U.S. Securities and Exchange Commission
Washington, D.C. 20549
CN DRAGON CORPORATION
(Exact name of small business issuer as specified in its charter)
Issuers Telephone Number (702) 951-5682
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 o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 1,804,696 of March 19, 2010.
CN DRAGON CORPORATION
Form 10-Q for the nine months ended January 31, 2010
TABLE OF CONTENTS AND INFORMATION REQUIRED IN REPORT
CN Dragon Corp. and Subsidiaries
Consolidated Balance Sheets
The accompanying notes are an integral part of these financial statements 3
CN Dragon Corp. and Subsidiaries
Consolidated Statements of Operations
The accompanying notes are an integral part of these financial statements 4
CN Dragon Corp. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Operations
The accompanying notes are an integral part of these financial statements 5
CN Dragon Corp. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these financial statements 6
CN Dragon Corp. and Subsidiaries
(A Development Stage Company)
Consolidated Statements of Cash Flows (continued)
The accompanying notes are an integral part of these financial statements 7
CN Dragon Corp. and Subsidiaries
Notes to the Consolidated Financial Statements
1. Interim Financial Information
The consolidated financial statements of CN Dragon Corp. (formerly Wavelit, Inc.) (the Company) and its wholly owned subsidiaries, Precision Aviation, Inc., Galaxy Networks Inc., China Teletech (formerly Stream Horizon Studios Ltd.), and Galaxy US Networks Inc. (formerly Eventec, Inc.) for the nine month periods ended January 31, 2010 and 2009 and related footnote information are unaudited. All adjustments (consisting only of normal recurring adjustments) have been made which, in the opinion of management, are necessary for a fair presentation. Results of operations for the nine month periods ended January 31, 2010 and 2009 are not necessarily indicative of the results that may be expected for any future period.
Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted. These financial statements should be read in conjunction with the audited financial statements and notes on Form 10-K for the year ended April 30, 2009 and filed on August 13, 2009.
2. Going Concern
The accompanying consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America, contemplates the continuation of the Company as a going concern. However, the Company has been in the development stage since its inception (December 13, 2002), sustained losses and has used capital raised through the issuance of stock and loans to fund activities. Continuation of the Company as a going concern is contingent upon establishing and achieving profitable operations. Such operations will require management to secure additional financing for the Company in the form of debt or equity.
Management believes that actions currently being taken to revise the Company’s funding requirements will allow the Company to continue its operations. However, there is no assurance that the necessary funds will be realized by securing debt or through stock offerings. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty
3. Summary of Significant Accounting Policies
Certain amounts in the prior year have been reclassified to conform to the current period presentation. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or cash flows.
Recent Accounting Pronouncements
With the exception of those stated below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2009, as compared to the recent accounting pronouncements described in the Annual Report that are of material significance, or have potential material significance, to the Company.
Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.
Recent Accounting Pronouncements (Continued)
Effective January 1, 2008, the Company adopted FASB ASC 820-10, Fair Value Measurements and Disclosures – Overall (“ASC 820-10”) with respect to its financial assets and liabilities. In February 2008, the FASB issued updated guidance related to fair value measurements, which is included in the Codification in ASC 820-10-55, Fair Value Measurements and Disclosures – Overall – Implementation Guidance and Illustrations. The updated guidance provided a one year deferral of the effective date of ASC 820-10 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. The adoption of ASC 820-10 did not have an impact on the Company’s results of operations or financial condition.
Effective April 1, 2009, the Company adopted FASB ASC 820-10-65, Fair Value Measurements and Disclosures – Overall – Transition and Open Effective Date Information (“ASC 820-10-65”). ASC 820-10-65 provides additional guidance for estimating fair value in accordance with ASC 820-10 when the volume and level of activity for an asset or liability have significantly decreased. ASC 820-10-65 also includes guidance on identifying circumstances that indicate a transaction is not orderly. ASC 825-10-65 also amends ASC 825-10 to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements and also amends ASC 270-10 to require those disclosures in all interim financial statements. The adoption of ASC 820-10-65 did not have an impact on the Company’s results of operations or financial condition.
Effective April 1, 2009, the Company adopted FASB ASC 855-10, Subsequent Events – Overall (“ASC 855-10”). ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date – that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. Adoption of ASC 855-10 did not have a material impact on the Company’s consolidated results of operations or financial condition. The Company has evaluated subsequent events from January 31, 2010 to the date the financial statements were issued.
Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material impact on the Company’s results of operations or financial condition.
4. Prepaid Expenses
On November 1, 2007, the Company entered into a consulting agreement and paid for consulting services which have not yet been provided as of the end of this quarter ended January 31, 2010.
5. Due to Shareholders
The total amount owing at January 31, 2010 and April 30, 2009 was $643,803 and $1,372,734 respectively. Convertible Debentures were issued to the following Shareholders: TOV Trust $500,000 ($250,000 Converted to shares July 7 2009); Arthur Griffiths $250,000 (Converted to shares June 29 2009); Edward Clunn $175,000 (Converted to shares March 4 2009); Bram Solloway $125,000 (Converted to shares March 4 2009); Carol Shaw $75,000 (Converted to shares March 4 2009); Robert Danvers $50,000 (Converted to shares March 4 2009); and Lorne Milne $27,730. All Convertible Debentures are 36-month term, bearing interest at 10%per annum payable upon conversion or end of term. Total Face Value of all Convertible Debentures is $1,202,730 and convert to a total of 24,054,600 common shares. Convertible Debentures were issued in order to consolidate debts owed and debt forgiveness of $264,856 was realized in the fiscal year ended April 30, 2008.
6. Capital Stock
ITEM 2. Management's Discussion and Analysis or Plan of Operation
Statements contained in this Plan of Operation of this quarterly report on Form 10-Q and elsewhere in this filing that are not statements of historical or current fact constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause the actual results of the Company, its performance (financial or operating) or its achievements expressed or implied by such forward-looking statements not to occur or be realized. Forward-looking statements may be identified by the use of forward-looking terminology such as "may," "will," "project," "expect," "believe," "estimate," "anticipate," "intends," "continue", "potential," "opportunity" or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions. You should read statements that contain these words carefully because they discuss our future expectations, make projections of our future results of operations or our financial condition or state other forward-looking statements. The factors listed under the caption "Additional Risk Factors" below, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events which may cause our actual results to differ materially from the expectations we described in our forward-looking statements. We do not undertake any obligation to publicly update forward-looking statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
The following information should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this filing as well our annual report on Form 10-K filed with the Securities and Exchange Commission on August 13, 2009. All figures representing shares of our capital stock have been adjusted to reflect the 100 to 1 reverse split of our capital stock on November 20, 2009.
Our 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 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 these estimates, including those related to software development expenses, financing operations and contingencies and litigation. We base these estimates 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.
Financial Reporting Release No. 60, which was recently released by the SEC, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 3 to our consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of our financial statements. We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
We recognize revenues in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue recognition in Financial Statements”. Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectibility is reasonably assured.
CN Dragon Corp.
The Board of Directors of the Company has made the determination to change the direction of the Company’s current business operations and to direct the Company’s future activities and endeavors into the development, ownership and operation of hotels & leisure facilities in China. We plan to primarily derive our revenue and earnings from the operation of hotels & resorts, which includes management and other revenue generated from hotel investments. We also intend to derive revenue and earnings from the operation of serviced apartments.
Our aim is to specialize in the luxury segment of the hospitality sector, targeting the upscale business and leisure traveler. We are presently seeking to acquire interests in respect to properties in this segment. Our long term strategy is to build an asset based portfolio of these businesses throughout China’s fast developing second-tier cities.
In 2008, China was the world’s second largest economy with its GDP registering US$ 7.9 trillion. According to the IMF, this figure will be eclipsed this year with China’s GDP already registering US$ 8.7 trillion in Oct 2009. In comparison with the US (1.1%) and Europe (0.80%), China was the fastest growing economy last year with a GDP real growth rate of 9% (CIA). China’s emerging second-tier cities have prospered along with that growth, attracting major investment and developments. With the population’s increased purchasing power, second-tier cities have become an attractive proposition for developers; with such markets evidencing a strong demand for modernization and presenting investors with comfortable room for growth.
Our research strategy involves identifying those markets and examining whether they exhibit a demand for luxury hotels & leisure facilities. We carry this out by thoroughly analyzing tourism figures, the supply of 5-Star lodging facilities and other industry related data. Additional factors we evaluate include the locality, population, GDP, infrastructure and the major industries. Overall economic indicators must project a positive outlook for high growth before the Company will consider investing in those markets.
Our objective is to fill a niche not presently available, namely the availability of 5-Star hospitality services in China's fastest growing second-tier cities. Consumers in the growing premium segment of these markets are looking for facilities that reflect their image – impressive and worldly. They expect and demand a high quality of service and a full array of amenities which we will endeavor to provide. Further, we believe timing is critical as there is still comfortable room for growth in these markets. By pioneering the development in these cities, our objective is to create a benchmark for future industry players to measure up to.
Precision Aviation, Inc. (wholly-owned subsidiary of CN Dragon Corp.)
Precision Aviation, Inc. (PAI) is in the business of developing, manufacturing and marketing Unmanned Aerial Vehicles (UAVs) for aerial surveillance and scanning missions. PAI markets these production and custom UAVs to civilian, industrial, governmental, policing and military clients.
PAI is a developer and marketer of short, medium and long-range aerial drones. Since the 1940's federal and locals governments have used varying forms of remotely piloted vehicles for many purposes primarily as target practice for manned aircraft. Our drones are intended for both private and governmental use in such a diverse array of applications such as oil and gas exploration, municipal operations, forestry, agriculture and coastal/border surveillance as well as various military applications.
PAI has taken a new approach to the development of UAV technology by making use of advanced composite construction techniques and materials. The company incorporates the latest in ultra light high speed computer processors to deliver a flexible, mission specific UAV to our customers that can perform various complex missions.
While military applications for PAI products are a natural in these current times of global instability, PAI is looking forward to a more peaceful future and is focusing not only on military, but also on civilian uses for UAVs. PAI products will provide platforms necessary for aerial imaging in industries and sectors as diverse as agricultural, forestry, livestock ranches, law enforcement, environmental protection agencies, coast guard, and even Hollywood. Currently, PAI is aggressively developing a class of micro-UAVs to support law enforcement with perimeter level reconnaissance to preserve the safety of officers in close contact and hostage type situations. These UAVs provide much more focused coverage than having only trained officers at street-level.
Results of Operations
Our January 31, 2010 consolidated interim financial statements have been prepared on the basis of the accounts and operations of Galaxy Networks Inc. from incorporation, December 13, 2002 to January 31, 2010 and incorporate the accounts and operations for CN Dragon Corp. (formerly Wavelit, Inc.), Precision Aviation, Inc., China Teletech (formerly Stream Horizon Studios Ltd.) and Galaxy US Networks Inc. from October 1, 2005 to January 31, 2010.
For the period from incorporation, December 13, 2002 through January 31, 2010, we incurred a deficit of $6,769,146. Operating expenditures during the period totaled $5,838,430.
For the nine month period ended January 31, 2010, we incurred a loss from operations of $184,212. Revenues were $341, and costs of goods sold were $80,000 in the period.
Liquidity and Capital Resources
As of January 31, 2010, we had an accumulated deficit of $6,769,146, stockholders deficit of $707,323 and cash on hand of $0. Our working capital deficit at January 31, 2010 was $690,452.
Our working capital is currently insufficient to sustain our current operations. Our operations are currently dependent on our suppliers’ willingness and ability to continue to provide services without some assurance of payment. As set out under the heading “Operation Development and Plan” above, our plan is to seek additional funding to underwrite our operations and our development plan.
While management believes that sales can be grown and that ultimately profitable operations can be attained in the future, there is no assurance that sales will be maintained or grown or that they will ultimately be of a level required to generate profitable operations or provide positive cash flow. We are unable to predict at this time the exact amount of any additional working capital we may require to fund the implementation of our business plan and achieve cash flow sufficient to sustain operations and achieve profitability. To fund our operations and implementation of our business plan, we are seeking additional capital in the private and/or public equity markets or through the sale of debt securities, or through the issuance of debt instruments. If we receive additional funds through the issuance of equity securities, however, our existing stockholders may experience significant dilution. If we issue new securities, they may contain certain rights, preferences or privileges that are senior to those of our common stock. Moreover, we may not be successful in obtaining additional financing when needed or on terms favorable to our stockholders. As we have no commitments from any third parties to provide additional equity or debt funding, we cannot provide any assurance that we will be successful in attaining such additional funding.
We currently market a range of products and services, however, we have limited revenues and only a limited operating history from which to assess our operations. Due to our lack of revenue-production history and our lack of contractual commitments to generate profits, there is no basis at this time for investors to make an informed determination as to the prospects for our future success. For this reason and, as we have not achieved profitable operations and require additional capital to achieve our objectives, our auditors have included in their report covering our financial statements for the period from incorporation to January 31, 2010, that there is substantial doubt about our ability to continue as a going concern.
Additional Risk Factors
As noted throughout this quarterly report, CN Dragon Corp. (formerly Wavelit, Inc.), is an emerging development stage company and accordingly, there are many risks that affect our operations and our ultimate viability. It is not possible, however, to foresee all risks which may affect us. Moreover, we cannot predict the magnitude of each risk nor can we predict whether we will successfully effectuate our current business plan. Each prospective investor is encouraged to carefully analyze the risks and merits of an investment in our securities and to take into consideration when making such analysis, among others, the financial risks discussed under the subheading “Liquidity and Capital Resources” above and the additional risk factors we have set out below.
Operating History - We are presently in the process of marketing products and services which we have developed or acquired. We have only a limited operating history from which investors can evaluate our future business prospects or managements performance. As a result, you have no reliable means to determine whether you should make an investment in this company.
Marketable Products - In order to sell our products and services, we must demonstrate to potential customers that we have systems and services that are functional, supported, cost effective and address their needs. We have developed products and services which we have introduced and from which we are receiving sales revenues. At present however, we have only limited history in offering and supporting these product offerings. If products and services we offer do not meet customer needs and if customers are not convinced we can maintain, support and upgrade our offerings in future, or if our products contain product flaws or bugs, we will not be able to successfully market our products and services or earn revenues.
Staff Availability - We currently have employment agreements with the directors, officers and employees we depend on for the successful implementation of our plan.
Competition - We face competition from a wide range of firms in the streaming media, filing and hosting services industry. These include large, well established and financially stronger companies. We do not currently have resources to compete and may never have sufficient funds to be able to refine, and successfully market our offerings so that we may become a factor in the industry. These competitive disadvantages represent another factor which may cause investors in our securities to lose the value of their investment.
ITEM 3. Controls and Procedures
On January 31, 2010, our management concluded its evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. As of the Evaluation Date, our Chief Executive Officer (also President, Secretary, Treasurer), interim Chief Financial Officer concluded that we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (also President, Secretary, Treasurer), interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding managements control objectives.
There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls over financial reporting subsequent to its evaluation.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
ITEM 3. Defaults Upon Senior Securities.
ITEM 4. Submissions of Matters to a Vote of Security Holders.
On February 20, 2007, a vote was put to the shareholders in order to change the corporate name from Infotec Business Systems, Inc to Wavelit, Inc., to approve a 30:1 reverse split of the authorized, issued and outstanding common shares and to increase the authorized common shares from 50,000,000 (post-split) to 250,000,000 authorized common shares. (as referenced by the Definitive 14C filing with the Securities and Exchange Commission on May 5, 2007 and the Form 8-K filing with the Securities and Exchange Commisssion on June 13, 2007.) The company received not less than 51% approval from its shareholders of record as at February 20, 2007.
On November 22, 2007, a vote was put to the shareholders in order to approve the Stock Purchase Agreement between Wavelit, Inc. and ATB Company, a Colorado corporation, in which Wavelit, Inc. will purchase 100% of the issued and outstanding shares of Precision Aviation, Inc., a Nevada corporation, for Forty Million (40,000,000) Wavelit, Inc. common shares. The company received not less than 51% approval from its shareholders of record as at November 22, 2007.
On February 10, 2009, a vote was put to the shareholders in order to approve “the spin-off of Wavelit, Inc.'s wholly-owned subsidiaries: Galaxy Networks, Inc. (Canada), Galaxy Networks, Inc. (USA) and Stream Horizon Studios Ltd. (Canada), resulting in the Wavelit, Inc. shareholders, on the Record Date, owning a direct interest in each of the three subsidiaries that is proportionate to their ownership in Wavelit, Inc.” The company received not less than 51% approval from its shareholders of record as at February 10, 2009.
On July 20, 2009, a vote was put to the shareholders in order to change the corporate name from Wavelit, Inc to CN Dragon Corporation (as referenced by the Definitive 14C filing with the Securities and Exchange Commission on October 20, 2009) The company received not less than 51% approval from its shareholders of record as at July 20, 2009.
On September 2, 2009, a vote was put to the shareholders in order to approve a 100:1 reverse split of the authorized, issued and outstanding common shares (as referenced by the Definitive 14C filing with the Securities and Exchange Commission on November 20, 2009.) The company received not less than 51% approval from its shareholders of record as at September 2, 2009.
ITEM 5. Other Information.
ITEM 6. Exhibits.
Index to Exhibits
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.