PLAG 10-Q Quarter ended June 30, 2014

ASSETS

Current assets

Cash and cash equivalents

Restricted cash

Trade accounts receivable

Other receivables

Related party receivable

Inventory

Advance to suppliers

Prepaid expenses and taxes

Deferred tax asset

Security deposits and other assets

Total current assets

Non-current assets

Investment

Property, plant and equipment, net

Construction in Progress, net

Land use rights, net

TOTAL ASSETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Short-term bank loans

Notes payable

Convertible promissory note

Long-term debt – current portion

Accounts payable

Taxes payable

Accrued liabilities and other payables

Customers deposits

Total current liabilities

Long-term liabilities

Long-term bank loans

Notes payable and debenture

TOTAL LIABILITIES

STOCKHOLDERS’ EQUITY

Preferred Stock, $.001 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

Common Stock, $0.001 par value, 200,000,000 shares authorized; 34,616,714 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

Additional paid-in capital

Statutory reserves

Retained earnings

Accumulated other comprehensive income

Non-controlling interests

TOTAL STOCKHOLDER’S EQUITY

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

Net revenues

Cost of revenues

Gross profit

Operating expenses

Selling and marketing expenses

General and administrative expenses

Operating income

Government subsidy income

Interest income

Other income

Other expenses

Interest expense

Earnings before tax

Income tax

Net income

Other comprehensive income:

Foreign currency translation gain

Comprehensive Income

Net income attributable to:

-Common stockholders

-Non-controlling interest

Earnings per share

- Basic

- Diluted

Weighted average shares outstanding

- Basic

- Diluted

Cash flows from operating activities

Net income

Depreciation of fixed assets

Amortization of intangible assets

(Increase)/decrease in accounts & other receivables

(Increase)/decrease in inventories

Decrease/(increase) in prepayment

Decrease/(increase) in deferred tax asset

Increase/(decrease) in accounts and other payables

Net cash (used in)/provided by operating activities

Cash flows from investing activities

(Purchase)/Sale of investment

Purchase of plant and equipment

Payment for the purchase of land use rights

(Increase)/decrease in restricted cash

(Increase)/decrease in deposit

Net cash used in investing activities

Cash flows from financing activities

Repayment of bank borrowings

Proceeds from bank borrowings

Proceeds from long-term borrowings and notes payable

Net cash provided by/(used in) financing activities

Net Increase/(decrease) of Cash and Cash Equivalents

Effect of foreign currency translation on cash and cash equivalents

Cash and cash equivalents–beginning of period

Cash and cash equivalents–end of period

Supplementary cash flow information:

Interest received

Interest paid

Income taxes paid

Balance, January 1, 2013

Net income

Allocation to non-controlling interests

Appropriations to statutory reserve

Foreign currency translation adjustment

Balance, December 31, 2013

Balance, January 1, 2014

ORGANIZATION, BASIS OF PRESENTATION, AND PRINCIPAL ACTIVITIES

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

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

Organization History of International Lorain Holding Inc. and its subsidiaries

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

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

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

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

Business Activities

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Method of Accounting

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

The Company regrouped certain accounts in its presentation of changes in assets and liabilities in the statement of cash flows for the periods ended June 30, 2014 in order to be consistent with the presentation provided for the year ended December 31, 2013. There was no impact in earnings for the regrouping.

Principles of consolidation

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

As of June 30, 2014, the detailed identities of the consolidating subsidiaries are as follows:

On February 7, 2014, Junan Hongrun acquired 51% of Athena group and its subsidiaries. The investment of Athena group is not consolidated into the financial statements since the acquisition is still subject to the approval of Department of Commerce of Shandong Province, PRC although the title has been passed to Junan Hongrun.

Use of estimates

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

Cash and cash equivalents

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

Investment securities

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

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

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

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

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.

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.

Customer deposits and advances to suppliers

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

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

Property, plant and equipment

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

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.

Construction in progress

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

Land Use Rights

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

Accounting for the Impairment of Long-Lived Assets

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

If an asset is considered impaired, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.The Company believes no impairment has occurred to its assets during 2013 and 2012.

Advertising

All advertising costs are expensed as incurred.

Shipping and handling

All shipping and handling are expensed as incurred.

Research and development

All research and development costs are expensed as incurred.

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.

Income taxes

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

Statutory reserves

Statutory reserves are referring to the amount appropriated from the net income in accordance with laws or regulations, which can be used to recover losses and increase capital, as approved, and are to be used to expand production or operations. The Company transferred $1,474,019 and $2,264,420 from retained earnings to statutory reserves for the years ended December 31, 2013 and 2012. PRC laws prescribe that an enterprise operating at a profit, must appropriate, on an annual basis, an amount equal to 10% of its profit. Such an appropriation is necessary until the reserve reaches a maximum that is equal to 50% of the enterprise’s PRC registered capital.

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.

Period end/Year end RMB:US$ exchange rate

Average period/yearly RMB: US$ exchange rate

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

Revenue recognition

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

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

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

Earnings per share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of ordinary shares outstanding and potential dilutive securities during the year. During the period ended December 31, 2013, no warrants were issued nor were options granted. For the year ended December 31, 2010, 81,155 warrants were issued to certain service providers. For the year ended December 31, 2009, 1,334,573 stock options were granted to employees pursuant to the Company’s equity incentive plan; 2,255,024 warrants were issued to investors in connection with a PIPE financing. These warrants and options could be potentially dilutive if the market price of the Company’s common stock exceeds the exercise price for these securities.

The Company computes earnings per share (“EPS”) in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per share” (“SFAS No. 128”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

Financial Instruments

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

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.

Comprehensive income

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

The Company uses FASB ASC Topic 220, “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except the changes in paid- in capital and distributions to stockholders due to investments by stockholders. Comprehensive income for the periods ended June 30, 2014 and 2013 included net income and foreign currency translation adjustments.

Recent accounting pronouncements

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” Some stakeholders told the Board that too many disposals of small groups of assets that are recurring in nature qualify for discontinued operations presentation under Subtopic 205-20, Presentation of Financial Statements—Discontinued Operations. That results in financial statements that are less decision useful for users. Other stakeholders noted that some of the guidance on reporting discontinued operations results in higher costs for preparers because it can be complex and difficult to apply. The amendments in this Update address those issues by changing the criteria for reporting discontinued operations and enhancing convergence of the FASB’s and the International Accounting Standard Board’s (IASB) reporting requirements for discontinued operations. The amendment should apply to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years.

In June 2014, the FASB issued ASU No. 2014-12, “Compensation—Stock Compensation (Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” Entities commonly issue share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. Examples of performance targets include an entity attaining a specified profitability metric or selling shares in an initial public offering. Generally, an award with a performance target also requires an employee to render service until the performance target is achieved. In some cases, however, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. That is, the employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved.

Current U.S. generally accepted accounting principles do not contain explicit guidance on how to account for those share-based payments. Many reporting entities account for performance targets that could be achieved after the requisite service period as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance target in the estimate of the grant-date fair value of the award. Other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award. This Update is intended to resolve the diverse accounting treatment of those awards in practice.

For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.

As of June 30, 2014, there are no other recently issued accounting standards not yet adopted that would have a material effect on the Company’s consolidated financial statements

RESTRICTED CASH

TRADE ACCOUNTS RECEIVABLE

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

OTHER RECEIVABLES

Other receivables consisted of the following as of June 30, 2014 and December 31, 2013:

INVENTORIES

Inventories consisted of the following as of June 30, 2014 and December 31, 2013:

PROPERTY, PLANT AND EQUIPMENT

Property, plant, and equipment consisted of the following as of June 30, 2014 and December 31, 2013:

Landscaping, plants, and trees accounts for the orchards that the Company has developed for agricultural operations. These orchards as well as the young trees which were purchased as nursery stock are capitalized into fixed assets. The depreciation is then calculated on a 30-year straight-line method when production in commercial quantities begins. The orchards have begun production in small quantities and the Company has accounted for depreciation commencing July 1, 2010. During the year ended December 31, 2013, the Company purchased three greenhouses to grow seasonal crops in order to lower cost.

LAND USE RIGHTS, NET

Land use rights consisted of the following as of June 30, 2014 and December 31, 2013 ^:

SHORT-TERM BANK LOANS AND NOTES PAYABLE

Short-term bank loans consisted of the following as of June 30, 2014 and December 31, 2013:

• Interest rate at 6.44% per annum; due 12/1/2014

• Interest rate at 7.20% per annum; due 12/10/2014

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

Loan from Linyi Commercial Bank,

• Interest rate at 1.512% per annum due 1/9/2014

• Interest rate at 1.26% per annum due 1/10/2014

Loan from China Minsheng Bank Corporation, Linyi Branch

• Interest rate at 7.8% per annum due 2/26/2014

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

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

Loan from Agricultural Bank of China, Luotian Branch

• Interest rate at 7.8% per annum due 8/20/2014

• Interest rate at 7.8% per annum due 9/3/2014

China Agricultural Development Bank

•Interest rate at 6.0% per annum due 1/3/2014

•Interest rate at 6.0% per annum due 8/19/2014

•Interest rate at 6.0% per annum due 1/5/2015

Bank of Beijing,

• Interest rate at 7.2% per annum due 6/19/2014

Luotian Sanliqiao Credit Union,

• Interest rate at 9.360% per annum due 12/31/2014

• Interest rate at 9.360% per annum due 1/21/2015

Beijing International Trust Co., Ltd.,

• Interest rate at 6.00% per annum due 9/23/2014

Bank of Ningbo ,

• Interest rate at 7.20% per annum due 9/25/2014

Hankou Bank, Guanggu Branch,

• Interest rate at 6.60% per annum due 9/12/2014

Agricultural Bank of China, Shandong Branch

• Interest rate at 7.2% per annum due 8/22/2014

Agricultural Bank of China, Junan Branch

• Interest rate at 7.2% per annum due 1/9/2015

Ping An Bank, Jinan Branch

• Interest rate at 6.72% per annum due 1/3/2014

• Interest rate at 6.72% per annum due 5/2/2014

Luzhen Credit Union,

• Interest rate at 10.40% per annum due 2/27/2014

China Guangfa Bank,

• Interest rate at 8.75% per annum due 12/27/2014

• Interest rate at 8.75% per annum due 4/3/2015

Bank of Rizhao,

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

China Construction Bank,

• Variable Interest rate, due 4/1/2014

• Variable Interest rate, due 4/30/2014

$

Notes payable issued by Hankou Bank,

• Interest rate at 5.55% per annum due 9/12/2014

• Interest rate at 5.55% per annum due 10/10/2014

CONVERTIBLE PROMISSORY NOTE

Convertible Promissory Note consisted of the following as of June 30, 2014 and December 31, 2013:

Note issued to Jade Lane Group Limited

• Interest rate at 4.50% per annum due 9/13/2014

TAXES PAYABLES

Taxes payable consisted of the following as of June 30, 2014 and December 31, 2013:

ACCRUED EXPENSES AND OTHER PAYABLE

Accrued expenses and other payables consisted of the following as of June 30, 2014 and December 31, 2013:

Current portions of long-term debt consisted of the following as of June 30, 2014 and December 31, 2013:

Loans from China Development Bank

• Interest rate at 7.07% per annum due 5/20/2014

• Interest rate at 7.07% per annum due 11/20/2014

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

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

• Interest rate at 5.510% per annum due 3/15/2014

• Interest rate at 5.510% per annum due 9/15/2014

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

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

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

Loans from China Development Bank

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

Note payable issued by Shanghai Pudong Development Bank

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

Debenture issued by Guoyuan Securities Co., Ltd.

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

Debenture issued by Daiwa SSC Securities Co. Ltd.

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

CAPITALIZATION

Dating back to May 3, 2007, the Company underwent a reverse-merger and a concurrent financing transaction that resulted in 24,923,178 shares of outstanding common stock that remained unchanged until through December 31, 2007. In connection with the financing, the Company also issued 1,037,858 and 489,330 warrants to the PIPE investors and placement agent, respectively. During 2008, several holders of warrants issued in connection with the financing transaction exercised their rights to purchase shares at the prescribed exercise price. The holders of the warrants exercised the right to purchase a total of 360,207 shares; however, because the holders did not pay in cash for the warrants, 110,752 of those shares were cancelled as consideration in lieu of the warrant holders paying in cash. Ultimately, 249,455 of new shares were issued to those who exercised their warrant. The Company also made an adjustment to its outstanding share count for rounding errors as result of the split and reverse splits made at the time of the reverse merger. The number of shares in the adjustment was an addition of seven shares. The Company believes the adjustment of seven shares is immaterial to both prior and current earnings per share calculation. As detailed in the table below, the total number of outstanding shares at December 31, 2013 was 34,616,714.

During the year 2009, the Company issued 56,393 shares of stock to its employees and vendors and 5,011,169 shares to investors. The Company issued 1,334,573 stock options to employees on July 28, 2009; 1,753,909 shares of Series A warrants and 501,115 shares of Series B warrants were issued to investors on October 28, 2009.

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

NON-CONTROLLING INTERESTS

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

SALES BY PRODUCT TYPE

Sales by categories of product consisted of the following as of June 30, 2014 and 2013:

INCOME TAXES

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