Hey Jim, this could help DRGG possibly: Form 10-Q for DRAGON INTERNATIONAL GROUP CORP.
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14-Feb-2007
Quarterly Report
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
The following analysis of our results of operations and financial condition should be read in conjunction with our financial statements for the years ended June 30, 2006 and 2005 and notes thereto contained in our report on Form 10-KSB as filed with the Securities and Exchange Commission.
Overview
Dragon International Group Corp. ("we," "us," "our," or "Dragon") was incorporated on February 17, 1993 pursuant to the laws of the State of Nevada.
We own a 100% interest in Dragon International Group Corp., a Florida corporation ("Dragon Florida"). Dragon Florida owns 100% interest in Ningbo Dragon International Trade Company, Limited ("Ningbo Dragon"), formerly known as Ningbo Anxin International Trade Company, Limited ("Anxin"). Ningbo Anxin International Trade Company, Limited changed its name to Ningbo Dragon International Trade Company, Limited ("Ningbo Dragon") on July 7, 2005. Ningbo Dragon is involved in the pulp, paper and packaging material industry, operating as a manufacturer and distributor of pulp, paper and integrated packaging products. Ningbo Dragon, through a subsidiary, holds an ISO9000 certificate and national license to import and export products. Our operations are conducted in China. Ningbo Dragon operates subsidiaries, including; (i) Ningbo City Jiangdong Yonglongxin Special Paper Company, Limited ("Yonglongxin") that holds an ISO9000 certificate and operates a civil welfare manufacturing facility in Fuming County of the Zhang'ai Village in Ningbo, China. Yonglongxin operates the Xianyang Naite Research & Development Center (the "R&D Center"), created to develop, design and improve production methods in the specialty packaging industry in China; (ii) Hangzhou Yongxin Paper Company, Limited ("Yongxin"). Yongxin manufactures, sells, and distributes packaging materials for the tobacco industry in China; and (iii) Ningbo Dragon Packaging Technology Company, Limited ("Dragon Packaging"), a manufacturer of specialized packaging materials products for the pharmaceutical and food industry. Shanghai JinKui Packaging Material Company, Limited ("JinKui"), a wholly owned subsidiary of Dragon Nevada, manufactures specialized packaging products for the pharmaceutical, food and beverage industry. Ningbo Dragon has a distribution network covering east and central China.
Our principal executive offices are located at Bldg 14, Suite A09, International Trading Center, 29 Dongdu Road, Ningbo, China 315000, telephone:
86-574-56169308.
In 2005, we consolidated the operations of two divisions in an effort to reduce fixed operational expenses. Ningbo Dragon 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"). The remote operations were established in an effort to improve client relations and extend the brand awareness of our products and services throughout China. Unfortunately, the cost of the additional offices proved too costly. We now service the clients of An'Hong and Long'An as they continue to operate the underlying business of each entity from our headquarters in Ningbo. The fixed assets, office equipment and entities were sold to Shanghai DIJI Investment Management Company.
We import pulp and paper products manufactured overseas and distribute 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.
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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.
Effective January 16, 2007, Dragon International Group Corp., a Nevada corporation (the "Registrant") entered into an agreement ("Agreement") whereby it agreed to purchase fifty one (51%) percent of the common stock (the "Common Stock") of Wellton International Fiber Corp., a corporation organized under the laws of the British Virgin Islands (the "Company"). Wellton acts as an agent for the distribution of pulp and waste paper products in China. The transactions contemplated by the Agreement are expected to close (the "Closing Date") on or before March 31, 2007. In exchange for the fifty-one (51%) percent of Company's Common Stock, the Registrant agreed to pay a purchase price (the "Purchase Price") equal to fifty-one (51%) percent of the value of the Company's audited net tangible assets, as stated on the Company's audited financial statements for the period ending December 31, 2006. The Company's audited financial statements have yet to be prepared and the Agreement is conditional upon the engagement of SEC approved auditor to prepare such audited financial statements. The purchase price will be in the form of common stock of Dragon Nevada and shall not exceed $1,500,000 in the aggregate.
In March 2005 and July 2005 we engaged in private offerings of our securities. All of the offerings have been converted to common stock in January 2006. Following is a description of these offerings:
March 2005 Private Placement
On March 1, 2005, we closed a private offering of Units. Each Unit consisted of a secured convertible debenture 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 minimum subscription was for $50,000 or one Unit; however, we reserved the right to accept subscriptions for a fractional Unit, which we did. 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 were scheduled to mature six months following the closing of the offering. Interest only was payable monthly.
We anticipated undertaking a subsequent offering to raise additional funds under similar terms and conditions as provided in the March 2005 Private Placement and as a result, the relevant offering documents contained a mandatory provision that provided for each of the investors to convert into the subsequent offering. This second offering, described below under the heading "July 2005 Private Placement," took place beginning in May 2005 and was similar to the offering terms of the March 2005 offering, with the exception of the primary term of the Debenture. Each of the investors retained ownership of the warrants issued to them in the March 2005 Private Placement.
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July 2005 Private Placement
During the period from May 9, 2005 to July 11, 2005, we successfully closed a 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 29 "accredited investors," as that term is defined under the Securities Act of 1933, as amended. As well gross proceeds of $357,500 received seven (7) investors who purchased Units under the terms of the March 2005 Private Placement were invested under the terms of the July 2005 Private Placement. Each Unit consisted of a secured convertible debenture with a face value of the principal amount invested by each investor, carrying an annual coupon of 8% and 200,000 Class A Common Stock Purchase Warrants (5 warrants per dollar invested) to purchase shares of our Common Stock at $.30 per share for a period of five (5) years expiring July 1, 2010. The minimum subscription was for $100,000 or one Unit; however, we reserved the right to accept subscriptions for a fractional Unit, which we did. T
January Conversion Offer
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 our 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 2005 Private Placement from $.30 to $.15 per warrant and the reduction of the exercise price on the warrants included in the Units issued in the March 2005 Private Placement from $.40 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 at the time of the January Conversion Offer. These conversion warrants are exercisable at $.15 per warrant for a period of Five (5) years. All of the Unit holders accepted our offer, except for two holders who assigned their Debentures to third parties who subsequently converted under the terms of the January Conversion Offer. These holders retained the warrants issued as part of their original Units in both the March 2005 Private Placement and the July 2005 Private Placement. 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 electing to convert under the terms of the January Conversion Offer. We also reduced the exercise price on the 3,704,800 warrants held by the converting holders from the July 2005 Private Placement from $.30 to $.15 per share, while maintaining the exercise price on 150,000 warrants at $.30 per share for those holders who elected not to convert. We also reduced the exercise price on the 1,787,500 warrants received as consideration for the March 2005 Private Placement from $.40 to $.15 per share. Results of Operations
Comparison of Results of Operations for the six months ended December 31, 2006 and 2005
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Six Months Ended December 31,
---------------------------------
2006 2005 $ %
(Unaudited) (Unaudited) Change Change
---------------- ---------------- ------------- ------------
Net Revenues $10,021,886 $9,491,419 $530,467 5.6%
Cost of sales 9,216,443 8,883,949 332,494 3.7%
Stock based consulting expenses 173,756 52,000 121,756 234.1%
Selling expenses 137,946 160,812 (22,866) -14.2%
General and administration(GA) expenses 490,122 221,130 268,992 121.6%
Total operating expenses 801,824 433,942 367,882 84.8%
Operating income 3,620 173,528 (169,909) -97.9%
Total other (expense) 23,310 (522,474) 545,784 NM
---------------- ---------------- ------------- ------------
Net loss $ 26,930 $(350,230) $377,160 NM
================ ================ ============= ============
NM= not meaningful
Six Months Ended December 31,
--------------------------------
2006 2005 %
(Unaudited) (Unaudited) Change
---------------- --------------- -------------
Other Key Indicators:
Cost of sales as a percentage of revenues 92.0% 93.6% -1.6%
Gross profit margin 8.0% 6.4% 1.6%
Selling expenses as a percentage of revenues 1.4% 1.7% -0.3%
GA expenses as a percentage of revenues 4.9% 2.4% 2.5%
Total operating expenses as a percentage of revenues 8.0% 4.6% 3.4%
Although we operate various entities, we identify our products under one product segment. The various entities combine their various resources to support the manufacture and distribution of paper and pulp related products.
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Revenue
During the six months ended December 31, 2006, we generated revenues of $10,021,887, as compared to revenues of $9,491,419 for the six months ended December 31, 2005, an increase of $530,468 or 5.6%. For the six months ended December 31, 2006, we recorded revenues of approximately $846,355 from our JinKui subsidiary acquired effective June 30, 2006. Comparatively, JinKui generated revenues of $474,069 for the six months ended December 31, 2005. This increase in our consolidated revenue was offset by a decrease in sales from our Yonglongxin and Yongxin subsidiaries.
Cost of Sales and Gross Profit
During the six months ended December 31, 2006, cost of goods sold was $9,216,443, compared to $8,883,949 during the six months ended December 31, 2005, an increase of $332,949, or 3.7%. As a percentage of net revenues, our cost of goods sold for the six months ended December 31, 2006 was 92.0%, as compared to 93.6% for the six months ended December 31, 2005, a decrease as a percentage of our revenues of 1.6%. Our cost of goods sold decreased due to efficiencies achieved when we upgraded our machinery.
For the six months ended December 31, 2006, gross profit for the period was $805,444, as compared to gross profit of $607,470 for the six months ended December 31, 2005, an increase of $197,974. For the six months ended December 31, 2006, gross profit on a percentage basis increased to 8.0% from 6.4% for the same period ended December 31, 2005, an increase of 1.6%. Our margins have improved due to efficiencies achieved when we upgraded our machinery. Also, a lower exchange rate has reduced our raw material costs slightly.
Total Operating Expenses
For the six months ended December 31, 2006, total operating expenses amounted to $801,824 or 8.0% of net revenues compared to $433,942 or 4.6% of net revenues for the six months ended December 31, 2005, an increase of $367,882. The increase was attributable to the following:
o For the six months ended December 31, 2006, we recorded non-cash compensation expenses of $173,756 as compared to $52,000 for the six months ended December 31, 2005, an increase of $121,756 or 234.1%. This amount represented the value amortized, for the shares of our common stock issued and warrants granted as compensation for consulting services and professional services being rendered to us. While we anticipate that we will enter into similar agreements during fiscal 2007, we cannot predict the amount of expense that will be attributable to such agreements.
o For the six months ended December 31, 2006, selling expenses amounted to $137,946, as compared to $160,812 for the six months ended December 31, 2005, a decrease of $22,866 or 14.2%. This decrease is attributable to the decrease in shipping costs of approximately $31,125, which is caused by a decrease in shipping costs associated with discounts earned by shipping larger shipments on a per unit basis, and a decrease in fuel charges based on lower fuel costs realized during the six months ending December 31, 2006.
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o For the six months ended December 31, 2006, general and administrative expenses were $490,122, as compared to $221,130 for the six months ended December 31, 2005, an increase of $268,992, or approximately 121.6%. The increase was attributable to the following:
o For the six months ended December 31, 2006, consulting expenses amounted to $73,930 as compared to a credit of $21,766 for the six months ended December 31, 2005, an increase of approximately $95,696. For the six months ended December 31, 2005, we recorded a refund of consulting fees amounting to $29,059 from this agent, as they did not complete service as agreed, thereby reducing our general and administrative expenses.
o For the six months ended December 31, 2006, amortization expenses amounted to $113,301 as compared to $6,905 for the six months ended December 31, 2005, an increase of $106,396. The increase is primarily attributable to amortization of land use rights and goodwill we inherited in connection with our acquisition of JinKui in June 2006.
For the six months ended December 31, 2006, salary and wages amounted to $61,135, as compared to $21,426 for the six months ended December 31, 2005, an increase of $39,709. During the six months ended December 31, 2006 we incurred $5,230 in salary and wages associated with JinKui that was acquired effective June 30, 2006. During the six months ended December 31, 2005 the Company increased its wage and salary rate by approximately 40%, and this new wage rate is reflected in our expenses for the six months ending December 31, 2006.
Total Other Income
For the six months ended December 31, 2006, we reported total other income of $23,310, as compared to total other expenses of $522,474 for the six months ended December 31, 2005. This increase in total other income of $545,784 is primarily associated with the following:
o Income recognized from the value added tax rebates received from the respective tax authority. For the six months ended December 31, 2006, the income recognized from the value added tax rebate was $95,675, compared to $202,072 for the six months ended December 31, 2005. We accrued for value-added taxes ("VAT") recorded on the sale of our paper products. Our paper products are subject to VAT, as imposed by the PRC or the local provincial tax authorities in the PRC. We charge, collect and remit VAT on the sales of our products. We routinely receive abatements of VAT, as we participate in our local provincial program of hiring employees with physical handicaps. The respective tax authorities in the PRC notify us of our VAT abatements after the VAT is collected. We incorporating the tax in our cost and pass it off to the end customer. Until we receive notification of the amount of VAT abated from the respective tax authorities, this VAT remains accrued. Upon notification from the tax authorities that VAT had been either abated, or has been partially abated as determined by the respective tax authority, the excess of accrued VAT is then reclassified into other income as this rebate is not remitted to the customer. Under PRC tax regulations; in the event that VAT collected by us from customers are either abated, or partially abated, the amount of VAT abated is not required to be refunded to customers.
o For the six months ended December 31, 2006, debt issuance costs were $0 as compared to $95,695 for the six months ended December 31, 2005. For the six months ended December 31, 2005, the debt issuance costs were related to the amortization of placement fees paid in connection with our March 2005 Private Placement and July 2005 Private Placement. In February 2006, upon conversion of the July Notes to common stock under the terms of the January Conversion Offer, we expensed all unamortized debt issuance costs. For the six months ended December 31, 2006, we did not have any such debt issuance costs.
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o For the six months ended December 31, 2006, interest expense was $76,763, as compared to $631,492 for the six months ended December 31, 2005, a decrease of $554,729. For the six months ended December 31, 2005, the interest expense of $631,492 was comprised of $561,248 of amortization for the discount on the July Notes that was included in interest expense related to the March 2005 Private Placement and July 2005 Private Placement and $70,244 of interest expenses related to other borrowings. In February 2006, upon conversion of the July Notes to common stock, we expensed all unamortized discounts related to the July Notes and the March Notes.
Net Income
As a result of these factors, we reported a net income of $26,930 (less than $.01 per share) for the six months ended December 31, 2006, as compared to net loss of $(350,230) (less than $.01 per share) for the six months ended December 31, 2005.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current
and future operations, satisfy its obligations and otherwise operate on an
ongoing basis. The following table provides certain selected balance sheet
comparisons between December 31, 2006 (unaudited) and June 30, 2006:
December 31, June 30, $ of % of
2006 (Unaudited) 2006 Change Change
Working capital 2,051,842 558,414 1,493,428 267.4%
Cash 174,562 466,272 (291,710) -62.6%
Accounts receivable, net 5,252,947 4,938,985 313,962 6.4%
Inventories 3,735,169 3,293,846 441,323 13.4%
Prepaid expenses and other 122,704 466,080 (343,376) -73.7%
Advance on purchases 2,865,382 805,662 2,059,720 255.7%
Due from related parties 0 3,498 (3,498) -100.0%
Total current assets 12,150,764 9,974,343 2,176,421 21.8%
Cash restricted 255,836 262,287 (6,451) -2.5%
Property and equipment, net 2,324,520 2,132,697 191,823 9.0%
Land use rights, net 2,557,499 2,524,568 32,931 1.3%
Intangible assets, net 353,020 393,928 (40,908) -10.4%
Notes payable - current portion 3,170,035 2,762,207 407,828 14.8%
Accounts payable 5,188,322 3,401,439 1,786,883 52.5%
Accrued expenses 1,717,922 2,042,113 (324,191) -15.9%
Advances from customers 22,643 68,694 (46,051) -67.0%
Liability in connection with acquisition 0 1,141,476 (1,141,476) -100.0%
Total current liabilities 10,098,922 9,415,929 682,993 7.3%
Notes payable - long-term portion 48,000 48,000
Total liabilities 10,146,922 9,415,929 730,993 7.8%
At December 31, 2006, we had $174,562 in cash. At December 31, 2006, our cash position by geographic area is as follows:
United States $ 844
China 173,718
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Total $ 174,562
========+=====
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Our working capital position increased $1,493,428 to $2,051,842 at December 31, 2006 from $558,414 at June 30, 2006. This increase in working capital is primarily attributable to an increase of approximately $2,176,421 in current assets at December 31, 2006 as compared to June 30, 2006, which was offset by increases in current liabilities of approximately $682,993 at December 31, 2006 as compared to June 30, 2006. The increase in our current liabilities is primarily attributable to an increase in accounts payable of $1,786,883 which were offset by a decrease in accrued expenses of $324,191and a decrease in liabilities of $1,141,476 in connection with the acquisition of JinKui in June 2006.
At December 31, 2006, our inventories of raw materials, work in process and finished goods amounted to $3,735,169, an increase of $441,323, or approximately 13.4%, from June 30, 2006. The inventory increased in order to meet growing demand for products associated with our JinKui acquisition. JinKui has witnessed strong demand for its products. And as a result we increased inventory levels to accommodate the growing demand for this new acquisition.
At December 31, 2006, our advances on purchases amounted $2,865,382, an increase of $2,059,720, or approximately 255.7%, from June 30, 2006. The increase in our advances on purchases is associated with payments made for a new construction contract for Dragon Packaging and 30% down payment for goods which we import through Ningbo Dragon, but have not yet been received.
At December 31, 2006 our accounts receivable, were $5,252,947, as compared to $4,938,985 at June 30, 2006 an increase of $313,961 and reflects our increase in sales. As is customary in the PRC, we extend relatively long payment terms to our customers. Our terms of sale generally require payment within 120 days, which is considerably longer than customary terms offered in the United States, however, we believe that our terms of sale are customary amongst our competitors for a company of our size within our industry and recently we have been collecting our accounts receivable on a timely basis.
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Net cash used in operating activities for the six months ended December 31, 2006 was $571,276 as compared to net cash used in operating activities of $972,273 for the six months ended December 31, 2005. For the six months ended December 31, 2006, we used cash to fund increases in inventories of $441,323, an increase in advances on purchases of 2,059,720, an increase in accounts payable of $1,786,883 and a decrease in accrued expenses of $324,191. The decreases were offset by a net decrease in prepaid and other current assets of $343,376, an increase in accounts receivables of $293,917, combined with a net addition of non-cash items of $357,978 which were offset by our net income.
For the six months ended December 31, 2005, we used cash to fund an increase in prepaid and other current assets, the reduction in accrued expenses and advances from customers. The decreases were offset by an increase in accounts payable of $1,329,956. These items, combined with a net addition of our non-cash items of $723,994 were offset by our net income.
Net cash used in investing activities during the six months ended December 31, 2006 was $376,316 as compared to net cash provided by investing activities of $156,493 for the six months ended December 31, 2005. During the six months ended . . .
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