UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended: June 25, 2008
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)
|
Suite
2808, International Chamber of Commerce Tower
Fuhua
Three Road, Shenzhen, PRC
|
518048
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(86
755)
8831 2115
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements
for
the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. (See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act):
Large Accelerated Filer
o
|
Accelerated Filer
o
|
Non-Accelerated Filer
x
|
Smaller Reporting Company
o
|
The
number of shares of Class A Common Stock outstanding as of July 30, 2008 was
58,758,275.
NEW
DRAGON ASIA CORP.
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED June 25, 2008
TABLE
OF CONTENTS
|
|
|
Page
|
PART
I:
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
ITEM
1.
|
Consolidated
Financial Statements:
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of
June
25, 200
8
(unaudited) and December 25, 2007
|
|
3
|
|
|
|
|
|
Consolidated
Statements of Operations (unaudited) for the three months and six
months
ended June 25, 2008 and 2007
|
|
4
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income (unaudited)
for the six months ended June 25, 2008 and the year ended December
25,
2007
|
|
5
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (unaudited) for the six months ended June
25,
2008 and 2007
|
|
6
|
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
|
7
|
|
|
|
|
ITEM
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
17
|
|
|
|
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
25
|
|
|
|
|
ITEM
4.
|
Controls
and Procedures
|
|
25
|
|
|
|
|
PART
II:
|
OTHER
INFORMATION
|
|
|
|
|
|
|
ITEM
1.
|
Legal
Proceedings
|
|
26
|
|
|
|
|
ITEM
1A.
|
Risk
Factors
|
|
26
|
|
|
|
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
32
|
|
|
|
|
ITEM
3.
|
Defaults
Upon Senior Securities
|
|
32
|
|
|
|
|
ITEM
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
32
|
|
|
|
|
ITEM
5.
|
Other
Information
|
|
32
|
|
|
|
|
ITEM
6.
|
Exhibits
|
|
32
|
|
|
|
|
SIGNATURES
|
|
35
|
|
|
|
|
EXHIBITS
|
|
|
PART
I: FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements.
NEW
DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Amounts
in thousands, except share data)
|
|
June
25,
2008
|
|
December
25,
2007
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,503
|
|
$
|
3,646
|
|
Accounts
receivable, net
|
|
|
9,605
|
|
|
9,223
|
|
Deposits
and prepayments, net
|
|
|
12,076
|
|
|
12,183
|
|
Inventories,
net
|
|
|
25,205
|
|
|
22,050
|
|
Due
from related companies
|
|
|
976
|
|
|
913
|
|
Total
current assets
|
|
|
57,365
|
|
|
48,015
|
|
|
|
|
|
|
|
|
|
Property,
machinery and equipment, net
|
|
|
27,615
|
|
|
25,986
|
|
Land
use rights, net
|
|
|
7,735
|
|
|
7,294
|
|
Goodwill
|
|
|
125
|
|
|
125
|
|
Total
assets
|
|
$
|
92,840
|
|
$
|
81,420
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,649
|
|
$
|
2,982
|
|
Other
payables and accruals
|
|
|
2,830
|
|
|
2,765
|
|
Taxes
payable
|
|
|
4,308
|
|
|
3,530
|
|
Embedded
derivatives, at fair value
|
|
|
958
|
|
|
2,493
|
|
Due
to related companies
|
|
|
--
|
|
|
36
|
|
Total
current liabilities
|
|
|
12,745
|
|
|
11,806
|
|
|
|
|
|
|
|
|
|
Due
to New Dragon Asia Food Limited
|
|
|
2,399
|
|
|
1,405
|
|
Due
to joint venture partners
|
|
|
635
|
|
|
272
|
|
Total
liabilities
|
|
|
15,779
|
|
|
13,483
|
|
Minority
interests
|
|
|
314
|
|
|
294
|
|
Series
A and B Redeemable Convertible Preferred Stock, $0.0001 par
value:
Authorized
shares - 5,000,000
Issued
and outstanding -8,005 shares and 9,434 shares at June 25, 2008 and
December 25, 2007
|
|
|
5,105
|
|
|
5,321
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Class
A Common Stock, $0.0001 par value:
Authorized
shares - 102,000,000
Issued
and outstanding - 57,230,174 at June 25, 2008 and 55,195,385 at December
25, 2007
|
|
|
6
|
|
|
5
|
|
Class
B Common Stock, $0.0001 par value:
Authorized
shares - 2,000,000
Issued
and outstanding - none
|
|
|
--
|
|
|
--
|
|
Additional
paid-in capital
|
|
|
31,207
|
|
|
29,982
|
|
Retained
earnings
|
|
|
27,353
|
|
|
24,568
|
|
Accumulated
other comprehensive income
|
|
|
13,076
|
|
|
7,767
|
|
Total
stockholders’ equity
|
|
|
71,642
|
|
|
62,322
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
92,840
|
|
$
|
81,420
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Amounts
in thousands, except per share data; unaudited)
|
|
|
Three
months ended
June
25,
|
|
|
Six
months ended
June
25,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
14,515
|
|
$
|
13,035
|
|
$
|
26,214
|
|
$
|
24,195
|
|
Cost
of goods sold
|
|
|
(11,970
|
)
|
|
(10,479
|
)
|
|
(21,527
|
)
|
|
(19,717
|
)
|
Gross
profit
|
|
|
2,545
|
|
|
2,556
|
|
|
4,687
|
|
|
4,478
|
|
Selling
and distribution expenses
|
|
|
(369
|
)
|
|
(284
|
)
|
|
(590
|
)
|
|
(523
|
)
|
General
and administrative expenses
|
|
|
(741
|
)
|
|
(757
|
)
|
|
(1,246
|
)
|
|
(1,294
|
)
|
Income
from operations
|
|
|
1,435
|
|
|
1,515
|
|
|
2,851
|
|
|
2,661
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
--
|
|
|
9
|
|
|
2
|
|
|
15
|
|
Other
income (expense)
|
|
|
27
|
|
|
120
|
|
|
215
|
|
|
128
|
|
Gain
on fair value adjustments to
e
mbedded
derivatives
|
|
|
738
|
|
|
3,101
|
|
|
1,428
|
|
|
5,638
|
|
VAT
refund
|
|
|
28
|
|
|
488
|
|
|
28
|
|
|
540
|
|
Income
(loss) before income taxes and minority interests
|
|
|
2,228
|
|
|
5,233
|
|
|
4,524
|
|
|
8,982
|
|
Provision
for income taxes
|
|
|
(472
|
)
|
|
(420
|
)
|
|
(786
|
)
|
|
(720
|
)
|
Income
(loss) before minority interests
|
|
|
1,756
|
|
|
4,813
|
|
|
3,738
|
|
|
8,262
|
|
Minority
interests
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Net
income (loss)
|
|
$
|
1,756
|
|
$
|
4,813
|
|
$
|
3,738
|
|
$
|
8,262
|
|
Accretion
of Redeemable Preferred Stock
|
|
|
(301
|
)
|
|
(378
|
)
|
|
(660
|
)
|
|
(756
|
)
|
Preferred
Stock Dividends
|
|
|
(140
|
)
|
|
(178
|
)
|
|
(293
|
)
|
|
(356
|
)
|
Income
(loss) available to common stockholders
|
|
$
|
1,315
|
|
$
|
4,257
|
|
$
|
2,785
|
|
$
|
7,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
$
|
0.08
|
|
$
|
0.05
|
|
$
|
0.13
|
|
Diluted
|
|
$
|
0.02
|
|
$
|
0.08
|
|
$
|
0.05
|
|
$
|
0.13
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
57,165
|
|
|
53,810
|
|
|
56,615
|
|
|
53,750
|
|
Diluted
|
|
|
57,165
|
|
|
62,266
|
|
|
56,615
|
|
|
54,838
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME
(Amounts
in thousands, unaudited)
|
|
|
Class
A
Common
Stock
|
|
|
Additional
Paid-in Capital
|
|
|
Receivable
from Stockholder
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Income
|
|
|
Total
Stockholders' Equity
|
|
|
Comprehensive
Income
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 25, 2006
|
|
|
53,614
|
|
$
|
5
|
|
$
|
28,411
|
|
$
|
--
|
|
$
|
12,668
|
|
$
|
2,928
|
|
$
|
44,012
|
|
$
|
(474
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,115
|
|
|
|
|
|
14,115
|
|
|
14,115
|
|
Accretion
of redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,512
|
)
|
|
|
|
|
(1,512
|
)
|
|
|
|
Preferred
stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(703
|
)
|
|
|
|
|
(703
|
)
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,839
|
|
|
4,839
|
|
|
4,839
|
|
Class
A Common Stocks issued to Berry Shino for dispute
resolution
|
|
|
275
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
Conversion
of preferred stocks and related dividend payments in Class A Common
Stock
|
|
|
1,306
|
|
|
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
1,302
|
|
|
|
|
Balance
at December 25, 2007
|
|
|
55,195
|
|
$
|
5
|
|
$
|
29,982
|
|
$
|
--
|
|
$
|
24,568
|
|
$
|
7,767
|
|
$
|
62,322
|
|
$
|
18,954
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,738
|
|
|
|
|
|
3,738
|
|
|
3,738
|
|
Accretion
of Redeemable Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(660
|
)
|
|
|
|
|
(660
|
)
|
|
|
|
Preferred
Stock Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(293
|
)
|
|
|
|
|
(293
|
)
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,309
|
|
|
5,309
|
|
|
5,309
|
|
Conversion
of Preferred Stock dividend in shares of Class A Common
Stock
|
|
|
2,035
|
|
|
1
|
|
|
1,225
|
|
|
|
|
|
|
|
|
|
|
|
1,226
|
|
|
|
|
Balance
at June 25, 2008
|
|
|
57,230
|
|
$
|
6
|
|
$
|
31,207
|
|
$
|
--
|
|
$
|
27,353
|
|
$
|
13,076
|
|
$
|
71,642
|
|
$
|
9,047
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts
in thousands, unaudited)
|
|
Six
months ended
June
25,
|
|
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
3,738
|
|
$
|
8,262
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
|
29
|
|
|
284
|
|
Provision
for inventory reserve
|
|
|
4
|
|
|
4
|
|
Depreciation
and amortization of property, machinery, equipment and land use
rights
|
|
|
1,020
|
|
|
656
|
|
(Gain)
loss on fair value adjustments to embedded derivatives
|
|
|
(1,428
|
)
|
|
(5,638
|
)
|
Changes
in operating assets and liabilities:
(Increase)
decrease in:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(411
|
)
|
|
(82
|
)
|
Deposits
and prepayments
|
|
|
107
|
|
|
(3,382
|
)
|
Inventories
|
|
|
(3,159
|
)
|
|
(5,939
|
)
|
Due
from related companies
|
|
|
(63
|
)
|
|
(23
|
)
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,667
|
|
|
1,382
|
|
Other
payables and accruals
|
|
|
98
|
|
|
(488
|
)
|
Taxes
payable
|
|
|
778
|
|
|
(1,778
|
)
|
Due
to related companies
|
|
|
(36
|
)
|
|
--
|
|
Net
cash provided by (used in) operating activities
|
|
|
2,344
|
|
|
(6,742
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property, machinery and equipment
|
|
|
(196
|
)
|
|
(792
|
)
|
Proceeds
from sale of property, machinery and equipment
|
|
|
3
|
|
|
--
|
|
Net
cash used in investing activities
|
|
|
(193
|
)
|
|
(792
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
--
|
|
|
(49
|
)
|
Proceed
from (repayments to) parent company
|
|
|
994
|
|
|
321
|
|
Proceeds
from (repayment to) joint venture partners
|
|
|
363
|
|
|
10
|
|
Payment
for preferred stock redemption
|
|
|
(84
|
)
|
|
--
|
|
Net
cash provided by financing activities
|
|
|
1,273
|
|
|
282
|
|
Foreign
currency translation adjustment
|
|
|
2,433
|
|
|
669
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
5,857
|
|
|
(6,583
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
3,646
|
|
|
10,276
|
|
Cash
and cash equivalents at end of period
|
|
$
|
9,503
|
|
$
|
3,693
|
|
|
|
|
|
|
|
|
|
Non-Cash
Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock into common stock
|
|
$
|
1,504
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
Dividend
payments on preferred stock in the form of common stock
|
|
$
|
326
|
|
$
|
322
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
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”), 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 corporate office in Shenzhen and 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 its majority owned subsidiaries required to be consolidated
in
accordance with accounting principles generally accepted in the United States
of
America (“U.S. GAAP”). Intercompany balances and transactions have been
eliminated in consolidation.
Investments
in companies in which the Company has significant influence, or ownership
between 20% and 50% of the investee, are accounted for using the equity method.
Under the equity method, the investment is originally recorded at cost and
adjusted to recognize the Company’s share of net earnings or losses of the
investee. The adjustment is limited to the extent of the Company’s investment in
and advances to the investee and financial guarantees made on behalf of the
investee. The Company’s investments of less than 20% in other entities are
accounted for using the cost method.
These
consolidated financial statements for interim periods are unaudited. In the
opinion of management, the consolidated financial statements include all
adjustments, consisting of only normal, recurring adjustments, necessary for
their fair presentation. Interim results are not necessarily indicative of
results to be expected for a full year. The accompanying consolidated financial
statements have been prepared in accordance with the rules and regulations
of
the Securities and Exchange Commission and do not include all information and
footnotes necessary for a complete presentation of financial statements in
conformity with accounting principles generally accepted in the United States.
These statements should be read in conjunction with the Company’s Annual Report
on Form 10-K for the fiscal year ended December 25, 2007.
FIN
46,
“Consolidation of Variable Interest Entities” requires an investor with a
majority of the variable interests (primary beneficiary) in a variable interest
entity (“VIE”) to consolidate the entity. A VIE is an entity in which the voting
equity investors do not have a controlling financial interest or the equity
investment at risk is insufficient to finance the entity’s activities without
receiving additional subordinated financial support from the 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 primary
beneficiary of any VIEs. The review did not identify any VIEs.
The
consolidated financial statements were prepared in accordance with U.S. GAAP.
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, the disclosure of contingent assets and liabilities
as
of the date of the financial statements and the reported amounts of revenues
and
expenses during the reporting period. The Company regularly evaluates estimates
and assumptions related to allowances for doubtful accounts, sales returns
and
allowances, and inventory reserves. Although management believes these estimates
and assumptions are adequate and reasonable under the circumstances, actual
results could differ from those estimates. U.S. GAAP differs from that used
in
the statutory financial statements of the major operating subsidiaries of the
Company, which were prepared in accordance with the relevant accounting
principles and financial reporting regulations in the PRC. Certain accounting
principles stipulated under U.S. GAAP are not applicable in the
PRC.
Accounting
for Derivative Instruments
Statement
of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, requires all derivatives to be
recorded on the Company’s balance sheet at fair value. These derivatives,
including embedded derivatives in the Company’s Series A and B Redeemable
Convertible Preferred Stock, are separately valued and accounted for on the
Company’s balance sheet.
The
pricing models the Company uses for determining fair values of its derivatives
are a combination of the Black Scholes and Binomial Pricing Models. Valuations
derived from this model are subject to ongoing internal and external review.
The
model uses market-sourced inputs such as interest rates and option volatilities.
Selection of these inputs involves management's judgment and may impact net
income (loss). The Company has obtained a valuation report from a valuation
firm
to support its estimates.
In
September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to and Potentially
Settled in, a Company's Own Stock," ("EITF 00-19") which requires freestanding
contracts that are settled in a company's own stock, including common stock
warrants, to be designated as an equity instrument, asset or a liability. Under
the provisions of EITF 00-19, a contract designated as an asset or a liability
must be carried at fair value on a company's balance sheet, with any changes
in
fair value recorded in the company's results of operations. A contract
designated as an equity instrument must be included within equity, and no fair
value adjustments are required.
The
Company has determined that the conversion features of its redeemable
convertible preferred stock and warrants to purchase common stock are
derivatives that the Company is required to account for as if they were
free-standing instruments under GAAP. The Company has also determined that
it is
required to designate these derivatives as liabilities in its financial
statements. As a result, the Company reports the value of these embedded
derivatives as current liabilities on its balance sheet and reports changes
in
the value of these derivatives as non-operating gains or losses on its statement
of operations. The value of the derivatives is required to be recalculated
(and
resulting non-operating gains or losses reflected in the statement of operations
and resulting adjustments to the associated liability amounts reflected on
the
balance sheet) on a quarterly basis, and is based on the market value of the
Company’s common stock. Due to the nature of the required calculations and the
large number of shares of the Company’s common stock involved in such
calculations, changes in the Company’s common stock price may result in
significant changes in the value of the derivatives and resulting gains and
losses on the Company’s statement of operations.
The
consolidated financial statements also reflect additional non-operating gains
and losses related to the classification of and accounting for: (1) the
conversion features of the Series A and B Preferred Stock and associated
warrants, (2) the amortization associated with the discount recorded with
respect to the Series A and B Preferred Stock as a preferred stock dividend,
and
(3) the conversion features associated with the preferred stock issued by
the Company and associated warrants.
Adoption
of New Accounting Pronouncements
Fair
Value of Financial Instruments
The
Company partially adopted SFAS 157 on
December
26, 2007, delaying application for non-financial assets and non-financial
liabilities as permitted. This statement establishes a framework for measuring
fair value, and expands disclosures about fair value measurements.
SFAS
157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels as follows:
-
|
Level
1 — quoted prices (unadjusted) in active markets for identical asset
or liabilities that the Company has the ability to access as of the
measurement date. Financial assets and liabilities utilizing Level
1
inputs include active exchange-traded securities and exchange-based
derivatives.
|
|
|
-
|
Level
2 — inputs other than quoted prices included within Level 1 that are
directly observable for the asset or liability or indirectly observable
through corroboration with observable market data. Financial assets
and
liabilities utilizing Level 2 inputs include fixed income securities,
non-exchange-based derivatives, mutual
funds,
and fair-value hedges.
|
|
|
-
|
Level
3 — unobservable inputs for the asset or liability only used when there
is
little, if any, market activity for the asset or liability at the
measurement date. Financial assets and liabilities utilizing Level
3
inputs include infrequently-traded, non-exchange-based derivatives
and
commingled investment funds, and are measured using present value
pricing
models.
|
In
accordance with SFAS 157, the Company determines the level in the fair value
hierarchy within which each fair value measurement in its entirety falls, based
on the lowest level input that is significant to the fair value measurement
in
its entirety. The following table presents the embedded derivative, the
Company’s only financial 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 as of June 25, 2008:
(In
thousands)
|
|
Fair
Value
|
|
As
of June 25, 2008
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
derivative
liabilities
|
|
$
|
--
|
|
$
|
958
|
|
$
|
--
|
|
$
|
958
|
|
The
following table reconciles, for the period ended June 25, 2008, the
beginning and ending balances for financial instruments that are recognized
at
fair value in the consolidated financial statements:
Balance
of
Embedded
derivative
at
December 25, 2007
|
|
$
|
2,493
|
|
Gain
on fair value adjustments to embedded
derivatives
|
|
|
(1,428
|
)
|
Conversion
of shares effect on
Embedded
derivative
|
|
|
(107
|
)
|
Balance
at June 25, 2008
|
|
$
|
958
|
|
The
valuation of the derivatives are calculated using a complex binomial pricing
model that is based on changes in the volatility of our shares and our stock
price and the time to conversion of the related financial instruments. See
note
13 for more information on the valuation methods used.
Fair
Value Option
On
February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — Including an Amendment of
SFAS No. 115” (“SFAS 159”). The fair value option established by SFAS 159
permits all entities to choose to measure eligible items at fair value at
specified election dates. A business entity will report unrealized gains and
losses on items for which the fair value option has been elected in earnings
(or
another performance indicator if the business entity does not report earnings)
at each subsequent reporting date. The fair value option: (a) may be applied
instrument by instrument, with a few exceptions, such as investments otherwise
accounted for by the equity method; (b) is irrevocable (unless a new election
date occurs); and (c) is applied only to entire instruments and not to portions
of instruments. SFAS 159 is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. The Company had not chosen
to
adopt this statement early. Management currently believe
s
its
adoption of SFAS 159 will not be material to its financial statement until
such
time as it decides to adopt a fair value option for an eligible item it has
no
plans at this time to do so.
NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS
In
March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about
Derivative Instruments and Hedging Activities, an Amendment of FASB
No. 133,” (“SFAS 161”). SFAS 161 is intended to improve transparency in
financial reporting by requiring enhanced disclosures of an entity’s derivative
instruments and hedging activities and their effects on the entity’s financial
position, financial performance, and cash flows. SFAS 161 applies to all
derivative instruments within the scope of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” (“SFAS 133”). SFAS 161 also
applies to non-derivative hedging instruments and all hedged items designated
and qualifying under SFAS 133. SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. SFAS 161 encourages,
but does not require, comparative disclosures for periods prior to its initial
adoption. We will adopt SFAS 161 on December 26, 2008 and are currently
evaluating the potential impact on our financial statements when
implemented.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,”
(“SFAS 141(R)”). SFAS 141(R) requires us to continue to follow the guidance in
SFAS 141 for certain aspects of business combinations, with additional guidance
provided defining the acquirer, recognizing and measuring the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in
the
acquiree, assets and liabilities arising from contingencies, defining a bargain
purchase and recognizing and measuring goodwill or a gain from a bargain
purchase. In addition, under SFAS 141(R) adjustments associated with changes
in
tax contingencies that occur after the one year measurement period are recorded
as adjustments to income. This statement is effective for all business
combinations for which the acquisition date is on or after the beginning of
an
entity’s first fiscal year that begins after December 15, 2008; however,
the guidance in this standard regarding the treatment of income tax
contingencies is retrospective to business combinations completed prior to
December
26, 2008
.
We will
adopt SFAS 141(R) for any business combinations occurring at or subsequent
to
December
26, 2008
.
In
April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets”. FSP 142-3 amends the factors
an entity should consider in developing renewal or extension assumptions used
in
determining the useful life of recognized intangible assets under FASB Statement
No. 142, “Goodwill and Other Intangible Assets”. This new guidance
applies prospectively to intangible assets that are acquired individually or
with a group of other assets in business combinations and asset acquisitions.
FSP 142-3 is effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008. Early adoption is
prohibited. We are currently evaluating the impact, if any, that FSP
142-3 will have on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” an Amendment of ARB No. 51,
“Consolidated Financial Statements,” (“SFAS 160”). SFAS 160 establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement is effective as of the beginning of an
entity’s first fiscal year that begins after December 15, 2008 with
retrospective application. We will adopt SFAS 160 beginning
December
26, 2008
and are
currently evaluating the potential impact on our financial statements when
implemented.
NOTE
4. CONDENSED BALANCE SHEET INFORMATION
Condensed
balance sheet information as of June 25, 2008 consisted of the following (in
thousands):
|
|
Inside
China
|
|
Outside
China
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
-
Cash and cash equivalents
|
|
$
|
9,363
|
|
$
|
140
|
|
$
|
9,503
|
|
-
Others
|
|
|
83,317
|
|
|
20
|
|
|
83,337
|
|
Total
assets
|
|
|
92,680
|
|
|
160
|
|
|
92,840
|
|
Liabilities
|
|
|
12,666
|
|
|
3,113
|
|
|
15,779
|
|
Minority
interests
|
|
|
314
|
|
|
--
|
|
|
314
|
|
Intercompany
|
|
|
13,951
|
|
|
(13,951
|
)
|
|
--
|
|
Equity
|
|
|
60,806
|
|
|
10,836
|
|
|
71,642
|
|
Assets
located outside of China consist primarily of cash and cash equivalents.
Liabilities located outside of China consist primarily of embedded derivatives,
net of the related beneficial conversion feature and fair value of the warrants.
Condensed
statement of operation information for the six months ended June 25, 2008
consisted of the following (in thousands):
|
|
Inside
China
|
|
Outside
China
|
|
Total
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
26,214
|
|
$
|
--
|
|
$
|
26,214
|
|
Cost
of goods sold
|
|
|
(21,527
|
)
|
|
--
|
|
|
(21,527
|
)
|
General
and administrative expenses
|
|
|
(717
|
)
|
|
(529
|
)
|
|
(1,246
|
)
|
Income
(loss) from operations
|
|
|
3,380
|
|
|
(529
|
)
|
|
2,851
|
|
Provision
for income taxes
|
|
|
(786
|
)
|
|
--
|
|
|
(786
|
)
|
Other
income
|
|
|
245
|
|
|
1,428
|
|
|
1,673
|
|
Net
income
|
|
|
2,839
|
|
|
899
|
|
|
3,738
|
|
The
Company does not believe that providing additional information regarding cash
flows is meaningful to the reader, in light of the nature of the assets and
operations located inside China and outside China.
NOTE
5. EARNINGS PER SHARE
The
Company computes earnings per share (“EPS’) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”),
and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128
requires companies with complex capital structures to present basic and diluted
EPS. Basic EPS is measured as the income or loss available to common
shareholders divided by the weighted average common shares outstanding for
the
period. Diluted EPS is similar to basic EPS but presents the dilutive
effect on a per share basis of potential common shares (e.g., convertible
securities, options and warrants) as if they had been converted at the beginning
of the periods presented, or issuance date, if later. Potential common
shares that have an anti-dilutive effect (i.e., those that increase income
per
share or decrease loss per share) are excluded from the calculation of diluted
EPS. Approximately
5,515
dilutive
shares on an “as converted” basis for the Redeemable Convertible Preferred stock
were excluded from the calculation of diluted EPS for the three and six months
ended June 25, 2008 since their effect would have been anti-dilutive. In
addition, options for 8,000 shares and warrants for 6,507 shares were excluded
for the three and six months ended June 25, 2008.
The
calculation of diluted weighted average common shares outstanding for the three
months ended June 25, 2008 and 2007 and for the six months ended June 25, 2008
and 2007 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 Preferred stock
is included on an “as converted” basis when these shares are
dilutive.
The
following table is a reconciliation of the weighted average shares used in
the
computation of basic and diluted earnings per share for the periods presented
(amounts in thousands, except per share data):
|
|
Three Months Ended June
25,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Income
|
|
Shares
|
|
Per-Share
|
|
Income
|
|
Shares
|
|
Per-Share
|
|
Earnings
per share - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
1,315
|
|
|
57,165
|
|
$
|
0.02
|
|
$
|
4,257
|
|
|
53,810
|
|
$
|
0.08
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
convertible preferred stock
|
|
|
--
|
|
|
--
|
|
|
|
|
|
556
|
|
|
7,254
|
|
|
|
|
Options
and warrants
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
1,202
|
|
|
|
|
Earnings
per share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,315
|
|
|
57,165
|
|
$
|
0.02
|
|
$
|
4,813
|
|
|
62,266
|
|
$
|
0.08
|
|
|
|
Six Months Ended June
25,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
Shares
|
|
Per-Share
|
|
Income
|
|
Shares
|
|
Per-Share
|
|
Earnings
per share - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) available to common stockholders
|
|
$
|
2,785
|
|
|
56,615
|
|
$
|
0.05
|
|
$
|
7,150
|
|
|
53,750
|
|
$
|
0.13
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
convertible preferred stock
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
--
|
|
|
|
|
Options
and warrants
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
1,088
|
|
|
|
|
Earnings
per share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
2,785
|
|
|
56,615
|
|
$
|
0.05
|
|
$
|
7,150
|
|
|
54,838
|
|
$
|
0.13
|
|
NOTE
6. ACCOUNTS RECEIVABLE
Accounts
receivable consisted of the following (in thousands):
|
|
June
25,
2008
|
|
December
25,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
10,605
|
|
$
|
10,167
|
|
Less:
Allowance for doubtful accounts
|
|
|
(1,000
|
)
|
|
(944
|
)
|
|
|
$
|
9,605
|
|
$
|
9,223
|
|
The
activity in the Company’s allowance for doubtful accounts is summarized as
follows (in thousands):
|
|
June
25,
2008
|
|
December
25,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the period
|
|
$
|
944
|
|
$
|
719
|
|
Add:
provision during the period
|
|
|
92
|
|
|
272
|
|
Less:
write-offs during the period
|
|
|
(36
|
)
|
|
(47
|
)
|
Balance
at the end of the period
|
|
$
|
1,000
|
|
$
|
944
|
|
NOTE
7. DEPOSITS AND PREPAYMENTS
Deposits
and prepayments consisted of the following (in thousands):
|
|
June
25,
2008
|
|
December
25,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Deposits
for raw materials
|
|
$
|
11,965
|
|
$
|
12,053
|
|
Prepayments
and advances
|
|
|
111
|
|
|
130
|
|
|
|
$
|
12,076
|
|
$
|
12,183
|
|
NOTE
8. INVENTORIES
Inventories
consisted of the following (in thousands):
|
|
June
25,
2008
|
|
December
25,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Raw
materials (including packing materials)
|
|
$
|
23,741
|
|
$
|
20,403
|
|
Finished
goods
|
|
|
1,561
|
|
|
1,743
|
|
|
|
|
25,302
|
|
|
22,146
|
|
Less:
Inventory reserve
|
|
|
(97
|
)
|
|
(96
|
)
|
|
|
$
|
25,205
|
|
$
|
22,050
|
|
The
activity in the Company’s provision for inventory reserve is summarized as
follows (in thousands):
|
|
June
25,
2008
|
|
December
25,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the period
|
|
$
|
96
|
|
$
|
104
|
|
Add:
provision during the period
|
|
|
10
|
|
|
20
|
|
Less:
write-offs during the period
|
|
|
(9
|
)
|
|
(28
|
)
|
Balance
at the end of the period
|
|
$
|
97
|
|
$
|
96
|
|
NOTE
9. DUE FROM RELATED COMPANIES
Due
from
related companies consisted of the following (in thousands):
|
|
June
25,
2008
|
|
December
25,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Due
from related companies for sales
|
|
$
|
976
|
|
$
|
913
|
|
NOTE
10. PROPERTY, MACHINERY AND EQUIPMENT
Property,
machinery and equipment consisted of following (in thousands):
|
|
Useful
Life
|
|
June
25,
2008
|
|
December
25,
2007
|
|
|
|
(In
years)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
40
|
|
$
|
14,767
|
|
$
|
13,839
|
|
Machinery
and equipment
|
|
|
5
- 12
|
|
|
21,648
|
|
|
20,229
|
|
Construction
in process
|
|
|
|
|
|
1,293
|
|
|
1,124
|
|
|
|
|
|
|
|
37,708
|
|
|
35,192
|
|
Less:
Accumulated depreciation and amortization
|
|
|
|
|
|
(10,093
|
)
|
|
(9,206
|
)
|
|
|
|
|
|
$
|
27,615
|
|
$
|
25,986
|
|
NOTE
11. LAND USE RIGHTS
Land
use
rights consisted of the following (in thousands):
|
|
June
25,
2
008
|
|
December
25,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Land
use rights
|
|
$
|
8,976
|
|
$
|
8,415
|
|
Less:
Accumulated amortization
|
|
|
(1,241
|
)
|
|
(1,121
|
)
|
|
|
$
|
7,735
|
|
$
|
7,294
|
|
NOTE
12. OTHER PAYABLES AND ACCRUALS
Other
payables and accruals consisted of the following (in thousands):
|
|
June
25,
2008
|
|
December
25,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Deposits
from customers
|
|
$
|
620
|
|
$
|
566
|
|
Accruals
for payroll, bonus and benefits
|
|
|
519
|
|
|
294
|
|
Utilities
and accrued expenses
|
|
|
1,691
|
|
|
1,905
|
|
|
|
$
|
2,830
|
|
$
|
2,765
|
|
NOTE
13. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On
July
11, 2005, the Company issued 6,000 shares of Series A 7% Redeemable Convertible
Preferred Stock (“Series A Preferred Stock”); initially convertible into an
aggregate of 6,315,789 shares of Class A Common Stock at a conversion price
of
$0.95 per share, raising $6 million in gross proceeds. Six-year warrants to
purchase an aggregate of 3,157,895 shares of Class A Common Stock at an exercise
price of $1.04 per share were also issued to the investors. As part of the
compensation to the placement agent, five-year warrants to purchase an aggregate
of 378,947 shares of Class A Common Stock at an exercise price of $1.04 share
were also issued. As of June 25, 2008, all of the warrants issued to the
placement agent were exercised cashlessly and 4,803 shares of Series A Preferred
Stock were converted into 5,087,270 shares of Class A Common Stock.
On
December 22, 2005, the Company issued 9,500 shares of Series B 7% Redeemable
Convertible Preferred Stock (“Series B Preferred Stock”), initially convertible
into an aggregate of 5,937,500 shares of Class A Common Stock at a conversion
price of $1.60 per share, raising $9.5 million in gross proceeds. Six-year
warrants to purchase an aggregate of 2,968,750 shares of Class A Common Stock
at
an exercise price of $1.76 per share were also issued to the investors. As
part
of the compensation to the placement agent, five-year warrants to purchase
an
aggregate of 356,250 shares of Class A Common Stock at an exercise price of
$1.76 per share were also issued. As of June 25, 2008, 2,692 shares of Series
B
Preferred Stock were converted into 2,094,783 shares of Class A Common Stock,
and no warrants were exercised.
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 $1,827,000. 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 and 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 and B Preferred Stock is as follows
(in
thousands):
Redeemable
Convertible Preferred Stock
|
|
|
Number
of shares
|
|
Series
A
|
|
Series
B
|
|
Combined
|
|
Sale
of Series A Preferred Stock
|
|
|
6,
000
|
|
$
|
6,000
|
|
|
|
|
$
|
6,000
|
|
Sale
of Series B Preferred Stock
|
|
|
9,500
|
|
|
|
|
$
|
9,500
|
|
|
9,500
|
|
Expenses
of Offering
|
|
|
|
|
|
(685
|
)
|
|
(1,142
|
)
|
|
(1,827
|
)
|
Original
Discounts
|
|
|
|
|
|
(4,558
|
)
|
|
(5,686
|
)
|
|
(10,244
|
)
|
Initial
Balance of Redeemable Preferred Stock
|
|
|
|
|
|
757
|
|
|
2,672
|
|
|
3,429
|
|
Net
value at conversion of preferred stock to common stocks
|
|
|
(7,495
|
)
|
|
(1,472
|
)
|
|
(1,345
|
)
|
|
(2,817
|
)
|
Accumulated
accretion of original discounts
|
|
|
|
|
|
1,474
|
|
|
3,019
|
|
|
4,493
|
|
Balance
June 25, 2008
|
|
|
8,005
|
|
|
759
|
|
|
4,346
|
|
$
|
5,105
|
|
The
pricing model the Company used for determining fair values of the 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 (loss). The Company has obtained a valuation report from
a
valuation firm to support its estimates. The principal assumptions used to
value
these complex freestanding financial instruments were as follows:
|
|
Warrants
|
|
Embedded
Conversion Feature
|
Expected
life (in years)
|
|
Remaining
term at valuation date
|
|
Remaining
Term to conversion or redemption date at each valuation
date
|
Expected
volatility
|
|
50%
|
|
50%
|
Risk-free
interest rate
|
|
3.11%
to 3.24%
|
|
1.82%
to 2.77%
|
Dividend
yield
|
|
0
|
|
0
|
The
Company considered all of the other minor features of the conversion option
associated with the Company’s 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. The Company 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 issuances
|
|
$
|
10,259
|
|
Loss
on change in value of derivatives during 2005
|
|
|
4,064
|
|
Conversion
of 1900 shares of Series A Preferred Stock to common stock during
2005
|
|
|
(2,188
|
)
|
Fair
Value at December 25, 2005
|
|
$
|
12,135
|
|
Loss
on change in value of derivatives during the period
|
|
|
1,434
|
|
Conversion
of 3,438 shares of Series A & B Preferred Stock to common stock during
2006
|
|
|
(2,431
|
)
|
Fair
Value at December 25, 2006
|
|
$
|
11,138
|
|
Gain
on change in value of derivatives during the period
|
|
|
(8,412
|
)
|
Conversion
of 728 shares of Series A & B Preferred Stock to common stock during
2007
|
|
|
(233
|
)
|
Fair
Value at December 25, 2007
|
|
$
|
2,493
|
|
Gain
on change in value of derivatives during the period
|
|
|
(1,428
|
)
|
Conversion
of 1,429 shares of Series A & B Preferred Stock to common stock during
2008
|
|
|
(107
|
)
|
Fair
Value at June 25, 2008
|
|
$
|
958
|
|
NOTE
14. COMMON STOCK
On
October 7, 2003, the Company issued 850,000 shares of Class A Common Stock
for
an aggregate purchase amount of $425,000 or $0.50 per share. The shares were
issued pursuant to an exemption provided by Section 4(2) of the Securities
Act.
The purchasers were also issued warrants to purchase 425,000 shares of the
Company’s Class A Common Stock, which have a term of 5 years and an exercise
price of $0.979 per share. As of June 25, 2008, warrants to purchase 25,000
shares of Class A Common Shares were outstanding.
NOTE
15. WARRANTS
The
following table summarizes the Company’s outstanding warrants as of June 25,
2008:
|
|
Shares
|
|
Weighted
Average Exercise Price
|
|
Warrants
exercisable at June 25, 2008
|
|
|
6,507,895
|
|
|
1.4093
|
|
The
number of shares of Class A Common Stock issuable under warrants related to
the
private placements and the respective exercise prices as of June 25, 2008 are
summarized as follows:
|
|
Shares
of Class A Common Stock Issuable Under Warrants
|
|
Exercise
Price
|
|
|
|
|
|
|
|
October
2003 private placement
|
|
|
25,000
|
|
$
|
0.979
|
|
|
|
|
|
|
|
|
|
July
2005 private placement
|
|
|
|
|
|
|
|
6-year
warrants
|
|
|
3,157,895
|
|
|
1.04
|
|
|
|
|
|
|
|
|
|
December
2005 private placement
|
|
|
|
|
|
|
|
6-year
warrants
|
|
|
2,968,750
|
|
|
1.76
|
|
5-year
warrants
|
|
|
356,250
|
|
|
1.76
|
|
Warrants
exercisable at June 25, 2008
|
|
|
6,507,895
|
|
|
|
|
NOTE
16. STOCK-BASED COMPENSATION
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, “Share-Based Payment,” which established standards for transactions in
which an entity exchanges its equity instruments for goods or services. This
standard requires a public entity to measure 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 adopted the requirements of SFAS No.123R for the
fiscal year 2006. Because all stock options granted before December 25, 2004
were fully vested and exercised or expired, no compensation charges were
recorded in fiscal 2008 for these options. For stock options granted after
December 25, 2004, the Company used the Black-Scholes option-pricing model
to
estimate the fair value of the options at the date of grant.
In
November 2004, options to purchase 400,000 shares of Class A Common Stock were
issued to an officer at an exercise price of $1.00 per share with a term of
10
years. The market price of the Class A Common Stock as of the grant date was
$0.64 per share. As of June 25, 2008, all of these options were
exercised.
On
June
22, 2005, options to purchase an additional 600,000 shares of Class A Common
Stock were issued to the same officer at an exercise price of $1.20 per share
with a term of 10 years. The market price of the Class A Common Stock as of
the
grant date was $1.00 per share. As of June 25, 2008, all of these options were
exercised.
On
January 20, 2006, options to purchase an additional 2,000,000 shares of Class
A
Common Stock were issued to the same officer at an exercise price of $1.60
per
share with a term of 6 years. The market price of the Class A Common Stock
as of
the grant date was $1.54 per share. As of June 25, 2008, none of these options
were exercised. The Company recorded compensation expense of $2,320,000 based
on
an estimated fair value of the options of $1.16 per share on January 20, 2006.
The per share fair value of the stock options granted has been estimated using
the Black-Scholes option-pricing model with the following
assumptions:
|
|
January
20, 2006
|
|
Life
(years)
|
|
|
6
|
|
Dividend
yield
|
|
|
None
|
|
Risk
- free interest rate
|
|
|
4.36
|
%
|
Volatility
|
|
|
89
|
%
|
On
December 13, 2006, options to purchase an additional 6,000,000 shares of Class
A
Common Stock were granted to the same officer at an exercise price of $1.82
per
share with a term of 10 years. The options were fully vested upon grant but
became exercisable on April 3, 2007. The market price of the Class A Common
Stock as of the grant date was $1.82 per share. As of December 25, 2006, these
options were fully vested but not exercisable. The Company recorded compensation
expense of $5,820,000 based on an estimated fair value of the options of $0.97
per share on December 13, 2006, the grant date. The per share fair value of
the
stock options granted has been estimated using the Black-Scholes option-pricing
model with the following assumptions:
|
|
December
13, 2006
|
|
Life
(years)
|
|
|
6
|
|
Dividend
yield
|
|
|
None
|
|
Risk
- free interest rate
|
|
|
4.55
|
%
|
Volatility
|
|
|
50
|
%
|
The
following table summarizes outstanding options as at June 25, 2008 and related
weighted average fair value and life information:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Range
of Exercise
Price
Per Share
|
|
Number
Outstanding
at
June 25, 2008
|
|
Weighted
Average
Fair
Value
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Number
Exercisable
at
June 25, 2008
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
$
1.60-1.82
|
|
8,000,000
|
|
$
1.02
|
|
6.75
|
|
8,000,000
|
|
$
1.765
|
The
Company recorded compensation expense of $8,140,000 based on the fair value
of
the options granted during the year of 2006. Any exercise of such options
granted on December 13, 2006 was contingent upon the effectiveness of a
shareholder consent, which occurred on April 3, 2007. The Company has no future
compensation expense to record from this option outstanding at December 25,
2006
because they were fully vested upon grant and compensation cost was recorded
as
of that date. As of June 25, 2008, our options granted had no intrinsic value.
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.
Particulars
of significant transactions between New Dragon Asia Corp. and related companies
are summarized below (in thousands):
|
|
Three
months ended
June
25,
|
|
Six
months ended
June
25,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Pre-determined
annual fee charged by joint venture partners:
|
|
|
|
|
|
|
|
|
|
Shandong
Longfeng Group Company (a)
|
|
$
|
21
|
|
$
|
20
|
|
$
|
42
|
|
$
|
40
|
|
Shandong
Longfeng Flour Company Limited (b)
|
|
|
11
|
|
|
9
|
|
|
21
|
|
|
18
|
|
|
|
$
|
32
|
|
$
|
29
|
|
|
63
|
|
|
58
|
|
|
(a)
|
Shandong
Longfeng Group Company is a joint venture partner of the Company
and the
parent company.
|
|
(b)
|
Subsidiary
of Shandong Longfeng Group Company.
|
The
amounts due to New Dragon Asia Food Limited (the parent company) and other
related parties which are primarily joint venture partners are unsecured and
non-interest bearing. Balances are the result of normal commercial
transactions.
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%. Three of the PRC subsidiaries of the
Company are eligible to be exempt from income taxes for a two-year period
commencing with the year in which their operations are profitable and then
subject to a 50% reduction in income taxes for the next three years, starting
from their first profitable year. Several PRC subsidiaries receive preferential
tax rates in regions in which they operated and are also entitled to partial
tax
refunds from those tax bureaus.
New
Dragon Asia Corp. is a Florida corporation with wholly-owned operating
subsidiaries. As a result, the Company is not subject to PRC tax for the
activities at the Florida company level. Costs or expenses incurred at the
Florida company level, such as the stock-based compensation and the amortization
of financing costs and derivative accounting related to Series A Preferred
Stock
and Series B Preferred Stock, cannot be used to offset any income derived in
the
PRC when measuring the PRC income tax liabilities. As of March 25, 2008 and
December 25, 2007, 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.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement 109”
FIN
48.
This
statement clarifies the criteria that an individual tax position must satisfy
for some or all of the benefits of that position to be recognized in a company’s
financial statements.
FIN
48
prescribes
a recognition threshold of more-likely-than-not, and a measurement attribute
for
all tax positions taken or expected to be taken on a tax return, in order for
those tax positions to be recognized in the financial statements. Effective
December 26, 2006, the Company has adopted the provisions of
FIN
48
and
there
was no material effect on the financial statements. As a result, there was
no
cumulative effect related to adopting
FIN
48.
NOTE
19. BUSINESS COMBINATION AND SIGNIFICANT ESTABLISHMENT
Longyuan
Packaging Plant
On
January 10, 2006, the Company established New Dragon Asia (Long Kou) Packing
Materials Company Limited, a wholly-owned subsidiary in Longkou, Shandong
Province. NDAPM is principally engaged in the manufacturing and sale of packing
materials, with a registered capital of $3,600,000. During the six months ended
June 25, 2008, the Company has spent approximately $1.29 million on the
construction at the new plant and has committed to further capital expenditures
of $1.03 million for the completion of the plant, which is scheduled to be
completed in 2009.
NOTE
20. SEGMENT INFORMATION
The
Company classifies its products into three core business segments; namely
instant noodles, flour and soybean. In view of the fact that the Company
operates principally in Mainland China, no geographical segment information
is
presented.
|
|
For
the three months ended
June
25,
|
|
For
the six months ended
June
25,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(US$'000)
|
|
(US$'000)
|
|
(US$'000)
|
|
(US$'000)
|
|
Net
revenue
|
|
|
|
|
|
|
|
|
|
Instant
noodles
|
|
|
3,535
|
|
|
3,506
|
|
|
6,930
|
|
|
7,013
|
|
Flour
|
|
|
8,207
|
|
|
6,961
|
|
|
14,322
|
|
|
12,949
|
|
Soybean
|
|
|
2,773
|
|
|
2,568
|
|
|
4,962
|
|
|
4,233
|
|
|
|
|
14,515
|
|
|
13,035
|
|
|
26,214
|
|
|
24,195
|
|
Income
(loss) from operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instant
noodles
|
|
|
222
|
|
|
239
|
|
|
550
|
|
|
468
|
|
Flour
|
|
|
1,231
|
|
|
1,343
|
|
|
2,298
|
|
|
2,356
|
|
Soybean
|
|
|
(18
|
)
|
|
(67
|
)
|
|
3
|
|
|
(163
|
)
|
|
|
|
1,435
|
|
|
1,515
|
|
|
2,851
|
|
|
2,661
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instant
noodles
|
|
|
274
|
|
|
4
|
|
|
548
|
|
|
245
|
|
Flour
|
|
|
164
|
|
|
157
|
|
|
337
|
|
|
303
|
|
Soybean
|
|
|
62
|
|
|
56
|
|
|
122
|
|
|
108
|
|
|
|
|
500
|
|
|
217
|
|
|
1,007
|
|
|
656
|
|
|
|
June
25,
|
|
December
25,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
(US$'000)
|
|
(US$'000)
|
|
|
|
|
|
Identifiable
long-term assets
|
|
|
|
|
|
|
|
|
|
Instant
noodles
|
|
|
23,398
|
|
|
22,640
|
|
|
|
|
|
|
|
Flour
|
|
|
7,526
|
|
|
7,470
|
|
|
|
|
|
|
|
Soybean
|
|
|
4,426
|
|
|
3,170
|
|
|
|
|
|
|
|
|
|
|
35,350
|
|
|
33,280
|
|
|
|
|
|
|
|
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, 2007, 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 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 are
reasonable 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 us and another joint
venture partner, with the rights and obligations of each party governed by
a
contract. Currently, we have established four contractual joint ventures with
two Chinese partners in China - Shandong Longfeng Flour Co. Ltd. and Shandong
Longfeng Group Co., with percentage of ownership ranging from 76.94% 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 entitled
to receive any profits and is not responsible for any losses, regardless of
the
ownership in the contractual joint venture. In view of such contracted profit
sharing arrangement, the contractual joint ventures are accounted for as
wholly-owned by the Company. Accordingly, 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, instant noodle and soybean products.
All of our revenue transactions contain standard business terms and conditions.
We determine the appropriate accounting for these transactions after considering
(1) whether a contract exists; (2) when to recognize revenue on the
deliverables; and (3) whether all elements of the contract have been fulfilled
and delivered. In addition, our revenue recognition policy requires an
assessment as to whether collection is reasonably assured, which inherently
requires us to evaluate the creditworthiness of our customers. Changes in
judgments on these assumptions and estimates could materially impact the timing
or amount of revenue recognition.
Accounting
for Derivative Instruments
Statement
of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, requires all derivatives to be
recorded on the balance sheet at fair value. These derivatives, including
embedded derivatives in our Series A and B Preferred Stock, are separately
valued and accounted for on our balance sheet. Where market prices are not
readily available, fair values are determined using market based pricing models
incorporating readily observable market data and requiring judgment and
estimates.
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, exchange 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 valuation
firm to support its estimates.
In
September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to and Potentially
Settled in, a Company's Own Stock," ("EITF 00-19") which requires freestanding
contracts that are settled in a company's own stock, including common stock
warrants, to be designated as an equity instrument, asset or a liability. Under
the provisions of EITF 00-19, a contract designated as an asset or a liability
must be carried at fair value on a company's balance sheet, with any changes
in
fair value recorded in the company's results of operations. A contract
designated as an equity instrument must be included within equity, and no fair
value adjustments are required. In accordance with EITF 00-19, in August 2006,
we determined that several of the outstanding warrants to purchase our common
stock and the embedded conversion feature of our financial instruments, should
be separately accounted for as liabilities. We have recorded the fair value
of
these warrants and conversion features on our balance sheets and record
unrealized changes in the values of these derivatives in our consolidated
statements of operations as “Gain (loss) on fair value adjustments to embedded
derivatives”.
Share-Based
Payment
On
December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based
Payment,” which replaces SFAS No. 123, “Accounting for Stock-Based
Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees.” SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in
the
financial statements based on the grant date fair value of the award. We adopted
the requirements of SFAS No. 123R for the fiscal year beginning on December
26,
2005, and recorded the compensation expense for all unvested stock
options.
Allowance
for Doubtful Accounts
Management
provides for an allowance for doubtful accounts for those third party trade
accounts that are not collected within one year. We base our estimate (one
year)
on historical experience and on continuous monitoring of customers’ credit and
settlement. We believe we have reasonable basis for making judgments on the
allowance for doubtful accounts.
We
normally grant up to 90 days credit to our customers. We monitor our allowance
for doubtful accounts on a monthly basis.
Inventories
Valuation
Inventories
are stated at the lower of cost, determined on a weighted average basis, or
net
realizable value. Costs of work-in-progress and finished goods are composed
of
direct material, direct labor and an attributable portion of manufacturing
overhead. Net realizable value is the estimated selling price, in the ordinary
course of business, less estimated costs to complete and dispose.
Recent
Accounting Pronouncements
In
March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about
Derivative Instruments and Hedging Activities, an Amendment of FASB
No. 133,” (“SFAS 161”). SFAS 161 is intended to improve transparency in
financial reporting by requiring enhanced disclosures of an entity’s derivative
instruments and hedging activities and their effects on the entity’s financial
position, financial performance, and cash flows. SFAS 161 applies to all
derivative instruments within the scope of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” (“SFAS 133”). SFAS 161 also
applies to non-derivative hedging instruments and all hedged items designated
and qualifying under SFAS 133. SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. SFAS 161 encourages,
but does not require, comparative disclosures for periods prior to its initial
adoption. We will adopt SFAS 161 on December 26, 2008 and are currently
evaluating the potential impact on our financial statements when
implemented.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,”
(“SFAS 141(R)”). SFAS 141(R) requires us to continue to follow the guidance in
SFAS 141 for certain aspects of business combinations, with additional guidance
provided defining the acquirer, recognizing and measuring the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in
the
acquiree, assets and liabilities arising from contingencies, defining a bargain
purchase and recognizing and measuring goodwill or a gain from a bargain
purchase. In addition, under SFAS 141(R) adjustments associated with changes
in
tax contingencies that occur after the one year measurement period are recorded
as adjustments to income. This statement is effective for all business
combinations for which the acquisition date is on or after the beginning of
an
entity’s first fiscal year that begins after December 15, 2008; however,
the guidance in this standard regarding the treatment of income tax
contingencies is retrospective to business combinations completed prior to
December
26, 2008
.
We will
adopt SFAS 141(R) for any business combinations occurring at or subsequent
to
December
26, 2008
.
In
April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets”. FSP 142-3 amends the factors
an entity should consider in developing renewal or extension assumptions used
in
determining the useful life of recognized intangible assets under FASB Statement
No. 142, “Goodwill and Other Intangible Assets”. This new guidance
applies prospectively to intangible assets that are acquired individually or
with a group of other assets in business combinations and asset acquisitions.
FSP 142-3 is effective for financial statements issued for fiscal years and
interim periods beginning after December 15, 2008. Early adoption is
prohibited. We are currently evaluating the impact, if any, that FSP
142-3 will have on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” an Amendment of ARB No. 51,
“Consolidated Financial Statements,” (“SFAS 160”). SFAS 160 establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement is effective as of the beginning of an
entity’s first fiscal year that begins after December 15, 2008 with
retrospective application. We will adopt SFAS 160 beginning
December
26, 2008
and are
currently evaluating the potential impact on our financial statements when
implemented.
In
September 2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Adoption
of SFAS No. 157 did not have a material impact on our consolidated
financial statements.
In
February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities
.
SFAS
No. 159 permits companies to choose to measure many financial instruments
and certain other items at fair value. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after November 15,
2007. Adoption of SFAS No. 159 did not have a material impact on our
consolidated financial statements..
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. With a well-known
brand name called “LONG FENG”, we market our well-established product line
through a countrywide network of over 200 key distributors and 16 regional
offices in 27 Chinese provinces. 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.
In
late
2005, we started producing 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 the highest
level of hygiene and efficiency and all of our plants are certified under the
ISO9002 standards. Most of our manufacturing equipment is purchased and imported
from Switzerland, Japan and South Korea. 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 regionally marketed and distributed throughout China. 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 leading domestic brands in China.
We have more than 200 points of distribution in China, which are owned and
managed by distributors. Most of our distributors have long-term relationships
with us.
Our
primary domestic customer base for both our flour products and instant noodles
consists of small retail stores in the rural areas throughout China where we
believe that our brand has long been recognized as the highest quality available
for the price. The rural market is rapidly growing, benefiting from increases
in
rural consumer income. We believe that brand loyalty by our customers is very
strong in this sector. In addition to the small retail sector, we sell to larger
supermarkets located in urban areas.
In
addition to domestic sales, we export noodles to other countries such as South
Korea, Australia, Malaysia, and Indonesia. We also obtained HACCP (Hazard
Analysis Critical Control Point) certification from CCIC Conformity Assessment
Services Co. Ltd., a Chinese quality assurance examination authority, enabling
the Company to begin exports of instant noodles and soybean powder to Europe.
During the second quarter of the year 2006, we began exporting sales of noodle
to Sweden and Greece. In early 2008, we began exporting noodle to Nigeria,
Africa.
We
also
receive orders for flour from certain KFC Corporation locations in China and
KFC’s intermediary suppliers for flour. KFC requires rigorous quality control
standards for its flour of at least the ISO9002 level. We believe that KFC’s
orders reflect the brand reputation and quality of the Long Feng brand, as
well
as our commitment to international quality standards.
With
the
strong growth of our soybean powder business, we have recently decided to add
soybean milk into our product line. We believe that soybean milk as a beverage
would generate higher margin than food business. Such expansion would not
increase our capital expenditure substantially given that we have our own
packaging company in Longkou. The production and sale of soybean milk will
likely commence in the first quarter of 2009.
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
and
the executive office located in Shenzhen. 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
June
25,
|
|
|
Six
months ended
June
25,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
14,515
|
|
$
|
13,035
|
|
$
|
26,214
|
|
$
|
24,195
|
|
Cost
of goods sold
|
|
|
(11,970
|
)
|
|
(10,479
|
)
|
|
(21,527
|
)
|
|
(19,717
|
)
|
Gross
profit
|
|
|
2,545
|
|
|
2,556
|
|
|
4,687
|
|
|
4,478
|
|
Selling
and distribution expenses
|
|
|
(369
|
)
|
|
(284
|
)
|
|
(590
|
)
|
|
(523
|
)
|
General
and administrative expenses
|
|
|
(741
|
)
|
|
(757
|
)
|
|
(1,246
|
)
|
|
(1,294
|
)
|
Gain
(loss) on fair value adjustments to embedded derivatives
|
|
|
738
|
|
|
3,101
|
|
|
1,428
|
|
|
5,638
|
|
Income
(loss) before income taxes and minority interest
|
|
|
2,228
|
|
|
5,233
|
|
|
4,524
|
|
|
8,982
|
|
Provision
for income taxes
|
|
|
(472
|
)
|
|
(420
|
)
|
|
(786
|
)
|
|
(720
|
)
|
Net
income (loss)
|
|
|
1,756
|
|
|
4,813
|
|
|
3,738
|
|
|
8,262
|
|
Six
Months Ended June 25, 2008 Compared to Six Months Ended June 25,
2007
Net
Revenue
Net
revenue for the six months ended June 25, 2008 was $26,214,000, representing
an
increase of $2,019,000, or 8%, from $24,195,000 for the six months ended June
25, 2007.
The
increase was due to the growth in market demand principally for flour products,
which increased from $12,949,000 for the six months ended June 25, 2007 to
$14,322,000 for the six months ended June 25, 2008. The selling prices for
all
our products remained stable.
Gross
Profit
As
a
percentage of net revenue, gross profit slightly decreased to 17.9% for the
six
months ended June 25, 2008 from 18.5% for the six months ended June 25, 2007
as
a result of the increase in raw material prices.
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 $590,000 for the six months ended June 25, 2008,
representing an increase of $67,000 from $523,000 for the corresponding period
of 2007. The increase was in line with the growth of our revenue.
As
a
percentage of net revenue, selling and distribution expenses remained constant
at 2% for the six months ended June 25, 2008 as compared with the corresponding
period in 2007. These results were primarily because we made no major change
to
our selling and distribution channels and as a result our costs were stabilized.
We monitor our selling and distribution expenses by reviewing
the
amount of expenses compared with the amount of revenue earned and adjust our
expenses to maintain
the
percentage of net
revenue
.
Spending has to be approved by sales director in advance and must in line with
the sales budget.
General
and Administrative Expenses
General
and administrative expenses decreased $48,000, or 4%, to $1,246,000 for the
six
months ended June 25, 2008 as compared to $1,294,000 for the six months ended
June 25, 2007. The decrease was primarily due to the cost controls implemented
by us.
Income
from Operations
Income
from operations increased $190,000, or 7%, to $2,851,000 for the six months
ended June 25, 2008 as compared to $2,661,000 for the six months ended June
25,
2007, which is in line with the increase of gross profit arising from the growth
of business.
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 gross 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 gross proceeds
of $9.5 million. The fair value of each instrument was recorded as a derivative
liability on our balance sheet. The corresponding gain or loss, which was
non-cash in nature, from changes in the fair values of these instruments was
recorded in our statement of income. For the six months ended June 25, 2008,
the
gain in this regard was $1,428,000. For the corresponding period of 2007, it
was
approximately $5.64 million. 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.
VAT
Refunds
VAT
refunds decreased to $28,000 for the six months ended June 25, 2008 as compared
to $540,000 for the six months ended June 25, 2007. This decrease was solely
due
to the decrease in the amount of tax refunds received from the municipal
government of China.
Net
Income
Net
income was $3,738,000 for the six months ended June 25, 2008 as compared to
$8,262,000 for the six months ended June 25, 2007. Such decrease was primarily
due to the fluctuation in gain derived from changes in the fair value of
derivative instruments.
Three
Months Ended June 25, 2008 Compared to Three Months Ended June 25,
2007
Net
Revenue
Net
revenue for the quarter ended June 25, 2008 was $14,515,000, representing an
increase of $1,480,000, or 11%, from $13,035,000 for the quarter ended June
25,
2007.
The
increase was due to the growth in market demand principally for flour products,
which increased from $6,961,000 for the three months ended June 25, 2007 to
$8,207,000 for the three months ended June 25, 2008. The selling prices for
all
our products remained stable.
Gross
Profit
As
a
percentage of net revenue, gross profit decreased to 17.5% for the three months
ended June 25, 2008 from 19.6% for the three months ended June 25, 2007 due
to
the increase in raw material prices.
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 $369,000 for the quarter ended June 25, 2008,
representing an increase of $85,000 or 30% from $284,000 for the corresponding
quarter of 2007. The increase was in line with the growth of our
revenue.
As
a
percentage of net revenue, selling and distribution expenses slightly increased
to 3% for the quarter ended June 25,2008 as compared to 2% for the corresponding
period in 2007. The increase was in line with the growth of our
revenue.
General
and Administrative Expenses
General
and administrative expenses slightly decreased by $16,000, or 2%, to $741,000
for the quarter ended June 25, 2008 as compared to $757,000 for the quarter
ended June 25, 2007. The decrease was primarily due to the savings arising
from
outsourcing our employee canteen operations to an independent
contractor.
Income
from Operations
Income
from operations was $1,435,000 for the three months ended June 25, 2008 as
compared to $1,515,000 for the three months ended June 25, 2007. The decrease
was primarily due to the increase in selling and distribution expenses and
the
decrease in gross profit.
Gain
(Loss) on Fair Value Adjustments to Embedded
Derivatives
The
Company issued Series A Redeemable Convertible Preferred Stock in July 2005,
together with 3,157,895 warrants to purchase Class A Common Stock resulting
in
aggregate gross 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 gross 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 three months ended June 25, 2008,
the gain in this regard was $738,000. For the corresponding period of 2007,
it
was approximately $3.1 million. 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.
VAT
Refunds
VAT
refund decreased to $28,000 for the quarter ended June 25, 2008 as compared
to
$488,000 for the quarter ended June 25, 2007. This decrease was solely due
to
the decrease in the amount of tax refunds received from the municipal government
of China.
Net
Income
Net
income was $1,756,000 for the quarter ended June 25, 2008 as compared to
$4,813,000 for the quarter ended June 25, 2007. Such decrease was primarily
due
to the fluctuation in gain derived from changes in the fair value of derivative
instruments.
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 increased $8,411,000 to $44,620,000 at June 25, 2008 as compared
to $36,209,000 at December 25, 2007, which was primarily due to the growth
and
profitability of the business.
Cash
and
cash equivalents were $9,503,000 as of June 25, 2008, an increase of $5,857,000
from December 25, 2007. The Company believes that it has enough cash available
and expects to have enough income from operations to operate for the next 12
months.
Off-Balance
Sheet Arrangements
We
have
never entered into any off-balance sheet financing arrangements and have not
formed any special purpose entities. We have not guaranteed any debt or
commitments of other entities or entered into any options on non-financial
assets.
Contractual
Obligations and Commercial Commitments
On
July
11, 2005, we issued 6,000 shares of Series A Preferred Stock, convertible into
an aggregate of 6,315,789 shares of Class A Common Stock at a conversion price
of $0.95 per share (subject to anti-dilution adjustments and interest payments),
raising $6.0 million in gross proceeds.
On
December 22, 2005, we issued 9,500 shares of Series B Preferred Stock,
convertible into an aggregate of 5,937,500 shares of Class A Common Stock at
a
conversion price of $1.60 per share (subject to anti-dilution adjustments and
interest payments), raising $9.5 million in gross proceeds.
The
key
terms of the Series A Preferred Stock and Series B Preferred Stock are as
follows:
|
|
Series
A Preferred Stock
|
|
Series
B Preferred Stock
|
|
|
|
|
|
Preferred
Dividend
|
|
7%
per annum, payable quarterly in arrears in cash or, at the Company’s
option subject to satisfaction of certain conditions, shares of Class
A
Common Stock valued at 95% of the volume-weighted current market
price.
|
|
7%
per annum, payable quarterly in arrears in cash or, at the Company’s
option subject to satisfaction of certain conditions, shares of Class
A
Common Stock valued at 95% of the volume-weighted current market
price.
|
|
|
|
|
|
Redemption
|
|
July
11, 2010
Beginning
on the 24th month following closing and each month thereafter, the
Company
shall redeem 1/37th of the face value of the Preferred Stock in either
cash or Class A Common Stock valued at 90% of the volume-weighted
current
market price.
|
|
December
22, 2010
Beginning
at the end of the 24th month following closing and on each third
monthly
anniversary of that date (quarterly) thereafter, the Company shall
redeem
1/13th of the face value of the Preferred Stock in either cash or
Class A
Common Stock valued at 90% of the volume-weighted current market
price.
|
Mandatory
Conversion
|
|
The
Company may at any time force the conversion of the Preferred Stock
if the
volume-weighted current market price of the Class A Common Stock
exceeds
300% of the then applicable conversion price.
|
|
The
Company may at any time force the conversion of the Preferred Stock
if the
volume-weighted current market price of the Class A Common Stock
exceeds
200% of its price at issuance of the Preferred Stock.
|
|
|
|
|
|
Registration
|
|
The
Company shall file to register the underlying Class A common shares
within
30 days of the closing date and make its best efforts to have the
Registration declared effective at the earliest date. In the event
such
Registration is not continuously effective during the period such
shares
are subject to transfer restrictions under the U.S. federal securities
laws, then (subject to certain exceptions) the holders are entitled
to
receive liquidated damages equal to 2.0% of the purchase price of
the
Preferred Stock per month.
|
|
The
Company shall file to register the underlying Class A common shares
with
30 days of the closing date and make its best efforts to have the
Registration declared effective at the earliest date. In the event
such
Registration is not continuously effective during the period such
shares
are subject to transfer restrictions under the U.S. federal securities
laws, then (subject to certain exceptions) the holders are entitled
to
receive liquidated damages equal to 2.0% of the purchase price of
the
Preferred Stock per month.
|
|
|
|
|
|
Anti-dilution
|
|
In
the event the Company issues, at any time while Preferred Stock are
still
outstanding, Common Stock or any type of securities giving rights
to
Common Stock at a price below the Issue Price, the Company agrees
to
extend full-ratchet anti-dilution protection to the
investors.
|
|
In
the event the Company issues, at any time while Preferred Stock are
still
outstanding, Common Stock or any type of securities giving rights
to
Common Stock at a price below the Issue Price, the Company agrees
to
extend full-ratchet anti-dilution protection to the
investors.
|
As
of
June 25, 2008, the Company had long-term debt obligations that resulted from
the
redeemable convertible preferred stock and the pre-determined annual fee charged
by joint venture partners through February 2009 and other commitments and
long-term liabilities through August 2049 as follows:
|
|
|
Payment
Obligations By Period
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
(In
thousands)
|
|
Redeemable
convertible preferred stock
|
|
$
|
2,303
|
|
$
|
2,976
|
|
$
|
2,726
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
8,005
|
|
Pre-determined
annual fee charged by joint venture partners
|
|
|
59
|
|
|
118
|
|
|
118
|
|
|
118
|
|
|
118
|
|
|
3,886
|
|
|
4,417
|
|
Total
|
|
$
|
2,362
|
|
$
|
3,094
|
|
$
|
2,844
|
|
$
|
118
|
|
$
|
118
|
|
$
|
3,886
|
|
$
|
12,422
|
|
Reconciliation
of the outstanding payment obligations of redeemable convertible preferred
stock:
|
|
(In
thousands)
|
|
Aggregated
balance as of the issue date
|
|
$
|
15,500
|
|
Partial
redemption of Series A Preferred Stock in 2005
|
|
|
(1,900
|
)
|
Partial
redemption of Series A and B Preferred Stock in 2006
|
|
|
(3,438
|
)
|
Partial
redemption of Series A Preferred Stock in 2007
|
|
|
(728
|
)
|
Partial
redemption of Series A and B Preferred Stock in 2008
|
|
|
(1,429
|
)
|
|
|
$
|
8,005
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk.
We
may be
exposed to changes in financial market conditions in the normal course of
business. Market risk generally represents the risk that losses may occur as
a
result of movements in interest rates and equity prices. We currently do not
use
financial instruments in the normal course of business that are subject to
changes in financial market conditions.
Currency
Fluctuations and Foreign Currency Risk
The
majority of our operations are conducted in the PRC except for some minor export
business and limited overseas purchases of raw materials. Most of our sales
and
purchases are conducted within the PRC in Chinese Renminbi. Hence, the effect
of
the fluctuations of the Renminbi exchange rate relative to other currencies
is
considered minimal to our business operations. However, we use the United States
dollar for financial reporting purposes and therefore, fluctuations in the
exchange rate between the Renminbi and the U.S dollar will result in increases
or decreases in other comprehensive income or loss. Conversion of Renminbi
into
foreign currencies is regulated by The People’s Bank of China through a unified
floating exchange rate system. Although the PRC government has stated its
intention to support the value of Renminbi, there can be no assurance that
such
exchange rate will not again become volatile or that Renminbi will not
strengthen or devalue significantly against the US dollar. Exchange rate
fluctuations may adversely affect the value, in US dollar terms, of our net
assets and income derived from our operations in the PRC.
Interest
Rate Risk
The
Company does not have significant interest rate risk, as our debt obligations
are primarily short-term in nature, with fixed interest rates. Our
embedded
derivatives
liabilities
are revalued each accounting period and their fair value can be affected by
interest rate fluctuations based on changes in the risk free interest rate
(generally the interest rate on intermediate term obligations of the United
States Government).
Credit
Risk
We
have
not experienced significant credit risk as most of our customers are long-term
customers with good payment records. Our receivables are regularly monitored
by
our credit manager.
Item
4T. Controls and Procedures.
Disclosure
Controls and Procedures
Under
the
supervision and with the participation of our management, including our chief
executive officer and the chief financial officer, we conducted an evaluation
of
the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as of June 25, 2008, 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 was made known to others within those entities, particularly
during the period when this report was being prepared.
Changes
in internal controls over financial reporting
There
were no changes in our internal controls over financial reporting (as defined
in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during
the three months ended June 25, 2008 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II: OTHER INFORMATION
Item
1. Legal Proceedings.
None.
Item
1A. Risk Factors.
There
have been no material changes in our business, operations or prospects that
would require a change to the Risk Factor disclosure included in our most recent
Annual Report on Form 10-K that have not already been disclosed.
The
risks
and uncertainties described below are not the only ones the Company faces.
Additional risks and uncertainties not presently known to the Company or that
the Company currently deemed immaterial also may impair the Company’s business
operations. If any of the following risks occur, the Company’s business
prospects, financial condition, operating results and cash flows could be
adversely affected in amounts that could be material.
RISKS
RELATED TO OUR CLASS A COMMON STOCK
We
have never declared or paid any dividends on our Class A Common
Stock
We
have
never declared or paid any dividends on our Class A Common Stock. The
declaration and payment in the future of any cash or stock dividends on the
Class A Common Stock will be at the discretion of our Board of Directors and
will depend upon a variety of factors, including our ability to service our
outstanding indebtedness, if any, and to pay dividends on securities ranking
senior to the Class A Common Stock, including the shares of our outstanding
Series A and Series B Preferred Stock, our future earnings, if any, capital
requirements, financial condition and such other factors as our Board of
Directors may consider to be relevant from time to time. We do not expect to
declare or pay any dividends on our Class A Common Stock in the foreseeable
future.
We
are controlled by our major shareholder
Our
major
shareholder, New Dragon Asia Food Ltd., which is controlled by our Chairman,
Mr.
Heng Jing Lu, owns approximately 49% of our outstanding shares. Mr. Lu has
sole
voting and dispositive control over the shares of us held by New Dragon Asia
Food Ltd. As a result, Mr. Lu, through this shareholder, effectively exercises
control over all matters requiring shareholder approval, including the election
of directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing
a
change in control of us that may not be viewed as beneficial by other
shareholders.
Our
primary source of funds for dividends and other distributions from our operating
subsidiary in China is subject to various legal and contractual restrictions
and
uncertainties, and our ability to pay dividends or make other distributions
to
our shareholders are negatively affected by those restrictions and uncertainties
We
are a
holding company established in the state of Florida and conduct our core
business operations through our operating subsidiaries, Hero Treasure Ltd.,
Delta Link Ltd., Mix Creation Ltd., Rich Delta Ltd. and Keen General Ltd. and
their respective subsidiaries in China. As a result, our profits available
for
distribution to our shareholders are dependent on the profits available for
distribution from the Subsidiaries. If the Subsidiaries incur debt on their
own
behalf, the debt instruments may restrict their ability to pay dividends or
make
other distributions, which in turn would limit our ability to pay dividends
on
our shares. Under the current PRC laws, because we are incorporated in the
State
of Florida, our PRC subsidiaries are each regarded as a wholly foreign-owned
enterprise in China. Although dividends paid by foreign invested enterprises,
such as wholly foreign-owned enterprises and Sino-foreign joint ventures, are
not subject to any PRC corporate withholding tax, the PRC laws permit payment
of
dividends only out of net income as determined in accordance with PRC accounting
standards and regulations. Determination of net income under PRC accounting
standards and regulations may differ from determination under U.S. GAAP in
significant aspects, such as the use of different principles for recognition
of
revenues and expenses. In addition, distribution of additional equity interests
by any of our PRC subsidiaries to us (which is credited as fully paid through
capitalization of the PRC subsidiaries’ undistributed profits) requires
additional approval of the PRC government due to an increase in our registered
capital and total investment in the subsidiary. Under the current PRC laws,
each
of our subsidiaries is required to set aside a portion of its net income each
year to fund designated statutory reserve funds. These reserves are not
distributable as cash dividends. As a result, our primary internal source of
funds for dividend payments from the subsidiaries are subject to these and
other
legal and contractual restrictions and uncertainties, which in turn may limit
or
impair our ability to pay dividends to our shareholders. Moreover, any transfer
of funds from us to the subsidiaries, either as a shareholder loan or as an
increase in registered capital, is subject to registration with or approval
by
PRC governmental authorities. These limitations on the flow of funds between
us
and the subsidiaries could restrict our ability to act in response to changing
market conditions.
Regulations
relating to offshore investment activities by PRC residents may adversely affect
our business and prospects
On
September 8, 2006, several agencies of the PRC government issued a new
regulation concerning restrictions on investments in China through special
purpose companies incorporated overseas and the listing of the shares of those
companies in overseas markets. The regulation contains a number of provisions
relating to the acquisition of Chinese domestic companies which involve
“important industries” and may affect the national economic safety or result in
the transfer of actual control rights of any company having “famous brands” or
any “old established Chinese brands,” and require that the parties to any such
transaction report to the Ministry of Commerce for approval. Additionally,
any
foreign company directly or indirectly controlled by Chinese companies or
individuals used as a vehicle for public listing in an overseas stock market
will need China Securities Regulatory Commission approval in connection with
such listing. As it is uncertain how this new regulation will be interpreted
or
implemented, we cannot predict how this regulation will affect our business
operations or future strategies. For example, we may be subject to a more
stringent review and approval process with respect to our acquisition
activities, which may adversely affect our business and prospects.
Dividend
Policy
We
have
never declared or paid any cash dividends on our Class A Common Stock and we
do
not anticipate paying any cash dividends in the foreseeable future. Our ability
to pay such cash dividends is subject to our receipt of dividends from our
operating subsidiaries, which are subject to legal restrictions in the PRC
on
making such payments. We currently intend to retain future earnings, if any,
to
finance operations and the expansion of our business. Any future determination
to pay cash dividends will be at the discretion of the board of directors and
will be based upon our financial condition, operating results, capital
requirements, plans for expansion, restrictions imposed by PRC law and any
financing arrangements and any other factors that the board of directors deems
relevant.
RISKS
RELATED TO OUR BUSINESS
Our
business may experience adverse effects from competition in the noodle, flour
and soybean product markets.
The
noodle, flour and soybean product markets in the PRC are highly competitive.
Competition in these markets takes many forms, including the following:
-
|
establishing
favorable brand recognition;
|
-
|
developing
products sought by consumers;
|
-
|
implementing
appropriate pricing;
|
-
|
providing
strong marketing support; and
|
-
|
obtaining
access to retail outlets and sufficient shelf
space.
|
Many
of
our competitors are larger and have greater financial resources, including
our
primary competitors, the manufactures of each of the brand names “Master Kang”
and “President”. We may not be able to compete successfully with such
competitors. Competition could cause us to lose our market share, increase
expenditures or reduce pricing, each of which could have a material adverse
effect on our business and financial results.
An
inability to respond quickly and effectively to new trends would adversely
impact our competitive position.
Our
failure to maintain our technological capabilities or to respond effectively
to
technological changes could adversely affect our ability to retain existing
business and secure new business. We will need to constantly seek out new
products and develop new solutions to maintain in our portfolio. If we are
unable to keep current with new trends, our competitors’ technologies or
products may render us noncompetitive and our products obsolete.
Increases
in prices of main ingredients and other materials could adversely affect our
business.
The
main
ingredients that we use to manufacture our products are wheat, soybeans and
eggs. We also use paper products, such as corrugated cardboard, as well as
films
and plastics, to package our products. The prices of these materials have been,
and we expect them to continue to be, subject to volatility. We may not be
able
to pass price increases in these materials onto our customers, which could
have
an adverse effect on our financial results.
We
are subject to risks associated with joint ventures and third party agreements.
We
conduct certain of our milling and sales operations through joint ventures
established with certain Chinese parties. Any deterioration of these strategic
relationships may have an adverse effect on our operation. Changes in laws
and
regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion, imports and sources of supply,
devaluations of currency or the nationalization or other expropriation of
private enterprises could have a material adverse effect on our business,
results of operations and financial condition. Under its current leadership,
the
Chinese government has been pursuing economic reform policies that encourage
private economic activity and greater economic decentralization. There is no
assurance, however, that the Chinese government will continue to pursue these
policies, or that it will not significantly alter these policies from time
to
time without notice.
We
may
have limited legal recourse under Chinese law if disputes arise under our
agreements with joint ventures or third parties. The Chinese government has
enacted some laws and regulations dealing with matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
However, the government’s experience in implementing, interpreting and enforcing
these laws and regulations is limited, and our ability to enforce commercial
claims or to resolve commercial disputes is unpredictable. If our new business
ventures are unsuccessful, or other adverse circumstances arise from these
transactions, we face the risk that the parties to these ventures may seek
ways
to terminate the transactions, or, may hinder or prevent us from accessing
important information regarding the financial and business operations of these
acquired companies. The resolution of these matters may be subject to the
exercise of considerable discretion by agencies of the Chinese government,
and
forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights we may have to specific performance,
or to seek an injunction under Chinese law, in either of these cases, are
severely limited, and without a means of recourse by virtue of the Chinese
legal
system, we may be unable to prevent these situations from occurring. The
occurrence of any such events could have a material adverse effect on our
business, financial condition and results of operations.
We
may be subject to product liability claims and product recalls, which could
negatively impact our profitability.
We
sell
food products for human consumption, which involves risks such as product
contamination or spoilage, product tampering and other adulteration of food
products. We may be subject to liability if the consumption of any of our
products causes injury, illness or death. In addition, we will voluntarily
recall products in the event of contamination or damage. A significant
product liability judgment or a widespread product recall may negatively impact
our profitability for a period of time depending on product availability,
competitive reaction and consumer attitudes. Even if a product liability
claim is unsuccessful or is not fully pursued, the negative publicity
surrounding any assertion that company products caused illness or injury could
adversely affect our reputation with existing and potential customers and our
corporate and brand image.
We
have limited business insurance coverage.
The
insurance industry in China is still in an early stage of development. Insurance
companies in China offer limited business insurance coverage. As a result,
we do
not have any business liability insurance coverage for our operations. Moreover,
while business disruption insurance is available, management has determined
that
the risks of disruption and cost of the insurance are such that we do not
require it at this time. Any business disruption, litigation or natural disaster
might result in substantial costs and diversion of resources.
We
may experience risks resulting from our plans for expansion.
We
have
acquired several companies and businesses and plan to continue to acquire
companies in the future. Entering into an acquisition entails many risks, any
of
which could harm our business, including: (a) diversion of management’s
attention from other business concerns; (b) failure to integrate the acquired
company with our existing businesses; (c) additional operating expenses not
offset by additional revenue; and (d) dilution of our stock as a result of
issuing equity securities.
If
we are
unable to implement our acquisition strategy, we may be less successful in
the
future. A key component of our growth strategy is accomplished by acquiring
additional flour and noodle factories and, if our acquisition of a soybean
business proves successful, our acquisition strategy may expand to include
future acquisitions of soybean businesses. While there are many such companies,
we may not always be able to identify and acquire companies meeting our
acquisition criteria on terms acceptable to us. Additionally, financing to
complete significant acquisitions may not always be available on satisfactory
terms. Further, our acquisition strategy presents a number of special risks
to
us that we would not otherwise contend with absent such strategy, including
possible adverse effects on our earnings after each acquisition, diversion
of
management’s attention from our core business due to the special attention that
a particular acquisition may require, failure to retain key acquired personnel
and risks associated with unanticipated events or liabilities arising after
each
acquisition, some or all of which could have a material adverse effect on our
business, financial condition and results of operations.
RISKS
ASSOCIATED WITH DOING BUSINESS IN THE PEOPLE’S REPUBLIC OF CHINA.
We
are subject to the risks associated with doing business in the People’s Republic
of China.
As
most
of our operations are conducted in the PRC, we are subject to special
considerations and significant risks not typically associated with companies
operating in North America and Western Europe. These include risks associated
with, among others, the political, economic and legal environments and foreign
currency exchange. Our results may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation,
among other things.
Although
the majority of productive assets in the PRC are owned by the Chinese
government, in the past several years the government has implemented economic
reform measures that emphasize decentralization and encourage private economic
activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
-
|
We
will be able to capitalize on economic reforms;
|
-
|
The
Chinese government will continue its pursuit of economic reform policies;
|
-
|
The
economic policies, even if pursued, will be successful;
|
-
|
Economic
policies will not be significantly altered from time to time;
and
|
-
|
Business
operations in China will not become subject to the risk of
nationalization.
|
Economic
reform policies or nationalization could result in a total investment loss
in
our Class A Common Stock.
Since
1979, the Chinese government has reformed its economic systems. Because many
reforms are unprecedented or experimental, they are expected to be refined
and
improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment or inflation,
or
in the disparities in per capita wealth between regions within China, could
lead
to further readjustment of the reform measures. This refining and readjustment
process may negatively affect our operations.
Over
the
last few years, China’s economy has registered a high growth rate. Recently,
there have been indications that rates of inflation have increased. In response,
the Chinese government has taken measures to curb this excessively expansive
economy. These measures include restrictions on the availability of domestic
credit, reducing the purchasing capability of certain of our customers, and
limited re-centralization of the approval process for purchases of some foreign
products. The Chinese government may adopt additional measures to further combat
inflation, including the establishment of freezes or restraints on certain
projects or markets. These measures may adversely affect our manufacturing
operations.
To
date,
reforms to China’s economic system have not adversely impacted our operations
and are not expected to adversely impact operations in the foreseeable future;
however, there can be no assurance that the reforms to China’s economic system
will continue or that we will not be adversely affected by changes in China’s
political, economic, and social conditions and by changes in policies of the
Chinese government, such as changes in laws and regulations, measures which
may
be introduced to control inflation and changes in the rate or method of
taxation.
On
November 11, 2001, China signed an agreement to become a member of the World
Trade Organization (“WTO”), the international body that sets most trade rules,
further integrating China into the global economy and significantly reducing
the
barriers to international commerce. China’s membership in the WTO was effective
on December 11, 2001. China has agreed upon its accession to the WTO to reduce
tariffs and non-tariff barriers, remove investment restrictions and provide
trading and distribution rights for foreign firms. The tariff rate reductions
and other enhancements will enable us to develop better investment strategies.
In addition, the WTO’s dispute settlement mechanism provides a credible and
effective tool to enforce members’ commercial rights. Also, with China’s entry
to the WTO, it is believed that the relevant laws on foreign investment in
China
will be amplified and will follow common practices.
The
Chinese legal system is not fully developed and has inherent uncertainties
that
could limit the legal protections available to investors.
The
Chinese legal system is a system based on written statutes and their
interpretation by the Supreme People’s Court. Prior court decisions may be cited
for reference but have limited legal precedents. Since 1979, the PRC government
has been developing a comprehensive system of commercial laws, and considerable
progress has been made in introducing laws and regulations dealing with economic
matters such as foreign investment, corporate organization and governance,
commerce, taxation and trade. Two examples are the promulgation of the Contract
Law of the PRC to unify the various economic contract laws into a single code,
which went into effect on October 1, 1999, and the Securities Law of the
People’s Republic of China, which went into effect on July 1, 1999. However,
because these laws and regulations are relatively new, and because of the
limited volume of published cases and their non-binding nature, interpretation
and enforcement of these laws and regulations involve uncertainties. In
addition, as the Chinese legal system develops, changes in such laws and
regulations, their interpretation or their enforcement may have a material
adverse effect on our business operations.
Enforcement
of regulations in China may be inconsistent.
Although
the Chinese government introduced new laws and regulations to modernize its
securities and tax systems on January 1, 1994, China does not yet possess an
expansive body of business law. As a result, the enforcement, interpretation
and
implementation of regulations may prove to be inconsistent and it may be
difficult to enforce contracts.
We
may experience lengthy delays in resolution of legal disputes.
As
China
has not developed a dispute resolution mechanism similar to the Western court
system, dispute resolution over Chinese projects and joint ventures can be
difficult and there is no assurance that any dispute involving our business
in
China can be resolved expeditiously and satisfactorily.
We
may experience an impact of the United States Foreign Corrupt Practices Act
on
our business.
We
are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits Unites States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in mainland China. We
have attempted to implement safeguards to prevent and discourage such practices
by our employees and agents. We cannot assure you, however, that our employees
or other agents will not engage in such conduct for which we might be held
responsible. If our employees or other agents are found to have engaged in
such
practices, we could suffer severe penalties and other consequences that may
have
a material adverse effect on our business, financial condition and results
of
operations.
Impact
of governmental regulation on our operations.
We
may be
subjected to liability for product safety that could lead to a product recall.
Our operations and properties are subject to regulation by various Chinese
government entities and agencies. As a producer of food products, our operations
are subject to production, packaging, quality, labeling and distribution
standards. Our production and distribution facilities are also subject to
various local environmental laws and workplace regulations.
We
believe that our current legal and environmental compliance programs adequately
address such concerns and that we are in compliance with applicable laws and
regulations. However, compliance with, or any violation of, current and future
laws or regulations could require material expenditures or otherwise adversely
affect our business and financial results.
We
may be
liable if the consumption of any of our products cause injury, illness or death.
We may also be required to recall certain of our products that become
contaminated or are damaged. We are not aware of any material product liability
judgment against us. However, a product liability judgment or a product recall
could have a material adverse effect on our business or financial
results.
It
may be difficult to serve us with legal process or enforce judgments against
our
management or us.
All
of
our assets are located in China. In addition, all of our directors and officers
are non-residents of the United States, and all, or substantial portions of
the
assets of such non-residents, are located outside the United States. As a
result, it may not be possible to effect service of process within the United
States upon such persons. Moreover, there is doubt as to whether the courts
of
China would enforce:
-
|
Judgments
of United States courts against us, our directors or our officers
based on
the civil liability provisions of the securities laws of the United
States
or any state; or
|
-
|
Original
actions brought in China relating to liabilities against non-residents
or
us based upon the securities laws of the United States or any
state.
|
The
Chinese government could change its policies toward private enterprise or even
nationalize or expropriate it, which could result in the total loss of your
investment.
Our
business is subject to significant political and economic uncertainties and
may
be adversely affected by political, economic and social developments in China.
Over the past several years, the Chinese government has pursued economic reform
policies including the encouragement of private economic activity and greater
economic decentralization. The Chinese government may not continue to pursue
these policies or may significantly alter them to our detriment from time to
time with little, if any, prior notice. Changes in policies, laws and
regulations or in their interpretation or the imposition of confiscatory
taxation, restrictions on currency conversion, restrictions or prohibitions
on
dividend payments to shareholders, devaluations of currency or the
nationalization or other expropriation of private enterprises could have a
material adverse effect on our business. Nationalization or expropriation could
even result in the total loss of our investment in China and in the total loss
of your investment.
If
relations between the United States and China worsen, our stock price may
decrease and we may have difficulty accessing U.S. capital
markets.
At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies
may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could adversely affect the market price of our Class
A
Common Stock and our ability to access U.S. capital markets.
The
Chinese economic, political and social conditions as well as government policies
could affect our business.
All
of
our business, assets and operations are located in China. The economy of China
differs from the economies of most developed countries in many respects,
including:
-
government
involvement;
-
level
of
development;
-
growth
rate;
-
control
of foreign exchange; and
-
allocation
of resources.
The
economy of China has been transitioning from a planned economy to a more
market-oriented economy. Although in recent years the Chinese government has
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of productive assets in China is still owned by the Chinese
government. In addition, the Chinese government continues to play a significant
role in regulating industry by imposing industrial policies. It also exercises
significant control over China’s economic growth through the allocation of
resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular
industries or companies.
The
economy of China has experienced significant growth in the past 20 years, but
growth has been uneven both geographically and among various sectors of the
economy. The Chinese government has implemented various measures from time
to
time to control the rate of economic growth. Some of these measures benefit
the
overall economy of China, but may have a negative effect on us. For example,
our
operating results and financial condition may be adversely affected
by:
-
changes
in the rate or method of taxation;
-
imposition
of additional restrictions on currency conversion and remittances
abroad;
-
reduction
in tariff or quota protection and other import restrictions; and
-
changes
in the usage and costs of state-controlled transportation services.
Fluctuations
in the value of the Chinese Renminbi relative to foreign currencies could affect
our operating results.
Substantially
all our revenues and expenses are denominated in the Chinese Renminbi. However,
we use the United States dollar for financial reporting purposes. The value
of
Chinese Renminbi against the United States dollar and other currencies may
fluctuate and is affected by, among other things, changes in China’s political
and economic conditions. The Chinese government values the exchange rate of
the
Chinese Renminbi against a number of currencies, rather than just exclusively
to
the United States dollar. Although the Chinese government has stated its
intention to support the value of the Chinese Renminbi, we cannot assure you
that the government will not revalue it. As our operations are primarily in
China, any significant revaluation of the Chinese Renminbi may materially and
adversely affect our cash flows, revenues and financial condition. For example,
to the extent that we need to convert United States dollars into Chinese
Renminbi for our operations, appreciation of this currency against the United
States dollar could have a material adverse effect on our business, financial
condition and results of operation. Conversely, if we decide to convert our
Chinese Renminbi into United States dollars for other business purposes and
the
United States dollar appreciates against this currency, the United States dollar
equivalent of the Chinese Renminbi would be reduced. To date, we have not
engaged in any hedging transactions in connection with our
operations.
The
discontinuation of the preferential tax treatment currently available to our
Chinese subsidiaries might adversely affect our results of operations.
Our
Chinese operating subsidiaries are subject to the People’s Republic of China
Enterprise Income Tax Law Concerning Foreign-Invested Enterprises and Foreign
Enterprises. Under this law and its related regulations, our Chinese
subsidiaries as foreign-invested enterprises, are generally subject to
enterprise income tax at a statutory rate of 33% (30% national income tax plus
3% local income tax) through 2007, and 25% from January 1, 2008 under the
tax law described below. However, as manufacturing foreign invested enterprises,
our Chinese subsidiaries enjoyed “two-year exemption, three-year 50% reduction”
preferential tax treatment from their first profitable year. However, under
the
new tax law, a new manufacturing foreign-invested enterprise established after
March 16, 2007 will not be entitled to such preferential tax treatment anymore.
On
March 16, 2007, the National People’s Congress of the People’s Republic of
China passed the People’s Republic of China Enterprise Income Tax Law, which was
effective as of January 1, 2008. In accordance with the new law, a unified
enterprise income tax rate of 25% and unified tax deduction standards will
be
applied equally to both domestic-invested enterprises and foreign-invested
enterprises. Enterprises established prior to March 16, 2007 eligible for
preferential tax treatment in accordance with the currently prevailing tax
laws
and administrative regulations shall, under the regulations of the State
Council, gradually be subject to the new tax rate over a five-year transition
period starting from the effectiveness date of the new law. For foreign-invested
enterprises that currently enjoy “two-year exemption, three-year 50% reduction”
preferential tax treatment, the tax holiday are still valid
.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Submission of Matters to a Vote of Security
Holders.
None.
Item
5. Other Information.
There
have been no material changes to the procedures by which security holders may
recommend nominees to the Company’s board of directors.
Item
6. Exhibits.
Exhibit
Number
|
Description
|
2.1
|
Share
Exchange Agreement dated as of December 18, 2001 (incorporated herein
by
reference from our filing on the Definitive Proxy 14/A filed on October
11, 2001).
|
3.1
|
Amended
Articles of Incorporation (incorporated herewith by reference to
Exhibit
3.1 to our Definitive Proxy 14/A filed on October 11,
2001).
|
3.2
|
By-laws
(incorporated herewith by reference to Exhibit 3.2 to our Definitive
Proxy
14/A filed on October 11, 2001).
|
3.3
|
Certificate
of Designations of Preferences, Rights and Limitations of the Series
A 7%
Convertible Preferred Stock (incorporated herewith by reference to
Exhibit
3.1 of our Form 8-K filed on July 12, 2005).
|
3.4
|
Certificate
of Designations of Preferences, Rights and Limitations of the Series
B 7%
Convertible Preferred Stock (incorporated herewith by reference to
Exhibit
3.1 of our Form 8-K filed on December 23, 2005).
|
4.1
|
Subscription
Agreement, dated September 4, 2003 (incorporated herewith by reference
to
Exhibit 4.1 to our Registration Statement on Form S-3 filed on October
3,
2003).
|
4.2
|
Subscription
Agreement, dated October 3, 2003 (incorporated herewith by reference
to
Exhibit 4.2 to our Registration Statement on Form S-3 filed on October
3,
2003).
|
4.3
|
Common
Stock Purchase Warrants for the September 4, 2003 Private Placement
(incorporated herewith by reference to Exhibit 4.3 to our Registration
Statement on Form S-3 filed on October 3, 2003).
|
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 (Yant
ai)
Company Limited, dated November 28, 1998 (incorporated herewith by
reference to Exhibit 10.3 to our Registration Statement on Form S-3
filed
on October 3, 2003).
|
10.4
|
Subcontracting
Agreement, for the New Dragon Asia Food (Yantai) Company Limited,
dated
December 26, 1998 (incorporated herewith by reference to Exhibit
10.4 to
our Registration Statement on Form S-3 filed on October 3,
2003).
|
10.5
|
Sino-Foreign
Joint Venture Contract for the New Dragon Asia Food (Dalian) Company
Limited, dated November 28, 1998 (incorporated herewith by reference
to
Exhibit 10.5 to our Registration Statement on Form S-3 filed on October
3,
2003).
|
10.6
|
Subcontracting
Agreement, for the New Dragon Asia Food (Dalian) Company Limited,
dated
December 26, 1998 (incorporated herewith by reference to Exhibit
10.6 to
our Registration Statement on Form S-3 filed on October 3,
2003).
|
10.7
|
Sino-Foreign
Joint Venture Contract for the Sanhe New Dragon Asia Food Company
Limited,
dated November 28, 1998 (incorporated herewith by reference to Exhibit
10.7 to our Registration Statement on Form S-3 filed on October 3,
2003).
|
10.8
|
Subcontracting
Agreement, for the Sanhe New Dragon Asia Food Company Limited, dated
December 26, 1998 (incorporated herewith by reference to Exhibit
10.8 to
our Registration Statement on Form S-3 filed on October 3,
2003).
|
10.9
|
Employment
Agreement between New Dragon Asia Corp. and Peter Mak, dated November
2,
2004 (incorporated herewith by reference to Exhibit 10.9 to our Form
8-K
filed on June 29, 2005).
|
10.10
|
Employment
Supplement between New Dragon Asia Corp. and Peter Mak, dated June
22,
2005 (incorporated herewith by reference to Exhibit 10.9 to our Form
8-K
filed on June 29, 2005).
|
10.11
|
Supplementary
Agreement to Employment Agreement between New Dragon Asia Corp. and
Peter
Mak, dated January 20, 2006 (incorporated herewith by reference to
Exhibit
10.10 to our Form 8-K filed on January 24,
2006).
|
10.12
|
Equity
Incentive Plan (incorporated herewith by reference to Exhibit B to
our
Definitive Information Statement on Schedule 14C filed on March 14,
2006).
|
10.13
|
Stock
Option Agreement between New Dragon Asia Corp. and Peter Mak, dated
December 13, 2006 (incorporated herewith by reference to Exhibit
10.1 to
our Form 8-K filed on December 15, 2006).
|
10.14
|
Settlement
Agreement and General Release between New Dragon Asia Corp and Berry-Shino
Securities Inc., dated August 15, 2007 (incorporated by reference
to
Exhibit 10.1 to our Form 8-K filed on August 15, 2007).
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of
the
Securities Exchange Act of 1934, as adopted pursuant to Section 302
of the
Sarbanes-Oxley Act of 2002, filed herewith.
|
31.2
|
Certification
of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A)
of
the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002, filed herewith.
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906
of the
Sarbanes-Oxley Act of 2002), filed herewith.
|
32.2
|
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section
906 of
the Sarbanes-Oxley Act of 2002), filed
herewith.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
NEW
DRAGON ASIA CORP.
|
|
|
|
Dated:
August 4, 2008
|
By:
|
/s/
Li Xia Wang
|
|
Name:
Li Xia Wang
|
|
Title:
Chief Executive Officer
|
|
|
|
|
By:
|
/s/
Peter Mak
|
|
Name:
Peter Mak
|
|
Title:
Chief Financial Officer
|
Grafico Azioni Nwd Group (AMEX:NWD)
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Grafico Azioni Nwd Group (AMEX:NWD)
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