NWD New Dragon Asia Corp. Class A Common Stock

		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.

		Payment Obligations By Period
		2008			2009			2010			2011			2012			Thereafter			Total
		(In thousands)
Redeemable convertible preferred stock		$	3,590		$	3,070		$	2,774		$	—		$	—		$	—		$	9,434
Pre-determined annual fee charged by joint venture partners			118			118			118			118			118			3,886			4,476
Total		$	3,708		$	3,188		$	2,892		$	118		$	118		$	3,886		$	13,910

		(In thousands)
Aggregated balance as of the issue date		$	15,500
Partial redemption of Series A Preferred Stock in 2005			(1,900	)
Partial redemption of Series A and B Preferred Stock in 2006			(3,438	)
Partial redemption of Series A Preferred Stock in 2007			(728	)
		$	9,434

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

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

The Company’s working capital increased $18.65 million to $36.21 million at December 25, 2007 as compared to $17.56 million at December 25, 2006. The increase was primarily due to (i) the increased inventory and (ii) the change in the fair value of derivative instruments.

Cash and cash equivalents were $3.65 million as of December 25, 2007, a decrease of $6.63 million as compared to the balance at December 25, 2006 of $10.28 million. Net cash used by operating activities for the year ended December 25, 2007 was $8.94 million, as compared to $2.49 million net cash provided for the year ended December 25, 2006. The decrease was primarily due to (i) additional deposits and prepayments of $5,597,000 paid to suppliers for wheat and soybean in order to secure additional supplies and (ii) increase in inventories of $10,452,000 in anticipation of price increases. Net cash used by investing activities for the year ended December 25, 2007 was $1.35 million, as compared to $ 9.36 million for the year ended December 25, 2006. The decrease was primarily due to the fact that no new business establishment and acquisition was incurred in 2007. Net cash provided by financing activities of $1.21 million for the year ended December 25, 2006, as compared to $0.90 million for the year ended December 25, 2006 was primarily the net balance due to the parent company. The Company believes that it has enough cash available and expects to have enough income from operations to operate for the next 12 months.

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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.

INFLATION AND CHANGING PRICES

The Company does not foresee any adverse effects on its earnings as a result of inflation or changing prices.

CRITICAL ACCOUNTING POLICIES

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

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

Revenue recognition

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

Accounting for Derivative Instruments

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

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

 

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

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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.

Stock-Based Compensation

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

Contractual joint ventures  

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

Recent accounting pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements , which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect the adoption of SFAS No. 157 to have a material impact on our consolidated financial statements. The FASB may delay a portion of this standard.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities . SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS No. 159 to have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations , and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements . SFAS No. 141 (R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We have not yet determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No. 141 (R) or SFAS No. 160. We are aware that our accounting for minority interest will change and we are considering those effects now but believe we will only be a reclassification of minority interest from mezzanine equity to our stockholder’s equity section in the balance sheet, in any case we do not believe the implementation of SFAS 160 will be material to our financial position. SFAS 141 (R) will significantly affect the accounting for future business combinations and we will determine the accounting as new combinations are determined.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

We may be exposed to changes in financial market conditions in the normal course of business. We have not entered into any financial instruments for trading purposes. However, the estimated fair value of the derivatives embedded within our Series A and B Preferred Stock creates a fluctuation risk exposure resulting from changes in the price of our common stock. These embedded derivatives derive their value primarily based on the price and volatility of our common stock and the time to expiration of the derivatives related to the conversion features and the warrants. The determination of the change in the value of the derivatives requires the use of a complex valuation model and can fluctuate significantly between periods based on changes in the price of our shares and the time remaining in the life of the underlying financial instruments. Increase in our stock’s market price increases the value of the derivative creating losses in our income statements and decreases in the stock’s market price reduce the value of the derivatives creating gains in our income statements. Unless our share price significantly rises, the fair value of the derivatives will continue to reduce as shares of our preferred stock are converted. The current derivatives outstanding related to the preferred shares and expire by the end of 2010.

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.. 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 our net assets and income derived from its operations in the PRC.

Interest Rate Risk

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

Credit Risk

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The following financial statements and the footnotes thereto are included in the section beginning on page F-1.

1.	Report of Independent Registered Public Accounting Firm.

2.	Consolidated Balance Sheets as of December 25, 2007 and 2006.

3.	Consolidated Statements of Operations for each of the three years in the period ended December 25, 2007, 2006 and 2005.

4.	Consolidated Statements of Stockholders’ Equity and Comprehensive Income for each of the three years in the period ended   December 25, 2007, 2006 and 2005.

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5.	Consolidated Statements of Cash Flows for each of the three years in the period ended December 25, 2007, 2006 and 2005.

6.	Notes to Consolidated Financial Statements.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

There were no changes in or disagreements with accountants on accounting and financial disclosure.

ITEM 9A (T). CONTROLS AND PROCEDURES.  

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and principal financial officer have concluded that during the period covered by this report, such disclosure controls and procedures were not effective to detect the inappropriate application of US GAAP. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our disclosure controls and that may be considered “material weaknesses.” The Public Company Accounting Oversight Board has defined a material weakness as a “significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.”

Management’s Report on Internal Control over Financial Reporting

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. In addition, in August 2004, we engaged a consulting firm to assist our management in evaluating and strengthening our internal control over financial reporting with the objective of full compliance with the Sarbanes-Oxley Act of 2002. Based on our evaluation, our principal executive officer and principal financial officer have concluded that during the period covered by this report, our internal controls over financial reporting were not effective. We have identified the following material weakness:

-	absence of written audit program of the Internal Audit Department and shortage of internal audit staff;

-	absence of Whistleblower Policy and Procedures; and

-	absence of related party transaction control system.

Remediation of Material Weaknesses

We have started to formulate a program, which we believe will finish at the end of 2008 and will remedy the material weaknesses described above. The program includes (i) a series of education sessions for our staff with the objective of helping them to understand the meaning and value of a whistleblower policy and procedures, and (ii) recruitment of a competent head internal auditor to develop an internal audit program.

We are reviewing and revising our internal accounting policies and procedures, increasing the training of our accounting personnel in the application of U.S. GAAP, and, as appropriate, expanding the resources allocated to our internal audit department, including hiring new personnel experienced in the financial reporting and the financial control function. We will continue these efforts until we are satisfied that all “material weaknesses” have been eliminated. We expect that resolution of all of these issues will take several months. Our principal executive officer will monitor the remediation process to ensure that we address all material weaknesses and that our internal controls system is strengthened.

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All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can only provide reasonable assurances with respect to financial statement preparation and presentation. In addition, any evaluation of effectiveness for future periods is subject to the risk that controls may become inadequate because of changes in conditions in the future.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the year ended December 25, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION  

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.  

 

The following table sets forth certain information concerning each of our directors continuing in office and each of our current executive officers:

 

NAME		AGE		POSITION		DIRECTOR SINCE
Heng Jing Lu		56		Chairman		2003
Li Xia Wang		49		Director and Chief Executive Officer		2003
Ling Wang		43		Director and Vice President		2003
Zhi Yong Jiang		41		Independent Non-Executive Director		2003
De Lin Yang		53		Independent Non-Executive Director		2003
Qi Xue		55		Independent Non-Executive Director		2003
Feng Ju Chen		52		Independent Non-Executive Director		2004
Peter Mak		46		Chief Financial Officer		N/A

 

The business experience during at least the last five years of each of these individuals is as follows:

 

Mr. Heng Jing Lu , Chairman of the Company, graduated from The Shandong Institute of Economics in accounting and is a PRC qualified accountant. Before joining the Company on December 15, 2003, he had been working in the oil and grain industry for over 30 years. Prior to joining the Company, he was the director of the Oil and Grain Bureau of Longkou, Shandong PRC where he had worked since 1975. He has extensive experience in the management of agricultural and food related enterprises and strategic planning. He is primarily responsible for business development and overall company management.

 

Ms. Li Xia Wang , director and Chief Executive Officer of the Company, graduated from The Shandong Institute of Economics in accounting and is a PRC qualified accountant. She joined the Longkou Oil & Grain Group Company in 1980 where she has remained, her last position being Deputy General Manager. She has over 20 years of extensive experience in the field of finance and accounting. She became a director of the Company on December 15, 2003, and its Chief Executive Officer in 2004.

 

Ms. Ling Wang , director and Vice President of the Company, graduated from Shandong Television Broadcast University in economics management. She has been working with the subsidiary of the Company since 1981 and her main responsibilities are in operation control and internal audit.

 

Mr. Zhi Yong Jiang , independent non-executive director of the Company since December 15, 2003, currently serves on the audit committee, acting as Chairman. He graduated from Yantai Oil & Grain College with a degree in finance & accounting. He had been working with Longkou Jinsheng Electronics Co. Ltd since 2000 and prior to joining the Company, his last position was Vice President of Longkou Soybean Food Co., Ltd. He has been working in the accounting and financing field for more than 19 years in different industries. He has extensive experience in the field of finance and accounting.

 

Mr. De Lin Yang , independent non-executive director of the Company since December 15, 2003, is currently the chairman of the Yantai Hong Yuan CPA, a public accounting firm. Mr. Yang graduated from Shandong Gan Bu Distance Learning University with a bachelor degree in Accounting. He joined the Longkou City Ceramics Factory as an accountant in 1975 and was promoted to Chief Accountant in 1982. From 1989 to 1999, Mr. Yang served as the deputy chairman of the Longkou City CPA. In 2000, Mr. Yang joined the Yantai Hong Yuan CPA as the deputy chairman and was promoted to the chairman of the firm in 2002.

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Mr. Qi Xue , independent non-executive director of the Company since March 15, 2003, graduated in 1987 from The Official Institute of Beijing Chemical Industry Management with a diploma of higher education specializing in industrial accounting. He is an associate member of The Chinese Institute of Certified Public Accountants. Since 1999, he has been the Principal of the Longkou Huayu Certified Public Accountants Co. Ltd.

 

Ms. Feng Ju Chen , independent non-executive director of the Company, graduated from Yantai University in business management and is a member of The Chinese Institute of Certified Public Accountants. She has been the accounting manager of the Audit Bureau of Longkou City for more than 20 years. She has extensive experience in the field of accounting and joined the Company as a director on April 15, 2004.

 

Mr. Peter Mak , joined the Company as Chief Financial Officer in November 2004. He graduated from Hong Kong Polytechnic University. He is a fellow of the Chartered Association of Certified Accountants in the U.K. and a fellow of the Hong Kong Institute of Certified Public Accountants. He was the founder and managing director of Venfund Investment in Hong Kong and Venfund Investment Management Ltd. in Shenzhen. Previously, he was the managing partner of Arthur Andersen Southern China and also a partner of Arthur Andersen Worldwide.

There are no family relationships between the directors and executive officers.

 

Code of Ethics  

 

Our Board of Directors has adopted a Code of Conduct and Ethics (the “Code”) that applies to all of our employees, officers and directors. The Code covers compliance with law, fair and honest dealings with the Company, with competitors and with others, fair and honest disclosure to the public, and procedures for compliance with the Code. You can obtain a copy of the Code by sending a written request to the attention of Mr. Peter Mak, Suite 2808, International Chamber of Commerce Tower, Fuhua Three Road, Shenzhen, PRC.

Board Committees and Designated Directors

The Board of Directors has a Compensation Committee, a Nominating Committee and an Audit Committee.

Compensation Committee.    The Compensation Committee makes recommendations to the Board of Directors concerning salaries and incentive compensation for our officers, including our Chief Executive Officer, and employees and administers our stock option plans. Our Compensation Committee consists of Qi Xue, Feng Ju Chen and Zhi Yong Jiang. Compensation decisions during the fiscal year ended December 25, 2007 were made by all of the directors of the Committee. Each of the members of the Committee is independent and none have served as an officer or employee of the Company.

Nominating Committee .   Under the rules of the American Stock Exchange (on which our Class A Common Stock is listed for trading), nominees for our Board must be selected either by a nominating committee consisting entirely of independent directors or by a majority of the independent directors, acting pursuant to a standing resolution governing the nominating process. Given the size of our company and the significant committee responsibilities that many directors already have, we have chosen to assign this function to the independent directors rather than to a nominating committee. Consequently, our three independent directors, Qi Xue, Feng Ju Chen and Zhi Yong Jiang, are responsible for nominations. They act pursuant to a standing resolution. To date, the independent directors have not engaged any third parties to assist them in identifying candidates for the Board.

Among the tasks that our independent directors may undertake in this capacity are these:

-	Identifying and selecting those persons who will be nominees for director.

-	Considering factors relevant to the selection of nominees, including requirements of law, stock exchange listing standards, matters of character, judgment, business experience and areas of expertise, the diversity of the Board, and other factors.

-	Recruiting appropriate candidates when necessary, and reviewing the qualifications of any candidates nominated by shareholders.

-	Evaluating from time to time the size and composition of the Board and its committees.

-	Evaluating the function and performance of the Board and its directors.

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

 

Audit Committee .   The Audit Committee operates under a written charter. The Audit Committee consists of three directors, Qi Xue, Zhi Yong Jiang and Feng Ju Chen, each of whom meets the independence requirements and standards currently established by the American Stock Exchange and the SEC. In addition, the Board of Directors has determined that Mr. Qi Xue is an “audit committee financial expert” and “independent” as defined under the relevant rules of the SEC and the American Stock Exchange. The Audit Committee assists the Board of Directors in fulfilling its oversight of the quality and integrity of the Company’s financial statements and the Company’s compliance with legal and regulatory requirements. The Audit Committee is responsible for retaining (subject to stockholder ratification) and, as necessary, terminating, the independent auditors, annually reviewing the qualifications, performance and independence of the independent auditors and the audit plan, fees and audit results, and pre-approving audit and non-audit services to be performed by the auditors and related fees. The Audit Committee also oversees the performance of the Company’s internal audit and compliance functions.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of common stock and other of our equity securities, on Forms 3, 4 and 5 respectively. Based on Company records and other information, we believe that all SEC filing requirements applicable to our directors and executive officers were complied with for the fiscal year ended December 25, 2007.

ITEM 11. EXECUTIVE COMPENSATION.  

COMPENSATION DISCUSSION AND ANALYSIS

The Compensation Committee of our board of directors and our CEO, CFO and head of Human Resources are collectively responsible for implementing and administering all aspects of our benefit and compensation plans and programs, as well as developing specific policies regarding compensation of our executive officers. All of the members of our Compensation Committee, Qi Xue, Feng Ju Chen and Zhi Yong Jiang, are independent directors.

Compensation Objectives

Our primary goal with respect to executive compensation has been to set compensation at levels that attract and retain the most talented and dedicated executives possible. Individual executive compensation is set at levels believed to be comparable with executives in other companies of similar size and stage of development operating in China . We also link long-term stock-based incentives to the achievement of specified performance objectives and to align executives’ incentives with stockholder value creation.  

The Committee has implemented and maintained compensation policies that tie a portion of executives’ overall compensation to our financial and operational performance, as measured by revenues and net income, and to accomplishing strategic goals such as merger and acquisitions, and fund raising. In addition, as a policy for determining compensation, our Compensation Committee has determined that an executive officer who is a Chinese national will be entitled to a locally competitive package and an executive officer who is an expatriate from Hong Kong will be paid a salary commensurate with those paid to Hong Kong executives working in Hong Kong.

Elements of Compensation

Base Salary . All full time executives are paid a base salary. For executives who are Chinese nationals, including our CEO and Chairman, we do not have employment agreements. However, we have an employment agreement with our CFO, a Hong Kong expatriate, which sets forth certain elements of base salary and option grants as compensation. In all cases, the Committee establishes a minimum base salary for our executive officers. Base salaries for our executives are established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies in our industry for similar positions, professional qualifications, academic background, and the other elements of the executive’s compensation, including stock-based compensation. Our intent is to set executives ’ base salaries near the median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies, in line with our compensation philosophy. Base salaries are reviewed annually, and may be increased to align salaries with market levels after taking into account the subjective evaluation described previously.

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Equity Incentive Compensation . We believe that long-term performance is achieved through an ownership culture participated in by our executive officers through the use of stock-based awards. Currently, we do not maintain any incentive compensation plans based on pre-defined performance criteria. The Compensation Committee has the general authority, however, to award equity incentive compensation, i.e. stock options, to our executive officers in such amounts and on such terms as the committee determines in its sole discretion. The Committee does not have a determined formula for determining the number of options available to be granted. Incentive compensation is intended to compensate officers for accomplishing strategic goals such as mergers and acquisitions and fund raising. The Compensation Committee will review each executive’s individual performance and his or her contribution to our strategic goals periodically and determine the amount of incentive compensation towards the end of the fiscal year. Our Compensation Committee grants equity incentive compensation at times when we do not have material non-public information to avoid timing issues and the appearance that such awards are made based on any such information.

Chinese Government Imposed Compensation . As a result of mandatory government employment standards, our executives are also entitled to certain annual statutory benefits, including fully subsidized, Company-paid health insurance, seven days of paid vacation and unlimited paid sick leave .  

Determination of Compensation

Our CEO, CFO and head of Human Resources meet frequently during the last several weeks of our fiscal year to evaluate each non-executive employee’s performance and determine his or her compensation for the following year. In the case of our executive officers, the Compensation Committee similarly evaluates the executive’s performance and the objectives set forth above at or about the end of our fiscal year to determine executive compensation. The Compensation Committee will also determine whether an executive officer is eligible for incentive compensation and if it is deemed in the best interests of the Company, the Committee may recommend that a certain number of stock options be granted to the executive officer as compensation for certain qualitative success during the fiscal year.

The following table sets forth the cash and other compensation paid by us in 2007 to all individuals who served as our chief executive officer and chief financial officer, who we collectively refer to as the named executive officers (“NEOs”). No other executives received total compensation greater than $100,000 in 2007.

Summary Compensation Table

Name and Principal Position		Year			Salary ($)			Option Awards ($)(i)			Total ($)
Li Xia Wang (ii) Chief Executive Officer and Director			2007 2006			20,000 20,000			— —			20,000 20,000
Peter Mak (iii) Chief Financial Officer			2007 2006			180,000 180,000			— 8,140,000(iv	)		180,000 8,320,000

(i) Amount reflects the compensation cost for the fiscal years ended December 25, 2007 and 2006, of the named executive officer’s options to purchase shares of our common stock, calculated in accordance with SFAS 123R. See Note 15 to the Company’s audited financial statements for the fiscal year ended December 25, 2007, included in Item 8 of this Annual Report for a discussion of assumptions made by the Company in determining the grant date fair value and compensation costs of these equity awards.

(ii) Li Xia Wang was promoted to CEO of the Company in 2004. She is a Chinese national. Her annual base salary is $20,000.

(iii) Peter Mak joined the Company as CFO in 2004. He is a Hong Kong expatriate. His annual base salary is $180,000.

(iv) On January 20, 2006, the Company and Mr. Mak further amended the Employment Agreement by entering into a second Supplementary Agreement (the “Second Employment Supplement,” and the Employment Agreement as supplemented by the Employment Supplement and the Second Employment Supplement, the “Supplemented Employment Agreement”) in order to further extend the contractual terms of his employment to December 31, 2008. Pursuant to the terms of the Second Employment Supplement, Mr. Mak was granted additional options to purchase up to 2,000,000 shares of Common Stock at an exercise price of $1.60 per share. Upon issuance, such options were fully vested and immediately exercisable. As of January 29, 2007 none of the options have been exercised. Mr. Mak may exercise the options without tendering cash consideration by surrendering shares then issuable upon exercise of the options having a fair market value on the date of exercise equal to the aggregate exercise price of the exercised options. On December 13, 2006, the Company and Mr. Mak entered into an Option Agreement whereby the Company granted options to purchase up to 6,000,000 shares of Common Stock, which options are fully vested on the same day, at an exercise price of $1.82 per share. Mr. Mak may exercise the options without tendering cash consideration by surrendering shares then issuable upon exercise of the options having a fair market value on the date of exercise equal to the aggregate exercise price of the exercised options.

28

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Grants of Plan-Based Awards

 

Name		Grant Date			Approval Date			All Other Option Awards: Number of Securities Underlying Options (#)			Exercise or Base Price of Option Awards ($/Sh)			Grant Date Fair Value of Stock and Option Awards ($)			Grant Date Fair Market Value of  a Share ($/Sh)
Li Xia Wang			—			—			—			—			—			—
Peter Mak			January 20, 2006 December 13, 2006			January 20, 2006 December 19, 2006 (2 )			2,000,000 6,000,000	(1) (3)	$ $	1.60 1.82		$ $	2,320,000 5,820,000		$ $	1.16 0.97	(4) (4)

(1) Options to purchase up to 2,000,000 shares of common stock  

In 2006, our Compensation Committee met two times and made two grants of options   to purchase up to an aggregate of 8 million shares of our Class A Common Stock. All options were granted to Peter Mak, our Chief Financial Officer, to compensate him for his extraordinary contributions towards accomplishing our strategic goals, including fund raising and acquisitions and to incentivize him to make further contributions in the future. The options were granted on January 20, 2006 with an exercise price of $1.60. The closing market price of our Class A Common Stock on the American Stock Exchange on January 20, 2006 was $1.54. The exercise price was determined by the Compensation Committee by comparing the average of the previous 10 days’ market price. The FAS 123R fair value of the options at the grant date is $2,320,000. These options were granted to the CFO as a reward for the extraordinary effort made by the CFO in successfully completing the $9.5 million financing prior to the end of the fiscal year in December 2005.

(2) Any exercise of such options granted on December 13, 2006 is contingent upon the effectiveness of shareholder consent, which shall occur no sooner than 20 days following the distribution of a Definitive Information Statement disclosing the approval of the option agreement between the Company and Peter Mak dated December 13, 2006.

(3) Options to purchase up to 6,000,000 shares of common stock.

The options were granted on December 13, 2006 with an exercise price of $1.82. The closing market price of our Class A Common Stock on the American Stock Exchange on December 13, 2006 was also $1.82. The exercise price was determined by the Compensation Committee by comparing the average of the previous 10 days’ market price. The FAS 123R fair value of the options is $5,820,000. These options were granted to recognize the CFO’s contributions in negotiating the terms and closing the acquisition of the Company’s Chengdu Plant and to incentivize him to make further contributions in the future.

(4) Determination of Grant Date Fair Value.

In order to determine the grant date fair value of the options, we used a Black-Scholes option-pricing model. Under the Black-Scholes model, we considered several factors and made several assumptions, including the strike price, time to maturity, volatility of the underlying shares, and a risk-free interest rate.

Based on the above Black-Scholes option-pricing model, the fair value per share was $1.16 and $0.97 for options granted on January 20 and December 13, 2006, respectively.

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Outstanding Equity Awards At Fiscal Year-end

Name		Number of Securities Underlying Unexercised Options (#) Exercisable			Number of Securities Underlying Unexercised Options (#) Unexercisable			Option Exercise Price ($)			Option Expiration Date
Li Xia Wang			—			—
Peter Mak			2,000,000			—		$	1.60			January 20, 2012
			6,000,000			—		$	1.82			December 13, 2016

Pension Benefits

We do not sponsor any qualified or non-qualified defined benefit plans.

Nonqualified Deferred Compensation

We do not maintain any non-qualified defined contribution or deferred compensation plans. Our Compensation Committee, which is comprised solely of “outside directors” as defined for purposes of Section 162(m) of the Code, may elect to provide our officers and other employees with non-qualified defined contribution or deferred compensation benefits if the Compensation Committee determines that doing so is in our best interests.

Compensation of Directors

We do not provide cash or other compensation to our directors for their services as members of the Board or for attendance at Board or committee meetings. However, our directors will be reimbursed for reasonable travel and other expenses incurred in connection with attending meetings of the Board and its committees.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of the members of the Compensation Committee have any relationship with the Company or any of its officers or employees other than in connection with their role as a director. None of the members of the Compensation Committee have participated in any related party transactions with the Company since the beginning of the Company’s last fiscal year.

EMPLOYMENT CONTRACTS

We have an Employment Contract with Mr. Peter Mak, our Chief Financial Officer. Mr. Mak is entitled to an annual compensation of US$180,000 per year until December 31, 2008 and under the agreement he has been granted stock options to acquire 400,000 shares of Class A Common Stock at an exercise price of $1.00 per share, 600,000 shares of Class A Common Stock at an exercise price of $1.20 per share, 2,000,000 shares of Class A Common Stock at an exercise price of $1.60 per share and 6,000,000 shares of Class A Common Stock at an exercise price of $1.82 per share. During the year ended December 25, 2007, Mr. Mak had not exercised any options to purchase Class A Common Stock.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth, as of March 9, 2008, certain information concerning the beneficial ownership of Common Stock by (i) each stockholder known to us to beneficially own five percent or more of our outstanding Common Stock; (ii) each director; (iii) each executive officer; and (iv) all of our executive officers and directors as a group, and their percentage ownership and voting power. As of March 9, 2008, there were 56,071,947 shares of Common Stock outstanding.

Name and Address of Beneficial Owner		Amount and Nature of Beneficial Ownership			Percent of Class
New Dragon Asia Food Ltd. Suite 2808, International Chamber of Commerce Tower, Fuhua Three Road, Shenzhen, PRC 518048			28,323,954			50.51	%
Heng Jing Lu† Chairman			28,323,954 (1	)		50.51	%
Peter Mak† Chief Financial Officer			8,000,000(2)(3	)		12.49	%
Li Xia Wang † Chief Executive Officer and Director			-0-			*
Ling Wang† Director and Vice President			-0-			*
Zhi Yong Jiang† Director			-0-			*
De Lin Yang† Director			-0-			*
Qi Xue† Director			-0-			*
Feng Ju Chen† Director
All Directors and Executive Officers (8 people)			36,323,954			56.69	%

 

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* Less than one percent.

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† Address of referenced person is c/o New Dragon Asia Corp. Suite 2808, International Chamber of Commerce Tower, Fuhua Three Road, Shenzhen, PRC 518048.

(1) Represents shares owned by New Dragon Asia Food Ltd. Mr. Heng Jing Lu, our Chairman, is the holder of record and beneficial holder of 100% of the equity interests of New Dragon Asia Food Ltd.

 

(2) Includes shares underlying options fully exercisable for up to 2,000,000 shares at an exercise price of $1.60 per share granted on January 20, 2006.

 

(3) Includes shares underlying options fully exercisable for up to 6,000,000 shares at an exercise price of $1.82 per share pursuant to an option granted on December 13, 2006.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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. For a summary of certain related party transactions, please refer to Note 17 of the Consolidated Financial Statements under the heading “Related Party Transactions” for significant details. The comprehensive summary of information required by Item 13 is set forth in our Proxy Statement under the caption “certain relationships and related transactions” and is incorporated herein by this reference.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.  

The Audit Committee has selected Grobstein, Horwath & Company LLP as our independent accountants for the fiscal year ending December 25, 2007. Grobstein, Horwath & Company LLP was our independent accounting firm for the fiscal year ended December 25, 2006.

 

Public Accountants’ fees

For fiscal years ended December 25, 2007 and 2006, fees for services provided by Grobstein, Horwath & Company LLP were as follows:

		2007			2006
Audit Fees		$	204,545		$	138,000
Audit Related Fees		$	0		$	100,500
Tax Fees		$	8,000		$	5,000
All other fees		$	0		$	0

 

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Audit Fees were for professional services rendered for the audit of the Company’s annual financial statements, the review of quarterly financial statements, and the preparation of statutory and regulatory filings. Audit-Related Fees relate to professional services rendered in connection with accounting consultations relating to SEC reviews on filings. Tax fees consist of fees billed for professional services for tax compliance, tax planning and tax advice. These services include assistance regarding federal, state and international tax compliance and planning, tax audit defense, and mergers and acquisitions.

Pre-Approval Policies and Procedures

In accordance with the SEC’s auditor independence rules, the Audit Committee has established the following policies and procedures by which it approves in advance any audit or permissible non-audit services to be provided to the Company by its independent auditor.

Prior to the engagement of the independent auditor for any fiscal year’s audit, management submits to the Audit Committee for approval lists of recurring audit, audit-related, tax and other services expected to be provided by the auditor during that fiscal year. The Audit Committee adopts pre-approval schedules describing the recurring services that it has pre-approved, and is informed on a timely basis, and in any event by the next scheduled meeting, of any such services rendered by the independent auditor and the related fees.

The fees for any services listed in a pre-approval schedule are budgeted, and the Audit Committee requires the independent auditor and management to report actual fees versus the budget periodically throughout the year. The Audit Committee will require additional pre-approval if circumstances arise where it becomes necessary to engage the independent auditor for additional services above the amount of fees originally pre-approved. Any audit or non-audit service not listed in a pre-approval schedule must be separately pre-approved by the Audit Committee on a case-by-case basis.   Every request to adopt or amend a pre-approval schedule or to provide services that are not listed in a pre-approval schedule must include a statement by the independent auditors as to whether, in their view, the request is consistent with the SEC’s rules on auditor independence.

The Audit Committee will not grant approval for:

-	any services prohibited by applicable law or by any rule or regulation of the SEC or other regulatory body applicable to the Company;

-	provision by the independent auditor to the Company of strategic consulting services of the type typically provided by management consulting firms; or

-

the retention of the independent auditor in connection with a transaction initially recommended by the independent auditor, the tax treatment of which may not be clear under the Internal Revenue Code and related regulations and which it is reasonable to conclude will be subject to audit procedures during an audit of the Company’s financial statements.

Tax services proposed to be provided by the auditor to any director, officer or employee of the Company who is in an accounting role or financial reporting oversight role must be approved by the Audit Committee on a case-by-case basis where such services are to be paid for by the Company, and the Audit Committee will be informed of any services to be provided to such individuals that are not to be paid for by the Company.

In determining whether to grant pre-approval of any non-audit services in the “all other” category, the Audit Committee will consider all relevant facts and circumstances, including the following four basic guidelines :

-	whether the service creates a mutual or conflicting interest between the auditor and the Company;

-	whether the service places the auditor in the position of auditing his or her own work;

-	whether the service results in the auditor acting as management or an employee of the Company; and

-	whether the service places the auditor in a position of being an advocate for the Company.

 

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  

(a)

1.

Financial Statements

 

An index to Consolidated Financial Statements appears on page F-1.

 

2.

Schedules

 

All financial statement schedules are omitted because they are not applicable, not required under the instructions or all the information required is set forth in the financial statements or notes thereto.

 

(b)

Exhibits

 

Exhibit Number		Description
2.1		Share Exchange Agreement dated as of December 18, 2001 (incorporated herein by reference from our filing on the Definitive Proxy 14/A filed on October 11, 2001).
3.1		Amended Articles of Incorporation (incorporated herewith by reference to Exhibit 3.1 to our Definitive Proxy 14/A filed on October 11, 2001).
3.2		By-laws (incorporated herewith by reference to Exhibit 3.2 to our Definitive Proxy 14/A filed on October 11, 2001).
3.3		Certificate of Designations of Preferences, Rights and Limitations of the Series A 7% Convertible Preferred Stock (incorporated herewith by reference to Exhibit 3.1 of our Form 8-K filed on July 12, 2005).
3.4		Certificate of Designations of Preferences, Rights and Limitations of the Series B 7% Convertible Preferred Stock (incorporated herewith by reference to Exhibit 3.1 of our Form 8-K filed on December 23, 2005).
4.1		Subscription Agreement, dated September 4, 2003 (incorporated herewith by reference to Exhibit 4.1 to our Registration Statement on Form S-3 filed on October 3, 2003).
4.2		Subscription Agreement, dated October 3, 2003 (incorporated herewith by reference to Exhibit 4.2 to our Registration Statement on Form S-3 filed on October 3, 2003).
4.3		Common Stock Purchase Warrants for the September 4, 2003 Private Placement (incorporated herewith by reference to Exhibit 4.3 to our Registration Statement on Form S-3 filed on October 3, 2003).
4.4		Common Stock Purchase Warrants for the October 3, 2003 Private Placement (incorporated herewith by reference to Exhibit 4.4 to our Registration Statement on Form S-3 filed on October 3, 2003).
4.5		Form of Warrant issued to Midsummer Investment Ltd. and Islandia, L.P. (incorporated herewith by reference to Exhibit 4.1 to our Form 8-K filed on July 12, 2005).
4.6		Form of Warrant issued to Alliance Financial, LLC, Renaissance Advisors BVI, John F. Steinmetz, TN Capital Equities, Ltd. and Kathleen McDonnell (incorporated herewith by reference to Exhibit 4.2 to our Registration Statement on Form S-3 filed on August 11, 2005).
4.7		Securities Purchase Agreement, dated July 11, 2005, relating to the sale of the Series A 7% Convertible Preferred Stock (incorporated herewith by reference to Exhibit 10.1 to our Form 8-K filed on July 12, 2005).

 

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4.8		Registration Rights Agreement, dated July 11, 2005, by and among New Dragon Asia Corp. and the investors named therein (incorporated herewith by reference to Exhibit 10.2 to our Form 8-K filed on July 12, 2005).
4.9		Form of Warrant issued to Midsummer Investment Ltd. and Islandia, L.P. (incorporated herewith by reference to Exhibit 4.1 to our Form 8-K filed on December 23, 2005).
4.10		Form of Warrant issued to Alliance Financial, LLC, Renaissance Advisors, Inc., John F. Steinmetz, TN Capital Equities, Ltd. and Kathleen McDonnell (incorporated herewith by reference to Exhibit 4.2 to our Registration Statement on Form S-3 filed on January 20, 2006).
4.11		Securities Purchase Agreement, dated December 22, 2005, relating to the sale of the Series B 7% Convertible Preferred Stock (incorporated herewith by reference to Exhibit 10.1 to our Form 8-K filed on December 23, 2005).
4.12		Registration Rights Agreement, dated December 22, 2005, by and among New Dragon Asia Corp. and the investors named therein (incorporated herewith by reference to Exhibit 10.2 to our Form 8-K filed on December 23, 2005).
4.13		Registration Rights Agreement, dated December 22, 2005, by and among New Dragon Asia Corp. and New Dragon Food Ltd. (incorporated herewith by reference to Exhibit 4.5 to our Registration Statement on Form S-3 filed on January 20, 2006).
10.1		Sino-Foreign Joint Venture Contract for the New Dragon Asia Flour (Yantai) Company Limited, dated June 1, 1999 (incorporated herewith by reference to Exhibit 10.1 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.2		Subcontracting Agreement, for the New Dragon Asia Flour (Yantai) Company Limited, dated June 26, 1999 (incorporated herewith by reference to Exhibit 10.2 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.3		Sino-Foreign Joint Venture Contract for the New Dragon Asia Food (Yanti) Company Limited, dated November 28, 1998 (incorporated herewith by reference to Exhibit 10.3 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.4		Subcontracting Agreement, for the New Dragon Asia Food (Yantai) Company Limited, dated December 26, 1998 (incorporated herewith by reference to Exhibit 10.4 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.5		Sino-Foreign Joint Venture Contract for the New Dragon Asia Food (Dalian) Company Limited, dated November 28, 1998 (incorporated herewith by reference to Exhibit 10.5 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.6		Subcontracting Agreement, for the New Dragon Asia Food (Dalian) Company Limited, dated December 26, 1998 (incorporated herewith by reference to Exhibit 10.6 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.7		Sino-Foreign Joint Venture Contract for the Sanhe New Dragon Asia Food Company Limited, dated November 28, 1998 (incorporated herewith by reference to Exhibit 10.7 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.8		Subcontracting Agreement, for the Sanhe New Dragon Asia Food Company Limited, dated December 26, 1998 (incorporated herewith by reference to Exhibit 10.8 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.9		Employment Agreement between New Dragon Asia Corp. and Peter Mak, dated November 2, 2004 (incorporated herewith by reference to Exhibit 10.9 to our Form 8-K filed on June 29, 2005).

 

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10.10		Employment Supplement between New Dragon Asia Corp. and Peter Mak, dated June 22, 2005 (incorporated herewith by reference to Exhibit 10.9 to our Form 8-K filed on June 29, 2005).
10.11		Supplementary Agreement to Employment Agreement between New Dragon Asia Corp. and Peter Mak, dated January 20, 2006 (incorporated herewith by reference to Exhibit 10.10 to our Form 8-K filed on January 24, 2006).
10.12		Equity Incentive Plan (incorporated herewith by reference to Exhibit B to our Definitive Information Statement on Schedule 14C filed on March 14, 2006).
10.13		Stock Option Agreement between New Dragon Asia Corp. and Peter Mak, dated December 13, 2006 (incorporated herewith by reference to Exhibit 10.1 to our Form 8-K filed on December 15, 2006).
10.14		Settlement Agreement and General Release between New Dragon Asia Corp and Berry-Shino Securities Inc., dated August 15, 2007 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on August 15, 2007).
21.1		Subsidiaries of New Dragon Asia Corp., filed herewith.
23.1		Consent of Grobstein, Horwath & Company LLP, Independent Registered Public Accounting Firm, filed herewith.
31.1		Certification of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2		Certification of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.
32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

Dated: March 14, 2008	By:	/s/ Li Xia Wang
		Name:	Li Xia Wang
		Title:	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Dated: March 14, 2008	By:	/s/ Heng Jing Lu
		Name:	Heng Jing Lu
		Title:	Chairman
Dated: March 14, 2008	By:	/s/ Peter Mak
		Name:	Peter Mak
		Title:	Chief Financial Officer
Dated: March 14, 2008	By:	/s/ Ling Wang
		Name:	Ling Wang
		Title:	Director
Dated: March 14, 2008	By:	/s/ De Lin Yang
		Name:	De Lin Yang
		Title:	Director
Dated: March 14, 2008	By:	/s/ Zhi Yong Jiang
		Name:	Zhi Yong Jiang
		Title:	Director
Dated: March 14, 2008	By:	/s/ Qi Xue
		Name:	Qi Xue
		Title:	Director
Dated: March 14, 2008	By:	/s/ Feng Ju Chen
		Name:	Feng Ju Chen
		Title:	Director

 

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NEW DRAGON ASIA CORP.

FINANCIAL STATEMENTS

TABLE OF CONTENTS

Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets as of December 25, 2007 and 2006			F-3
Consolidated Statements of Operations for each of the three years in the period ended December 25, 2007, 2006 and 2005			F-4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for each of the three years in the period ended December 25, 2007, 2006 and 2005			F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended December 25, 2007, 2006 and 2005			F-6
Notes to Consolidated Financial Statements			F-8

 

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  

To the Stockholders and Board of Directors of New Dragon Asia Corp. and Subsidiaries

We have audited the accompanying consolidated balance sheets of New Dragon Asia Corp. and Subsidiaries (the “Company”) as of December 25, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of the three years in the period ended December 25, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of New Dragon Asia Corp. and Subsidiaries as of December 25, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 25, 2007 in conformity with U.S. generally accepted accounting principles.

 

/s/ GROBSTEIN, HORWATH & COMPANY LLP

Sherman Oaks, California

March 11, 2008

 

F-2

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NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS  

(Amounts in thousands, except share data)

		December 25, 2007			December 25, 2006
ASSETS
Current assets:
Cash and cash equivalents		$	3,646		$	10,276
Accounts receivable, net			9,223			8,835
Deposits and prepayments, net			12,183			6,586
Inventories, net			22,050			11,598
Due from related companies			913			857
Total current assets			48,015			38,152
Property, machinery and equipment, net			25,986			24,248
Land use rights, net			7,294			6,983
Goodwill			125			125
Total assets		$	81,420		$	69,508
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	2,982		$	2,723
Other payables and accruals			2,765			3,255
Taxes payable			3,530			3,453
Due to related companies			36			28
Embedded derivatives at fair value			2,493			11,138
Total current liabilities			11,806			20,597
Due to New Dragon Asia Food Limited			1,405			317
Due to joint venture partners			272			102
Total liabilities			13,483			21,016
Minority interests			294			276
Series A & B Redeemable Convertible Preferred Stock, $0.0001 par value: Authorized shares – 5,000,000 Issued and outstanding – 9,434 shares and 10,162 shares at December 25, 2007 and 2006, respectively			5,321			4,204
Commitments
Stockholders’ equity:
Class A Common Stock, $0.0001 par value: Authorized shares – 102,000,000 Issued and outstanding – 55,195,385 in 2007 and 53,614,723 in 2006			5			5
Class B Common Stock, $0.0001 par value: Authorized shares – 2,000,000 – none issued and outstanding			—			—
Additional paid-in capital			29,982			28,411
Retained earnings			24,568			12,668
Accumulated other comprehensive income			7,767			2,928
Total stockholders’ equity			62,322			44,012
Total liabilities and stockholders’ equity		$	81,420		$	69,508

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS  

(Amounts in thousands, except per share data)

		For the years ended December 25,
		2007			2006			2005
Net revenue		$	55,738		$	53,439		$	44,180
Cost of goods sold			(45,427	)		(43,404	)		(36,151	)
Gross profit			10,311			10,035			8,029
Operating expenses:
Selling and distribution expenses			(1,279	)		(1,045	)		(721	)
General and administrative expenses			(2,606	)		(10,908	)		(2,358	)
Income/(loss) from operations			6,426			(1,918	)		4,950
Other income (expense):
Other income			252			144			186
Interest income			41			67			10
Gain ( l oss) on fair value adjustments to e mbedded derivatives			8,412			(1,434	)		(4,064	)
VAT refund			952			2,328			2,158
Income/(loss) before income taxes and minority interests			16,083			(813	)		3,240
Provision for income taxes			(1,968	)		(1,657	)		(1,487	)
Income/(loss) before minority interests			14,115			(2,470	)		1,753
Minority interests			—			(134	)		(6	)
Net income/(loss)		$	14,115		$	(2,604	)	$	1,747
Accretion of redeemable preferred stock			(1,512	)		(1,882	)		(454	)
Preferred stock dividends			(703	)		(875	)		(187	)
Income (loss) available to common stockholders		$	11,900		$	(5,361	)	$	1,106
Earnings per common share
Basic		$	0.22		$	(0.10	)	$	0.02
Diluted		$	0.21		$	(0.10	)	$	0.02
Weighted average number of common shares outstanding
Basic			54,109			51,485			46,051
Diluted			55,519			51,485			46,949

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME  

(Amounts in the thousands)

 

			Class A Common Stock
			Shares			Amount			Additional Paid-in Capital			Receivable from Stockholder			Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity			Comprehensive Income
Balance at December 25, 2004			45,061			4			9,909			-			16,922			-			26,835			-
Net income			-			-			-			-			1,747			-			1,747			1,747
Accretion of redeemable preferred stock															(454	)					(454	)
Preferred stock dividends															(187	)					(187	)
Stock-based compensation expense			-			-			105			-			-			-			105			-
Foreign currency translation adjustment			-			-			-			-			-			798			798			798
Preferred stock issuance cost			-			-			565			-			-			-			565			-
Conversion of preferred stocks and related dividend payments made in Class A Common Stock			2,039			0.5			2,611			-			-			-			2,611.5			-
Exercise of warrants			2,222			0.5			2,025			-			-			-			2,025.5			-
Receivable from stockholder			-			-			-			(49	)		-			-			(49	)		-
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 stocks and related dividend payments made in Class A Common Stock			3,292			-			3,935			-			-			-			3,935			-
Exercise of stock option			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			-			-			-			-			14,115			-			14,115			14,115
Accretion of redeemable preferred stock			-			-			-			-			(1,512	)		-			(1,512	)
Preferred stock dividends															(703	)					(703	)
Foreign currency translation adjustment			-			-			-			-			-			4,839			4,839			4,839
Class A Common Stocks issued to Berry Shino for dispute resolution			275			-			269			-			-			-			269			-
Conversion of preferred stocks and related dividend payments made in Class A Common Stock			1,306			-			1,302			-			-			-			1,302			-
Balance at December 25, 2007			55,195		$	5		$	29,982		$	-		$	24,568		$	7,767		$	62,322		$	18,954

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS  

(Amounts in thousands)

		For the years ended December 25,
		2007			2006			2005
Cash flows from operating activities:
Net income (loss)		$	14,115		$	(2,604	)	$	1,747
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for doubtful accounts			272			83			250
Provision for inventory reserve			20			—			—
Depreciation and amortization of land use rights			1,889			1,613			1,266
Loss (gain) on sale of machinery and equipment			20			—			5
Loss ( gain ) on fair value adjustments to embedded derivatives			(8,412	)		1,434			4,064
Minority interests			—			134			6
Stock-based compensation expense			—			8,140			105
Non-cash service payment			269			—			—
Changes in operating assets and liabilities:
Accounts receivable			(660	)		(2,340	)		(351	)
Deposits and prepayments			(5,597	)		(1,616	)		(3,450	)
Inventories			(10,472	)		(3,968	)		(3,640	)
Due from related companies			(20	)		(178	)		504
Accounts payable			259			14			—
Other payables and accruals			(494	)		774			316
Taxes payable			77			1,599			363
Due to related companies			—			(598	)		(233	)
Net cash provided by (used in) operating activities			(8,734	)		2,487			952
Cash flows from investing activities:
Acquisition of Chengdu Plant			—			(2,414	)		—
Proceeds from sale of property, machinery and equipment			49			—			22
Purchases of property, machinery and equipment			(1,603	)		(5,129	)		(3,395	)
Purchases of land use rights			—			(2,084	)		(273	)
Minority interest			—			266			—
Net cash provided by (used in) investing activities			(1,554	)		(9,361	)		(3,646	)
Cash flows from financing activities:
Proceeds from issuance of preferred stock			—			—			15,500
Payments of issuance costs related to preferred stock			—			(58	)		(1,218	)
Preferred Stock Dividends			(49	)		(387	)		(30	)
Proceeds from parent company			1,088			—			—
Repayment to parent company			—			180			(166	)
Repayment to joint venture partners			170			48			(56	)
Proceeds from exercise of warrants			—			—			1,977
Proceeds from exercise of stock options			—			1,120			—
Net cash provided by (used in) financing activities			1,209			903			16,007
Foreign currency translation adjustment			2,449			1,915			800
Net increase (decrease) in cash and cash equivalents			(6,630	)		(4,056	)		14,113
Cash and cash equivalents at the beginning of the period			10,276			14,332			219
Cash and cash equivalents at the end of the period		$	3,646		$	10,276 $			14,332

Non-cash Investing and Financing Activities
Conversion of preferred stock to common stock		$	730		$	3,438		$	2,611
Dividend payments on preferred stock in form of common stock		$	678		$	277		$	72
Supplemental disclosure of cash flows information:
Income taxes paid		$	1,274		$	3		$	1,865

Name		Domicile and date of  incorporation		Paid-in capital		Percentage of ownership		Principal activities
Mix Creation Limited (“MC”)		The British Virgin Islands November 7, 1997		US$1,500,000		100%		Investment holding
Rich Delta Limited (“RD”)		The British Virgin Islands October 28, 1998		US$1,000,000		100%		Investment holding
Hero Treasure Limited (“HT”)		The British Virgin Islands April 19, 2004		US$1		100%		Investment holding
Keen General Limited (“KG”)		The British Virgin Islands July 20, 1998		US$1,500,000		100%		Investment holding
Delta Link Limited (“DL”)		The British Virgin Islands October 29, 1998		US$1		100%		Investment holding
New Dragon Asia Flour (Yantai) Company Limited (“NDAFLY”)		The PRC August 13, 1999		RMB28,500,000		90% (a)		Manufacture, marketing and distribution of flour
New Dragon Asia Food (Yantai) Company Limited (“NDAFY”)		The PRC December 24, 1998		RMB17,462,000		90% (b)		Manufacture, marketing and distribution of instant noodles
New Dragon Asia Food (Sanhe) Company Limited (“NDAFS”)		The PRC December 25, 1998		RMB51,191,432		79.64% (b)		Manufacture, marketing and distribution of instant noodles
Penglai New Dragon Jin Qiao Food Company Limited (“PNDJQ”)		The PRC December 5, 2003		US$850,000		100%		Manufacture, marketing and distribution of flour
New Dragon Asia (Longkou) Packing Materials Company Limited (“NDALPM”)		The PRC January 10, 2006		US$3,600,000		100%		Manufacture and sale of packing materials
New Dragon Asia (LongKou) Food Company Limited (“NDALS”)		The PRC March 17, 2005		RMB16,996,980		100%		Manufacture, marketing and distribution of soybean products
Shandong Xinlongya Industry and Trade Company Limited (“SXDC”)		The PRC September 27, 2005		US$404,400		100%		Marketing and distribution of instant noodles, flour and soybean products
New Dragon Asia Food (Chengdu) Company Limited (“NDAFC)		The PRC February 24, 2006		RMB17,430,000		90%		Manufacture, marketing and distribution of instant noodles

		Year Ended December 25,
		2007									2006									2005
					Weighted									Weighted									Weighted
		Income(Loss)			Average Shares			Per-Share			Income(Loss)			Average Shares			Per-Share			Income (Loss)			Average Shares			Per-Share
Earnings per share – basic
Income available to common stockholders		$	11,900			54,109		$	0.22		$	(5,361	)		51,485		$	(0.10	)	$	1,106			46,051		$	0.02
Effect of dilutive securities
Redeemable Convertible P referred Stock			—			—						—			—						—			—
Options and Warrants			—			1,410						—			—						—			898
Earnings per share – diluted
Eliminate underscore
Income available to common stockholders		$	11,900			55,519		$	0.21		$	(5,361	)		51,485		$	(0.10	)	$	1,106			46,949		$	0.02

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

NOTE 4. ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

		December 25, 2007			December 25, 2006
		(In thousands)			(In thousands)
Accounts receivable		$	10,167		$	9,554
Less: Allowance for doubtful accounts			(944	)		(719	)
		$	9,223		$	8,835

		December 25, 2007			December 25, 2006
		(In thousands)			(In thousands)
Balance at the beginning of the year		$	719		$	893
Add: provision during the year			272			83
Less: write-offs during the year			(47	)		(257	)
Balance at the end of the year		$	944		$	719

NOTE 5. DEPOSITS AND PREPAYMENTS

Deposits and prepayments consist of the following:

		December 25, 2007			December 25, 2006
		(In thousands)			(In thousands)
Deposits for raw materials		$	12,053		$	6,394
Prepayments and advances			130			192
		$	12,183		$	6,586

NOTE 6. INVENTORIES

Inventories consist of the following:

		December 25,  2007			December 25, 2006
		(In thousands)			(In thousands)
Raw materials (including packing materials)		$	20,403		$	9,807
Finished goods			1,743			1,895
			22,146			11,702
Less: Inventory reserve			(96	)		(104	)
		$	22,050		$	11,598

		December 25, 2007			December 25, 2006
		(In thousands)			(In thousands)
Balance at the beginning of the year		$	104		$	134
Add: provision during the year			20			-
Less: write-offs during the year			(28	)		(30	)
Balance at the end of the year		$	96		$	104

NOTE 7. DUE FROM RELATED COMPANIES

Due from related companies consist of the following:

		December 25, 2007			December 25, 2006
		(In thousands)			(In thousands)
Due from affiliated companies for sales		$	913		$	857

NOTE 8. PROPERTY, MACHINERY AND EQUIPMENT

Property, machinery and equipment consist of the following:

		Useful Life			December 25, 2007			December 25, 2006
		(In years)			(In thousands)			(In thousands)
Buildings			40		$	13,839		$	12,935
Machinery and equipment			5- 12			20,229			19,067
Construction in process						1,124			—
						35,192			32,002
Less: Accumulated depreciation and amortization						(9,206	)		(7,754	)
					$	25,986		$	24,248

NOTE 9. LAND USE RIGHTS

Land use rights consist of the following:

		December 25, 2007			December 25, 2006
		(In thousands)			(In thousands)
Land use rights		$	8,415		$	7,882
Less: Accumulated amortization			(1,121	)		(899	)
		$	7,294		$	6,983

NOTE 1 0. OTHER PAYABLES AND ACCRUALS

Other payables and accruals consist of the following:

		December 25, 2007			December 25, 2006
		(In thousands)			(In thousands)
Deposits from customers		$	566		$	1,094
Accruals for payroll, bonus and benefits			294			290
Utilities and accrued expenses			1,905			1,871
		$	2,765		$	3,255

		2007			2006			2005
Expected tax provision			33	%		33	%		33	%
Non deductible expenses:
Stock compensation			—			(330	)%		1	%
Change in fair value of derivatives			(17	)%		(58	)%		41	%
Expenses outside of China			3	%		(51	)%		9	%
Governmental tax rate effects:
Reduction for preferential tax rate			(4	)%		68	%		(15	)%
Impact of effective tax holiday and lower factory rates			(3	)%		134	%		(23	)%
Effective tax rate			12	%		(204	)%		46	%

		Preferred Stock A		Preferred Stock B
Preferred Dividend		7% per annum, payable quarterly in arrears in cash or, at the Company’s option subject to satisfaction of certain conditions, shares of Class A Common Stock valued at 95% of the volume-weighted current market price.		7% per annum, payable quarterly in arrears in cash or, at the Company’s option subject to satisfaction of certain conditions, shares of Class A Common Stock valued at 95% of the volume-weighted current market price.
Redemption		July 11, 2010		December 22, 2010
Mandatory Conversion		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.   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.		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.   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 right 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 right to Common Stock at a price below the Issue Price, the Company agrees to extend full-ratchet anti-dilution protection to the investors.

Redeemable Convertible Preferred Stock
		Number of shares			Series A			Series B			Combined
Sale of Series A Preferred Stock			6, 000		$	6,000					$	6,000
Sale of Series B Preferred Stock			9,500					$	9,500			9,500
Expenses of Offering						(685	)		(1,142	)		(1,827	)
Original Discounts						(4,558	)		(5,686	)		(10,244	)
Initial Balance of Redeemable Preferred Stock						757			2,672			3,429
Net value at Conversion of Preferred Stock to common stocks			(6,066	)		(1,363	)		(578	)		(1,941	)
Accumulated Accretion of original discounts						1,361			2,472			3,833
Balance December 25, 2007			9,434		$	755		$	4,566		$	5,321

		Warrants			Embedded Conversion Feature
Expected life (in years)			Remaining term at valuation  date			Remaining Term to conversion or redemption date at each valuation date
Expected volatility			50 %			50 %
Risk-free interest rate			3.52 %			3.21% to 3.63 %
Dividend yield			0			0

Fair Value at issuances		$	10,259
Loss on change in value of derivatives during 2005			4,064
Conversion of 1900 shares of Series A Preferred Stock to common stock during 2005			(2,188	)
Fair Value at December 25, 2005		$	12,135
Loss on change in value of derivatives during the period			1,434
Conversion of 3,438 shares of Series A & B Preferred Stock to common stock during 2006			(2,431	)
Fair Value at December 25, 2006		$	11,138
Gain on change in value of derivatives during the period			(8,412	)
Conversion of 728 shares of Series A & B Preferred Stock to common stock during 2007			(233	)
Fair Value at December 25, 2007		$	2,493

NOTE 1 4. WARRANTS

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

		Shares			Weighted Average Exercise Price
Outstanding at December 25, 2004			2,075,000			0.9883
Issued			6,861,842			1.3889
Exercised			2,327,368			0.9945
Forfeited/Cancelled			—			—
Outstanding at December 25, 2005			6,609,474			1.4020
Issued			—			—
Exercised			101,579			1.0400
Forfeited/Cancelled			—			—
Outstanding at December 25, 2006			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 December 25, 2007			6,507,895			1.4093

		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 December 25, 2007			6,507,895

		January 20, 2006
Life (years)			6
Dividend yield			None
Risk - free interest rate			4.36	%
Volatility			89	%

		December 13, 2006
Life (years)			6
Dividend yield			None
Risk - free interest rate			4.55	%
Volatility			50	%

		Options Outstanding									Options Exercisable
Range of Exercise Price Per Share			Number Outstanding at December 25,  2007			Weighted  Average Fair Value			Weighted Average Remaining Life  (Years )			Number Exercisable at December 25,  2007			Weighted Average Exercise Price
$ 1.60-1.82			8,000,000		$	1.02			4.73			8,000,000		$	1.75

NOTE 16. COMMITMENTS

Annual fees

Under the supplementary joint venture agreements, the Company has committed to pay predetermined annual fees of $113,000 to the Chinese joint venture partners for each of the years in the period from December 26, 1998 to 2049 as long as the joint venture continues to operate. As of December 25, 2007, total commitments under these arrangements were as follows (in thousands):

2008			118
2009			118
2010			118
2011			118
2012			118
Thereafter			3,886
Total		$	4,476

		2007			2006			2005
Sales of finished goods to:
Related parties (b)		$	28		$	7		$	8
Pre-determined annual fees charged by joint venture partners:
Shandong Longfeng Group Company (a)		$	79		$	75		$	75
Shandong Longfeng Flour Company Limited (b)			39			38			36
		$	118		$	113		$	111
Sales of machinery to Shandong Longfeng Group Company		$	10		$	—		$	—
Management fees charged by a related party (b)		$	—		$	—		$	12
Rental income from a joint venture partner:
Shandong Longfeng Group Company		$	69		$	66		$	64
Purchase of machinery from a related party (b)		$	—		$	—		$	70

NOTE 18. CONDENSED GEOGRAPHIC FINANCIAL INFORMATION

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

		Inside China			Outside China			Total
Assets
- Cash and cash equivalents		$	3,505		$	141		$	3,646
- Others			77,725			49			77,774
Total Assets			81,230			190			81,420
Liabilities			8,935			4,548			13,483
Minority interests			294			—			294
Intercompany			13,385			(13,385	)		—
Equity			52,642			9,680			62,322

		Inside China			Outside China			Total
Net revenue		$	55,738		$	—		$	55,738
Cost of goods sold			(45,427	)		—			(45,427	)
General and administrative expenses			(1,309	)		(1,297	)		(2,606	)
Income (loss) from operation			7,723			(1,297	)		6,426
Other income (loss)			1,245			8,412			9,657
Provision for income taxes			(1,968	)		—			(1,968	)
Net income (loss)			7,000			4,900			11,900

		Inside China			Outside China			Total
Assets
- Cash and cash equivalents		$	9,919		$	357		$	10,276
- Others			59,179			53			59,232
Total Assets			69,098			410			69,508
Liabilities			5,246			15,770			21,016
Minority interests			276			—			276
Intercompany			12,536			(12,536	)		—
Equity			40,803			3,209			44,012

		Inside China			Outside China			Total
Net revenue		$	53,439		$	—		$	53,439
Cost of goods sold			(43,404	)		—			(43,404	)
General and administrative expenses			(1,350	)		(9,558	)		(10,908	)
Income (loss) from operation			7,640			(9,558	)		(1,918	)
Other income (loss)			2,515			(1,410	)		1,105
Provision for income taxes			(1,657	)		—			(1,657	)
Net income (loss)			8,364			(10,968	)		(2,604	)

		Inside China			Outside China			Total
Assets
- Cash and cash equivalents		$	4,180		$	10,152		$	14,332
- Others			41,988			1,101			43,089
Total Assets			46,168			11,253			57,421
Liabilities			7,006			12,766			19,772
Minority interests			91			—			91
Intercompany			8,743			(8,743	)		—
Equity			30,328			3,671			33,999

		Inside China			Outside China			Total
Net revenue		$	44,180		$	—		$	44,180
Cost of goods sold			(36,151	)		—			(36,151	)
General and administrative expenses			(1,330	)		(1,028	)		(2,358	)
Income (loss) from operation			5,978			(1,028	)		4,950
Provision for income taxes			(1,487	)		—			(1,487	)
Other income (loss)			2,352			(4,062	)		(1,710	)
Net income (loss)			6,837			(5,090	)		1,747

NOTE 1 9. 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.

		2007			2006			2005
		(In thousands)
Net revenue:
Instant noodles		$	15,262		$	15,799		$	15,353
Flour			30,903			30,263			28,827
Soybean			9,573			7,377			—
		$	55,738		$	53,439		$	44,180
Income (loss) from operations:
Instant noodles		$	1,208		$	1,268		$	1,336
Flour			5,526			5,356			3,614
Soybean			(308	)		(8,542	)		—
		$	6,426		$	(1,918	)	$	4,950
Depreciation and amortization:
Instant noodles		$	841		$	808		$	537
Flour			615			550			729
Soybean			218			255			—
		$	1,674		$	1,613		$	1,266
Identifiable long-term assets:
Instant noodles		$	22,640		$	20,864		$	11,836
Flour			7,470			7,377			10,459
Soybean			3,170			2,990			—
		$	33,280		$	31,231		$	22,295

NOTE 22. QUARTERLY FINANCIAL DATA (UNAUDITED)

											Net Income (loss) per  share
		Net Revenue			Gross Profit			Net Income (loss)			Basic			Diluted
		(In thousands, except per share data)
Year Ended December 25, 2007
First Quarter		$	11,160		$	1,922		$	3,449		$	0.05		$	0.05
Second Quarter			13,035			2,556			4,813			0.08			0.08
Third Quarter			13,955			2,807			3,204			0.05			0.05
Fourth Quarter			17,588			3,026			2,649			0.04			0.04
		$	55,738		$	10,311		$	14,115
Year Ended December 25, 2006
First Quarter		$	11,096		$	1,854		$	(7,852	)	$	(0.17	)	$	(0.17	)
Second Quarter			11,544			2,172			9,087			0.16			0.15
Third Quarter			12,964			2,522			4,790			0.08			0.08
Fourth Quarter			17,835			3,487			(8,629	)		(0.17	)		(0.17	)
		$	53,439		$	10,035		$	(2,604	)
Year Ended December 25, 2005
First Quarter		$	8,282		$	1,492		$	588		$	0.01		$	0.01
Second Quarter			8,993			1,409			1,372			0.03			0.03
Third Quarter			11,645			2,157			(6,440	)		(0.14	)		(0.14	)
Fourth Quarter			15,260			2,971			6,227			0.14			0.13
		$	44,180		$	8,029		$	1,747

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONDENSED PARENT COMPANY BALANCE SHEETS

(Amounts in thousands, except share data)

		December 25, 2007			December 25,  2006
ASSETS
Current assets:
Cash and cash equivalents		$	141		$	355
Other receivable			20			20
Deferred expenses, net			29			33
Total current assets			190			408
Investment in and advances to subsidiaries			72,001			60,163
Total assets		$	72,191		$	60,571
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Other payables and accruals		$	792		$	684
Dividend payable on preferred shares			173			193
Embedded derivatives at fair value			2,493			11,138
Total current liabilities			3,458			12,015
Due to New Dragon Asia Food Limited			1,090			340
Total liabilities			4,548			12,355
Series A & B Redeemable Convertible Preferred Stock, $0.0001 par value: Authorized shares – 5,000,000
Issued and outstanding – 9,434 shares and 10,162 shares at December 25,  2007 and 2006, respectively			5,321			4,204
Commitments
Stockholders’ equity:
Class A Common Stock, $0.0001 par value:
Authorized shares – 102,000,000 Issued and outstanding –55,195,385 in 2007 and 53,614,723 in 2006			5			5
Class B Common Stock, $0.0001 par value:
Authorized shares – 2,000,000 – none issued and outstanding			—			—
Additional paid-in capital			29,982			28,411
Retained earnings			24,568			12,668
Accumulated other comprehensive income			7,767			2,928
Total stockholders’ equity			62,322			44,012
Total liabilities and stockholders’ equity		$	72,191		$	60,571

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONDENSED PARENT COMPANY STATEMENTS OF OPERATIONS

(Amounts in thousands)

		For the years ended December 25,
		2007			2006			2005
General and administrative expenses			(1,297	)		(9,558	)		(1,020	)
Loss from operations			(1,297	)		(9,558	)		(1,020	)
Other income (expense):
Interest income			—			25			9
Loss on fair value adjustments to e mbedded derivatives			8,412			(1,434	)		(4,064	)
Total parent only gain (loss)			7,115			(10,967	)		(5,075	)
Equity in subsidiary earnings, net of taxes			7,000			8,363			6,822
Net income (loss)		$	14,115		$	(2,604	)	$	1,747
Accretion of redeemable preferred stock			(1,512	)		(1,882	)		(454	)
Preferred stock dividends			(703	)		(875	)		(187	)
Income (loss) available to common stockholders		$	11,900		$	(5,361	)	$	1,106

NEW DRAGON ASIA CORP. AND SUBSIDIARIES

CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS

(Amounts in thousands)

		For the years ended December 25,
		2007			2006			2005
Cash flows from operating activities:
Total parent only gain (loss)		$	7,115		$	(10,967	)	$	(5,075	)
Adjustments to reconcile total parent only loss to net cash provided by (used in) operating activities:
Loss   on fair value adjustments to e mbedded derivatives			(8,412	)		1,434			4,064
Stock-based compensation expense			—			8,140			105
Non-cash service payment			269			—			—
Changes in operating assets and liabilities:
Other receivable			4			—			(1,032	)
Other payables and accruals			108			24			459
Net cash provided by (used in) operating activities			(916	)		(1,369	)		(1,479	)
Cash flows from investing activities:
Investment and advances to subsidiaries			(2,447	)		(11,016	)		(4,848	)
Net cash provided by (used in) investing activities			(2,447	)		(11,016	)		(4,848	)
Cash flows from financing activities:
Proceeds from issuance of preferred stock			—			—			15,500
Payments of issuance costs related to preferred stock			—			(58	)		(1,218	)
Preferred Stock Dividends			(49	)		(387	)		(30	)
Repayment to parent company			—			—			(550	)
Increase in due to parent company			750			—			—
Proceeds from exercise of warrants			—			—			1,977
Proceeds from exercise of stock options			—			1,120			—
Net cash provided by financing activities			701			675			15,679
Foreign currency translation adjustment			2,448			1,915			798
Net increase (decrease) in cash and cash equivalents			(214	)		(9,795	)		10,150
Cash and cash equivalents at the beginning of the period			355			10,150			—
Cash and cash equivalents at the end of the period		$	141		$	355		$	10,150

EXHIBIT INDEX

 

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

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4.12		Registration Rights Agreement, dated December 22, 2005, by and among New Dragon Asia Corp. and the investors named therein (incorporated herewith by reference to Exhibit 10.2 to our Form 8-K filed on December 23, 2005).
4.13		Registration Rights Agreement, dated December 22, 2005, by and among New Dragon Asia Corp. and New Dragon Food Ltd. (incorporated herewith by reference to Exhibit 4.5 to our Registration Statement on Form S-3 filed on January 20, 2006).
10.1		Sino-Foreign Joint Venture Contract for the New Dragon Asia Flour (Yantai) Company Limited, dated June 1, 1999 (incorporated herewith by reference to Exhibit 10.1 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.2		Subcontracting Agreement, for the New Dragon Asia Flour (Yantai) Company Limited, dated June 26, 1999 (incorporated herewith by reference to Exhibit 10.2 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.3		Sino-Foreign Joint Venture Contract for the New Dragon Asia Food (Yanti) Company Limited, dated November 28, 1998 (incorporated herewith by reference to Exhibit 10.3 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.4		Subcontracting Agreement, for the New Dragon Asia Food (Yantai) Company Limited, dated December 26, 1998 (incorporated herewith by reference to Exhibit 10.4 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.5		Sino-Foreign Joint Venture Contract for the New Dragon Asia Food (Dalian) Company Limited, dated November 28, 1998 (incorporated herewith by reference to Exhibit 10.5 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.6		Subcontracting Agreement, for the New Dragon Asia Food (Dalian) Company Limited, dated December 26, 1998 (incorporated herewith by reference to Exhibit 10.6 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.7		Sino-Foreign Joint Venture Contract for the Sanhe New Dragon Asia Food Company Limited, dated November 28, 1998 (incorporated herewith by reference to Exhibit 10.7 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.8		Subcontracting Agreement, for the Sanhe New Dragon Asia Food Company Limited, dated December 26, 1998 (incorporated herewith by reference to Exhibit 10.8 to our Registration Statement on Form S-3 filed on October 3, 2003).
10.9		Employment Agreement between New Dragon Asia Corp. and Peter Mak, dated November 2, 2004 (incorporated herewith by reference to Exhibit 10.9 to our Form 8-K filed on June 29, 2005).
10.10		Employment Supplement between New Dragon Asia Corp. and Peter Mak, dated June 22, 2005 (incorporated herewith by reference to Exhibit 10.9 to our Form 8-K filed on June 29, 2005).
10.11		Supplementary Agreement to Employment Agreement between New Dragon Asia Corp. and Peter Mak, dated January 20, 2006 (incorporated herewith by reference to Exhibit 10.10 to our Form 8-K filed on January 24, 2006).
10.12		Equity Incentive Plan (incorporated herewith by reference to Exhibit B to our Definitive Information Statement on Schedule 14C filed on March 14, 2006).
10.13		Stock Option Agreement between New Dragon Asia Corp. and Peter Mak, dated December 13, 2006 (incorporated herewith by reference to Exhibit 10.1 to our Form 8-K filed on December 15, 2006).

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10.14		Settlement Agreement and General Release between New Dragon Asia Corp and Berry-Shino Securities Inc., dated August 15, 2007 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed on August 15, 2007).
21.1		Subsidiaries of New Dragon Asia Corp., filed herewith.
23.1		Consent of Grobstein, Horwath & Company LLP, Independent Registered Public Accounting Firm, filed herewith.
31.1		Certification of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2		Certification of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.
32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.

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