NEW DRAGON ASIA CORP (Form: 10-Q, Received: 08/10/2009 14:10:17)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 25, 2009

o	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: 001-15046

NEW DRAGON ASIA CORP.

(Exact name of Registrant as specified in its charter)

FLORIDA	88-0404114
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

10 Huangcheng Road (N), Longkou, Shandong Province, PRC
(Address of Principal Executive Offices)	(Zip Code)

(86 535) 8951 567

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).* Yes o No o *The registrant has not yet been phased into the interactive data requirements.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act):

Large Accelerated Filer ¨

Accelerated Filer ¨

Non-Accelerated Filer ¨

Smaller Reporting Company x

The number of shares of Class A Common Stock outstanding as of July 31, 2009 was 77,757,447.

NEW DRAGON ASIA CORP.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 25, 2009

TABLE OF CONTENTS

		Page
PART I:	FINANCIAL INFORMATION

ITEM 1.	Consolidated Financial Statements:

	Consolidated Balance Sheets as of June 25, 2009 (unaudited) and December 25, 2008	3

	Consolidated Statements of Operations (unaudited) for the three months and six months ended June 25, 2009 and 2008	4

	Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the six months ended June 25, 2009 (unaudited) and the year ended December 25, 2008	5

	Consolidated Statements of Cash Flows (unaudited) for the six months ended June 25, 2009 and 2008	6

	Notes to Consolidated Financial Statements (unaudited)	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	26

ITEM 4T.	Controls and Procedures	26

PART II:	OTHER INFORMATION

ITEM 1.	Legal Proceedings	27

ITEM 1A.	Risk Factors	27

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

ITEM 3.	Defaults Upon Senior Securities	33

ITEM 4.	Submission of Matters to a Vote of Security Holders	33

ITEM 5.	Other Information	34

ITEM 6.	Exhibits	34

SIGNATURES		37

EXHIBITS

PART I: FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements.

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

	June 25, 2009		December 25, 2008
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	7,352	$	4,383
Accounts receivable, net		10,972		8,888
Deposits and prepayments, net		7,357		13,056
Inventories, net		23,386		27,124
Assets held for disposal		—		5,778
Total current assets		49,067		59,229

Deferred tax asset		349		—
Property, machinery and equipment, net		25,454		20,139
Land use rights, net		4,438		4,529
Due from related companies		951		981
Total assets	$	80,259	$	84,878

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	5,098	$	4,980
Other payables and accruals		1,918		3,845
Taxes payable		581		294
Embedded derivatives, at fair value		93		287
Total current liabilities		7,690		9,406

Due to shareholder		3,389		2,780
Due to joint venture partners		837		767
Series A and B Redeemable Convertible Preferred Stock, $0.0001 par value: Authorized shares - 5,000,000 Issued and outstanding –4,997 shares and 6,501 shares at June 25, 2009 and December 25, 2008		3,936		4,645
Total liabilities		15,852		17,598

Commitments

Stockholders’ equity:
Class A Common Stock, $0.0001 par value: Authorized shares - 102,000,000 Issued and outstanding – 71,141,326 at June 25, 2009 and 60,922,981 at December 25, 2008		7		6
Class B Common Stock, $0.0001 par value: Authorized shares - 2,000,000 Issued and outstanding – none		—		—
Additional paid-in capital		34,171		32,521
Non-controlling interest		124		122
Retained earnings		16,761		21,321
Accumulated other comprehensive income		13,344		13,310
Total stockholders’ equity		64,407		67,280
Total liabilities and stockholders’ equity	$	80,259	$	84,878

The accompanying notes are an integral part of these consolidated financial statements.

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data; unaudited)

	Three months ended June 25,						Six months ended June 25,
	2009			2008			2009			2008

Net revenue	$	5,630		$	14,515		$	9,593		$	26,214
Cost of goods sold		(6,513	)		(11,970	)		(12,031	)		(21,527	)
Gross profit		(883	)		2,545			(2,438	)		4,687
Selling and distribution expenses		(148	)		(369	)		(367	)		(590	)
General and administrative expenses		(442	)		(741	)		(1,608	)		(1,246	)
Income (Loss) from operations		(1,473	)		1,435			(4,413	)		2,851
Other income (expense):
Interest income		—			—			2			2
Other income (expense)		(66	)		27			(92	)		215
Gain on fair value adjustments to e mbedded derivatives		53			738			173			1,428
VAT refund		15			28			15			28
Income (loss) before income taxes		(1,471	)		2,228			(4,315	)		4,524
Benefit (provision) for income taxes		—			(472	)		349			(786	)
Net income (loss)		(1,471	)		1,756			(3,966	)		3,738
Net income (loss) attributable to Non-controlling interest		1			—			2			—
Net income (loss) attributable to Controlling interest	$	(1,470	)	$	1,756		$	(3,964	)	$	3,738
Accretion of Redeemable Preferred Stock		(187	)		(301	)		(406	)		(660	)
Preferred Stock Dividends		(87	)		(140	)		(188	)		(293	)
Income available to (loss attributable to) common stockholders	$	(1,744	)	$	1,315		$	(4,558	)	$	2,785

Earnings per common share
Basic	$	(0.03	)	$	0.02		$	(0.07	)	$	0.05
Diluted	$	(0.03	)	$	0.02		$	(0.07	)	$	0.05
Weighted average number of common shares outstanding
Basic		69,742			57,165			66,815			56,615
Diluted		69,742			57,165			66,815			56,615

The accompanying notes are an integral part of these consolidated financial statements.

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Amounts in thousands)

	Class A Common Stock				Additional Paid-in		Non Controlling			Retained			Accumulated Other Comprehensive		Total Stockholders'			Comprehensive
	Shares		Amount		Capital		Interest			Earnings			Income		Equity			Income
Balance at December 25, 2007		55,195	$	5	$	29,982	$	294		$	24,568		$	7,767	$	62,616		$	18,972
Net (loss) attributable to controlling interest		-		-		-		(193	)		(1,517	)		-		(1,710	)		(1,517	)
Accretion of Redeemable Preferred Stock		-		-		-		-			(1,196	)		-		(1,196	)		-
Preferred Stock Dividends		-		-		-		-			(534	)		-		(534	)		-
Foreign currency translation adjustment		-		-		-		21			-			5,543		5,564			5,543
Conversion of preferred stocks and related dividend payments made in Class A Common Stock		5,728		1		2,539		-			-			-		2,540			-
Balance at December 25, 2008		60,923		6		32,521		122			21,321			13,310		67,280		$	4,026
Net income (loss)		-		-		-		2			(3,966	)		-		(3,964	)		(3,964	)
Accretion of Redeemable Preferred Stock		-		-		-		-			(406	)		-		(406	)		-
Preferred Stock Dividends		-		-		-		-			(188	)		-		(188	)		-
Foreign currency translation adjustment		-		-		-		-			-			34		34			34
Conversion of preferred stock and related dividend payments made in Class A Common Stock		8,218		1		1,350		-			-			-		1,351			-
Share-based compensation to CFO		2,000		—		300		-			-			-		300			-
Balance at June 25, 2009 (unaudited)		71,141	$	7	$	34,171	$	124		$	16,761		$	13,344	$	64,407		$	(3,930	)

The accompanying notes are an integral part of these consolidated financial statements.

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)

	Six months ended June 25,
	2009			2008
Cash flows from operating activities:
Net income (loss)	$	(3,966	)	$	3,738
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Allowance for doubtful accounts		317			29
Provision for inventory reserve		2,244			4
Depreciation and amortization of property, machinery, equipment and land use rights		864			1,020
Gain on fair value adjustments to embedded derivatives		(173	)		(1,428	)
Stock based compensation expense		75			—
Changes in operating assets and liabilities:
Accounts receivable		(2,396	)		(411	)
Deposits and prepayments		5, 628			107
Inventories		1,506			(3,159	)
Due from related companies		30			(63	)
Accounts payable		115			1,667
Other payables and accruals		(1,601	)		98
Taxes payable		287			778
Due to related companies		—			(36	)
Deferred tax asset		(349	)		—
Net cash provided by operating activities		2,581			2,344

Cash flows from investing activities:
Purchases of property, machinery and equipment		(6,071	)		(196	)
Proceeds from sale of property, machinery and equipment		5,778			3
Net cash used in investing activities		(293	)		(193	)

Cash flows from financing activities:
Payment for preferred stock redemption		—			994
Proceed from shareholder loan		607			363
Proceeds from (repayment to) joint venture partners		70			(84	)
Net cash provided by financing activities		677			1,273
Impact of foreign currency translation on cash		4			2,433
Net increase in cash and cash equivalents		2,969			5,857
Cash and cash equivalents at beginning of period		4,383			3,646
Cash and cash equivalents at end of period	$	7,352		$	9,503

Non-Cash Investing and Financing Activities

Conversion of preferred stock into common stock	$	1,504		$	1,504

Dividend payments on preferred stock in the form of common stock	$	215		$	326

The accompanying notes are an integral part of these consolidated financial statements.

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS

New Dragon Asia Corp., a corporation incorporated in the State of Florida (collectively with its subsidiaries, the “Company,” “we,” “us,” or “our”), is principally engaged in the milling, sale and distribution of flour and related products, including instant noodles and soybean-derived products, to retail and wholesale customers throughout China through its foreign subsidiaries in China. The Company is headquartered in Shandong Province in the People’s Republic of China (“PRC” or “China”) and has its eight manufacturing plants in Yantai, Beijing, Chengdu, and Penglai.

NOTE 2. BASIS OF PRESENTATION

The consolidated financial statements include the financial statements of New Dragon Asia Corp. and all of its wholly and majority owned subsidiaries (Note 1). Intercompany balances and transactions have been eliminated in consolidation.

FIN 46, “Consolidation of Variable Interest Entities” requires an investor with a majority of the variable interests (primary beneficiary) in a variable interest entity (“VIE”) to consolidate the entity. A VIE is an entity in which the voting equity investors do not have a controlling financial interest or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from other parties. VIEs are required to be consolidated by their primary beneficiaries if they do not effectively disperse risks among the parties involved. The primary beneficiary of a VIE is the party that absorbs a majority of the entity’s expected losses or receives a majority of its expected residual returns. The Company has completed a review of its investments in both non-marketable and marketable equity interests as well as other arrangements to determine whether it is the primarily beneficiary of any VIEs. The review did not identify any VIEs.

The consolidated financial statements have been prepared in accordance with U.S. GAAP. These Consolidated Financial Statements for interim periods are unaudited. In the opinion of management, the consolidated financial statements include all adjustments, consisting only of normal, recurring adjustments, necessary for their fair presentation. The results reported in these Consolidated Financial Statements are not necessarily indicative of the results that may be reported for the entire year. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to allowances for doubtful accounts, sales returns and allowance, and inventory reserves. Although management believes these estimates and assumptions are adequate and reasonable under the circumstances, actual results could differ from those estimates.

Effective December 26, 2008 the Company adopted FAS 160, “Non-controlling Interests in Consolidated Financial Statements,” an Amendment of ARB No. 51, “Consolidated Financial Statements.” The adoption of FAS 160 was applied retrospectively, resulting in the reclassification of minority interest to equity. The change was not significant.

Contractual Joint Ventures

A contractual joint venture is an entity established between the Company and another joint venture partner, with the rights and obligations of each party governed by a contract. Currently, the Company has established three contractual joint ventures with three Chinese partners in China, with percentage of ownership ranging from 79.64% to 90%. Pursuant to each Chinese joint venture agreement, each Chinese joint venture partner is entitled to receive a pre-determined annual fee and is not responsible for any profit or loss, regardless of the ownership in the contractual joint venture. In view of such contracted profit sharing arrangement, the three contractual joint ventures are regarded as 100% owned by the Company. Hence, the Company’s consolidated financial statements include the financial statements of the contractual joint ventures.

Accounting for Derivative Instruments

Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires all derivatives to be recorded on the Company’s balance sheet at fair value. These derivatives, including embedded derivatives in the Company’s Series A and B Redeemable Convertible Preferred Stock, are separately valued and accounted for on the Company’s balance sheet.

The pricing models the Company uses for determining fair values of its derivatives are a combination of the Black-Scholes and Binomial Pricing Models. Valuations derived from this model are subject to ongoing internal and external review. The model uses market-sourced inputs such as interest rates and option volatilities. Selection of these inputs involves management's judgment and may impact net earnings. The Company has obtained a valuation report from a valuation firm to support its estimates.

In September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company's Own Stock," ("EITF 00-19") which requires freestanding contracts that are settled in a company's own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company's balance sheet, with any changes in fair value recorded in the company's results of operations. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required.

The Company has determined that the conversion features of its redeemable convertible preferred stock and warrants to purchase common stock are derivatives that the Company is required to account for as if they were free-standing instruments under U.S. GAAP. The Company has also determined that it is required to designate these derivatives as liabilities in its financial statements. As a result, the Company reports the value of these embedded derivatives as current liabilities on its balance sheet and reports changes in the value of these derivatives as non-operating gains or losses on its statement of operations. The value of the derivatives is required to be recalculated (and resulting non-operating gains or losses reflected in the statement of operations and resulting adjustments to the associated liability amounts reflected on the balance sheet) on a quarterly basis, and is based on the market value of the Company’s common stock. Due to the nature of the required calculations and the large number of shares of the Company’s common stock involved in such calculations, changes in the Company’s common stock price may result in significant changes in the value of the derivatives and resulting gains and losses on the Company’s statement of operations.

The consolidated financial statements also reflect additional non-operating gains and losses related to the classification of and accounting for: (1) the conversion features of the Series A and B Preferred Stock and associated warrants, (2) the amortization associated with the discount recorded with respect to the Series A and B Preferred Stock as a preferred stock dividend, and (3) the conversion features associated with the preferred stock issued by the Company and associated warrants.

Fair Value of Financial Instruments

The Company adopted SFAS 157 on January 1, 2008. This statement establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

Level 1 -	quoted prices (unadjusted) in active markets for identical asset or liabilities that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange-traded securities and exchange-based derivatives.

Level 2 -	inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges.

Level 3 -

unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models.

In accordance with SFAS 157, the Company determines the level in the fair value hierarchy within which each fair value measurement in its entirety falls, based on the lowest level input that is significant to the fair value measurement in its entirety.

The following table presents the embedded derivative, the Company’s only financial liability measured and recorded at fair value on the Company’s Consolidated Balance Sheets on a recurring basis and its level within the fair value hierarchy during the period ended June 25, 2009 and 2008:

(In thousands)	Fair Value
	Level 1		Level 2		Level 3		Total

Embedded derivative liabilities as of June 25, 2009	$	—	$	—	$	93	$	93
Embedded derivative liabilities as of December 25, 2008	$	—	$	—	$	287	$	287

NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Financial Accounting Standard (SFAS) 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which is effective for fiscal years ending after December 15, 2009. The new standard expands disclosures for assets held by employer pension and other postretirement benefit plans. FSP SFAS 132(R)-1 will not affect the Company’s financial position or results of operations.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company evaluated subsequent events after the balance sheet date of June 25, 2009 through the filing of this report with the SEC on August 10, 2009.

In June 2009, FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140.” SFAS 166 is applied to financial asset transfers on or after the effective date, which is January 1, 2010 for the Company’s financial statements. SFAS 166 limits the circumstances in which a financial asset may be de-recognized when the transferor has not transferred the entire financial asset or has continuing involvement with the transferred asset. The concept of a qualifying special-purpose entity, which had previously facilitated sale accounting for certain asset transfers, is removed by SFAS 166. The Company expects that adoption of SFAS 166 will not have a material effect on its financial position or results of operations.

In June 2009, FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” which deals with accounting for variable interest entities and is effective for reporting periods beginning after November 15, 2009. The amendments change the process for how an enterprise determines which party consolidates a variable interest entity (VIE) to a primarily qualitative analysis. SFAS 167 defines the party that consolidates the VIE (the primary beneficiary) as the party with (1) the power to direct activities of the VIE that most significantly affect the VIE’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. Upon adoption of SFAS 167, reporting enterprises must reconsider their conclusions on whether an entity should be consolidated and should a change result, the effect on net assets will be recorded as a cumulative effect adjustment to retained earnings. The Company expects that adoption of SFAS 167 will not have a material effect on its financial position or results of operations.

In January 2009, the FASB released Proposed Staff Position SFAS 107-b and Accounting Principles Board (APB) Opinion No. 28-a, “Interim Disclosures about Fair Value of Financial Instruments” (SFAS 107-b and APB 28-a). This proposal amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments,” to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. The proposal also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements. This proposal is effective for interim periods ending after June 15, 2009. The Company adopted SFAS 107-b and APB 28-a in the current period; no additional disclosures were required.

In March 2009, the FASB released Proposed Staff Position SFAS 157-e, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed” (SFAS 157-e). This proposal provides additional guidance in determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurement purposes as defined in SFAS 157, “Fair Value Measurements.” SFAS 157-e is effective for interim periods ending after June 15, 2009. Adoption of this standard did not have a material impact on the Company’s financial position, cash flows, or disclosures.

In March 2009, the FASB issued Proposed Staff Position SFAS 115-a, SFAS 124-a, and EITF 99-20-b, “Recognition and Presentation of Other-Than-Temporary Impairments.” This proposal provides guidance in determining whether impairments in debt securities are other than temporary, and modifies the presentation and disclosures surrounding such instruments. This Proposed Staff Position is effective for interim periods ending after June 15, 2009. Adoption of this standard did not have a material impact on the Company’s financial position, cash flows, or disclosures.

NOTE 4. CONDENSED BALANCE SHEET INFORMATION

Condensed balance sheet information as of June 25, 2009 consisted of the following (in thousands):

	Inside China		Outside China		Total
Assets
- Cash and cash equivalents	$	7,112	$	240	$	7,352
- Others		72,662		245		72,907
Total assets		79,774		485		80,259
Liabilities		8,375		7,477		15,852
Equity		52,039		12,368		64,407

Assets located outside of China consist primarily of cash and cash equivalents. Liabilities located outside of China consist primarily of embedded derivatives, net of the related beneficial conversion feature and fair value of the warrants.

Condensed statement of operation information for the six months ended June 25, 2009 consisted of the following (in thousands):

	Inside China			Outside China			Total

Net revenue	$	9,593		$	—		$	9,593
Cost of goods sold		(12,031	)		—			(12,031	)
General and administrative expenses		(1,043	)		(565	)		(1,608	)
Income (loss) from operations		(3,848	)		(565	)		(4,413	)
Income tax benefit		349			—			349
Other income (expense)		(75	)		173			98
Net loss attributable to controlling interest		(2,572	)		(392	)		(3,964	)

The Company does not believe that providing additional information regarding cash flows is meaningful to the reader, in light of the nature of the assets and operations located inside China and outside China.

NOTE 5. EARNINGS PER SHARE

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. Approximately 29,258 dilutive shares on an “as converted” basis for the Redeemable Convertible Preferred stock for the three and six months ended July 25, 2009 were excluded from the calculation of diluted earnings per share since their effect would have been anti-dilutive.

The calculation of diluted weighted average common shares outstanding for the three months and six months ended June 25, 2009 and 2008 is based on the average of the closing price of the Company’s common stock during such periods applied to warrants and options using the treasury stock method to determine if they are dilutive. The Redeemable Convertible Preferred stock is included on an “as converted “basis when these shares are dilutive.

The following table is a reconciliation of the weighted average shares used in the computation of basic and diluted earnings per share for the periods presented (amounts in thousands, except per share data):

	Three Months Ended June 25,
	2009										2008
					Weighted									Weighted
					Average						Income			Average
	Income				Shares		Per-Share				(Loss)			Shares		Per-Share
Earnings per share – basic
Income (loss) attributable to common stockholders		$	(1,744	)		69,742		$	(0.03	)		$	1,315		57,165		$	0.02
Effect of dilutive securities
Redeemable convertible preferred stock			—			—							—		—
Options and warrants			—			—							—		—

Earnings per share – diluted		$	(1,744	)		69,742		$	(0.03	)		$	1,315		57,165		$	0.02

	Six Months Ended June 25,
	2009										2008
					Weighted									Weighted
					Average						Income			Average
	Income				Shares		Per-Share				(Loss)			Shares		Per-Share
Earnings per share – basic
Income (loss) attributable to common stockholders		$	(4,558	)		66,815		$	(0.07	)		$	2,785		56,615		$	0.05
Effect of dilutive securities
Redeemable convertible preferred stock			—			—							—		—
Options and warrants			—			—							—		—

Earnings per share – diluted		$	(4,558	)		66,815		$	(0.07	)		$	2,785		56,615		$	0.05

NOTE 6. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following (in thousands):

		June 25, 2009				December 25, 2008
Accounts receivable		$	12,469