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: March 25, 2010
 
or
 
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  ¨

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  ¨ No  ¨ *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, 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.

Large Accelerated Filer  ¨
Accelerated Filer  ¨
Non-Accelerated Filer (Do not check if a smaller reporting company)  ¨
Smaller Reporting Company  x

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

The number of shares of Class A Common Stock outstanding as of April 30, 2010 was 97,709,653.

 

 

NEW DRAGON ASIA CORP.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 25, 2010

TABLE OF CONTENTS
 
     
Page
PART I:
FINANCIAL INFORMATION
   
       
ITEM 1.
Financial Statements
   
       
 
Consolidated Balance Sheets as of March 25, 2010 (unaudited) and December 25, 2009
 
3
       
 
Consolidated Statements of Operations (unaudited) for the three months ended March 25, 2010 and 2009
 
4
       
 
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (unaudited) for the three months ended March 25, 2010 and the year ended December 25, 2009
 
5
       
 
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 25, 2010 and 2009
 
6
       
 
Notes to Consolidated Financial Statements (unaudited)
 
7
       
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
17
       
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
 
24
       
ITEM 4T.
Controls and Procedures
 
24
       
PART II:
OTHER INFORMATION
   
       
ITEM 1.
Legal Proceedings
 
25
       
ITEM 1A.
Risk Factors
 
25
       
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
25
       
ITEM 3.
Defaults Upon Senior Securities
 
25
       
ITEM 4.
(Removed and Reserved)
 
25
       
ITEM 5.
Other Information
 
25
       
ITEM 6.
Exhibits
 
25
       
SIGNATURES
 
28
       
EXHIBITS
   

 

 
 
PART I: FINANCIAL INFORMATION

Item 1. Financial Statements.

NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
   
March 25,
2010
   
December 25,
2009
 
   
(Unaudited)
       
ASSETS  
           
             
Current assets:
           
Cash and cash equivalents
  $ 3,392     $ 3,440  
Accounts receivable, net
    13,921       13,437  
Deposits and prepayments, net
    5,556       5,632  
Inventories, net
    12,882       14,466  
Total current assets
    35,751       36,975  
                 
Property, machinery and equipment, net
    29,560       30,263  
Land use rights, net
    4,290       4,332  
Due from related companies
    952       952  
Total assets
  $ 70,553     $ 72,522  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Accounts payable
  $ 5,019     $ 4,808  
Other payables and accruals
    2,118       2,062  
Taxes payable
    376       186  
Embedded derivatives, at fair value
    62       76  
Total current liabilities
    7,575       7,132  
                 
Due to shareholder
    3,733       3,700  
Due to joint venture partners
    476       463  
Total liabilities
    11,784       11,295  
Series A and B Redeemable Convertible Preferred Stock, $0.0001 par value:
Authorized shares - 5,000,000
Issued and outstanding –2,742 shares and 3,494 shares at March 25, 2010 and December 25, 2009, respectively
    2,469       3,008  
                 
Commitments
               
                 
Stockholders’ equity:
               
Class A Common Stock, $0.0001 par value:
Authorized shares - 102,000,000
Issued and outstanding – 90,241,559 at March 25, 2010 and 83,364,229 at December 25, 2009
    9       8  
Class B Common Stock, $0.0001 par value:
Authorized shares - 2,000,000
Issued and outstanding – none
           
Additional paid-in capital
    36,291       35,569  
Deferred stock compensation
          (75 )
Retained earnings
    6,451       9,187  
Accumulated other comprehensive income
    13,424       13,405  
Total NWD stockholders’ equity
    56,175       58,094  
                 
Non-controlling interest
    125       125  
Total equity
    56,300       58,219  
Total liabilities and stockholders’ equity
  $ 70,553     $ 72,522  
The accompanying notes are an integral part of these consolidated financial statements. 

 
3

 
 
NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data; unaudited)
 
   
Three months ended
March 25,
 
   
2010
   
2009
 
             
Net revenue
  $ 6,046     $ 3,963  
Cost of goods sold
    (6,023 )     (5,518 )
Gross profit (loss)
    23       (1,555 )
Selling and distribution expenses
    (177 )     (219 )
General and administrative expenses
    (2,092 )     (1,166 )
Loss from operations
    (2,246 )     (2,940 )
Other income (expense):
               
Other income (expense)
    (334 )     (26 )
Interest income
          2  
Gain on fair value adjustments to e mbedded derivatives
    10       120  
Loss before income taxes and non-controlling interests
    (2,570 )     (2,844 )
Benefit (provision) for income taxes
    (1 )     349  
Net loss
    (2,571 )     (2,495 )
Net loss attributable to non-controlling interest
          1  
Net loss attributable to controlling interest
  $ (2,571 )   $ (2,494 )
Accretion of Redeemable Preferred Stock
    (117 )     (219 )
Preferred Stock Dividends
    (48 )     (101 )
Loss attributable to common stockholders
  $ (2,736 )   $ (2,814 )
                 
Earnings per common share
               
Basic
  $ (0.03 )   $ (0.04 )
Diluted
  $ (0.03 )   $ (0.04 )
Weighted average number of common shares outstanding
               
Basic
    89,248       63,931  
Diluted
    89,248       63,931  

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

 
4

 
 
NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Amounts in thousands, unaudited)

   
Class A Common
Stock
   
Additional
Paid-in
   
Deferred Stock
   
Retained
   
Accumulated
Other
Comprehensive
   
Total NWD
Stockholders’
   
Non
Controlling
   
Total
   
Comprehensive
 
   
Shares
   
Amount
   
Capital
      Compensation    
Earnings
   
Income
   
Equity
   
Interests
   
Equity
   
Income
 
Balance at December 25, 2008
    60,923     $ 6     $ 32,521     $ -     $ 21,321     $ 13,310     $ 67,158     $ 122     $ 67,280     $ 4,026  
Net income (loss)
    -       -       -       -       (11,106 )     -       (11,106 )     3       (11,103 )     (11,106 )
Accretion of Redeemable Preferred Stock
    -       -       -       -       (704 )     -       (704 )     -       (704 )     -  
Preferred Stock Dividends
    -       -       -       -       (324 )     -       (324 )     -       (324 )     -  
Foreign currency translation adjustment
    -       -       -       -       -       95       95       -       95       95  
Conversion of preferred stock and related dividend payments made in Class A Common Stock
    20,441       2       2,748       -       -       -       2,750       -       2,750       -  
Share-based compensation to CFO
    2,000       -       300       (75 )     -       -       225       -       225       -  
Balance at December 25, 2009
    83,364       8       35,569       (75 )     9,187       13,405       58,094       125       58,219     $ (11,011 )
Net loss
    -       -       -       -       (2,571 )     -       (2,571 )     -       (2,571 )     (2,571 )
Accretion of Redeemable Preferred Stock
    -       -       -       -       (117 )     -       (117 )     -       (117 )     -  
Preferred Stock Dividends
    -       -       -       -       (48 )     -       (48 )     -       (48 )     -  
Foreign currency translation adjustment
    -       -       -       -       -       19       19       -       19       19  
Conversion of preferred stock and related dividend payments made in Class A Common Stock
    6,877       1       722       -       -       -       723       -       723       -  
Share-based compensation to CFO
    -       -       -       75       -       -       75       -       75       -  
Balance at March 25, 2010
    90,241     $ 9     $ 36,291     $ -     $ 6,451     $ 13,424     $ 56,175     $ 125     $ 56,300     $ (2,552 )

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

 
5

 

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands, unaudited)  
   
Three months ended 
March 25,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net loss
  $ (2,571 )   $ (2,494 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Allowance for doubtful accounts
    1,460       527  
Provision for inventory reserve
    25       1,666  
Depreciation and amortization of land use rights
    412       434  
Loss on sale of machinery and equipment
    120        
Gain on fair value adjustments to embedded derivatives
    (10 )     (120 )
Stock-based compensation expense
    75        
Non-controlling interests
          (1 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,939 )     (1,291 )
Deposits and prepayments
    77       4,011  
Inventories
    1,562       (949 )
Due from related companies
          31  
Accounts payable
    210       (358 )
Other payables and accruals
    69       (1,373 )
Taxes payable
    190       (287 )
Deferred tax asset
          (349 )
Net cash used in operating activities
    (320 )     (553 )
                 
Cash flows from investing activities:
               
Proceeds from sale of property, machinery and equipment
    15       5,778  
Purchases of property, machinery and equipment
    (5 )     (3,718 )
Net cash provided by investing activities
    10       2,060  
                 
Cash flows from financing activities:
               
Proceeds from (Repayment to) shareholder loan
    32       (141 )
Proceeds from joint venture partners
    13       55  
Net cash provided by (used in) financing activities
    45       (86 )
Impact of foreign currency translation on cash
    217       3  
Net increase (decrease) in cash and cash equivalents
    (48 )     1,424  
Cash and cash equivalents at the beginning of period
    3,440       4,383  
Cash and cash equivalents at the end of period
  $ 3,392     $ 5,807  
                 
Non-Cash Investing and Financing Activities
               
                 
Conversion of preferred stock into common stock
  $ 752     $ 752  
                 
Dividend payments on preferred stock in the form of common stock
  $ 64     $ 114  

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

 
6

 
 
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. Intercompany balances and transactions have been eliminated in consolidation.

Accounting Standards Codification (“ASC”) Topic 810, “Consolidation of Variable Interest Entities” (formerly Standards of Financial Accounting Standards (“SFAS”) 167, “Amendments to FASB Interpretation No. 46(R))” 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 ASC Topic 810 in the United States.  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 ASC Topic 810 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.

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 for income statement purpose. The Company’s consolidated financial statements of the contractual joint ventures and accounts for the portion of the contractual joint ventures not wholly-owned by the Company as non-controlling interest.

Accounting for Derivative Instruments

Derivatives are 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 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. 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.

 
7

 

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 as of March 25, 2010 and December 25, 2009.

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, and (2) the amortization associated with the discount recorded with respect to the Series A and B Preferred Stock as a preferred stock dividend.

Fair Value of Financial Instruments

The Company adopted ASC Topic 820, “Fair Value Measurements and Disclosure” (formerly SFAS 157, “Fair Value Measurements”) on January 1, 2008 to account for and record fair values of financial instruments. This ASC establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The ASC 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.

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 only financial assets measured and recorded at fair value on the Company’s Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy during the period ended March 25, 2010 and 2009:

(In thousands)
 
Fair Value
 
                         
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Embedded derivative liabilities as of March 25, 2010
  $     $     $ 62     $ 62  
Embedded derivative liabilities as of March 25, 2009
  $     $     $ 155     $ 155  

NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, FASB issued ASU 2010-2, “Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification”. ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of the FASB ASC, originally issued as SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements”. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2 is effective for the Company starting January 3, 2010. The Company expects the adoption of ASU 2010-2 will not have a material impact on the Company's results of operations or financial position.

 
8

 

In January 2010, FASB issued ASU 2010-6, “Improving Disclosures about Fair Measurements". ASU 2010-6 provides amendments to subtopic 820-10 that require separate disclosure of significant transfers into and out of Level 1 and Level 2 fair value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments to subtopic 820-10 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques. ASU 2010-6 is effective for financial statements issued for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The Company expects the adoption of ASU 2010-06 will not have a material impact on the Company’s results of operations or financial position.

In February 2010, FASB issued ASU 2010-9 “Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements”. ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The Company expects the adoption of ASU 2010-06 will not have a material impact on the Company’s results of operations or financial position.

In March 2010, FASB issued ASU 2010-11 “Derivatives and Hedging (Topic 815) Scope Exception Related to Embedded Credit Derivatives”. ASU 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only one form of embedded credit derivative qualifies for the exemption—one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The amendments in this Update are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this Update. The Company expects the adoption of ASU 2010-11 will not have a material impact on the Company’s results of operations or financial position.

In April 2010, FASB issued ASU 2010-13 “Compensation-Stock Compensation (Topic 718) Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades”. ASU 2010-13 addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this Update should be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the amendments are initially applied. The Company expects the adoption of ASU 2010-13 will not have a material impact on the Company’s results of operations or financial position.

NOTE 4. CONDENSED BALANCE SHEET INFORMATION

Condensed balance sheet information as of March 25, 2010 consisted of the following (in thousands):

   
Inside China
   
Outside China
   
Total
 
Assets
                 
- Cash and cash equivalents
  $ 3,238     $ 154     $ 3,392  
- Others
    67,133       28       67,161  
Total assets
    70,371       182       70,553  
Liabilities, excluding Series A and B Redeemable Convertible Preferred Stock
    8,383       3,401       11,784  
Equity
    43,109       13,191       56,300  

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 three months ended March 25, 2010 consisted of the following (in thousands):

   
Inside China
   
Outside China
   
Total
 
                   
Net revenue
  $ 6,046     $     $ 6,046  
Cost of goods sold
    (6,023 )           (6,023 )
General and administrative expenses
    (1,906 )     (186 )     (2,092 )
Loss from operations
    (2,060 )     (186 )     (2,246 )
Provision for income taxes
    (1 )           (1 )
Other income (loss)
    (334 )     10       (324 )
Net loss attributable to controlling interest
    (2,395 )     (176 )     (2,571 )

 
9

 

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 generally accepted accounting principles.  Companies with complex capital structures are required 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 23,192 dilutive shares on an “as converted” basis for the Redeemable Convertible Preferred stock for the three months ended March 25, 2010 were excluded from the calculation of diluted earnings per share since their effect would have been anti-dilutive.  Approximately 31,117 dilutive shares on an “as converted” basis for the Redeemable Convertible Preferred stock for the three months ended March 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 ended March 25, 2010 and 2009 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 March 25,
 
   
2010
   
2009
 
         
Weighted
               
Weighted
       
         
Average
               
Average
       
   
Loss
   
Shares
   
Per-Share
   
Loss
   
Shares
   
Per-Share
 
Earnings per share – basic
                                   
Loss available to common stockholders
  $ (2,736 )     89,248     $ (0.03 )   $ (2,814 )     63,931     $ (0.04 )
Effect of dilutive securities
                                               
Redeemable convertible preferred stock
                                       
Options and warrants
                                       
                                                 
Earnings per share – diluted
  $ (2,736 )     89,248     $ (0.03 )   $ (2,814 )     63,931     $ (0.04 )

NOTE 6. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following (in thousands):
 
   
March 25, 2010
   
December 25, 2009
 
   
(Unaudited)
       
             
Accounts receivable
  $ 18,060     $ 16,162  
Less: Allowance for doubtful accounts
    (4,139 )     (2,725 )
    $ 13,921     $ 13,437  

The activity in the Company’s allowance for doubtful accounts is summarized as follows (in thousands):
 
   
March 25, 2010
   
December 25, 2009
 
   
(Unaudited)
       
             
Balance at the beginning of the period
  $ 2,725     $ 1,184  
Add: provision during the period
    1,460       1,551  
Less: write-offs during the period
    (46 )     (10 )
Balance at the end of the period
  $ 4,139     $ 2,725  

 
10

 

NOTE 7. DEPOSITS AND PREPAYMENTS

Deposits and prepayments consisted of the following (in thousands):
 
   
March 25, 2010
   
December 25, 2009
 
   
(Unaudited)
       
             
Deposits for raw materials
  $ 4,712     $ 4,794  
Prepayments and advances
    844       838  
    $ 5,556     $ 5,632  

NOTE 8. INVENTORIES

Inventories consisted of the following (in thousands):
 
   
March 25, 2010
   
December 25, 2009
 
   
(Unaudited)
       
             
Raw materials (including packing materials)
  $ 12,027     $ 13,488  
Finished goods
    1,154       1,490  
      13,181       14,978  
Less: Inventory reserve
    (299 )     (512 )
    $ 12,882     $ 14,466  

The activity in the Company’s provision for inventory reserve is summarized as follows (in thousands):

   
March 25, 2010
   
December 25, 2009
 
   
(Unaudited)
       
             
Balance at the beginning of the period
  $ 512     $ 565  
Add: provision during the period
    25       510  
Less: write-offs during the period
    (238 )     (563 )
Balance at the end of the period
  $ 299     $ 512  
 
NOTE 9. DUE FROM RELATED COMPANIES

Due from related companies consisted of the following (in thousands):
 
   
March 25, 2010
   
December 25, 2009
 
   
(Unaudited)
       
             
Xinlong Asia Food (Dalian) Co., Ltd.*
    899       899  
Xinlong Asia Food (Luoyang) Co., Ltd.*
    53       53  
Due from related companies for sales
  $ 952     $ 952  

* Subsidiaries of Shandong Longfeng Group Company.

 
11

 

NOTE 10. PROPERTY, MACHINERY AND EQUIPMENT

Property, machinery and equipment consisted of following (in thousands):
 
   
Useful Life
   
March 25, 2010
   
December 25, 2009
 
   
(In years)
   
(Unaudited)
       
                   
Buildings
    40     $ 13,383     $ 13,437  
Machinery and equipment
    5 - 12       22,933       23,680  
Construction in process
            2,397       2,397  
              38,713       39,514  
Less: Accumulated depreciation and amortization
            (9,153 )     (9,251 )
            $ 29,560     $ 30,263  

Depreciation and amortization expense was approximately $386,000 and $383,000 for the three months ended March 25, 2010 and 2009.

NOTE 11. LAND USE RIGHTS

Land use rights consisted of the following (in thousands):
 
   
March 25, 2010
   
December 25, 2009
 
   
(Unaudited)
       
             
Land use rights
  $ 5,240     $ 5,256  
Less: Accumulated amortization
    (950 )     (924 )
    $ 4,290     $ 4,332  

Amortization expense was approximately $26,000 and $51,000 for the three months ended March 25, 2010 and 2009.

NOTE 12. OTHER PAYABLES AND ACCRUALS

Other payables and accruals consisted of the following (in thousands):
 
   
March 25, 2010
   
December 25, 2009
 
   
(Unaudited)
       
             
Deposits from customers
  $ 673     $ 465  
Accruals for payroll, bonus and benefits
    278       413  
Utilities and accrued expenses
    1,167       1,184  
    $ 2,118     $ 2,062  

NOTE 13. REDEEMABLE CONVERTIBLE PREFERRED STOCK

On July 11, 2005, the Company issued 6,000 shares of Series A 7% Redeemable Convertible Preferred Stock (“Series A Preferred Stock”); initially convertible into an aggregate of 6,315,789 shares of Class A Common Stock at a conversion price of $0.95 per share, raising $6 million in gross proceeds. Six-year warrants to purchase an aggregate of 3,157,895 shares of Class A Common Stock at an exercise price of $1.04 per share were also issued to the investors. As part of the compensation to the placement agent, five-year warrants to purchase an aggregate of 378,947 shares of Class A Common Stock at an exercise price of $1.04 share were also issued. As of March 25, 2010, all of the warrants issued to the placement agent have been exercised cashless, and 5,734 shares of Series A Preferred Stock have been converted into 9,867,540 shares of Class A Common Stock.

On December 22, 2005, the Company issued 9,500 shares of Series B 7% Redeemable Convertible Preferred Stock (“Series B Preferred Stock”), initially convertible into an aggregate of 5,937,500 shares of Class A Common Stock at a conversion price of $1.60 per share, raising $9.5 million in gross proceeds. Six-year warrants to purchase an aggregate of 2,968,750 shares of Class A Common Stock at an exercise price of $1.76 per share were also issued to the investors. As part of the compensation to the placement agent, five-year warrants to purchase an aggregate of 356,250 shares of Class A Common Stock at an exercise price of $1.76 per share were also issued.  As of March 25, 2010, 7,024 shares of Series B Preferred Stock have been converted into 24,164,188 shares of Class A Common Stock, and no warrants have been exercised.

 
12

 

The key terms of the Series A Preferred Stock and Series B Preferred Stock are as follows:

   
Series A Preferred Stock
 
Series B Preferred Stock
         
Preferred Dividend
 
7% per annum, payable quarterly in arrears in cash or, at the Company’s option subject to satisfaction of certain conditions, shares of Class A Common Stock valued at 95% of the volume-weighted current market price.
 
7% per annum, payable quarterly in arrears in cash or, at the Company’s option subject to satisfaction of certain conditions, shares of Class A Common Stock valued at 95% of the volume-weighted current market price.
         
Redemption
 
July 11, 2010
 
December 22, 2010
         
   
Beginning on the 24th month following closing and each month thereafter, the Company shall redeem 1/37th of the face value of the Preferred Stock in either cash or Class A Common Stock valued at 90% of the volume-weighted current market price.
 
Beginning at the end of the 24th month following closing and on each third monthly anniversary of that date (quarterly) thereafter, the Company shall redeem 1/13th of the face value of the Preferred Stock in either cash or Class A Common Stock valued at 90% of the volume-weighted current market price.
         
Mandatory Conversion
 
The Company may at any time force the conversion of the Preferred Stock if the volume-weighted current market price of the Class A Common Stock exceeds 300% of the then applicable conversion price.
 
The Company may at any time force the conversion of the Preferred Stock if the volume-weighted current market price of the Class A Common Stock exceeds 200% of its price at issuance of the Preferred Stock.
Registration
 
The Company shall file to register the underlying Class A common shares within 30 days of the closing date and make its best efforts to have the Registration declared effective at the earliest date.  In the event such Registration is not continuously effective during the period such shares are subject to transfer restrictions under the U.S. federal securities laws, then (subject to certain exceptions) the holders are entitled to receive liquidated damages equal to 2.0% of the purchase price of the Preferred Stock per month.
 
The Company shall file to register the underlying Class A common shares with 30 days of the closing date and make its best efforts to have the Registration declared effective at the earliest date.  In the event such Registration is not continuously effective during the period such shares are subject to transfer restrictions under the U.S. federal securities laws, then (subject to certain exceptions) the holders are entitled to receive liquidated damages equal to 2.0% of the purchase price of the Preferred Stock per month.
         
Anti-dilution
 
In the event the Company issues, at any time while Preferred Stock are still outstanding, Common Stock or any type of securities giving rights to Common Stock at a price below the Issue Price, the Company agrees to extend full-ratchet anti-dilution protection to the investors.
 
In the event the Company issues, at any time while Preferred Stock are still outstanding, Common Stock or any type of securities giving rights to Common Stock at a price below the Issue Price, the Company agrees to extend full-ratchet anti-dilution protection to the investors.

In connection with the issuance of the Redeemable Convertible Series A Preferred Stock and Series B Preferred Stock, the Company paid professional fees, placement agent fees and associated expenses amounting to $1.83 million since the issuance of the Redeemable Convertible Preferred Stocks. The Company also identified freestanding financial instruments included in the issuances that were required to be recorded as liabilities. These included the embedded conversion feature and warrants included in the Series A & B Preferred Stock issuances. The Company has evaluated the fair value of these liabilities using combination of the Black Scholes and Binomial Pricing Models. The summary of activity in the Series A & B Preferred Stock is as follows:

Redeemable Convertible Preferred Stock
 
Preferred shares
   
Balance
 
           
(in thousand)
 
2009
               
Series A
    399     $ 399  
Series B
    3,095       3,095  
Less unamortized discount
    -       ( 486 )
Balance December 25, 2009
    3,494     $   3,008  
                 
2010
               
Series A
    266     $ 266  
Series B
    2,476       2,476  
Less unamortized discount
            ( 273 )
Balance March 25, 2010
    2,742     $   2,469  

 
13

 

Embedded derivatives relate to redeemable convertible preferred stock. We determined that the conversion features of our redeemable convertible preferred stock and warrants to purchase our common stock are derivatives that we are required to account for as freestanding instruments under U.S. GAAP. We have also determined that we are required to designate these derivatives as liabilities in our financial statements. As a result, we report the value of these embedded derivatives as current liabilities on our balance sheet and we report changes in the value of these derivatives as non-operating gains or losses on our statement of operations. The value of the derivatives is required to be recalculated (and resulting non-operating gains or losses reflected in our statement of operations and resulting adjustments to the associated liability amounts reflected on our balance sheet) on a quarterly basis, and is based on the market value of our common stock. Due to the nature of the required calculations and the large number of shares of our common stock involved in such calculations, changes in our common stock price may result in significant changes in the value of the derivatives and resulting gains and losses on our statements of operations. We were required to report a change of $10 and $120 as gain on the embedded derivative liability in other income on our statement of operations for the three months ended March 25, 2010 and 2009, respectively.

The pricing model we use for determining fair values of our derivatives is 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 income. The Company has obtained a valuation report from a third-party valuation firm to support its estimates. The principal assumptions used to value these complex freestanding financial instruments were as follows:

   
Warrants
   
Embedded Conversion Feature
 
Expected life (in years)
 
Remaining term at valuation date
   
Remaining Term to conversion or redemption
date at each valuation date
 
Expected volatility
 
100% to 110%
   
110% to 125%
 
Risk-free interest rate
 
0.75% to 1.06%
   
0.12% to 0.33%
 
Dividend yield
 
0
   
0
 

The Company considered all of the other minor features of the conversion option associated with the Company’s Series A and Series B Preferred Stock, including adjustments for: (i) stock dividends and splits, (ii) the sale of the Company’s securities, (iii) the subsequent issuance of rights, options, or warrants to Common shareholders, and (iv) forced conversion and redemption features. We ultimately determined that these features were insignificant and did not have a material impact on the concluded values of the Series A and Series B Preferred Stock.

The changes in the derivative liabilities during the period are as follows:

Fair Value at December 25, 2008
  $ 287  
Gain on change in value of derivatives during the period
    (177 )
Conversion of 3,007 shares of Series A & B Preferred Stock to common stock during 2009
    (34 )
Fair Value at December 25, 2009
  $ 76  
Gain on change in value of derivatives during the period
    (10 )
Conversion of 752 shares of Series A & B Preferred Stock to common stock during 2010
    (4 )
Fair Value at March 25, 2010
  $ 62  

NOTE 14. COMMON STOCK

During the three months ended March 25, 2010 and 2009, 133 shares and 133 shares of Series A Preferred Stock have been converted into 1,129,666 shares and 498,610 shares of Class A Common Stock, respectively.

During the three months ended March 25, 2010 and 2009, 619 shares and 619 shares of Series B Preferred Stock have been converted into 5,255,800 shares and 2,319,799 shares of Class A Common Stock, respectively.

NOTE 15. WARRANTS

The following table summarizes activity regarding the Company’s outstanding warrants:

   
Shares
   
Weighted Average Exercise Price
 
Outstanding at December 25, 2009
    6,482,895       1.4093  
Issued
           
Exercised
           
Expired
           
Outstanding at March 25, 2010
    6,482,895       1.4093  

 
14

 

The number of shares of Class A Common Stock issuable under warrants related to the private placements and respective exercise prices are summarized as follows:

   
Shares of Class A Common Stock
Issuable Under Warrants
   
Exercise
Price
 
July 2005 private placement
           
6-year warrants
    3,157,895     $ 1.04  
                 
December 2005 private placement
               
6-year warrants
    2,968,750       1.76  
5-year warrants
    356,250       1.76  
Warrants exercisable at March 25, 2010
    6,482,895          

As of March 25, 2010, these warrants had no intrinsic value.

NOTE 16. STOCK-BASED COMPENSATION

The Company measures the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The Company used the Black-Scholes option-pricing model to estimate the fair value of the options at the date of grant.

The Company issued 2,000,000 Class A Common Shares to the CFO as annual compensation for the service term from April 1, 2009 to March 31, 2010. The market value of such common shares was $300,000. The Company recognized $225,000 as compensation expense for the year ended December 25, 2009 and $75,000 for the three months ended March 25, 2010.

NOTE 17. RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence.

Transactions between New Dragon Asia Corp. and related companies are summarized below (in thousands):

   
Three months ended
March 25,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
             
Pre-determined annual fee charged by joint venture partners:
           
Shandong Longfeng Group Company (a)
  $ 7     $ 7  
Shandong Longfeng Flour Company Limited (b)
    11       11  
    $ 18     $ 18  

(a) Shandong Longfeng Group Company is a joint venture partner of the Company.

(b) Subsidiary(ies) of Shandong Longfeng Group Company.

Loans from the Company’s major shareholder New Dragon Asia Food Limited are for working capital, are unsecured and bear no interest, and are payable if requested, and funds are available. The Company and the major shareholder have agreed that no repayments will take place in 2010. The joint venture partner’s amounts are similar to the condition of New Dragon Asia Food Limited loans and no repayment is expected in 2010.

NOTE 18. TAXATION

The PRC subsidiaries within the Company are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate. The group companies that are incorporated under the International Business Companies Act of the British Virgin Islands are exempt from payment of the British Virgin Islands income tax.

Substantially all of the Company’s income was generated in the PRC, which is subject to PRC income taxes at rates ranging from 24% to a statutory rate of 25%. Two of the PRC subsidiaries of the Company are eligible to be exempt from income taxes for a two-year period commencing with the year in which their operations are profitable and then subject to a 50% reduction in income taxes for the next three years, starting from their first profitable year. Several PRC subsidiaries receive preferential tax rates in regions in which they operated and are also entitled to partial tax refunds from those tax bureaus.

 
15

 

New Dragon Asia Corp. is a Florida corporation with wholly-owned operating subsidiaries. As a result, the Company is not subject to PRC tax for the activities at the Florida company level. Costs or expenses incurred at the Florida company level, such as the stock-based compensation and the amortization of financing costs and derivative accounting related to Series A Preferred Stock and Series B Preferred Stock, cannot be used to offset any income derived in the PRC when measuring the PRC income tax liabilities. As of March 25, 2010 and December 25, 2009, there were no material deferred tax assets or deferred tax liabilities. The expenses of the United States company are not recoverable against future taxable income in the United States or the PRC and meet the definition of permanent differences for tax accounting purposes. The Company has never been audited by the taxing authority in the United States or the PRC. The Company believes that it has filed properly in all required jurisdictions.

NOTE 19. COMPREHENSIVE INCOME

The following table summarizes the comprehensive income for the three months ended March 25, 2010 and 2009:

   
March 25, 2010
   
March 25, 2009
 
Net loss
  $ (2,571 )   $ (2,494 )
Foreign currency translation adjustment
    19       41  
Comprehensive loss
  $ (2,552 )   $ (2,453 )

NOTE 20. SEGMENT INFORMATION

The Company classifies its products into three core business segments; namely instant noodles, flour and soybean. In view of the fact that the Company operates principally in Mainland China, no geographical segment information is presented.

   
For the three months ended 
March 25,
 
   
2010
   
2009
 
   
(US$'000)
   
(US$'000)
 
Net revenue
           
Instant noodles
    1,012       1,064  
Flour
    3,329       1,999  
Soybean
    1,705       900  
      6,046       3,963  
Loss from operations
               
Instant noodles
    (577 )     (1,573 )
Flour
    (1,610 )     (958 )
Soybean
    (59 )     (409 )
      (2,246 )     (2,940 )
Depreciation and amortization
               
Instant noodles
    188       198  
Flour
    90       149  
Soybean
    134       87  
      412       434  

   
March 25,
   
December 25,
 
   
2010
   
2009
 
   
(US$'000)
   
(US$'000)
 
Identifiable long-term assets
           
Instant noodles
    17,046       17,510  
Flour
    8,081       8,268  
Soybean
    9,675       9,769  
      34,802       35,547  

 
16

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

In addition to historical information, the matters discussed in this Form 10-Q contain forward-looking statements that involve risks or uncertainties. Generally, the words "believes," "anticipates," "may," "will," "should," "expect," "intend," "estimate," "continue," and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements. Readers should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended December 25, 2009, the Quarterly Reports on Form 10-Q filed by the Company and Current Reports on Form 8-K (including any amendments to such reports). References in this filing to the “Company”, “Group”, “we”, “us”, and “our” refer to New Dragon Asia Corp. and its subsidiaries.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.  We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimates are made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements.  We believe the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.

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.

Revenue Recognition

Our revenues are generated from sales of flour, soybean products and instant noodles. All of our revenue transactions contain standard business terms and conditions. We determine the appropriate accounting for these transactions after considering (1) whether a contract exists; (2) when to recognize revenue on the deliverables; and (3) whether all elements of the contract have been fulfilled and delivered. In addition, our revenue recognition policy requires an assessment as to whether collection is reasonably assured, which inherently requires us to evaluate the creditworthiness of our customers. Changes in judgments on these assumptions and estimates could materially impact the timing or amount of revenue recognition.

Accounting for Derivative Instruments

Derivatives are 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 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. 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.

 
17

 

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 as of March 25, 2010 and December 25, 2009.

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, and (2) the amortization associated with the discount recorded with respect to the Series A and B Preferred Stock as a preferred stock dividend.

Share-Based Payment

On December 16, 2004, the FASB issued SFAS 123R, “Share-Based Payment,” (now Accounting Standards Codification (“ASC”) Topic 718, “Compensation-Stock Compensation”) which replaces SFAS 123, “Accounting for Stock-Based Compensation” and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of the award. Under ASC 718, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of ASC 718, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We have adopted the requirements of ASC 718 for the fiscal year beginning on December 26, 2005, and recorded the compensation expense for all unvested stock options.

Allowance for Doubtful Accounts

Management provides for an allowance for doubtful accounts for those third party trade accounts that are not collected within one year. We base our estimate (one year) on historical experience and on continuous monitoring of customers’ credit and settlement. We believe we have reasonable basis for making judgments on the allowance for doubtful accounts.

We normally grant up to 90 days credit to our customers. We monitor our allowance for doubtful accounts on a monthly basis.

Inventories Valuation

Inventories are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Costs of work-in-progress and finished goods are composed of direct material, direct labor and an attributable portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose.

Recent Accounting Pronouncements

In January 2010, FASB issued ASU 2010-2, “Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification”. ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of the FASB ASC, originally issued as SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements”. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2 is effective for the Company starting January 3, 2010. The Company expects the adoption of ASU 2010-2 will not have a material impact on the Company's results of operations or financial position.

In January 2010, FASB issued ASU 2010-6, “Improving Disclosures about Fair Measurements". ASU 2010-6 provides amendments to subtopic 820-10 that require separate disclosure of significant transfers into and out of Level 1 and Level 2 fair value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments to subtopic 820-10 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques. ASU 2010-6 is effective for financial statements issued for annual reporting periods after beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning December 15, 2010. The Company expects the adoption of ASU 2010-06 will not have a material impact on the Company’s results of operations or financial position.

 
18

 

In February 2010, FASB issued ASU 2010-9 “Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements”. ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The Company expects the adoption of ASU 2010-06 will not have a material impact on the Company’s results of operations or financial position.

In March 2010, FASB issued ASU 2010-11 “Derivatives and Hedging (Topic 815) Scope Exception Related to Embedded Credit Derivatives”. ASU 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only one form of embedded credit derivative qualifies for the exemption—one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The amendments in this Update are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this Update. The Company expects the adoption of ASU 2010-11 will not have a material impact on the Company’s results of operations or financial position.

In April 2010, FASB issued ASU 2010-13 “Compensation-Stock Compensation (Topic 718) Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades”. ASU 2010-13 addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this Update should be effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the amendments are initially applied. The Company expects the adoption of ASU 2010-13 will not have a material impact on the Company’s results of operations or financial position.

Overview

Headquartered in Shandong Province, PRC, we are 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. We market our products with our brand name called “LONG FENG” through a countrywide network of distributors. We have eight manufacturing plants in the PRC with an aggregate annual production capacity of approximately 110,000 tons of flour and approximately 1.1 billion packets of instant noodles and 4,500 tons of soybean powder.

Operations

We produce and market a broad range of wheat flour for use in bread, dumplings, noodles, and confectionary products. Our flour products are marketed under the “Long Feng” brand name and sold throughout China at both wholesale and retail levels.

We provide a wide range of instant noodle products to our customers. Our products can be separated into two broad categories for selling and marketing purposes: (i) packet noodles for home preparation and (ii) snacks and cup noodles for outdoor convenience.

We produce two types of soybean products - soybean protein powder and soybean powder. They are principally supplied to food and beverage producers.

We believe that we have a reputation in China for producing some of the highest quality food products. We believe our production plants operate at a high level of hygiene and efficiency and all of our plants are certified under the ISO9002 standards. We also use strict quality control systems, resulting in what we believe to be a favorable customer perception of the “Long Feng” brand.

Our products are marketed and distributed throughout China by our distributors. Our sales and marketing strategy focuses on maintaining strong distribution relationships by holding annual sales order meetings, regular distributor conferences and an excellent quality/price dynamic.

We believe our distribution system is the key to our continued success in developing the “Long Feng” brand as one of the famous domestic brands in China. Most of our distributors have long-term relationships with us.

Our primary domestic customer base for both our flour products and instant noodles consists of small retail stores in the rural areas throughout China where we believe that our brand has long been recognized as the highest quality available for the price. The rural market is rapidly growing, benefiting from increases in rural consumer income. We believe that brand loyalty by our customers is very strong in this sector. In addition to the small retail sector, we sell to larger supermarkets located in urban areas.

 
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In addition to domestic sales, we also export noodles to other countries such as South Korea, Australia, Malaysia and Indonesia.  We also obtained HACCP (Hazard Analysis Critical Control Point) certification from CCIC Conformity Assessment Services Co. Ltd., a Chinese quality assurance examination authority, enabling the Company to begin exports of instant noodles and soybean powder to Europe. In early 2008, we began exporting noodles to Nigeria, Africa.

Strategy

Our strategy for growth is to capitalize on our strong brand name and pursue strategic partnerships and acquisitions that will enhance our sales. The following are some of the key elements of our business growth strategy:

-
Acquire additional locations to increase our production capacity
-
Build strategic alliances with multinational food groups to enhance product range and capitalize on our China distribution network

Plans for expansion of the existing plants are expected to be funded through current working capital from ongoing sales. Acquisitions of plants will require an additional infusion of funds in the form of debt or equity, or a combination of both. However, there can be no assurance these funds will be available.

Competition

The flour industry in the PRC is very competitive. Our largest competitors are Shandong Guang Rao Ban Qiu Flour and Hebei Wu De Li Flour in the Northern market and Shenzhen Nanshun Flour in the Southern market.

The instant noodle segment in the PRC is also highly competitive. We compete against well-established foreign companies and many smaller companies. Our largest competitors are the “Master Kang” brand manufactured by Tingyi (Cayman Island) Holdings Corporation and the “President” brand manufactured by Uni-President Group, both based in Taiwan. Both are focused predominately in the more developed and competitive urban markets. We do not face substantial competition in the “high-quality” soybean powder market.

Employees

We employ approximately 1,500 employees. All of them are located in the eight plants. We have maintained good relationships with our employees and no major disputes have occurred since our inception.

Currency Conversion and Exchange

Although the Chinese government regulations now allow convertibility of Renminbi (“RMB”) for current account transactions, significant restrictions still remain. Hence, such translations should not be construed as representations that RMB could be converted into U.S. dollars at that rate or any other rate.

Substantially all our revenue and expenses are denominated in RMB. Our RMB cash inflows are sufficient to service our RMB expenditures. For financial reporting purposes, we use U.S. dollars. The value of RMB against U.S. dollars and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of RMB may materially affect our financial condition in terms of U.S. dollar reporting. To date, we have not engaged in any currency hedging transactions in connection with our operations.

Results of Operations

The following table sets forth, for the periods indicated, certain operating information expressed in U.S. dollars (in thousands):

   
Three months ended 
March 25,
 
   
2010
   
2009
 
             
Net revenue
  $ 6,046     $ 3,963  
Cost of goods sold
    (6,023 )     (5,518 )
Gross profit (loss)
    23       (1,555 )
Selling and distribution expenses
    (177 )     (219 )
General and administrative expenses
    (2,092 )     (1,166 )
Gain on fair value adjustments to embedded derivatives
    10       120  
Loss before income taxes
    (2,570 )     (2,844 )
Income taxes benefit (expense)
    (1 )     349  
Net loss attributable to controlling interest
    (2,571 )     (2,494 )
 
 
20

 

Three Months Ended March 25, 2010 Compared to Three Months Ended March 25, 2009

Net Revenue

Net revenue for the quarter ended March 25, 2010 was $6,046,000, representing an increase of $2,083,000, or 53%, from $3,963,000 for the quarter ended March 25, 2009.

Revenues increased in flour and soybean segments by over 60% as the global economy is began to recover and the demand for our products is gradually strengthening. However, the average selling price of our instant noodles was still lower in 2010 compared to 2009, which significantly affected our revenue.

Cost of goods sold

For the three months ended March 25, 2010, cost of goods sold was $6,023,000, an increase of $505,000, or 9%, as compared to $5,518,000 for the three months ended March 25, 2009. The increase was due to the increase in sales of our products.

For the three months ended March 25, 2010, as a percentage of revenue, cost of goods sold decreased to 99% as compared to 139% for that of the same period of prior year. For the three months ended March 25, 2010, gross margin was 1% as compared to a negative gross margin of 39% for the same period of prior year.  The improvement in gross margin was mainly attributable to the increase sales volumes in flour and soybean segments.

Selling and Distribution Expenses

Selling and distribution expenses consist primarily of salaries, commissions and associated employee benefits, travel expenses of sales and marketing personnel and promotional expenses.

Selling and distribution expenses were $177,000 for the quarter ended March 25, 2010, representing a decrease of $42,000 or 19% from $219,000 for the corresponding quarter of 2009. The decrease was primarily due to the cost controls implemented by us.

As a percentage of net revenue, selling and distribution expenses decreased to 3% for the quarter ended March 25, 2010 as compared to 6% for the corresponding period in 2009. The decrease was primarily due to the cost controls implemented by us.

General and Administrative Expenses

General and administrative expenses increased by $926,000, or 79%, to $2,092,000 for the quarter ended March 25, 2010 as compared to $1,166,000 for the corresponding quarter in 2009. The increase was primarily due to the provision for bad debt due from customers who were seriously affected by the abrupt slowdown in the economy worldwide.

Gain on Fair Value Adjustments to Embedded Derivatives

The Company issued Series A Redeemable Convertible Preferred Stock in July 2005, together with 3,157,895 warrants to purchase Class A Common Stock resulting in aggregate proceeds of $6 million. The Company also issued Series B Redeemable Convertible Preferred Stock in December 2005, together with 2,968,750 warrants to purchase Class A Common Stock resulting in aggregate proceeds of $9.5 million. The fair value of each instrument was recorded as a derivative liability on our balance sheet. The corresponding gain or loss, which was non-cash in nature, from changes in the fair values of these instruments was recorded in our statement of income.  For the quarter ended March 25, 2010, the gain in this regard was $10,000. For the corresponding period of 2009, the gain in this regard was $120,000. The determination of the change in the value of the derivatives requires the use of a complex valuation model and can fluctuate significantly between periods based on changes in the price of our shares and the time remaining in the life of the underlying financial instruments. Increase in our stock’s market value increases the value of the derivative creating losses in our income statements and decrease in the stock’s market value reduces the value of the derivatives creating gains in our income statements.

Net Loss Attributable to Controlling Interests

Net loss attributable to controlling interest was $2,571,000 for the quarter ended March 25, 2010 as compared to net loss attributable to controlling interest of $2,494,000 for the quarter ended March 25, 2009. Such increase was primarily due to (i) the provision for bad debt due from customers, and (ii) the write-off of some unserviceable equipment for the three months ended March 25, 2010 compared with income tax benefit for the three months ended March 25, 2009.

 
21

 

 
Financial Condition, Liquidity and Capital Resources

The Company’s primary liquidity needs are for the purchase of inventories and funding accounts receivable and capital expenditures. Historically, the Company has financed its working capital requirements through a combination of internally generated cash and advances from related companies.

Our working capital decreased by $1,667,000 to $28,176,000 at March 25, 2010 as compared to $29,843,000 at December 25, 2009, which was primarily due to decrease of inventory by consumption of raw materials in productions and increased sales of products.

Cash and cash equivalents were $3,392,000 as of March 25, 2010, a decrease of $48,000 from December 25, 2009. The Company believes that it has enough cash available and expects to have enough income and cash flow from operations to operate for the next 12 months.

Off-Balance Sheet Arrangements

We have never entered into any off-balance sheet financing arrangements and have not formed any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Contractual Obligations and Commercial Commitments

On July 11, 2005, we issued 6,000 shares of Series A Preferred Stock, convertible into an aggregate of 6,315,789 shares of Class A Common Stock at a conversion price of $0.95 per share (subject to anti-dilution adjustments and interest payments), raising $6.0 million in gross proceeds.

On December 22, 2005, we issued 9,500 shares of Series B Preferred Stock, convertible into an aggregate of 5,937,500 shares of Class A Common Stock at a conversion price of $1.60 per share (subject to anti-dilution adjustments and interest payments), raising $9.5 million in gross proceeds.

The key terms of the Series A Preferred Stock and Series B Preferred Stock are as follows:
 
   
Series A Preferred Stock
 
Series B Preferred Stock
         
Preferred Dividend
 
7% per annum, payable quarterly in arrears in cash or, at the Company’s option subject to satisfaction of certain conditions, shares of Class A Common Stock valued at 95% of the volume-weighted current market price.
 
7% per annum, payable quarterly in arrears in cash or, at the Company’s option subject to satisfaction of certain conditions, shares of Class A Common Stock valued at 95% of the volume-weighted current market price.
         
Redemption
 
July 11, 2010
 
Beginning on the 24th month following closing and each month thereafter, the Company shall redeem 1/37th of the face value of the Preferred Stock in either cash or Class A Common Stock valued at 90% of the volume-weighted current market price.
 
December 22, 2010
 
Beginning at the end of the 24th month following closing and on each third monthly anniversary of that date (quarterly) thereafter, the Company shall redeem 1/13th of the face value of the Preferred Stock in either cash or Class A Common Stock valued at 90% of the volume-weighted current market price.
         
Mandatory Conversion
 
The Company may at any time force the conversion of the Preferred Stock if the volume-weighted current market price of the Class A Common Stock exceeds 300% of the then applicable conversion price.
 
The Company may at any time force the conversion of the Preferred Stock if the volume-weighted current market price of the Class A Common Stock exceeds 200% of its price at issuance of the Preferred Stock.
 
 
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Registration
 
The Company shall file to register the underlying Class A common shares within 30 days of the closing date and make its best efforts to have the Registration declared effective at the earliest date.  In the event such Registration is not continuously effective during the period such shares are subject to transfer restrictions under the U.S. federal securities laws, then (subject to certain exceptions) the holders are entitled to receive liquidated damages equal to 2.0% of the purchase price of the Preferred Stock per month.
 
The Company shall file to register the underlying Class A common shares with 30 days of the closing date and make its best efforts to have the Registration declared effective at the earliest date.  In the event such Registration is not continuously effective during the period such shares are subject to transfer restrictions under the U.S. federal securities laws, then (subject to certain exceptions) the holders are entitled to receive liquidated damages equal to 2.0% of the purchase price of the Preferred Stock per month.
         
Anti-dilution
  
In the event the Company issues, at any time while Preferred Stock are still outstanding, Common Stock or any type of securities giving rights to Common Stock at a price below the Issue Price, the Company agrees to extend full-ratchet anti-dilution protection to the investors.
  
In the event the Company issues, at any time while Preferred Stock are still outstanding, Common Stock or any type of securities giving rights to Common Stock at a price below the Issue Price, the Company agrees to extend full-ratchet anti-dilution protection to the investors.

As of March 25, 2010, the Company had long-term debt obligations that resulted from the redeemable convertible preferred stock through December 2010 and the pre-determined annual fee charged by joint venture partners through August 2049 as follows:

   
Payment Obligations By Period
 
   
2010
   
2011
   
2012
   
2013
   
2014
   
Thereafter
   
Total
 
   
(In thousands)
 
Redeemable convertible preferred stock
  $ 2,742     $     $     $     $     $     $ 2,742  
Pre-determined annual fee charged by joint venture partners
    97       129       129       129       129       4,399       5,012  
Total
  $ 2,839     $ 129     $ 129     $ 129     $ 129     $ 4,399     $ 7,754  

Reconciliation of the outstanding payment obligations of redeemable convertible preferred stock:
 
   
(In thousands)
 
Aggregated balance as of the issue date
  $ 15,500  
Partial redemption of Series A Preferred Stock in 2005
    (1,900 )
Partial redemption of Series A and B Preferred Stock in 2006
    (3,438 )
Partial redemption of Series A Preferred Stock in 2007
    (728 )
Partial redemption of Series A and B Preferred Stock in 2008
    (2,933 )
Partial redemption of Series A and B Preferred Stock in 2009
    (3,007 )
Partial redemption of Series A and B Preferred Stock in 2010
    (752 )
    $ 2,742  

 
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

This information has been omitted based on our status as a smaller reporting company.

Item 4T. Controls and Procedures.

Disclosure Controls and Procedures  

Under the supervision and with the participation of our management, including our chief executive officer and the chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of March 25, 2010, the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to us and our consolidated subsidiaries, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal controls over financial reporting

There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the three months ended March 25, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
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PART II: OTHER INFORMATION
 
Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

This information has been omitted based on our status as a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).
 
 
Item 5. Other Information.

There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors.

Item 6. Exhibits.

Exhibit
Number
 
Description
2.1
 
Share Exchange Agreement dated as of December 18, 2001 (incorporated herein by reference from our filing on the Definitive Proxy 14/A filed on October 11, 2001).
     
3.1
 
Amended  Articles  of  Incorporation (incorporated herewith by reference to Exhibit 3.1 to our Definitive Proxy 14/A filed on October 11, 2001).
     
3.2
 
By-laws (incorporated herewith by reference to Exhibit 3.2 to our Definitive Proxy 14/A filed on October 11, 2001).
     
3.3
 
Certificate of Designations of Preferences, Rights and Limitations of the Series A 7% Convertible Preferred Stock (incorporated herewith by reference to Exhibit 3.1 of our Form 8-K filed on July 12, 2005).
     
3.4
 
Certificate of Designations of Preferences, Rights and Limitations of the Series B 7% Convertible Preferred Stock (incorporated herewith by reference to Exhibit 3.1 of our Form 8-K filed on December 23, 2005).
     
4.1
 
Subscription Agreement, dated September 4, 2003  (incorporated herewith by reference to Exhibit 4.1 to our Registration Statement on Form S-3 filed on October 3, 2003).
     
4.2
 
Subscription Agreement, dated October 3, 2003 (incorporated herewith by reference to Exhibit 4.2 to our Registration Statement on Form S-3 filed on October 3, 2003).
     
4.3
  
Common Stock Purchase Warrants for the September 4, 2003 Private Placement (incorporated herewith by reference to Exhibit 4.3 to our Registration Statement on Form S-3 filed on October 3, 2003).
 
 
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4.4
 
Common Stock Purchase Warrants for the October 3, 2003 Private Placement (incorporated herewith by reference to Exhibit 4.4 to our Registration Statement on Form S-3 filed on October 3, 2003).
     
4.5
 
Form of Warrant issued to Midsummer Investment Ltd. and Islandia, L.P. (incorporated herewith by reference to Exhibit 4.1 to our Form 8-K filed on July 12, 2005).
     
4.6
 
Form of Warrant issued to Alliance Financial, LLC, Renaissance Advisors BVI, John F. Steinmetz, TN Capital Equities, Ltd. and Kathleen McDonnell (incorporated herewith by reference to Exhibit 4.2 to our Registration Statement on Form S-3 filed on August 11, 2005).
     
4.7
 
Securities Purchase Agreement, dated July 11, 2005, relating to the sale of the Series A 7% Convertible Preferred Stock (incorporated herewith by reference to Exhibit 10.1 to our Form 8-K filed on July 12, 2005).
     
4.8
 
Registration Rights Agreement, dated July 11, 2005, by and among New Dragon Asia Corp. and the investors named therein (incorporated herewith by reference to Exhibit 10.2 to our Form 8-K filed on July 12, 2005).
     
4.9
 
Form of Warrant issued to Midsummer Investment Ltd. and Islandia, L.P. (incorporated herewith by reference to Exhibit 4.1 to our Form 8-K filed on December 23, 2005).
     
4.10
 
Form of Warrant issued to Alliance Financial, LLC, Renaissance Advisors, Inc., John F. Steinmetz, TN Capital Equities, Ltd. and Kathleen McDonnell (incorporated herewith by reference to Exhibit 4.2 to our Registration Statement on Form S-3 filed on January 20, 2006).
     
4.11
 
Securities Purchase Agreement, dated December 22, 2005, relating to the sale of the Series B 7% Convertible Preferred Stock (incorporated herewith by reference to Exhibit 10.1 to our Form 8-K filed on December 23, 2005).
     
4.12
 
Registration Rights Agreement, dated December 22, 2005, by and among New Dragon Asia Corp. and the investors named therein (incorporated herewith by reference to Exhibit 10.2 to our Form 8-K filed on December 23, 2005).
     
4.13
 
Registration Rights Agreement, dated December 22, 2005, by and among New Dragon Asia Corp. and New Dragon Food Ltd. (incorporated herewith by reference to Exhibit 4.5 to our Registration Statement on Form S-3 filed on January 20, 2006).
     
10.1
 
Sino-Foreign Joint Venture Contract for the New Dragon Asia Flour (Yantai) Company Limited, dated June 1, 1999 (incorporated herewith by reference to Exhibit 10.1 to our Registration Statement on Form S-3 filed on October 3, 2003).
     
10.2
 
Subcontracting Agreement, for the New Dragon Asia Flour (Yantai) Company Limited, dated June 26, 1999  (incorporated herewith by reference to Exhibit 10.2 to our Registration Statement on Form S-3 filed on October 3, 2003).
     
10.3
 
Sino-Foreign Joint Venture Contract for the New Dragon Asia Food (Yanti) Company Limited, dated November 28, 1998  (incorporated herewith by reference to Exhibit 10.3 to our Registration Statement on Form S-3 filed on October 3, 2003).
     
10.4
 
Subcontracting Agreement, for the New Dragon Asia Food (Yantai) Company Limited, dated December 26, 1998  (incorporated herewith by reference to Exhibit 10.4 to our Registration Statement on Form S-3 filed on October 3, 2003).
     
10.5
 
Sino-Foreign Joint Venture Contract for the New Dragon Asia Food (Dalian) Company Limited, dated November 28, 1998 (incorporated herewith by reference to Exhibit 10.5 to our Registration Statement on Form S-3 filed on October 3, 2003).
     
10.6
  
Subcontracting Agreement, for the New Dragon Asia Food (Dalian) Company Limited, dated December 26, 1998 (incorporated herewith by reference to Exhibit 10.6 to our Registration Statement on Form S-3 filed on October 3, 2003).
 
 
26

 
 
10.7
 
Sino-Foreign Joint Venture Contract for the Sanhe New Dragon Asia Food Company Limited, dated November 28, 1998 (incorporated herewith by reference to Exhibit 10.7 to our Registration Statement on Form S-3 filed on October 3, 2003).
     
10.8
 
Subcontracting Agreement, for the Sanhe New Dragon Asia Food Company Limited, dated December 26, 1998  (incorporated herewith by reference to Exhibit 10.8 to our Registration Statement on Form S-3 filed on October 3, 2003).
     
10.9
 
Employment Agreement between New Dragon Asia Corp. and Peter Mak, dated November 2, 2004 (incorporated herewith by reference to Exhibit 10.9 to our Form 8-K filed on June 29, 2005).
     
10.10
 
Employment Supplement between New Dragon Asia Corp. and Peter Mak, dated June 22, 2005 (incorporated herewith by reference to Exhibit 10.9 to our Form 8-K filed on June 29, 2005).
     
10.11
 
Supplementary Agreement to Employment Agreement between New Dragon Asia Corp. and Peter Mak, dated January 20, 2006 (incorporated herewith by reference to Exhibit 10.10 to our Form 8-K filed on January 24, 2006).
     
10.12
 
Amended and Restated Equity Incentive Plan (incorporated herewith by reference to Exhibit C to our Definitive Information Statement on Schedule 14C filed on May 4, 2009).
     
10.13
 
Stock Option Agreement between New Dragon Asia Corp. and Peter Mak, dated December 13, 2006 (incorporated herewith by reference to Exhibit 10.1 to our Form 8-K filed on December 15, 2006).
     
10.14
 
Settlement Agreement and General Release between New Dragon Asia Corp and Berry-Shino Securities Inc., dated August 15, 2007 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on August 15, 2007).
     
10.15
 
Employment Agreement dated April 1, 2009 between New Dragon Asia Corp. and Ling Wang (incorporated herewith by reference to Exhibit 10.1 to our Registration Statement on Form S-8 filed on May 8, 2009).
     
21.1
 
Subsidiaries of New Dragon Asia Corp., (incorporated by reference to Exhibit 21.1 to our Form 10-K filed on April 6, 2010).
     
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
     
31.2
 
Certification of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
     
32.1
  
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.

 
27

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
NEW DRAGON ASIA CORP.
     
Dated: May 14, 2010
By:  
/s/ Li Xia Wang
   
Name: Li Xia Wang (Principal Executive Officer)
   
Title: Chief Executive Officer
     
Dated: May 14, 2010
By:  
/s/ Ling Wang
   
Name: Ling Wang
   
Title: Chief Financial Officer (Principal Financial and Accounting
   
Officer)
 
 
28

 

Exhibit 31.1
CERTIFICATION

I, Li Xia WANG, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of New Dragon Asia Corp.:

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
 

(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 14, 2010
By:
/s/ Li Xia WANG
   
Li Xia WANG (Principal Executive Officer)
   
Chief Executive Officer

 
 

 

Exhibit 31.2
 
CERTIFICATION

I, Ling Wang, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of New Dragon Asia Corp.:

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 14, 2010
By:  
/s/ Ling Wang
   
Ling Wang
   
Chief Financial Officer (Principal Financial and Accounting
   
Officer)

 
 

 

 
Exhibit 32.1

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of New Dragon Asia Corp. (the “Company”), does hereby certify, to such officer's knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended March 25, 2010 of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Dated: May 14, 2010
By:  
/s/   Li Xia WANG
   
Li Xia WANG (Principal Executive Officer)
   
Chief Executive Officer
     
Dated: May 14, 2010
By:  
/s/   Ling Wang
   
Ling Wang
   
Chief Financial Officer (Principal Financial and Accounting
   
Officer)