UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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




For the
quarterly period ended: June 25, 2009




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  o





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





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





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





Large
      Accelerated Filer   ̈
                Accelerated
      Filer   ̈
                Non-Accelerated
      Filer   ̈
                Smaller
      Reporting Company  x





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












NEW
DRAGON ASIA CORP.





FORM
10-Q





FOR
THE QUARTERLY PERIOD ENDED JUNE 25, 2009





TABLE
OF CONTENTS




PagePART
      I:
                  FINANCIAL
      INFORMATIONITEM
      1.
                  Consolidated
      Financial Statements:Consolidated
      Balance Sheets as of June 25, 2009 (unaudited) and December 25,
      2008
                  3Consolidated
      Statements of Operations (unaudited) for the three months and six months
      ended June 25, 2009 and 2008
                  4Consolidated
      Statements of Stockholders’ Equity and Comprehensive Income for the six
      months ended June 25, 2009 (unaudited) and the year ended December 25,
      2008
                  5Consolidated
      Statements of Cash Flows (unaudited) for the six months ended June 25,
      2009 and 2008
                  6Notes
      to Consolidated Financial Statements (unaudited)
                  7ITEM
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  18ITEM
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  26ITEM
      4T.
                  Controls
      and Procedures
                  26PART
      II:
                  OTHER
      INFORMATIONITEM
      1.
                  Legal
      Proceedings
                  27ITEM
      1A.
                  Risk
      Factors
                  27ITEM
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  33ITEM
      3.
                  Defaults
      Upon Senior Securities
                  33ITEM
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  33ITEM
      5.
                  Other
      Information
                  34ITEM
      6.
                  Exhibits
                  34SIGNATURES
                  37EXHIBITS








PART
I: FINANCIAL INFORMATION





Item
1. Consolidated Financial Statements.





NEW
DRAGON ASIA CORP. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Amounts
in thousands, except share data)


June 25,
                    2009
                  
                  
                  December 25,
                    2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  7,352
                  
                  
                  $
                  4,383Accounts
      receivable, net
                  
                  
                  10,972
                  
                  
                  
                  8,888Deposits
      and prepayments, net
                  
                  
                  7,357
                  
                  
                  
                  13,056Inventories,
      net
                  
                  
                  23,386
                  
                  
                  
                  27,124Assets
      held for disposal
                  
                  
                  —
                  
                  
                  
                  5,778Total
      current assets
                  
                  
                  49,067
                  
                  
                  
                  59,229Deferred
      tax asset
                  
                  
                  349
                  
                  
                  
                  —Property,
      machinery and equipment, net
                  
                  
                  25,454
                  
                  
                  
                  20,139Land
      use rights, net
                  
                  
                  4,438
                  
                  
                  
                  4,529Due
      from related companies
                  
                  
                  951
                  
                  
                  
                  981Total
      assets
                  
                  $
                  80,259
                  
                  
                  $
                  84,878LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                  
                  $
                  5,098
                  
                  
                  $
                  4,980Other
      payables and accruals
                  
                  
                  1,918
                  
                  
                  
                  3,845Taxes
      payable
                  
                  
                  581
                  
                  
                  
                  294Embedded
      derivatives, at fair value
                  
                  
                  93
                  
                  
                  
                  287Total
      current liabilities
                  
                  
                  7,690
                  
                  
                  
                  9,406Due
      to shareholder
                  
                  
                  3,389
                  
                  
                  
                  2,780Due
      to joint venture partners
                  
                  
                  837
                  
                  
                  
                  767Series
      A and B Redeemable Convertible Preferred Stock, $0.0001 par
      value:
                    Authorized
      shares - 5,000,000Issued
      and outstanding –4,997 shares and 6,501 shares at June 25, 2009 and
      December 25, 2008
                  
                  
                  3,936
                  
                  
                  
                  4,645Total
      liabilities
                  
                  
                  15,852
                  
                  
                  
                  17,598CommitmentsStockholders’
      equity:Class
      A Common Stock, $0.0001 par value:
                    Authorized
      shares - 102,000,000Issued
      and outstanding – 71,141,326 at June 25, 2009 and 60,922,981 at December
      25, 2008
                  
                  
                  7
                  
                  
                  
                  6Class
      B Common Stock, $0.0001 par value:
                    Authorized
      shares - 2,000,000Issued
      and outstanding – none
                  
                  
                  —
                  
                  
                  
                  —Additional
      paid-in capital
                  
                  
                  34,171
                  
                  
                  
                  32,521Non-controlling
      interest
                  
                  
                  124
                  
                  
                  
                  122Retained
      earnings
                  
                  
                  16,761
                  
                  
                  
                  21,321Accumulated
      other comprehensive income
                  
                  
                  13,344
                  
                  
                  
                  13,310Total
      stockholders’ equity
                  
                  
                  64,407
                  
                  
                  
                  67,280Total
      liabilities and stockholders’ equity
                  
                  $
                  80,259
                  
                  
                  $
                  84,878





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
                      June 25,
                    
                    
                    Six months ended
                      June 25,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      revenue
                    
                    $
                    5,630
                    
                    
                    $
                    14,515
                    
                    
                    $
                    9,593
                    
                    
                    $
                    26,214Cost
      of goods sold
                    
                    
                    (6,513
                    )
                    
                    
                    (11,970
                    )
                    
                    
                    (12,031
                    )
                    
                    
                    (21,527
                    )Gross
      profit
                    
                    
                    (883
                    )
                    
                    
                    2,545
                    
                    
                    
                    (2,438
                    )
                    
                    
                    4,687Selling
      and distribution expenses
                    
                    
                    (148
                    )
                    
                    
                    (369
                    )
                    
                    
                    (367
                    )
                    
                    
                    (590
                    )General
      and administrative expenses
                    
                    
                    (442
                    )
                    
                    
                    (741
                    )
                    
                    
                    (1,608
                    )
                    
                    
                    (1,246
                    )Income
      (Loss) from operations
                    
                    
                    (1,473
                    )
                    
                    
                    1,435
                    
                    
                    
                    (4,413
                    )
                    
                    
                    2,851Other
      income (expense):Interest
      income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2
                    
                    
                    
                    2Other
      income (expense)
                    
                    
                    (66
                    )
                    
                    
                    27
                    
                    
                    
                    (92
                    )
                    
                    
                    215Gain
      on fair value adjustments toembedded
      derivatives
                    
                    
                    53
                    
                    
                    
                    738
                    
                    
                    
                    173
                    
                    
                    
                    1,428VAT
      refund
                    
                    
                    15
                    
                    
                    
                    28
                    
                    
                    
                    15
                    
                    
                    
                    28Income
      (loss) before income taxes
                    
                    
                    (1,471
                    )
                    
                    
                    2,228
                    
                    
                    
                    (4,315
                    )
                    
                    
                    4,524Benefit
      (provision) for income taxes
                    
                    
                    —
                    
                    
                    
                    (472
                    )
                    
                    
                    349
                    
                    
                    
                    (786
                    )Net
      income (loss)
                    
                    
                    (1,471
                    )
                    
                    
                    1,756
                    
                    
                    
                    (3,966
                    )
                    
                    
                    3,738Net
      income (loss) attributable to Non-controlling interest
                    
                    
                    1
                    
                    
                    
                    —
                    
                    
                    
                    2
                    
                    
                    
                    —Net
      income (loss) attributable to Controlling interest
                    
                    $
                    (1,470
                    )
                    
                    $
                    1,756
                    
                    
                    $
                    (3,964
                    )
                    
                    $
                    3,738Accretion
      of Redeemable Preferred Stock
                    
                    
                    (187
                    )
                    
                    
                    (301
                    )
                    
                    
                    (406
                    )
                    
                    
                    (660
                    )Preferred
      Stock Dividends
                    
                    
                    (87
                    )
                    
                    
                    (140
                    )
                    
                    
                    (188
                    )
                    
                    
                    (293
                    )Income
      available to (loss attributable to) common stockholders
                    
                    $
                    (1,744
                    )
                    
                    $
                    1,315
                    
                    
                    $
                    (4,558
                    )
                    
                    $
                    2,785Earnings
      per common shareBasic
                    
                    $
                    (0.03
                    )
                    
                    $
                    0.02
                    
                    
                    $
                    (0.07
                    )
                    
                    $
                    0.05Diluted
                    
                    $
                    (0.03
                    )
                    
                    $
                    0.02
                    
                    
                    $
                    (0.07
                    )
                    
                    $
                    0.05Weighted
      average number of common shares outstandingBasic
                    
                    
                    69,742
                    
                    
                    
                    57,165
                    
                    
                    
                    66,815
                    
                    
                    
                    56,615Diluted
                    
                    
                    69,742
                    
                    
                    
                    57,165
                    
                    
                    
                    66,815
                    
                    
                    
                    56,615





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)




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





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


5





NEW
DRAGON ASIA CORP. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS





(Amounts in thousands,
unaudited)


Six months ended
                      June 25,2009
                    
                    
                    2008Cash
      flows from operating activities:Net
      income (loss)
                    
                    $
                    (3,966
                    )
                    
                    $
                    3,738Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Allowance
      for doubtful accounts
                    
                    
                    317
                    
                    
                    
                    29Provision
      for inventory reserve
                    
                    
                    2,244
                    
                    
                    
                    4Depreciation
      and amortization of property, machinery, equipment and land use
      rights
                    
                    
                    864
                    
                    
                    
                    1,020Gain
      on fair value adjustments to embedded derivatives
                    
                    
                    (173
                    )
                    
                    
                    (1,428
                    )Stock
      based compensation expense
                    
                    
                    75
                    
                    
                    
                    —Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    (2,396
                    )
                    
                    
                    (411
                    )Deposits
      and prepayments
                    
                    
                    5,
      628
                    
                    
                    
                    107Inventories
                    
                    
                    1,506
                    
                    
                    
                    (3,159
                    )Due
      from related companies
                    
                    
                    30
                    
                    
                    
                    (63
                    )Accounts
      payable
                    
                    
                    115
                    
                    
                    
                    1,667Other
      payables and accruals
                    
                    
                    (1,601
                    )
                    
                    
                    98Taxes
      payable
                    
                    
                    287
                    
                    
                    
                    778Due
      to related companies
                    
                    
                    —
                    
                    
                    
                    (36
                    )Deferred
      tax asset
                    
                    
                    (349
                    )
                    
                    
                    —Net
      cash provided by operating activities
                    
                    
                    2,581
                    
                    
                    
                    2,344Cash
      flows from investing activities:Purchases
      of property, machinery and equipment
                    
                    
                    (6,071
                    )
                    
                    
                    (196
                    )Proceeds
      from sale of property, machinery and equipment
                    
                    
                    5,778
                    
                    
                    
                    3Net
      cash used in investing activities
                    
                    
                    (293
                    )
                    
                    
                    (193
                    )Cash
      flows from financing activities:Payment
      for preferred stock redemption
                    
                    
                    —
                    
                    
                    
                    994Proceed
      from shareholder loan
                    
                    
                    607
                    
                    
                    
                    363Proceeds
      from (repayment to) joint venture partners
                    
                    
                    70
                    
                    
                    
                    (84
                    )Net
      cash provided by financing activities
                    
                    
                    677
                    
                    
                    
                    1,273Impact
      of foreign currency translation on cash
                    
                    
                    4
                    
                    
                    
                    2,433Net
      increase in cash and cash equivalents
                    
                    
                    2,969
                    
                    
                    
                    5,857Cash
      and cash equivalents at beginning of period
                    
                    
                    4,383
                    
                    
                    
                    3,646Cash
      and cash equivalents at end of period
                    
                    $
                    7,352
                    
                    
                    $
                    9,503Non-Cash
      Investing and Financing ActivitiesConversion
      of preferred stock into common stock
                    
                    $
                    1,504
                    
                    
                    $
                    1,504Dividend
      payments on preferred stock in the form of common stock
                    
                    $
                    215
                    
                    
                    $
                    326





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


6




NEW
DRAGON ASIA CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





NOTE
1. ORGANIZATION AND NATURE OF OPERATIONS





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





NOTE
2. BASIS OF PRESENTATION





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





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





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





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





Contractual
Joint Ventures





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





Accounting
for Derivative Instruments





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





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


7





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





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





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





Fair
Value of Financial Instruments





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





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


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


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





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





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





(In thousands)
                        
                        Fair ValueLevel
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3
                        
                        TotalEmbedded
      derivative liabilities as of June 25, 2009
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        93
                        
                        $
                        93Embedded
      derivative liabilities as of December 25, 2008
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        287
                        
                        $
                        287


8





NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS





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





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





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





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





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





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





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





NOTE
4. CONDENSED BALANCE SHEET INFORMATION





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





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





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


9





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





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





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





NOTE
5. EARNINGS PER SHARE





The Company computes earnings per share
(“EPS’) in accordance with Statement of Financial Accounting Standards No. 128,
“Earnings per Share” (“SFAS No. 128”), and SEC Staff Accounting Bulletin
No. 98 (“SAB 98”).  SFAS No. 128 requires companies with complex
capital structures to present basic and diluted EPS.  Basic EPS is measured
as the income or loss available to common shareholders divided by the weighted
average common shares outstanding for the period.  Diluted EPS is similar
to basic EPS but presents the dilutive effect on a per share basis of potential
common shares (e.g., convertible securities, options and warrants) as if they
had been converted at the beginning of the periods presented, or issuance date,
if later.  Potential common shares that have an anti-dilutive effect (i.e.,
those that increase income per share or decrease loss per share) are excluded
from the calculation of diluted EPS. Approximately 29,258dilutive shares on an “as converted”
basis for the Redeemable Convertible Preferred stock for the three and six
months ended July 25, 2009 were excluded from the calculation of diluted
earnings per share since their effect would have been
anti-dilutive.





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





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





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





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


10





NOTE
6. ACCOUNTS RECEIVABLE





Accounts
receivable consisted of the following (in thousands):




June 25, 2009
                    
                    
                    December 25, 2008Accounts
      receivable
                    
                    $
                    12,469
                    
                    
                    $
                    10,072Less:
      Allowance for doubtful accounts
                    
                    
                    (1,497
                    )
                    
                    
                    (1,184
                    )$
                    10,972
                    
                    
                    $
                    8,888





The
activity in the Company’s allowance for doubtful accounts is summarized as
follows (in thousands):





June 25, 2009
                      
                      
                      December 25, 2008Balance
      at the beginning of the period
                      
                      $
                      1,184
                      
                      
                      $
                      944Add:
      provision during the period
                      
                      
                      317
                      
                      
                      
                      308Less:
      write-offs during the period
                      
                      
                      (4
                      )
                      
                      
                      (68
                      )Balance
      at the end of the period
                      
                      $
                      1,497
                      
                      
                      $
                      1,184




NOTE
7. DEPOSITS AND PREPAYMENTS





Deposits
and prepayments consisted of the following (in thousands):




June 25, 2009
                    
                    
                    December 25, 2008Deposits
      for raw materials
                    
                    $
                    6,215
                    
                    
                    $
                    12,414Prepayments
      and advances
                    
                    
                    1,142
                    
                    
                    
                    642$
                    7,357
                    
                    
                    $
                    13,056





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 $75,000 as compensation
expense for the quarter ended June 25, 2009. The remaining $225,000 has been
recognized as a prepaid expense and will be charged to income on the
straight-line basis over the remaining service term. See also Note
16.





NOTE
8. INVENTORIES





Inventories
consisted of the following (in thousands):




June 25, 2009
                    
                    
                    December 25, 2008Raw
      materials (including packing materials)
                    
                    $
                    23,629
                    
                    
                    $
                    26,047Finished
      goods
                    
                    
                    2,068
                    
                    
                    
                    1,64225,697
                    
                    
                    
                    27,689Less:
      Inventory reserve
                    
                    
                    (2,311
                    )
                    
                    
                    (565
                    )$
                    23,386
                    
                    
                    $
                    27,124





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





June 25, 2009
                      
                      
                      December 25, 2008Balance
      at the beginning of the period
                      
                      $
                      565
                      
                      
                      $
                      96Add:
      provision during the period
                      
                      
                      2,244
                      
                      
                      
                      471Less:
      write-offs during the period
                      
                      
                      (498
                      )
                      
                      
                      (2
                      )Balance
      at the end of the period
                      
                      $
                      2,311
                      
                      
                      $
                      565


11


NOTE
9. DUE FROM RELATED COMPANIES





Due from
related companies consisted of the following (in thousands):




June 25, 2009
                    
                    
                    December 25, 2008Due
      from related companies for sales
                    
                    $
                    951
                    
                    
                    $
                    981





NOTE
10. PROPERTY, MACHINERY AND EQUIPMENT





Property,
machinery and equipment consisted of following (in thousands):




Useful Life
                    
                    
                    June 25, 2009
                    
                    
                    December 25, 2008(In years)Buildings
                    
                    
                    40
                    
                    
                    $
                    7,580
                    
                    
                    $
                    9,379Machinery
      and equipment
                    
                    
                    5 -
      12
                    
                    
                    
                    18,701
                    
                    
                    
                    16,298Construction
      in process
                    
                    
                    
                    
                    
                    
                    7,698
                    
                    
                    
                    2,21633,979
                    
                    
                    
                    27,893Less:
      Accumulated depreciation and amortization
                    
                    
                    
                    
                    
                    
                    (8,525
                    )
                    
                    
                    (7,754
                    )$
                    25,454
                    
                    
                    $
                    20,139





NOTE
11. LAND USE RIGHTS





Land use
rights consisted of the following (in thousands):




June 25, 2009
                    
                    
                    December 25, 2008Land
      use rights
                    
                    $
                    5,252
                    
                    
                    $
                    5,250Less:
      Accumulated amortization
                    
                    
                    (814
                    )
                    
                    
                    (721
                    )$
                    4,438
                    
                    
                    $
                    4,529





NOTE
12. OTHER PAYABLES AND ACCRUALS





Other
payables and accruals consisted of the following (in thousands):




June 25, 2009
                      
                      
                      December 25, 2008Deposits
      from customers
                      
                      $
                      372
                      
                      
                      $
                      591Accruals
      for payroll, bonus and benefits
                      
                      
                      446
                      
                      
                      
                      1,173Utilities
      and accrued expenses
                      
                      
                      1,100
                      
                      
                      
                      2,081$
                      1,918
                      
                      
                      $
                      3,845





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 June 25, 2009, all of the warrants issued to the
placement agent have been exercised cashless, and 5,335 shares of Series A
Preferred Stock have been converted into 6,935,558 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 June 25, 2009, 5,168 shares
of Series B Preferred Stock have been converted into 10,966,164 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 StockPreferred
      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.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
                      
                      
                      Balance2008
                      
                      
                      
                      
                      (in
      thousands)Series
      A
                      
                      
                      931
                      
                      
                      $
                      931Series
      B
                      
                      
                      5,570
                      
                      
                      
                      5,570Less
      unamortized discount
                      
                      
                      
                      
                      
                      
                      (1,856
                      )Balance
      December 25, 2008
                      
                      
                      6,501
                      
                      
                      $
                      4,6452009Series
      A
                      
                      
                      665
                      
                      
                      $
                      665Series
      B
                      
                      
                      4,332
                      
                      
                      
                      4,332Less
      unamortized discount
                      
                      
                      
                      
                      
                      
                      (1,061
                      )Balance June
      25, 2009
                      
                      
                      4,997
                      
                      
                      $
                      3,936


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
recognized a gain of $173,000 on the embedded derivative liability in other
income on our statement of operations for the six months ended June 25, 2009 and
a gain of $1,428,000 for the six months ended June 25, 2008.





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 FeatureExpected
      life (in years)
                              
                              Remaining
      term at valuation date
                              
                              
                              Remaining
      Term to conversion or redemption
                                date
      at each valuation dateExpected
      volatility
                              
                              85%
      to 90%
                              
                              
                              105%
      to 1100%Risk-free
      interest rate
                              
                              1.15%
      to 1.42%
                              
                              
                              0.07%
      to 0.82%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 (in
thousands):





Fair
      Value at December 25, 2007
                  
                  $
                  2,493Gain
      on change in value of derivatives during the period
                  
                  
                  (2,047
                  )Conversion
      of 3,685 shares of Series A & B Preferred Stock to common stock during
      2008
                  
                  
                  (159
                  )Fair
      Value at December 25, 2008
                  
                  $
                  287Gain
      on change in value of derivatives during the period
                  
                  
                  (173
                  )Conversion
      of 1,504 shares of Series A & B Preferred Stock to common stock during
      2009
                  
                  
                  (21
                  )Fair
      Value at June 25, 2009
                  
                  $
                  93





NOTE
14. COMMON STOCK





On
September 4, 2003, the Company issued 3,300,000 shares of Class A Common Stock
for an aggregate purchase amount of $1,650,000 or $0.50 per share. The shares
were issued pursuant to an exemption provided by Section 4(2) of the Securities
Act. The purchasers were also issued warrants to purchase 1,650,000 shares of
the Company’s Class A Common Stock, which have a term of 5 years at an exercise
price of $0.99 per share. As of June 25, 2009, all such warrants had been
exercised.





On
October 7, 2003, the Company issued 850,000 shares of Class A Common Stock for
an aggregate purchase amount of $425,000 or $0.50 per share. The shares were
issued pursuant to an exemption provided by Section 4(2) of the Securities Act.
The purchasers were also issued warrants to purchase 425,000 shares of the
Company’s Class A Common Stock, which have a term of 5 years and an exercise
price of $0.979 per share. As of June 25, 2009, warrants to purchase 400,000
shares of Class A Common Shares had been exercised and the outstanding warrants
to purchase 25,000 shares of Class A Common Shares had expired.


14


NOTE
15. WARRANTS





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





Shares
                    
                    
                    Weighted Average Exercise PriceOutstanding
      at December 25, 2007
                    
                    
                    6,507,895
                    
                    
                    
                    1.4077Issued
                    
                    
                    —
                    
                    
                    
                    —Exercised
                    
                    
                    —
                    
                    
                    
                    —Expired
                    
                    
                    (25,000
                    )
                    
                    
                    0.979Outstanding
      at December 25, 2008
                    
                    
                    6,482,895
                    
                    
                    
                    1.4093Outstanding
      at June 25, 2009
                    
                    
                    6,482,895
                    
                    
                    
                    1.4093





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
                      PriceJuly
      2005 private placement6-year
      warrants
                    
                    
                    3,157,895
                    
                    
                    $
                    1.04December
      2005 private placement6-year
      warrants
                    
                    
                    2,968,750
                    
                    
                    
                    1.765-year
      warrants
                    
                    
                    356,250
                    
                    
                    
                    1.76Warrants
      exercisable at June 25, 2009
                    
                    
                    6,482,895





As of
June 25, 2009, these warrants had no intrinsic value.





NOTE
16. STOCK-BASED COMPENSATION





On
January 20, 2006, options to purchase 2,000,000 shares of Class A Common Stock
were issued to an officer at an exercise price of $1.60 per share with a term of
6 years. The market price of the Class A Common Stock as of the grant date was
$1.54 per share. The Company recorded compensation expense of $2,320,000 based
on an estimated fair value of the options of $1.16 per share on January 20,
2006. The per share fair value of the stock options granted has been estimated
using the Black-Scholes option-pricing model with the following
assumptions:




January 20, 2006Life
      (years)
                  
                  
                  6Dividend
      yield
                  
                  
                  NoneRisk
      - free interest rate
                  
                  
                  4.36
                  %Volatility
                  
                  
                  89
                  %





None of
these options were exercised, and as of June 25, 2009, all of these options had
expired as the employment contract with the officer expired





On
December 13, 2006, options to purchase an additional 6,000,000 shares of Class A
Common Stock were granted to the same officer at an exercise price of $1.82 per
share with a term of 10 years. The options were fully vested upon grant. The
market price of the Class A Common Stock as of the grant date was $1.82 per
share. The Company recorded compensation expense of $5,820,000 based on an
estimated fair value of the options of $0.97 per share on December 13, 2006, the
grant date. The per share fair value of the stock options granted has been
estimated using the Black-Scholes option-pricing model with the following
assumptions:




December 13, 2006Life
      (years)
                  
                  
                  6Dividend
      yield
                  
                  
                  NoneRisk
      - free interest rate
                  
                  
                  4.55
                  %Volatility
                  
                  
                  50
                  %





As of
June 25, 2009, these options were fully vested. According to the employment
contract with the officer, all of these options will expire in January 2010, one
year after the expiration of the employment contract.


15





The
following table summarizes outstanding options as at June 25, 2009, related
weighted average fair value and life information:





Options Outstanding
                    
                    
                    Options ExercisableExercise
                      Price Per Share
                    
                    Number Outstanding
                      at June 25, 2009
                    
                    
                    Weighted
                      Average
                      Fair Value
                    
                    
                    Weighted Average
                      Remaining Life
                      (Years)
                    
                    
                    Number Exercisable
                      at June 25, 2009
                    
                    
                    Weighted Average
                      Exercise Price$
                    1.82
                    
                    
                    6,000,000
                    
                    
                    $
                    0.97
                    
                    
                    
                    0.58
                    
                    
                    
                    6,000,000
                    
                    
                    $
                    1.82





The
Company has no future compensation expense to record from this option
outstanding at June 25, 2009 because they were fully vested upon grant and
compensation cost was recorded as of that date.





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 $75,000 as compensation
expense for the quarter ended June 25, 2009. The remaining $225,000 has been
recognized as a prepaid expense and will be charged to income on the
straight-line basis over the remaining service term.





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
                          June 25,
                        
                        Six months ended
                          June 25,2009
                        
                        2008
                        
                        2009
                        
                        2008Pre-determined
      annual fee charged by joint venture partners:Shandong
      Longfeng Group Company (a)
                        
                        $
                        7
                        
                        
                        $
                        21
                        
                        
                        $
                        14
                        
                        
                        $
                        42Shandong
      Longfeng Flour Company Limited (b)
                        
                        
                        12
                        
                        
                        
                        11
                        
                        
                        
                        23
                        
                        
                        
                        21$
                        19
                        
                        
                        $
                        32
                        
                        
                        
                        37
                        
                        
                        
                        63





(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, bear no interest, and are payable upon request,
and funds are available. The Company and the major shareholder have agreed that
no repayments will take place in 2009. The joint venture partner’s amounts are
similar to the condition of New Dragon Asia Food Limited loans and no repayment
is expected in 2009.





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.





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 June 25, 2009 and
December 25, 2008, 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.


16


NOTE
19. COMPREHENSIVE INCOME





The
following table summarizes the comprehensive income for the quarter ended June
25, 2009 and 2008:





June 25, 2009
                  
                  
                  June 25, 2008Net
      income (loss)
                  
                  $
                  (3,964
                  )
                  
                  $
                  3,738Foreign
      currency translation adjustment
                  
                  
                  34
                  
                  
                  
                  5,309Comprehensive
      income (loss)
                  
                  $
                  (3,930
                  )
                  
                  $
                  9,047





NOTE
20. BUSINESS COMBINATION AND SIGNIFICANT ESTABLISHMENT





Longyuan
Packaging Plant





On
January 10, 2006, the Company established New Dragon Asia (Long Kou) Packing
Materials Company Limited (“NDAPM”), a wholly-owned subsidiary in Longkou,
Shandong Province. NDAPM is principally engaged in the manufacturing and sale of
packing materials, with a registered capital of $3,600,000. During the six
months ended June 25, 2009, the Company spent approximately $2.42 million on the
construction at the new plant and has committed to further capital expenditures
of $0.51 million for the completion of the plant, which is scheduled to be
completed in 2009.





NOTE
21. 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
                    June 25,
                  
                  
                  For the six months ended
                    June 25,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(US$'000)
                  
                  
                  (US$'000)
                  
                  
                  (US$'000)
                  
                  
                  (US$'000)Net
      revenueInstant
      noodles
                  
                  
                  1,001
                  
                  
                  
                  3,535
                  
                  
                  
                  2,065
                  
                  
                  
                  6,930Flour
                  
                  
                  3,356
                  
                  
                  
                  8,207
                  
                  
                  
                  5,355
                  
                  
                  
                  14,322Soybean
                  
                  
                  1,273
                  
                  
                  
                  2,773
                  
                  
                  
                  2,173
                  
                  
                  
                  4,9625,630
                  
                  
                  
                  14,515
                  
                  
                  
                  9,593
                  
                  
                  
                  26,214Income
      (loss) from operationInstant
      noodles
                  
                  
                  (884
                  )
                  
                  
                  222
                  
                  
                  
                  (2,457
                  )
                  
                  
                  550Flour
                  
                  
                  (205
                  )
                  
                  
                  1,231
                  
                  
                  
                  (1,163
                  )
                  
                  
                  2,298Soybean
                  
                  
                  (384
                  )
                  
                  
                  (18
                  )
                  
                  
                  (793
                  )
                  
                  
                  3(1,473
                  )
                  
                  
                  1,435
                  
                  
                  
                  (4,413
                  )
                  
                  
                  2,851Depreciation
      and amortizationInstant
      noodles
                  
                  
                  246
                  
                  
                  
                  274
                  
                  
                  
                  444
                  
                  
                  
                  548Flour
                  
                  
                  95
                  
                  
                  
                  164
                  
                  
                  
                  243
                  
                  
                  
                  337Soybean
                  
                  
                  90
                  
                  
                  
                  62
                  
                  
                  
                  177
                  
                  
                  
                  122431
                  
                  
                  
                  500
                  
                  
                  
                  864
                  
                  
                  
                  1,007





June 25,
                  
                  
                  December 25,2009
                  
                  
                  2008(US$'000)
                  
                  
                  (US$'000)Identifiable
      long-term assetsInstant
      noodles
                  
                  
                  15,923
                  
                  
                  
                  13,084Flour
                  
                  
                  8,952
                  
                  
                  
                  8,667Soybean
                  
                  
                  6,317
                  
                  
                  
                  3,89831,192
                  
                  
                  
                  25,649


17





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, 2008, 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 and instant noodle. 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





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





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


18





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





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





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





Share-Based
Payment





On
December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based
Payment,” which replaces SFAS No. 123, “Accounting for Stock-Based
Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees.” SFAS No. 123R 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 SFAS
No. 123R, 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 SFAS No. 123R, 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 SFAS No. 123R 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
December 2008, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position (FSP) Financial Accounting Standard (SFAS) 132(R)-1,
“Employers’ Disclosures about Postretirement Benefit Plan Assets,” which is
effective for fiscal years ending after December 15, 2009. The new standard
expands disclosures for assets held by employer pension and other postretirement
benefit plans. FSP SFAS 132(R)-1 will not affect the company’s financial
position or results of operations.


19





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





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





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





In March
2008, the FASB issued statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133” (SFAS 161). SFAS 161 requires entities that use derivative instruments
to provide qualitative disclosures about their objectives and strategies for
using such instruments, as well as any details of credit-risk-related contingent
features contained within derivatives.  SFAS 161 also requires
entities to disclose additional information about the amounts and location of
derivatives located within the financial statements, how the provisions of SFAS
133 have been applied, and the impact that hedges have on an entity’s financial
position, financial performance, and cash flows.  The Company adopted
the provisions of SFAS 161 effective December 26, 2008, and no additional
disclosure were required.





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





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





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





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.


20




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.





In
addition to domestic sales, we 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 export instant noodles and soybean powder to Europe and
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.




21




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
                        June 25,
                      
                      
                      Six months ended
                        June 25,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Net
      revenue
                      
                      $
                      5,630
                      
                      
                      $
                      14,515
                      
                      
                      $
                      9,593
                      
                      
                      $
                      26,214Cost
      of goods sold
                      
                      
                      (6,513
                      )
                      
                      
                      (11,970
                      )
                      
                      
                      (12,031
                      )
                      
                      
                      (21,527
                      )Gross
      profit
                      
                      
                      (883
                      )
                      
                      
                      2,545
                      
                      
                      
                      (2,438
                      )
                      
                      
                      4,687Selling
      and distribution expenses
                      
                      
                      (148
                      )
                      
                      
                      (369
                      )
                      
                      
                      (367
                      )
                      
                      
                      (590
                      )General
      and administrative expenses
                      
                      
                      (442
                      )
                      
                      
                      (741
                      )
                      
                      
                      (1,608
                      )
                      
                      
                      (1,246
                      )Gain
      on fair value adjustments to embedded derivatives
                      
                      
                      53
                      
                      
                      
                      738
                      
                      
                      
                      173
                      
                      
                      
                      1,428Income
      (loss) before income taxes
                      
                      
                      (1,471
                      )
                      
                      
                      2,228
                      
                      
                      
                      (4,315
                      )
                      
                      
                      4,524Income
      taxes benefit (expense)
                      
                      
                      —
                      
                      
                      
                      (472
                      )
                      
                      
                      349
                      
                      
                      
                      (786
                      )Net
      income (loss) attributable to controlling interest
                      
                      
                      (1,470
                      )
                      
                      
                      1,756
                      
                      
                      
                      (3,964
                      )
                      
                      
                      3,738





Six
Months Ended June 25, 2009 Compared to Six Months Ended June 25,
2008





Net
Revenue





Net
revenue for the six months ended June 25, 2009 was $9,593,000, representing a
decrease of $16,621,000, or 63%, from $26,214,000 for the six months ended June
25, 2008.





Revenues
declined in all segments with instant noodles decreasing 70%, flour products
decreasing 63% and soybean products declining 56%. The demand for our products
decreased significantly and was responsible for 90% of the revenue decline. The
price of our instant noodle also decreased and attributed to 10% of the revenue
decline. We believe our revenues were affected by the abrupt slowdown in the
economy worldwide.





Cost
of goods sold





For the
six months ended June 25, 2009, cost of goods sold was $12,031,000, a decrease
of $9,496,000, or 44%, as compared to $21,527,000 for the six months ended June
25, 2008. The decrease was in line with the decrease in sales of our
products.





For the
six months ended June 25, 2009, as a percentage of revenue, cost of goods sold
increased to 125% as compared to 82% for that of the prior year. For the six
months ended June 25, 2009, gross margin (loss) was (25)% as compared to 18% for
the prior year.  The loss in 2009 is due to 1) losses sustained on our
higher end noodle products, as a result of the weakening economy, and 2) a
charge to cost of goods sold of approximately $2.0 million as a reserve to
inventory.  In our estimate, the reserve reduces inventory to a level
that will allow us to produce finished goods inventory at a cost that will allow
us to recover selling costs and realize normal gross margins upon
sale.





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 $367,000 for the six months ended June 25, 2009,
representing a decrease of $223,000 or 38% from $590,000 for the corresponding
period of 2008. The decrease was in line with the decrease in sales of our
products.





As a
percentage of net revenue, selling and distribution expenses increased to 4% for
the six months ended June 25, 2009 as compared to 2% for the corresponding
period in 2008. The increase was primarily due to the rapid decrease in the
sales of our products.




22




General
and Administrative Expenses





General
and administrative expenses increased by $362,000, or 29%, to $1,608,000 for the
six months ended June 25, 2009 as compared to $1,246,000 for the corresponding
period in 2008. 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
(Loss) 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 six months ended June 25, 2009, the
gain in this regard was $173,000. For the corresponding period of 2008, the gain
in this regard was $1,428,000. 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
Income (Loss) Attributable to Controlling Interests





Net loss
attributable to controlling interest was $3,964,000 for the six months ended
June 25, 2009 as compared to net income attributable to controlling interest of
$3,738,000 for the six months ended June 25, 2008. Such decrease was primarily
due to the decline in sales and provision for bad debt and raw
material.





Three
Months Ended June 25, 2009 Compared to Three Months Ended June 25,
2008





Net
Revenue





Net
revenue for the quarter ended June 25, 2009 was $5,630,000, representing a
decrease of $8,885,000, or 61%, from $14,515,000 for the quarter ended June 25,
2008.





Revenues
declined in all segments with instant noodles decreasing 72%, flour products
decreasing 59% and soybean products declining 54%. The demand for our products
decreased significantly and was responsible for 90% of the revenue decline. The
price of our instant noodle also decreased and attributed to 10% of the revenue
decline. We believe our revenues were affected by the abrupt slowdown in the
economy worldwide.





Cost
of goods sold





For the
three months ended June 25, 2009, cost of goods sold was $6,513,000, a decrease
of $5,457,000, or 46%, as compared to $11,970,000 for the three months ended
June 25, 2008. The decrease was in line with the decrease in sales of our
products.





For the
three months ended June 25, 2009, as a percentage of revenue, cost of goods sold
increased to 116% as compared to 82% for that of the prior year. For the three
months ended June 25, 2009, gross margin (loss) was (16)% as compared to 18% for
the prior year.  The loss in 2009 is due to 1) losses sustained on our
higher end noodle products, as a result of the weakening economy, and 2) a
charge to cost of goods sold of approximately $0.6 million as a reserve to
inventory.  In our estimate, the reserve reduces inventory to a level
that will allow us to produce finished goods inventory at a cost that will allow
us to realize normal gross margins upon sale.





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 $148,000 for the quarter ended June 25, 2009,
representing a decrease of $221,000 or 60% from $369,000 for the corresponding
quarter of 2008. The decrease was primarily due to the cost controls implemented
by us.





As a
percentage of net revenue, selling and distribution expenses increased to 3% for
the quarter ended June 25, 2009 as compared to 2% for the corresponding period
in 2008. The increase was primarily due to the decrease in the sales of our
products.




23




General
and Administrative Expenses





General
and administrative expenses decreased by $299,000, or 40%, to $442,000 for the
quarter ended June 25, 2009 as compared to $741,000 for the corresponding
quarter in 2008. The decrease was primarily due to the cost controls implemented
by us.





Gain
(Loss) 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 June 25, 2009, the
gain in this regard was $53,000. For the corresponding period of 2008, the gain
in this regard was $738,000. 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
Income (Loss) Attributable to Controlling Interests





Net loss
attributable to controlling interest was $1,470,000 for the quarter ended June
25, 2009 as compared to net income attributable to controlling interest of
$1,756,000 for the quarter ended June 25, 2008. Such decrease was primarily due
to the decline in sales and provision for bad debt and raw
material.





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 $8,446,000 to $41,377,000 at June 25, 2009 as compared
to $49,823,000 at December 25, 2008, which was primarily due to the disposal of
the assets held for disposal and provision for bad debt and raw
material.





Cash and
cash equivalents were $7,352,000 as of June 25, 2009, an increase of $2,969,000
from December 25, 2008. 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.




24




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




Series A Preferred Stock
                
                Series B Preferred StockPreferred
      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.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
June 25, 2009, the Company had long-term debt obligations that resulted from the
redeemable convertible preferred stock and the pre-determined annual fee charged
by joint venture partners through February 2009 and other commitments and
long-term liabilities through August 2049 as follows:





Payment Obligations By Period2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  Thereafter
                  
                  
                  Total(In thousands)Redeemable
      convertible preferred stock
                  
                  $
                  1,770
                  
                  
                  $
                  3,227
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  4,997Pre-determined
      annual fee charged by joint venture partners
                  
                  
                  65
                  
                  
                  
                  129
                  
                  
                  
                  129
                  
                  
                  
                  129
                  
                  
                  
                  129
                  
                  
                  
                  4,528
                  
                  
                  
                  5,109Total
                  
                  $
                  1,835
                  
                  
                  $
                  3,356
                  
                  
                  $
                  129
                  
                  
                  $
                  129
                  
                  
                  $
                  129
                  
                  
                  $
                  4,528
                  
                  
                  $
                  10,106





Reconciliation
of the outstanding payment obligations of redeemable convertible preferred
stock:




(In thousands)Aggregated
      balance as of the issue date
                    
                    $
                    15,500Partial
      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
                    
                    
                    (1,504
                    )$
                    4,997





25




Item
3. Quantitative and Qualitative Disclosures about Market Risk.





We may be
exposed to changes in financial market conditions in the normal course of
business. Market risk generally represents the risk that losses may occur as a
result of movements in interest rates and equity prices. We currently do not use
financial instruments in the normal course of business that are subject to
changes in financial market conditions.





Currency
Fluctuations and Foreign Currency Risk





The
majority of our operations are conducted in the PRC except for some minor export
business and limited overseas purchases of raw materials.  Most of our
sales and purchases are conducted within the PRC in Chinese Renminbi. Hence, the
effect of the fluctuations of the Renminbi exchange rate relative to other
currencies is considered minimal to our business operations.  However,
we use the United States dollar for financial reporting purposes and therefore,
fluctuations in the exchange rate between the Renminbi and the U.S dollar will
result in increases or decreases in other comprehensive income or
loss.  Conversion of Renminbi into foreign currencies is regulated by
The People’s Bank of China through a unified floating exchange rate system.
Although the PRC government has stated its intention to support the value of
Renminbi, there can be no assurance that such exchange rate will not again
become volatile or that Renminbi will not strengthen or devalue significantly
against the US dollar.  Exchange rate fluctuations may adversely
affect the value, in US dollar terms, of our net assets and income derived from
our operations in the PRC.





Interest
Rate Risk





The
Company does not have significant interest rate risk, as our debt obligations
are primarily short-term in nature, with fixed interest rates. Our embedded
derivatives liabilities are revalued each accounting period and their fair value
can be affected by interest rate fluctuations based on changes in the risk free
interest rate (generally the interest rate on intermediate term obligations of
the United States Government).





Credit
Risk





We have
not experienced significant credit risk as most of our customers are long-term
customers with good payment records. Our receivables are regularly monitored by
our credit manager.





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 June 25, 2009, 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 communicated to our management (including our principal
executive and principal financial officers or persons performing similar
functions) as appropriate to allow timely decisions regarding required
disclosure, particularly during the period when this report was being
prepared.





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 June 25, 2009 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.




26




PART
II: OTHER INFORMATION




Item
1. Legal Proceedings.





None.





Item
1A. Risk Factors.





There
have been no material changes in our business, operations or prospects that
would require a change to the Risk Factor disclosure included in our most recent
Annual Report on Form 10-K that have not already been disclosed.





The risks
and uncertainties described below are not the only ones the Company faces.
Additional risks and uncertainties not presently known to the Company or that
the Company currently deemed immaterial also may impair the Company’s business
operations. If any of the following risks occur, the Company’s business
prospects, financial condition, operating results and cash flows could be
adversely affected in amounts that could be material.





RISKS
RELATED TO OUR CLASS A COMMON STOCK





We
have never declared or paid any dividends on our Class A Common
Stock





We have
never declared or paid any dividends on our Class A Common Stock. Our ability to
pay such cash dividends is subject to our receipt of dividends from our
operating subsidiaries, which are subject to legal restrictions in the PRC on
making such payments. We currently intend to retain future earnings, if any, to
finance operations and the expansion of our business. The declaration and
payment in the future of any cash or stock dividends on the Class A Common Stock
will be at the discretion of our Board of Directors and will depend upon a
variety of factors, including our ability to service our outstanding
indebtedness, if any, and to pay dividends on securities ranking senior to the
Class A Common Stock, including the shares of our outstanding Series A and
Series B Preferred Stock; our future earnings, if any; capital requirements;
financial condition; plans for expansion; restrictions imposed by PRC law; any
financing arrangements; and such other factors as our Board of Directors may
consider to be relevant from time to time. We do not expect to declare or pay
any dividends on our Class A Common Stock in the foreseeable
future.





We
are controlled by our major shareholder





Our major
shareholder, New Dragon Asia Food Ltd., which is controlled by our Chairman, Mr.
Heng Jing Lu, owns approximately 25% of our outstanding shares.  Mr.
Lu has sole voting and dispositive control over the shares of us held by New
Dragon Asia Food Ltd.





Our
primary source of funds for dividends and other distributions from our operating
subsidiary in China is subject to various legal and contractual restrictions and
uncertainties, and our ability to pay dividends or make other distributions to
our shareholders are negatively affected by those restrictions and
uncertainties





We are a
holding company established in the state of Florida and conduct our core
business operations through our operating subsidiaries, Hero Treasure Ltd.,
Delta Link Ltd., Mix Creation Ltd., Rich Delta Ltd. and Keen General Ltd. and
their respective subsidiaries in China.  As a result, our profits
available for distribution to our shareholders are dependent on the profits
available for distribution from our subsidiaries.  If our subsidiaries
incur debt on their own behalf, the debt instruments may restrict their ability
to pay dividends or make other distributions, which in turn would limit our
ability to pay dividends on our shares.  Under the current PRC laws,
because we are incorporated in the State of Florida, our PRC subsidiaries are
each regarded as a wholly foreign-owned enterprise in China.  The PRC
laws permit payment of dividends only out of net income as determined in
accordance with PRC accounting standards and
regulations.  Determination of net income under PRC accounting
standards and regulations may differ from determination under U.S. GAAP in
significant aspects, such as the use of different principles for recognition of
revenues and expenses.  In addition, distribution of additional equity
interests by any of our PRC subsidiaries to us (which is credited as fully paid
through capitalization of the PRC subsidiaries’ undistributed profits) requires
additional approval of the PRC government due to an increase in our registered
capital and total investment in the subsidiary.  Under current PRC
laws, each of our subsidiaries is required to set aside a portion of its net
income each year to fund designated statutory reserve funds.  These
reserves are not distributable as cash dividends.  As a result, our
primary internal source of funds for dividend payments from the subsidiaries are
subject to these and other legal and contractual restrictions and uncertainties,
which in turn may limit or impair our ability to pay dividends to our
shareholders.  Moreover, any transfer of funds from us to our
subsidiaries, either as a shareholder loan or as an increase in registered
capital, is subject to registration with or approval by PRC governmental
authorities.  These limitations on the flow of funds between us and
the subsidiaries could restrict our ability to act in response to changing
market conditions.




27




Regulations
relating to offshore investment activities by PRC residents may adversely affect
our business and prospects





On
September 8, 2006, several agencies of the PRC government issued a regulation
concerning restrictions on investments in China through special purpose
companies incorporated overseas and the listing of the shares of those companies
in overseas markets.  The regulation contains a number of provisions
relating to the acquisition of Chinese domestic companies which involve
“important industries” and may affect the national economic safety or result in
the transfer of actual control rights of any company having “famous brands” or
any “old established Chinese brands,” and require that the parties to any such
transaction report to the Ministry of Commerce for
approval.  Additionally, any foreign company directly or indirectly
controlled by Chinese companies or individuals used as a vehicle for public
listing in an overseas stock market will need China Securities Regulatory
Commission approval in connection with such listing.  As it is
uncertain how this new regulation will be interpreted or implemented, we cannot
predict how this regulation will affect our business operations or future
strategies.  For example, we may be subject to a more stringent review
and approval process with respect to our acquisition activities, which may
adversely affect our business and prospects.





RISKS
RELATED TO OUR BUSINESS





The
effects of the global financial crisis on our business have been
severe





From the
middle of 2008 until the middle of 2009, the international capital markets
experienced severe volatility and exhibited overall significant declines in
prices of equity securities, which events taken in combination with a freezing
of international credit markets and lack of availability of private capital led
to a near shutdown of private flows of capital.  In addition, several
high profile acquisitions and bankruptcies and the alleged fraud perpetrated by
Bernard Madoff exacerbated a lack of confidence in global financial institutions
and their oversight.





Government
responses to these events have included partial nationalization of certain
industries and enterprises, “bail-out” packages intended to provide liquidity to
market participants, stimulus measures designed to reinvigorate national
economies.  Consumers, on the other hand, have pulled back spending on
a global scale, including with respect to those items otherwise considered
recession proof such as food products.  Our ability to operate our
business has been materially adversely affected by these events.  In
addition, the effects of the global financial crisis on the industry and
geographic sectors that we are engaged in are just beginning to become apparent
and it is impossible to predict the full impact they may have on us, including
with respect to our expansion plans and the capital required to implement such
strategy.  While we intend to conserve capital in order to keep
operating, it is very difficult for us to anticipate future trends in the PRC
food industry or in the PRC economy in general, each of which materially affects
our business.





We
may be subject to product liability claims and product recalls that could result
in a decrease in demand for our products due to negative publicity, which could
negatively impact our profitability.





We sell
food products for human consumption, which involves risks such as product
contamination or spoilage, product tampering and other adulteration of food
products. We may be subject to liability if the consumption of any of our
products causes injury, illness or death.  In addition, we will voluntarily
recall products in the event of contamination or damage.  A significant
product liability judgment or a widespread product recall may negatively impact
our profitability for a period of time depending on product availability,
competitive reaction and consumer attitudes.  Even if a product liability
claim is unsuccessful or is not fully pursued, the negative publicity
surrounding any assertion that company products caused illness or injury could
adversely affect our reputation with existing and potential customers and our
corporate and brand image.





In
September 2008, the Health Ministry of the People’s Republic of China announced
that several babies had died in recent months and thousands more had been
sickened by contaminated milk formula powder due to the presence of melamine, an
industrial chemical sometimes used to make plastics and
fertilizer.  On October 22, 2008, the United Nations issued a paper
addressing food safety in China, citing key challenges for China as the need for
a more modern food safety law; the need for improved monitoring, inspection and
enforcement; and the need to continue to improve standards to bring China in
line with international norms.  Although none of our products contain
milk powder, negative international publicity surrounding this food safety issue
could influence the popular perceptions of international consumers and result in
lower demand for exports of food products from China, which could have an
adverse effect on our sales and profitability.





Our
business may experience adverse effects from competition in the noodle, flour
and soybean product markets.





The
noodle, flour and soybean product markets in the PRC are highly competitive.
Competition in these markets takes many forms, including the
following:





-
            establishing
      favorable brand recognition;-
            developing
      products sought by consumers;-
            implementing
      appropriate pricing;-
            providing
      strong marketing support; and-
            obtaining
      access to retail outlets and sufficient shelf
  space.




28




Many of
our competitors are larger and have greater financial resources, including our
primary competitors, the manufactures of each of the brand names “Master Kang”
and “President”. We may not be able to compete successfully with such
competitors. Competition could cause us to lose our market share, increase
expenditures or reduce pricing, each of which could have a material adverse
effect on our business and financial results.





An
inability to respond quickly and effectively to new trends would adversely
impact our competitive position.





Our
failure to maintain our technological capabilities or to respond effectively to
technological changes could adversely affect our ability to retain existing
business and secure new business.  We will need to constantly seek out
new products and develop new solutions to maintain in our
portfolio.  If we are unable to keep current with new trends, our
competitors’ technologies or products may render us noncompetitive and our
products obsolete.





Increases
in prices of main ingredients and other materials could adversely affect our
business.





The main
ingredients that we use to manufacture our products are wheat, soybeans and
eggs. We also use paper products, such as corrugated cardboard, as well as films
and plastics, to package our products. The prices of these materials have been,
and we expect them to continue to be, subject to volatility. We may not be able
to pass price increases in these materials onto our customers, which could have
an adverse effect on our financial results.





We
are subject to risks associated with joint ventures and third party
agreements.





We
conduct certain of our milling and sales operations through joint ventures
established with certain Chinese parties. Any deterioration of these strategic
relationships may have an adverse effect on our operations.  Changes
in laws and regulations, or their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion, imports and sources
of supply, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on our
business, results of operations and financial condition. Under its current
leadership, the Chinese government has been pursuing economic reform policies
that encourage private economic activity and greater economic decentralization.
There is no assurance, however, that the Chinese government will continue to
pursue these policies, or that it will not significantly alter these policies
from time to time without notice.





We may
have limited legal recourse under Chinese law if disputes arise under our
agreements with joint ventures or third parties. The Chinese government has
enacted some laws and regulations dealing with matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
However, the government’s experience in implementing, interpreting and enforcing
these laws and regulations is limited, and our ability to enforce commercial
claims or to resolve commercial disputes is unpredictable. If our new business
ventures are unsuccessful, or other adverse circumstances arise from these
transactions, we face the risk that the parties to these ventures may seek ways
to terminate the transactions, or, may hinder or prevent us from accessing
important information regarding the financial and business operations of these
acquired companies. The resolution of these matters may be subject to the
exercise of considerable discretion by agencies of the Chinese government, and
forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights we may have to specific performance,
or to seek an injunction under Chinese law, in either of these cases, are
severely limited, and without a means of recourse by virtue of the Chinese legal
system, we may be unable to prevent these situations from occurring. The
occurrence of any such events could have a material adverse effect on our
business, financial condition and results of operations.





We
have limited business insurance coverage.





The
insurance industry in China is still in an early stage of
development.  Insurance companies in China offer limited business
insurance coverage.  As a result, we do not have any business
liability insurance coverage for our operations.  Moreover, while
business disruption insurance is available, management has determined that the
risks of disruption and cost of the insurance are such that we do not require it
at this time.  Any business disruption, litigation or natural disaster
might result in substantial costs and diversion of resources.





We
may experience risks resulting from our plans for expansion.





We have
acquired several companies and businesses and plan to continue to acquire
companies in the future. Entering into an acquisition entails many risks, any of
which could harm our business, including: (a) diversion of management’s
attention from other business concerns; (b) failure to integrate the acquired
company with our existing businesses; (c) additional operating expenses not
offset by additional revenue; and (d) dilution of our stock as a result of
issuing equity securities.




29




If we are
unable to implement our acquisition strategy, we may be less successful in the
future. A key component of our growth strategy is accomplished by acquiring
additional flour, noodle and soybean factories. While there are many such
companies, we may not always be able to identify and acquire companies meeting
our acquisition criteria on terms acceptable to us. Additionally, financing to
complete significant acquisitions may not always be available on satisfactory
terms. Further, our acquisition strategy presents a number of special risks to
us that we  would not otherwise contend with absent such strategy,
including possible adverse effects on our earnings after each acquisition,
diversion of management’s attention from our core business due to the special
attention that a particular acquisition may require, failure to retain key
acquired personnel and risks associated with unanticipated events or liabilities
arising after each acquisition, some or all of which could have a material
adverse effect on our business, financial condition and results of
operations.





A
general economic downturn, a recession in China or sudden disruption in business
conditions may affect consumer purchases of discretionary items, including
instant noodles and soybean-derived products, which could adversely affect our
business.





Consumer
spending is generally affected by a number of factors, including general
economic conditions, the level of unemployment, inflation, interest rates,
energy costs, gasoline prices and consumer confidence generally, all of which
are beyond our control. Consumer purchases of discretionary items tend to
decline during recessionary periods, when disposable income is lower, and may
impact sales of our products. In addition, sudden disruptions in business
conditions as a result of a terrorist attack, retaliation and the threat of
further attacks or retaliation, war, adverse weather conditions and climate
changes or other natural disasters, pandemic situations or large scale power
outages can have a short or, sometimes, long-term impact on consumer spending. A
downturn in the economy in China, including any recession or a sudden disruption
of business conditions in those economies, could adversely affect our business,
financial condition, and results of operation.





RISKS
ASSOCIATED WITH DOING BUSINESS IN THE PEOPLE’S REPUBLIC OF CHINA.





We
are subject to the risks associated with doing business in the People’s Republic
of China.





As most
of our operations are conducted in the PRC, we are subject to special
considerations and significant risks not typically associated with companies
operating in North America and Western Europe. These include risks associated
with, among others, the political, economic and legal environments and foreign
currency exchange. Our results may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation,
among other things.





Although
the majority of productive assets in the PRC are owned by the Chinese
government, in the past several years the government has implemented economic
reform measures that emphasize decentralization and encourage private economic
activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:





-
            We
      will be able to capitalize on economic reforms;-
            The
      Chinese government will continue its pursuit of economic reform
      policies;-
            The
      economic policies, even if pursued, will be successful;-
            Economic
      policies will not be significantly altered from time to time;
      and-
            Business
      operations in China will not become subject to the risk of
      nationalization.





Economic
reform policies or nationalization could result in a total investment loss in
our Class A Common Stock.





Since
1979, the Chinese government has reformed its economic systems. Because many
reforms are unprecedented or experimental, they are expected to be refined and
improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment or inflation, or
in the disparities in per capita wealth between regions within China, could lead
to further readjustment of the reform measures. This refining and readjustment
process may negatively affect our operations.





Over the
last few years, China’s economy has registered a high growth rate. Recently,
there have been indications that rates of inflation have increased. In response,
the Chinese government has taken measures to curb this excessively expansive
economy. These measures include restrictions on the availability of domestic
credit, reducing the purchasing capability of certain of our customers, and
limited re-centralization of the approval process for purchases of some foreign
products. The Chinese government may adopt additional measures to further combat
inflation, including the establishment of freezes or restraints on certain
projects or markets. These measures may adversely affect our manufacturing
operations.





To date,
reforms to China’s economic system have not adversely impacted our operations
and are not expected to adversely impact operations in the foreseeable future;
however, there can be no assurance that the reforms to China’s economic system
will continue or that we will not be adversely affected by changes in China’s
political, economic, and social conditions and by changes in policies of the
Chinese government, such as changes in laws and regulations, measures which may
be introduced to control inflation and changes in the rate or method of
taxation.





On
November 11, 2001, China signed an agreement to become a member of the World
Trade Organization (“WTO”), the international body that sets most trade rules,
further integrating China into the global economy and significantly reducing the
barriers to international commerce. China’s membership in the WTO was effective
on December 11, 2001. China has agreed upon its accession to the WTO to reduce
tariffs and non-tariff barriers, remove investment restrictions and provide
trading and distribution rights for foreign firms. The tariff rate reductions
and other enhancements will enable us to develop better investment strategies.
In addition, the WTO’s dispute settlement mechanism provides a credible and
effective tool to enforce members’ commercial rights. Also, with China’s entry
to the WTO, it is believed that the relevant laws on foreign investment in China
will be amplified and will follow common practices.




30




The
Chinese legal system is not fully developed and has inherent uncertainties that
could limit the legal protections available to investors.





The
Chinese legal system is a system based on written statutes and their
interpretation by the Supreme People’s Court. Prior court decisions may be cited
for reference but have limited legal precedents. Since 1979, the PRC government
has been developing a comprehensive system of commercial laws, and considerable
progress has been made in introducing laws and regulations dealing with economic
matters such as foreign investment, corporate organization and governance,
commerce, taxation and trade. Two examples are the promulgation of the Contract
Law of the PRC to unify the various economic contract laws into a single code,
which went into effect on October 1, 1999, and the Securities Law of the
People’s Republic of China, which went into effect on July 1, 1999. However,
because these laws and regulations are relatively new, and because of the
limited volume of published cases and their non-binding nature, interpretation
and enforcement of these laws and regulations involve uncertainties. In
addition, as the Chinese legal system develops, changes in such laws and
regulations, their interpretation or their enforcement may have a material
adverse effect on our business operations.





Enforcement
of regulations in China may be inconsistent.





Although
the Chinese government introduced new laws and regulations to modernize its
securities and tax systems on January 1, 1994, China does not yet possess an
expansive body of business law. As a result, the enforcement, interpretation and
implementation of regulations may prove to be inconsistent and it may be
difficult to enforce contracts.





We
may experience lengthy delays in resolution of legal disputes.





As China
has not developed a dispute resolution mechanism similar to the Western court
system, dispute resolution over Chinese projects and joint ventures can be
difficult and there is no assurance that any dispute involving our business in
China can be resolved expeditiously and satisfactorily.





We
may experience an impact of the United States Foreign Corrupt Practices Act on
our business.





We are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits Unites States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in mainland China. We
have attempted to implement safeguards to prevent and discourage such practices
by our employees and agents. We cannot assure you, however, that our employees
or other agents will not engage in such conduct for which we might be held
responsible. If our employees or other agents are found to have engaged in such
practices, we could suffer severe penalties and other consequences that may have
a material adverse effect on our business, financial condition and results of
operations.





Impact
of governmental regulation on our operations.





We may be
subjected to liability for product safety that could lead to a product recall.
Our operations and properties are subject to regulation by various Chinese
government entities and agencies. As a producer of food products, our operations
are subject to production, packaging, quality, labeling and distribution
standards. Our production and distribution facilities are also subject to
various local environmental laws and workplace regulations.





We
believe that our current legal and environmental compliance programs adequately
address such concerns and that we are in compliance with applicable laws and
regulations. However, compliance with, or any violation of, current and future
laws or regulations could require material expenditures or otherwise adversely
affect our business and financial results.





We may be
liable if the consumption of any of our products cause injury, illness or death.
We may also be required to recall certain of our products that become
contaminated or are damaged. We are not aware of any material product liability
judgment against us. However, a product liability judgment or a product recall
could have a material adverse effect on our business or financial
results.





It
may be difficult to serve us with legal process or enforce judgments against our
management or us.





All of
our assets are located in China. In addition, all of our directors and officers
are non-residents of the United States, and all, or substantial portions of the
assets of such non-residents, are located outside the United States. As a
result, it may not be possible to effect service of process within the United
States upon such persons. Moreover, there is doubt as to whether the courts of
China would enforce:





-
            Judgments
      of United States courts against us, our directors or our officers based on
      the civil liability provisions of the securities laws of the United States
      or any state; or




31




-
            Original
      actions brought in China relating to liabilities against non-residents or
      us based upon the securities laws of the United States or any
      state.




The
Chinese government could change its policies toward private enterprise or even
nationalize or expropriate it, which could result in the total loss of your
investment.





Our
business is subject to significant political and economic uncertainties and may
be adversely affected by political, economic and social developments in China.
Over the past several years, the Chinese government has pursued economic reform
policies including the encouragement of private economic activity and greater
economic decentralization. The Chinese government may not continue to pursue
these policies or may significantly alter them to our detriment from time to
time with little, if any, prior notice. Changes in policies, laws and
regulations or in their interpretation or the imposition of confiscatory
taxation, restrictions on currency conversion, restrictions or prohibitions on
dividend payments to shareholders, devaluations of currency or the
nationalization or other expropriation of private enterprises could have a
material adverse effect on our business. Nationalization or expropriation could
even result in the total loss of our investment in China and in the total loss
of your investment.





If
relations between the United States and China worsen, our stock price may
decrease and we may have difficulty accessing U.S. capital markets.





At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could adversely affect the market price of our Class A
Common Stock and our ability to access U.S. capital markets.





The
Chinese economic, political and social conditions as well as government policies
could affect our business.





All of
our business, assets and operations are located in China. The economy of China
differs from the economies of most developed countries in many respects,
including:





-
            government
      involvement;


-
            level
      of development;


-
            growth
      rate;


-
            control
      of foreign exchange; and


-
            allocation
      of resources.





The
economy of China has been transitioning from a planned economy to a more
market-oriented economy. Although in recent years the Chinese government has
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of productive assets in China is still owned by the Chinese
government. In addition, the Chinese government continues to play a significant
role in regulating industry by imposing industrial policies. It also exercises
significant control over China’s economic growth through the allocation of
resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular
industries or companies.





The
economy of China has experienced significant growth in the past 20 years, but
growth has been uneven both geographically and among various sectors of the
economy. The Chinese government has implemented various measures from time to
time to control the rate of economic growth. Some of these measures benefit the
overall economy of China, but may have a negative effect on us. For example, our
operating results and financial condition may be adversely affected
by:





-
            changes
      in the rate or method of taxation;


-
            imposition
      of additional restrictions on currency conversion and remittances
      abroad;


-
            reduction
      in tariff or quota protection and other import restrictions;
      and


-
            changes
      in the usage and costs of state-controlled transportation
      services.





Fluctuations
in the value of the Chinese Renminbi relative to foreign currencies could affect
our operating results.





Substantially
all our revenues and expenses are denominated in the Chinese Renminbi. However,
we use the United States dollar for financial reporting purposes. The value of
Chinese Renminbi against the United States dollar and other currencies may
fluctuate and is affected by, among other things, changes in China’s political
and economic conditions. The Chinese government values the exchange rate of the
Chinese Renminbi against a number of currencies, rather than just exclusively to
the United States dollar. Although the Chinese government has stated its
intention to support the value of the Chinese Renminbi, we cannot assure you
that the government will not revalue it. As our operations are primarily in
China, any significant revaluation of the Chinese Renminbi may materially and
adversely affect our cash flows, revenues and financial condition. For example,
to the extent that we need to convert United States dollars into Chinese
Renminbi for our operations, appreciation of this currency against the United
States dollar could have a material adverse effect on our business, financial
condition and results of operation. Conversely, if we decide to convert our
Chinese Renminbi into United States dollars for other business purposes and the
United States dollar appreciates against this currency, the United States dollar
equivalent of the Chinese Renminbi would be reduced. To date, we have not
engaged in any hedging transactions in connection with our
operations.




32




The
discontinuation of the preferential tax treatment currently available to our
Chinese subsidiaries might adversely affect our results of
operations.





Our
Chinese operating subsidiaries are subject to the People’s Republic of China
Enterprise Income Tax Law Concerning Foreign-Invested Enterprises and Foreign
Enterprises. Under this law and its related regulations, our Chinese
subsidiaries as foreign-invested enterprises, are generally subject to
enterprise income tax at a statutory rate of 33% (30% national income tax plus
3% local income tax) through 2007, and 25% from January 1, 2008 under the
tax law described below. However, as manufacturing foreign invested enterprises,
our Chinese subsidiaries enjoyed “two-year exemption, three-year 50% reduction”
preferential tax treatment from their first profitable year. However, under the
new tax law, a new manufacturing foreign-invested enterprise established after
March 16, 2007 will not be entitled to such preferential tax treatment
anymore.





On
March 16, 2007, the National People’s Congress of the People’s Republic of
China passed the People’s Republic of China Enterprise Income Tax Law, which was
effective as of January 1, 2008. In accordance with the new law, a unified
enterprise income tax rate of 25% and unified tax deduction standards will be
applied equally to both domestic-invested enterprises and foreign-invested
enterprises. Enterprises established prior to March 16, 2007 eligible for
preferential tax treatment in accordance with the currently prevailing tax laws
and administrative regulations shall, under the regulations of the State
Council, gradually be subject to the new tax rate over a five-year transition
period starting from the effectiveness date of the new law. For foreign-invested
enterprises that currently enjoy “two-year exemption, three-year 50% reduction”
preferential tax treatment, the tax holiday are still valid.





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





None.





Item
3. Defaults Upon Senior Securities.





None.





Item
4. Submission of Matters to a Vote of Security Holders.





Our
Annual Meeting of Shareholders (“Annual Meeting”) was held on June 11, 2009.
Proposals 1, 2 and 3 were approved, Proposal 4 was not approved. The proposals
below are described in detail in the Company’s definitive proxy statement dated
May 4, 2009, for the Annual Meeting originally scheduled to be held on May 21,
2009. Abstentions and broker non-votes were counted for purposes of determining
whether a quorum was present. Shares not present at the Annual Meeting, broker
non-votes and abstentions had no effect on the results of any of the
proposals.





The
results are as follows:





Proposal
1





The
individuals listed below received the highest number of affirmative votes of the
outstanding shares of the Company’s common stock present or represented by proxy
and voting at the Annual Meeting, in each case constituting a majority of the
total outstanding shares, and were elected at the Annual Meeting to serve a
one-year term on the Board of Directors.





NAME
              
              For
              
              Authority WithheldHeng
      Jing Lu
              
              33,074,182
              
              1,457,218Li
      Xia Wang
              
              33,257,881
              
              1,273,519Ling
      Wang
              
              33,207,805
              
              1,323,595Zhi
      Yong Jiang
              
              33,338,150
              
              1,193,250De
      Lin Yang
              
              33,340,961
              
              1,190,439Qi
      Xue
              
              33,338,164
              
              1,193,236Feng
      Ju Chen
              
              33,326,101
              
              1,205,299




33




Proposal
2





Ratification
of the appointment of Crowe Horwath LLP to serve as our independent auditors for
the fiscal year ended December 25, 2009.





For
              
              Against
              
              Abstain33,799,299
              
              403,035
              
              329,065





Proposal
3





Amendment
of the existing New Dragon Asia Corporation Equity Incentive Plan to allow for
the grant of restricted stock and for grants to employs.





For
              
              Against
              
              Abstain31,787,649
              
              2,577,974
              
              165,777





Proposal
4





To amend
our Certificate of Incorporation to effect a reverse split of our Series A
Common Stock at a ratio of 1 for 10.





For
              
              Against
              
              Abstain31,953,211
              
              2,526,289
              
              51,900




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.





ExhibitNumber
            
            Description2.1
            
            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).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).




34




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 (Yantai) 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).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).




35




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
              
              Equity
      Incentive Plan (incorporated herewith by reference to Exhibit B to our
      Definitive Information Statement on Schedule 14C filed on March 14,
      2006).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).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 Pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002), filed herewith.32.2
              
              Certification
      of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of
      the Sarbanes-Oxley Act of 2002), filed herewith.





36




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:
      August 10, 2009
                By:
                /s/
      Li Xia WangName:
      Li Xia Wang (Principal Executive Officer)Title:
      Chief Executive
Officer




Dated:
      August 10, 2009
                  By:
                  /s/
      Ling WangName:
      Ling WangTitle:
      Chief Financial Officer (Principal Financial and Accounting
      Officer)




37