New Dragon Asia Corp - Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: September 25, 2007

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 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

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

The number of shares of Class A Common Stock outstanding as of October 31, 2007 was 54,995,385.

NEW DRAGON ASIA CORP.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 2007

TABLE OF CONTENTS

		Page
PART I:	FINANCIAL INFORMATION

ITEM 1.	Consolidated Financial Statements:

	Consolidated Balance Sheets as of September 25, 2007 (unaudited) and December 25, 2006	3

	Consolidated Statements of Operations (unaudited) for the three months and nine months ended September 25, 2007 and 2006	4

	Consolidated Statements of Stockholders’ Equity and Comprehensive Income (unaudited) for the nine months ended September 25, 2007 and the year ended December 25, 2006	5

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 25, 2007 and 2006	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	31

ITEM 4.	Controls and Procedures	31

PART II:	OTHER INFORMATION

ITEM 1.	Legal Proceedings	32

ITEM 1A.	Risk Factors	32

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		33

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)

	September 25, 2007		December 25, 2006
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	3,740	$	10,276
Accounts receivable, net		8,634		8,835
Deposits and prepayments, net		11,665		6,586
Inventories, net		19,937		11,598
Due from related companies		893		857
Total current assets		44,869		38,152

Property, machinery and equipment, net		25,496		24,248
Land use rights, net		7,143		6,983
Goodwill		125		125
Total assets	$	77,633	$	69,508

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	4,063	$	2,723
Other payables and accruals		3,055		3,255
Taxes payable		2,638		3,453
Embedded derivatives, at fair value		3,596		11,138
Due to related companies		—		28
Total current liabilities		13,352		20,597

Due to New Dragon Asia Food Limited		1,069		317
Due to joint venture partners		162		102
Total liabilities		14,583		21,016
Minority interests		287		276
Series A and B Redeemable Convertible Preferred Stock, $0.0001 par value: Authorized shares - 50,000,000 Issued and outstanding - 10,162,000 shares at September 25, 2007 and December 25, 2006		5,337		4,204

Commitments

Stockholders’ equity:
Class A Common Stock, $0.0001 par value: Authorized shares - 102,000,000 Issued and outstanding - 54,248,830 at September 25, 2007 and 53,614,723 at December 25, 2006		5		5
Class B Common Stock, $0.0001 par value: Authorized shares - 2,000,000 Issued and outstanding - none		—		—
Additional paid-in capital		29,180		28,411
Retained earnings		22,467		12,668
Accumulated other comprehensive income		5,774		2,928
Total stockholders’ equity		57,426		44,012
Total liabilities and stockholders’ equity	$	77,633	$	69,508

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 September 25,						Nine months ended September 25,
	2007			2006			2007			2006
Net revenue	$	13,955		$	12,964		$	38,150		$	35,604
Cost of goods sold		(11,148	)		(10,442	)		(30,865	)		(29,056	)
Gross profit		2,807			2,522			7,285			6,548
Selling and distribution expenses		(302	)		(263	)		(825	)		(709	)
General and administrative expenses		(731	)		(711	)		(2,025	)		(4,020	)
Income from operations		1,774			1,548			4,435			1,819
Other income (expense):
Interest income		3			26			18			49
Other income (expense)		15			14			143			18
Gain on fair value adjustments to e mbedded derivatives		1,903			2,593			7,541			3,198
VAT refund		—			1,036			540			2,135
Income (loss) before income taxes and minority interests		3,695			5,217			12,677			7,219
Provision for income taxes		(491	)		(427	)		(1,211	)		(1,061	)
Income (loss) before minority interests		3,204			4,790			11,466			6,158
Minority interests		—			—			—			(133	)
Net income (loss)	$	3,204		$	4,790		$	11,466		$	6,025
Accretion of Redeemable Preferred Stock		(377	)		(470	)		(1,133	)		(1,456	)
Preferred Stock Dividends		(178	)		(214	)		(534	)		(679	)
Income available to common stockholders	$	2,649		$	4,106		$	9,799		$	3,890

Earnings per common share
Basic	$	0.05		$	0.08		$	0.18		$	0.08
Diluted	$	0.05		$	0.08		$	0.18		$	0.07
Weighted average number of common shares outstanding
Basic		54,073			51,936			53,858			51,101
Diluted		54,950			61,618			54,735			52,450

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		Additional Paid-in Capital		Receivable from Stockholder			Retained Earnings			Accumulated Other Comprehensive Income		Total Stockholders' Equity			Comprehensive Income
Balance at December 25, 2005		49,322	$	5	$	15,216	$	(49	)	$	18,029		$	798	$	33,999		$	2,545
Net income											(2,604	)				(2,604	)		(2,604	)
Write off receivable from stockholder								49								49
Accretion of Redeemable Preferred Stock											(1,882	)				(1,882	)
Preferred Stock Dividends											(875	)				(875	)
Stock-based compensation expense						8,140										8,140
Foreign currency translation adjustment														2,130		2,130			2,130
Conversion of Preferred Stock, related dividend payments made, and cashless exercise of warrants in shares of Class A Common Stock		3,292				3,935										3,935
Exercise of stock options		1,000				1,120										1,120
Balance at December 25, 2006		53,614	$	5	$	28,411	$	—		$	12,668		$	2,928	$	44,012		$	(474	)
Net income											11,466					11,466			11,466
Accretion of Redeemable Preferred Stock											(1,133	)				(1,133	)
Preferred Stock Dividends											(534	)				(534	)
Foreign currency translation adjustment														2,846		2,846			2,846
Conversion of Preferred Stock / dividend in shares of Class A Common Stock		634				769										769
Balance at September 25, 2007		54,248	$	5	$	29,180	$	—		$	22,467		$	5,774	$	57,426		$	14,312

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)

	Nine months ended September 25,
	2007			2006
Cash flows from operating activities:
Net income (loss)	$	11,466		$	6,025
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Allowance for doubtful accounts		299			(124	)
Provision for inventory reserve		4			11
Depreciation and amortization of property, machinery, equipment and land use rights		1,213			1, 639
(Gain) loss on fair value adjustments to embedded derivatives		(7,541	)		(3,198	)
Minority interests		—			7
Stock-based expense for services received		269			2,320
Changes in operating assets and liabilities: (Increase) decrease in:
Accounts receivable		(98	)		(602	)
Deposits and prepayments		(5,079	)		588
Inventories		(8,343	)		(372	)
Due from related companies		(36	)		(167	)
Increase (decrease) in:
Accounts payable		1,340			1,061
Other payables and accruals		(213	)		(813	)
Taxes payable		(815	)		985
Due to related companies		—			(200	)
Net cash provided by (used in) operating activities		(7,534	)		7,160

Cash flows from investing activities:
Acquisition of Chengdu plant		—			(2,300	)
Purchases of property, machinery and equipment		(1,237	)		(4,720	)
Purchases of land use rights		—			(2,024	)
Minority interests		—			266
Net cash used in investing activities		(1,237	)		(8,778	)

Cash flows from financing activities:
Payments of issuance costs related to preferred stock		—			(60	)
Preferred stock dividend		(49	)		(277	)
Proceed from (repayments to) parent company		752			(14	)
Proceeds from (repayment to) joint venture partners		60			249
Proceeds from issuance of common stock upon exercise of stock options		—			1,120
Net cash provided by financing activities		763			1,018
Foreign currency translation adjustment		1,472			832
Net increase (decrease) in cash and cash equivalents		(6,536	)		232
Cash and cash equivalents at beginning of period		10,276			14,332
Cash and cash equivalents at end of period	$	3,740		$	14,564

Non-Cash Investing and Financing Activities

Conversion of preferred stock into common stock	$	—		$	1,800

Dividend payments on preferred stock in form of common stock	$	500		$	267

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 all of its 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 in other entities are accounted for using the cost method. The Company is not the primary beneficiary of any Variable Interest Entities.

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 accruals, 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, 2006.

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 allowance, and inventory reserves. Although management believes these estimates and assumptions are adequate and reasonable under the circumstances, actual results could differ from those estimates. 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.

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.

NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value instruments. SFAS 157 does not require any new fair value measurements, but applies other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (the Company’s fiscal 2008). The Company believes that implementation of SFAS 157 will have little or no impact on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115” (SFAS 159). This statement allows all entities a one-time election to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value (the “fair value option”). SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, of SFAS 159 on the Company’s consolidated financial statements.

NOTE 4. CONDENSED BALANCE SHEET INFORMATION

Condensed balance sheet information as of September 25, 2007 consisted of the following (in thousands):

	Inside China		Outside China			Total
Assets
- Cash and cash equivalents	$	3,487	$	253		$	3,740
- Others		73,830		63			73,893
Total assets		77,317		316			77,633
Liabilities		9,429		5,154			14,583
Minority interests		287		—			287
Intercompany		12,871		(12,871	)		—
Equity		48,707		8,719			57,426

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 nine months ended September 25, 2007 consisted of the following (in thousands):

	Inside China			Outside China			Total
Net revenue	$	38,150		$	—		$	38,150
Cost of goods sold		(30,865	)		—			(30,865	)
General and administrative expenses		(916	)		(1,109	)		(2,025	)
Income (loss) from operations		5,544			(1,109	)		4,435
Provision for income taxes		(1,211	)		—			(1,211	)
Other income		710			7,532			8,242
Net income		5,043			6,423			11,466

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, respectively.

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 7,254 million 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 nine months ended September 25, 2007 since their effect would have been anti-dilutive.

The calculation of diluted weighted average common shares outstanding for the three months ended September 25, 2007 and 2006 and for the nine months ended September 25, 2007 and 2006 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 September 25,
	2007						2006
	Income		Weighted Average Shares		Per-Share		Income		Weighted Average Shares		Per-Share
Earnings per share - basic
Income available to common stockholders	$	2, 649		54,073	$	0.05	$	4,106		51,936	$	0.08
Effect of dilutive securities
Redeemable convertible preferred stock		—		—				684		8,846
Options and warrants		—		877				—		836
Earnings per share - diluted
Net income	$	2,649		54,950	$	0.05	$	4,790		61,618	$	0.08

	Nine Months Ended September 25,
	2007						2006
			Weighted						Weighted
			Average						Average
	Income		Shares		Per-Share		Income		Shares		Per-Share
Earnings per share - basic
Income available to common stockholders	$	9,799		53,858	$	0.18	$	3,890		51,101	$	0.08
Effect of dilutive securities
Redeemable convertible preferred stock		—		—				—		—
Options and warrants		—		877				—		1,349
Earnings per share - diluted
Net income	$	9,799		54,735	$	0.18	$	3,890		52,450	$	0.07

NOTE 6. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following (in thousands):

	September 25, 2007			December 25, 2006
	(Unaudited)
Accounts receivable	$	9,568		$	9,554
Less: Allowance for doubtful accounts		(934	)		(719	)
	$	8,634		$	8,835

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

	September 25, 2007			December 25, 2006
	(Unaudited)
Balance at the beginning of the period	$	719		$	893
Add: provision during the period		299			83
Less: write-offs during the period		(84	)		(257	)
Balance at the end of the period	$	934		$	719

NOTE 7. DEPOSITS AND PREPAYMENTS

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

	September 25, 2007		December 25, 2006
	(Unaudited)
Deposits for raw materials	$	11,640	$	6,394
Prepayments and advances		25		192
	$	11,665	$	6,586

NOTE 8. INVENTORIES

Inventories consisted of the following (in thousands):

	September 25, 2007			December 25, 2006
	(Unaudited)
Raw materials (including packing materials)	$	18,562		$	9,807
Finished goods		1,453			1,895
		20,015			11,702
Less: Inventory reserve		(78	)		(104	)
	$	19,937		$	11,598

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

	September 25, 2007			December 25, 2006
	(Unaudited)
Balance at the beginning of the period	$	104		$	134
Add: provision during the period		4			—
Less: write-offs during the period		(30	)		(30	)
Balance at the end of the period	$	78		$	104

NOTE 9. DUE FROM RELATED COMPANIES

	September 25, 2007		December 25, 2006
	(Unaudited)
Due from related companies for sales	$	893	$	857

NOTE 10. PROPERTY, MACHINERY AND EQUIPMENT

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

	Useful Life		September 25, 2007			December 25, 2006
	(In years)		(Unaudited)
Buildings		40	$	14,530		$	12,935
Machinery and equipment		5 - 12		19,767			19,067
				34,297			32,002
Less: Accumulated depreciation and amortization				(8,801	)		(7,754	)
			$	25,496		$	24,248

NOTE 11. LAND USE RIGHTS

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

	September 25, 2007			December 25, 2006
	(Unaudited)
Land use rights	$	8,208		$	7,882
Less: Accumulated amortization		(1,065	)		(899	)
	$	7,143		$	6,983

NOTE 12. OTHER PAYABLES AND ACCRUALS

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

	September 25, 2007		December 25, 2006
	(Unaudited)
Deposits from customers	$	961	$	1,094
Accruals for payroll, bonus and benefits		222		290
Utilities and accrued expenses		1,872		1,871
	$	3,055	$	3,255

NOTE 13. REDEEMABLE CONVERTIBLE PREFERRED STOCK

On July 11, 2005, the Company issued 6,000 shares of 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 September 25, 2007, all of the five-year warrants had been exercised, and 3,888 shares of Series A Preferred Stock were converted into 4,092,633 shares of Class A Common Stock.

On December 22, 2005, the Company issued 9,500 shares of 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 September 25, 2007, 1,450 shares of Series B Preferred Stock had been converted into 906,250 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 a 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	)
Effect of Allocation to Derivative Liabilities					(1,648	)		(4,830	)		(6,478	)
Conversion of Series A Preferred Stock to common stocks		(5,338	)		(3,888	)		(1,450	)		(5,338	)
Accretion of discount					1,295			2,185			3,480
		10,162		$	1,074		$	4,263		$	5,337

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	4.16%	3.83% to 4.11%
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 from issuance are as follows:

Fair value at issuances	$	10,259
Change in value of derivatives during 2005		4,064
Conversion of 1,900 shares of Series A Preferred Stock to common stock during 2005		(2,188	)
Fair Value at December 25, 2005		12,135
Change in value of derivatives during the period		1,434
Conversion of 3,438 shares of Series A and B Preferred Stock to common stock during 2006		(2,431	)
Fair value at December 25, 2006		11,138
Change in value of derivatives during the period		(7,542	)
Fair Value at September 25, 2007	$	3,596

NOTE 14. COMMON STOCK

On September 4, 2003, the Company issued 3,300,000 shares of Class A Common Stock for an aggregate purchase amount of $1,650,000 or $0.50 per share. The shares were issued pursuant to an exemption provided by Section 4(2) of the Securities Act. The purchasers were also issued warrants to purchase 1,650,000 shares of the Company’s Class A Common Stock, which have a term of 5 years at an exercise price of $0.99 per share. As of September 25, 2007, all such warrants had been exercised.

On October 7, 2003, the Company issued 850,000 shares of Class A Common Stock for an aggregate purchase amount of $425,000 or $0.50 per share. The shares were issued pursuant to an exemption provided by Section 4(2) of the Securities Act. The purchasers were also issued warrants to purchase 425,000 shares of the Company’s Class A Common Stock, which have a term of 5 years and an exercise price of $0.979 per share. As of September 25, 2007, warrants to purchase 25,000 shares of Class A Common Shares were outstanding.

NOTE 15. WARRANTS

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

	Shares			Weighted Average Exercise Price
Outstanding at December 25, 2005		6,609,474		$	1.4020
Issued		—			—
Exercised		(101,579	)		1.0400
Forfeited/Cancelled		—			—
Outstanding at December 25, 2006 and September 25, 2007		6,507,895			1.4093

Warrants exercisable at December 25, 2005		6,609,474			1.4020
Warrants exercisable at December 25, 2006		6,507,895			1.4093
Warrants exercisable at September 25, 2007		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 September 25, 2007 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 September 25, 2007		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 2006 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 September 25, 2007, all of these options had been 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 September 25, 2007, all of these options had been 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 September 25, 2007, 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 September 25, 2007, related weighted average fair value and life information:

	Options Outstanding						Options Exercisable
Range of Exercise Price Per Share	Number Outstanding at September 25, 2007		Weighted Average Fair Value		Weighted Average Remaining Life (Years)		Number Exercisable at September 25, 2007		Weighted Average Exercise Price
$ 1.60-1.82		8,000,000	$	1.02		7.95		8,000,000	$	1.7650

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.

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 September 25,				Nine months ended September 25,
	2007		2006		2007		2006
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Pre-determined annual fee charged by joint venture partners:
Shandong Longfeng Group Company (a)	$	21	$	19	$	61	$	57
Shandong Longfeng Flour Company Limited (b)		10		9		28		27
	$	31	$	28		89		84

	(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 33%. Four 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 September 25, 2007 and December 25, 2006, 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 January 1, 2007, 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

Delta Link Limited and Chengdu Plant

On February 24, 2006, the Company acquired 100% of the equity interest shares of Delta Link Ltd. (“Delta Link”) for a cash consideration of $3,300,000. Delta Link is a holding company, which owns a 90% equity interest in a noodle manufacturing facility in Chengdu, Sichuan Province. The Chengdu Plant serves the western China market.

This acquisition has been accounted for using the purchase method pursuant to SFAS No. 141, “Business Combinations.” The consolidated financial statements include the results of operations of the acquired company commencing as of the acquisition date. No pro forma information is presented due to the immaterial effect of this acquisition on the consolidated result of operations.

In connection with the acquisition, the assets acquired and the liabilities assumed from Delta Link and the Chengdu Plant were recorded at their fair values on the consolidated balance sheet. Based on the initial purchase price allocation, the Company recorded goodwill in the amount of approximately $125,000.

The long-lived assets and goodwill are subject to periodic review to determine if impairment has occurred and, if so, the amount of such impairment. If the Company determines that impairment exists, the Company will be required to reduce the carrying value of the impaired assets by the amount of impairment and to record a corresponding charge to operations in the period of impairment.

The allocation of initial purchase consideration was as follows (in thousands):

Acquisition consideration	$	3,300

Accounts receivable		62
Property, machinery and equipment		2,167
Land use rights		1,056
Accounts payable		(13	)
Other payable and accruals		(97	)
Net assets value		3,175

Goodwill	$	125

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.

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 September 25,						For the nine months ended September 25,
	2007			2006			2007			2006
	(US$'000)			(US$'000)			(US$'000)			(US$'000)
Net revenue
Instant noodles		3,853			4,030			10,866			11,691
Flour		7,805			7,613			20,754			20,044
Soybean		2,297			1,321			6,530			3,869
		13,955			12,964			38,150			35,604
Income (loss) from operation
Instant noodles		360			240			828			1,117
Flour		1,648			1,447			4,004			3,487
Soybean		(234	)		(139	)		(397	)		(2,785	)
		1,774			1,548			4,435			1,819
Depreciation and amortization
Instant noodles		338			257			583			563
Flour		164			156			467			392
Soybean		55			44			163			205
		557			457			1,213			1,160

	September 25,		December 25,
	2007		2006
	(US$'000)		(US$'000)
Identifiable long-term assets
Instant noodles		22,153		20,864
Flour		7,370		7,377
Soybean		3,116		2,990
		32,639		31,231

NOTE 21. OTHER EVENTS

On August 15, 2007, the Company entered into the Settlement Agreement and General Release (the “Agreement”) dated August 15, 2007 by and between the Company and Berry Shino Securities, Inc. (“Berry Shino”) pursuant to which the parties agreed to resolve a dispute relating to the alleged failure of the Company to pay in full for services rendered by Berry Shino in connection with a private placement of the Company’s securities in 2003 (the “Dispute”). The parties entered into the Agreement to resolve the Dispute without litigation and its attendant costs and without admission of liability by the Company. In accordance with the terms of the Agreement, the Company agreed to issue to Berry Shino, 275,000 shares of restricted Class A Common Stock in full satisfaction of the Dispute.

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, 2006, 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 of 90%, 79.64%, 90% and 90% respectively. 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 September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value instruments. SFAS 157 does not require any new fair value measurements, but applies under other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (our fiscal 2008). We believe that implementation of SFAS 157 will have little or no 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 including an amendment of FASB Statement No. 115” (SFAS 159). This Statement allows all entities a one-time election to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value (the “fair value option”). SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact, if any, of SFAS 159 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 have obtained HACCP (Hazard Analysis Critical Control Point) certification from CCIC Conformity Assessment Services Co. Ltd., a Chinese quality assurance examination authority, enabling us to begin exports of instant noodles and soybean powder to Europe. From the second quarter of the year 2006, we began export sales to Sweden and Greece.

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.

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.

Employees

On September 25, 2007, we had approximately 1,500 employees. All of our employees are located in the eight plants and the Shenzhen executive office. We believe we have good relationships with our employees and no major disputes or work stoppages 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 September 25,						Nine months ended September 25,
	2007			2006			2007			2006
Net revenue	$	13,955		$	12,964		$	38,150		$	35,604
Cost of goods sold		(11,148	)		(10,442	)		(30,865	)		(29,056	)
Gross profit		2,807			2,522			7,285			6,548
Selling and distribution expenses		(302	)		(263	)		(825	)		(709	)
General and administrative expenses		(731	)		(711	)		(2,025	)		(4,020	)
Gain (loss) on fair value adjustments to embedded derivatives		1,903			2,593			7,541			3,198
Income (loss) before income taxes and minority interest		3,695			5,217			12,677			7,219
Provision for income taxes		(491	)		(427	)		(1,211	)		(1,061	)
Net income (loss)		3,204			4,790			11,466			6,025
EBITDA*		2,346			3,093			6,331			7,798
EBITDA margin on revenue		17	%		24	%		17	%		22	%

* The Company uses EBITDA as an operating performance measure. EBITDA is defined as net earnings (loss) before interest, taxes, depreciation and amortization expense, non-cash stock-based compensation and in our case (loss) gain on fair value adjustments to embedded derivatives. EBITDA is not a measure of operating performance under U.S. generally accepted accounting principles (“GAAP”) and should not be considered as an alternative or substitute for GAAP profitability measures such as operating earnings (loss) and net earnings (loss). EBITDA as an operating performance measure has material limitations since it excludes, among other things, the statement of operations impact of depreciation and amortization expense, interest expense and the provision (benefit) for income taxes and (loss) gain on fair value adjustments to embedded derivatives and therefore does not necessarily represent an accurate measure of profitability, particularly in situations where a company is highly leveraged or has a disadvantageous tax structure. The Company uses a significant amount of capital assets and depreciation and amortization expense is a necessary element of the Company’s costs and ability to generate revenue and therefore its exclusion from EBITDA is a material limitation. The Company generally incurs significant income taxes each year and the provision (benefit) for income taxes is a necessary element of the Company’s costs and therefore its exclusion from EBITDA is a material limitation. As a result, EBITDA should be evaluated in conjunction with net earnings (loss) for a more complete analysis of the Company’s profitability, as net earnings (loss) includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to EBITDA. As EBITDA is not defined by GAAP, the Company’s definition of EBITDA may differ from and therefore may not be comparable to similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of the Company’s operating results as reported under GAAP.

The following table presents reconciliation from net earnings, which is the most directly comparable GAAP operating performance measure, to EBITDA for the third quarters of 2007 and 2006, respectively.

	Three months ended September 25,						Nine months ended September 25,
	2007			2006			2007			2006
Net income	$	3,204		$	4,790		$	11,466		$	6,025
Income tax		491			427			1,211			1,061
Interest income		(3	)		(26	)		(18	)		(49	)
Depreciation and amortization		557			495			1,213			1,639
Loss (gain) on fair value adjustments to embedded derivatives		(1,903	)		(2,593	)		(7,541	)		(3,198	)
Non-cash stock-based compensation		—			—			—			2,320
EBITDA	$	2,346		$	3,093		$	6,331		$	7,798

Nine Months Ended September 25, 2007 Compared to Nine Months Ended September 25, 2006

Net Revenue

Net revenue for the nine months ended September 25, 2007 was $38,150,000, representing an increase of $2,546,000, or 7%, from $35,604,000 for the nine months ended September 25, 2006. The increase was primarily due to the introduction of our soybean protein powder product, which accounted for approximately $ 2.4 million of the increase .

Gross Profit

As a percentage of net revenue, gross profit increased to 19% for the nine months ended September 25, 2007 from 18% for the nine months ended September 25, 2006. The increase was primarily due to the growth of export sales, which generate higher margins.

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 $825,000 for the nine months ended September 25, 2007, representing an increase of $116,000 from $709,000 for the corresponding period of 2006. The increase was primarily due to the expansion of marketing activities.

As a percentage of net revenue, selling and distribution expenses remained constant at 2% for the nine months ended September 25, 2007 as compared with the corresponding period in 2006. These results were primarily because we made no major change to our selling and distribution channels and as a result our costs were stabilized.

General and Administrative Expenses

General and administrative expenses decreased $1,995,000, or 50%, to $2,025,000 for the nine months ended September 25, 2007 as compared to $4,020,000 for the nine months ended September 25, 2006. The decrease was primarily due to the fact that no stock-based compensation expense was incurred in the year 2007.

Income from Operations

Income from operations increased $2,616,000, or 144%, to $4,435,000 for the nine months ended September 25, 2007 as compared to $1,819,000 for the nine months ended September 25, 2006. The increase was primarily due to the fact that no stock-based compensation expense was incurred in the year 2007 and the increase in the number of high margin export sales during 2007.

Gain on Fair Value Adjustments to Embedded Derivatives

The Company issued Series A Preferred Stock in July 2005, together with 3,157,896 warrants to purchase Class A Common Stock resulting in aggregate proceeds of $6 million. The Company also issued Series B Preferred Stock in December 2005, together with 2,968,750 warrants to purchase Class A Common Stock resulting in aggregate proceeds of $9.5 million. T he 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 operation. For the nine months ended September 25, 2007, the gain from variation of the fair value of these instruments was $7,541,000.

For the nine months ended September 25, 2006 , the gain from changes in the fair value of these instruments was $3,198,000. The increase was primarily due to the adjustments in the price used to calculate the fair value of the derivatives as a result of the change of the trading price of our common stock on September 25, 2007 and 2006, the valuation dates used to calculate such fair value for the respective periods.

VAT Refunds

VAT refunds remained at $540,000 for the nine months ended September 25, 2007 as compared to $2,135,000 for the nine months ended September 25, 2006. During the three months ended September 30, 2007, there were no additional tax refunds received from the municipal government of China.

Net Income

Net income was $11,466,000 for the nine months ended September 25, 2007 as compared to $6,025,000 for the nine months ended September 25, 2006. Such increase was primarily due to (i) the fact that there was no stock-based compensation expense incurred in the year 2007 and (ii) the gain derived from changes in the fair value of derivative instruments.

Three Months Ended September 25, 2007 Compared to Three Months Ended September 25, 2006

Net Revenue

Net revenue for the quarter ended September 25, 2007 was $13,955,000, representing an increase of $991,000, or 8%, from $12,964,000 for the quarter ended September 25, 2006. The increase was primarily due to the introduction of our soybean protein powder product, which accounted for approximately $900,000of the increase.

Gross Profit

As a percentage of net revenue, gross profit increased to 20% for the three months ended September 25, 2007 from 19% for the three months ended September 25, 2006. The increase was primarily due to the growth of export sales, which generate higher margins.

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 $302,000 for the quarter ended September 25, 2007, representing an increase of $39,000 or 15% from $263,000 for the corresponding quarter of 2006. The increase was primarily due to the expansion of marketing activities.

As a percentage of net revenue, selling and distribution expenses remained constant at 2% in the quarter ended September 25, 2007 as compared with the corresponding period in 2006. These results were primarily because we made no major change to our selling and distribution channels and as a result our costs were stabilized.

General and Administrative Expenses

General and administrative expenses increased $20,000, or 3%, to $731,000 for the quarter ended September 25, 2007 as compared to $711,000 for the quarter ended September 25, 2006. The increase was primarily due to the increase in professional fees on services including fees for investor relations, legal and accounting advice.

Income (Loss) from Operations

Income from operations was $1,774,000 for the three months ended September 25, 2007 as compared to $1,548,000 for the three months ended September 25, 2006. The increase was primarily due to the increase in the number of export sales, which generate higher margins.

Gain (Loss) on Fair Value Adjustments to Embedded Derivatives

The Company issued Series A Preferred Stock in July 2005, together with 3,157,896 warrants to purchase Class A Common Stock resulting in aggregate proceeds of $6 million. The Company also issued Series B Preferred Stock in December 2005, together with 2,968,750 warrants to purchase Class A Common Stock resulting in aggregate proceeds of $9.5 million. The fair value of each instrument was recorded as a derivative liability on our balance sheet. The corresponding gain or loss, which is non-cash in nature, resulting from changes in the fair values of these instruments is subsequently recorded in our statements of operations. For the three months ended September 25, 2007, the gain from changes in the fair value of these instruments was $1,903,000.

For the three months ended September 25, 2006, the gain from changes in the fair value of these instruments was $2,593,000. The change was primarily due to the adjustments in the price used to calculate the fair value of the derivatives as a result of the change of the trading price of our common stock on September 25, 2007 and 2006, the valuation dates used to calculate such fair value for the respective periods.

VAT Refunds

VAT refund was $0 for the quarter ended September 25, 2007 as compared to $1,036,000 for the quarter ended September 25, 2006. During the three months ended September 30, 2007, there were no additional tax refunds received from the municipal government of China.

Net Income (Loss)

Net income was $3,204,000 for the quarter ended September 25, 2007 as compared to $4,790,000 for the quarter ended September 25, 2006. Such decrease was primarily due to fact that (i) the gain derived from changes in the fair value of derivative instruments was lower and (ii) no VAT refund occurred during the quarter ended September 25, 2007.

Financial Condition, Liquidity and Capital Resources

Our primary liquidity needs are to purchase inventories and fund accounts receivable and capital expenditures. We have financed our working capital requirements through collections from customers and advances from related companies, together with proceeds received from financing transactions. We started a receivable collection campaign in late June with an objective of improving the debtor turnover period by 20% resulting in additional cash resources for the additional payment of deposits for wheat and soybean. This should enhance our supply chain management by averaging out the effect of the expected continued price increase in these crops.

Our working capital increased $13,962,000 to $31,517,000 at September 25, 2007 as compared to $17,555,000 at December 25, 2006, which was primarily due to (i) the increased inventory and (ii) the change in the fair value of derivative instruments.

Cash and cash equivalents were $3,740,000 as of September 25, 2007, a decrease of $6,536,000 from December 25, 2006. Net cash used in operating activities for the nine months ended September 25, 2007 was $7,534,000, which was primarily due to (i) additional deposits and prepayments of $5,079,000 paid to suppliers for wheat and soybean in order to secure additional supplies in anticipation of prices increase; (ii) increase in inventories of $8,343,000 for the growth of business.

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 September 25, 2007, 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
	2007		2008		2009		2010		2011		Thereafter		Total
	(In thousands)
Redeemable convertible preferred stock	$	400	$	3,162	$	3,162	$	3,438	$	—	$	—	$	10,162
Pre-determined annual fee charged by joint venture partners		28		113		113		113		113		3,823		4,303
Total	$	428	$	3,275	$	3,275	$	3,551	$	113	$	3,823	$	14,465

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	)
	$	10,162

RISK FACTORS

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 paid 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 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. Factors including, but not limited to, outstanding indebtedness, payment of dividends on securities ranking senior to the Class A Common Stock, decreases in our future earnings, increases in capital requirements, and negative results of our financial conditions may restrict our ability to declare or pay any dividends on our Class A Common Stock in the future. We currently intend to retain our future earnings to support operations and therefore do not expect to declare or pay any dividends on our Class A Common Stock in the foreseeable future.

We are controlled by our majority shareholder, which is controlled by our Chairman.

We are controlled by our major shareholder, which is controlled by our Chairman, Mr. Lu. Mr. Lu owns 100% of the equity interests of New Dragon Asia Food Ltd, which is our majority shareholder. As a result, Mr. Lu through his equity ownership effectively exercises control over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership might 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, Mix Creation Ltd., Rich Delta Ltd. and Keen General Ltd. and their respective subsidiaries in China (collectively, the “Subsidiaries”). 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 the 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.

Recent 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.

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 retain outlets and sufficient shelf space.

Many of our competitors are larger and have greater financial resources, including our primary competitors, the manufacturers 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 its 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 may 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 business; (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 recent 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 its 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 precedential value. 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 has introduced new laws and regulations to modernize its securities and tax systems on January 1, 1994, China does not yet possess a comprehensive 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 causes 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 resource

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 are 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 recently announced that it is valuing 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 any preferential tax treatments or other incentives currently available to us in the PRC could materially and adversely affect our business, financial condition and results of operations

Four of our PRC subsidiaries enjoy certain special or preferential tax treatments regarding enterprise income tax in accordance with the “Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises.” Accordingly, they are entitled to tax concessions whereby the profit for the first two financial years beginning with the first profit-making year (after setting off tax losses carried forward from prior years) is exempt from income tax in the PRC and the profit for each of the subsequent three financial years is taxed at 50% of the prevailing tax rates set by the relevant tax authorities. On March 16, 2007, the National People’s Congress of the PRC passed the Enterprise Income Tax Law of the People’s Republic of China, which law will take effect 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 such as our PRC subsidiaries. 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 become subject to the new tax rate over a five-year transition period starting from the date of effectiveness of the new law. We expect details of the transitional arrangement for the five-year period from January 1, 2008 to December 31, 2012 applicable to enterprises approved for establishment prior to March 16, 2007, such as our PRC subsidiaries, to be set out in more detailed implementing rules to be adopted in the future. Accordingly, our PRC subsidiaries’ applicable tax rate may gradually increase to the unified tax rate of 25% by January 1, 2013 under the new tax law and in accordance with more detailed implementing rules to be adopted in the future. Any increase in our effective tax rate as a result of the above may adversely affect our operating results. However, details regarding implementation of this new law are expected to be provided in the form of one or more implementing regulations to be promulgated by the PRC government and the timing of the issuance of such implementing regulations is currently unclear.

The tax laws and regulations in the PRC may be further reformed by the PRC government, and we cannot assure you that our subsidiaries in the PRC will continue to enjoy any of these special or preferential tax treatments or other incentives in future. The discontinuation of any such special or preferential tax treatment or other incentives could materially and adversely affect our business, financial condition and results of operations.

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 exchange rate is considered minimal to our business operations.

Substantially all of our revenues and expenses are denominated in Renminbi, which is the official currency of China. However, we use the United States dollar for financial reporting purposes. 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 devalue significantly against the US dollar. Exchange rate fluctuations may adversely affect the value, in US dollar terms, of the net assets and income derived from its operations in the PRC.

Interest Rate Risk

We do not have significant interest rate risk, as our debt obligations are primarily short-term in nature, with fixed interest rates.

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 4. 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 September 25, 2007, 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 significant 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 nine months ended September 25, 2007 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.

In accordance with the terms of the Agreement, the Company agreed to issue to Berry Shino, 275,000 shares of restricted Class A Common Stock (the “Settlement Amount”) in full satisfaction of the Dispute. In exchange for the Settlement Amount, Berry Shino agreed to not pursue any claims against the Company and irrevocably and completely released and discharged the Company, its present or former affiliates, subsidiaries, parents, directors, officers, shareholders, employees and representatives, and their respective successors and assigns (the “Releasees”) from, and waived, any and all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, complaints, covenants, contracts, controversies, agreements, promises, damages, judgments, claims, counterclaims, demands, losses and other liabilities whatsoever, in law or equity, which Berry Shino, its directors, officers, employees, agents and representatives, and their respective successors and assigns, ever had, now has, or hereafter can, shall or may have for, upon or by reason of any matter, cause or thing whatsoever from the beginning of the world to August 15, 2007, whether presently known or unknown, asserted or unasserted, against any Releasee, including, without limitation, any and all claims arising out of, related to, or connected with the Dispute.

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.

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
31.1		Certification of Chief Executive Officer pursuant to Rules 13A-14(A)/15D-15(E) 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 Chief Financial Officer pursuant to Rules 13A-14(A)/15D-15(E) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.

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.