UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended: September 25, 2010
or
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from
to
Commission
File Number: 001-15046
NEW
DRAGON ASIA CORP.
(Exact
name of Registrant as specified in its charter)
FLORIDA
|
88-0404114
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification Number)
|
10
Huangcheng Road (N), Longkou, Shandong Province, PRC
|
265701
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(86 535)
8951 567
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).* Yes
¨
No
¨
*The registrant has not
yet been phased into the interactive data requirements.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer
¨
|
Accelerated
Filer
¨
|
Non-Accelerated
Filer (Do not check if a smaller reporting company)
¨
|
Smaller
Reporting Company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨
No
x
The
number of shares of Class A Common Stock outstanding as of October 31, 2010 was
100,000,000.
NEW
DRAGON ASIA CORP.
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 2010
TABLE
OF CONTENTS
|
|
|
Page
|
PART
I:
|
FINANCIAL
INFORMATION
|
|
3
|
|
|
|
|
ITEM
1.
|
Consolidated
Financial Statements:
|
|
3
|
|
|
|
|
|
Consolidated
Balance Sheets as of September 25, 2010 (unaudited) and December 25,
2009
|
|
3
|
|
|
|
|
|
Consolidated
Statements of Operations (unaudited) for the three months and nine months
ended September 25, 2010 and 2009
|
|
4
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the
nine months ended September 25, 2010 (unaudited) and the year ended
December 25, 2009
|
|
5
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (unaudited) for the nine months ended September
25, 2010 and 2009
|
|
6
|
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
|
7
|
|
|
|
|
ITEM
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
19
|
|
|
|
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
28
|
|
|
|
|
ITEM
4T.
|
Controls
and Procedures
|
|
28
|
|
|
|
|
PART
II:
|
OTHER
INFORMATION
|
|
29
|
|
|
|
|
ITEM
1.
|
Legal
Proceedings
|
|
29
|
|
|
|
|
ITEM
1A.
|
Risk
Factors
|
|
29
|
|
|
|
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
29
|
|
|
|
|
ITEM
3.
|
Defaults
Upon Senior Securities
|
|
29
|
|
|
|
|
ITEM
4.
|
[Removed
and Reserved]
|
|
29
|
|
|
|
|
ITEM
5.
|
Other
Information
|
|
29
|
|
|
|
|
ITEM
6.
|
Exhibits
|
|
29
|
|
|
|
|
SIGNATURES
|
|
32
|
|
|
|
|
EXHIBITS
|
|
|
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Financial
Statements.
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Amounts
in thousands, except share data)
|
|
September 25,
2010
|
|
|
December 25,
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,185
|
|
|
$
|
3,440
|
|
Accounts
receivable, net
|
|
|
13,242
|
|
|
|
13,437
|
|
Deposits
and prepayments, net
|
|
|
6,866
|
|
|
|
5,632
|
|
Inventories,
net
|
|
|
10,566
|
|
|
|
14,466
|
|
Total
current assets
|
|
|
33,859
|
|
|
|
36,975
|
|
|
|
|
|
|
|
|
|
|
Property,
machinery and equipment, net
|
|
|
27,751
|
|
|
|
30,263
|
|
Land
use rights, net
|
|
|
4,297
|
|
|
|
4,332
|
|
Due
from related companies
|
|
|
933
|
|
|
|
952
|
|
Total
assets
|
|
$
|
66,840
|
|
|
$
|
72,522
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
6,158
|
|
|
$
|
4,808
|
|
Other
payables and accruals
|
|
|
2,427
|
|
|
|
2,062
|
|
Taxes
payable
|
|
|
130
|
|
|
|
186
|
|
Embedded
derivatives, at fair value
|
|
|
110
|
|
|
|
76
|
|
Total
current liabilities
|
|
|
8,825
|
|
|
|
7,132
|
|
|
|
|
|
|
|
|
|
|
Due
to shareholder
|
|
|
3,749
|
|
|
|
3,700
|
|
Due
to joint venture partners
|
|
|
527
|
|
|
|
463
|
|
Total
liabilities
|
|
|
13,101
|
|
|
|
11,295
|
|
Series
A and B Redeemable Convertible Preferred Stock, $0.0001 par
value:
Authorized
shares - 5,000,000
Issued
and outstanding –1,742 shares and 3,494 shares at September 25, 2010 and
December 25, 2009, respectively
|
|
|
1,720
|
|
|
|
3,008
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Class
A Common Stock, $0.0001 par value:
Authorized
shares - 100,000,000
Issued
and outstanding – 100,000,000 at September 25, 2010 and 83,364,229 at
December 25, 2009
|
|
|
10
|
|
|
|
8
|
|
Class
B Common Stock, $0.0001 par value:
Authorized
shares - 2,000,000
Issued
and outstanding – none
|
|
|
—
|
|
|
|
—
|
|
Additional
paid-in capital
|
|
|
37,277
|
|
|
|
35,569
|
|
Deferred
stock compensation
|
|
|
—
|
|
|
|
(75
|
)
|
Retained
earnings
|
|
|
(31
|
)
|
|
|
9,187
|
|
Accumulated
other comprehensive income
|
|
|
14,638
|
|
|
|
13,405
|
|
Total
stockholders’ equity
|
|
|
51,894
|
|
|
|
58,094
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest
|
|
|
125
|
|
|
|
125
|
|
Total
equity
|
|
|
52,019
|
|
|
|
58,219
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
66,840
|
|
|
$
|
72,522
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW DRAGON ASIA CORP. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Amounts
in thousands, except per share data; unaudited)
|
|
Three months ended
September 25,
|
|
|
Nine months ended
September 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
5,450
|
|
|
$
|
6,290
|
|
|
$
|
18,043
|
|
|
$
|
15,883
|
|
Cost
of goods sold
|
|
|
(5,373
|
)
|
|
|
(6,560
|
)
|
|
|
(18,006
|
)
|
|
|
(18,591
|
)
|
Gross
profit (loss)
|
|
|
77
|
|
|
|
(270
|
)
|
|
|
37
|
|
|
|
(2,708
|
)
|
Selling
and distribution expenses
|
|
|
(164
|
)
|
|
|
(230
|
)
|
|
|
(588
|
)
|
|
|
(597
|
)
|
General
and administrative expenses
|
|
|
(2,569
|
)
|
|
|
(413
|
)
|
|
|
(7,872
|
)
|
|
|
(2,021
|
)
|
Loss
from operations
|
|
|
(2,656
|
)
|
|
|
(913
|
)
|
|
|
(8,423
|
)
|
|
|
(5,326
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1
|
|
|
|
4
|
|
|
|
2
|
|
|
|
6
|
|
Other
income (expense)
|
|
|
68
|
|
|
|
(512
|
)
|
|
|
(381
|
)
|
|
|
(604
|
)
|
Gain
(loss)
on fair value adjustments to
e
mbedded
derivatives
|
|
|
(102
|
)
|
|
|
(11
|
)
|
|
|
(51
|
)
|
|
|
162
|
|
VAT
refund
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
|
Loss
before income taxes
|
|
|
(2,689
|
)
|
|
|
(1,432
|
)
|
|
|
(8,853
|
)
|
|
|
(5,747
|
)
|
Benefit
(provision) for income taxes
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
348
|
|
Net
loss
|
|
|
(2,689
|
)
|
|
|
(1,433
|
)
|
|
|
(8,854
|
)
|
|
|
(5,399
|
)
|
Net
loss attributable to Non-controlling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
Net
loss attributable to Controlling interest
|
|
$
|
(2,689
|
)
|
|
$
|
(1,433
|
)
|
|
$
|
(8,854
|
)
|
|
$
|
(5,397
|
)
|
Accretion
of Redeemable Preferred Stock
|
|
|
(68
|
)
|
|
|
(164
|
)
|
|
|
(260
|
)
|
|
|
(570
|
)
|
Preferred
Stock Dividends
|
|
|
(21
|
)
|
|
|
(74
|
)
|
|
|
(104
|
)
|
|
|
(262
|
)
|
Loss
attributable to common stockholders
|
|
$
|
(2,778
|
)
|
|
$
|
(1,671
|
)
|
|
$
|
(9,218
|
)
|
|
$
|
(6,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(
0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(
0.10
|
)
|
|
$
|
(
0.09
|
)
|
Diluted
|
|
$
|
(
0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(
0.10
|
)
|
|
$
|
(
0.09
|
)
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
99,751
|
|
|
|
76,961
|
|
|
|
95,358
|
|
|
|
70,259
|
|
Diluted
|
|
|
99,751
|
|
|
|
76,961
|
|
|
|
95,358
|
|
|
|
70,259
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(Amounts
in thousands, unaudited)
|
|
Class A Common
Stock Shares
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Deferred Stock
Compensation
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total NWD
Stockholders’
Equity
|
|
|
Non
Controlling
Interests
|
|
|
Total
Equity
|
|
|
Comprehensive
Income (loss)
|
|
Balance
at December 25, 2008
|
|
|
60,923
|
|
|
$
|
6
|
|
|
$
|
32,521
|
|
|
$
|
-
|
|
|
$
|
21,321
|
|
|
$
|
13,310
|
|
|
$
|
67,158
|
|
|
$
|
122
|
|
|
$
|
67,280
|
|
|
$
|
4,026
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,106
|
)
|
|
|
-
|
|
|
|
(11,106
|
)
|
|
|
3
|
|
|
|
(11,103
|
)
|
|
|
(11,106
|
)
|
Accretion
of Redeemable Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(704
|
)
|
|
|
-
|
|
|
|
(704
|
)
|
|
|
-
|
|
|
|
(704
|
)
|
|
|
-
|
|
Preferred
Stock Dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(324
|
)
|
|
|
-
|
|
|
|
(324
|
)
|
|
|
-
|
|
|
|
(324
|
)
|
|
|
-
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95
|
|
|
|
95
|
|
|
|
-
|
|
|
|
95
|
|
|
|
95
|
|
Conversion
of preferred stock and related dividend payments made in Class A Common
Stock
|
|
|
20,441
|
|
|
|
2
|
|
|
|
2,748
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,750
|
|
|
|
-
|
|
|
|
2,750
|
|
|
|
-
|
|
Share-based
compensation to CFO
|
|
|
2,000
|
|
|
|
-
|
|
|
|
300
|
|
|
|
(75
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
225
|
|
|
|
-
|
|
|
|
225
|
|
|
|
-
|
|
Balance
at December 25, 2009
|
|
|
83,364
|
|
|
|
8
|
|
|
|
35,569
|
|
|
|
(75
|
)
|
|
|
9,187
|
|
|
$
|
13,405
|
|
|
$
|
58,094
|
|
|
$
|
125
|
|
|
|
58,219
|
|
|
$
|
(11,011
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,854
|
)
|
|
|
-
|
|
|
|
(8,854
|
)
|
|
|
-
|
|
|
|
(8,854
|
)
|
|
|
(8,854
|
)
|
Accretion
of Redeemable Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(260
|
)
|
|
|
-
|
|
|
|
(260
|
)
|
|
|
-
|
|
|
|
(260
|
)
|
|
|
-
|
|
Preferred
Stock Dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(104
|
)
|
|
|
-
|
|
|
|
(104
|
)
|
|
|
-
|
|
|
|
(104
|
)
|
|
|
-
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,233
|
|
|
|
1,233
|
|
|
|
-
|
|
|
|
1,233
|
|
|
|
1,233
|
|
Conversion
of preferred stock and related dividend payments made in Class A Common
Stock
|
|
|
16,636
|
|
|
|
2
|
|
|
|
1,708
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,710
|
|
|
|
-
|
|
|
|
1,710
|
|
|
|
-
|
|
Share-based
compensation to CFO
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75
|
|
|
|
-
|
|
|
|
75
|
|
|
|
-
|
|
Balance
at September 25, 2010
|
|
|
100,000
|
|
|
$
|
10
|
|
|
$
|
37,277
|
|
|
$
|
-
|
|
|
$
|
(31
|
)
|
|
$
|
14,638
|
|
|
$
|
51,894
|
|
|
$
|
125
|
|
|
$
|
52,019
|
|
|
$
|
(7,621
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW DRAGON ASIA CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts in thousands,
unaudited)
|
|
Nine months ended
September 25,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(8,854
|
)
|
|
$
|
(5,399
|
)
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
|
6,137
|
|
|
|
94
|
|
Provision
for inventory reserve
|
|
|
9
|
|
|
|
2,257
|
|
Depreciation
and amortization of property, machinery, equipment and land use
rights
|
|
|
1,512
|
|
|
|
1,319
|
|
Loss
on sale of machinery and equipment
|
|
|
263
|
|
|
|
203
|
|
Loss/(gain)
on fair value adjustments to embedded derivatives
|
|
|
51
|
|
|
|
(162
|
)
|
Stock
based compensation expense
|
|
|
75
|
|
|
|
150
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(5,868
|
)
|
|
|
(4,643
|
)
|
Deposits
and prepayments
|
|
|
(1,191
|
)
|
|
|
6,497
|
|
Inventories
|
|
|
3,950
|
|
|
|
5,213
|
|
Due
from related companies
|
|
|
24
|
|
|
|
30
|
|
Accounts
payable
|
|
|
1,315
|
|
|
|
236
|
|
Other
payables and accruals
|
|
|
393
|
|
|
|
(1,611
|
)
|
Taxes
payable
|
|
|
(56
|
)
|
|
|
325
|
|
Deferred
tax asset
|
|
|
(4
|
)
|
|
|
(350
|
)
|
Net
cash (used in) provided by operating activities
|
|
|
(2,244
|
)
|
|
|
4,159
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property, machinery and equipment
|
|
|
(75
|
)
|
|
|
(11,546
|
)
|
Proceeds
from sale of property, machinery and equipment
|
|
|
1,286
|
|
|
|
5,848
|
|
Net
cash provided by (used in) investing activities
|
|
|
1,211
|
|
|
|
(5,698
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from shareholder loan
|
|
|
28
|
|
|
|
664
|
|
Proceeds
from joint venture partners
|
|
|
61
|
|
|
|
88
|
|
Net
cash provided by financing activities
|
|
|
89
|
|
|
|
752
|
|
Impact
of foreign currency translation on cash
|
|
|
689
|
|
|
|
(346
|
)
|
Net
decrease in cash and cash equivalents
|
|
|
(255
|
)
|
|
|
(1,133
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
3,440
|
|
|
|
4,383
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,185
|
|
|
$
|
3,250
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock into common stock
|
|
$
|
1,752
|
|
|
$
|
2,255
|
|
|
|
|
|
|
|
|
|
|
Dividend
payments on preferred stock in the form of common stock
|
|
$
|
144
|
|
|
$
|
302
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NEW
DRAGON ASIA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1. ORGANIZATION AND NATURE OF OPERATIONS
New
Dragon Asia Corp., a corporation incorporated in the State of Florida
(collectively with its subsidiaries, the “Company,” “we,” “us,” or “our”), is
principally engaged in the milling, sale and distribution of flour and related
products, including instant noodles and soybean-derived products, to retail and
wholesale customers throughout China through its foreign subsidiaries in China.
The Company is headquartered in Shandong Province in the People’s Republic of
China (“PRC” or “China”) and has its eight manufacturing plants in Yantai,
Beijing, Chengdu, and Penglai.
NOTE
2. BASIS OF PRESENTATION
The
consolidated financial statements include the financial statements of New Dragon
Asia Corp. and all of its wholly and majority owned subsidiaries. Intercompany
balances and transactions have been eliminated in consolidation.
Accounting
Standards Codification (“ASC”) Topic 810, “Consolidation of Variable Interest
Entities” (formerly Standards of Financial Accounting Standards (“SFAS”) 167,
“Amendments to FASB Interpretation No. 46(R))” requires an investor with a
majority of the variable interests (primary beneficiary) in a variable interest
entity (“VIE”) to consolidate the entity. A VIE is an entity in which
the voting equity investors do not have a controlling financial interest or the
equity investment at risk is insufficient to finance the entity’s activities
without receiving additional subordinated financial support from other parties.
VIEs are required to be consolidated by their primary beneficiaries if they do
not effectively disperse risks among the parties involved. The
primary beneficiary of a VIE is the party that absorbs a majority of the
entity’s expected losses or receives a majority of its expected residual
returns. The Company has completed a review of its investments in
both non-marketable and marketable equity interests as well as other
arrangements to determine whether it is the primarily beneficiary of any
VIEs. The review did not identify any VIEs.
These
Consolidated Financial Statements for interim periods are unaudited and were
prepared in accordance with accounting principles generally accepted in the
United States and the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the consolidated financial
statements include all adjustments, consisting only of normal, recurring
adjustments, necessary for their fair presentation. The results
reported in these Consolidated Financial Statements are not necessarily
indicative of the results that may be reported for the entire
year. The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company regularly evaluates
estimates and assumptions related to allowances for doubtful accounts, sales
returns and allowance, and inventory reserves. Although management believes
these estimates and assumptions are adequate and reasonable under the
circumstances, actual results could differ from those estimates.
Contractual
Joint Ventures
A
contractual joint venture is an entity established between the Company and
another joint venture partner, with the rights and obligations of each party
governed by a contract. Currently, the Company has established three contractual
joint ventures with three Chinese partners in China, with percentage of
ownership ranging from 79.64% to 90%. Pursuant to each Chinese joint venture
agreement, each Chinese joint venture partner is entitled to receive a
pre-determined annual fee and is not responsible for any profit or loss,
regardless of the ownership in the contractual joint venture. In view of such
contracted profit sharing arrangement, the three contractual joint ventures are
regarded as 100% owned by the Company for income statement purposes. The Company
consolidates financial statements of the contractual joint ventures and accounts
for the portion of the contractual joint ventures not wholly-owned by the
Company as non-controlling interest.
Accounting
for Derivative Instruments
Derivatives
are recorded on the Company’s balance sheet at fair value. These derivatives,
including embedded derivatives in the Company’s Series A and B Redeemable
Convertible Preferred Stock are separately valued and accounted for on the
Company’s balance sheet.
The Company has determined that the conversion features of its
redeemable convertible preferred stock and warrants to purchase common stock are
derivatives that the Company is required to account for as if they were
free-standing instruments. The Company has also determined that it is required
to designate these derivatives as liabilities in its financial statements. As a
result, the Company reports the value of these embedded derivatives as current
liabilities on its balance sheet and reports changes in the value of these
derivatives as non-operating gains or losses on its statement of operations. The
value of the derivatives is required to be recalculated (and resulting
non-operating gains or losses reflected in the statement of operations and
resulting adjustments to the associated liability amounts reflected on the
balance sheet) on a quarterly basis, and is based on the market value of the
Company’s common stock. Due to the nature of the required calculations and the
large number of shares of the Company’s common stock involved in such
calculations, changes in the Company’s common stock price may result in
significant changes in the value of the derivatives and resulting gains and
losses on the Company’s statement of operations.
The
pricing models the Company uses for determining fair values of its derivatives
are a combination of the Black-Scholes and Binomial Pricing Models. Valuations
derived from this model are subject to ongoing internal and external review. The
model uses market-sourced inputs such as interest rates and option volatilities.
Selection of these inputs involves management’s judgment and may impact net
earnings. The Company has obtained a valuation report from a valuation firm to
support its estimates.
The
consolidated financial statements also reflect additional non-operating gains
and losses related to the classification of and accounting for: (1) the
conversion features of the Series A and B Preferred Stock and associated
warrants, and (2) the amortization associated with the discount recorded with
respect to the Series A and B Preferred Stock as a preferred stock dividend.
Fair
Value of Financial Instruments
The
Company adopted ASC Topic 820, “Fair Value Measurements and Disclosure”
(formerly SFAS 157, “Fair Value Measurements”) on January 1, 2008 to
account for and record fair values of financial instruments. This ASC
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. The ASC establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value
into three levels as follows:
Level
1 -
|
quoted
prices (unadjusted) in active markets for identical asset or
liabilities that the Company has the ability to access as of the
measurement date. Financial assets and liabilities utilizing Level 1
inputs include active exchange-traded securities and exchange-based
derivatives.
|
|
|
Level
2 -
|
inputs
other than quoted prices included within Level 1 that are directly
observable for the asset or liability or indirectly observable through
corroboration with observable market data. Financial assets and
liabilities utilizing Level 2 inputs include fixed income securities,
non-exchange-based derivatives, mutual funds, and fair-value
hedges.
|
|
|
Level
3 -
|
unobservable
inputs for the asset or liability only used when there is little, if any,
market activity for the asset or liability at the measurement date.
Financial assets and liabilities utilizing Level 3 inputs include
infrequently-traded, non-exchange-based derivatives and commingled
investment funds, and are measured using present value pricing
models.
|
The
Company determines the level in the fair value hierarchy within which each fair
value measurement in its entirety falls, based on the lowest level input that is
significant to the fair value measurement in its entirety.
The
following table presents the embedded derivative, the Company only financial
assets measured and recorded at fair value on the Company’s Consolidated Balance
Sheets on a recurring basis and their level within the fair value hierarchy
during the period ended September 25, 2010 and 2009:
(In
thousands)
|
Fair Value
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
derivative liabilities as of September 25, 2010
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
110
|
|
|
$
|
110
|
|
Embedded
derivative liabilities as of September 25, 2009
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
99
|
|
|
$
|
99
|
|
NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS
In
January 2010, FASB issued ASU 2010-2, “Accounting and Reporting for Decreases in
Ownership of a Subsidiary- a Scope Clarification”. ASU 2010-2 addresses
implementation issues related to the changes in ownership provisions in the
Consolidation—Overall Subtopic (Subtopic 810-10) of the FASB ASC, originally
issued as SFAS 160, “Noncontrolling Interests in Consolidated Financial
Statements”. Subtopic 810-10 establishes the accounting and reporting guidance
for noncontrolling interests and changes in ownership interests of a subsidiary.
An entity is required to deconsolidate a subsidiary when the entity ceases to
have a controlling financial interest in the subsidiary. Upon deconsolidation of
a subsidiary, an entity recognizes a gain or loss on the transaction and
measures any retained investment in the subsidiary at fair value. The gain or
loss includes any gain or loss associated with the difference between the fair
value of the retained investment in the subsidiary and its carrying amount at
the date the subsidiary is deconsolidated. In contrast, an entity is required to
account for a decrease in ownership interest of a subsidiary that does not
result in a change of control of the subsidiary as an equity transaction.
ASU 2010-2 is effective for the Company starting January 3, 2010. The
adoption of ASU 2010-2 will not have a material impact on the Company's results
of operations or financial position.
In
January 2010, FASB issued ASU 2010-6, “Improving Disclosures about Fair
Measurements". ASU 2010-6 provides amendments to subtopic 820-10 that require
separate disclosure of significant transfers into and out of Level 1 and
Level 2 fair value measurements and the presentation of separate
information regarding purchases, sales, issuances and settlements on a gross
basis in the reconciliation of Level 3 fair value measurements.
Additionally, ASU 2010-6 provides amendments to subtopic 820-10 that clarify
existing disclosures about the level of disaggregation and inputs and valuation
techniques. ASU 2010-6 is effective for financial statements issued for annual
reporting periods beginning after December 15, 2009, except for Level 3
reconciliation disclosures which are effective for annual periods beginning
after December 15, 2010. The adoption of ASU 2010-6 will not have a
material impact on the Company’s results of operations or financial
position.
In
February 2010, FASB issued ASU 2010-9 “Subsequent Events (Topic 855) Amendments
to Certain Recognition and Disclosure Requirements”. ASU 2010-9 amends
disclosure requirements within Subtopic 855-10. An entity that is an SEC filer
is not required to disclose the date through which subsequent events have been
evaluated. This change alleviates potential conflicts between Subtopic 855-10
and the SEC's requirements. ASU 2010-9 is effective for interim and annual
periods ending after June 15, 2010. The Company expects the adoption of ASU
2010-9 will not have a material impact on the Company’s results of operations or
financial position.
In March
2010, FASB issued ASU 2010-11 “Derivatives and Hedging (Topic 815) Scope
Exception Related to Embedded Credit Derivatives”. ASU 2010-11 clarifies the
type of embedded credit derivative that is exempt from embedded derivative
bifurcation requirements. Only one form of embedded credit derivative qualifies
for the exemption—one that is related only to the subordination of one financial
instrument to another. As a result, entities that have contracts containing an
embedded credit derivative feature in a form other than such subordination may
need to separately account for the embedded credit derivative feature. The
amendments in this Update are effective for each reporting entity at the
beginning of its first fiscal quarter beginning after June 15, 2010. Early
adoption is permitted at the beginning of each entity’s first fiscal quarter
beginning after issuance of this Update. The Company expects the adoption of ASU
2010-11 will not have a material impact on the Company’s results of operations
or financial position.
In April
2010, FASB issued ASU 2010-13 “Compensation-Stock Compensation (Topic 718)
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades”. ASU
2010-13 addresses the classification of a share-based payment award with an
exercise price denominated in the currency of a market in which the underlying
equity security trades. Topic 718 is amended to clarify that a share-based
payment award with an exercise price denominated in the currency of a market in
which a substantial portion of the entity’s equity securities trades shall not
be considered to contain a market, performance, or service condition. Therefore,
such an award is not to be classified as a liability if it otherwise qualifies
as equity classification. The amendments in this Update should be effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The guidance should be applied by recording a
cumulative-effect adjustment to the opening balance of retained earnings for all
outstanding awards as of the beginning of the fiscal year in which the
amendments are initially applied. The Company expects the adoption of ASU
2010-13 will not have a material impact on the Company’s results of operations
or financial position.
In April
2010, FASB issued ASU 2010-18
“
Effect of a Loan Modification When the Loan Is Part of a Pool That Is
Accounted for as a Single Asset (A consensus of the FASB Emerging Issues
Task)”
.
ASU 2010-18
clarifies that modifications of loans that are accounted for within a pool under
Subtopic 310-30, which provides guidance on accounting for acquired loans that
have evidence of credit deterioration upon acquisition, do not result in the
removal of those loans from the pool even if the modification would otherwise be
considered a troubled debt restructuring. An entity will continue to be required
to consider whether the pool of assets in which the loan is included is impaired
if expected cash flows for the pool change. The amendments do not affect the
accounting for loans under the scope of Subtopic 310-30 that are not accounted
for within pools. Loans accounted for individually under Subtopic 310-30
continue to be subject to the troubled debt restructuring accounting provisions
within Subtopic 310-40. The amendments in this Update are effective for
modifications of loans accounted for within pools under Subtopic 310-30
occurring in the first interim or annual period ending on or after July 15,
2010. The Company expects the adoption of ASU 2010-18 will not have a material
impact on the Company’s results of operations or financial
position.
In July
2010, FASB issued ASU 2010-20 “Receivables (Topic 310): Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit
Losses”
.
ASU 2010-20
improves the disclosures that an entity provides about the credit quality of its
financing receivables and the related allowance for credit losses. As a result
of these amendments, an entity is required to disaggregate by portfolio segment
or class certain existing disclosures and provide certain new disclosures about
its financing receivables and related allowance for credit losses. For public
entities, the disclosures as of the end of a reporting period are effective for
interim and annual reporting period ending on or after December 15, 2010. The
disclosures about activity that occurs during a reporting period are effective
for interim and annual reporting periods beginning on or after December 15,
2010. The Company expects the adoption of ASU 2010-20 will not have a material
impact on the Company’s results of operations or financial
statements.
In August
2010, FASB issued ASU 2010-21 “Accounting for Technical Amendments to Various
SEC Rules and Schedules. Amendments to SEC Paragraphs Pursuant to Release No.
33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of
Financial Reporting Policies”. ASU 2010-21 amends various SEC paragraphs
pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules,
Forms, Schedules and Codification of Financial Reporting Policies. The Company
expects the adoption of ASU 2010-21 will not have a material impact on the
Company’s results of operations or financial statements.
In August
2010, FASB issued ASU 2010-22 “Accounting for Various Topics-Technical
Corrections to SEC paragraphs (SEC Update)”. ASU 2010-22 amends various SEC
paragraphs based on external comments received and the issuance of SAB 112,
which amends or rescinds portions of certain SAB topics. The Company expects the
adoption of ASU 2010-22 will not have a material impact on the Company’s results
of operations or financial statements.
NOTE 4. CONDENSED BALANCE SHEET
INFORMATION
Condensed
balance sheet information as of September 25, 2010 consisted of the following
(in thousands):
|
|
Inside China
|
|
|
Outside China
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
-
Cash and cash equivalents
|
|
$
|
3,151
|
|
|
$
|
34
|
|
|
$
|
3,185
|
|
-
Others
|
|
|
63,610
|
|
|
|
45
|
|
|
|
63,655
|
|
Total
assets
|
|
|
66,761
|
|
|
|
79
|
|
|
|
66,840
|
|
Liabilities,
excluding Series A and B Redeemable Convertible Preferred
Stock
|
|
|
9,513
|
|
|
|
3,588
|
|
|
|
13,101
|
|
Equity
|
|
|
38,367
|
|
|
|
13,652
|
|
|
|
52,019
|
|
Assets
located outside of China consist primarily of cash and cash equivalents.
Liabilities located outside of China consist primarily of embedded derivatives,
net of the related beneficial conversion feature and fair value of the warrants.
Condensed
statement of operation information for the nine months ended September 25, 2010
consisted of the following (in thousands):
|
|
Inside China
|
|
|
Outside China
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
18,043
|
|
|
$
|
—
|
|
|
$
|
18,043
|
|
Cost
of goods sold
|
|
|
(18,006
|
)
|
|
|
—
|
|
|
|
(18,006
|
)
|
General
and administrative expenses
|
|
|
(7,418
|
)
|
|
|
(454
|
)
|
|
|
(7,872
|
)
|
Loss
from operations
|
|
|
(7,969
|
)
|
|
|
(454
|
)
|
|
|
(8,423
|
)
|
Provision
for income taxes
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
Other
income (expense)
|
|
|
(379
|
)
|
|
|
(51
|
)
|
|
|
(430
|
)
|
Net
loss attributable to controlling interest
|
|
|
(8,349
|
)
|
|
|
(505
|
)
|
|
|
(8,854
|
)
|
The
Company does not believe that providing additional information regarding cash
flows is meaningful to the reader, in light of the nature of the assets and
operations located inside China and outside China.
NOTE 5. LOSS PER SHARE
The Company computes earnings per share (“EPS’) in accordance
generally accepted accounting principles. Companies with complex capital
structures are required to present basic and diluted EPS. Basic EPS is
measured as the income or loss available to common shareholders divided by the
weighted average common shares outstanding for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., convertible securities, options and warrants) as
if they had been converted at the beginning of the periods presented, or
issuance date, if later. Potential common shares that have an
anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS. Approximately
28,953 dilutive shares on an “as converted” basis for the Redeemable Convertible
Preferred stock for the three and nine months ended September 25, 2010 were
excluded from the calculation of diluted earnings per share since their effect
would have been anti-dilutive. Approximately 25,266 dilutive shares
on an “as converted” basis for the Redeemable Convertible Preferred stock for
the three and nine months ended September 25, 2009 were excluded from the
calculation of diluted earnings per share since their effect would have been
anti-dilutive.
The
calculation of diluted weighted average common shares outstanding for the three
and nine months ended September 25, 2010 and 2009 is based on the average of the
closing price of the Company’s common stock during such periods applied to
warrants and options using the treasury stock method to determine if they are
dilutive. The Redeemable Convertible Preferred stock is included on an “as
converted “basis when these shares are dilutive.
The
following table is a reconciliation of the weighted average shares used in the
computation of basic and diluted earnings per share for the periods presented
(amounts in thousands, except per share data):
|
|
Three Months Ended September 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Loss
|
|
|
Shares
|
|
|
Per-Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Per-Share
|
|
Loss
per share – basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders
|
|
$
|
(2,778
|
)
|
|
|
99,751
|
|
|
$
|
(0.03
|
)
|
|
$
|
(1,671
|
)
|
|
|
76,961
|
|
|
$
|
(0.02
|
)
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
convertible preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Options
and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share – diluted
|
|
$
|
(2,778
|
)
|
|
|
99,751
|
|
|
$
|
( 0.03
|
)
|
|
$
|
(1,671
|
)
|
|
|
69,742
|
|
|
$
|
(0.02
|
)
|
|
|
Nine Months Ended September 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Loss
|
|
|
Shares
|
|
|
Per-Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Per-Share
|
|
Loss
per share – basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common stockholders
|
|
$
|
(9,218
|
)
|
|
|
95,358
|
|
|
$
|
(0.10
|
)
|
|
$
|
(6,229
|
)
|
|
|
70,259
|
|
|
$
|
(0.09
|
)
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
convertible preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Options
and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share – diluted
|
|
$
|
(9,218
|
)
|
|
|
95,358
|
|
|
$
|
(0.10
|
)
|
|
$
|
(6,229
|
)
|
|
|
70,259
|
|
|
$
|
(0.09
|
)
|
NOTE
6. ACCOUNTS RECEIVABLE
Accounts
receivable consisted of the following (in thousands):
|
|
September 25, 2010
|
|
|
December 25, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
22,001
|
|
|
$
|
16,162
|
|
Less:
Allowance for doubtful accounts
|
|
|
(8,759
|
)
|
|
|
(2,725
|
)
|
|
|
$
|
13,242
|
|
|
$
|
13,437
|
|
The
activity in the Company’s allowance for doubtful accounts is summarized as
follows (in thousands):
|
|
September 25, 2010
|
|
|
December 25, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the period
|
|
$
|
2,725
|
|
|
$
|
1,184
|
|
Add:
provision during the period
|
|
|
6,188
|
|
|
|
1,551
|
|
Less:
write-offs during the period
|
|
|
(154
|
)
|
|
|
(10
|
)
|
Balance
at the end of the period
|
|
$
|
8,759
|
|
|
$
|
2,725
|
|
NOTE
7. DEPOSITS AND PREPAYMENTS
Deposits
and prepayments consisted of the following (in thousands):
|
|
September 25, 2010
|
|
|
December 25, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
for raw materials
|
|
$
|
5,555
|
|
|
$
|
4,794
|
|
Prepayments
and advances
|
|
|
1,311
|
|
|
|
838
|
|
|
|
$
|
6,866
|
|
|
$
|
5,632
|
|
NOTE
8. INVENTORIES
Inventories
consisted of the following (in thousands):
|
|
September 25, 2010
|
|
|
December 25, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials (including packing materials)
|
|
$
|
9,627
|
|
|
$
|
13,488
|
|
Finished
goods
|
|
|
1,066
|
|
|
|
1,490
|
|
|
|
|
10,693
|
|
|
|
14,978
|
|
Less:
Inventory reserve
|
|
|
(127
|
)
|
|
|
(512
|
)
|
|
|
$
|
10,566
|
|
|
$
|
14,466
|
|
The
activity in the Company’s provision for inventory reserve is summarized as
follows (in thousands):
|
|
September 25, 2010
|
|
|
December 25, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the period
|
|
$
|
512
|
|
|
$
|
565
|
|
Add:
provision during the period
|
|
|
10
|
|
|
|
510
|
|
Less:
write-offs during the period
|
|
|
(395
|
)
|
|
|
(563
|
)
|
Balance
at the end of the period
|
|
$
|
127
|
|
|
$
|
512
|
|
NOTE
9. DUE FROM RELATED COMPANIES
Due from
related companies consisted of the following (in thousands):
|
|
September 25, 2010
|
|
|
December 25, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Xinlong
Asia Food (Dalian) Co., Ltd.*
|
|
|
879
|
|
|
|
899
|
|
Xinlong
Asia Food (Luoyang) Co., Ltd.*
|
|
|
54
|
|
|
|
53
|
|
Due
from related companies for sales
|
|
$
|
933
|
|
|
$
|
952
|
|
*
Subsidiaries of Shandong
Longfeng Group Company.
NOTE
10. PROPERTY, MACHINERY AND EQUIPMENT
Property, machinery and equipment consisted of
following (in thousands):
|
|
Useful Life
|
|
|
September 25, 2010
|
|
|
December 25, 2009
|
|
|
|
(In
years)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
40
|
|
|
$
|
13,626
|
|
|
$
|
13,437
|
|
Machinery
and equipment
|
|
|
5 -
12
|
|
|
|
22,850
|
|
|
|
23,680
|
|
Construction
in process
|
|
|
|
|
|
|
1,176
|
|
|
|
2,397
|
|
|
|
|
|
|
|
|
37,652
|
|
|
|
39,514
|
|
Less:
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(9,901
|
)
|
|
|
(9,251
|
)
|
|
|
|
|
|
|
$
|
27,751
|
|
|
$
|
30,263
|
|
Depreciation
and amortization expense was approximately $490,000, $396,000, $1,382,000 and
$1,167,000 for the three and nine months ended September 25, 2010 and 2009
respectively.
NOTE
11. LAND USE RIGHTS
Land use rights consisted of the following (in
thousands):
|
|
September 25, 2010
|
|
|
December 25, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Land
use rights
|
|
$
|
5,334
|
|
|
$
|
5,256
|
|
Less:
Accumulated amortization
|
|
|
(1,037
|
)
|
|
|
(924
|
)
|
|
|
$
|
4,297
|
|
|
$
|
4,332
|
|
Amortization
expense was approximately $44,000, $59,000, $130,000 and $152,000 for the three
and nine months ended September 25, 2010 and 2009 respectively.
NOTE
12. OTHER PAYABLES AND ACCRUALS
Other
payables and accruals consisted of the following (in thousands):
|
|
September 25, 2010
|
|
|
December 25, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
from customers
|
|
$
|
907
|
|
|
$
|
465
|
|
Accruals
for payroll, bonus and benefits
|
|
|
284
|
|
|
|
413
|
|
Utilities
and accrued expenses
|
|
|
1,236
|
|
|
|
1,184
|
|
|
|
$
|
2,427
|
|
|
$
|
2,062
|
|
NOTE
13. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On July
11, 2005, the Company issued 6,000 shares of Series A 7% Redeemable Convertible
Preferred Stock (“Series A Preferred Stock”); initially convertible into an
aggregate of 6,315,789 shares of Class A Common Stock at a conversion price of
$0.95 per share, raising $6 million in gross proceeds. Six-year warrants to
purchase an aggregate of 3,157,895 shares of Class A Common Stock at an exercise
price of $1.04 per share were also issued to the investors. As part of the
compensation to the placement agent, five-year warrants to purchase an aggregate
of 378,947 shares of Class A Common Stock at an exercise price of $1.04 share
were also issued. As of September 25, 2010, all of the warrants issued to the
placement agent have been exercised cashless, and all of 6,000 shares of Series
A Preferred Stock have been converted into 12,881,540 shares of Class A Common
Stock.
On
December 22, 2005, the Company issued 9,500 shares of Series B 7% Redeemable
Convertible Preferred Stock (“Series B Preferred Stock”), initially convertible
into an aggregate of 5,937,500 shares of Class A Common Stock at a conversion
price of $1.60 per share, raising $9.5 million in gross proceeds. Six-year
warrants to purchase an aggregate of 2,968,750 shares of Class A Common Stock at
an exercise price of $1.76 per share were also issued to the investors. As part
of the compensation to the placement agent, five-year warrants to purchase an
aggregate of 356,250 shares of Class A Common Stock at an exercise price of
$1.76 per share were also issued. As of September 25,
2,010, 7,758 shares of Series B Preferred Stock have been converted into
30,485,866 shares of Class A Common Stock, and no warrants have been
exercised.
The key
terms of the Series A Preferred Stock and Series B Preferred Stock are as
follows:
|
|
Series A Preferred Stock
|
|
Series B Preferred Stock
|
|
|
|
|
|
Preferred
Dividend
|
|
7%
per annum, payable quarterly in arrears in cash or, at the Company’s
option subject to satisfaction of certain conditions, shares of Class A
Common Stock valued at 95% of the volume-weighted current market
price.
|
|
7%
per annum, payable quarterly in arrears in cash or, at the Company’s
option subject to satisfaction of certain conditions, shares of Class A
Common Stock valued at 95% of the volume-weighted current market
price.
|
|
|
|
|
|
Redemption
|
|
July
11, 2010
|
|
December
22, 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.
|
|
Beginning
at the end of the 24th month following closing and on each third monthly
anniversary of that date (quarterly) thereafter, the Company shall redeem
1/13th of the face value of the Preferred Stock in either cash or Class A
Common Stock valued at 90% of the volume-weighted current market
price.
|
|
|
|
|
|
Mandatory
Conversion
|
|
The
Company may at any time force the conversion of the Preferred Stock if the
volume-weighted current market price of the Class A Common Stock exceeds
300% of the then applicable conversion price.
|
|
The
Company may at any time force the conversion of the Preferred Stock if the
volume-weighted current market price of the Class A Common Stock exceeds
200% of its price at issuance of the Preferred Stock.
|
|
|
|
|
|
Registration
|
|
The
Company shall file to register the underlying Class A common shares within
30 days of the closing date and make its best efforts to have the
Registration declared effective at the earliest date. In the
event such Registration is not continuously effective during the period
such shares are subject to transfer restrictions under the U.S. federal
securities laws, then (subject to certain exceptions) the holders are
entitled to receive liquidated damages equal to 2.0% of the purchase price
of the Preferred Stock per month.
|
|
The
Company shall file to register the underlying Class A common shares with
30 days of the closing date and make its best efforts to have the
Registration declared effective at the earliest date. In the
event such Registration is not continuously effective during the period
such shares are subject to transfer restrictions under the U.S. federal
securities laws, then (subject to certain exceptions) the holders are
entitled to receive liquidated damages equal to 2.0% of the purchase price
of the Preferred Stock per month.
|
|
|
|
|
|
Anti-dilution
|
|
In
the event the Company issues, at any time while Preferred Stock are still
outstanding, Common Stock or any type of securities giving rights to
Common Stock at a price below the Issue Price, the Company agrees to
extend full-ratchet anti-dilution protection to the
investors.
|
|
In
the event the Company issues, at any time while Preferred Stock are still
outstanding, Common Stock or any type of securities giving rights to
Common Stock at a price below the Issue Price, the Company agrees to
extend full-ratchet anti-dilution protection to the
investors.
|
In
connection with the issuance of the Redeemable Convertible Series A Preferred
Stock and Series B Preferred Stock, the Company paid professional fees,
placement agent fees and associated expenses amounting to $1.83 million since
the issuance of the Redeemable Convertible Preferred Stock. The Company also
identified freestanding financial instruments included in the issuances that
were required to be recorded as liabilities. These included the embedded
conversion feature and warrants included in the Series A & B Preferred Stock
issuances. The Company has evaluated the fair value of these liabilities using
combination of the Black Scholes and Binomial Pricing Models. The summary of
activity in the Series A & B Preferred Stock is as follows:
Redeemable Convertible Preferred Stock
|
|
Preferred shares
|
|
|
Balance
|
|
|
|
|
|
|
(in
thousand)
|
|
2009
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
399
|
|
|
$
|
399
|
|
Series
B
|
|
|
3,095
|
|
|
|
3,095
|
|
Less
unamortized discount
|
|
|
-
|
|
|
|
(
486
|
)
|
Balance
December 25, 2009
|
|
|
3,494
|
|
|
$
|
3,008
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
—
|
|
|
$
|
—
|
|
Series
B
|
|
|
1,238
|
|
|
|
1,238
|
|
Less:
unamortized discount
|
|
|
|
|
|
|
(22
|
)
|
Add:
adjustment for quarterly redemption reversion
|
|
|
504
|
|
|
|
504
|
|
Balance
September 25, 2010
|
|
|
1
,
742
|
|
|
$
|
1,
720
|
|
Embedded
derivatives relate to redeemable convertible preferred stock. We determined that
the conversion features of our redeemable convertible preferred stock and
warrants to purchase our common stock are derivatives that we are required to
account for as freestanding instruments under U.S. GAAP. We have also determined
that we are required to designate these derivatives as liabilities in our
financial statements. As a result, we report the value of these embedded
derivatives as current liabilities on our balance sheet and we report changes in
the value of these derivatives as non-operating gains or losses on our statement
of operations. The value of the derivatives is required to be recalculated (and
resulting non-operating gains or losses reflected in our statement of operations
and resulting adjustments to the associated liability amounts reflected on our
balance sheet) on a quarterly basis, and is based on the market value of our
common stock. Due to the nature of the required calculations and the large
number of shares of our common stock involved in such calculations, changes in
our common stock price may result in significant changes in the value of the
derivatives and resulting gains and losses on our statements of operations. We
were required to report a change of $102,000 and $51,000 as loss on the
embedded derivative liability in other income on our statement of operations for
the three and nine months ended September 25, 2010, a change of $11,000 as loss
and a change of $162,000 as gain on the embedded derivative liability in other
income on our statement of operations for the three and nine months ended
September 25, 2009, respectively.
The
pricing model we use for determining fair values of our derivatives is a
combination of the Black Scholes and Binomial Pricing Models. Valuations derived
from this model are subject to ongoing internal and external review. The model
uses market-sourced inputs such as interest rates and option volatilities.
Selection of these inputs involves management’s judgment and may impact net
income. The Company has obtained a valuation report from a third-party valuation
firm to support its estimates. The principal assumptions used to value these
complex freestanding financial instruments were as follows:
|
|
Warrants
|
|
Embedded Conversion Feature
|
Expected
life (in years)
|
|
Remaining
term at valuation date
|
|
Remaining
Term to conversion or redemption
date
at each valuation date
|
Expected
volatility
|
|
105%
to 115%
|
|
105%
|
Risk-free
interest rate
|
|
0.23%
to 0.26%
|
|
0.12%
|
Dividend
yield
|
|
0
|
|
0
|
The
Company considered all of the other minor features of the conversion option
associated with the Company’s Series A and Series B Preferred Stock, including
adjustments for: (i) stock dividends and splits, (ii) the sale of the Company’s
securities, (iii) the subsequent issuance of rights, options, or warrants to
Common shareholders, and (iv) forced conversion and redemption features. We
ultimately determined that these features were insignificant and did not have a
material impact on the concluded values of the Series A and Series B Preferred
Stock.
The
changes in the derivative liabilities during the period are as
follows:
Fair
Value at December 25, 2008
|
|
$
|
287
|
|
Gain
on change in value of derivatives during the period
|
|
|
(177
|
)
|
Conversion
of 3,007 shares of Series A & B Preferred Stock to common stock during
2009
|
|
|
(34
|
)
|
Fair
Value at December 25, 2009
|
|
$
|
76
|
|
Loss
on change in value of derivatives during the period
|
|
|
51
|
|
Conversion
of 1,752 shares of Series A & B Preferred Stock to common stock
during 2010
|
|
|
(17
|
)
|
Fair
Value at September 25, 2010
|
|
$
|
110
|
|
NOTE
14. COMMON STOCK
During
the nine months ended September 25, 2010 and 2009, 399 shares and 399 shares of
Series A Preferred Stock have been converted into 4,143,666 shares and 2,177,967
shares of Class A Common Stock, respectively.
During
the nine months ended September 25, 2010 and 2009, 1,353 shares and 1,857 shares
of Series B Preferred Stock have been converted into 11,136,072 shares and
10,133,031 shares of Class A Common Stock, respectively.
-
NOTE
15. WARRANTS
The following table summarizes activity regarding the Company’s
outstanding warrants:
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
Outstanding
at December 25, 2009
|
|
|
6,482,895
|
|
|
|
1.4093
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Outstanding
at September 25, 2010
|
|
|
6,482,895
|
|
|
|
1.4093
|
|
The
number of shares of Class A Common Stock issuable under warrants related to the
private placements and respective exercise prices are summarized as
follows:
|
|
Shares of Class A Common Stock
|
|
|
Exercise
|
|
|
|
Issuable Under Warrants
|
|
|
Price
|
|
July
2005 private placement
|
|
|
|
|
|
|
6-year
warrants
|
|
|
3,157,895
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
December
2005 private placement
|
|
|
|
|
|
|
|
|
6-year
warrants
|
|
|
2,968,750
|
|
|
|
1.76
|
|
5-year
warrants
|
|
|
356,250
|
|
|
|
1.76
|
|
Warrants
exercisable at September 25, 2010
|
|
|
6,482,895
|
|
|
|
|
|
As of
September 25, 2010, these warrants had no intrinsic value.
NOTE
16. STOCK-BASED COMPENSATION
The
Company measures the cost of services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. The Company
used the Black-Scholes option-pricing model to estimate the fair value of the
options at the date of grant.
The
Company issued 2,000,000 Class A Common Shares to the CFO as annual compensation
for the service term from April 1, 2009 to March 31, 2010. The fair value of
such common shares was $300,000. The Company recognized $225,000 as compensation
expense for the year ended December 25, 2009 and $75,000 for the nine months
ended September 25, 2010.
NOTE
17. RELATED PARTY TRANSACTIONS
Parties
are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operational decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence.
Transactions
between New Dragon Asia Corp. and related companies are summarized below (in
thousands):
|
|
Three months ended
September 25,
|
|
|
Nine months ended
September 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Pre-determined
annual fee charged by joint venture partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shandong
Longfeng Group Company (a)
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
20
|
|
|
$
|
20
|
|
Shandong
Longfeng Flour Company Limited (b)
|
|
|
13
|
|
|
|
12
|
|
|
|
36
|
|
|
|
35
|
|
|
|
$
|
19
|
|
|
$
|
18
|
|
|
|
56
|
|
|
|
55
|
|
(a) Shandong Longfeng Group Company is a joint
venture partner of the Company.
(b)
Shandong Longfeng Flour Company Limited is a subsidiary of Shandong Longfeng
Group Company.
As of
September 25, 2010, loans from the Company’s major shareholder New Dragon Asia
Food Limited of $3,749,000 are for working capital, are unsecured and bear no
interest, and are payable if requested, and funds are available. The Company and
the major shareholder have agreed that no repayments will take place in
2010.
As of
September 25, 2010, the amounts due to the Company’s joint venture partners of
$527,000 are also unsecured and bear no interest, and no repayment is expected
in 2010.
As of
September 25, 2010, the amounts due from the Company’s related companies of
$933,000 are unsecured, bear no interest and no fix terms of
repayment.
NOTE
18. TAXATION
The PRC
subsidiaries within the Company are subject to PRC income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which they
operate. The group companies that are incorporated under the International
Business Companies Act of the British Virgin Islands are exempt from payment of
the British Virgin Islands income tax.
Substantially
all of the Company’s income was generated in the PRC, which is subject to PRC
income taxes at rates ranging from 24% to a statutory rate of 25%. Two of the
PRC subsidiaries of the Company are eligible to be exempt from income taxes for
a two-year period commencing with the year in which their operations are
profitable and then subject to a 50% reduction in income taxes for the next
three years, starting from their first profitable year. Several PRC subsidiaries
receive preferential tax rates in regions in which they operated and are also
entitled to partial tax refunds from those tax bureaus.
New
Dragon Asia Corp. is a Florida corporation with wholly-owned operating
subsidiaries. As a result, the Company is not subject to PRC tax for the
activities at the Florida company level. Costs or expenses incurred at the
Florida company level, such as the stock-based compensation and the amortization
of financing costs and derivative accounting related to Series A Preferred Stock
and Series B Preferred Stock, cannot be used to offset any income derived in the
PRC when measuring the PRC income tax liabilities. As of September 25, 2010 and
December 25, 2009, there were no material deferred tax assets or deferred tax
liabilities. The expenses of the United States company are not recoverable
against future taxable income in the United States or the PRC and meet the
definition of permanent differences for tax accounting purposes. The Company has
never been audited by the taxing authority in the United States or the PRC. The
Company believes that it has filed properly in all required
jurisdictions.
NOTE
19. COMPREHENSIVE INCOME
The
following table summarizes the comprehensive income for the nine months ended
September 25, 2010 and 2009 (in thousands):
|
|
September 25, 2010
|
|
|
September 25, 2009
|
|
Net
loss
|
|
$
|
(8,854
|
)
|
|
$
|
(5,397
|
)
|
Foreign
currency translation adjustment
|
|
|
1,233
|
|
|
|
95
|
|
Comprehensive
loss
|
|
$
|
(7,621
|
)
|
|
$
|
(5,302
|
)
|
NOTE
20. SEGMENT INFORMATION
The
Company classifies its products into three core business segments; namely
instant noodles, flour and soybean. In view of the fact that the Company
operates principally in Mainland China, no geographical segment information is
presented.
|
|
For the three months ended
September 25,
|
|
|
For the nine months ended
September 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(US$'000)
|
|
|
(US$'000)
|
|
|
(US$'000)
|
|
|
(US$'000)
|
|
Net
revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Instant
noodles
|
|
|
1,497
|
|
|
|
929
|
|
|
|
3,569
|
|
|
|
2,994
|
|
Flour
|
|
|
3,321
|
|
|
|
3,286
|
|
|
|
11,038
|
|
|
|
8,641
|
|
Soybean
|
|
|
632
|
|
|
|
2,075
|
|
|
|
3,436
|
|
|
|
4,248
|
|
|
|
|
5,450
|
|
|
|
6,290
|
|
|
|
18,043
|
|
|
|
15,883
|
|
Loss
from operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instant
noodles
|
|
|
(360
|
)
|
|
|
(397
|
)
|
|
|
(1,387
|
)
|
|
|
(2,854
|
)
|
Flour
|
|
|
(2,297
|
)
|
|
|
(232
|
)
|
|
|
(5,984
|
)
|
|
|
(1,395
|
)
|
Soybean
|
|
|
1
|
|
|
|
(284
|
)
|
|
|
(1,052
|
)
|
|
|
(1,077
|
)
|
|
|
|
(2,656
|
)
|
|
|
(913
|
)
|
|
|
(8,423
|
)
|
|
|
(5,326
|
)
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instant
noodles
|
|
|
245
|
|
|
|
209
|
|
|
|
696
|
|
|
|
653
|
|
Flour
|
|
|
106
|
|
|
|
64
|
|
|
|
308
|
|
|
|
307
|
|
Soybean
|
|
|
183
|
|
|
|
182
|
|
|
|
508
|
|
|
|
359
|
|
|
|
|
534
|
|
|
|
455
|
|
|
|
1,512
|
|
|
|
1,319
|
|
|
|
September 25,
|
|
|
December 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(US$'000)
|
|
|
(US$'000)
|
|
Identifiable
long-term assets
|
|
|
|
|
|
|
Instant
noodles
|
|
|
15,624
|
|
|
|
17,510
|
|
Flour
|
|
|
7,571
|
|
|
|
8,268
|
|
Soybean
|
|
|
9,786
|
|
|
|
9,769
|
|
|
|
|
32,981
|
|
|
|
35,547
|
|
NOTE
21. COMMITMENTS AND CONTINGENCIES
Void
Share Issuances in 2010
During
the first nine months of 2010, 8,142,409 shares of the Company’s Class A common
stock were issued in excess of the Company's Articles of
Incorporation. Subsequent to September 25, 2010, a further 11,367,485
were issued in excess of the Company’s Articles of
Incorporation. Such shares are void under Florida law and are not
entitled to vote at meetings of our stockholders or to any other rights of a
stockholder of the Company. In addition, any shareholder holding such
void shares is entitled to recover their value from the Company unless the
Company is able to replace the void share with a valid share. As of
November 15, 2010, this obligation results in a potential commitment to buy back
shares amounting to approximately $800,000, plus the expenses associated with
administering such claims.
Accordingly,
the Company has proposed in the coming shareholders’ meeting to increase the
authorized shares to 119,509,894 in order to cover the excess shares issued.
Should the shareholders’ resolution not be approved, the Company might need
to buy from the market 19,509,894 shares amounting to approximately $800,000
using the latest market price of $0.04 per share. The over issuance of shares at
September 25,2010 resulted from a conversion of Preferred stock on July 5,2010.
For financial statement purposes the Company has presented the equivalent shares
of preferred stock as still outstanding and accounted for the unexercisable
conversion feature as part of the derivative liability.
The
Company has also planned to propose a reverse split of its Class A common stock
at a ratio of 100 for 1. If the reverse split were approved by the shareholders’
meeting, the total amount of outstanding common shares would reduce and the
stock price would increase accordingly. However, there is no assurance that the
reverse split will be approved. As such, the Company has
not retroactively reflected the reverse split in the financial
statements as at September 25, 2010.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
In
addition to historical information, the matters discussed in this Form 10-Q
contain forward-looking statements that involve risks or uncertainties.
Generally, the words "believes," "anticipates," "may," "will," "should,"
"expect," "intend," "estimate," "continue," and similar expressions or the
negative thereof or comparable terminology are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, including the matters set forth in this report or other reports
or documents we file with the Securities and Exchange Commission from time to
time, which could cause actual results or outcomes to differ materially from
those projected. Undue reliance should not be placed on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to update these forward-looking statements. Readers should carefully review the
risks described in other documents we file from time to time with the Securities
and Exchange Commission, including the Annual Report on Form 10-K for the fiscal
year ended December 25, 2009, the Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K (including any amendments to such reports) filed by the
Company. References in this filing to the “Company”, “Group”, “we”, “us”, and
“our” refer to New Dragon Asia Corp. and its subsidiaries.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of these consolidated financial statements
requires us to make estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may
differ from these estimates.
An
accounting policy is considered to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimates are made, and if different estimates that reasonably
could have been used, or changes in the accounting estimates that are reasonably
likely to occur, could materially impact the consolidated financial
statements. We believe the following critical accounting policies
reflect the more significant estimates and assumptions used in the preparation
of the consolidated financial statements.
Contractual
Joint Ventures
A
contractual joint venture is an entity established between the Company and
another joint venture partner, with the rights and obligations of each party
governed by a contract. Currently, the Company has established three
contractual joint ventures with three Chinese partners in China, with percentage
of ownership ranging from 79.64% to 90%. Pursuant to each Chinese
joint venture agreement, each Chinese joint venture partner is entitled to
receive a pre-determined annual fee and is not responsible for any profit or
loss, regardless of the ownership in the contractual joint
venture. In view of such contracted profit sharing arrangement, the
three contractual joint ventures are regarded as 100% owned by the
Company. Hence, the Company’s consolidated financial statements
include the financial statements of the contractual joint ventures.
Revenue
Recognition
Our
revenues are generated from sales of flour, soybean products and instant
noodles. All of our revenue transactions contain standard business terms and
conditions. We determine the appropriate accounting for these transactions after
considering (1) whether a contract exists; (2) when to recognize revenue on the
deliverables; and (3) whether all elements of the contract have been fulfilled
and delivered. In addition, our revenue recognition policy requires an
assessment as to whether collection is reasonably assured, which inherently
requires us to evaluate the creditworthiness of our customers. Changes in
judgments on these assumptions and estimates could materially impact the timing
or amount of revenue recognition.
Accounting
for Derivative Instruments
Derivatives
are recorded on the Company’s balance sheet at fair value. These derivatives,
including embedded derivatives in the Company’s Series A and B Redeemable
Convertible Preferred Stock are separately valued and accounted for on the
Company’s balance sheet.
The
Company has determined that the conversion features of its redeemable
convertible preferred stock and warrants to purchase common stock are
derivatives that the Company is required to account for as if they were
free-standing instruments. The Company has also determined that it is required
to designate these derivatives as liabilities in its financial statements. As a
result, the Company reports the value of these embedded derivatives as current
liabilities on its balance sheet and reports changes in the value of these
derivatives as non-operating gains or losses on its statement of operations. The
value of the derivatives is required to be recalculated (and resulting
non-operating gains or losses reflected in the statement of operations and
resulting adjustments to the associated liability amounts reflected on the
balance sheet) on a quarterly basis, and is based on the market value of the
Company’s common stock. Due to the nature of the required calculations and the
large number of shares of the Company’s common stock involved in such
calculations, changes in the Company’s common stock price may result in
significant changes in the value of the derivatives and resulting gains and
losses on the Company’s statement of operations.
The
pricing models the Company uses for determining fair values of its derivatives
are a combination of the Black-Scholes and Binomial Pricing Models. Valuations
derived from this model are subject to ongoing internal and external review. The
model uses market-sourced inputs such as interest rates and option volatilities.
Selection of these inputs involves management’s judgment and may impact net
earnings. The Company has obtained a valuation report from a valuation firm to
support its estimates as of September 25, 2010 and December 25,
2009.
The
consolidated financial statements also reflect additional non-operating gains
and losses related to the classification of and accounting for: (1) the
conversion features of the Series A and B Preferred Stock and associated
warrants, and (2) the amortization associated with the discount recorded with
respect to the Series A and B Preferred Stock as a preferred stock
dividend.
Share-Based
Payment
On
December 16, 2004, the FASB issued SFAS 123R, “Share-Based Payment,” (now
Accounting Standards Codification (“ASC”) Topic 718, “Compensation-Stock
Compensation”) which replaces SFAS 123, “Accounting for Stock-Based
Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees.” ASC 718 requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on the grant date fair value of the award. Under ASC 718, we
must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive options,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and restricted stock at the
beginning of the first quarter of adoption of ASC 718, while the retroactive
methods would record compensation expense for all unvested stock options and
restricted stock beginning with the first period restated. We have adopted the
requirements of ASC 718 for the fiscal year beginning on December 26, 2005, and
recorded the compensation expense for all unvested stock options.
Allowance
for Doubtful Accounts
Management
provides for an allowance for doubtful accounts for those third party trade
accounts that are not collected within one year. We base our estimate (one year)
on historical experience and on continuous monitoring of customers’ credit and
settlement. We believe we have reasonable basis for making judgments on the
allowance for doubtful accounts.
We
normally grant up to 90 days credit to our customers. We monitor our allowance
for doubtful accounts on a monthly basis.
Inventories
Valuation
Inventories
are stated at the lower of cost, determined on a weighted average basis, or net
realizable value. Costs of work-in-progress and finished goods are composed of
direct material, direct labor and an attributable portion of manufacturing
overhead. Net realizable value is the estimated selling price, in the ordinary
course of business, less estimated costs to complete and dispose.
Recent
Accounting Pronouncements
In
January 2010, FASB issued ASU 2010-2, “Accounting and Reporting for Decreases in
Ownership of a Subsidiary- a Scope Clarification”. ASU 2010-2 addresses
implementation issues related to the changes in ownership provisions in the
Consolidation—Overall Subtopic (Subtopic 810-10) of the FASB ASC, originally
issued as SFAS 160, “Noncontrolling Interests in Consolidated Financial
Statements”. Subtopic 810-10 establishes the accounting and reporting guidance
for noncontrolling interests and changes in ownership interests of a subsidiary.
An entity is required to deconsolidate a subsidiary when the entity ceases to
have a controlling financial interest in the subsidiary. Upon deconsolidation of
a subsidiary, an entity recognizes a gain or loss on the transaction and
measures any retained investment in the subsidiary at fair value. The gain or
loss includes any gain or loss associated with the difference between the fair
value of the retained investment in the subsidiary and its carrying amount at
the date the subsidiary is deconsolidated. In contrast, an entity is required to
account for a decrease in ownership interest of a subsidiary that does not
result in a change of control of the subsidiary as an equity transaction.
ASU 2010-2 is effective for the Company starting January 3, 2010. The
adoption of ASU 2010-2 will not have a material impact on the Company's results
of operations or financial position.
In
January 2010, FASB issued ASU 2010-6, “Improving Disclosures about Fair
Measurements". ASU 2010-6 provides amendments to subtopic 820-10 that require
separate disclosure of significant transfers into and out of Level 1 and
Level 2 fair value measurements and the presentation of separate
information regarding purchases, sales, issuances and settlements on a gross
basis in the reconciliation of Level 3 fair value measurements.
Additionally, ASU 2010-6 provides amendments to subtopic 820-10 that clarify
existing disclosures about the level of disaggregation and inputs and valuation
techniques. ASU 2010-6 is effective for financial statements issued for annual
reporting periods after beginning after December 15, 2009, except for Level 3
reconciliation disclosures which are effective for annual periods beginning
December 15, 2010. The adoption of ASU 2010-06 will not have a material
impact on the Company’s results of operations or financial
position.
In
February 2010, FASB issued ASU 2010-9 “Subsequent Events (Topic 855) Amendments
to Certain Recognition and Disclosure Requirements”. ASU 2010-9 amends
disclosure requirements within Subtopic 855-10. An entity that is an SEC filer
is not required to disclose the date through which subsequent events have been
evaluated. This change alleviates potential conflicts between Subtopic 855-10
and the SEC's requirements. ASU 2010-9 is effective for interim and annual
periods ending after June 15, 2010. The Company expects the adoption of ASU
2010-06 will not have a material impact on the Company’s results of operations
or financial position.
In March
2010, FASB issued ASU 2010-11 “Derivatives and Hedging (Topic 815) Scope
Exception Related to Embedded Credit Derivatives”. ASU 2010-11 clarifies the
type of embedded credit derivative that is exempt from embedded derivative
bifurcation requirements. Only one form of embedded credit derivative qualifies
for the exemption—one that is related only to the subordination of one financial
instrument to another. As a result, entities that have contracts containing an
embedded credit derivative feature in a form other than such subordination may
need to separately account for the embedded credit derivative feature. The
amendments in this Update are effective for each reporting entity at the
beginning of its first fiscal quarter beginning after June 15, 2010. Early
adoption is permitted at the beginning of each entity’s first fiscal quarter
beginning after issuance of this Update. The Company expects the adoption of ASU
2010-11 will not have a material impact on the Company’s results of operations
or financial position.
In April
2010, FASB issued ASU 2010-13 “Compensation-Stock Compensation (Topic 718)
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades”. ASU
2010-13 addresses the classification of a share-based payment award with an
exercise price denominated in the currency of a market in which the underlying
equity security trades. Topic 718 is amended to clarify that a share-based
payment award with an exercise price denominated in the currency of a market in
which a substantial portion of the entity’s equity securities trades shall not
be considered to contain a market, performance, or service condition. Therefore,
such an award is not to be classified as a liability if it otherwise qualifies
as equity classification. The amendments in this Update should be effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The guidance should be applied by recording a
cumulative-effect adjustment to the opening balance of retained earnings for all
outstanding awards as of the beginning of the fiscal year in which the
amendments are initially applied. The Company expects the adoption of ASU
2010-13 will not have a material impact on the Company’s results of operations
or financial position.
In April
2010, FASB issued ASU 2010-18
“
Effect of a Loan Modification When the Loan Is Part of a Pool That Is
Accounted for as a Single Asset (A consensus of the FASB Emerging Issues
Task)”
.
ASU 2010-18
clarifies that modifications of loans that are accounted for within a pool under
Subtopic 310-30, which provides guidance on accounting for acquired loans that
have evidence of credit deterioration upon acquisition, do not result in the
removal of those loans from the pool even if the modification would otherwise be
considered a troubled debt restructuring. An entity will continue to be required
to consider whether the pool of assets in which the loan is included is impaired
if expected cash flows for the pool change. The amendments do not affect the
accounting for loans under the scope of Subtopic 310-30 that are not accounted
for within pools. Loans accounted for individually under Subtopic 310-30
continue to be subject to the troubled debt restructuring accounting provisions
within Subtopic 310-40. The amendments in this Update are effective for
modifications of loans accounted for within pools under Subtopic 310-30
occurring in the first interim or annual period ending on or after July 15,
2010. The Company expects the adoption of ASU 2010-18 will not have a material
impact on the Company’s results of operations or financial
position.
In July
2010, FASB issued ASU 2010-20 “Receivables (Topic 310): Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit
Losses”
.
ASU 2010-20
improves the disclosures that an entity provides about the credit quality of its
financing receivables and the related allowance for credit losses. As a result
of these amendments, an entity is required to disaggregate by portfolio segment
or class certain existing disclosures and provide certain new disclosures about
its financing receivables and related allowance for credit losses. For public
entities, the disclosures as of the end of a reporting period are effective for
interim and annual reporting period ending on or after December 15, 2010. The
disclosures about activity that occurs during a reporting period are effective
for interim and annual reporting periods beginning on or after December 15,
2010. The Company expects the adoption of ASU 2010-20 will not have a material
impact on the Company’s results of operations or financial
statements.
In August
2010, FASB issued ASU 2010-21 “Accounting for Technical Amendments to Various
SEC Rules and Schedules. Amendments to SEC Paragraphs Pursuant to Release No.
33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of
Financial Reporting Policies”. ASU 2010-21 amends various SEC paragraphs
pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules,
Forms, Schedules and Codification of Financial Reporting Policies. The Company
expects the adoption of ASU 2010-21 will not have a material impact on the
Company’s results of operations or financial statements.
In August
2010, FASB issued ASU 2010-22 “Accounting for Various Topics-Technical
Corrections to SEC paragraphs (SEC Update)”. ASU 2010-22 amends various SEC
paragraphs based on external comments received and the issuance of SAB 112,
which amends or rescinds portions of certain SAB topics. The Company expects the
adoption of ASU 2010-22 will not have a material impact on the Company’s results
of operations or financial statements.
Overview
Headquartered
in Shandong Province, PRC, we are engaged in the milling, sale, and distribution
of flour and related products, including instant noodles and soybean-derived
products, to retail and wholesale customers throughout China. We market our
products with our brand name called “LONG FENG” through a countrywide network of
distributors. We have eight manufacturing plants in the PRC with an aggregate
annual production capacity of approximately 110,000 tons of flour and
approximately 1.1 billion packets of instant noodles and 4,500 tons of soybean
powder.
Operations
We
produce and market a broad range of wheat flour for use in bread, dumplings,
noodles, and confectionary products. Our flour products are marketed under the
“Long Feng” brand name and sold throughout China at both wholesale and retail
levels.
We
provide a wide range of instant noodle products to our customers. Our products
can be separated into two broad categories for selling and marketing purposes:
(i) packet noodles for home preparation and (ii) snacks and cup noodles for
outdoor convenience.
We
produce two types of soybean products - soybean protein powder and soybean
powder. They are principally supplied to food and beverage
producers.
We
believe that we have a reputation in China for producing some of the highest
quality food products. We believe our production plants operate at a high level
of hygiene and efficiency and all of our plants are certified under the ISO9002
standards. We also use strict quality control systems, resulting in what we
believe to be a favorable customer perception of the “Long Feng”
brand.
Our
products are marketed and distributed throughout China by our distributors. Our
sales and marketing strategy focuses on maintaining strong distribution
relationships by holding annual sales order meetings, regular distributor
conferences and an excellent quality/price dynamic.
We
believe our distribution system is the key to our continued success in
developing the “Long Feng” brand as one of the famous domestic brands in China.
Most of our distributors have long-term relationships with us.
Our
primary domestic customer base for both our flour products and instant noodles
consists of small retail stores in the rural areas throughout China where we
believe that our brand has long been recognized as the highest quality available
for the price. The rural market is rapidly growing, benefiting from increases in
rural consumer income. We believe that brand loyalty by our customers is very
strong in this sector. In addition to the small retail sector, we sell to larger
supermarkets located in urban areas.
In
addition to domestic sales, we also export noodles to other countries such as
South Korea, Australia, Malaysia and Indonesia. We also obtained
HACCP (Hazard Analysis Critical Control Point) certification from CCIC
Conformity Assessment Services Co. Ltd., a Chinese quality assurance examination
authority, enabling the Company to export instant noodles and soybean powder to
Europe. In early 2008, we began exporting noodles to Nigeria,
Africa.
Strategy
Our
strategy for growth is to capitalize on our strong brand name and pursue
strategic partnerships and acquisitions that will enhance our sales. The
following are some of the key elements of our business growth
strategy:
-
|
Acquire
additional facilities to increase our production
capacity
|
-
|
Build
strategic alliances with multinational food groups to enhance product
range and capitalize on our China distribution
network
|
Plans for
expansion of the existing plants are expected to be funded through current
working capital from ongoing sales. Acquisitions of plants will require an
additional infusion of funds in the form of debt or equity, or a combination of
both. However, there can be no assurance these funds will be
available.
Competition
The flour
industry in the PRC is very competitive. Our largest competitors are Shandong
Guang Rao Ban Qiu Flour and Hebei Wu De Li Flour in the Northern market and
Shenzhen Nanshun Flour in the Southern market.
The
instant noodle segment in the PRC is also highly competitive. We compete against
well-established foreign companies and many smaller companies. Our largest
competitors are the “Master Kang” brand manufactured by Tingyi (Cayman Island)
Holdings Corporation and the “President” brand manufactured by Uni-President
Group, both based in Taiwan. Both are focused predominately in the more
developed and competitive urban markets. We do not face substantial competition
in the “high-quality” soybean powder market.
Employees
We employ
approximately 1,500 employees. All of them are located in the eight plants. We
have maintained good relationships with our employees and no major disputes have
occurred since our inception.
Currency
Conversion and Exchange
Although
the Chinese government regulations now allow convertibility of Renminbi (“RMB”)
for current account transactions, significant restrictions still remain. Hence,
such translations should not be construed as representations that RMB could be
converted into U.S. dollars at that rate or any other rate.
Substantially
all our revenue and expenses are denominated in RMB. Our RMB cash inflows are
sufficient to service our RMB expenditures. For financial reporting purposes, we
use U.S. dollars. The value of RMB against U.S. dollars and other currencies may
fluctuate and is affected by, among other things, changes in China’s political
and economic conditions. Any significant revaluation of RMB may materially
affect our financial condition in terms of U.S. dollar reporting. To date, we
have not engaged in any currency hedging transactions in connection with our
operations.
Results
of Operations
The
following table sets forth, for the periods indicated, certain operating
information expressed in U.S. dollars (in thousands):
|
|
Three months ended
September 25,
|
|
|
Nine months ended
September 25,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
5,450
|
|
|
$
|
6,290
|
|
|
$
|
18,043
|
|
|
$
|
15,883
|
|
Cost
of goods sold
|
|
|
(5,373
|
)
|
|
|
(6,560
|
)
|
|
|
(18,006
|
)
|
|
|
(18,591
|
)
|
Gross
profit (loss)
|
|
|
77
|
|
|
|
(270
|
)
|
|
|
37
|
|
|
|
(2,708
|
)
|
Selling
and distribution expenses
|
|
|
(164
|
)
|
|
|
(230
|
)
|
|
|
(588
|
)
|
|
|
(597
|
)
|
General
and administrative expenses
|
|
|
(2,569
|
)
|
|
|
(413
|
)
|
|
|
(7,872
|
)
|
|
|
(2,021
|
)
|
Gain
(loss) on fair value adjustments to embedded derivatives
|
|
|
(102
|
)
|
|
|
(11
|
)
|
|
|
(51
|
)
|
|
|
162
|
|
Loss
before income taxes
|
|
|
(2,689
|
)
|
|
|
(1,432
|
)
|
|
|
(8,853
|
)
|
|
|
(5,747
|
)
|
Income
taxes benefit (expense)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
348
|
|
Net
loss attributable to controlling interest
|
|
|
(2,689
|
)
|
|
|
(1,433
|
)
|
|
|
(8,854
|
)
|
|
|
(5,397
|
)
|
Nine Months Ended September 25, 2010 Compared to Nine Months
Ended September 25, 2009
Net
Revenue
Net
revenue for the nine months ended September 25, 2010 was $18,043,000,
representing an increase of $2,160,000, or 14%, from $15,883,000 for the nine
months ended September 25, 2009.
Revenues
increased in instant noodle and flour segments by 19% and 28% as the global
economy began to recover and the demand for our products gradually strengthened.
However, revenue decreased in soybean segment by 19%, as the Company is
gradually ceasing producing low-margin products and planning to concentrate on
the high-margin products, like soybean-protein powder in the future. At such
transition period, the revenue of soybean segment should be temporarily
affected.
Cost
of goods sold
For the
nine months ended September 25, 2010, cost of goods sold was $18,006,000, a
decrease of $585,000, or 3%, as compared to $18,591,000 for the nine months
ended September 25, 2009. The decrease was due to the fact that the Company did
not need to provide further provision for its inventory as in the corresponding
period in 2009 in view that the price of its product was not expected to be
further declined under the current economy environment.
For the
nine months ended September 25, 2010, as a percentage of revenue, cost of goods
sold decreased to 100% as compared to 117% for that of the same period of prior
year. For the nine months ended September 25, 2010, gross margin was 0% as
compared to a negative gross margin of 17% for the same period of prior
year. The improvement in gross margin was mainly attributable to the
increase in sales volumes in our flour segment.
Selling
and Distribution Expenses
Selling
and distribution expenses consist primarily of salaries, commissions and
associated employee benefits, travel expenses of sales and marketing personnel
and promotional expenses.
Selling
and distribution expenses were $588,000 for the nine months ended September 25,
2010, representing a decrease of $9,000 or 2% from $597,000 for the
corresponding period in 2009. The decrease was primarily due to the cost
controls implemented by us.
As a
percentage of net revenue, selling and distribution expenses decreased to 3% for
the nine months ended September 25, 2010 as compared to 4% for the corresponding
period in 2009. The decrease was primarily due to the cost controls implemented
by us.
General
and Administrative Expenses
General
and administrative expenses increased by $5,851,000, or 290%, to $7,872,000 for
the nine months ended September 25, 2010 as compared to $2,021,000 for the
corresponding period in 2009. The increase was primarily due to the provision
for doubt accounts. This provision stems from customers with receivable balance
over one year old. Many of our customers are export related companies. In the
first nine months of 2010, these companies were still seriously affected by the
world wide economy slowdown and overseas orders for Chinese food and agriculture
products did not recover as quickly as expected. As a result, the food export
industry in Shandong was slow to recover and its turnover rate of funds stayed
at a low level. As a part of the industry chain and supplier to export entities,
the Company had to inevitably face the lengthening of its average days
outstanding regarding receivables from its customers. During the nine months
ended September 25, 2010, the Company believes it has recorded the appropriate
provision for bad debts and it has the appropriate allowance at September 25,
2010. The Company will gradually tighten its credit policy and intends to
strengthen collection effort regarding outstanding receivables,
including legal remedies when necessary. The Company believes this will
prevent significant bad debts in the future.
Gain/(Loss)
on Fair Value Adjustments to Embedded Derivatives
The
Company issued Series A Redeemable Convertible Preferred Stock in July 2005,
together with 3,157,895 warrants to purchase Class A Common Stock resulting in
aggregate proceeds of $6 million. The Company also issued Series B Redeemable
Convertible Preferred Stock in December 2005, together with 2,968,750 warrants
to purchase Class A Common Stock resulting in aggregate proceeds of $9.5
million. The fair value of each instrument was recorded as a derivative
liability on our balance sheet. The corresponding gain or loss, which was
non-cash in nature, from changes in the fair values of these instruments was
recorded in our statement of income. For the nine months ended September 25,
2010, the loss in this regard was $51,000. For the corresponding period of 2009,
the gain in this regard was $162,000. The determination of the change in the
value of the derivatives requires the use of a complex valuation model and can
fluctuate significantly between periods based on changes in the price of our
shares and the time remaining in the life of the underlying financial
instruments. An increase in our stock’s market value increases the value of the
derivative creating losses in our income statements and a decrease in the
stock’s market value reduces the value of the derivatives creating gains in our
income statements.
Net
Loss Attributable to Controlling Interests
Net loss
attributable to controlling interest was $8,854,000 for the nine months ended
September 25, 2010 as compared to net loss attributable to controlling interest
of $5,397,000 for the nine months ended September 25, 2009. Such increase was
primarily due to (i) the provision for doubtful debts due from customers, (ii)
the write-off of some unserviceable equipment for the nine months ended
September 25, 2010 compared with an income tax benefit for the corresponding
period of 2009, and (iii) the fluctuation of gain/(loss) on fair value
adjustments to embedded derivatives.
Three
Months Ended September 25, 2010 Compared to Three Months Ended September 25,
2009
Net
Revenue
Net
revenue for the quarter ended September 25, 2010 was $5,450,000, representing a
decrease of $840,000, or 13%, from $6,290,000 for the quarter ended September
25, 2009.
Revenues
increased in noodle and flour segments by 61% and 1% as the global economy began
to recover and the demand for our products gradually strengthened. However,
revenue decreased in soybean segment by 70%, as the Company is gradually ceasing
producing low-margin products and planning to concentrate on the high-margin
products, like soybean-protein powder in the future. At such transition period,
the revenue of soybean segment should be temporarily affected.
Cost
of goods sold
For the
three months ended September 25, 2010, cost of goods sold was $5,373,000, a
decrease of $1,187,000, or 18%, as compared to $6,560,000 for the three months
ended September 25, 2009. The decrease was due to the decrease in sales of our
products.
For the
three months ended September 25, 2010, as a percentage of revenue, cost of goods
sold decreased to 99% as compared to 104% for that of the same period of prior
year. For the three months ended September 25, 2010, gross margin was 1% as
compared to a negative gross margin of 4% for the same period of prior
year. The improvement in gross margin was mainly attributable to the
fact that the Company did not need to provide further provision for its
inventory as in the corresponding period in 2009 in view that the price of its
product was not expected to be further declined under the current economy
environment.
Selling
and Distribution Expenses
Selling
and distribution expenses consist primarily of salaries, commissions and
associated employee benefits, travel expenses of sales and marketing personnel
and promotional expenses.
Selling
and distribution expenses were $164,000 for the quarter ended September 25,
2010, representing a decrease of $66,000 or 29% from $230,000 for the
corresponding quarter of 2009. The decrease was due to the cost controls
implemented by us.
As a
percentage of net revenue, selling and distribution expenses decreased to 3% for
the quarter ended September 25, 2010 as compared to 4% for the corresponding
period in 2009. The decrease was due to the cost controls implemented by
us.
General
and Administrative Expenses
General
and administrative expenses increased by $2,156,000, or 522%, to $2,569,000 for
the quarter ended September 25, 2010 as compared to $413,000 for the
corresponding quarter in 2009. The increase was primarily due to the provision
for double accounts. This provision stems from customers with receivable balance
over one year old. Many of our customers are export related companies. In the
first nine months of 2010, these companies were still seriously affected by the
world wide economy slowdown and overseas orders for Chinese food and agriculture
products did not recover as quickly as expected. As a result, the food export
industry in Shandong was slow to recover and its turnover rate of funds stayed
at a low level. As a part of the industry chain and supplier to export entities,
the Company had to inevitably face the lengthening of its average days
outstanding regarding receivables from its customers. During the quarter ended
September 25, 2010, the Company believes it has recorded the appropriate
provision for bad debts and it has the appropriate allowance at September 25,
2010. The Company will gradually tighten its credit policy and intends to
strengthen collection effort regarding outstanding receivables,
including legal remedies when necessary. The Company believes this will
prevent significant bad debts in the future.
Loss
on Fair Value Adjustments to Embedded Derivatives
The
Company issued Series A Redeemable Convertible Preferred Stock in July 2005,
together with 3,157,895 warrants to purchase Class A Common Stock resulting in
aggregate proceeds of $6 million. The Company also issued Series B Redeemable
Convertible Preferred Stock in December 2005, together with 2,968,750 warrants
to purchase Class A Common Stock resulting in aggregate proceeds of $9.5
million. The fair value of each instrument was recorded as a derivative
liability on our balance sheet. The corresponding gain or loss, which was
non-cash in nature, from changes in the fair values of these instruments was
recorded in our statement of income. For the quarter ended September 25, 2010,
the loss in this regard was $102,000. For the corresponding period of 2009, the
loss in this regard was $11,000. The determination of the change in the value of
the derivatives requires the use of a complex valuation model and can fluctuate
significantly between periods based on changes in the price of our shares and
the time remaining in the life of the underlying financial instruments. Increase
in our stock’s market value increases the value of the derivative creating
losses in our income statements and decrease in the stock’s market value reduces
the value of the derivatives creating gains in our income
statements.
Net Loss Attributable to Controlling Interests
Net loss
attributable to controlling interest was $2,689,000 for the quarter ended
September 25, 2010 as compared to net loss attributable to controlling interest
of $1,433,000 for the corresponding period of 25, 2009. Such increase was
primarily due to (i) the provision for doubtful debts due from customers and
(ii) the fluctuation of loss on fair value adjustments to embedded
derivatives.
Financial
Condition, Liquidity and Capital Resources
The Company’s primary liquidity needs are for the
purchase of inventories and funding accounts receivable and capital
expenditures. Historically, the Company has financed its working capital
requirements through a combination of internally generated cash and advances
from related companies.
Our
working capital decreased by $4,809,000 to $25,034,000 at September 25, 2010 as
compared to $29,843,000 at December 25, 2009, which was primarily due to
decrease of inventory by consumption of raw materials in
production.
Cash and
cash equivalents were $3,185,000 as of September 25, 2010, a decrease of
$255,000 from December 25, 2009. The Company believes that it has enough cash
available and expects to have enough income and cash flow from operations to
operate for the next 12 months.
Off-Balance
Sheet Arrangements
We have
never entered into any off-balance sheet financing arrangements and have not
formed any special purpose entities. We have not guaranteed any debt or
commitments of other entities or entered into any options on non-financial
assets.
Contractual
Obligations and Commercial Commitments
On July
11, 2005, we issued 6,000 shares of Series A Preferred Stock, convertible into
an aggregate of 6,315,789 shares of Class A Common Stock at a conversion price
of $0.95 per share (subject to anti-dilution adjustments and interest payments),
raising $6.0 million in gross proceeds. The Series A Preferred Stock has been
fully converted as of September 25, 2010.
On
December 22, 2005, we issued 9,500 shares of Series B Preferred Stock,
convertible into an aggregate of 5,937,500 shares of Class A Common Stock at a
conversion price of $1.60 per share (subject to anti-dilution adjustments and
interest payments), raising $9.5 million in gross proceeds.
The key
terms of the Series A Preferred Stock and Series B Preferred Stock are as
follows:
|
|
Series A Preferred Stock
|
|
Series B Preferred Stock
|
|
|
|
|
|
Preferred
Dividend
|
|
7%
per annum, payable quarterly in arrears in cash or, at the Company’s
option subject to satisfaction of certain conditions, shares of Class A
Common Stock valued at 95% of the volume-weighted current market
price.
|
|
7%
per annum, payable quarterly in arrears in cash or, at the Company’s
option subject to satisfaction of certain conditions, shares of Class A
Common Stock valued at 95% of the volume-weighted current market
price.
|
|
|
|
|
|
Redemption
|
|
July
11, 2010
|
|
December
22, 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.
|
|
Beginning
at the end of the 24th month following closing and on each third monthly
anniversary of that date (quarterly) thereafter, the Company shall redeem
1/13th of the face value of the Preferred Stock in either cash or Class A
Common Stock valued at 90% of the volume-weighted current market
price.
|
|
|
|
|
|
Mandatory Conversion
|
|
The
Company may at any time force the conversion of the Preferred Stock if the
volume-weighted current market price of the Class A Common Stock exceeds
300% of the then applicable conversion price.
|
|
The
Company may at any time force the conversion of the Preferred Stock if the
volume-weighted current market price of the Class A Common Stock exceeds
200% of its price at issuance of the Preferred Stock.
|
|
|
|
|
|
Registration
|
|
The
Company shall file to register the underlying Class A common shares within
30 days of the closing date and make its best efforts to have the
Registration declared effective at the earliest date. In the
event such Registration is not continuously effective during the period
such shares are subject to transfer restrictions under the U.S. federal
securities laws, then (subject to certain exceptions) the holders are
entitled to receive liquidated damages equal to 2.0% of the purchase price
of the Preferred Stock per month.
|
|
The
Company shall file to register the underlying Class A common shares with
30 days of the closing date and make its best efforts to have the
Registration declared effective at the earliest date. In the
event such Registration is not continuously effective during the period
such shares are subject to transfer restrictions under the U.S. federal
securities laws, then (subject to certain exceptions) the holders are
entitled to receive liquidated damages equal to 2.0% of the purchase price
of the Preferred Stock per month.
|
|
|
|
|
|
Anti-dilution
|
|
In
the event the Company issues, at any time while Preferred Stock are still
outstanding, Common Stock or any type of securities giving rights to
Common Stock at a price below the Issue Price, the Company agrees to
extend full-ratchet anti-dilution protection to the
investors.
|
|
In
the event the Company issues, at any time while Preferred Stock are still
outstanding, Common Stock or any type of securities giving rights to
Common Stock at a price below the Issue Price, the Company agrees to
extend full-ratchet anti-dilution protection to the
investors.
|
As of September 25, 2010, the Company had long-term debt
obligations that resulted from the redeemable convertible preferred stock
through December 2010 and the pre-determined annual fee charged by joint venture
partners through August 2049 as follows:
|
|
Payment Obligations By Period
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
Redeemable
convertible preferred stock
|
|
$
|
1,238
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,238
|
|
Pre-determined
annual fee charged by joint venture partners
|
|
|
33
|
|
|
|
129
|
|
|
|
129
|
|
|
|
129
|
|
|
|
129
|
|
|
|
4,399
|
|
|
|
4,948
|
|
Total
|
|
$
|
1,271
|
|
|
$
|
129
|
|
|
$
|
129
|
|
|
$
|
129
|
|
|
$
|
129
|
|
|
$
|
4,399
|
|
|
$
|
6,186
|
|
Reconciliation
of the outstanding payment obligations of redeemable convertible preferred
stock:
|
|
(In thousands)
|
|
Aggregated
balance as of the issue date
|
|
$
|
15,500
|
|
Partial
redemption of Series A Preferred Stock in 2005
|
|
|
(1,900
|
)
|
Partial
redemption of Series A and B Preferred Stock in 2006
|
|
|
(3,438
|
)
|
Partial
redemption of Series A Preferred Stock in 2007
|
|
|
(728
|
)
|
Partial
redemption of Series A and B Preferred Stock in 2008
|
|
|
(2,933
|
)
|
Partial
redemption of Series A and B Preferred Stock in 2009
|
|
|
(3,007
|
)
|
Partial
redemption of Series A and B Preferred Stock in 2010
|
|
|
(1,752
|
)
|
|
|
$
|
1,742
|
|
Void
Share Issuances in 2010
During
the first nine months of 2010, 8,142,409 shares of the Company’s Class A common
stock were issued in excess of the Company's Articles of
Incorporation. Subsequent September 25, 2010, a further 11,367,485
were issued in excess of the Company’s Articles of
Incorporation. Such shares are void under Florida law and are not
entitled to vote at meetings of our stockholders or to any other rights of a
stockholder of the Company. In addition, any shareholder
holding such void shares is entitled to recover their value from the
Company unless the Company is able to replace the void share with a valid
share. As of November 15, 2010, this obligation results in a
potential commitment to buy back shares amounting to approximately $800,000,
plus the expenses associated with administering such claims.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
This
information has been omitted based on our status as a smaller reporting
company.
Item 4T. Controls and
Procedures.
Disclosure
Controls and Procedures
Under the
supervision and with the participation of our management, including our chief
executive officer and the chief financial officer, we conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as of September 25, 2010, the end of the period covered by
this report (the “Evaluation Date”). Based on this evaluation, our chief
executive officer and chief financial officer concluded as of the Evaluation
Date that, except for the void share issuance as described in
Note 21, our disclosure controls and procedures were effective such
that the material information required to be included in our Securities and
Exchange Commission (“SEC”) reports is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms relating to us
and our consolidated subsidiaries, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
To enhance the control over share issuance, the Company had
designed and implemented a new control point by assigning an accounting officer
to check against the ledger of the authorized share capital upon issuance of new
shares in the future to ensure that any new issuance will be properly arranged
within the limit of the authorized share capital.
Changes
in internal controls over financial reporting
There
were no changes in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during
the nine months ended September 25, 2010 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II: OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item
1A. Risk Factors.
This
information has been omitted based on our status as a smaller reporting
company.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds.
None.
Item
3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved).
Item
5. Other Information.
There
have been no material changes to the procedures by which security holders may
recommend nominees to the Company’s board of directors.
Item
6. Exhibits.
|
|
|
2.1
|
|
Share
Exchange Agreement dated as of December 18, 2001 (incorporated herein by
reference from our filing on the Definitive Proxy 14/A filed on October
11, 2001).
|
|
|
|
3.1
|
|
Amended Articles of Incorporation
(incorporated herewith by reference to Exhibit 3.1 to our Definitive Proxy
14/A filed on October 11, 2001).
|
|
|
|
3.2
|
|
By-laws
(incorporated herewith by reference to Exhibit 3.2 to our Definitive Proxy
14/A filed on October 11, 2001).
|
|
|
|
3.3
|
|
Certificate
of Designations of Preferences, Rights and Limitations of the Series A 7%
Convertible Preferred Stock (incorporated herewith by reference to Exhibit
3.1 of our Form 8-K filed on July 12, 2005).
|
|
|
|
3.4
|
|
Certificate
of Designations of Preferences, Rights and Limitations of the Series B 7%
Convertible Preferred Stock (incorporated herewith by reference to Exhibit
3.1 of our Form 8-K filed on December 23, 2005).
|
|
|
|
4.1
|
|
Subscription
Agreement, dated September 4, 2003 (incorporated herewith by
reference to Exhibit 4.1 to our Registration Statement on Form S-3 filed
on October 3, 2003).
|
|
|
|
4.2
|
|
Subscription
Agreement, dated October 3, 2003 (incorporated herewith by reference to
Exhibit 4.2 to our Registration Statement on Form S-3 filed on October 3,
2003).
|
|
|
|
4.3
|
|
Common
Stock Purchase Warrants for the September 4, 2003 Private Placement
(incorporated herewith by reference to Exhibit 4.3 to our Registration
Statement on Form S-3 filed on October 3, 2003).
|
|
|
|
4.4
|
|
Common
Stock Purchase Warrants for the October 3, 2003 Private Placement
(incorporated herewith by reference to Exhibit 4.4 to our Registration
Statement on Form S-3 filed on October 3,
2003).
|
4.5
|
|
Form
of Warrant issued to Midsummer Investment Ltd. and Islandia, L.P.
(incorporated herewith by reference to Exhibit 4.1 to our Form 8-K filed
on July 12, 2005).
|
|
|
|
4.6
|
|
Form
of Warrant issued to Alliance Financial, LLC, Renaissance Advisors BVI,
John F. Steinmetz, TN Capital Equities, Ltd. and Kathleen McDonnell
(incorporated herewith by reference to Exhibit 4.2 to our Registration
Statement on Form S-3 filed on August 11, 2005).
|
|
|
|
4.7
|
|
Securities
Purchase Agreement, dated July 11, 2005, relating to the sale of the
Series A 7% Convertible Preferred Stock (incorporated herewith by
reference to Exhibit 10.1 to our Form 8-K filed on July 12,
2005).
|
|
|
|
4.8
|
|
Registration
Rights Agreement, dated July 11, 2005, by and among New Dragon Asia Corp.
and the investors named therein (incorporated herewith by reference to
Exhibit 10.2 to our Form 8-K filed on July 12, 2005).
|
|
|
|
4.9
|
|
Form
of Warrant issued to Midsummer Investment Ltd. and Islandia, L.P.
(incorporated herewith by reference to Exhibit 4.1 to our Form 8-K filed
on December 23, 2005).
|
|
|
|
4.10
|
|
Form
of Warrant issued to Alliance Financial, LLC, Renaissance Advisors, Inc.,
John F. Steinmetz, TN Capital Equities, Ltd. and Kathleen McDonnell
(incorporated herewith by reference to Exhibit 4.2 to our Registration
Statement on Form S-3 filed on January 20, 2006).
|
|
|
|
4.11
|
|
Securities
Purchase Agreement, dated December 22, 2005, relating to the sale of the
Series B 7% Convertible Preferred Stock (incorporated herewith by
reference to Exhibit 10.1 to our Form 8-K filed on December 23,
2005).
|
|
|
|
4.12
|
|
Registration
Rights Agreement, dated December 22, 2005, by and among New Dragon Asia
Corp. and the investors named therein (incorporated herewith by reference
to Exhibit 10.2 to our Form 8-K filed on December 23,
2005).
|
|
|
|
4.13
|
|
Registration
Rights Agreement, dated December 22, 2005, by and among New Dragon Asia
Corp. and New Dragon Food Ltd. (incorporated herewith by reference to
Exhibit 4.5 to our Registration Statement on Form S-3 filed on January 20,
2006).
|
|
|
|
10.1
|
|
Sino-Foreign
Joint Venture Contract for the New Dragon Asia Flour (Yantai) Company
Limited, dated June 1, 1999 (incorporated herewith by reference to Exhibit
10.1 to our Registration Statement on Form S-3 filed on October 3,
2003).
|
|
|
|
10.2
|
|
Subcontracting
Agreement, for the New Dragon Asia Flour (Yantai) Company Limited, dated
June 26, 1999 (incorporated herewith by reference to Exhibit
10.2 to our Registration Statement on Form S-3 filed on October 3,
2003).
|
|
|
|
10.3
|
|
Sino-Foreign
Joint Venture Contract for the New Dragon Asia Food (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
|
|
Amended
and Restated Equity Incentive Plan (incorporated herewith by reference to
Exhibit C to our Definitive Information Statement on Schedule 14C filed on
May 4, 2009).
|
|
|
|
10.13
|
|
Stock
Option Agreement between New Dragon Asia Corp. and Peter Mak, dated
December 13, 2006 (incorporated herewith by reference to Exhibit 10.1 to
our Form 8-K filed on December 15, 2006).
|
|
|
|
10.14
|
|
Settlement
Agreement and General Release between New Dragon Asia Corp and Berry-Shino
Securities Inc., dated August 15, 2007 (incorporated by reference to
Exhibit 10.1 to our Form 8-K filed on August 15, 2007).
|
|
|
|
10.15
|
|
Employment
Agreement dated April 1, 2009 between New Dragon Asia Corp. and Ling Wang
(incorporated herewith by reference to Exhibit 10.1 to our Registration
Statement on Form S-8 filed on May 8, 2009).
|
|
|
|
21.1
|
|
Subsidiaries
of New Dragon Asia Corp., (incorporated by reference to Exhibit 21.1 to
our Form 10-K filed on April 6, 2010).
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
|
|
|
|
31.2
|
|
Certification
of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, filed herewith.
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed
herewith.
|
SIGNATURES
Pursuant to the requirements of
the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.
|
NEW
DRAGON ASIA CORP.
|
|
|
|
Dated:
November 15, 2010
|
By:
|
/s/
Li Xia Wang
|
|
Name:
Li Xia Wang (Principal Executive Officer)
|
|
Title:
Chief Executive
Officer
|
Dated:
November 15, 2010
|
By:
|
/s/
Ling Wang
|
|
|
|
Title:
Chief Financial Officer (Principal Financial and Accounting
Officer)
|