UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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




For the
quarterly period ended: March 25, 2010




or




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





For the
transition period from  to





Commission
File Number: 001-15046




NEW
DRAGON ASIA CORP.


(Exact
name of Registrant as specified in its charter)





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





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





(86 535)
8951 567


(Registrant's
telephone number, including area code)





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





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.





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





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





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








NEW
DRAGON ASIA CORP.





FORM
10-Q





FOR
THE QUARTERLY PERIOD ENDED MARCH 25, 2010





TABLE
OF CONTENTS




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







PART
I: FINANCIAL INFORMATION





Item
1. Financial Statements.





NEW
DRAGON ASIA CORP. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Amounts
in thousands, except share data)


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


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


3




NEW
DRAGON ASIA CORP. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF OPERATIONS





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




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





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


4




NEW
DRAGON ASIA CORP. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME





(Amounts
in thousands, unaudited)





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





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


5





NEW
DRAGON ASIA CORP. AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS





(Amounts in thousands,
unaudited)


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





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


6




NEW
DRAGON ASIA CORP. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1. ORGANIZATION AND NATURE OF OPERATIONS





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





NOTE
2. BASIS OF PRESENTATION





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





Accounting
Standards Codification (“ASC”) Topic 810, “Consolidation of Variable Interest
Entities” (formerly Standards of Financial Accounting Standards (“SFAS”) 167,
“Amendments to FASB Interpretation No. 46(R))” requires an investor with a
majority of the variable interests (primary beneficiary) in a variable interest
entity (“VIE”) to consolidate the entity.  A VIE is an entity in which the
voting equity investors do not have a controlling financial interest or the
equity investment at risk is insufficient to finance the entity’s activities
without receiving additional subordinated financial support from other parties.
VIEs are required to be consolidated by their primary beneficiaries if they do
not effectively disperse risks among the parties involved.  The primary
beneficiary of a VIE is the party that absorbs a majority of the entity’s
expected losses or receives a majority of its expected residual returns. 
The Company has completed a review of its investments in both non-marketable and
marketable equity interests as well as other arrangements to determine whether
it is the primarily beneficiary of any VIEs.  The review did not identify
any VIEs.





The
consolidated financial statements have been prepared in accordance with ASC
Topic 810 in the United States.  These Consolidated Financial Statements
for interim periods are unaudited.  In the opinion of management, the
consolidated financial statements include all adjustments, consisting only of
normal, recurring adjustments, necessary for their fair presentation.  The
results reported in these Consolidated Financial Statements are not necessarily
indicative of the results that may be reported for the entire year.  The
preparation of financial statements in conformity with ASC Topic 810 requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.  The Company regularly evaluates
estimates and assumptions related to allowances for doubtful accounts, sales
returns and allowance, and inventory reserves. Although management believes
these estimates and assumptions are adequate and reasonable under the
circumstances, actual results could differ from those estimates.





Contractual
Joint Ventures





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





Accounting
for Derivative Instruments





Derivatives
are recorded on the Company’s balance sheet at fair value. These derivatives,
including embedded derivatives in the Company’s Series A and B Redeemable
Convertible Preferred Stock are separately valued and accounted for on the
Company’s balance sheet.





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


7





The
pricing models the Company uses for determining fair values of its derivatives
are a combination of the Black-Scholes and Binomial Pricing Models. Valuations
derived from this model are subject to ongoing internal and external review. The
model uses market-sourced inputs such as interest rates and option volatilities.
Selection of these inputs involves management’s judgment and may impact net
earnings. The Company has obtained a valuation report from a valuation firm to
support its estimates as of March 25, 2010 and December 25, 2009.





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





Fair
Value of Financial Instruments





The
Company adopted ASC Topic 820, “Fair Value Measurements and Disclosure”
(formerly SFAS 157, “Fair Value Measurements”) on January 1, 2008 to
account for and record fair values of financial instruments. This ASC
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements.  The ASC establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three levels as follows:





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


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


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





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





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





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





NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS





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


8





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





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





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





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





NOTE
4. CONDENSED BALANCE SHEET INFORMATION





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





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





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





Condensed
statement of operation information for the three months ended March 25, 2010
consisted of the following (in thousands):





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


9





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





NOTE
5. EARNINGS PER SHARE





The
Company computes earnings per share (“EPS’) in accordance generally accepted
accounting principles.  Companies with complex capital structures are
required to present basic and diluted EPS.  Basic EPS is measured as the
income or loss available to common shareholders divided by the weighted average
common shares outstanding for the period.  Diluted EPS is similar to basic
EPS but presents the dilutive effect on a per share basis of potential common
shares (e.g., convertible securities, options and warrants) as if they had been
converted at the beginning of the periods presented, or issuance date, if
later.  Potential common shares that have an anti-dilutive effect (i.e.,
those that increase income per share or decrease loss per share) are excluded
from the calculation of diluted EPS. Approximately 23,192 dilutive shares on an
“as converted” basis for the Redeemable Convertible Preferred stock for the
three months ended March 25, 2010 were excluded from the calculation of diluted
earnings per share since their effect would have been anti-dilutive. 
Approximately 31,117 dilutive shares on an “as converted” basis for the
Redeemable Convertible Preferred stock for the three months ended March 25, 2009
were excluded from the calculation of diluted earnings per share since their
effect would have been anti-dilutive.





The
calculation of diluted weighted average common shares outstanding for the three
months ended March 25, 2010 and 2009 is based on the average of the closing
price of the Company’s common stock during such periods applied to warrants and
options using the treasury stock method to determine if they are dilutive. The
Redeemable Convertible Preferred stock is included on an “as converted “basis
when these shares are dilutive.





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





Three Months Ended March 25,2010
                        
                        
                        2009Weighted
                        
                        
                        
                        
                        
                        
                        
                        
                        WeightedAverage
                        
                        
                        
                        
                        
                        
                        
                        
                        AverageLoss
                        
                        
                        Shares
                        
                        
                        Per-Share
                        
                        
                        Loss
                        
                        
                        Shares
                        
                        
                        Per-ShareEarnings per share – basicLoss
      available to common stockholders
                        
                        $
                        (2,736
                        )
                        
                        
                        89,248
                        
                        
                        $
                        (0.03
                        )
                        
                        $
                        (2,814
                        )
                        
                        
                        63,931
                        
                        
                        $
                        (0.04
                        )Effect
      of dilutive securitiesRedeemable
      convertible preferred stock
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        
                        
                        
                        
                        —
                        
                        
                        
                        —Options
      and warrants
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        
                        
                        
                        
                        —
                        
                        
                        
                        —Earnings
      per share – diluted
                        
                        $
                        (2,736
                        )
                        
                        
                        89,248
                        
                        
                        $
                        (0.03
                        )
                        
                        $
                        (2,814
                        )
                        
                        
                        63,931
                        
                        
                        $
                        (0.04
                        )





NOTE
6. ACCOUNTS RECEIVABLE





Accounts
receivable consisted of the following (in thousands):




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





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





March 25, 2010
                  
                  
                  December 25, 2009(Unaudited)Balance
      at the beginning of the period
                  
                  $
                  2,725
                  
                  
                  $
                  1,184Add:
      provision during the period
                  
                  
                  1,460
                  
                  
                  
                  1,551Less:
      write-offs during the period
                  
                  
                  (46
                  )
                  
                  
                  (10
                  )Balance
      at the end of the period
                  
                  $
                  4,139
                  
                  
                  $
                  2,725


10


NOTE
7. DEPOSITS AND PREPAYMENTS





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




March 25, 2010
                  
                  
                  December 25, 2009(Unaudited)Deposits
      for raw materials
                  
                  $
                  4,712
                  
                  
                  $
                  4,794Prepayments
      and advances
                  
                  
                  844
                  
                  
                  
                  838$
                  5,556
                  
                  
                  $
                  5,632





NOTE
8. INVENTORIES





Inventories
consisted of the following (in thousands):




March 25, 2010
                    
                    
                    December 25, 2009(Unaudited)Raw
      materials (including packing materials)
                    
                    $
                    12,027
                    
                    
                    $
                    13,488Finished
      goods
                    
                    
                    1,154
                    
                    
                    
                    1,49013,181
                    
                    
                    
                    14,978Less:
      Inventory reserve
                    
                    
                    (299
                    )
                    
                    
                    (512
                    )$
                    12,882
                    
                    
                    $
                    14,466





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





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




NOTE
9. DUE FROM RELATED COMPANIES





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




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





*Subsidiaries of Shandong
Longfeng Group Company.


11


NOTE
10. PROPERTY, MACHINERY AND EQUIPMENT





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




Useful Life
                  
                  
                  March 25, 2010
                  
                  
                  December 25, 2009(In years)
                  
                  
                  (Unaudited)Buildings
                  
                  
                  40
                  
                  
                  $
                  13,383
                  
                  
                  $
                  13,437Machinery
      and equipment
                  
                  
                  5 -
      12
                  
                  
                  
                  22,933
                  
                  
                  
                  23,680Construction
      in process
                  
                  
                  
                  
                  
                  
                  2,397
                  
                  
                  
                  2,39738,713
                  
                  
                  
                  39,514Less:
      Accumulated depreciation and amortization
                  
                  
                  
                  
                  
                  
                  (9,153
                  )
                  
                  
                  (9,251
                  )$
                  29,560
                  
                  
                  $
                  30,263





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





NOTE
11. LAND USE RIGHTS





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




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





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





NOTE
12. OTHER PAYABLES AND ACCRUALS





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




March 25, 2010
                  
                  
                  December 25, 2009(Unaudited)Deposits
      from customers
                  
                  $
                  673
                  
                  
                  $
                  465Accruals
      for payroll, bonus and benefits
                  
                  
                  278
                  
                  
                  
                  413Utilities
      and accrued expenses
                  
                  
                  1,167
                  
                  
                  
                  1,184$
                  2,118
                  
                  
                  $
                  2,062





NOTE
13. REDEEMABLE CONVERTIBLE PREFERRED STOCK





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





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


12





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





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





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





Redeemable Convertible Preferred Stock
                              
                              Preferred shares
                              
                              
                              Balance(in thousand)2009Series
      A
                              
                              
                              399
                              
                              
                              $
                              399Series
      B
                              
                              
                              3,095
                              
                              
                              
                              3,095Less
      unamortized discount
                              
                              
                              -
                              
                              
                              
                              (486
                              )Balance
      December 25, 2009
                              
                              
                              3,494
                              
                              
                              $
                              3,0082010Series
      A
                              
                              
                              266
                              
                              
                              $
                              266Series
      B
                              
                              
                              2,476
                              
                              
                              
                              2,476Less
      unamortized discount
                              
                              
                              
                              
                              
                              
                              (273
                              )Balance
      March 25, 2010
                              
                              
                              2,742
                              
                              
                              $
                              2,469


13





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





The
pricing model we use for determining fair values of our derivatives is a
combination of the Black Scholes and Binomial Pricing Models. Valuations derived
from this model are subject to ongoing internal and external review. The model
uses market-sourced inputs such as interest rates and option volatilities.
Selection of these inputs involves management’s judgment and may impact net
income. The Company has obtained a valuation report from a third-party valuation
firm to support its estimates. The principal assumptions used to value these
complex freestanding financial instruments were as follows:





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





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





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





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





NOTE
14. COMMON STOCK





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





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





NOTE
15. WARRANTS





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





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


14





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





Shares of Class A Common Stock
                    Issuable Under Warrants
                  
                  
                  Exercise
                    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 March 25, 2010
                  
                  
                  6,482,895





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





NOTE
16. STOCK-BASED COMPENSATION





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





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





NOTE
17. RELATED PARTY TRANSACTIONS





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





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





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





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





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





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





NOTE
18. TAXATION





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





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


15





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





NOTE
19. COMPREHENSIVE INCOME





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





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





NOTE
20. SEGMENT INFORMATION





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





For the three months ended
                    March 25,2010
                  
                  
                  2009(US$'000)
                  
                  
                  (US$'000)Net revenueInstant
      noodles
                  
                  
                  1,012
                  
                  
                  
                  1,064Flour
                  
                  
                  3,329
                  
                  
                  
                  1,999Soybean
                  
                  
                  1,705
                  
                  
                  
                  9006,046
                  
                  
                  
                  3,963Loss
      from operationsInstant
      noodles
                  
                  
                  (577
                  )
                  
                  
                  (1,573
                  )Flour
                  
                  
                  (1,610
                  )
                  
                  
                  (958
                  )Soybean
                  
                  
                  (59
                  )
                  
                  
                  (409
                  )(2,246
                  )
                  
                  
                  (2,940
                  )Depreciation
      and amortizationInstant
      noodles
                  
                  
                  188
                  
                  
                  
                  198Flour
                  
                  
                  90
                  
                  
                  
                  149Soybean
                  
                  
                  134
                  
                  
                  
                  87412
                  
                  
                  
                  434





March 25,
                  
                  
                  December 25,2010
                  
                  
                  2009(US$'000)
                  
                  
                  (US$'000)Identifiable
      long-term assetsInstant
      noodles
                  
                  
                  17,046
                  
                  
                  
                  17,510Flour
                  
                  
                  8,081
                  
                  
                  
                  8,268Soybean
                  
                  
                  9,675
                  
                  
                  
                  9,76934,802
                  
                  
                  
                  35,547


16




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





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





Critical
Accounting Policies





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





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





Contractual
Joint Ventures





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





Revenue
Recognition





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





Accounting
for Derivative Instruments





Derivatives
are recorded on the Company’s balance sheet at fair value. These derivatives,
including embedded derivatives in the Company’s Series A and B Redeemable
Convertible Preferred Stock are separately valued and accounted for on the
Company’s balance sheet.





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


17


The
pricing models the Company uses for determining fair values of its derivatives
are a combination of the Black-Scholes and Binomial Pricing Models. Valuations
derived from this model are subject to ongoing internal and external review. The
model uses market-sourced inputs such as interest rates and option volatilities.
Selection of these inputs involves management’s judgment and may impact net
earnings. The Company has obtained a valuation report from a valuation firm to
support its estimates as of March 25, 2010 and December 25, 2009.





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





Share-Based
Payment





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





Allowance
for Doubtful Accounts





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





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





Inventories
Valuation





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





Recent
Accounting Pronouncements





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





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


18


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





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





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





Overview





Headquartered
in Shandong Province, PRC, we are engaged in the milling, sale, and distribution
of flour and related products, including instant noodles and soybean-derived
products, to retail and wholesale customers throughout China. We market our
products with our brand name called “LONG FENG” through a countrywide network of
distributors. We have eight manufacturing plants in the PRC with an aggregate
annual production capacity of approximately 110,000 tons of flour and
approximately 1.1 billion packets of instant noodles and 4,500 tons of soybean
powder.





Operations





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





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





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





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





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





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





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


19


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





Strategy





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





-
            Acquire
      additional locations to increase our production
  capacity


-
            Build
      strategic alliances with multinational food groups to enhance product
      range and capitalize on our China distribution
  network





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





Competition





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





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





Employees





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





Currency
Conversion and Exchange





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





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





Results
of Operations





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





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


20


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





Net
Revenue





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





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





Cost
of goods sold





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





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





Selling
and Distribution Expenses





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





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





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





General
and Administrative Expenses





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





Gain
on Fair Value Adjustments to Embedded Derivatives





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





Net
Loss Attributable to Controlling Interests





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


21





Financial
Condition, Liquidity and Capital Resources





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





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





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





Off-Balance
Sheet Arrangements





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





Contractual
Obligations and Commercial Commitments





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





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





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




Series A Preferred Stock
                
                Series B Preferred 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.


22




Registration
                
                The
      Company shall file to register the underlying Class A common shares within
      30 days of the closing date and make its best efforts to have the
      Registration declared effective at the earliest date.  In the
      event such Registration is not continuously effective during the period
      such shares are subject to transfer restrictions under the U.S. federal
      securities laws, then (subject to certain exceptions) the holders are
      entitled to receive liquidated damages equal to 2.0% of the purchase price
      of the Preferred Stock per month.
                
                The
      Company shall file to register the underlying Class A common shares with
      30 days of the closing date and make its best efforts to have the
      Registration declared effective at the earliest date.  In the
      event such Registration is not continuously effective during the period
      such shares are subject to transfer restrictions under the U.S. federal
      securities laws, then (subject to certain exceptions) the holders are
      entitled to receive liquidated damages equal to 2.0% of the purchase price
      of the Preferred Stock per month.Anti-dilution
                
                In
      the event the Company issues, at any time while Preferred Stock are still
      outstanding, Common Stock or any type of securities giving rights to
      Common Stock at a price below the Issue Price, the Company agrees to
      extend full-ratchet anti-dilution protection to the
    investors.
                
                In
      the event the Company issues, at any time while Preferred Stock are still
      outstanding, Common Stock or any type of securities giving rights to
      Common Stock at a price below the Issue Price, the Company agrees to
      extend full-ratchet anti-dilution protection to the
    investors.





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





Payment
      Obligations By Period2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      2013
                      
                      
                      2014
                      
                      
                      Thereafter
                      
                      
                      Total(In
      thousands)Redeemable
      convertible preferred stock
                      
                      $
                      2,742
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      2,742Pre-determined
      annual fee charged by joint venture partners
                      
                      
                      97
                      
                      
                      
                      129
                      
                      
                      
                      129
                      
                      
                      
                      129
                      
                      
                      
                      129
                      
                      
                      
                      4,399
                      
                      
                      
                      5,012Total
                      
                      $
                      2,839
                      
                      
                      $
                      129
                      
                      
                      $
                      129
                      
                      
                      $
                      129
                      
                      
                      $
                      129
                      
                      
                      $
                      4,399
                      
                      
                      $
                      7,754





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




(In
      thousands)Aggregated
      balance as of the issue date
                    
                    $
                    15,500Partial
      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
                    
                    
                    (3,007
                    )Partial
      redemption of Series A and B Preferred Stock in 2010
                    
                    
                    (752
                    )$
                    2,742


23


Item
3. Quantitative and Qualitative Disclosures about Market Risk.





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





Item
4T. Controls and Procedures.





Disclosure
Controls and Procedures





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





Changes
in internal controls over financial reporting





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


24





PART
II: OTHER INFORMATION




Item
1. Legal Proceedings.





None.





Item
1A. Risk Factors.





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





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





None.





Item
3. Defaults Upon Senior Securities.





None.





Item
4. (Removed and Reserved).






Item
5. Other Information.





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





Item
6. Exhibits.





Exhibit
                    Number
                
                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).


25




4.4
              
              Common
      Stock Purchase Warrants for the October 3, 2003 Private Placement
      (incorporated herewith by reference to Exhibit 4.4 to our Registration
      Statement on Form S-3 filed on October 3, 2003).4.5
              
              Form
      of Warrant issued to Midsummer Investment Ltd. and Islandia, L.P.
      (incorporated herewith by reference to Exhibit 4.1 to our Form 8-K filed
      on July 12, 2005).4.6
              
              Form
      of Warrant issued to Alliance Financial, LLC, Renaissance Advisors BVI,
      John F. Steinmetz, TN Capital Equities, Ltd. and Kathleen McDonnell
      (incorporated herewith by reference to Exhibit 4.2 to our Registration
      Statement on Form S-3 filed on August 11, 2005).4.7
              
              Securities
      Purchase Agreement, dated July 11, 2005, relating to the sale of the
      Series A 7% Convertible Preferred Stock (incorporated herewith by
      reference to Exhibit 10.1 to our Form 8-K filed on July 12,
      2005).4.8
              
              Registration
      Rights Agreement, dated July 11, 2005, by and among New Dragon Asia Corp.
      and the investors named therein (incorporated herewith by reference to
      Exhibit 10.2 to our Form 8-K filed on July 12, 2005).4.9
              
              Form
      of Warrant issued to Midsummer Investment Ltd. and Islandia, L.P.
      (incorporated herewith by reference to Exhibit 4.1 to our Form 8-K filed
      on December 23, 2005).4.10
              
              Form
      of Warrant issued to Alliance Financial, LLC, Renaissance Advisors, Inc.,
      John F. Steinmetz, TN Capital Equities, Ltd. and Kathleen McDonnell
      (incorporated herewith by reference to Exhibit 4.2 to our Registration
      Statement on Form S-3 filed on January 20, 2006).4.11
              
              Securities
      Purchase Agreement, dated December 22, 2005, relating to the sale of the
      Series B 7% Convertible Preferred Stock (incorporated herewith by
      reference to Exhibit 10.1 to our Form 8-K filed on December 23,
      2005).4.12
              
              Registration
      Rights Agreement, dated December 22, 2005, by and among New Dragon Asia
      Corp. and the investors named therein (incorporated herewith by reference
      to Exhibit 10.2 to our Form 8-K filed on December 23,
    2005).4.13
              
              Registration
      Rights Agreement, dated December 22, 2005, by and among New Dragon Asia
      Corp. and New Dragon Food Ltd. (incorporated herewith by reference to
      Exhibit 4.5 to our Registration Statement on Form S-3 filed on January 20,
      2006).10.1
              
              Sino-Foreign
      Joint Venture Contract for the New Dragon Asia Flour (Yantai) Company
      Limited, dated June 1, 1999 (incorporated herewith by reference to Exhibit
      10.1 to our Registration Statement on Form S-3 filed on October 3,
      2003).10.2
              
              Subcontracting
      Agreement, for the New Dragon Asia Flour (Yantai) Company Limited, dated
      June 26, 1999  (incorporated herewith by reference to Exhibit
      10.2 to our Registration Statement on Form S-3 filed on October 3,
      2003).10.3
              
              Sino-Foreign
      Joint Venture Contract for the New Dragon Asia Food (Yanti) Company
      Limited, dated November 28, 1998  (incorporated herewith by
      reference to Exhibit 10.3 to our Registration Statement on Form S-3 filed
      on October 3, 2003).10.4
              
              Subcontracting
      Agreement, for the New Dragon Asia Food (Yantai) Company Limited, dated
      December 26, 1998  (incorporated herewith by reference to
      Exhibit 10.4 to our Registration Statement on Form S-3 filed on October 3,
      2003).10.5
              
              Sino-Foreign
      Joint Venture Contract for the New Dragon Asia Food (Dalian) Company
      Limited, dated November 28, 1998 (incorporated herewith by reference to
      Exhibit 10.5 to our Registration Statement on Form S-3 filed on October 3,
      2003).10.6
              
              Subcontracting
      Agreement, for the New Dragon Asia Food (Dalian) Company Limited, dated
      December 26, 1998 (incorporated herewith by reference to Exhibit 10.6 to
      our Registration Statement on Form S-3 filed on October 3,
      2003).


26




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


27





SIGNATURES





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





NEW
      DRAGON ASIA CORP.Dated:
      May 14, 2010
                    By:
                    /s/
      Li Xia WangName:
      Li Xia Wang (Principal Executive Officer)Title:
      Chief Executive OfficerDated:
      May 14, 2010
                    By:
                    /s/
      Ling WangName:
      Ling WangTitle:
      Chief Financial Officer (Principal Financial and
  AccountingOfficer)


28