United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: March 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)(Zip code)
(86) 574-56169308
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of November __, 2005; 39,635,234 outstanding shares of common
stock, $.001 par value per share.
This amended Quarterly Report on Form 10-QSB/A1 of Dragon International Group
Corp. for the fiscal quarter ended March 31, 2005 is being filed for the purpose
of
o Revising net revenues and corresponding cost of sales related to an
error in the elimination of inter-company revenues and related cost of sales.
For the nine months ended March 31, 2005 and 2004, we initially did not
eliminate certain inter-company sales and the related cost of sales of
$5,774,337 and $2,121,927, respectively. Accordingly, we decreased revenues
and cost of sales for the nine months ended March 31, 2005 and 2004 by
$5,774,337 and $2,121,927, respectively. For the three months ended March
31, 2005 and 2004, we initially did not eliminate certain inter-company
revenues and the related cost of sales. Accordingly, we decreased revenues
and cost of sales for the three months ended March 31, 2005 and 2004 by $0
and $1,110,332, respectively.
This report on Form 10QSB/A1 supercedes in its entirety the previously filed
Quarterly Report for March 31, 2005.
DRAGON INTERNATIONAL GROUP CORP.
FORM 10-QSB/A1
QUARTERLY PERIOD ENDED MARCH 31, 2005
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet
March 31, 2005 (Unaudited)...................................3
Consolidated Statements of Operations (Unaudited)
For the Three and Nine Months Ended March 31, 2005 and 2004..4
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended March 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........................................29
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, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2005
(Unaudited)
<table>
<caption>
ASSETS
<s> <c>
CURRENT ASSETS:
Cash and cash equivalents $ 226,588
Accounts receivable (net of allowance for doubtful accounts of $57,780) 3,205,317
Inventories 1,013,259
Advances to employees 264,847
Due from related parties 3,072,182
Prepaid expenses and other 292,077
------------
Total Current Assets 8,074,270
PROPERTY AND EQUIPMENT - Net 398,487
OHER ASSETS 14,018
------------
Total Assets $ 8,486,775
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,117,150
Convertible debentures payable, net 96,985
Convertible notes payable 10,188
Accounts payable 2,596,062
Accrued expenses 1,239,732
------------
Advances from customers 64,917
Total Current Liabilities 5,125,034
LONG-TERM DEBT, net of current portion 120,773
------------
Total Liabilities 5,245,807
------------
STOCKHOLDERS' EQUITY:
Common stock ($.001 Par Value; 200,000,000 Shares Authorized;
37,585,234 shares issued and outstanding) 37,585
Additional paid-in capital 647,272
Retained earnings 2,556,111
------------
Total Stockholders' Equity 3,240,968
------------
Total Liabilities and Stockholders' Equity $ 8,486,775
============
</table>
See notes to consolidated financial statements
-3-
<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(AS RESTATED - SEE NOTE 1)
<table>
<caption>
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
---------------------------------- ------------------------------------
2005 2004 2005 2004
---------------- ---------------- ----------------- -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<s> <c> <c> <c> <c>
NET REVENUES $ 2,472,995 $ 4,921,314 $ 8,789,729 $ 12,593,474
COST OF SALES 2,127,643 4,276,496 7,871,809 10,952,717
---------------- ---------------- ----------------- -----------------
GROSS PROFIT 345,352 644,818 917,920 1,640,757
---------------- ---------------- ----------------- -----------------
OPERATING EXPENSES:
Selling expenses 120,371 358,873 338,595 642,573
General and administrative 105,836 238,678 387,334 351,558
---------------- ---------------- ----------------- -----------------
Total Operating Expenses 226,207 597,551 725,929 994,131
---------------- ---------------- ----------------- -----------------
INCOME FROM OPERATIONS 119,145 47,267 191,991 646,626
---------------- ---------------- ----------------- -----------------
OTHER INCOME (EXPENSE):
Other income 27,943 124,559 57,856 252,002
Interest expense, net (54,105) (13,966) (105,787) (54,087)
---------------- ---------------- ----------------- -----------------
Total Other Income (Expense) (26,162) 110,593 (47,931) 197,915
---------------- ---------------- ----------------- -----------------
INCOME BEFORE INCOME TAXES 92,983 157,860 144,060 844,541
INCOME TAXES 70 (30,574) (49,213) (89,627)
---------------- ---------------- ----------------- -----------------
NET INCOME $ 93,053 $ 127,286 $ 94,847 $ 754,914
================ ================ ================= =================
NET INCOME PER COMMON SHARE
Basic $ 0.00 $ 0.01 $ 0.00 $ 0.03
================ ================ ================= =================
Diluted $ 0.00 $ 0.01 $ 0.00 $ 0.03
================ ================ ================= =================
Weighted Common Shares Outstanding - Basic 36,094,090 24,625,000 29,774,932 24,625,000
================ ================ ================= =================
Weighted Common Shares Outstanding - Diluted 37,447,310 24,625,000 31,112,316 24,625,000
================ ================ ================= =================
</table>
See notes to consolidated financial statements
-4-
<page>
DRAGON INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<table>
<caption>
For the Nine
Months Ended
March 31,
----------------------------------------
2005 2004
------------------- -------------------
(Unaudited) (Unaudited)
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 94,847 $ 754,914
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 53,306 34,205
Amortization of discount on debentures payable 23,684 -
Amortization of debt issuance costs 2,979 -
Changes in assets and liabilities:
Accounts receivable (1,106,472) (1,955,020)
Inventories 1,813,955 (148,993)
Prepaid and other current assets 372,876 696,662
Advances to employees 306,547 (12,487)
Other assets (14,018) 65,135
Accounts payable (1,697,935) 3,219,669
Accrued expenses 256,802 (711,326)
Advances from customers (324,022) (223,184)
------------------- -------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (217,451) 1,719,575
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Due from related parties (513,142) (1,819,651)
Decrease in short-term investments 386,473 -
Capital expenditures (153,348) (32,275)
------------------- -------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (280,017) (1,851,926)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans payable 101,450 54,347
Proceeds from debentures payable 321,750 -
Contributed capital 15,000 -
Distributions to shareholders - (102,657)
------------------- -------------------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES 438,200 (48,310)
------------------- -------------------
NET DECREASE IN CASH (59,268) (180,661)
CASH - beginning of year 285,856 501,135
------------------- -------------------
CASH - end of period $ 226,588 $ 320,474
=================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities
Issuance of common stock for debt $ 57,601 $ -
=================== ===================
Deferred discount and deneficial conversion on debentures payable $ 284,199 $ -
=================== ===================
</table>
See notes to consolidated financial statements.
-5-
<page>
DRAGON INTERNATIONAL GROUP CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Dragon International Group Corp. (formerly Retail Highway.com, Inc) (the
"Company") was incorporated in the State of Nevada on February 17, 1993 under
the name "LBF Corporation" and has been in the development stage since its
inception. Effective April 17, 1999, the Company acquired certain assets to
facilitate the Company's entry into electronic commerce and changed its name to
Retail Highway.com, Inc.
On or around August 13, 2004, as amended on September 30, 2004 and effective
October 4, 2004, under an Agreement and Plan of Reorganization, the Company
issued 24,625,000 shares of the Company's 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 will be treated as a recapitalization of Retail with the
former shareholders of the Company retaining 1,280,234 or approximately 5% of
the outstanding stock.
In connection with the merger, the Company affected a reverse stock split of the
Company's 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 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 re-established 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").
<page>
-6-
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
The Company (Continued)
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. In
addition to its own operations, Anxin operates four subsidiaries, including: (i)
Jiangdong Yonglongxin Special Paper Company, Limited ("Yonglongxin"), 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
("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. On December 31, 2004, we
issued 4,000,000 Common Shares for the remaining 30% interest in Anxin. 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, 2004 and notes thereto
contained on Form 8K/A2 of the Company as filed with the Securities and Exchange
Commission. The results of operations for the nine months ended March 31, 2005
are not necessarily indicative of the results for the full fiscal year ending
June 30, 2005.
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.
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.
-7-
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Net income per share
Basic income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
income per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents and potentially
dilutive securities outstanding during each period. The following table presents
a reconciliation of basic and diluted earnings per share:
<table>
<caption>
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
---------------------------- ---------------------------
<s> <c> <c> <c> <c>
Net income (loss) $ 93,053 $ 127,386 $ 94,847 $ 754,914
Weighted average shares outstanding - basic 36,094,090 24,625,000 29,774,932 24,625,000
EPS - basic $0.00 $ 0.01 $ 0.00 $ 0.03
============== ============== =============== ==============
Net income (loss) $ 93,053 $ 127,386 $94,847 $ 754,914
============== ============== =============== ==============
Weighted average shares outstanding - basic 36,094,090 24,625,000 29,774,932 24,625,000
Effect of dilutive securities
Unexercised warrants 11,640 - 2,555 -
Convertible debentures 5,820 - 1,278 -
Convertible note payable 1,335,760 - 1,333,551 -
-------------- -------------- --------------- --------------
Weighted average shares outstanding- diluted 37,447,310 24,625,000 31,112,316 24,625,000
============== ============== =============== ==============
EPS - diluted $ 0.00 $ 0.01 $ 0.00 $0.03
============== ============== =============== ==============
</table>
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.
-8-
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 March 31, 2005, the exchange rate for the Chinese Renminbi (RMB) was $1 US
for 8.28 RMB.
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
March 31, 2005 and 2003 was not material.
-9-
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Concentration of Credit Risk
Financial instruments which 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.
Restatement
For the three and nine months ending March 31, 2005 and 2004, the Company
revised net revenues and cost of sales related to an error in the elimination of
inter-company revenues and cost of sales. The Company initially reflected
revenues and cost of sales figures prior to the elimination of inter-company
revenues and costs of revenues. Since there were no inter-company profits or
losses associated with the inter-company sales, there was no change to the
Company's gross profit or net income. Accordingly, the adjustments to the
statement of operations were as follows:
<table>
<caption>
For the Three For the Three For the Nine Months For the Nine
Months Ended March Months Ended March Ended March 31, 2005 Months Ended March
31, 2005 31, 2004 31, 2004
-------------------- --------------------- --------------------- --------------------
<s> <c> <c> <c> <c>
Prior to Restatement
Net Revenues $ 2,472,996 $ 6,031,646 $ 14,564,067 $ 14,715,401
Cost of Sales 2,127,644 5,386,828 13,646,147 13,074,644
-------------------- --------------------- --------------------- --------------------
Gross Profit $ 345,352 $ 644,818 $ 917,920 $ 1,640,757
==================== ===================== ===================== ====================
As Restated
Net Revenues $ 2,472,995 $ $ 8,789,729 $ 12,593,474
4,921,314
Cost of Sales 2,127,643 4,276,496 7,871,809 10,952,717
-------------------- --------------------- --------------------- --------------------
Gross Profit $ 345,352 $ 644,818 $ 917,920 $ 1,640,757
==================== ===================== ===================== ====================
</table>
NOTE 2 - INVENTORIES
At March 31, 2005, inventories consisted of the following:
Raw materials $ 447,821
Finished goods 565,438
--------------
$ 1,013,259
==============
-10-
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 3 - RELATED PARTY TRANSACTIONS
Due from related parties
The consolidated financial statements include balances and transactions with
related parties. At March 31, 2005, the Company had a net receivable from
several affiliated entities owned by an officer of the Company amounting to
$3,072,182. These advanced are payable on demand and are personally guaranteed
by the officer.
Due to related party
The former President of the Company, from time to time, provided advances to the
Company for operating expenses. These advances are short-term in nature and
non-interest bearing. The amount due to the former President at March 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 the earlier of (i) the Company successfully consummating
a merger or acquisition; or (ii) one year from the date of the note. 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 to 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 the earlier of (i) the Company successfully consummating
a merger or acquisition; or (ii) one year from the date of the note. Interest
accrues at the rate of 3% per annum and aggregated $558 through March 31, 2005.
During the nine months ended March 31, 2005, the Company issued 4,136,789 shares
of common stock in connection with the conversion of $31,026 of this debt. At
March 31, 2005, convertible notes payable outstanding amounted to $10,188, which
is convertible into 1,358,400 shares of common stock.
In May 2004, the Company's attorney entered into an agreement with the Company
to convert $15,171 of accounts payable for legal services to a note. This note
was convertible into 2,022,667 shares of the Company's common stock at a
conversion price of $0.0075 per share and was due on the earlier of (1) the
Company successfully consummating a merger or acquisition; or (ii) upon demand.
Interest accrued at the rate of 18% per annum. On October 4, 2004, this note was
converted into 2,022,667 shares of common stock.
-11-
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 4 - CONVERTIBLE NOTES PAYABLE (continued)
In August 2004, a vendor entered into an agreement with the Company to convert
$11,404 of accounts payable to a convertible note. This note was convertible
into 1,520,544 shares of the Company's common stock at a conversion price of
$0.0075 per share and was due on the earlier of (1) the Company successfully
consummating a merger or acquisition; or (ii) upon demand. Interest accrued at
the rate of 18% per annum. On October 4, 2004, this note was converted into
1,520,544 shares of common stock.
NOTE 5 - DEBENTURES PAYABLE
During fiscal 2003, the Company raised capital from accredited investors under a
private placement memorandum. Each unit consisted of a promissory note of
$50,000 and a common stock purchase warrant to purchase 25,000 shares of the
Company's common stock exercisable at $.16 per share. The purchase warrants
expire in five years from the date of the warrant. The notes had a term of one
year and provided for interest accrual on the unpaid principal balance of 10%
per year.
Effective March 15, 2005, the Company raised capital from accredited investors
under a private offering of Units. The private offering provided for the sale of
12 units at a price of $25,000 per unit in order to raise up to a total of
$300,000. The private offering sold additional units for a total capital raise
of $357,500. Each unit consisted of a $25,000 8% Secured Convertible Debenture
and a Class A common stock purchase warrant to purchase 125,000 of the Company's
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 Company received gross proceeds of $357,500 from the sale of
these Units ($321,750 net). 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 are secured by property with an estimated value of $227,900 and
12,250,000 shares of Common Stock owned by David Wu, the Company's President and
Chief Executive Officer. The Debentures mature six (6) months following the
closing of the offering. Interest only is payable monthly.
Conversion of the Debenture can occur several ways as follows:
1. The Company may convert a portion of the remaining principal and
accrued interest due into shares of common stock, upon notice, at a
conversion rate equal to a 20% discount to the weighted average bid
price for the previous five days prior to receipt of such Notice of
Conversion with a floor of $.40 per share. The Company can elect to
convert provided that the Company notifies the Holder of its intent to
convert to shares of common stock by the 15th calendar day of the month
preceding such anticipated conversion and provided that:
-12-
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 5 - DEBENTURES PAYABLE (continued)
i) The common stock received for payment is fully registered
at the time of receipt and is delivered without restriction of
any kind ii) The average daily trading volume of the Company's
common stock as measured for the prior 60 days to Notice of
Conversion is no less than 50,000 shares per day to the
Holder; or iii) The weighted average daily price per share as
measured from the five trading days prior to Notice of
Conversion is no less than $0.50 per share; or iv) Any payment
of the principal balance due herein must be received by the
Holder within three (3) business days of the first day of the
month
Further, the Company may elect to convert the remaining principal and
accrued interest due into shares of common stock at the greater of: (i)
10% of the remaining principal value of the Debenture for the previous
five (5) days prior to receipt of such Notice of Conversion; or (ii)
25% of the average weighted daily value of the common shares.
2. The Holder can elect to convert all remaining principal and interest
due into shares of common stock at a 20% discount to the market with
a floor of $.40. At no time can the conversion price be in excess of
$.75 per share. Such anticipated conversion may only occur in the
event the following criteria are met: (a) the common stock received
for payment is fully registered at the time of receipt and is
delivered without restriction of any kind; (b) the average daily
trading volume as measured for the 60 days prior to Notice of
Conversion is no less than 50,000 shares per day; (c) the weighted
average daily price per share as measured from the five trading days
prior to Notice of Conversion is no less than $.50 per share; and (d)
the stock must be delivered within three (3) business days of the
1st of the current month.
In connection with the 1,787,500 warrants issued with the debentures, the
Company recorded imputed interest in the amount of $239,510 that will be
amortized over the life of the debentures. Additionally in connection with the
Debentures, the Company recorded a beneficial conversion amount of $44,688 that
will be amortized over the life of the Debentures. For the nine months ended
March 31, 2005, the amount of amortization of imputed interest and beneficial
conversion charged to interest expense was $23,683.
The convertible debenture liability is as follows at March 31, 2005:
Convertible debentures payable $ 357,500
Less: unamortized discount on debentures (260,515)
---------------
Convertible debentures, net $ 96,985
===============
-13-
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 6 - STOCKHOLDERS EQUITY
Common Stock
In August 2004, the Company's board of directors approved a 1 for 8 reverse
stock split. All per share data included in the accompanying consolidated
financial statement have been adjusted retroactively to reflect the reverse
split.
On October 4, 2004, holders of convertible promissory notes aggregating $26,575
exercised their conversion rights applicable thereto. Accordingly, the Company
issued an aggregate of 3,543,211 common shares to five persons and/or entities
(see note 4).
On October 4, 2004, under an Agreement and Plan of Reorganization, the Company
issued 24,625,000 shares of the Company's common stock for the acquisition of
all of the outstanding capital stock of Dragon International Group Corp.,
("Dragon") a Florida corporation.
On December 31, 2004, in connection with the acquisition of the remaining 30% of
its subsidiary, the Company issued 4,000,000 shares of common stock.
On January 17, 2005, holders of convertible promissory notes aggregating $13,424
exercised their conversion rights applicable thereto. Accordingly, the Company
issued an aggregate of 1,789,823 common shares (see note 4).
On February 7, 2005, holders of convertible promissory notes aggregating $17,602
exercised their conversion rights applicable thereto. Accordingly, the Company
issued an aggregate of 2,346,966 common shares (see note 4).
Stock Warrants
On March 15, 2005, in connection with the private offering discussed in Note 5,
the Company granted 1,787,500 warrants to purchase 1,787,500 shares of the
Company's common stock exercisable at $.40 per share. The purchase warrants
expire in five years from the date of the warrant.
-14-
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 6 - STOCKHOLDERS EQUITY (continued)
A summary of the status of the Company's outstanding stock warrants as of March
31, 2005 and changes during the period then ended is as follows:
Weighted
Average
Exercise
Shares Price
----------- --------------
Outstanding at July 1, 2004 - $ -
Granted 1,787,500 0.40
Exercised - -
Forfeited - -
----------- --------------
Outstanding at March 31, 2005 1,787,500 $ 0.40
============ ==============
Warrants exercisable at end of period 1,787,500 $ 0.40
============ ==============
Weighted-average fair value of warrants
granted during the period $ 0.40
===============
The following information applies to all warrants outstanding at March 31, 2005:
<table>
<caption>
Warrants Outstanding Warrants Exercisable
---------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life (Years) Price Shares Price
<s> <c> <c> <c> <c> <c>
------------------------ ----------- ------------ ----------- -------------- ----------
$0.40 1,787,500 5.00 $ 0.40 1,787,500 $ 0.40
</table>
NOTE 7 - 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.
-15-
<page>
DRAGON INTERNATIONAL GROUP CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 7 - 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
Remnibi 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 is 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.
-16-
<page>
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 financial statements for our fiscal year
ended June 30, 2004 and notes thereto contained in our report on Form 8-K/A2. as
filed with the Securities and Exchange Commission.
This amended report on Form 10-QSB/A1 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.
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 of Retail with our former shareholders
retaining 1,280,234, or approximately 5% of the outstanding stock.
Dragon International Group Corp. ("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"). 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. In addition to its own operations, Anxin operates
four subsidiaries, including: (i) Jiangdong Yonglongxin Special Paper Company,
Limited ("Yonglongxin"), 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 ("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. On December 31, 2004, we issued 4,000,000 Common Shares for the remaining
30% interest in Anxin.
-17-
<page>
Critical Accounting Policies
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.
-18-
<page>
A summary of significant accounting policies is included in Note 1 to the
audited financial statements included Form 10-KSB as filed with the Securities
and Exchange Commission for the year ended June 30, 2004. 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.
We record property and equipment at cost. Depreciation and amortization are
provided using the straight-line method over the estimated economic lives of the
assets, which are from five to ten years. 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 account 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. We 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. We account for stock options and stock issued to non-employees
for goods or services in accordance with the fair value method of SFAS 123.
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.
RESULTS OF OPERATIONS
Comparison of Our Results of Operations for the Nine Month Periods Ended March
31, 2005 and 2004
For the nine months ended March 31, 2005, our revenues were $8,789,729, as
compared to $12,593,474 for the nine months ended March 31, 2004, a decrease of
$3,803,745 or approximately 30.2%. Additionally, during the period, we
consolidated the operations of certain of our subsidiaries in one company and
delayed the shipment of product to expedite the consolidation. Additionally, we
announced that we entered into an agreement to become the supplier of printing
paper for "Red Gold Dragon" cigarette mark paper to the Hubei Jinsanxia Printing
Company ("Jinsanxia"). Jinsanxia specializes in the printing of cigarette
packaging and is ranked number one in the industry in Provinces of Hunan and
Hubei. On April 5, 2005, we announced that we received an order from Jiangsu
Dare Technology Company Limited, a wholly owned subsidiary of Jiangsu Dare
Group.. Dare Group, established in 1978, is a shareholder of Dare PLC, a
publicly listed company. The initial order is valued in excess of $2 million.
-19-
<page>
For the nine months ended March 31, 2005, cost of sales amounted to $7,871,809,
or 89.6% of net revenues, as compared to cost of sales of $10,952,717 or 87% of
net revenues for the nine months ended March 31, 2004, a decrease of $3,080,908
or 28%. This decrease was a result of decreased sales and resulted from an
increase in raw material costs and overhead costs such as utilities during the
nine months ended March 31, 2005 as compared to the nine months ended March 31,
2004. We paid more for pulp, oil, and metal materials due to increase in global
prices.
Gross profit for the nine months ended March 31, 2005 was $917,920 or 10.4% of
revenues, as compared to $1,640,757 or 13% of revenues for the nine months ended
March 31, 2004.
For the nine months ended March 31, 2005, total operating expenses were
$725,929, as compared to $994,131 for the nine months ended March 31, 2004, a
decrease of $268,202, or approximately 27%.
Included in this decrease was:
For the nine months ended March 31, 2005, selling expenses amounted to
$338,595, as compared to $642,573 for the nine months ended March 31, 2004, a
decrease of $303,978 or approximately 47%. This decrease is attributable to a
material decrease in consulting expense of approximately $321,000 incurred in
the 2004 period compared to $0 in the 2005 period. This decrease was offset by
increased shipping costs. Additionally, for the nine months ended March 31,
2005, we increased our advertising and promotions spending compared to the same
period in the prior year. We expect out selling expenses to increase as we
attempt to increase revenues and expect to spend increased funds on adverting
and promotion of our products.
o For the nine months ended March 31, 2005, general and administrative
expenses were $387,334, as compared to $351,558 for the nine months
ended March 31, 2004, an increase of $35,776, or approximately 10%.
For the nine months ended March 31, 2005, we incurred professional
fees of approximately $70,000 related to our acquisition of Anxin as
compared to $0 for the nine months ended March 31, 2004, an increase
of $70,000 or 100%. Additional increases were due to increased
salary and wages and operating expenses.
For the nine months ended March 31, 2005, other income amounted to $57,856 as
compared to other income of expenses of $252,002 for the nine months ended March
31, 2004. Other income for the nine months ended March 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 nine months ended March 31, 2005, interest expense was $105,787, as
compared to $54,087 for the nine months ended March 31, 2004 and was related to
increased borrowings.
As a result of these factors, we reported net income of $94,847 (less than $.01
per share) for the nine months ended March 31, 2005, as compared to net income
of $754,914 (approximately $.03 per share) for the nine months ended March 31,
2004.
-20-
<page>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005 we had cash and cash equivalents of $226,588.
During fiscal 2003, we raised capital from accredited investors under a
private placement memorandum. Each unit consisted of a promissory note of
$50,000 and a common stock purchase warrant to purchase 25,000 shares of our
common stock exercisable at $.16 per share. The purchase warrants expire in five
years from the date of the warrant. The notes had a term of one year and
provided for interest accrual on the unpaid principal balance of 10% per year.
Effective March 15, 2005, we raised capital from accredited investors
under a private offering of Units. The private offering provided for the sale of
12 units at a price of $25,000 per unit raising up to a total of $300,000. The
private offering sold additional units for a total capital raise of $357,500.
Each unit consisted of a $25,000 8% Secured Convertible Debenture and a Class A
common stock purchase warrant to purchase 250,000 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. We received gross
proceeds of $357,500 from the sale of these Units ($321,750 net). 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 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 mature six
(6) months following the closing of the offering. Interest only is payable
monthly.
Additionally, we will raise capital from accredited investors under a
new private offering of Units. The private offering provides for the sale of up
to 25 units at a price of $100,000 per unit raising up to a total of $2,500,000.
Each unit consisted of a $100,000 8% Secured Convertible Debenture and a Class A
common stock purchase warrant 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 convertible into our common stock, as defined in the private placement
memorandum.
Net cash used in operating activities for the nine months ended March
31, 2005, was $217,451, as compared to net cash provided by operating activities
of $1,719,575 for the nine months ended March 31, 2004.
Net cash used in investing activities for the nine months ended March
31, 2005 was $280,017, as compared to net cash used in investing activities for
the nine months ended March 31, 2004, of $1,851,926. For the nine months ended
March 31, 2005, we used cash for capital expenditures of $153,348 and the
advance of funds to related parties of $513,142 offset by cash provided by a
decrease in short-term investments of $386,473. For the nine months ended March
31, 2004, we used cash for capital expenditures of $32,275 and advanced related
parties $1,819,651.
-21-
<page>
Net cash provided by financing activities for the nine months ended
March 31, 2005 was $438,200 as compared to net cash used in financing activities
for the nine months ended March 31, 2004 of $(48,310). For the nine months ended
March 31, 2005, we received proceeds of $101,450 from loans payable, received
net proceeds of $321,750 from debentures payable, and received contributions of
$15,000. For the nine months ended March 31, 2004, we received proceeds from
loans payable of $54,347 and offset by shareholder distribution of $102,657.
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. In relation to an offering of
securities the Company received net proceeds of $1,734,660. A portion of the
proceeds will be used to update our manufacturing facilities.
RISK FACTORS
An investment in our securities involves a high degree of risks.
Following are a description of those risks of which our management is currently
aware:
Our revenues are mainly derived from sale of paper products in the
Peoples Republic of China (PRC). We hope to expand our operations to countries
outside the PRC. However, such expansion has not been commenced and there are no
assurances that we 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 our financial condition and results of
operations.
In addition to competing with other companies, we 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 US 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 we will remain competitive should this occur.
We cannot guarantee that the current exchange rate will remain steady,
therefore there is a possibility that we 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.
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, our ability to operate
the PRC subsidiaries could be affected.
-22-
<page>
Our future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental to
us and could have an adverse effect on business development. We do 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.
Our revenues are derived via the operations of our Chinese
subsidiaries. Economic, governmental, political, industry and internal company
factors outside of our 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 our subsidiaries are located in China and have
specific risks associated with that and the intensifying competition for our
products and services and those of the subsidiaries
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.
In this amended Quarterly Report on Form 10-QSB/A1 we are restating our
consolidated statement of operations for the three and nine months ended March
31, 2005 and 2004, respectively, as previously filed with the Securities and
Exchange Commission.
-23-
<page>
ITEM 3. CONTROLS AND PROCEDURES (continued)
The restatement of our consolidated financial statements is also being
made to correct an error in the elimination of inter-company revenues and cost
of sales as described in Note 1 to our financial statements appearing elsewhere
in this report. As a result of this error, we have determined that there was a
significant deficiency in our internal control over financial reporting as of
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.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On January 17, 2005, holders of convertible promissory notes
aggregating $13,424 exercised their conversion rights applicable thereto.
Accordingly, we issued an aggregate of 1,789,823 common shares.
On February 7, 2005, holders of convertible promissory notes
aggregating $17,602 exercised their conversion rights applicable thereto.
Accordingly, we issued an aggregate of 2,346,966 common shares.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
-24-
<page>
Item 6. Exhibits
Exhibit
Number Description
- ------ ----------------
31.1 Rule 13a - 14(a)/15d-14(a) Certification of the Chief Executive Officer *
31.2 Rule 13a - 14(a)/15d-14(a) Certification of the Chief Financial Officer *
32.1 Certification of Chief Executive Officer Certification under Section
906 *
32.2 Certification of Principal Financial and Accounting Officer
Certification under Section 906 *
* Filed herein
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this amended report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Ningbo, China on
November 10, 2005.
DRAGON INTERNATIONAL GROUP CORP.
By: /s/ David Wu
David Wu,
CEO, Principal Executive Officer
-25-