority interest   974,191     964,666  
   Fire Loss         1,392,379  
   Depreciation   1,273,935     802,927  
   Amortization   158,428     17,798  
   (Increase)/decrease in accounts & other receivables   14,642,687     (23,809,252 )
   (Increase)/decrease in inventories   (6,924,578 )   (8,560,781 )
   Increase/(decrease) in accounts and other payables   (5,319,600 )   15,862,094  
             
Net cash (used in)/provided by operating activities $ 19,508,440 $ (3,585,249 )
Cash flows from investing activities            
   Purchase of plant and equipment   (13,928,921 )   (7,657,346 )
   Purchase of biological assets         (2,784,136 )
   Increase of construction in progress   (3,524,520 )   (2,258,097 )
   (Increase)/decrease in restricted cash   (1,694,159 )   527,482  
   Payment of land use rights   (1,062,334 )   (287,344 )
   Investments in securities   (105,823 )   19,374  
     Net cash used in investing activities $  (20,315,757 ) $  (12,440,067 )
Cash flows from financing activities            
   Issue of common stock   -     17,347,638  
   Dividend paid         -  
   Proceeds from notes   2,474,041        
   Bank borrowings   35,327,917     25,645,795  
   Bank repayment   (45,936,138 )   (23,329,333 )
   Net cash provided by/(used in) financing            
   Activities $  (8,134,180 ) $  19,664,100  
Net in cash and cash equivalents (used)/sourced (8,941,497 ) 3,638,784
Effect of foreign currency translation on cash and cash equivalents 5,012,863 840,513
Cash and cash equivalents–beginning of year   6,769,973     2,290,676  
Cash and cash equivalents–end of year $  2,841,339   $  6,769,973  
             
Supplementary cash flow information:            
Interest received $  99,411   $  209,010  
Interest paid   2,769,597     2,293,442  
Taxes Paid   3,003,265     740,943  

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

F-6


1.

ORGANIZATION, BASIS OF PRESENTATION, AND PRINCIPAL ACTIVITIES

     
(a)

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

     

American Lorain Corporation (the “Company” or “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.

     
(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 Company’s 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 14 Capitalization.

     
(d)

Business Activities

The Company develops, manufactures, and sells convenience foods (such as ready-to-cook (or RTC) meals; ready-to-eat (or RTE) meals and meals ready-to-eat (or MRE); chestnut products; and frozen, canned, and bulk 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, canned, and bulk food (“FCB food”).

F-7


 

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.

     
(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, 2008, the detailed identities of the consolidating subsidiaries are as follows:


                           
                         Name of Company     Place of     Attributable       Registered        
      incorporation       equity interest     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 )

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

F-8


 

 

  (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.

F-9


 

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

     
 

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

     
 

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

     
  (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.

F-10


  (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 uses the accrual method of accounting to determine and report its taxable reduction of income taxes for the year in which they are available. The Company has implemented Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Income tax liabilities computed according to the United States and People’s Republic of China (PRC) tax laws are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize that tax benefit, or that future realization is uncertain.

     
 

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

     
 

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


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

Based on the consolidated net income for the year ended December 31, 2008, the Company shall not be subject to income tax.

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-11


 

 

  (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.


    2008 2007
  Year end RMB : US$ exchange rate 6.8542 7.3141
  Average yearly RMB : US$ exchange rate 6.9622 7.6172

 

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 2008 and 2007, no dilutive potential ordinary shares were issued.

F-12


 

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)

Commitments and contingencies

     
 

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

     
  (x)

Comprehensive income

     
 

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

     
  (y)

Recent accounting pronouncements

     
 

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

     
 

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). Statement 162 will become effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles."

     
 

In May 2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis.

F-13

In September 2008, FASB issued FSP No. 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees”, an amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This FSP is intended to improve disclosures about credit derivatives by requiring more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives. The provisions of the FSP that amend Statement 133 and FIN 45 are effective for reporting periods (annual or interim) ending after November 15, 2008.

This FSP amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. This FSP also amends FASB Interpretation (FIN) No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. The provisions of the FSP that amend Statement 133 and FIN 45 are effective for reporting periods (annual or interim) ending after November 15, 2008.

Finally, this FSP clarifies the effective date in FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The disclosures required by Statement 161 should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008. For example, an entity with a March 31 fiscal year-end should provide the disclosures for its fourth quarter interim period ending March 31, 2009, in its 2009 annual financial statements. This clarification of the effective date of Statement 161 is effective upon issuance of the FSP.

The Company is currently evaluating the potential impact, if any, of the adoption of the above recent accounting pronouncements on its consolidated results of operations and financial condition.

3.

RESTRICTED CASH

   

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

   
4.

TRADE ACCOUNTS RECEIVABLE


      2008     2007  
  Trade accounts receivable $  25,421,293   $  33,031,997  
  Less: Allowance for doubtful accounts   (127,967 )   (172,309 )
               
    $  25,293,326   $  32,859,688  

F-14


  Allowance for Bad Debt:   2008     2007  
  Beginning Balance $  172,309   $  226,881  
  Additions to Allowance         -  
     Less: Bad debt written-off   (44,342 )   (54,572 )
    $  127,967   $  172,309  

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:


      2008     2007  
  Advances to suppliers $  663,302   $  2,858,351  
Advances to Employees for job/travel disbursements 3,160,886 3,027,007
  Amount due by a non-related enterprise   1,278,501     1,063,932  
  Other non-related receivables   5,030     451,183  
  Business taxes prepayment   -     21,876  
  Sundry deposits   -     130,627  
    $  5,107,719   $  7,552,976  

6.

INVENTORIES

   

Inventories consisted of the following as of December 31:


      2008     2007  
  Raw materials $  9,636,050   $  5,278,484  
  Work in Process   1,143,766     4,828,790  
  Finished goods   14,048,106     7,796,070  
    $  24,827,922   $  17,903,344  

7.

PROPERTY, PLANT, AND EQUIPMENT

   

Property, plant, and equipment consisted of the following as of December 31:


      2008     2007  
  At cost:            
         Buildings $  27,798,849   $  15,547,205  
         Landscaping, plant, and tree   2,752,101     2,784,136  
         Machinery and equipment   7,229,512     5,732,776  
         Office equipment   859,818     28,520  
         Motor vehicles   39,824     658,547  
    $  38,680,104   $  24,751,184  

F-15


  Less: accumulated depreciation            
         Buildings   (1,192,855 )   (698,732 )
         Machinery and equipment   (2,628,710 )   (1,954,257 )
         Office equipment   (414,478 )   (15,643 )
         Motor vehicles   (24,992 )   (318,468 )
      (4,261,035 )   (2,987,100 )
               
  Construction in Progress   5,782,617     2,258,097  
   $ 40,201,686   $  24,022,181  

Construction in progress mainly comprises capital expenditures for construction of the Company’s new corporate campus, including offices, factories and staff dormitories. Capital commitments for the construction are immaterial for the 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 Company’s operations to date.

8.

LAND USE RIGHTS, NET

   

Land use rights consisted of the following as of December 31:

 
      2008     2007  
  Land use rights, at cost $  4,236,266   $  3,173,931  
     Less: Accumulated amortization   (285,339 )   (126,910 )
    $  3,950,927   $  3,047,021  
   

Land use rights represent the prepaid land use right. The PRC government owns the land on which the Company’s corporate campus is being constructed.

   
9.

SHORT-TERM DEBTS

   

Short-term debts consisted of the following as of December 31:


    2008   2007
Loans from Junan County Construction Bank,        
   • Interest rate at 6.264% per annum due 8/31/2007 $ - $ 410.167
   • Interest rate at 6.264% per annum due 9/7/2007   -   343,173
   • Interest rate at 7.776% per annum due 12/18/2007   -   261,139
   • Interest rate at 7.776% per annum due 12/18/2007   -   355,478
   • Interest rate at 8.541% per annum due 3/5/2008   -   355,478
   • Interest rate at 8.892% per annum due 7/23/2008   -   328,133
   • Interest rate at 6.314% per annum due 9/17/2008   -   256,696
   • Interest rate at 6.264% per annum due between 1/10/2007 and 9/7/2007   -   -
   • 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   -

F-16

         
Loan from Junan County Agriculture Bank,        
   • Interest rate at 10.251% per annum due 1/11/2008   -   231,061
   • Interest rate at 10.557% per annum due 1/11/2008   -   345,907
   • Interest rate at 11.016% per annum due 2/21/2008   -   191,411
         
         
         
         
    2008   2007
   • Interest rate at 11.169% per annum due 6/7/2008   -   123,050
   • Interest rate at 11.169% per annum due 6/7/2008   -   41,017
   • Interest rate at 11.169% per annum due 6/29/2008   -   347,274
   • Interest rate at 11.169% per annum due 6/29/2008   -   109,378
   • Interest rate at 11.169% per annum due 7/3/2008   -   505,872
   • Interest rate at 7.884% per annum due 7/18/2008   -   273,444
   • Interest rate at 11.628% per annum due 7/25/2008   -   191,411
   • Interest rate at 11.628% per annum due 8/1/2008   -   82,033
   • Interest rate at 12.393% per annum due 10/30/2008   -   410,167
   • Interest rate at 12.393% per annum due 11/11/2008   -   239,264
   • Interest rate at 12.393% per annum due 11/14/2008   -   205,083
   • Interest rate at 12.393% per annum due 11/14/2008   -   199,614
   • Interest rate at 12.393% per annum due 11/22/2008   -   410,167
   • Interest rate at 12.393% per annum due 11/29/2008   -   287,117
   • Interest rate at 12.393% per annum due 12/4/2008   -   410,167
   • Interest rate at 12.393% per annum due 12/13/2008   -   410,167
   • Interest rate at 7.65% to 10.404% per annum due between 1/10/2007 and 12/5/2007   -   -
   • 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 8/18/2009   364,740   -
   • Interest rate at 10.577% per annum due 3/27/2009   1,458,959   -
         
Loan from Junan County Industrial and Commercial Bank,        
   • Interest rate at 6.120% per annum due 1/11/2007   -   546,889
   • Interest rate at 8.424% per annum due 3/7/2007   -   806,661
   • Interest rate at 6.120% per annum due 11/10/2007   -   136,722
   • Interest rate at 8.073% per annum due 12/7/2007   -   1,278,353
   • Interest rate at 7.956% per annum due 1/18/2008   -   478,528
   • Interest rate at 7.956% per annum due 1/18/2008   -   546,889
   • Interest rate at 6.9545% per annum due 2/8/2008   -   604,299
   • Interest rate at 6.570% per annum due 2/8/2008   -   546,889
   • Interest rate at 7.956% per annum due 3/5//2008   -   1,367,222
   • Interest rate at 8.892% per annum due 3/7/2008   -   410,167
   • Interest rate at 6.12% per annum due 6/30/2008   -   706,766
   • Interest rate at 7.290% per annum due 6/30/2008   -   232,428

F-17

         
   • Interest rate at 3.5% to 6.12% per annum due between 1/11/2007 and 12/10/2007   -   -
   • 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   -
         
    2008   2007
   • Interest rate at 10.1825% per annum due 3/5/2009   173,670    
         
Loan from Junan County Merchants Bank,        
   • Interest rate at 6.210% per annum due 3/13/2008 -       1,367,222
         
Loan from Junan County Agricultural Financial Institution,        
   • Interest rate at 9.750% per annum due 5/20/2008   -   25,977
   • Interest rate at 12.420% per annum due 6/20/2008   -   68,361
   • Interest rate at 10.935% per annum due 10/1/2008   -   2,597,722
   • Interest rate at 9.765% per annum due between 1/13/2007 and 5/22/2007   -   -
   • Interest rate at 9.765% per annum due between 1/13/2007 and 5/22/2007   -   -
         
Loan from Linyi Commercial Bank,        
   • Interest rate at 10.71% per annum due 2/6/2008   -   615,250
   • Interest rate at 10.71% per annum due 2/9/2008   -   497,221
   • Interest rate at 13.73% per annum due   -   136,722
   • Interest rate at 9.765% to 10.4715% per annum due between 1/9/2007 and 11/29/2007   -   -
   • 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 Junan Agricultural Development Bank,        
   • Interest rate at 7.290% per annum due 9/26/2008   -   1,367,222
   • Interest rates at 5.3625% to 6.435% per annum due between 7/19/2007 and 9/4/2007   -   -
         
Loan from Beijing Miyun County Shilipu Rural Financial Institution,        
   • Interest rates at 7.56% to 9.18% per annum due between 3/30/2007 and 5/27/2007   -   -
   • Interest rates at 8.539% per annum due 9/30/2009   2,772,023   -
         
Loan from China Agricultural Bank, Miyun        
   • Interest rate at 7.02% per annum due 7/18/2007   -   -
         

F-18

         
Loan from China Agricultural Bank, Luotian Branch        
         
   • Interest rate at 7.722% per annum due 8/30/2008   -   1,039,089
   • Interest rates at 7.605% to 7.95% per due 6/30/2007 and 9/5/2007   -   -
         
    2008   2007
   • 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 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   9,815
         
United Commercial Bank, China Branch        
   • Interest rate at 5.494% per annum due 1/14/2009   1,156,955   -
         
International Trust Co., Ltd.,        
   • Interest rate at 7.839% per annum due 5/19/2009   -   1,367,222
         
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   -
         
International Trust and Investment Co., Ltd.        
   • Interest rate at 0.67% per annum due 6/13/2008   -   -
  $ 14,414,996 $ 24,077,504
         

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

All overdue loans were extended by its financial institution.

10. NOTES PAYABLE

Notes payable consisted of the following as of December 31:

    2008   2007
         
Notes to Industrial and Commercial Bank,        
   • Bank commission charge at 3.99% due December 20, 2007 $ - $ 546,889
   • Bank commission charge at 3.99% due December 12, 2007   -   1,093,778
   • Bank commission charge at 3.99% due December 18, 2007   -   1,093,778
         

F-19

         
   • Bank commission charge at 3.744% due June 1, 2007   -   -
         
Notes to Linyi Commercial Bank,        
   • Bank commission charge at 2.85%, due May 20, 2007   -   -
         
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 $ 2,734,444

All overdue notes were extended by its financial institution.

11.

ACCRUED EXPENSES AND OTHER PAYABLE

   

Accrued expenses and other payables consisted of the following as of December 31:


      2008     2007  
  Accrued salaries and wages $  605,471   $  302,356  
  Accrued utility expenses   481,678     515,092  
  Accrued interest expenses   -     -  
  Accrued transportation expenses   1,103,112     371,839  
  Other accruals   -     2,848,985  
  Business and other taxes   1,979,650     -  
  Purchases disbursements payables   6,018,057     12,359,109  
  Interest Payable   -     180,696  
  Accrued staff welfare   103,269     206,031  
               
    $  10,291,237   $ 16,784,108  

12.

LONG-TERM DEBTS

   

Long-term debts consisted of the following as of December 31:


    2008   2007
Loan from Bank of China, Junan Branch,        
   • Interest rates at 0.67% per annum due 5/19/2009 $ - $ -
         
Loan from Agricultural Development Luotian Government,        
   • Interest rates at 0.67% per annum due - 12/11/2010       102,542
   • Interest rates at 2.10% per annum due 12/11/2011   25,532   -
         
Loan from United Commercial Bank, China Branch        
   • Interest rates at 5.494% per annum due 1/14/2011   551,443   -
         
Less: Current maturities of long-term debts   -   -
         
  $ 576,975 $  102,542
         

F-20


13.

MINORITY INTERESTS

   

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

   
14.

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.


F-21

                  Additional  
      Number of     Common Stock     Paid-in  
  Type of Shares   Shares     Capital     Capital  
                   
  Free Trading Shares   8,406,244   $  8,406   $  17,340,648  
  Restricted Shares   16,766,396     16,766     6,846,371  
      25,172,640   $  25,172   $  24,187,019  

15.

INCOME TAXES

All of the Group’s income before income taxes and related tax expenses are from PRC sources. In accordance with the relevant tax laws and regulations of PRC, the corporation income tax rate is 33%. However, also in accordance with the relevant taxation laws in the PRC, some of the subsidiaries of the Group are eligible for tax exemption. In particular, from the time that a company has its first profitable tax year, the company is exempt from corporate income tax for its first two year and is then entitled to a 50% tax reduction for the succeeding three year. Actual income tax expenses reported in the consolidated statements of income and comprehensive income differ from the amounts computed by applying the PRC statutory income tax rate of 33% to income before income tax for the period from August 4, 2006 (date of incorporation) to December 31, 2008 for the following reasons: -

      2008     2007  
  Income before tax $  18,680,832   $  12,595,196  
               
  Tax at the income tax rate   4,670,208     3,778,559  
  Effect of tax exemption granted   (1,666,943 )   (1,643,643 )
  Income tax $  3,003,265   $  2,134,916  
               
   Per Share Effect of Tax Exemption            
      2008     2007  
   Effect of tax exemption granted $ 1,666,943    $ 1,643,643  
               
   Weighted-Average Shares Outstanding   25,172,640     24,923,178  
   Per share effect $ 0.0662    $ 0.0659  

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.

Based on the background of each constituent of our group, the income tax rates applicable to the four constituents for 2007, 2008 and 2009 are depicted in the following table.

F-22

                     
  Income Tax Rate   2007     2008     2009  
  Junan Hongran   15%     15%     25%  
  Luotian Lorain   0%     15%     15%  
  Beijing Lorain   0%     0%     15%  
  Shangdong Lorain   30%     25%     25%  

16.

SALES BY PRODUCT TYPE

Sales by categories of product consisted of the following as of December 31:

                             Category   2008     2007  
  Chestnut $  83,027,719   $  45,799,404  
  Convenience food   25,736,534     15,288,515  
  FCB food   23,596,064     21,007,044  
  Total $  132,360,317   $  82,094,963  

Revenue by geography consisted of the following as of December 31:

  Country   2008     2007  
  Australia $  -   $  18,710  
  Belgium   1,893,467     2,040,636  
  Canada   -     14,112  
  China   91,442,654     48,566,474  
  France   1,579,449     284,101  
  Germany   722,436     44,527  
  Holland   346,140     586,379  
  Hong Kong   189,790     71,860  
  Japan   21,764,764     17,077,937  
  Kuwait   -     364,893  
  Malaysia   1,395,654     1,569,794  
  Mexico   -     -  
  Saudi Arabia   32,961     684,321  
  Singapore   1,054,239     2,442,038  
  South Korea   8,338,475     5,174,079  
  Taiwan   331,723     57,819  
  United Arab Emirates   -     239,565  
  United Kingdom   2,775,230     1,793,707  
  United States of America   493,335     1,064,011  
  Other   -     -  
  Total $  132,360,317   $  82,094,963  

F-23

EXHIBIT INDEX

 Exhibit No.  Description
   
2.1 Share Exchange Agreement, dated May 3, 2007, among the registrant, International Lorain Holding, Inc. and its stockholders. Incorporated by reference to Exhibit 2.1 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
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 registrant’s current on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
3.2 Bylaws of the registrant, adopted on March 31, 2000. Incorporated by reference to Exhibit 3.2 to the registrant’s Registration Statement on Form 10SB12G filed October 19, 2001, in commission file 0-31619.
   
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 registrant’s 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 registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
4.3 Option Agreement, dated May 3, 2007, between Mr. Hisashi Akazawa and Mr. Si Chen. Incorporated by reference to Exhibit 4.3 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
4.4 Form of Registration Rights Agreement, dated May 3, 2007. Incorporated by reference to Exhibit to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
4.5 Form of Common Stock Purchase Warrants issued to investors, dated May 3, 2007. Incorporated by reference to Exhibit 4.5 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
4.6 Form of Common Stock Purchase Warrants issued to Sterne Agee & Leach, Inc. and its designee, dated May 3, 2007. Incorporated by reference to Exhibit 4.5 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.1 Form of the Securities Purchase Agreement, dated May 3, 2007, by and among the registrant and the investors named therein, and joined by Mr. Akazawa and Mr. Chen as to certain sections. Incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.2 Make Good Escrow Agreement, dated May 3, 2007, by and among the registrant, Sterne Agee & Leach, Inc., Mr. Hisashi Akazawa, Mr. Si Chen and Securities Transfer Corporation. Incorporated by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.3 Closing Escrow Agreement, dated May 3, 2007, by and among the registrant, Sterne Agee & Leach, Inc. and Thelen Reid Brown Raysman & Steiner LLP. Incorporated by reference to Exhibit 10.3 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.4 Cancellation and Escrow Agreement, dated May 3, 2007, by and among the registrant, Halter Financial Investments, L.P., Halter Financial Group, L.P. and Security Transfer Corporation. Incorporated by reference to Exhibit 10.4 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.5 Employment Agreement, dated March 2, 2005, by and between Shandong Green Foodstuff CO., LTD and Si Chen. Incorporated by reference to Exhibit 10.5 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.6 Employment Agreement, dated July 2, 2002, by and between Shandong Green Foodstuff CO., LTD and Xiandong Zhou. Incorporated by reference to Exhibit 10.6 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.7 Employment Agreement, dated November 20, 2007, by and between Shandong Green Foodstuff CO., LTD and Jing Thomas Wu. Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 21, 2007 in commission file number 0-31619.
   
10.8 Cooperation Agreement, dated May 18, 2006, by and between Beijing Green Foodstuff Co., Ltd. and the Chestnut Cooperation of Zhenzhai Village, Gaoling town, Miyun County. Incorporated by reference to Exhibit 10.8 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.9 Equity Transfer Agreement, dated August 15, 2006, by and between International Lorain Co., Ltd and International Lorain Holding, Inc. Incorporated by reference to Exhibit 10.9 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.10 Credit Facility Agreement, dated September 28, 2006, by and between Beijing Green Foodstuff Co., Ltd. and the Shilibao Branch of Beijing Rural Commercial Bank Co., Ltd. Incorporated by reference to Exhibit 10.10 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.11 Sales contract, dated May 13, 2006, by and between Shandong Green Foodstuff Co., Ltd. and the Shandong Lu An Import & Export Co., Ltd. Incorporated by reference to Exhibit 10.11 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.12 Sales contract, dated September 5, 2006, by and between Shandong Green Foodstuff Co., Ltd. and the Shinsei Foods Co., Ltd. Incorporated by reference to Exhibit 10.12 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.13 Sales Contract, dated September 10, 2006, by and between Junan Hongrun Foodstuff Co., Ltd. and the Shinsei Foods Co., Ltd. Incorporated by reference to Exhibit 10.13 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.14 Financial Advisory Agreement, dated February 14, 2007, by and between HFG International, Limited and Shandong Green Foodstuff Co., Ltd. Incorporated by reference to Exhibit 10.14 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.15 Consulting Agreement, dated March 8, 2007, by and between Heritage Management Consultants, Inc. and International Lorain Holding, Inc. Incorporated by reference to Exhibit 10.15 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
10.16 Equity Transfer Agreement dated September 5, 2006, by and between Junan Hongrun Foodstuff Co., Ltd. and International Lorain Holding, Inc.
   
10.17 Equity Transfer Agreement, dated August 19, 2006, by and between Lihua Liu, Junxia Wang, Shixiang Wang, Yuan Tian, Lantao Li, Yubo Liu, Zhixu Sun, Guangxing Han, Linying Wang, International Lvan Co., as transferors and International Lorain Holding, Inc. as transferee
   
10.18 Equity Transfer Agreement, dated August 27, 2006, by and between Si Chen, Xiaodong Zhou, Shixiang Wang, and International Lvan Co., Ltd., as transferors and International Lorain Holding, Inc. as transferee
   
10.19 Equity Transfer Agreement, dated August 15, 2006, by and between International Lvan Co., Ltd. and International Lorain Holding, Inc.
   
10.20 Employment Agreement, effective September 22, 2008, by and between American Lorain Corporation and Yilun Alan Jin. Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on September 18, 2008 in commission file number 0-31619.
   
10.21 Form of Sales Agreement by and between Shandong Lorain Foodstuff Co., Ltd. and Shandong Lvan Import & Export Co., Ltd.
   
14 Business Ethics Policy and Code of Conduct, adopted on April 30, 2007. Incorporated by reference to Exhibit 14 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
21 List of subsidiaries of the registrant. Incorporated by reference to Exhibit 21 to the registrant’s current report on Form 8-K filed on May 9, 2007 in commission file number 0-31619.
   
24 Power of Attorney (included on the signature page of this annual report).
   
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