United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended December 31, 2005
Commission File Number: 0-23485
DRAGON INTERNATIONAL GROUP CORP.
--------------------------------
(Exact name of registrant as specified in its charter)
Nevada 98-0177646
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Bldg 14
Suite A09, International Trading Center,
29 Dongdu Road
Ningbo, China 315000
--------------------
(Address of principal executive offices)
(86) 574-56169308
-----------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes[x] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 58,463,799 shares at February 1,
2006.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [x]
CAUTIONARY STATEMENT REGARDING FOWARD LOOKING INFORMATION
This quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of
the Securities and Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, as amended. These forward-looking statements are
subject to risks and uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from the
results, performance or achievements expressed or implied by the forward-looking
statements. You should not unduly rely on these statements. Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts. They use words such as "anticipate," "estimate,"
"expect," "project," "intend," "plan," "believe," "project," "contemplate,"
"would," "should," "could," or "may." With respect to any forward-looking
statement that includes a statement of its underlying assumptions or bases, we
believe such assumptions or bases to be reasonable and have formed them in good
faith, assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material
depending on the circumstances. When, in any forward-looking statement, we
express an expectation or belief as to future results, that expectation or
belief is expressed in good faith and is believed to have a reasonable basis,
but there can be no assurance that the stated expectation or belief will result
or be achieved or accomplished. All subsequent written and oral forward-looking
statements attributable to us, or anyone acting on our behalf, are expressly
qualified in their entirety by the cautionary statements.
DRAGON INTERNATIONAL GROUP CORP.
FORM 10-QSB
QUARTERLY PERIOD ENDED DECEMBER 31, 2005
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet
December 31, 2005 (Unaudited)..................................... 3
Consolidated Statements of Operations (Unaudited)
For the Three and Six Months Ended December 31, 2005 and 2004..... 4
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended December 31, 2005 and 2004............... 5
Notes to Consolidated Financial Statements............................ 6-19
Item 2 - Management's Discussion and Analysis or Plan of Operation.... 20-29
Item 3 - Controls and Procedures...................................... 30
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................ 30
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.. 30
Item 3 - Default upon Senior Securities .............................. 30
Item 4 - Submission of Matters to a Vote of Security Holders.......... 30
Item 5 - Other Information............................................ 31
Item 6 - Exhibits..................................................... 31
Signatures............................................................ 32
-2-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2005
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 564,591
Cash - restricted 266,307
Accounts receivable (net of allowance for
doubtful accounts of $127,711) 4,767,101
Inventories 414,353
Advances on purchases 912,158
Other receivables 353,728
Prepaid expenses and other 41,928
------------
Total Current Assets 7,320,166
PROPERTY AND EQUIPMENT - Net 964,171
LAND USE RIGHTS - Net 2,530,861
DEFERRED DEBT ISSUANCE COSTS 242,396
GOODWILL 488,330
------------
Total Assets $ 11,545,924
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,500,476
Convertible debentures payable, net 382,934
Convertible notes payable 6,438
Accounts payable 1,793,239
Accrued expenses 1,698,122
------------
Total Current Liabilities 6,381,209
CONVERTIBLE DEBENTURES PAYABLE, net 284,029
------------
Total Liabilities 6,665,238
------------
MINORITY INTEREST 17,988
------------
STOCKHOLDERS' EQUITY:
Preferred stock ($.001 Par Value; 25,000,000
Shares Authorized; No shares
issued and outstanding) --
Common stock ($.001 Par Value; 200,000,000
Shares Authorized; 39,985,234 shares
issued and outstanding) 39,985
Additional paid-in capital 2,909,922
Retained earnings 1,844,118
Deferred compensation (52,000)
Other comprehensive income - foreign currency 120,673
------------
Total Stockholders' Equity 4,862,698
------------
Total Liabilities and Stockholders' Equity $ 11,545,924
============
See notes to unaudited consolidated financial statements
-3-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
NET REVENUES $ 4,869,309 $ 2,773,884 $ 9,491,419 $ 6,316,734
COST OF SALES 4,368,285 2,507,284 8,883,949 5,744,166
------------ ------------ ------------ ------------
GROSS PROFIT 501,024 266,600 607,470 572,568
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling expenses 111,977 67,983 160,812 218,224
General and administrative 16,806 211,918 275,931 281,498
------------ ------------ ------------ ------------
Total Operating Expenses 128,783 279,901 436,743 499,722
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 372,241 (13,301) 170,727 72,846
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income 22,249 10,695 204,713 29,913
Debt issuance costs (40,400) -- (95,695) --
Interest expense (254,356) (29,745) (631,492) (51,682)
------------ ------------ ------------ ------------
Total Other Income (Expense) (272,507) (19,050) (522,474) (21,769)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 99,734 (32,351) (351,747) 51,077
INCOME TAXES 11 (9,692) 2,801 (49,283)
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE MNORITY INTEREST 99,745 (42,043) (348,946) 1,794
MINORITY INTEREST IN LOSS OF SUBSIDIARY (3,618) -- (1,284) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) 96,127 (42,043) (350,230) 1,794
OTHER COMPREHENSIVE INCOME:
Unrealized foreign currency translation 22,499 -- 120,673 --
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 118,626 $ (42,043) $ (229,557) $ 1,794
============ ============ ============ ============
NET INCOME PER COMMON SHARE
Basic $ 0.00 $ (0.00) $ (0.01) $ 0.00
============ ============ ============ ============
Diluted $ 0.00 $ (0.00) $ (0.01) $ 0.00
============ ============ ============ ============
Weighted Common Shares Outstanding - Basic 39,979,799 29,392,783 39,637,951 28,780,497
============ ============ ============ ============
Weighted Common Shares Outstanding - Diluted 41,206,234 29,392,783 39,637,951 34,263,697
============ ============ ============ ============
See notes to unaudited consolidated financial statements
-4-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months Ended
December 31,
--------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (350,230) $ 1,794
Adjustments to reconcile net income (loss)
to net cash provided by (used in
operating activities:
Depreciation and amortization 58,922 16,787
Stock-based compensation 52,000 --
Amortization of discount on debentures payable 503,934 --
Amortization of debt issuance costs 95,695 --
Allowance for doubtful accounts 12,063 --
Minority interest 1,380 --
Changes in assets and liabilities:
Accounts receivable (1,023,979) 289,402
Inventories 1,192,844 1,123,777
Prepaid and other current assets 284,266 308,627
Other receivables 646,083 --
Advances to employees -- 431,147
Advances on purchases (657,429) --
Other assets 4,154 (2,298)
Accounts payable (1,329,956) (1,830,943)
Accrued expenses (439,075) (15,290)
Advances from customers (22,945) (364,477)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (972,273) (41,474)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Due from related parties -- 40,924
Cash acquired in acquisition 33,654 --
Increase in short-term investments -- (120,773)
Decrease in restricted cash 353,258 --
Capital expenditures (230,419) (122,657)
----------- -----------
NET CASH FLOWS PROVIDED BY
(USED IN) INVESTING ACTIVITIES 156,493 (202,506)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable 548,746 12,078
Repayment of loans payable (376,097) --
Proceeds from debentures payable 503,500 --
Prepayment of debentures payable (183,592) --
Placement fees paid (48,350) --
----------- -----------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 444,207 12,078
----------- -----------
EFFECT OF EXCHANGE RATE ON CASH 33,605 --
----------- -----------
NET DECREASE IN CASH (337,968) (231,902)
CASH - beginning of year 902,559 285,856
----------- -----------
CASH - end of period $ 564,591 $ 53,954
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 134,625 $ 21,937
=========== ===========
Income Taxes $ 54,766 $ 39,591
=========== ===========
Non-cash investing and financing activities
Issuance of common stock for future services $ 52,000 $ --
=========== ===========
Deferred discount and beneficial conversion
on debentures payable $ 420,845 $ --
=========== ===========
Issuance of common stock for convertible debt $ 3,750 $ --
=========== ===========
Acquisition details:
Fair value of assets acquired $ 1,142,348 $ --
=========== ===========
Goodwill $ 486,120 $ --
=========== ===========
Liabilities assumed $ 1,148,468 $ --
=========== ===========
Common stock issued in connecxtion
with acquisition $ 480,000 $ --
=========== ===========
See notes to unaudited consolidated financial statements.
-5-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Dragon International Group Corp., (the "Company") formerly Retail Highway.com,
Inc. ("Retail"), was incorporated in the State of Nevada on February 17, 1993
under the name "LBF Corporation". Effective April 17, 1999, Retail acquired
certain assets to facilitate its entry into electronic commerce and changed its
name to "Retail Highway.com, Inc."
Thereafter, on or about August 13, 2004, as amended on September 30, 2004 and
effective October 4, 2004, pursuant to an Agreement and Plan of Reorganization,
the Company issued 24,625,000 shares of its common stock for the acquisition of
all of the outstanding capital stock of Dragon International Group Corp.,
("Dragon") a Florida corporation (the "Merger"). For financial accounting
purposes, the Merger as has been treated as a recapitalization of Retail with
the former shareholders of the Company retaining 1,280,234 shares of common
stock, or approximately 5%.
In connection with the Merger, the Company undertook a reverse stock split of
its common stock, whereby one (1) share of common stock was issued in exchange
for every eight (8) shares of common stock outstanding immediately prior to
October 4, 2004, the effective date. All share and per-shares information
included in this report has been restated to reflect this reverse stock split.
Additionally, as part of the Merger, the Company amended its Articles of
Incorporation, whereby the Company changed its name to "Dragon International
Group Corp.," as well as reestablished its capitalization to the authorized
capital structure immediately prior to the Merger, which consists of 25,000,000
shares of Preferred Stock, par value $0.001 per share, and 50,000,000 Common
Shares, par value $.001 per share. Further, the Company's prior management
resigned their respective positions with the Company and was replaced by
management of Dragon.
Dragon, a Florida corporation, was founded in June 2004. On June 30, 2004,
Dragon acquired 70% ownership interest of Ningbo Anxin International Co. Ltd.
("Anxin"). On December 31, 2004, the Company issued 4,000,000 Common Shares for
the remaining 30% interest in Anxin. Anxin, established in 1997, is located in
the Zhejiang Province of Ningbo, China, approximately 200 miles south of
Shanghai. Anxin is involved in the pulp and paper industry, operating as a
manufacturer and distributor of paper and integrated packaging paper products.
Anxin, through a subsidiary, holds an ISO9000 certificate and national license
to import and export products.
-6-
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
The Company (Continued)
In addition to its own operations, Anxin operates four subsidiaries, including:
(i) Jiangdong Yonglongxin Special Paper Company, Limited ("Yonglongxin"), which
holds an ISO9000 certificate and operates a civil welfare manufacturing facility
Fuming County Zhang'ai Village in Ningbo, China: (ii) Hangzhou Yongxin Paper
Company, Limited ("Yongxin"). Yongxin manufactures, sells and distributes
cigarette packing materials; (iii) Ningbo Xinyi Paper Product Industrial
Company, Limited ("Xinyi"). Xinyi operates in the pulp and paper industry,
operating a manufacturing facility; and (iv) Xianyang Naite Research &
Development Center (the "R&D Center") The R&D Center was created to develop,
design and improve production methods in the specialty packaging industry in
China. Anxin has a distribution network covering east and central China. The
Stock Purchase Agreement between Dragon and Anxin has been accounted for as a
reverse acquisition under the purchase method for business combinations.
Accordingly, the combination of the two companies is recorded as a
recapitalization of Dragon, pursuant to which Anxin is treated as the continuing
entity.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The accompanying financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. These financial statements should be read in conjunction with
the financial statements for the year ended June 30, 2005 and notes thereto
contained on Form 10-KSB of the Company as filed with the Securities and
Exchange Commission. The results of operations for the six months ended December
31, 2005 are not necessarily indicative of the results for the full fiscal year
ending June 30, 2006.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates in 2005 and
2004 include the allowance for doubtful accounts of accounts receivable and the
useful life of property, plant and equipment and land use rights.
-7-
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Accounts receivable
Accounts receivable are reported at net realizable value. The Company has
established an allowance for doubtful accounts based upon factors pertaining to
the credit risk of specific customers, historical trends, and other information.
Delinquent accounts are written-off when it is determined that the amounts are
uncollectible. At December 31, 2005, the allowance for doubtful accounts was
$127,711.
Inventories
Inventories, consisting of raw materials and finished goods related to the
Company's products are stated at the lower of cost or market utilizing the
first-in, first-out method.
Net income (loss) per common share
Basic income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock, common stock equivalents and
potentially dilutive securities outstanding during each period. The following
table presents a reconciliation of basic and diluted earnings per share:
For the Three Months Ended For the Six Months
December 31, Ended December 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income (loss) $ 96,127 $ (42,043) $ (350,230) $ 1,794
Weighted average shares outstanding - basic 39,979,799 29,392,783 39,637,951 28,790,497
EPS - basic $ 0.00 $ (0.00) $ (0.01) $ 0.00
============ ============ ============ ============
Net income (loss) $ 96,127 $ (42,043) $ (350,230) $ 1,794
============ ============ ============ ============
Weighted average shares outstanding - basic 39,979,799 29,392,783 39,637,951 28,790,497
Effect of dilutive securities
Unexercised warrants 422,617 -- -- --
Convertible debentures -- -- -- --
Convertible note payable 803,818 -- -- 5,473,200
------------ ------------ ------------ ------------
Weighted average shares outstanding- diluted 41,206,234 29,392,783 39,637,951 34,263,697
============ ============ ============ ============
EPS - diluted $0.00 $(0.00) $(0.01) $0.00
============ ============ ============ ============
-8-
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock-based compensation
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure", which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
Revenue recognition
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The
Company's revenues from the sale of products are recorded when the goods are
shipped, title passes, and collectibility is reasonably assured.
Foreign currency translation
Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in
determining net income or loss.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive loss. As
of December 31, 2005, the exchange rate for the Chinese Renminbi (RMB) was $1 US
for 8.0734 RMB.
-9-
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Foreign currency translation (continued)
The reporting currency is the U.S. dollar. The functional currency of the
Company's Chinese subsidiary, Anxin, is the local currency. The financial
statements of the subsidiaries are translated into United States dollars using
year-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 and were not material during the periods presented
because the Chinese dollar (RMB) fluctuates with the United States dollar. The
cumulative translation adjustment and effect of exchange rate changes on cash at
December 31, 2005 and 2004 was not material.
On July 21, 2005, China let the RMB fluctuate ending its decade-old valuation
peg to the U.S. dollar. The new RMB rate reflects an approximate 2% increase in
value against the U.S. dollar. Historically, the Chinese government has
benchmarked the RMB exchange ratio against the U.S. dollar, thereby mitigating
the associated foreign currency exchange rate fluctuation risk. The Company does
not believe that its foreign currency exchange rate fluctuation risk is
significant.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and trade accounts receivable. The
Company places its cash with high credit quality financial institutions. Almost
all of the Company's sales are credit sales that are primarily to customers
whose ability to pay is dependent upon the industry economics prevailing in
these areas; however, concentrations of credit risk with respect to trade
accounts receivables is limited due to generally short payment terms. The
Company also performs ongoing credit evaluations of its customers to help
further reduce credit risk.
NOTE 2 - INVENTORIES
At December 31, 2005, inventories consisted of the following:
Raw materials $ 131,434
Finished goods 282,919
------------
$ 414,353
============
-10-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 3 - RELATED PARTY TRANSACTIONS
Due from related parties
The consolidated financial statements include balances and transactions with
related parties. From time to time, the Company receives advances from or
advances funds to several affiliated entities for working capital purposes. At
December 31, 2005, the Company did not have any outstanding balances with these
affiliated entities.
Due to related party
A shareholder/consultant advanced funds to the Company for working capital
purposes. At December 31, 2005, the Company owed $5,000 to this
shareholder/consultant that is included in accrued expenses. The advances are
non-interest bearing, unsecured and are due on demand.
The former President of the Company, from time to time, provided advances to the
Company for operating expenses. These advances are non-interest bearing and
convertible into shares of the Company's common stock. The amount due to the
former President at December 31, 2005 was $18,345 and is included in accrued
expenses on the accompanying balance sheet. .
NOTE 4 - CONVERTIBLE NOTES PAYABLE
In September 2002, the former President of the Company lent the Company $10,000
to pay operating expenses pursuant to a note. This note is convertible into
1,333,333 shares of the Company's common stock at a conversion price of $0.0075
per share and is due on demand. Interest accrues at the rate of 3% per annum and
aggregated $532 through March 31, 2005. Additionally, in April 2004, the former
President of the Company entered into a convertible note agreement with the
Company to convert $31,124 of advances to pay operating expenses into a
convertible note. This note is convertible into 4,149,867 shares of the
Company's common stock at a conversion price of $0.0075 per share and is due on
demand. Interest accrues at the rate of 3% per annum and aggregated $558 through
December 31, 2005. In October 2005, the Company issued 500,000 shares of common
stock in connection with the conversion of $3,750 of this debt. At December 31,
2005, convertible notes payable outstanding amounted to $6,438, which is
convertible into 858,400 shares of common stock.
-11-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 5 - ACQUISITION AND DISPOSITIONS
On July 1, 2005, the Company acquired 60% interest in Hangzhou Yongxin Paper
Company, Limited ("Yongxin"). Yongxin, established in 2003, is located in
Hangzhou of Zhejiang Province, China, and manufactures and sells high-end
cigarette packing material and was a direct competitor of the Company. The
Company issued an aggregate of 1,000,000 shares of its common stock in
consideration for the nets assets of Yongxin. The fair value of the common stock
issued was based on the $.34 quoted trading price of the common stock on the
acquisition date and amounted to $340,000. All operations are now located in the
new manufacturing facilities in Ningbo. The Company acquired Yongxin as part of
its ongoing desire to consolidate interests in its industry. The Company
accounted for this acquisition using the purchase method of accounting in
accordance with SFAS No. 141. On the date of acquisition, the fair value of net
assets exceeded the purchase price by $322,192. The excess had been applied to
goodwill. The results of operations of Yongxin are included in the consolidated
results of operations of the Company from the acquisition date.
On August 1, 2005, the Company acquired the Xianyang Naite Research &
Development Center ("Xianyang"), located in Ningbo, China, which was created to
improve production efficiencies in the specialty packaging industry. The Company
paid $25,000 in cash and issued 500,000 shares of its common stock in
consideration for this acquisition. The fair value of the common stock issued
was based on $.28 per share, quoted trading price of the common stock on the
acquisition date, for a fair value of $140,000. The Research & Development
Center is expected to reduce time to commercialization for new products
substantially and allow the Company to leverage innovative paper transferring
techniques developed at the Center. The Company accounted for this acquisition
using the purchase method of accounting in accordance with SFAS No. 141. On the
date of acquisition, the fair value of net assets exceeded the purchase price by
$163,928. The excess had been applied to goodwill. The results of operations of
Xianyang are included in the consolidated results of operations of the Company
from the August 1, 2005.
Anxin has consolidated the operations of two divisions in an effort to reduce
fixed operational expenses. Anxin operates the underlying business of each
entity from the headquarters located in Ningbo. The two consolidated divisions
are Shanghai An'Hong Paper Company Limited, ("An'Hong") and Ningbo Long'An
Industry and Trade Company Limited ("Long'An"). In connection with this
consolidation, the Company has a receivable of $353,728 from a third party which
is included in other receivables on the accompanying consolidated balance sheet.
-12-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 5 - ACQUISITION AND DISPOSITIONS (continued)
For acquisitions during the six months ended December 31, 2005, the assets
acquired and liabilities assumed at acquisition date were as follows:
Yongxin Xianyang Total
---------- -------- ---------
Cash $ 33,654 $ - $ 33,654
Accounts receivable 543,564 - 543,564
Inventory 496,009 25,733 521,742
Property and equipment, net 69,121 - 69,121
Accounts payable (576,978) - (576,978)
Accrued expenses and other (547,562) - (547,562)
Loans payable - (24,661) (24,661)
Goodwill 322,192 163,928 486,120
---------- -------- ---------
Total purchase price $ 340,000 $165,000 $ 505,000
========== ======== =========
NOTE 6 - CONVERTIBLE DEBENTURES PAYABLE
On March 1, 2005, the Company closed a private offering of Units, each Unit
consisting of a secured convertible note with a face value of the principal
amount invested by each investor, carrying an annual coupon of 8% and 250,000 (5
warrants per dollar invested) Class "A" Warrants, each warrant exercisable to
purchase one (1) share of the Company's Common Stock at an exercise price of
$.40 per share for a period of five (5) years following the closing of the
offering. The investors in this offering were also granted "piggyback"
registration rights for the shares underlying the warrants, as well as the
shares reserved for issuance in the event of conversion of the Debentures. The
minimum subscription was for $50,000 or one Unit; however, we reserved the right
to accept subscriptions for a fractional Unit, which we did. The Company
received gross proceeds of $357,500 from the sale of these Units ($321,750 net)
and issued 1,787,500 warrants. The Units were sold to a total of 7 "accredited
investors," as that term is defined under the Securities Act of 1933, as
amended. The debentures were scheduled to mature six months following the
closing of the offering. Interest only is payable monthly. The relevant offering
documents contained a provision that provided for each of the investors to
convert into a subsequent offering that took place beginning in May 2005
(described below). As such, the debentures of the March 2005 offering were
replaced with $357,500 worth of Debentures under the terms of the July 2005
offering. Pursuant to the terms of the March offering, each of the investors
retained ownership of the warrants issued to them in the March offering as part
of the consideration for extending the maturity date of their Debenture.
-13-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 6 - CONVERTIBLE DEBENTURES PAYABLE (continued)
In connection with the 1,787,500 warrants issued in the Units, the Company
recorded imputed interest in the amount of $239,510 that was amortized over the
original life of the debentures (6 months). As incentive for these debenture
holders to convert their debentures to the terms of the subsequent offering, the
Company granted debenture holders 715,000 Class "A" Warrants, each warrant
exercisable to purchase one (1) share of the Company's Common Stock at an
exercise price of $.30 per share for a period of five (5) years following the
closing of the offering (July 2010). These warrants were treated as a discount
on the convertible debenture and in May 2005 were valued at $20,579 to be
amortized over the debenture term, which begins on July 11, 2005. The fair
market value of each stock warrant grant is estimated on the date of grant using
the Black-Scholes option-pricing model, in accordance with SFAS No. 123 using
the following weighted-average assumptions: expected dividend yield 0%,
risk-free interest rate of 4.00%, volatility of 141% to 145% and expected term
of 5 years. Additionally, in connection with the debentures, the Company
recorded a beneficial conversion amount of $97,411 that will be amortized over
the life of the debentures.
On May 9, 2005, the Company commenced a private offering of Units, each Unit
consisting of a secured, convertible promissory note and warrants (the "Units"),
totaling up to a maximum of $2,500,000. The Company closed this offering on July
11, 2005, after the Company had sold an aggregate of $1,927,400 of these Units
to 36 "accredited" investors, as that term is defined under the Securities Act
of 1933, as amended. This aggregate figure consisted of $1,569,900 in new
subscriptions and $357,500 from the offering in March 2005. The March 2005
offering stipulated the funds were to be converted under the terms of the July
2005 offering. Each Unit consisted of a secured convertible note with a face
value of the principal amount invested by each investor, carrying an annual
coupon of 8% and 2 warrants for each dollar invested. The annual coupon of 8%,
is payable on a monthly basis in cash or common stock on the first of every
month. Each warrant is exercisable at a purchase price of $.30 per share for a
period of five years following the final closing date of the offering period,
subject to adjustment upon the occurrence of specific events, including stock
dividends, stock splits, combinations or reclassifications of its common stock.
The Notes mature two years after issuance.
The Company has the option to satisfy principal and interest payments in cash or
common stock. The principal and interest is convertible into shares of our
"registered" common stock based on the following criteria: At the sole election
of the holder (the "Holder"), any portion of the unpaid principal balance of the
Note, together with any interest that may have accrued through the date of such
conversion, may be converted into shares of the Company's common stock. The
Holder shall provide the Company with fifteen (15) days written notice prior to
such payment ("Holder Conversion Notice"). The Holder may elect to receive
shares of the Company's common stock at a conversion rate equal to a 20%
discount to the average closing bid price for the previous five days to the
Holder Conversion Notice. The Holder will have a maximum conversion price of
$.55 per share and a minimum conversion price of $.20 per share. The Holder may
elect to convert a portion or all of any unpaid interest and/or principal due to
the Holder regardless as to whether the criteria as detailed herein are
satisfied.
-14-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 6 - CONVERTIBLE DEBENTURES PAYABLE (continued)
Principal payments began on the first day of the fourth month following the
final closing date of the offering. The amount of principal paid each month is
1/21 of the total amount offered plus any accrued interest. The remaining
balance of the principal value of the Notes is due on the first day of the
twenty-fourth month following the final closing of the offering. However, the
Company, at its sole option, may elect to pay the current portion of principal
and/or interest in shares of its common stock. The Company is obligated to
provide the Holder with fifteen (15) days written notice prior to such payment
("Company Conversion Notice"). The Holder may receive shares of common stock at
a conversion rate equal to a 20% discount to the average closing bid price for
the previous five days to the Company Conversion Notice, subject to a $.55
ceiling.
The Company can elect to convert the current portion of unpaid interest and/or
principal due to the Holder under the condition that certain criteria are met
which include: (a) the Common Stock received for payment is fully registered at
the time of receipt and is delivered without restriction of any kind; and (b)
the average daily trading volume as measured for the prior twenty days to
payment is as follows: (i) 100,000 shares per day for principal balance in
excess of $2,000,000; (ii) 75,000 shares per day for principal balance in excess
of $500,000 but less than $2,000,000; (iii) 50,000 shares per day for principal
balance less than $500,000; (iv) no less than 100,000 shares per day if the
remaining principal balance is in excess of $2,000,000; and (v) the average
daily price per share as measured from the five trading days prior to payment is
no less than $0.24 per share. The stock must be delivered within five business
days of the first of the then current month.
In addition, the Company entered into a Registration Rights Agreement with these
investors pursuant to which the Company was obligated to file a registration
statement covering the above-referenced common stock and shares underlying the
warrants within 45 days of closing of this offering. The Company filed a
registration statement on August 15, 2005. Should the registration statement not
be effective within 140 days from the closing date of the offering, and the
closing bid price for any three of the previous twenty trading days is greater
than $.6875, the Company is obligated to issue collateral shares on the monthly
payment date to the investor, as liquidated damages and not as a penalty,
equivalent to 2% per month of the investor's position as calculated under the
following formula:
(Principal Balance of Investor + Accrued interest x 2%
x (80% average of three highest closing bids - .55))
The average of the three highest closing bids would be measured from the 20 days
preceding the 1st of each month from which a payment is due. This penalty will
be in effect until such time as the registration statement is declared effective
and will be due each month, if applicable, along with the cash payment.
-15-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 6 - CONVERTIBLE DEBENTURES PAYABLE (continued)
In connection with these convertible debentures, warrants to purchase 2,132,800
common shares were issued to the holders at an exercise price per share of
$0.30. The warrants are exercisable immediately and expire in July 2010. These
warrants were treated as a discount on the convertible debenture and in June
2005 were valued at $423,192 to be amortized over the debenture term, which
begins on July 11, 2005. The fair market value of each stock warrant grant is
estimated on the date of grant using the Black-Scholes option-pricing model, in
accordance with SFAS No. 123 using the following weighted-average assumptions:
expected dividend yield of 0%, risk-free interest rate of 4.00%, volatility of
145% and expected term of 5 years. Additionally, in connection with the
debentures, the Company recorded a beneficial conversion amount of $591,757 that
will be amortized over the life of the debentures. -
In July 2005, the Company sold to new investors an aggregate of $503,500 of the
Units. In connection with these convertible debentures, warrants to purchase
1,007,000 common shares were issued to the holders at an exercise price per
share of $0.30. The warrants are exercisable immediately and expire in July
2010. These warrants were treated as a discount on the convertible debenture and
in July 2005 were valued at $184,829 under SFAS No.123 using the Black-Scholes
option-pricing model to be amortized over the debenture term, which begins on
July 11, 2005. The fair market value of each stock warrant grant is estimated on
the date of grant using the Black-Scholes option-pricing model, in accordance
with SFAS No. 123 using the following weighted-average assumptions: expected
dividend yield 0%, risk-free interest rate of 3.75%, volatility of 145% and
expected term of 5 years. Additionally, in connection with the debentures, the
Company recorded a beneficial conversion amount of $236,016 that will be
amortized over the life of the debentures.
For the six months ended December 31, 2005, the amount of amortization of
imputed interest and beneficial conversion charged to interest expense was
$503,934.
Skyebanc, Inc. ("Skyebanc"), an NASD broker dealer, acted as selling agent in
connection with the offering. The Company paid Skyebanc a total of eight percent
(8%) of the total proceeds resulting from the sale of the securities and
reimbursed Skyebanc, Inc. for its expenses in the amount of two percent (2%) of
the selling price of the securities sold on a non-accountable basis for an
aggregate cash placement fee of $190,740. Additionally, on July 1, 2005, the
Company granted Skyebanc warrants to purchase 500,000 shares of its common stock
for its services related to the offering at an exercise price of $.01 per share,
which warrants expire on July 1, 2010. These warrants were treated as a deferred
debt offering cost and on July 1, 2005 were valued at $168,205 to be amortized
over the debenture term. The fair market value of each stock warrant grant is
estimated on the date of grant using the Black-Scholes option-pricing model, in
accordance with SFAS No. 123 using the following weighted-average assumptions:
expected dividend yield 0%, risk-free interest rate of 3.75%, volatility of 145%
and expected term of 5 years. At December 31, 2005, the placement fees were
deemed to be a deferred debt offering cost on the accompanying balance sheet and
are being amortized as a debt issuance cost over the debenture term of 24
months. For the six months ended December 31, 2005, amortization of debt
issuance costs amounted to $95,695.
-16-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 6 - CONVERTIBLE DEBENTURES PAYABLE (continued)
The debentures are secured by 12,250,000 shares of common stock held in the name
of the Company's Chief Executive Officer, 7,150,000 shares of common stock in
the name of Shun Li Shi, a shareholder, a minimum of $150,000 in readily
available funds and a mining facility valued of at $3,000,000 owned by David Wu,
the Company's Chief Executive Officer.
The convertible debenture liability is as follows at December 31, 2005:
Convertible debentures payable $ 1,743,808
Less: unamortized discount on debentures (1,076,845)
---------------
Convertible debentures, net 666,963
Less: current portion of convertible debentures (382,934)
----------------
Convertible debentures payable - long-term $ 284,029
===============
NOTE 7 - STOCKHOLDERS EQUITY
Common Stock
On July 1, 2005, in connection with the acquisition of a 60% interest in
Yongxin, the Company issued 1,000,000 shares of common stock (see note 5 above).
The fair value of the common shares issued was based on the $.34 quoted trading
price of the Company's common stock on the acquisition date and amounted to
$340,000.
On July 22, 2005, the Company entered into a one-year agreement with China
Direct Investments, Inc. to provide business development and management
services, effective July 1, 2005. In connection with this agreement, the Company
issued 400,000 shares of the Company's common stock. The Company valued these
services using the fair value of common shares on grant date at approximately
$.26 per share and recorded deferred consulting expense of $104,000 to be
amortized over the service period. For the six months ended December 31, 2005,
amortization of deferred consulting expense amounted to $52,000.
On August 1, 2005, in connection with the acquisition of a 100% interest in
Xianyang, the Company issued 500,000 shares of common stock (see note 5). The
fair value of the common shares issued was based on the $.28 quoted trading
price of the common stock on the acquisition date and amounted to $140,000.
In October 2005, the Company issued 500,000 shares of common stock in connection
with the conversion of $3,750 of convertible notes payable (see Note 4).
-17-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 7 - STOCKHOLDERS EQUITY (continued)
Stock Warrants
In July 2005, in connection with the private offering discussed in Note 6, the
Company issued 1,007,000 warrants to purchase 1,007,000 shares of the Company's
common stock exercisable at $.30 per share. The purchase warrants expire in July
2010. Additionally, in July 2005, in connection with the private offering
discussed in Note 6, the Company granted 500,000 warrants to purchase 500,000
shares of the Company's common stock to the placement agent for services
rendered exercisable at $.01 per share. The purchase warrants expire in July
2010.
A summary of the status of the Company's outstanding stock warrants as of
December 31, 2005 and changes during the period then ended is as follows:
Weighted
Average
Exercise
Shares Price
---------- ----------
Outstanding at July 1, 2005 4,635,300 $ 0.34
Granted 1,507,000 0.20
Exercised - -
Forfeited - -
---------- ---------
Outstanding at December 31, 2005 6,142,300 $ 0.31
========== ==========
Warrants exercisable at end of period 6,142,300 $ 0.31
========== ==========
Weighted-average fair value of warrants
granted during the period $0.20
==========
The following information applies to all warrants outstanding at December 31,
2005:
Warrants Outstanding Warrants Exercisable
------------------------ ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price
------------------------ ----------- ------------ ---------- --------- ----------
$0.40 1,787,500 4.50 $ 0.40 1,787,500 $ 0.40
$0.30 3,854,800 4.55 $ 0.30 3,854,800 $ 0.30
$0.01 500,000 4.50 $ 0.01 500,000 $ 0.01
NOTE 8 - OPERATING RISK
(a) Country risk
The Company's revenues are mainly derived from the sale of paper products in the
Peoples Republic of China (PRC). The Company hopes to expand its operations to
countries outside the PRC, however, such expansion has not been commenced and
there are no assurances that the Company will be able to achieve such an
expansion successfully. Therefore, a downturn or stagnation in the economic
environment of the PRC could have a material adverse effect on the Company's
financial condition.
-18-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 8 - OPERATING RISK (continued)
(b) Products risk
In addition to competing with other companies, the Company could have to compete
with larger US companies who have greater funds available for expansion,
marketing, research and development and the ability to attract more qualified
personnel if access is allowed into the PRC market. If U.S. companies do gain
access to the PRC markets, they may be able to offer products at a lower price.
There can be no assurance that the Company will remain competitive should this
occur.
(c) Exchange risk
The Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Chinese
Reminbi converted to US dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.
(d) Political risk
Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.
(e) Key personnel risk
The Company's future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
(f) Performance of subsidiaries risk
All of the Company's revenues are derived via the operations of the Company's
Chinese subsidiaries. Economic, governmental, political, industry and internal
company factors outside of the Company's control affect each of the
subsidiaries. If the subsidiaries do not succeed, the value of the assets and
the price of our common stock could decline. Some of the material risks relating
to the partner companies include the fact that the subsidiaries are located in
China and have specific risks associated with that and the intensifying
competition for the Company's products and services and those of the
subsidiaries.
-19-
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 9 - SUBSEQUENT EVENT
In January 2006, the Company made an offer to all of the holders of its
outstanding Units wherein the Company offered the holders of the Units an
opportunity to convert the outstanding principal and interest owed pursuant to
the Debentures into shares of the Company's Common Stock at a conversion price
of $.09 per share. This offer also provided for the reduction of the exercise
price on the Warrants included in the Units issued in the July Offering from
$.30 to $.15 per Warrant. As further inducement, if the holder agreed to
convert, the Company also agreed to issue additional common stock purchase
warrants equal to the number of Warrants held by each Unit holder that are also
exercisable at $.15 per warrant for a period of three (3) years. As of the date
of this Report, all of the Unit holders have accepted the Company's offer,
except for two holders who did agree to assign their Debentures to third
parties. These holders kept the Warrants issued as part of their Units. As a
result, the Company issued an aggregate of 18,478,565 shares of our Common Stock
and 5,642,300 common stock purchase warrants, pro rata to the number of Units
held by each holder that elected to convert. The exercise price on the 3,704,800
Warrants held by the converting holders was also reduced to $.15 per share. The
exercise price for those holders who elected not to convert remains at $.30 per
share for the relevant 150,000 Warrants.
-20-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following analysis of our results of operations and financial condition
should be read in conjunction with our audited financial statements for the year
ended June 30, 2005, and notes thereto contained in our report on Form 10-KSB,
as filed with the Securities and Exchange Commission.
This report on Form 10-QSB contains forward-looking statements that are subject
to risks and uncertainties that could cause actual results to differ materially
from those discussed in the forward-looking statements and from historical
results of operations. Among the risks and uncertainties which could cause such
a difference are those relating to our dependence upon certain key personnel,
our ability to manage our growth, our success in implementing the business
strategy, our success in arranging financing where required, and the risk of
economic and market factors affecting us or our customers. Many of such risk
factors are beyond our control.
Overview
On or around August 13, 2004, as amended on September 30, 2004 and effective
October 4, 2004, under an Agreement and Plan of Reorganization, we issued
24,625,000 shares of our common stock for the acquisition of all of the
outstanding capital stock of Dragon International Group Corp., ("Dragon") a
Florida corporation. For financial accounting purposes, the exchange of stock
was treated as a recapitalization, with our former shareholders retaining
1,280,234, or approximately 5% of the outstanding stock.
Dragon was founded in June 2004. On June 30, 2004, Dragon acquired 70% ownership
interest of Ningbo Anxin International Co. Ltd. ("Anxin") and on December 31,
2004, we issued 4,000,000 common shares for the remaining 30% interest in Anxin.
Anxin, established in 1997, is located in the Zhejiang Province of Ningbo in
China, approximately 200 miles south of Shanghai. Anxin is involved in the pulp
and paper industry, operating as a manufacturer and distributor of paper and
integrated packaging paper products. Anxin, through a subsidiary, holds an
ISO9000 certificate and national license to import and export products. The
Stock Purchase Agreement between Dragon and Anxin has been accounted for as a
reverse acquisition under the purchase method for business combinations.
Accordingly, the combination of the two companies is recorded as a
recapitalization of Anxin, pursuant to which Dragon is treated as the continuing
entity.
Our operations are conducted through Anxin. Anxin distributes an assortment of
paper products and packaging materials. The main consumers of Anxin's products
are packaging companies for the tobacco industry, cosmetics industry, and the
wine and spirits industry. Anxin, through its wholly owned subsidiary, Jiangdong
Yonglongxin Special Paper Co. Ltd. ("Yonglongxin"), imports an assortment of
paper and packaging products. The products imported by Anxin are used both as a
finished product and as well as a raw material to manufacture a variety of paper
products and packaging materials. Products manufactured by Anxin or one of its
subsidiaries are then sold and distributed in China.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
Anxin operates the following subsidiaries:
- Jiangdong Yonglongxin Special Paper Co. Limited. ("Yonglongxin")
- Hangzhou Yongxin Paper Company, Limited. ("Yongxin")
- Ningbo Xinyi Paper Product Industrial Co., Limited ("Xinyi")
- Xianyang Naite Research & Development Center (the "R&D Center")
In fiscal 2005, Anxin consolidated the operations of two divisions in an effort
to reduce fixed operational expenses. Anxin continues operating the underlying
business of each entity from the headquarters located in Ningbo. The two
consolidated divisions are; Shanghai An'Hong Paper Company Limited, ("An'Hong")
and Ningbo Long'An Industry and Trade Company Limited ("Long'An"). The remote
operations were established in an effort to improve client relations and extend
the brand awareness of Anxin products and services throughout China. Further, we
believe Anxin can improve its status among financial institutions in China, as a
large group with additional operations in various business segments.
Unfortunately the cost of the additional offices proved too costly. Anxin will
service the clients of An'Hong and Long'An as they continue to operate the
underlying business of each entity from the headquarters in Ningbo. The fixed
assets, office equipment and entities were sold to Shanghai DIJI Investment
Management Company.
The following information is intended to highlight developments in our
operations, to present our results of operations, to identify key trends
affecting our businesses and to identify other factors affecting our results of
operations for the periods indicated.
Results of Operations
Comparison of Our Results of Operations for our six months ended December 31,
2005 and 2004
During the six months ended December 31, 2005, we generated revenues of
$9,491,419, as compared to revenues of $6,316,734 for the six months ended
December 31, 2004, an increase of $3,174,685, or 50.3%. For the six months ended
December 31, 2005, we recorded revenues from our Yongxin subsidiary that we
acquired effective July 1, 2005 of approximately $1,414,000. The remaining
increase was attributable to the hiring of additional sales staff, from sales to
new customers and increased sales during the months of December 2005.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
Anxin imports pulp and paper products manufactured overseas and distributes
those products in China. The general process of a typical order are; (i) initial
purchase order from customer, (ii) relay the purchase order to international
supplier; (iii) receive letter of credit from bank; (iv) schedule transportation
from supplier; (v) schedule transportation to customer; and (vi) receive payment
from customer. This entire process can take anywhere from two to three months.
Often times, extenuating factors such as weather or holidays may prolong this
process, causing a delay in payment or shipment.
For the six months ended December 31, 2005, gross profit was $607,470, as
compared to gross profit of $572,568 for the six months ended December 31, 2004,
an increase of $34,902. For the six months ended December 31, 2005, gross profit
on a percentage basis decreased to 6.4% from 9.0% for the six months ended
December 31, 2004.
The decrease in gross profit percentage is attributable to higher cost of sales.
Anxin is experiencing higher raw material costs and increased
import/transportation costs. We have experienced an increase in the cost of our
raw materials; such as raw pulp and pulp related products over the past 12
months. This increase has impacted the global paper industry and is not specific
to our company. Additionally, we recorded increased revenues that were generated
through sales agents that we recognize a gross profit of approximately 1%.
Management of Anxin does not anticipate the trend to reverse. Furthermore,
increased oil prices over the past year have led to higher transportation costs
for our products. Anxin does not have any control over the international price
of oil. Management has made efforts to reduce fixed administrative costs to
alleviate the burden of an increase cost of sales for the fiscal year 2005. As
mentioned above, Anxin has consolidated the operations of Shanghai Anhong Paper
Company Ltd., ("An'Hong") and Ningbo Long'An Industry and Trade Company Limited
in 2005. The closures will allow Anxin to decrease fixed administrative costs.
For the six months ended December 31, 2005, operating expenses amounted to
$436,743, or 4.6% of net revenues, compared to $499,722, or 7.9% of revenues for
the six months ended December 31, 2004, a decrease of $62,979, or 12.6%. The
decrease was attributable to the following:
For the six months ended December 31, 2005, selling expenses amounted to
$160,812 as compared to $218,224 for the six months ended December 31, 2005, a
decrease of $57,412 or 26%. This decrease is attributable to a decrease in
shipping costs of approximately $22,418. Additionally, we experienced a decrease
in salaries of approximately $23.455 due to reduction in sales staff and a
decrease in other selling expenses due to the consolidation of our operations.
For the six months ended December 31, 2005, general and administrative expenses
were $275,931, as compared to $281,498 for the six months ended December 31,
2004, a decrease of $5,567, or approximately 2%. For the six months ended
December 31, 2005, our subsidiary, Anxin, received a refund of consulting fees
amounting to approximately $54,187 that reduced our general and administrative
expenses. This decrease was offset by an increase in professional fees and
consulting fees associated with our obligations under the Securities Exchange
Act of 1934, as amended and other administrative activities of approximately
$48,000.
-23-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
For the six months ended December 31, 2005, other income amounted to $204,713,
as compared to other income of $29,913 for the six months ended December 31,
2004. Other income for the six months ended December 31, 2005 and 2004 was
associated with income recognized from the collection of value-added taxes on
certain of our products which we receive a tax credit.
For the six months ended December 31, 2005, debt issuance costs were $95,695, as
compared to $0 for the six months ended December 31, 2004 this was related to
the amortization of placements fees paid in connection with the private offering
described above.
For the six months ended December 31, 2005, interest expense was $631,492, as
compared to $51,682 for the six months ended December 31, 2004, an increase of
$579,810 and was related to 1) increased borrowings; and 2) the recording of
$503,934 in amortization of discount of debentures payable that was included in
interest expense.
As a result of these factors, we reported a net loss of $(350,230) or a net loss
of $(.01) per share for the six months ended December 31, 2005 as compared to
net income of $1,794 (less than $.01 per share) for the six months ended
December 31, 2004.
Anxin is making an effort to increase the sales generated by Yonglongxin. The
reason is twofold; (i) Anxin can control the price and maintain higher margins
on products manufactured within the organization; and (ii) increase the tax
benefits realized from output from the Yonglongxin factory. Yonglongxin operates
a welfare factory in the Fuming County of the Zhang'ai Village in Ningbo.
Yonglongxin has been certified as a civil welfare company by the municipal
government of Ningbo. Civil welfare companies in China enjoy financial
incentives including favorable tax status and value-added tax rebates. These
incentives translate to reduced costs.
Liquidity and Capital Resources
At December 31, 2005, we had $564,591 in cash. At December 31, 2005, our cash
position by geographic area is as follows:
United States $ 3,996
China 560,595
---------
Total $ 564,591
=========
-24-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
In March 2005, we raised $357,500 ($321,750 net) from accredited investors
under a private offering of Units. Each Unit consisted of a of a secured
convertible note with a face value of the principal amount invested by each
investor, carrying an annual coupon of 8% and 250,000 (5 warrants per dollar
invested) Class A Common Stock Purchase Warrants to purchase shares of our
Common Stock at $.40 per share for a period of five (5) years following the
closing of the offering. The investors in this offering were also granted
"piggyback" registration rights for the shares underlying the warrants, as well
as the shares reserved for issuance in the event of conversion of the
Debentures. The minimum subscription was for $50,000 or one Unit; however, we
reserved the right to accept subscriptions for a fractional Unit, which we did.
The Units were sold to a total of 7 "accredited investors," as that term is
defined under the Securities Act of 1933, as amended. The Debentures were to
mature six (6) months following the closing of the offering. Interest only is
payable monthly. However, the investors in this offering converted to our second
offering, described below, pursuant to the original terms included in this
offering.
During the period from May 2005 to July 2005, we successfully closed a
second private offering of Units. We sold an aggregate of $1,569,900 from the
sale of the Units ($1,413,910 net) to a total of 36 "accredited investors," as
that term is defined under the Securities Act of 1933, as amended, including the
seven (7) investors who purchased Units in our prior offering undertaken in
March 2005, discussed above. Each Unit consisted of a $100,000 8% Secured
Convertible Debenture and Class A Common Stock Purchase Warrants to purchase
200,000 of our Common Stock at $.30 per share for a period of five (5) years
expiring July 1, 2010. The Debentures are secured by property with an audited
value of $227,900 and 12,250,000 shares of Common Stock owned by David Wu, our
President and Chief Executive Officer. The Debentures are convertible into
shares of our Common Stock and mature two years after issuance. We have the
option to satisfy principal and interest payments in cash or Common Stock. The
principal and interest is convertible into shares of our "registered" Common
Stock. At the sole election of the Holder, any portion of the unpaid principal
balance of the Note, together with any interest that may have accrued through
the date of such conversion, may be converted into shares of our Common Stock.
The Holder shall provide us with fifteen (15) days written notice prior to such
payment ("Holder Conversion Notice"). The Holder may elect to receive shares of
Common Stock at a conversion rate equal to a 20% discount to the average closing
bid price for the previous five days to the date of the Holder's Conversion
Notice. The Holder will have a maximum conversion price of $.55 per share and a
minimum conversion price of $.20 per share. The Holder may elect to convert a
portion or all of any unpaid interest and/or principal due to the Holder
regardless as to whether the criteria as detailed herein are satisfied.
Principal payments began on the first day of the fourth month following the
final closing date of the offering. The amount of principal to be paid each
month shall be 1/21 of the total amount offered plus any accrued interest. The
remaining balance of the principal value of the Notes will be due on the first
day of the twenty-fourth month following the final closing of the offering.
However, we, at our sole option, may elect to pay the current portion of
principal and/or interest in shares of our Common Stock. During the six months
ended December 31, 2005, we repaid principal amounts amounting to $183,592.
-25-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
We are obligated to provide the Holder with fifteen (15) days written
notice prior to such payment ("Company Conversion Notice"). The Holder may
receive shares of Common Stock at a conversion rate equal to a 20% discount to
the average closing bid price for the previous five days to our Company
Conversion Notice, subject to a $.55 ceiling. We can elect to convert the
current portion of unpaid interest and/or principal due to the Holder under the
condition that certain criteria are met which include: (a) the Common Stock
received for payment is fully registered at the time of receipt and is delivered
without restriction of any kind; and (b) the average daily trading volume as
measured for the prior twenty days to payment is as follows: (i) 100,000 shares
per day for principal balance in excess of $2,000,000; (ii) 75,000 shares per
day for principal balance in excess of $500,000 but less than $2,000,000; (iii)
50,000 shares per day for principal balance less than $500,000; (iv) no less
than 100,000 shares per day if the remaining principal balance is in excess of
$2,000,000.00; and (v) the average daily price per share as measured from the
five trading days prior payment is no less than $0.24 per share. The stock must
be delivered within 5 business days of the first of the then current month.
Subsequent Event
In January 2006, we made an offer to all of the holders of our outstanding
Units wherein we offered the holders of the Units an opportunity to convert the
outstanding principal and interest owed pursuant to the Debentures into shares
of the Company's Common Stock at a conversion price of $.09 per share. This
offer also provided for the reduction of the exercise price on the Warrants
included in the Units issued in the July Offering from $.30 to $.15 per Warrant.
As further inducement, if the holder agreed to convert, we also agreed to issue
additional common stock purchase warrants equal to the number of warrants held
by each Unit holder that are also exercisable at $.15 per warrant for a period
of three (3) years. As of the date of this Report, all of the Unit holders have
accepted the Company's offer, except for two holders who did agree to assign
their Debentures to third parties. These holders kept the Warrants issued as
part of their original Units. As a result, we issued an aggregate of 18,478,565
shares of our Common Stock and 5,642,300 common stock purchase warrants, pro
rata to the number of Units held by each holder that elected to convert. We also
reduced the exercise price on the 3,704,800 Warrants held by the converting
holders to $.15 per share, while maintaining the exercise price on 150,000
Warrants for those holders who elected not to convert at $.30 per share.
Net cash used in operating activities during the six months ended December
31, 2005 were $972,273 as compared to net cash used in operating activities of
$41,474 during the six months ended December 31, 2004. This increase in cash
used in operating activities is primarily attributable to:
* an increase of $352,024 in our net loss. For the six months ended
December 31, 2005, we had a net loss of $350,230 compared to net income of
$1,794 for the six months ended December 31, 2004.
* an increase of $42,135 in depreciation and amortization as a result of an
increase in property, plant and equipment as well as the amortization of
acquired land use rights.
* an increase of $503,934 and $95,695 in amortization of discount on
debentures payable and debt issuance costs , respectively, related to the sale
of debentures payable.
-26-
* an increase of $52,000 in stock-based compensation related to the
issuance of common stock to a consultant in the current period,
* an increase of $12,063 in allowance for doubtful accounts which
represents an increase in our allowance for bad debt based on an analysis of our
receivable balances.
* For the six months ended December 31, 2005, our net operating assets
increased by $1,346,037 as compared to a net increase in net operating assets of
$60,055 for the six months ended December 31, 2004,
Net cash provided by investing activities during the six months ended December
31, 2005 was $156,493 as compared to net cash used in investing activities of
$(202,506) for the six months ended December 31, 2004. During the six months
ended December 31, 2005, we used cash for capital expenditures of $230,419 and
had a decrease in our restricted cash balance by $353,258 that collateralizes
certain debt offset by cash received of $33,654 from acquisitions. During the
six months ended December 31, 2004, we used cash for capital expenditures of
$122,657, used cash to acquire short-term investments of $120,773 and received
advances from related parties of $40,924.
Net cash provided by financing activities during the six months ended December
31, 2005 was $444,207 as compared to net cash provided by financing activities
during the six months ended December 31, 2004 of $12,078. During the six months
ended December 31, 2005, we received gross proceeds of $503,500 from debentures
payable and $548,746 from borrowings offset by the repayment of loans payable of
$376,097, the payment of placement fees of $48,350, and the repayment of
debentures payable of $183,592. During the six months ended December 31, 2004,
we received proceeds from loans payable of $12,078.
From time to time, we need additional working capital for our operations. In
2005, Yonglongxin, a subsidiary of Anxin, borrowed money pursuant to several
lines of credit that we have established with three banks. At December 31, 2005,
we owed $2,500,476 to these lenders with six to 12 months term from through
September 2006, with an annual interest rate ranging from approximately 5 to 7%.
All loans are renewable when they mature. We generate sufficient cash flow from
financing and operations to pay for our debt services. We do not anticipate
these loans will have material impact on our liquidity. These loans are secured
by inventory, equipment and assets owned by the third parties. We are current on
all payments relating to these loans and expect to renew the loans at terms and
at interest rates comparable to our current loans.
We currently have no material commitments for capital expenditures.
While we have sufficient funds to conduct our business and operations as they
are currently undertaken, we want to build an additional manufacturing line in
order to expand our paper product production. A portion of the proceeds we
derived from our private offering will be used to update our manufacturing
facilities.
-27-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
Trends
Management estimates that Federal SBS and Hang Kong CCB will continue to witness
strong consumer demand in the near future. Both products have a strong
reputation for quality and are produced by venerable industry participants.
Domestic grades of SBS are improving, and should witness increased demand as
consumer confidence grows. If consumer confidence for domestic SBS improves,
demand for Federal SBS may decrease. We expect International Paper Company will
take measures to protect its market share, possibly in the form of price
incentives. There can be no assurances that such incentives will be available in
the future, or if available, that such incentives will result in improved
margins. From time to time, Anxin may purchase domestically manufactured SBS. In
the past Anxin has purchased solid bleached sulfate paperboard ("SBS") from
Zhong' Hua Paper Co., Ltd. Anxin expects Federal SBS will continue to witness
strong demand. Anxin will seek to garner a growing share of sales of
domestically produced SBS as this market gains acceptance.
Anxin expects the demand for Hang Kong CCB to remain strong. Hang Kong CCB has
established a reputation for quality generally accepted by the industry in
China. Presently there are few alternatives to Hang Kong CCB available in China
and there are no substantial domestic manufacturers in China. Management of
Anxin believes it will take time for domestic grades of cast coated board to be
accepted by the industry. As a result, we expect the demand for Hang Kong CCB to
remain strong for the foreseeable future.
Our organization has witnessed an increase in the cost of our raw materials;
such as raw pulp and pulp related products over the past 12 months. This
increase has impacted the global paper industry and is not specific to our
company. Management of Anxin does not anticipate the trend to reverse.
Furthermore, increase oil prices over the past year have led to higher
transportation costs for our products. Anxin does not have any control over the
price of oil. In response, we have taken necessary actions to alleviate the
impact of rising costs including the reduction of fixed administration expenses
and the implementation of variable cost controls. Management estimates our gross
profit as a percentage will decline over the next few operating quarters.
Furthermore management has taken steps to improve operating results in the
future. Management has successfully acquired a manufacturing facility with the
acquisition of Yonglongxin. This should limit our dependence on foreign
manufactured goods, while attaining a level of control on both the price and
availability of our products. We have established an internal research and
development program with the acquisition of the Research & Development Center.
This research and development program could lead to the creation of new
innovative products. New innovative products could command a higher profit
margin in the industry. However, there is no guarantee that the program will
generate new products. There is no guarantee that any new products will receive
a favorable reception in the industry.
-28-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
In the first quarter of 2005, the Chinese government issued minimum production
quotas for the cigarette manufacturing industry. The government established a
yearly quota of 100,000 boxes of cigarettes. This judgment unfavorably impacted
smaller cigarette manufacturers; many of who are customers of Anxin. Management
of Anxin had consciously sought target smaller manufacturers because Anxin
sought to limit the dependence on any one customer, and Anxin can garner a
higher margin from smaller manufacturers, as opposed to larger manufacturers.
Larger manufactures have a higher level of pricing power than smaller
manufacturers. This new quota impacted many of our clients, as they were forced
to close plants or merge with other industry participants in an effort to meet
quotas. As an indirect result, orders for packaging materials were reduced.
The quality of SBS produced domestically has improved. In response, Anxin is
exploring new forms of solid bleached sulfate paperboard produced domestically.
Domestic manufacturers have had success with new products such as Zhong Hua
solid bleached sulfate paperboard and a form of water-proof art paper. Anxin is
seeking ways to incorporate these new products into their product base. In the
event Anxin is successful with this effort, it will attempt to sell and
distribute the new products using the existing sales network. A main attraction
to employ domestic products is the reduced cost as compared to foreign sources.
Anxin, through its subsidiaries, has gradually increased the sales of domestic
products as it attempts to grab market share in this domestic market. Anxin
expects to obtain a higher profit margin on sales of domestically manufactured
SBS because of reduced raw material, transportation and export costs. Anxin has
begun to establish a relationship with Ningbo Zhong' Hua Paper Company Limited
("Zhong Hua"), a manufacturer of SBS in China. Anxin believes that Zhong' Hua
will be able to provide a stable supply of quality grades of SBS. In the future,
the quality of SBS manufactured domestically should improve. Management plans to
protect our position in this segment by seeking to expand our manufacturing base
to incorporate our own proprietary form of a high quality SBS and establishing a
relationship with a domestic manufacturer of a high quality SBS. Although sales
of domestically produced SBS have gradually increased due to increased quality,
overall the domestic products will not substitute all imported products in the
near future, because customers will continue to demand the highest quality
grades, and foreign manufacturer will take measures to protect their market
share. As foreign manufacturers offer incentives to maintain market share, Anxin
could experience improved margins on foreign goods than it currently realizes on
foreign goods.
Inflation
Although management expects that our operations will be influenced by general
economic conditions we do not believe that inflation had a material effect on
our results of operations during the six months ended December 31, 2005.
-29-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience and on various other assumptions that are 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. Actual results may differ from these
estimates under different assumptions or conditions.
A summary of significant accounting policies is included in Note 1 to our
audited financial statements included in our Form 10-KSB as filed with the
Securities and Exchange Commission for the year ended June 30, 2005. Management
believes that the application of these policies on a consistent basis enables us
to provide useful and reliable financial information about the company's
operating results and financial condition. During the six months ended December
31, 2005, there have been no material changes to our critical accounting
policies that impacted our consolidated financial condition or results of
operations.
We record property and equipment at cost. Depreciation on property and equipment
is calculated using the straight-line method over the estimated useful lives of
the assets. Expenditures for major renewals and betterments that extend the
useful lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred. We review these
long-lived assets for impairment whenever circumstances and situations change
such that there is an indication that the carrying amounts may not be
recoverable. If the undiscounted future cash flows of the long-lived assets are
less than the carrying amount, their carrying amount is reduced to fair value
and an impairment loss is recognized. To date, we have not recognized any
impairment losses.
Accounting for Stock Based Compensation - We account for stock based
compensation utilizing Statement of Financial Accounting Standards No. 123R,
"Accounting for Stock-Based Compensation" ("SFAS 123R") and related
interpretations, which requires companies to record compensation cost for
stock-based employee compensation plans at fair value.
We follow the guidance of the Securities and Exchange Commission's Staff
Accounting Bulletin 104 for revenue recognition. In general, we record revenue
when persuasive evidence of an arrangement exists, services have been rendered
or product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured. Our revenues from the
sale of products are recorded when the goods are shipped, title passes, and
collectibility is reasonably assured.
-30-
ITEM 3. CONTROLS AND PROCEDURES
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
President as appropriate, to allow timely decisions regarding required
disclosure. Our management, including our President, 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.
Based upon that evaluation, our company's President has concluded that our
disclosure controls and procedures were not effective because of the significant
deficiency and the material weakness described below.
We restated our consolidated statement of operations, as previously filed with
the Securities and Exchange Commission for our three-month periods ended
September 30, 2004 and March 31, 2005. The restatement of our consolidated
financial statements was made to correct an error in the elimination of
inter-company revenues and cost of sales. As a result of this error, we have
determined that there was a significant deficiency in our internal control over
financial reporting through March 31, 2005, related to elimination of
inter-company revenues and cost of sales. We have also determined that this
control deficiency constituted a material weakness. We have taken the remedial
steps necessary to eliminate the material weakness relating to financial
disclosure controls that resulted in this restatement.
Other than the changes 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.
-31-
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We made no unregistered sales of our equity securities during the three
month period ended December 31, 2005.
Subsequent Event
In January 2006, we made an offer to all of the holders of our outstanding
Units wherein we offered the holders of the Units an opportunity to convert the
outstanding principal and interest owed pursuant to the Debentures into shares
of the Company's Common Stock at a conversion price of $.09 per share. This
offer also provided for the reduction of the exercise price on the Warrants
included in the Units issued in the July Offering from $.30 to $.15 per Warrant.
As further inducement, if the holder agreed to convert, we also agreed to issue
additional common stock purchase warrants equal to the number of warrants held
by each Unit holder that are also exercisable at $.15 per warrant for a period
of three (3) years. As of the date of this Report, all of the Unit holders have
accepted the Company's offer, except for two holders who did agree to assign
their Debentures to third parties. These holders kept the Warrants issued as
part of their original Units. As a result, we issued an aggregate of 18,478,565
shares of our Common Stock and 5,642,300 common stock purchase warrants, pro
rata to the number of Units held by each holder that elected to convert. We also
reduced the exercise price on the 3,704,800 Warrants held by the converting
holders to $.15 per share, while maintaining the exercise price on 150,000
Warrants for those holders who elected not to convert at $.30 per share.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
Exhibit
Number Description
- ----------- ----------------
31.1 Section 302 Certificate of Chief Executive Officer *
31.2 Section 302 Certificate of Chief Financial Officer *
32.1 Section 906 Certificate of Chief Executive Officer *
32.2 Section 906 Certificate of Chief Financial Officer *
* Filed herein
-32-
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Ningbo, China on February 9, 2006.
DRAGON INTERNATIONAL GROUP CORP
By: /s/ David Wu
------------------------------------------
David Wu, CEO, Principal Executive Officer
-33-