LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations and otherwise operate on
an ongoing basis. The following table provides certain selected balance sheet
comparisons between March 31, 2007 (unaudited) and June 30, 2006 (audited):
MARCH 31, 2007
(UNAUDITED) JUNE 30, 2006 $ CHANGE
-------------- ------------- -----------
Working capital ........................ $ 2,997,518 $ 558,414 $ 2,439,104
Cash ................................... $ 205,048 $ 466,272 ($ 261,224)
Accounts receivable, net ............... 4,067,442 4,938,985 (871,543)
Inventories ............................ 4,164,245 3,293,846 870,399
Advances on purchases .................. 2,747,672 805,662 1,942,010
Prepaid expenses and other ............. 518,353 466,080 52,273
Due from related parties ............... 0 3,498 (3,498)
Total current assets ................... 11,702,760 9,974,343 1,728,417
Cash-restricted ........................ 258,368 262,287 (3,919)
Property and equipment, net ............ 2,505,647 2,132,697 372,950
Land use rights, net ................... 2,568,615 2,524,568 44,047
Intangible assets, net ................. 331,048 393,928 (62,880)
----------- ----------- -----------
Total Assets ........................... 17,366,438 15,287,823 2,078,615
----------- ----------- -----------
Notes payable - current portion ........ 2,580,331 2,762,207 (181,876)
Accounts payable ....................... 5,877,086 3,401,439 2,475,647
Accrued expenses ....................... 238,574 2,042,113 (1,803,539)
Advances from customers ................ 9,251 68,694 (59,443)
Liability in connection with acquisition 0 1,141,476 (1,141,476)
Total current liabilities .............. 8,705,242 9,415,929 (710,687)
Notes payable - long-term portion ...... 48,000 0 48,000
----------- ----------- -----------
Total Liabilities ...................... $ 8,753,242 $ 9,415,929 ($ 662,687)
----------- ----------- -----------
At March 31, 2007, we held cash and cash equivalents of $205,048 and
working capital of $2,997,518, as compared to cash and cash equivalents of
$466,272 and working capital of $558,414 at June 30, 2006. At March 31, 2007,
our cash position by geographic area is as follows:
United States $ 8,929
China ....... 196,119
--------
Total ....... $205,048
========
In addition to our increase in working capital of $2,439,104, our
current assets increased approximately $1,728,417 from June 30, 2006 to March
31, 2007. This increase was offset by decreases in total current liabilities of
approximately $710,687 at March 31, 2007 as compared to June 30, 2006. The
decrease in our current liabilities is primarily attributable to an increase in
accounts payable of $2,475,647 which were offset by a decrease in accrued
expenses of $1,803,539 and a decrease in liabilities of $1,141,476 in connection
with the acquisition of JinKui in June 2006.
-26-
At March 31, 2007 changes in our total assets are as follows:
* an increase of $870,399 in inventories. At March 31, 2007, our
inventories of raw materials and finished goods amounted to $4,164,245, as
compared to inventories of $3,293,846, representing an increase of approximately
26.4%, from June 30, 2006. The increase in inventory levels is primarily
attributable to products associated with our JinKui acquisition. JinKui has
increased inventory levels in anticipation of increased demand for its products
during the fourth quarter.
* an increase of $1,942,010 in advances on purchases. At March 31, 2007,
our advances on purchases amounted to $2,747,672 as compared to $805,662 at June
30, 2006. The primary causes for the increase in our advances on purchases is
associated with payments of $243,792 related to construction materials for our
new facilities which was recently completed, and a down payment of $2,100,789 on
products related to our services as an agent of pulp and paper goods. Ningbo
Dragon pays a 30% deposit on certain goods distributed by Ningbo Dragon. This
advance reflects the deposit on goods which have not yet been received.
* an increase in prepaid expenses of $52,273. At March 31, 2007 our
prepaid expenses were $518,353 as compared to $466,080 at June 30, 2006.
* an increase of $372,950 in property and equipment, net of accumulated
deprecation. At March 31, 2007 we reflected property and equipment, net of
accumulated depreciation of $2,505,647 as compared to $2,132,697 at June 30,
2006. This increase is related to the increased value of our property as a
result of our new facility.
These increases were offset by the following;
* a decrease of $871,543 in accounts receivable. At March 31, 2007 our
accounts receivable, were $4,067,442, as compared to $4,938,985 at June 30,
2006. This decrease is associated with a decrease in revenues for the three
months ended March 31, 2007. As is customary in the PRC, we extend relatively
long payment terms to our customers. Our terms of sale generally require payment
within 120 days, which is considerably longer than customary terms offered in
the United States, however, we believe that our terms of sale are customary
amongst our competitors for a company of our size within our industry and
recently we have been collecting our accounts receivable on a timely basis.
* a decrease of $3,498 in due from related parties. At March 31, 2007 due
from related parties was $0 as compared to $3,498 at June 30, 2006. This
decrease is due the satisfaction of amounts due from related parties during the
nine months ended March 31, 2007.
* a decrease of $3,919 in restricted cash. At March 31, 2007 restricted
cash was $258,368 as compared to $262,287 at June 30, 2006. This decrease in our
restricted cash is attributable to letters of credit outstanding. The decrease
represents normal business fluctuations in the amount of letters of credit the
company has outstanding at any given date.
* a decrease of $44,047 in land use rights, net of accumulated
amortization. At March 31, 2007 land use rights net of accumulated amortization
was $2,568,615 as compared to $2,524,568 at June 30, 2006.
* a decrease of $62,880 of intangible assets, net of accumulated
depreciation. At March 31, 2007 we reflected intangible assets, net of
accumulated depreciation of $331,048 as compared to $393,928 at June 30, 2006.
As a result of the foregoing, our total assets increased $2,078,615 at
March 31, 2007 from June 30, 2006.
-27-
Our total liabilities at March 31, 2007 decreased $662,687 from June
30, 2006. Principal changes in our total liabilities at March 31, 2007 from June
30, 2006 include the following;
* an increase of $2,475,647 in accounts payable. At March 31, 2007
accounts payable was $5,877,086 as compared to $3,401,439 at June 30, 2006.
These increases were offset by the following:
* a decrease of $181,876 in notes payable-current portion. At March 31,
2007 notes payable-current portion were $2,580,331 as compared to $2,762,207 at
June 30, 2006. This decrease in notes payable long term was offset by an
increase of $48,000 in notes payable-long term. At March 31, 2007 notes
payable-long term were $48,000 as compared to $0 at June 30, 2006. Our notes
payable is described in Note 5-Notes Payable to the consolidated financial
statements appearing elsewhere in this quarterly report.
* a decrease of $1,803,539 in accrued expenses. At March 31, 2007 accrued
expenses were $238,574 as compared to $2,042,113 at June 30, 2006.
* a decrease of $59,443 in advances from customers. At March 31, 2007
advances from customers were $ $9,251 as compared to $68,694 at June 30, 2006.
Advances from customers decreased as a result of our decrease in revenues during
the nine months ended March 31, 2007.
* a decrease of $1,141,476 in liabilities associated with the acquisition
of JinKui. This liability associated with acquisition are related to JinKui.
During the nine months ended March 31, 2007, Dragon Nevada has satisfied this
liability. On October 30, 2006 Dragon Nevada issued 8,095,574 shares of common
stock with a fair value of $1,141,,476 to JinKui. At March 31, 2007 liabilities
associated with acquisitions were $0 as compared to $1,141,476 at June 30, 2006.
As a result of the foregoing, our total assets increased $2,078,615 at
March 31, 2007 from June 30, 2006.
For the nine months ended March 31, 2007 our cash decreased to $205,048
from $466,272 at June 30, 2006 a decrease of $261,224 or approximately 56%. This
decrease consisted of total cash used in operating activities of $576,542; net
cash used in investing activities of $937,473; and net cash flow provided by
financing activities of $1,203,124, and the effect of exchange rates on cash of
$49,667.
Net cash used in operating activities for the nine months ended March
31, 2007 was $576,542 as compared to net cash used in operating activities of
$603,962 for the nine months ended March 31, 2006. For the nine months ended
March 31, 2007, we used cash to fund increases in inventories of $870,399, a
decrease in advances from customers of $59,443, increases in advances on
purchases of $1,942,010, and increases in accrued expenses of $1,803,539. The
decreases were offset by a net decrease in prepaid and other current assets of
$410,429, a decrease in accounts receivables of $890,249, an increase in
accounts payable of $2,475,647, and a decrease in other assets of $78,759. These
items, combined with a net increase of non-cash items of $535,205 were offset by
our net loss during the nine month period ended March 31, 2007.
In comparison for the nine months ended March 31, 2006, we used cash to
fund an increase in accounts receivables and advances on purchases, the
reduction in accrued expenses and advances from customers. The decreases were
offset by an increase in accounts payable of $852,332. These items, combined
with a net addition of our non-cash items of $3,579,334 were offset by our net
loss during the nine month period ended March 31, 2006.
-28-
Net cash used in investing activities during the nine months ended
March 31, 2007 was $940,971 as compared to net cash provided by investing
activities of $11,966 for the nine months ended March 31, 2006. During the nine
months ended March 31, 2007, we used cash for capital expenditures of $533,405
of which $465,022 was used to purchase equipment for our new manufacturing
facility. During the nine months ended March 31, 2007 we increased our notes
receivable by $420,484. Our notes payable is described in Note 5-Notes Payable
to the consolidated financial statements appearing elsewhere in this quarterly
report. We decreased our restricted cash balance by $12,918 to collateralize
certain debt, ($3,919 decrease which was adjusted by $8,999 for the fluctuation
in the currency).
During the nine months ended March 31, 2006, net cash provided by
investing activities was $11,966 which was comprised of net cash used for
capital expenditures of $389,594, which was offset by cash of $33,654 acquired
in the acquisition of Yongxin in August 2005, $23,000, and a restricted cash
balance of $367,906 to collateralize certain debt.
Ningbo Dragon has invested approximately $1,300,000 to construct a new
facility. The Company recently completed construction on the new facility
located at No. 201 Guangyuan Road, Investment Pioneering Park, Jiangbei
District, Ningbo, 315033.
This facility consists of a total of 91,000 square feet consisting of
approximately 20,000 square feet of office space, approximately 17,000 square
feet of warehouse space; approximately 40,000 square feet for manufacturing, and
approximately 14,400 square feet utilized as a dormitory for employees of the
Company.
Net cash provided by financing activities during the nine months ended
March 31, 2007 was $1,206,622, as compared to net cash provided by financing
activities of $725,022 during the nine months ended March 31, 2006. During the
nine months ended March 31, 2007, we received gross proceeds of $1,944,355 from
notes payable offset by the satisfaction of notes payable of $2,078,231. On
October 30, 2006, the Company received gross proceeds of $100,000 from the sale
of 2,000,000 shares of common stock to H.K. Mingtai Investment Co., Ltd., a
financial institution in China. The company also received net proceeds of
$1,301,000 from the sale of 16,666,672 shares of its common stock, and common
stock purchase warrants to purchase 16,666,672 shares of common stock
exercisable at $.125 per share for a period of five years and common stock
purchase warrants to purchase 8,333,340 shares of common stock exercisable at
$.15 per share for a period of five years. The company received $1,000 for
exercise of common stock purchase warrants.
From time to time, we need additional working capital for our
operations. In 2006, Yonglongxin borrowed money pursuant to several lines of
credit that we have established with two separate banks. We renewed pre-existing
loans of $1,944,355 from the Bank of Agriculture with 6 to 12 month terms from
November 2006 to November 2007, with an annual interest rate ranging from 6.138%
to 7.344%. We repaid loans of $62,450 to Ningbo Commercial Bank (Tianyuan
Branch) and $620,083 to Bank of Agriculture during the nine months ended March
31, 2007. All loans are renewable when they mature. We expect to generate
sufficient cash flows from financing and operations to meet our debt services.
We do not anticipate these loans will have material impact on our liquidity. We
are current on all payments relating to these loans and expect to renew the
loans upon maturity at terms and at interest rates comparable to our current
loans.
-29-
OFF BALANCE SHEET ARRANGEMENTS
As of the date of this report, we do not have any off-balance sheet
arrangements that we are likely to have a current or future effect on our
financial condition material to our shareholders. In the ordinary course of
business, we enter into operating lease commitments, purchase commitments and
other contractual obligations. These transactions are recognized in our
financial statements in accordance with generally accepted accounting principles
in the United States.
RECENT CAPITAL RAISING TRANSACTIONS
JANUARY 2007 PRIVATE PLACEMENT
On January 30, 2007 the Company entered into a subscription agreement
(the "Subscription Agreement") and related agreements (collectively with the
Subscription Agreement, the "Agreements") for the purchase of $1,500,000 units
of securities. The Company entered into the Agreements with nine (9) accredited
investors (the "Investors") for an aggregate of $1,500,000 of financing of units
of its securities consisting of 16,666,672 shares of common stock, common stock
purchase warrants to purchase 16,666,672 shares of common stock exercisable at
$.125 per share for a period of five years, and common stock purchase warrants
to purchase 8,333,340 shares of common stock at an exercise price of $.15 per
share for a period of five years.
The January 2007 Private Placement was conducted in two phases. On
January 30, 2007, the Company completed an initial closing (the "Initial
Closing") of $750,000 of units of securities consisting of 8,333,336 shares of
common stock, common stock purchase warrants to purchase 8,333,336 shares of
common stock exercisable at $.125 per share for a period of five years, and
common stock purchase warrants to purchase 4,166,670 shares of common stock
shares of common stock exercisable at $.15 per share for a period of five years.
The second phase of the offering (the "Second Closing") was held on
February 27, 2007 for an additional $750,000 financing of units of its
securities consisting of 8,333,336 shares of common stock, common stock purchase
warrants to purchase 8,333,336 shares of common stock exercisable at $.125 per
share for a period of five years and common stock purchase warrants to purchase
4,166,670 shares of common stock shares of common stock exercisable at $.15 per
share for a period of five years. The Second Closing was conditioned upon
Wellton International Fiber Corp. engaging an SEC approved auditor to prepare
certain financial statements. Wellton International Fiber Corp. engaged an SEC
approved auditor on February 22, 2007.
We paid a fee of $84,000 in cash to certain of the investors and issued
common stock purchase warrants to purchase an aggregate of 1,555,558 shares of
common stock exercisable at $.125 per share for a period of five years as a due
diligence fee related to the January 2007 Private Placement. The recipients of
the due diligence fee are as set forth below:
TOTAL DUE DILIGENCE FEES PAID
---------------------------------------------------
RECIPIENT CASH COMMON STOCK PURCHASE WARRANTS @$.125
- --------- -------- -------------------------------------
Libra Finance ........ $ 9,075 168,056
Osher Capital, LLC ... 32,175 595,834
Utica Advisors ....... 41,250 763,890
Robert Prager ........ 1,500 27,778
-------- ---------
Totals: .............. $ 84,000 1,555,558
-30-
We also paid Skyebanc, Inc. an NASD member and broker-dealer, a
finder's fee of $5,500 and issued common stock purchase warrants to purchase
111,112 shares of common stock at an exercise price of $.125 for a period of
five years.
We granted the purchasers a right of first refusal for a period of 24
months from the second closing date, February 27, 2007. In the event we should
offer to sell common stock, debt or other securities to a third party (except in
certain instances). The purchasers have the right to purchase the offered
securities upon the same terms and conditions as we offered the securities to a
third party. In addition, other than in the event of excepted issuances, during
the 24 month period from the effective date of the registration statement to be
filed in conjunction with this private placement so long as the purchasers still
own any of the shares sold in such offering, (including the shares underlying
the warrants), if we should issue any common stock or securities convertible
into or exercisable for shares of common stock at a price per share of common
stock or exercise price per share of common stock which is less than the
purchase price of the shares paid by the purchasers in the offering, or less
than the exercise price of the common stock purchaser warrants exercisable at
$.125 per share, without the consent of each purchaser, then the purchaser's
have the right to elect to retroactively substitute any term or terms of such
new offering in connection with which the purchaser has a right of first refusal
for any term or terms of this unit offering and adjustments will be made
accordingly.
Any subsequent adjustments in the exercise price of the common stock
purchase warrants will not result in additional shares of common stock of Dragon
Nevada being issued.
We agreed to file a registration statement covering the shares of
common stock underlying the securities issued. In the event the registration
statement is not filed within 75 days after February 27, 2007, and the
registration statement is not declared effective by July 27 2007, we will be
required to pay liquidated damages in an amount equal to 2% for each 30 days (or
such lesser pro-rata amount for any period of less than 30 days) of the purchase
price of the outstanding shares and exercise price of the warrant shares owned
of record by such holder which are subject to such non-registration event, but
not to exceed in the aggregate 12% of the aggregate purchase price or $180,000.
The transaction documents also provide for the payment of liquidated damages to
the investors in certain events, including our failure to maintain an effective
registration statement covering the resale of the common shares issuable upon
conversion or exercise of the securities.
We agreed not to file any registration statements without the consent
of the purchasers in the offering until the sooner of 24 months from the
effective date of the registration statement of which this prospectus is a part
or until all the shares, including the shares underlying the warrants, have been
resold or transferred by the purchasers pursuant to the registration statement
or Rule 144 of the Securities Act of 1933, without regard to volume limitations.
During this same exclusion period, we also agreed not to issue any equity,
convertible debt or other securities convertible into common stock or equity of
our company without the prior written consent of the purchasers.
ITEM 3. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
as of March 31, 2007, the end of the period covered by this quarterly report,
our management concluded its evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures.
-31-
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures will
prevent all error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. The design of any system of controls is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.
Disclosure controls and procedures and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time period specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 is accumulated and communicated to management including our
Chief Executive Officer and Chief Financial Officer as appropriate, to allow
timely decisions regarding required disclosure.
Based upon that evaluation, our company's Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were not effective because of the significant deficiency and the material
weakness described below. Measures are being taken to include documentation of
management oversight and review as part of the appropriate functional
procedures.
In our amended Annual Report on Form 10-KSB/A we restated our consolidated
balance sheet at June 30, 2006 and the consolidated statements of stockholders'
equity for the year ended June 30, 2006 as contained in the Annual Report on
Form 10-KSB for the year ended June 30, 2006 as previously filed with the
Securities and Exchange Commission.
The restatement was made in part to correct a clerical error related to the
classification of common stock to be issued in connection with the acquisition
of Shanghai JinKui Packaging Material Co., Ltd. (JinKui") on June 30, 2006. We
initially classified 8,095,574 shares of common stock, based on the fair value
of each share at $0.141 for a total of $1,141,476, as common stock issuable in
the stockholders' equity section of the initially issued balance sheet and
statements of stockholders' equity. We reclassified these common shares to be
issued as a liability in connection with the acquisition. We were aware of the
proper classification prior to the initial filing of our Form 10-KSB, but
deficiencies in financial statement reporting controls prevented this
misclassification from being corrected. As a result of this clerical error, we
have determined that there was a significant deficiency in our internal control
over financial reporting as of June 30, 2006 related to the treatment of common
stock to be issued in regards to the JinKui acquisition. We determined, however,
that this significant deficiency did not rise to the level of a material
weakness in our internal control over financial reporting. Because we have
corrected our presentation of the common stock to be issued, we believe that we
have corrected this significant deficiency.
-32-
All of our employees and accounting staff are located in the PRC and we do not
presently have a chief financial officer, comptroller or similarly titled senior
financial officer who is bilingual and experienced in the application of U.S.
Generally Accepted Accounting Principles. During fiscal 2006 we began a search
for an appropriate candidate who can fill such a position; however, as of March
31, 2007 have not engaged one and we are unable to predict when such a person
will be hired. During fiscal 2006 we also began providing additional training to
our accounting staff in the application of U.S. GAAP. As a result, our
management believes that a deficiency in our internal controls continues to
exist. Until we expand our staff to include a bilingual senior financial officer
who has the requisite experience necessary, and supplement the accounting
knowledge of our staff, it is likely that we will continue to have material
weaknesses in our disclosure controls and procedures.
Other than the items discussed above there have been no changes in our internal
control over financial reporting 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 30, 2007 (the "January 2007 initial Offering"), the Company completed
an initial $750,000 units of securities consisting of 8,333,336 shares of Common
Stock, common stock purchase warrants to purchase 8,333,336 shares of common
stock exercisable at a$.125 per share for a period of five years, and common
stock purchase warrants to purchase 4,166,670 shares of common stock exercisable
at $.15 per share for a period of five years.
On February 27, 2007 (the "January 2007 second Offering"), the Company completed
the sale of an additional $750,000 financing of units of its securities
consisting of 8,333,336 shares of Common Stock, common stock purchase warrants
to purchase 8,333,336 shares of common stock exercisable at a$.125 per share for
a period of five years, and common stock purchase warrants to purchase 4,166,670
shares of common stock exercisable at $.15 per share for a period of five years.
In total the Company sold $1,500,000 of units (net proceeds of $1,301,000) which
consisted of 16,666,672 shares of Common Stock, and common stock purchase
warrants to purchase 16,666,672 shares of common stock exercisable at $.125 per
share for a period of five years and common stock purchase warrants to purchase
8,333,340 shares of common stock exercisable at $.15 per share for a period of
five years. The Common Stock was purchased at a price of $.09 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-33-
ITEM 5. OTHER INFORMATION
Effective January 16, 2007, Dragon International Group Corp., a Nevada
corporation (the "Registrant") entered into an agreement ("Agreement") whereby
it agreed to purchase fifty one (51%) percent of the common stock (the "Common
Stock") of Wellton International Fiber Corp., a corporation organized under the
laws of the British Virgin Islands ("Wellton"). Wellton operates as an agent for
the distribution of pulp, and waste paper in China. In exchange for the fifty
one (51%) percent of Wellton, the Registrant agreed to pay a purchase price (the
"Purchase Price") equal to fifty one (51%) percent of the value of the audited
net tangible assets, as stated on the Wellton audited financial statements for
the period ending December 31, 2006. The Purchase price will be in the form of
common stock of Dragon Nevada and shall not exceed $1,500,000 in the aggregate.
The parties have mutually agreed to extend the closing until no later than
September 30, 2007.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
31.1 Rule 13a-14(a)/15d-14(a) certification of CEO
31.2 Rule 13a-14(a)/15d-14(a) certification of principal accounting officer
32.1 Section 1350 certification of CEO
32.2 Section 1350 certification of principal accounting officer
-34-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 18, 2007.
DRAGON INTERNATIONAL GROUP CORP.
By: /s/ David Wu
----------------
David Wu,
Chief Executive Officer,
(Principal Executive Officer)
-35-
