Oriental Dragon Corp - FORM 10-Q

Attached files

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EX-32.1 - Oriental Dragon Corp	v222601_ex32-1.htm
EX-31.2 - Oriental Dragon Corp	v222601_ex31-2.htm
EX-31.1 - Oriental Dragon Corp	v222601_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

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

For the transition period from __________ to __________

Commission File Number: 000-52133

ORIENTAL DRAGON CORPORATION

(Exact name of registrant as specified in its charter)

Cayman Islands	N/A
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

No. 48 South Qingshui Road

Laiyang City, Shandong 265200

People’s Republic of China

(Address of principal executive offices)

(86) (535) 729-6152

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 þ No o

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 (§232.405 of this chapter) during the

preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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	o	Accelerated filer	o
Non-accelerated filer (Do not check if smaller reporting company)	þ	Smaller reporting company	o

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 27,501,171 ordinary shares are issued and outstanding as of May 15, 2011.

ORIENTAL DRAGON CORPORATION

FORM 10-Q

March 31, 2011

TABLE OF CONTENTS

		Page No.
PART I. - FINANCIAL INFORMATION
Item 1.	Financial Statements.	3
	Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010	3
	Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2011 and 2010 (unaudited)	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (unaudited)	5
	Notes to Unaudited Consolidated Financial Statements.	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	30
Item 4.	Controls and Procedures.	31

PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	31
Item 1A.	Risk Factors.	31
Item 2.	Unregistered Sales of Equity Securities and Use Of Proceeds.	31
Item 3.	Defaults Upon Senior Securities.	31
Item 4.	(Removed and Reserved).	31
Item 5.	Other Information.	31
Item 6.	Exhibits.	32

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this report. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q and in other reports that we file with the SEC. You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements.

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,		December 31,
	2011		2010
	(Unaudited)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	69,299,239	$	47,670,666
Cash - restricted		505,473		675,656
Inventories, net of reserve for obsolete inventory		3,553,872		16,239,577
Prepaid VAT on purchases		-		446,677
Prepaid expenses and other		86,358		35,115
Deferred income taxes		62,206		61,719

Total Current Assets		73,507,148		65,129,410

PROPERTY AND EQUIPMENT, net		19,272,971		19,586,350

OTHER ASSETS:
Land use rights, net		15,732,080		15,750,747
Deferred income taxes - net of current portion		793,124		802,352

Total Assets	$	109,305,323	$	101,268,859

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	3,653,615	$	4,050,730
Accrued expenses		247,610		1,055,593
Income taxes payable		4,305,123		8,509,308
Other taxes payable		35,899		69,935

Total Current Liabilities		8,242,247		13,685,566

COMMITMENT

SHAREHOLDERS' EQUITY:
Preference shares ($0.001 par value; 1,000,000 shares authorized,none issued and outstanding at March 31, 2011 and December 31, 2010)		-		-
Ordinary shares ($0.001 par value; 50,000,000 shares authorized, 27,501,171 and 27,499,171shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively)		27,501		27,499
Additional paid-in capital		16,361,305		16,355,307
Retained earnings		74,811,462		62,385,882
Statutory and non-statutory reserves		4,205,146		3,875,734
Accumulated other comprehensive income - cumulative foreign currency translation adjustment		5,657,662		4,938,871

Total Shareholders' Equity		101,063,076		87,583,293

Total Liabilities and Shareholders' Equity	$	109,305,323	$	101,268,859

See notes to unaudted consolidated financial statements

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

	For the Three Months Ended March 31,
	2011			2010

NET REVENUES	$	51,232,125		$	43,201,052

COST OF REVENUES		33,555,083			30,064,963

GROSS PROFIT		17,677,042			13,136,089

OPERATING EXPENSES:
Selling		169,017			172,186
Research and development		-			73,142
General and administrative		524,289			518,128

Total Operating Expenses		693,306			763,456

INCOME FROM OPERATIONS		16,983,736			12,372,633

OTHER INCOME (EXPENSE):
Interest income		55,485			24,841
Loss from foreign currency		(1,481	)		-

Total Other Income (Expense)		54,004			24,841

INCOME BEFORE PROVISION FOR INCOME TAXES		17,037,740			12,397,474

PROVISION FOR INCOME TAXES:
Current		(4,267,245	)		(3,117,051	)
Deferred		(15,503	)		(14,924	)

Total Provision for Income Taxes		(4,282,748	)		(3,131,975	)

NET INCOME	$	12,754,992		$	9,265,499

COMPREHENSIVE INCOME:
NET INCOME	$	12,754,992		$	9,265,499

OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain		718,791			784

COMPREHENSIVE INCOME	$	13,473,783		$	9,266,283

NET INCOME PER ORDINARY SHARE:
Basic	$	0.46		$	0.34
Diluted	$	0.46		$	0.34

WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING:
Basic		27,500,460			27,491,171
Diluted		27,500,460			27,491,171

See notes to unaudited consolidated financial statements

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Three Months Ended March 31,
	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	12,754,992		$	9,265,499
Adjustments to reconcile net income from operations to net cash
provided by operating activities:
Depreciation		496,958			237,313
Amortization of land use rights		142,358			137,035
Stock-based compensation		6,000			-
Deferred income taxes		15,503			14,924
Changes in assets and liabilities:
Inventories		12,774,159			13,267,660
Prepaid and other current assets		(51,003	)		-
Prepaid VAT on purchases		448,808			82,329
Accounts payable		(426,828	)		18,137
Accrued expenses		(813,784	)		(592,542	)
Other taxes payable		(34,481	)		144,033
Income taxes payable		(4,258,071	)		(1,899,414	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		21,054,611			20,674,974

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(30,663	)		(1,908,093	)

NET CASH USED IN INVESTING ACTIVITIES		(30,663	)		(1,908,093	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in cash - restricted		170,183			1,556,265

NET CASH PROVIDED BY FINANCING ACTIVITIES		170,183			1,556,265

EFFECT OF EXCHANGE RATE ON CASH		434,442			2,375

NET INCREASE IN CASH		21,628,573			20,325,521

CASH - beginning of year		47,670,666			26,574,338

CASH - end of period	$	69,299,239		$	46,899,859

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	-		$	-
Income taxes	$	8,525,315		$	5,016,465

See notes to unaudited consolidated financial statements.

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Oriental Dragon Corporation (the “Company”) was formed under the laws of the Cayman Islands on March 10, 2006 under the name of Emerald Acquisition Corporation. Effective on August 27, 2010, the Company’s corporate name was changed to Oriental Dragon Corporation. On October 22, 2009, the Company acquired Merit Times International Limited (“Merit Times”) in a reverse acquisition transaction. Merit Times was established on February 8, 2008, under the laws of British Virgin Islands. Pursuant to a share exchange agreement in this reverse acquisition transaction, the Company issued an aggregate of 21,333,332 ordinary shares to the shareholders of Merit Times, their designees or assigns in exchange for all of the issued and outstanding capital stock of Merit Times. On October 22, 2009, the Share Exchange closed and Merit Times became the Company’s wholly-owned subsidiary. Merit Times owns 100% of the outstanding capital stock of Shandong MeKeFuBang Food Limited (“MeKeFuBang”), a wholly foreign owned enterprise incorporated on June 9, 2009 under the laws of the People’s Republic of China (PRC).

Prior to the Exchange Agreement, there were 1,281,500 Ordinary Shares issued and outstanding. Pursuant to the terms of the Exchange Agreement, a shareholder of the Company cancelled a total of 794,000 Ordinary Shares of the Company. Following the combination prior to the Offering, there are 21,820,832 Ordinary Shares of the Company issued and outstanding.

Presently all of the Company’s business operations are carried out through MeKeFuBang and through Shandong Longkang Juice Co., Ltd., a limited liability company under the laws of China (“Longkang”). Longkang was incorporated in Shandong province on November 22, 2004 with registered capital of RMB 10 million.

On June 10, 2009, MeKeFuBang entered into a series of contractual agreements (the “Contractual Arrangements”) with Longkang, and its five shareholders. The Company does not own any equity interests in Longkang, but control and receive the economic benefits of its Longkang business operations through the Contractual Arrangements. The Contractual Arrangements are comprised of (1) a Consulting Services Agreement, through which the MeKeFuBang has the right to advise, consult, manage and operate Longkang, and collect and own all of the net profits of Longkang; (2) an Operating Agreement, through which MeKeFuBang has the right to recommend director candidates and appoint the senior executives of Longkang, approve any transactions that may materially affect the assets, liabilities, rights or operations of Longkang, and guarantee the contractual performance by Longkang of any agreements with third parties, in exchange for a pledge by Longkang of its accounts receivable and assets; (3) a Proxy Agreement, under which the five owners of Longkang have vested their collective voting control over the Operating Entity to MeKeFuBang and will only transfer their respective equity interests in Longkang to MeKeFuBang or its designee(s); (4) a VIE Option Agreement, under which the owners of Longkang have granted MeKeFuBang the irrevocable right and option to acquire all of their equity interests in Longkang; and (5) an Equity Pledge Agreement, under which the owners of Longkang have pledged all of their rights, titles and interests in Longkang to MeKeFuBang to guarantee Longkang’s performance of its obligations under the Consulting Services Agreement. As a result of these Contractual Arrangements, which enables the Company to control Longkang and to receive, through its subsidiaries, all of its profits, the Company is considered the primary beneficiary of Longkang, which is deemed its variable interest entity (“VIE”). Accordingly, the Company consolidates Longkang’s results, assets and liabilities in its financial statements. The Contractual Agreements were amended on December 20, 2010 to restrict Longkang’s ability to terminate such agreements.

The Company, through its subsidiaries and variable interest entity, engages in the production of fruit juice concentrate in the PRC, specializing in processing, producing and distributing Laiyang Pear fruit juice concentrate. The Company is the only producer of Laiyang Pear fruit juice concentrate, which contains 46 kinds of mineral substances such as Organic Acid, Vitamin B1, B2, Vitamin C, Nicotinic Acid, Protocatechuic Acid, Carotene and mineral substances such as Calcium, Phosphorus and Iron, etc., and therefore is known for its taste, nutritional and medical benefits, and application in health supplements, pharmaceuticals, and the food and beverage industries.

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basis of presentation

Management acknowledges its responsibility for the preparation of the accompanying financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its financial position and the results of its operations for the periods presented. The accompanying unaudited condensed consolidated financial statements for Oriental Dragon Corporation, its subsidiaries and variable interest entities, have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. This basis differs from that used in the statutory accounts of our subsidiaries in China, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with U.S. GAAP.

These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the year ended December 31, 2010.

The Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiary, Merit Times International Limited and MeKeFuBang, as well as the financial statements of Longkang. All significant intercompany accounts and transactions have been eliminated in consolidation.

Longkang is considered a variable interest entity (“VIE”), and the Company is the primary beneficiary. The Company’s relationships with Longkang and its shareholders are governed by a series of contractual arrangements between MeKeFuBang, the Company’s wholly foreign-owned enterprise in the PRC, and Longkang, which is the operating company of the Company in the PRC. Under PRC laws, each of MeKeFuBang and Longkang is an independent legal entity and none of them are exposed to liabilities incurred by the other party. The contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC. On June 10, 2009, the Company entered into the following contractual arrangements with Longkang, which were amended on December 20, 2010 to restrict Longkang’s ability to terminate such agreements.

Operating Agreement - Pursuant to the operating agreement among MeKeFuBang, Longkang and all shareholders of Longkang (the “Longkang Shareholders”), MeKeFuBang provides guidance and instructions on Longkang’s daily operations, financial management and employment issues. Longkang Shareholders must designate the candidates recommended by MeKeFuBang as their representatives on the boards of directors of Longkang. MeKeFuBang has the right to appoint senior executives of Longkang. In addition, MeKeFuBang agrees to guarantee Longkang’s performance under any agreements or arrangements relating to Longkang’s business arrangements with any third party. Longkang, in return, agrees to pledge their accounts receivable and all of their assets to MeKeFuBang. Moreover, Longkang agrees that without the prior consent of MeKeFuBang, Longkang will not engage in any transactions that could materially affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party. The terms of this agreement shall remain in full force and effect for the maximum period of time permitted by law unless being terminated by MeKeFuBang by giving a thirty day prior written notice. In no circumstances, however, Longkang can terminate this agreement.

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Consulting Services Agreement - Pursuant to the exclusive consulting services agreement between MeKeFuBang and Longkang, MeKeFuBang has the exclusive right to provide to Longkang general business operation services, including advice and strategic planning, as well as consulting services related to the technological research and development of the Longkang’s products (the “Services”). Under this agreement, MeKeFuBang owns the intellectual property rights developed or discovered through research and development, in the course of providing the Services, or derived from the provision of the Services. Longkang shall pay a quarterly consulting service fees in Renminbi (“RMB”) to MeKeFuBang that is equal to all of Longkang’s profits for such quarter. This agreement shall remain in full force and effect for the maximum period of time permitted by law unless being terminated by MeKeFuBang by giving a thirty day prior written notice. In no circumstances, however, Longkang can terminate this agreement.

Equity Pledge Agreement - Under the equity pledge agreement between Longkang’s shareholders and MeKeFuBang, Longkang’s Shareholders pledged all of their equity interests in Longkang to MeKeFuBang to guarantee Longkang’s performance of its obligations under the consulting services agreement. If Longkang or Longkang’s Shareholders breaches their respective contractual obligations, MeKeFuBang, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. Longkang’s Shareholders also agreed that upon occurrence of any event of default, MeKeFuBang shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the Longkang’s Shareholders to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument that MeKeFuBang may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. Longkang’s Shareholders agreed not to dispose of the pledged equity interests or take any actions that would prejudice MeKeFuBang’s interest. The equity pledge agreement will expire two (2) years after Longkang’s obligations under the consulting services agreements have been fulfilled.

Option Agreement - Under the option agreement between Longkang’s Shareholders and MeKeFuBang, Longkang’s Shareholders irrevocably granted MeKeFuBang or its designated person an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in Longkang for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted by applicable PRC law. MeKeFuBang or its designated person has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement shall last for the maximum period of time permitted by law unless terminated by MeKeFuBang by giving a thirty day prior written notice. In no circumstances, however, the Longkang shareholders can terminate this agreement.

Proxy Agreement – Under the proxy agreement, the five owners of Longkang have vested their collective voting control over the Operating Entity to MeKeFuBang and will only transfer their respective equity interests in Longkang to MeKeFuBang or its designee(s). The proxy agreement shall remain in full force and effect for the maximum period of time permitted by law unless terminated by MeKeFuBang by giving a thirty day prior written notice. In no circumstances, however, the Longkang shareholders can terminate this agreement.

The accounts of Longkang are consolidated in the accompanying consolidated financial statements pursuant to Financial Accounting Codification Standards Topic 810-10-05 and related subtopics related to the consolidation of Variable Interest Entities As a VIE, Longkang’s sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s, and the Company’s net income includes all of Longkang’s net income. The Company does not have any non-controlling interest and accordingly, did not subtract any net income in calculating the net income attributable to the Company. Because of the contractual arrangements, the Company had a pecuniary interest in Longkang that require consolidation of the Company’s and Longkang financial statements.

Use of estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the consolidated financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates in 2011 and 2010 include the allowance for obsolete inventory, the useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets, and the valuation of stock-based compensation.

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair value of financial instruments

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts reported in the balance sheets for cash, accounts receivable, loans payable, accounts payable and accrued expenses, and advances to suppliers approximate their fair market value based on the short-term maturity of these instruments. The Company did not identify any assets or liabilities that are required to be presented on the balance sheets at fair value in accordance with the accounting guidance.

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

Cash and cash equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions mainly in the PRC. Balances in banks in the PRC are uninsured.

Cash – restricted

As at March 31, 2011 and December 31, 2010, restricted cash consisted of cash deposits held with Company counsel (see Note 6).

Concentrations of credit risk

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentrations of credit risk (continued)

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company's sales are collected immediately upon the delivery of the product to the customer since the demand for our products exceeds our current supply.

At March 31, 2011 and December 31, 2010, the Company’s cash balances by geographic area were as follows:

	March 31, 2011				December 31, 2010
Country:
China	$	69,299,239	100.0	%	$	47,670,666	100.0	%
Total cash and cash equivalents	$	69,299,239	100.0	%	$	47,670,666	100.0	%

Accounts receivable

At March 31, 2011 and December 31, 2010 there were no outstanding accounts receivable. The Company, when necessary, maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.

Inventories

Inventories, consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. The Company recorded an inventory reserve of $96,532 and $95,777 at March 31, 2011 and December 31, 2010, respectively. Cost of sales represents all direct and indirect costs associated with the production of products for sale to customers. These costs include cost of raw materials, direct and indirect labor and benefit costs, freight in, depreciation, and storage fees.

Property and equipment

Property and equipment are carried at cost and are depreciated on a straight-line basis (after taking into account their respective estimated residual value) over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. Included in property and equipment is construction-in-progress which consisted of costs for a factory under construction and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use.

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impairment of long-lived assets

In accordance with ASC Topic 360, the Company reviews, long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not record any impairment charges for the three-month periods ended March 31, 2011 and 2010.

Income taxes

The Company is governed by the Income Tax Law of the People’s Republic of China. The Company accounts for income taxes using the liability method prescribed by ASC 740 “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

The Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of March 31, 2011 and December 31, 2010, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.

Revenue recognition

Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company recognizes revenues from the sale of juice concentrate and animal bio feed upon shipment and transfer of title.

Shipping costs

Shipping costs are included in selling expenses and totaled $25,023 and $22,380 for the three months ended March 31, 2011 and 2010, respectively.

Employee benefits

The Company’s operations and employees are all located in the PRC. The Company makes mandatory contributions to the PRC government’s health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws, which is approximately 25% of salaries. For the three months ended March 31, 2011 and 2010, the costs of these payments are charged to general and administrative expenses in the same period as the related salary costs and amounted to $20,286 and $16,550, respectively.

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Advertising

Advertising is expensed as incurred and is included in selling expenses on the accompanying statement of operations. For the three months ended March 31, 2011 and 2010, advertising expense amounted to $0 and $14,628, respectively.

Research and development

Research and development costs are expensed as incurred. For the three months ended March 31, 2011 and 2010, research and development costs amounted to $0 and $73,142, respectively.

Foreign currency translation

The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries and affiliates is the Chinese Renminbi (“RMB”). For the subsidiaries and affiliates whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. All of the Company’s revenue transactions are transacted in the functional currency. The Company does not enter any material transaction in foreign currencies and accordingly, transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.

Asset and liability accounts at March 31, 2011 and December 31, 2010 were translated at 6.5601 RMB to $1.00 and at 6.6118 RMB to $1.00, respectively. Equity accounts were stated at their historical rate. The average translation rates applied to the statements of income for the three months ended March 31, 2011 and 2010 were 6.5804 RMB and 6.83603 RMB to $1.00, respectively. Cash flows from the Company's operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

Accumulated other comprehensive income

Comprehensive income is comprised of net income and all changes to the statements of stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the three months ended March 31, 2011 and 2010 included net income and unrealized gains from foreign currency translation adjustments.

Related parties

Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company shall disclose all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged.

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income per share of ordinary stock

ASC 260 “Earnings Per Share”, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic net income per ordinary share is computed by dividing net income available to ordinary shareholders by the weighted average number of shares of ordinary shares outstanding during the period. Diluted income per ordinary share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive ordinary shares consist of common stock warrants (using the treasury stock method). Common stock warrants were not included in the following calculation as the effect on net income per ordinary share was anti-dilutive. The following table presents a reconciliation of basic and diluted net income per ordinary share:

	Three Months Ended March 31,
	2011		2010
Net income available to ordinary shareholders for basic and diluted net income per ordinary share	$	12,754.992	$	9,265,499

Weighted average ordinary shares outstanding – basic		27,500,460		27,491,171
Effect of dilutive securities:
Warrants		-		-
Weighted average ordinary shares outstanding– diluted		27,500,460		27,491,171
Net income per ordinary share - basic	$	0.46	$	0.34
Net income per ordinary share - diluted	$	0.46	$	0.34

The Company's aggregate common stock equivalents at March 31, 2011 and 2010 include the following:

	2011		2010
Warrants		3,402,212		3,402,212
Total		3,402,212		3,402,212

Recent accounting pronouncements

In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements.” This ASU changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance will include factors to help companies determine what software elements are considered “essential to the functionality.” The amendments will now subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. The adoption of the new ASU did not have any impact on the Company’s consolidated financial statements.

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements”. ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. For the reconciliation of Level 3 fair value measurements, information about purchases, sales, issuances and settlements are presented separately. This standard is effective for interim and annual reporting periods beginning after December 15, 2009 with the exception of revised Level 3 disclosure requirements which are effective for interim and annual reporting periods beginning after December 15, 2010. Comparative disclosures are not required in the year of adoption. The Company adopted the provisions of the standard on January 1, 2010, which did not have a material impact on its consolidated financial statements.

In April 2010, the 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 - a consensus of the FASB Emerging Issues Task Force. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company.

In December 2010, FASB issued ASU No. 2010-28, Intangibles - Goodwill and Other (ASC Topic 350). Under Topic 350 on goodwill and other intangible assets, testing for goodwill impairment is a two-step test. When a goodwill impairment test is performed (either on an annual or interim basis), an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The amendments in this update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. As we do not have any significant intangible assets, we believe that the impact of adopting this update will not be material on our consolidated results of operations and financial position.

In December 2010, FASB issued Accounting Standards Update (ASU) No. 2010-29, Business Combinations (ASC Topic 805). The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also improve the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination(s). The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is permitted. As we did not enter into any business combinations in fiscal year 2010, we believe that the adoption of this update will not have any material impact on our financial statement disclosures. However, if we enter into material business combinations in the future, the adoption of this update may have a significant impact on our financial statement disclosures.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 2 - INVENTORIES

At March 31, 2011 and December 31, 2010, inventories consisted of the following:

	2011			2010
Raw materials	$	100,379		$	108,930
Work in process		170,045			-
Finished goods		3,379,980			16,226,424
		3,650,404			16,335,354
Less: reserve for obsolete inventory		(96,532	)		(95,777	)
	$	3,553,872		$	16,239,577

NOTE 3 - PROPERTY AND EQUIPMENT

At March 31, 2011 and December 31, 2010, property and equipment consisted of the following:

	Useful Life	2011			2010
Office equipment and furniture	10 Years	$	127,229		$	126,235
Manufacturing equipment	10 Years		15,849,199			15,662,571
Vehicles	10 Years		140,379			139,281
Construction in progress	-		1,397			90,274
Building and building improvements	10-20 Years		9,734,696			9,601,870
			25,852,900			25,620,231
Less: accumulated depreciation			(6,579,930	)		(6,033,881	)
		$	19,272,970		$	19,586,350

For the three months ended March 31, 2011 and 2010, depreciation expense amounted to $496,958 and $237,313, of which $435,834 and $184,893 is included in cost of sales, and $61,124 and $52,420 is included in general and administrative expenses, respectively.

NOTE 4 – LAND USE RIGHTS

There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. In additional to land use rights acquired in 2004, in 2008, the Company acquired land use rights for cash of 78,550,010 RMB (approximately $11,300,000) for 500 acres of plantation fields in Laiyang, China. The land contains Laiyang Pear plantations and will be used to supply pears to the Company for production. The Company’s land use rights have terms that expire in December 2037 through December 2054. The Company amortizes these land use rights over the term of the respective land use right. The lease agreements do not have any renewal option and the Company has no further obligations to the lessor. Through September 30, 2010, the pear orchards on this land did not produce any pears. Accordingly, for the three months ended March 31, 2010, the Company included the amortization of the respective land use rights in general and administrative expenses. Effective on October 1, 2010, upon the use of pears from the orchards in the production process, the Company reflected the amortization of these land use rights in cost of sales. For the three months ended March 31, 2011 and 2010, amortization of land use rights amounted to $142,358 and $137,035, respectively. At March 31, 2011 and December 31, 2010, land use rights consist of the following:

	Useful Life	2011			2010
Land Use Rights	30 - 50 years	$	17,829,937		$	17,690,518
Less: Accumulated Amortization			(2,097,857	)		(1,939,771	)
		$	15,732,080		$	15,750,747

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 4 – LAND USE RIGHTS (continued)

Amortization of land use rights attributable to future periods is as follows:

Years ending March 31:
2012	$	571,195
2013		571,195
2014		571,195
2015		571,195
2016		571,195
Thereafter		12,876,105
	$	15,732,080

In connection with the construction of Company’s new production and storage facility, during 2010, the Company obtained certain land use certificates to use the underlying land. In connection with the use of this land use right, the Company is still negotiating the amount that it will pay for the land use right. The Company has estimated that it will be required to pay approximately $7,900,000 prior to the third quarter of 2011 to obtain the respective land use right certificate.

NOTE 5 – ACCRUED EXPENSES

At March 31, 2011 and December 31, 2010, accrued expenses consist of the following:

	2011		2010
Accrued payroll and employees benefit	$	172,426	$	-
Accrued equipment and construction payable		-		924,459
Other		75,184		131,134
	$	247,610	$	1,055,593

NOTE 6 – CASH - RESTRICTED

Pursuant to an Investor Relations Escrow Agreement, amongst the Company, Grandview Capital, Inc. (“Grandview”), Access America Investments, LLC and Anslow & Jaclin, LLP as escrow agent, dated October 22, 2009 (the “Investor Relations Escrow Agreement”), the Company placed a total of $120,000 in an escrow account with its counsel to be used for the payment of investor relation fees. Additionally, pursuant to a Going Public Escrow Agreement, amongst the Company, Grandview, Access America Investments, LLC and Anslow & Jaclin, LLP as escrow agent, dated October 22, 2009 (the “Going Public Escrow Agreement”), the Company placed a total of $1,000,000 from the Offering proceeds with its counsel to be used for the payment of fees and expenses related to becoming a public company and listing its Ordinary Shares on a senior exchange. Pursuant to each of the Investor Relations Escrow Agreement and Going Public Escrow Agreement, in the event that the proceeds of such escrow accounts have not been fully distributed within two years from the date thereof, the balance of such escrow proceeds shall be returned to the Company. At March 31, 2011 and December 31, 2010, cash - restricted amounted to $505,473 and $675,656, respectively.

NOTE 7 – SHAREHOLDERS’ EQUITY

Ordinary Shares

On February 1, 2011, the Company issued 2,000 ordinary shares to its chief financial officer for services rendered pursuant to an engagement agreement. The shares were valued at fair value on the dates of grant and the Company recorded stock-based compensation of $6,000.

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 7 – SHAREHOLDERS’ EQUITY (continued)

Warrants

Warrant activity for the three months ended March 31, 2011 is summarized as follows:

	Number of Warrants		Weighted Average Exercise Price
Balance at beginning of year		3,402,210	$	6.00
Granted		-		-
Exercised		-		-
Balance at end of period		3,402,210	$	6.00

Warrants exercisable at end of period		3,402,210	$	6.00

The following table summarizes the shares of the Company's common stock issuable upon exercise of warrants outstanding at March 31, 2011:

		Warrants Outstanding						Warrants Exercisable
Range of Exercise Price		Number Outstanding at March 31, 2011		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable at March 31, 2011		Weighted Average Exercise Price
$	6.00		3,402,210		4.06	$	6.00		3,402,210	$	6.00

NOTE 8 – MAJOR CUSTOMERS

For the three months ended March 31, 2011 and 2010, ten and eight customers accounted for 100.0% of the Company’s revenues, respectively. For the three months ended March 31, 2011, no single customer accounted for greater than 13% of total sales. For the three months ended March 31, 2010, no single customer accounted for greater than 15% of total sales.

NOTE 9 – RESTRICTED NET ASSETS

Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant's proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party (i.e., lender, regulatory agency, foreign government, etc.).

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 9 – RESTRICTED NET ASSETS (continued)

The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the Company’s China-based operating VIE’s and subsidiary exceed 25% of the consolidated net assets of Oriental Dragon Corporation. The ability of our Chinese operating affiliates to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of the Chinese operating subsidiaries. Because a significant portion of our operations and revenues are conducted and generated in China, all of our revenues being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars.

The condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the consolidated financial statements, with the only exception being that the parent company accounts for its subsidiaries using the equity method. Refer to the consolidated financial statements and notes presented above for additional information and disclosures with respect to these financial statements.

ORIENTAL DRAGON CORPORATION

CONSOLIDATED PARENT COMPANY BALANCE SHEETS

(Unaudited)

	As of March 31,		As of December 31,
	2011		2010
ASSETS
Cash and cash equivalents	$	95,873	$	996,143
Cash – restricted		505,473		675,656
Prepaid expenses and other		55,000		5,000
Total Current Assets		656,346		1,676,799
Investments in subsidiaries at equity		100,499,484		86,032,447
Total Assets	$	101,155,830	$	87,709,246

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	92,754	$	125,953
Total Current Liabilities		92,754		125,953

Shareholders' equity:
Ordinary shares ($0.001 par value; 50,000,000 shares authorized, 27,501,171 and 27,499,171 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively)		27,501		27,499
Additional paid-in capital		16,361,305		16,355,307
Statutory and non-statutory reserves		4,205,146		3,875,734
Retained earnings		74,811,462		62,385,882
Accumulated other comprehensive income		5,657.662		4,938,871
Total Shareholders' Equity		101,063,076		87,583,293
Total Liabilities and Shareholders' Equity	$	101,155,830	$	87,709,246

ORIENTAL DRAGON CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

NOTE 9 – RESTRICTED NET ASSETS (continued)

	For the Three Month Ended March 31,
	2011			2010
REVENUES	$	-		$	-

OPERATING EXPENSES:
General and administrative		93,254			65,068
Total Operating Expenses		93,254			65,068
LOSS FROM OPERATIONS		(93,254	)		(65,068	)

LOSS ATTRIBUTABLE TO PARENT ONLY		(93,254	)		(65,068	)
EQUITY INCOME EARNINGS OF SUBSIDIARIES		12,848,246			9,330,567

NET INCOME	$	12,754,992		$	9,265,499

	For the Three Month Ended March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	12,754,992		$	9,265,499
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in earnings of subsidiary		(12,848,246	)		(9,330,567	)
Stock-based compensation		6,000			-
Changes in assets and liabilities:
Prepaid expenses		(50,000	)		-
Accounts payable		(33,199	)		18,137
NET CASH USED IN OPERATING ACTIVITIES		(170,453	)		(46,931	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment payments to subsidiaries		(900,000	)		(2,000,000	)
NET CASH USED IN INVESTING ACTIVITIES		(900,000	)		(2,000,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in cash – restricted		170,183			1,556,265
NET CASH PROVIDED BY FINANCING ACTIVITIES		170,183			1,556,265

NET DECREASE IN CASH		(900,270	)		(490,666	)
CASH - beginning of year		996,143			10,487,306
CASH - end of period	$	95,873		$	9,996,640

NOTE 10 - COMMITTMENT

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations and financial condition of Oriental Dragon Corporation for the three months ended March 31, 2011 and 2010 should be read in conjunction with the Oriental Dragon Corporation financial statements. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Special Note Regarding Forward-Looking Statements and Business sections in our Form 10-K as filed with the Securities and Exchange Commission March 31, 2011. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

COMPANY OVERVIEW

Primarily, we engage in the processing, producing and distributing of Laiyang Pear fruit juice concentrate. Recently, we began producing and distributing bio animal feed using the waste produced by our juice concentrate business. Our subsidiary, Merit Times, owns 100% of the issued and outstanding capital stock of MeKeFuBang, a wholly foreign owned enterprise incorporated under the laws of the PRC. On December 20, 2010, MeKeFuBang entered into a series of contractual agreements (which replaced similar agreements dated June 10, 2010) with Longkang, a company incorporated under the laws of the PRC, and its five shareholders, in which MeKeFuBang effectively assumed management of the business activities of Longkang and has the right to appoint all executives and senior management and the members of the board of directors of Longkang. The contractual arrangements are comprised of a series of agreements, including a Consulting Services Agreement, Operating Agreement, Proxy Agreement, and Option Agreement, through which MeKeFuBang has the right to advise, consult, manage and operate Longkang for an annual fee in the amount of Longkang’s yearly net profits after tax. Additionally, Longkang’s Shareholders have pledged their rights, titles and equity interest in Longkang as security for MeKeFuBang to collect consulting and services fees provided to Longkang through an Equity Pledge Agreement. In order to further reinforce MeKeFuBang’s rights to control and operate Longkang, Longkang’s shareholders have granted MeKeFuBang the exclusive right and option to acquire all of their equity interests in Longkang through an Option Agreement. As all of the companies are under common control, this has been accounted for as a reorganization of entities and the financial statements have been prepared as if the reorganization had occurred retroactively. We have consolidated Longkang’s operating results, assets and liabilities within our financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements for the year ended December 31, 2010, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be 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. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements.

Variable Interest Entities

Pursuant to Financial Accounting Standards Board accounting standards, we are required to include in our consolidated financial statements the financial statements of variable interest entities (“VIEs”). The accounting standards require a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are those entities in which we, through contractual arrangements, bear the risk of, and enjoy the rewards normally associated with ownership of the entity, and therefore we are the primary beneficiary of the entity.

Longkang is considered a VIE, and we are the primary beneficiary. We conduct a portion of our operations in China through our PRC operating company Longkang. On October 22, 2009, we entered into agreements with Longkang pursuant to which we shall receive 100% of Longkang’s net income. In accordance with these agreements, Longkang shall pay consulting fees equal to 100% of its net income to our wholly-owned subsidiary, MeKeFuBang. MeKeFuBang shall supply the technology and administrative services needed to service Longkang.

The accounts of Longkang are consolidated in the accompanying financial statements. As a VIE, Longkang sales are included in our total sales, its income from operations is consolidated with ours, and our net income includes all of Longkang’s net income, and its assets and liabilities are included in our consolidated balance sheets. The VIE does not have any non-controlling interest and accordingly, did not subtract any net income in calculating the net income attributable to us. Because of the contractual arrangements, we have pecuniary interest in Longkang that requires consolidation of Longkang’s financial statements with our financial statements.

Accounts receivable

We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We periodically review our accounts receivable and other receivables to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

As a basis for accurately estimating the likelihood of collection has been established, we consider a number of factors when determining reserves for uncollectable accounts. We believe that we use a reasonably reliable methodology to estimate the collectability of our accounts receivable. We review our allowances for doubtful accounts on at least a quarterly basis. We also consider whether the historical economic conditions are comparable to current economic conditions. If the financial condition of our customers or other parties that we have business relations with were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories

Inventories, consisting of raw materials and finished goods related to our products are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, we will record additional reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. We review inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory, if necessary. If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained. Our inventory reserves establish a new cost basis for inventory and are not reversed until we sell or dispose of the related inventory. Such provisions are established based on historical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using straight-line method (after taking into account their respective estimated residual value) over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

	Useful Life
Building and building improvements	10 - 20	Years
Manufacturing equipment	10	Years
Office equipment and furniture	10	Years
Vehicle	10	Years

The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.

We examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

Included in property and equipment is construction-in-progress which consists of a deposit on a factory under construction and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use.

Land use rights

There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. In additional to land use rights acquired in 2004, in 2008, we acquired land use rights for cash of 78,550,010 RMB (approximately $11,300.000) for 500 acres of plantation fields in Laiyang, China. The land contains Laiyang Pear plantations and will be used to supply Laiyang Pear to us for production. Our land use rights have terms that expire in December 2037 through December 2054. We amortize these land use rights over the term of the respective land use right. The lease agreements do not have any renewal options and we have no further obligations to the lessor. Through September 30, 2010, the pear orchards on this land did not produce any pears. Accordingly, for the three months ended March 31, 2010, we included the amortization of the respective land use rights in general and administrative expenses. Effective on October 1, 2010, upon the use of pears from the orchards in the production process, we reflected the amortization of these land use rights in cost of sales.

Revenue recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company recognizes revenues from the sale of juice concentrate and bio animal feed upon shipment and transfer of title.

Research and development

Research and development costs are expensed as incurred. These costs primarily consist of fees paid to third parties and cost of material used and salaries paid for the development of our products.

Income taxes

We account for income taxes pursuant to the accounting standards that requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally, the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the temporary difference from the deduction of imputed interest and related depreciation expenses for income tax purposes as compared to financial statement purposes, are dependent upon future earnings. Accordingly, prior to October 2009, the net deferred tax asset related to temporary differences was fully offset by a valuation allowance. The Company’s operating affiliate is governed by the Income Tax Law of the People’s Republic of China. The Company and our wholly-owned subsidiary, Merit Times were incorporated in the Cayman Islands and British Virgin Islands (“BVI”), respectively. Under the current laws of the Cayman Islands and BVI, the two entities are not subject to income taxes. Accordingly, we have not established a provision for current or deferred taxes for these jurisdictions.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Prior to 2009, we had recognized a valuation allowance for those deferred tax assets for which it is more likely than not that realization will not occur. The Company’s deferred tax asset relates to the temporary difference from the amortization of imputed interest expense on a loan payable for financial statement purposes as compared the depreciation of the related equipment for tax purposes. In 2008, the deferred tax asset had been fully reserved with a valuation allowance as management of the Company had not determined if realization of these assets would occur in the future. Prior to 2009, management believed that the realization of income tax benefits from a temporary difference arising from the amortization of imputed interest expense on a loan payable for financial statement purposes over the loan period from 2004 to 2009 as compared to the depreciation of the related asset over 20 years for income tax purposes appeared not more than likely due to the Company’s limited operating history, the fact that prior to 2007, the Company had no cooperative agreements for the acquisition of raw materials, and the Company had a limited number of customers.

Accordingly, we had provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. In 2009, after analysis, management concluded that the realization of the deferred tax asset is probable and accordingly, reversed the valuation allowance and will reflect a deferred tax asset. Our decision was based on the fact that 1) we have several years of operating history with increasing net income; 2) In 2007, we signed cooperative agreements with farmers for the supply of raw materials. In 2008, we acquired additional land use rights for the production of Laiyang Pears, our main raw material; 3) In October 2009, we entered into a financing agreement for the sale of our ordinary shares for net proceeds of approximately $15,100,000; and 4) we have begun our plans to diversify its product line to include the sale of bio animal feed products.

Foreign currency translation

Asset and liability accounts at March 31, 2011 and December 31, 2010 were translated at 6.5601 RMB to $1.00 and at 6.6118 RMB to $1.00, respectively. Equity accounts were stated at their historical rate. The average translation rates applied to the statements of income for the three months ended March 31, 2011 and 2010 were 6.5804 RMB and 6.77875 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

Accumulated other comprehensive income

Recent Accounting Pronouncements

In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements.” This ASU changes the accounting model for revenue arrangements that include both tangible products and software elements that are “essential to the functionality,” and scopes these products out of current software revenue guidance. The new guidance will include factors to help companies determine what software elements are considered “essential to the functionality.” The amendments will now subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple-deliverables. The amendments in this ASU are effective prospectively for revenue arrangements entered into or materially modified in the fiscal years beginning on or after June 15, 2010. The adoption of the new ASU did not have any important impact on the Company’s consolidated financial statements.

In April 2010, the 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 - a consensus of the FASB Emerging Issues Task Force. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. We do not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company.

In December 2010, FASB issued Accounting Standards Update (ASU) No. 2010-29, Business Combinations (ASC Topic 805). The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also improve the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination(s). The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. As we did not enter into any business combinations in fiscal year 2010, we believe that the adoption this update will not have any material impact on our financial statement disclosures. However, if we enter into material business combinations in the future, the adoption of this update may have significant impact on our financial statement disclosures.

RESULTS OF OPERATIONS

Comparison of Results of Operations for the Three Months ended March 31, 2011 and 2010

The following tables set forth key components of our results of operations for the years indicated, in dollars, and key components of our revenue for the years indicated, in dollars. The discussion following the table is based on these results.

	For the Three Months Ended March 31,
	2011			2010
NET REVENUES	$	51,232,125		$	43,201,052
COST OF SALES		33,555,083			30,064,963
GROSS PROFIT		17,677,042			13,136,089
OPERATING EXPENSES:
Selling		169,017			172,186
Research and development		-			73,142
General and administrative		524,289			518,128
Total Operating Expenses		693,306			763,456
INCOME FROM OPERATIONS		16,983,736			12,372,633
OTHER INCOME (EXPENSE):
Interest income		55,485			24,841
Interest expense		-			-
Loss from foreign currency		(1,481	)		-
Total Other Income (Expense)		54,004			24,841
INCOME BEFORE INCOME TAXES		17,037,740			12,397,474
(PROVISION FOR) BENEFIT FROM INCOME TAXES
Current		(4,267,245	)		(3,117,051	)
Deferred		(15,503	)		(14,924	)
TOTAL PROVISION FOR INCOME TAXES		(4,282,748	)		(3,131,975	)
NET INCOME	$	12,754,992		$	9,265,499
COMPREHENSIVE INCOME:
NET INCOME	$	12,754,992		$	9,265,499
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation gain		718,791			784

COMPREHENSIVE INCOME	$	13,473,783		$	9,266,283

Revenues. For the three months ended March 31, 2011 and 2010, revenue and changes for each product line is summarized as follows:

	2011		2010
Laiyang pear juice concentrate	$	48,728,065	$	43,184,787
Bio animal feed		2,504,060		-
Other		-		16,265

Total net revenues	$	51,232,125	$	43,201,052

During the first quarter of 2011, we continued to see strong demand for our Laiyang Pear juice concentrate products. Laiyang Pear is a trademark that has been registered by an entity affiliated with the Laiyang city government, and we have been granted a license to use this trademark through 2038. In January 2008, the Laiyang government issued a government letter, which indicated that we can enjoy the status as the sole producer of Laiyang Pear juice concentrate for a period of 30 years. Pursuant to this government letter, during this period, no other producer will be permitted to enter into the Laiyang Pear juice concentrate business. During the three months ended March 31, 2011 (“the 2011 period”), our revenues from Laiyang Pear juice concentrate increased by 12.8% as compared to the 2010 period (“the 2010 period”) with the Laiyang Pear juice concentrate increased revenue attributable to an increase in volume. Revenues from Laiyang Pear juice concentrate have increased due to increasing market demands from the pharmaceutical and health supplement products in which Laiyang Pear juice concentrate is used for its nutritional content. Our business is highly seasonal, reflecting the harvest season of our primary source fruits, the Laiyang Pear, during the months from September through the following February. We produce fruit juice concentrate and store it in cold storage until it is sold. Typically, a substantial portion of our revenues are earned during our first, third and fourth quarters. We generally experience lower revenues during our second quarter. Our inventory levels increase during the third and fourth quarter of the year and decrease substantially in the first quarter of the year. Generally we sell the remaining inventory balances during the first quarter of the year and experience a significant decrease in inventory during this quarter. We have not experienced a shortfall in working capital during our production period and we have sufficient working capital on hand to secure our raw materials. If we experience a bad harvest season due to weather or other situation that we cannot control, we would have a shortage of primary raw material and we would experience a substantial decrease in our revenues. Currently, there are no known trends or uncertainties that may have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.

The increase in revenues from the sale of bio animal feed was attributable to the completion of our bio animal feed production line in October 2010. We did not produce or sell bio animal feed in the 2010 period.

The production of apple, strawberry and any other juice concentrates that we may produce is dependent upon the season and production requirements of our Laiyang Pear juice concentrate and may vary depending on the capacity of our limited production lines. Generally, we only produce apple and strawberry juice concentrate when we are not producing Laiyang Pear juice concentrate.

Cost of revenues. Cost of revenues increased by $3,490,120, or 11.6%, from $30,064,963 for the 2010 period to $33,555,083 for the 2011 period and was attributable to the increase in our net revenue.

Gross profit and gross margin. For the three months ended March 31, 2011 and 2010, gross profit amounted to $17,677,042 and $13,136,089 representing gross margins of 34.5% and 30.4%, respectively.

Gross margin percentages by product line are as follows:

	For the Three Months ended March 31, 2011			For the Three Months ended March 31, 2010
Laiyang Pear juice concentrate		32.3	%		30.4	%
Bio animal feed		81.0	%		-
Other		-			100.0	%
Overall gross profit %		34.5	%		30.4	%

For the 2011 period, the increase in gross margin percentages related to Laiyang Pear juice concentrate was from 30.4% in the 2010 period to 32.3% in the 2011 period and was mainly attributed to a reduction in raw materials costs. In the fourth quarter of 2010, we began to use Laiyang pears from our orchards and spent less on pears.

Gross margin percentages related to the sale of bio animal feed was 81.0% for the 2011 period. We began producing and selling bio animal feed in the fourth quarter of 2010. We did not sell bio animal feed in 2010 period. We are able to recognize a high gross margin from the sale of bio animal feed since we use waste from the production of Laiyang Pear juice concentrate as our main raw material in the production of the bio animal feed.

Gross margin percentages can vary from period to period based on the price of raw materials such as Laiyang pears and strawberries and can also fluctuate based on market conditions such as demand and selling price. We expect gross margins to improve as we become more efficient and since we have begun using Laiyang Pears produced on our pear orchards that we have rights to use for a period of 30 years.

Selling expenses. For the three months ended March 31, 2011 and 2010, selling expenses consisted of the following:

	2011		2010
Compensation and related benefits	$	143,994	$	135,178
Shipping and handling		25,023		22,380
Advertising		-		14,628

Total	$	169,017	$	172,186

For the 2011 period, compensation and related benefits increased by $8,816 or 6.5% as compared to the 2010 comparable period primarily due to an increase in commissions paid on increased revenues. We expect commission to increase proportionally when sales increase.

	·	For the 2011 period, we had slight increase in shipping and handling expenses of $2.643 as compared to the 2010 period. In the 2011 and 2010 periods, shipping and handling expenses were substantially paid by our customers.

	·	For the 2010 period, advertising expense amounted to $14,628. We did not have corresponding expenses in the 2011 period. Accordingly, advertising expenses decreased.

Research and development expenses. For the 2011 period, research and development expenses amounted to $0 as compared to $73,142 for the 2010 period. The change was primarily attributable to the timing of services performed pursuant to research and development contracts. On March 1, 2010, we entered into a cooperative R&D contract with the Preclinical Medicine Research Laboratory of Shandong Medicine Academy to develop the applications of immunoregulation and antitumor effects of Laiyang Pear juice concentrate. This R&D project is expected to be completed by early 2012 and the total cost of the project is $732,500 of which we have spent $147,520. In future periods, we expect research and development expenses to fluctuate depending on the nature, timing and costs of third party research and development contracts.

General and administrative expenses. For the three months ended March 31, 2011 and 2010, general and administrative expenses consisted of the following:

	2011		2010
Compensation and related benefits	$	195,786	$	130,687
Professional fees		92,029		62,685
Depreciation		61,124		52,420
Amortization of land use rights		8,649		137,035
Other		166,701		135,301

Total	$	524,289	$	518,128

	·	For the 2011 period, compensation and related benefits increased by $65,099 or 49.8% as compared to same period in 2010. During 2010, we hired our chief financial officer, other administrative and professional staff, and our directors in connection with becoming a public company. We did not have director’s fees and certain other professional staff in the 2010 period.

	·	For the 2011 period, professional fees consisting of legal fees, accounting fees, internal control consulting services and other fees associated with being a public company, increased by $29,344 or 46.8% as compared to the same period in 2010. We became public in the fourth quarter of 2009. In the 2011 period, we incurred fees in connection with internal control procedures as well as additional due diligence consulting fees.

	·	For the 2011 period, depreciation expense increased by $8,704 or 16.6% as compared to the same period in 2010.

In the 2011 period, amortization of land use rights decreased as compared to the 2010 period. Through September 30, 2010, the pear orchards on this land did not produce any pears. Accordingly, for the 2010 period, we included the amortization of the respective land use rights in general and administrative expenses. Effective on October 1, 2010, upon the use of pears from the orchards in the production process, we reflected a portion of amortization of these land use rights in cost of revenues. In 2011, all of the amortization of land use rights related to the pear orchards was reflected in cost of revenues.

Other general and administrative expenses which consist of entertainment, utilities, office maintenance, travel expenses, pension, miscellaneous taxes, office supplies, filing fees and telephone increased by $31,400 or 23.2% for the 2011 period as compared with the same period in 2010. The increase was primarily attributable to an increase in utilities related to our new facility of $16,375 and an increase in travel, local accommodation fees, meals and entertainment of $11,677 related to meetings, local hotel and meal expenses incurred in connection with visiting professionals.

Income from operations. For the 2011 period, income from operations was $16,983,736 as compared to $12,372,633 for the 2010 period, an increase of $4,611,103 or 37.3%.

Other income (expenses). For the 2011 period, other income amounted to $54,004 as compared to $24,841 for the 2010 period. For the periods presented, other income (expense) primarily included the following:

For the 2011 and 2010period, interest income amounted to $55,485 and $24,841, respectively, and related to funds in interest bearing accounts.

Income tax expense. For the 2011 period, income tax expense increased by $1,150,773, or 36.7%, as compared to the comparable period in 2010 which was primarily attributed to an increase in taxable income generated by our operating entities.

Net income. As a result of the factors described above, our net income for the 2011 period was $12,754,992, or $0.46 per ordinary share (basic and diluted). For the 2010 period, we had net income of $9,265,499, or $0.34 per ordinary share (basic and diluted).

Foreign currency translation gain. The functional currency of our subsidiaries operating in the PRC is the Chinese Yuan or Renminbi (“RMB”). The financial statements of our subsidiaries are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of these translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $718,791 and $784 for the 2011 and 2010 periods, respectively. This non-cash gain had the effect of increasing our reported comprehensive income.

Comprehensive income. For the 2011 period, comprehensive income of $13,473,783 is derived from the sum of our net income of $12,754,992 plus foreign currency translation gains of $718,791.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2011, our balance of cash and cash equivalents was $69,299,239, comparing to $47,670,666 as of December 31, 2010. These funds were located in financial institutions located in China.

Our primary uses of cash have been for the construction of our new factory and warehouse facility and for the purchase of equipment for the new productions lines as discussed below. Additionally, we use cash for employee compensation, new product development and working capital. All funds received have been expended in the furtherance of growing the business and establishing brand portfolios. The following trends are reasonably likely to result in a decrease in our liquidity over the near to long term:

An increase in working capital requirements to finance higher level of inventories,

Addition of administrative and sales personnel as the business grows,

Increases in advertising, public relations and sales promotions for existing and new brands as the company expands within existing markets or enters new markets,

Development of new products in the bio-animal feed industry to complement our current products,

The cost of being a public company and the continued increase in costs due to governmental compliance activities, and

Capital expenditures to add production lines and cold storage facilities.

In September 2010, we added two new production lines: one for the processing of juice concentrate and puree products and one for the processing of bio animal feed as a byproduct of Laiyang Pear juice concentrate and fruit puree products to further diversify our product mix and increase our revenues. We incurred approximately $10,700,000 in costs in connection with the addition of these two production lines. We began using both of these new production lines - one for the processing of juice concentrate and puree products and one for the processing of bio animal feed in September 2010 to produce test and sample batches of product. We began generating revenues from the new production lines in the fourth quarter of 2010. The offering proceeds from the November 2009 private placement, along with the proceeds from operations, were used to fund the above production lines expansion. We currently plan on using net cash provided by operating activities to fund our internal growth and fund an expansion of our distribution channels. In addition to the new productions lines discussed above, we intend to raise additional funds in the near future for two additional production lines: one for the processing of juice concentrate and puree products and one for the processing of bio animal feed. We estimated that these two new production lines will cost approximately $20,000,000 and will be paid for from working capital funds and funds from future financing. However there are no assurances that we will be able to raise additional funds in the near future. Additionally, in connection with the construction of our new production and storage facility, during 2010, we obtained certain land use certificates to use the underlying land. In connection with the use of this land use right, we are still negotiating the amount that we will pay for the land use right. We have estimated that we will be required to pay approximately $7,900,000 prior to the third quarter of 2011 to obtain the respective land use right certificate.

Changes in our working capital position are summarized as follows:

	March 31,			December 31,			Increase
	2011			2010			(Decrease)
Current assets	$	73,507,148		$	65,129,410		$	8,377,738
Current liabilities		(8,242,247	)		(13,685,566	)		5,443,319
Working capital	$	65,264,901		$	51,443,844		$	13,821,057

Our working capital increased $13,821,057 to $65,264,901 at March 31, 2011 from working capital of $51,443,844 at December 31, 2010. This increase in working capital is primarily attributable to an increase in cash and restricted cash of $21,628,573 generated from operations, a decrease in accounts payable of $397,115, a decrease in accrued expenses of $807,983, and a decrease in incomes taxes payable of $4,204,185 offset by a decrease in restricted cash of $170,183, a decrease in inventories of $12,685,705 due the sale of remaining inventories caused by seasonality as discussed below and a decrease in prepaid VAT on purchases of $446,677.

Our business is highly seasonal, reflecting the harvest season of our primary source fruits during the months from September through February of the following year. Typically, a substantial portion of our revenues are earned during our first, third and fourth quarters. We generally experience lower revenues during our second quarter. Our inventory levels increase during the third and fourth quarter of the year and decrease substantially in the first quarter of the year. Generally, we pay our suppliers during the third and fourth quarters. The impact from the use of cash to secure raw materials and for production during these quarters is lessened by the receipt of cash upon delivery of our products during the production period. Generally we sell the remaining inventory balances during the first quarter on the year and experience a significant decrease in inventory during this quarter. We have not experienced a shortfall in working capital during our production period and we have sufficient working capital on hand to secure our raw materials.

Generally, we receive payment from our customers immediately upon delivery of our products. We have been able to collect our accounts receivable balances at or near the time of delivery. Accordingly, as of March 31, 2010 and December 31, 2010, we had no accounts receivable. In the future, we expect to continue to collect payments in advance of delivery.

Cash flows from the Company's operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.

The following summarizes the key components of the Company’s cash flows for the three months ended March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011			2010
Net cash provided by operating activities	$	21,054,611		$	20,674,974
Cash flows used in investing activities	$	(30,663	)	$	(1,908,093	)
Cash flows provided by (used in) financing activities	$	170,183		$	1,556,265
Effect of exchange rate on cash	$	434,442		$	2,375
Net increase (decrease) in cash and cash equivalents	$	21,628,573		$	20,325,521

Net cash flow provided by operating activities was $21,054,611 for the 2011 period as compared to $20,674,974 for the 2010 period, a decrease of $379,637.

Net cash flow provided by operating activities for the 2011 period was mainly due to:

net income of $12,754,992 adjusted for the add back of non-cash items such as depreciation of $496,958, the amortization of land use rights of $142,358, stock-based compensation of $6,000, and deferred income taxes of $15,503, and

Changes in operating assets and liabilities consisting primarily of:

a decrease in inventories of 12,774,159 attributable to the seasonality factors described above,

a decrease in prepaid VAT on purchases of $448,808

offset by

a decrease in accounts payable of $426,828,

a decrease in accrued expenses of $813,784,

a decrease in income taxes payable of $4,258,071 due to the payment of 2010 incomes taxes.

Net cash flow provided by operating activities for the 2010 period consisted of

net income of $9,265,499 adjusted for the add back of non-cash items such as $237,313 of depreciation, the amortization of land use rights of $137,035, and deferred income taxes of $14,924, and

Changes in operating assets and liabilities consisting of

a decrease in inventories of $13,267,660,

a decrease in prepaid VAT on purchases of $82,329,

an increase in accounts payable of $18,137,

offset by

a decrease in income taxes payable of $1,899,414, and

a decrease in accrued expenses of $592,542.

Net cash flow used in investing activities was $30,663 for the 2011 period as compared to net cash used in investing activities of $1,908,093 for the 2010 period. During the 2011 and 2010 periods, we used cash towards the construction of our new manufacturing facility and for the purchase of property and equipment for our new production lines.

During the 2011 period, we received operating cash from our restricted cash held in escrow of $170,183. During the 2010 period, we received operating cash from our restricted cash held in escrow of $1,556,265.

We currently generate cash flow from our operating activities which we believe will be sufficient to sustain current level of operations for at least the next twelve months.

2009 Offering

On October 22, 2009, pursuant to a subscription agreement (the “Subscription Agreement”) between the Company and certain investors named in the Subscription Agreement, we completed an offering of the sales of investment units for gross proceeds of $15,096,011, each unit consisting of 50,000 ordinary shares, par value $0.001 per share and five-year warrants to purchase 25,000 ordinary shares of the Company, at an exercise price of $6.00 per share. Additionally, on November 2, 2009, we entered into and closed on the second and final round of a private placement by raising gross proceeds of $1,915,003 through the sale of units pursuant to the Subscription Agreement. Together with the first closing on October 22, 2009, we raised aggregate gross proceeds of $17,011,014 from the financing, and issued 5,670,339 ordinary shares and 2,835,177 warrants.

Additionally, our majority shareholder, Proud Glory Limited, of which our chief executive officer and director Mr. Zhide Jiang is the managing director, entered into a lock-up agreement with the Company whereby Proud Glory Limited agreed it will not, offer, pledge, sell or otherwise dispose of any ordinary shares or any securities convertible into or exercisable or exchangeable for ordinary shares during the period beginning on and including the date of the final closing of the financing for a period of eighteen (18) months.

Pursuant to an investor relations escrow agreement, amongst us, Grandview Capital, Inc. (“Grandview”), Access America Investments, LLC (“Access America”) and Anslow & Jaclin, LLP as escrow agent, dated October 22, 2009 (the “Investor Relations Escrow Agreement”); we placed a total of $120,000 in an escrow account with our counsel to be used for the payment of investor relation fees. Additionally, pursuant to a going public escrow agreement, amongst us, Grandview, Access America and Anslow & Jaclin, LLP as escrow agent, dated October 22, 2009 (the “Going Public Escrow Agreement”), we placed a total of $1,000,000 from the offering proceeds with our counsel to be used for the payment of fees and expenses related to becoming a public company and listing its ordinary shares on a senior exchange. Pursuant to each of the Investor Relations Escrow Agreement and Going Public Escrow Agreement, in the event that the proceeds of such escrow accounts have not been fully distributed within two years from the date thereof, the balance of such escrow proceeds shall be returned to us. At March 31, 2011, we had restricted cash held in escrow of $505,473.

Contractual Obligations

The following tables summarize our contractual obligations as of March 31, 2011 and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

	Payments Due by Period
	Total			Less than 1 year			1-3 Years			3-5 Years			5 Years +
Contractual Obligations :
Land use rights acquisition (1)		$	7,900,000			7,900,000			-			-			-
Equipment purchase payments due (2)			2,854,000			2,854,000			-			-			-
Total Contractual Obligations:		$	10,754,000		$	10,754,000		$	-		$	-		$	-

(1)

In connection with the construction of our new production and storage facility, during 2010, we obtained certain land use certificates to use the underlying land. In connection with the use of this land use right, we are still negotiating the amount that we will pay for the land use right. We have estimated that we will be required to pay approximately $7,900,000 prior to the third quarter of 2011 to obtain the respective land use right certificate.

(2)

Represents amounts due for equipment acquired and installed at March 31, 2011 which is included in accounts payable.

OFF-BALANCE SHEET ARRANGEMENTS

There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

Changes in interest rates may affect the interest paid (or earned) and therefore affect our cash flows and results of operations. However, we do not believe that this interest rate change risk is significant.

Inflation

Inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the consumer price index in China rose 4.8% and 5.9% in 2007 and 2008, respectively, and decreased by 0.7% in 2009. In September 2010, the consumer price index increased by 2.9% as compared to September 2009. Although we have not in the past been materially affected by inflation, we may be affected in the future by higher rates of inflation in China. For example, certain operating costs and expenses, such as personnel expenses, travel expenses and office operating expenses may increase as a result of higher inflation. Additionally, because a substantial portion of our assets consists of cash and cash equivalents, high inflation could significantly reduce the value and purchasing power of these assets. Inflation has not had a material impact on the Company’s business for the Company’s three most recent fiscal years.

Currency Exchange Fluctuations

All of the Company’s revenues are denominated in Chinese Renminbi, while its expenses are denominated primarily in Chinese Renminbi (“RMB”). The value of the RMB-to-U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Since 1994, the conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China (“PBOC”), which are set daily based on the previous day’s inter-bank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate for the conversion of Renminbi to U.S. dollars had generally been stable and the Renminbi had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. Recently there has been increased political pressure on the Chinese government to decouple the Renminbi from the United States dollar. At the recent quarterly regular meeting of PBOC, its Currency Policy Committee affirmed the effects of the reform on Chinese Renminbi exchange rate. Since February 2006, the new currency rate system has been operated; the currency rate of Renminbi has become more flexible while basically maintaining stable and the expectation for a larger appreciation range is shrinking. The Company has never engaged in currency hedging operations and has no present intention to do so.

Country Risk

A substantial portion of our assets and operations are located and conducted in China. While the PRC economy has experienced significant growth in the past twenty years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China, but may also have a negative effect on us. For example, our operating results and financial condition may be adversely affected by government control over capital investments or changes in tax regulations applicable to us. If there are any changes in any policies by the Chinese government and our business is negatively affected as a result, then our financial results, including our ability to generate revenue and profits, will also be negatively affected.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective as of March 31, 2011 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in our system of internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS

	None.

ITEM 1A.	RISK FACTORS

	There are no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March 31, 2011.

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

	None.

ITEM 6.

EXHIBITS

31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Principal Executive Officer and Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.

	ORIENTAL DRAGON CORPORATION

Date: May 16, 2011	By:	/s/ Zhide Jiang
		Zhide Jiang
		President, Chief Executive Officer and Chairman of the Board of Directors

Date: May 16, 2011	By:	/s/ Adam Wasserman
		Adam Wasserman
		Chief Financial Officer (Principal Financial and Accounting Officer)

Oriental Dragon Corp - FORM 10-Q - May 16, 2011

Attached files

Oriental Dragon Corp Reports