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U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 0-27937
DRAGON PHARMACEUTICAL INC.
(Exact name of small business issuer as specified in its charter)
Florida 65-0142474
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1055 West Hastings Street, Suite 1900
Vancouver, British Columbia
Canada V6E 2E9
(Address of principal executive offices)
(604) 669-8817
(Issuer's telephone number)
(Former address if changed since last report)
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
Number of shares of common stock outstanding as of June 30, 2002: 20,331,000
Part 1. Financial Information
Item 1. Financial Statements
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
June 30, December 31,
2002 2001
ASSETS
Current
Cash and short term securities $ 3,612,284 $ 9,446,084
Accounts receivable 961,063 1,309,686
Inventories 1,177,735 1,095,860
Prepaid and deposits 223,076 140,340
Total current assets 5,974,158 11,991,970
Fixed assets 2,580,677 2,534,609
Hepatitis B vaccine project - related party 3,290,000 3,790,000
Refundable investment deposits - related party - 372,000
Patent rights - related party 500,000 -
Licence and permit 3,752,207 3,316,458
Total assets $ 16,097,042 $ 22,005,037
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loans $ 652,465 $ 2,887,345
Accounts payable and accrued liabilities 1,239,372 1,318,938
Management fees payable - related parties 95,833 234,000
Total current liabilities 1,987,670 4,440,283
Minority interests - 688,539
Commitments (Note 13)
Stockholders' Equity
Share capital
Authorized: 50,000,000 common shares at
par value of $0.001 each
Issued and outstanding: 20,331,000 common shares
(December 31, 2001 - 20,331,000) 20,331 20,331
Additional paid in capital 26,624,741 26,624,741
Accumulated other comprehensive (loss) (29,106) (25,008)
Accumulated deficit (12,506,594) (9,743,849)
Total stockholders' equity 14,109,372 16,876,215
Total liabilities and stockholders' equity $ 16,097,042 $ 22,005,037
The accompanying notes are an integral part of these financial statements.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
Accumulated
Compre- other Total
Additional hensive Compre- Stock
Common Stock paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated income equity
Balance, December 31, 2000 16,700,000 $ 16,700 $ 20,000,897 - $ (6,008,544) $ (25,588) $ 13,983,465
Exercise of stock options for cash 131,000 131 65,369 - - - 65,500
Issuance of common stock pursuant
to a private placement at $2.00 per
share, net of share issuance costs
of $490,000 in September 3,500,000 3,500 6,506,500 - - - 6,510,000
Other comprehensive income
- foreign currency translation - - - 580 - 580 580
Comprehensive (loss)
- net (loss) for the year - - - (3,735,305) (3,735,305) - (3,735,305)
Stock option compensation - - 51,975 - - - 51,975
Comprehensive (loss) (3,734,725)
Balance, December 31, 2001 20,331,000 $ 20,331 $ 26,624,741 $ (9,743,849) $(25,008) $16,876,215
The accompanying notes are an integral part of these financial statements.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
((Unaudited - Prepared by Management)
Accumulated
Compre- other Total
Additional hensive compre- Stock
Common Stock paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated income equity
Balance, December 31, 2001 20,331,000 $ 20,331 $ 26,624,741 - $ (9,743,849) $ (25,008) $ 16,876,215
Other comprehensive income
- foreign currency translation - - - (4,098) - (4,098) (4,098)
Comprehensive (loss)
- net (loss) for the year - - - (2,762,745) (2,762,745) - (2,762,745)
Comprehensive (loss) $ (2,766,843)
Balance, June 30, 2002 20,331,000 $ 20,331 $ 26,624,741 $(12,506,594) $ (29,106) $ (14,109,372)
The accompanying notes are an integral part of these financial statements.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Operations
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
Sales $ 1,026,159 $ 602,341 $2,398,966 $ 1,266,755
Cost of sales 174,465 155,726 364,989 302,647
Gross profit 851,694 446,615 2,033,977 964,108
Selling, general and
administrative expenses (1,316,578) (1,288,609) (2,413,037) (2,414,416)
Depreciation of fixed assets and
amortization of licence and
permit and land-use right (180,449) (154,515) (362,107) (308,329)
Net write off of land-use right and fixed assets - - (1,225) -
Research expenses (1,015,796) (26,537) (1,771,368) (66,737)
New market development (109,735) 9,709 (162,323) (90,171)
Provision for doubtful debts (54,693) (42,000) (80,549) (78,825)
Loan interest expense (15,605) (38,313) (56,015) (72,306)
Stock-based compensation - - - (51,975)
Operating loss (1,841,162) (1,093,650) (2,812,647) (2,118,651)
Interest income 16,295 54,985 49,902 120,243
Loss before minority interest (1,824,867) (1,038,665) (2,762,745) (1,998,408)
Minority interest - 65,952 - 169,512
Net (loss) for the period $(1,824,867) $ (972,713) (2,762,745) $(1,828,896)
(Loss) per share
Basic and diluted $ (0.09) $ (0.06) $ (0.14) $ (0.11)
Weighted average number of
common shares outstanding
Basic and diluted 20,331,000 16,717,657 20,331,000 16,717,657
The accompanying notes are an integral part of these financial statements.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Cash Flows
Six Months Ended June 30, 2002 and 2001
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
2002 2001
Cash flows from (used in) operating activities
Net (loss) for the period $ (2,762,745) $ (1,828,896)
Adjustments to reconcile net loss to
net cash used in operating activities:
- stock-based compensation expense - 51,975
- depreciation of fixed assets and amortization of
licence and permit and land-use right 362,107 308,329
- minority interests - (169,512)
- net write off of land-use right and fixed assets 1,225 -
- provision for doubtful debts 80,549 78,825
Changes in non-cash working capital items:
- accounts receivable 240,074 135,148
- inventories (81,875) (288,852)
- prepaid expenses and deposits (82,736) (156,330)
- accounts payable and accrued liabilities (79,566) (150,995)
- management fees payable - related parties (138,167) -
(2,461,134) (2,020,308)
Cash flows used in investing activities
Purchase of fixed assets (133,444) (275,875)
(Increase) decrease in restricted funds 2,449,955 (692,342)
Acquisition of Patent rights (500,000) -
Acquisition of balance of Huaxin (1,400,000) -
Refundable investment deposits 400,000 -
Recovery from Hepatitis B Vaccine Project 500,000 -
1,316,511 (968,217)
Cash flows from financing activities
Loan proceeds (2,234,880) 1,106,696
Proceeds from issuance of shares 65,500
Proceeds from shares subscribed and allotted
in prior period, net of issuance costs - -
Funds contributed by minority shareholders - -
(2,234,880) 1,172,196
Foreign exchange (gain) loss on cash
held in foreign currency (4,342) (1,221)
Increase (decrease) in cash and
and cash equivalents (3,383,845) (1,817,550)
Cash and cash equivalents, beginning of period 6,306,129 4,092,702
Cash and cash equivalents, end of period $ 2,922,284 $ 2,275,152
The accompanying notes are an integral part of these financial statements.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
1. Nature of Business
The Company was formed on August 22, 1989 as First Geneva Investments Inc.
under the laws of the State of Florida. The Company changed its name to
Dragon Pharmaceuticals Inc. on August 31, 1998. Pursuant to a share
exchange agreement, dated July 29, 1998, the Company acquired 100% of the
issued and outstanding shares of Allwin Newtech Ltd. ("Allwin") by issuing
7,000,000 common shares of the Company. This transaction is accounted for
as a reverse acquisition.
Allwin was incorporated under the laws of British Virgin Islands on
February 10, 1998. Pursuant to a Sino-Foreign Co-operative Company
Contract, dated April 18, 1998, Allwin and a Chinese corporation formed a
limited liability company under the Chinese law, named as Sanhe Kailong
Bio-pharmaceutical Co., Ltd. ("Kailong"), located in Hebei Province, China.
Allwin has a 95% interest in Kailong. Pursuant to another Sino-foreign
Co-operative Company Contract, dated July 27, 1999, Allwin completed the
acquisition of a 75% interest in Nanjing Huaxin Bio-pharmaceutical Co. Ltd.
("Huaxin"). In January 2002, the Company acquired the balance of Huaxin for
$1,400,000. Kailong is inactive and Huaxin is in the business of research
and development, production and sales of pharmaceutical products in China.
Allwin Biotrade Inc. ("Biotrade) was incorporated under the laws of British
Virgin Islands on June 6, 2000 for the purpose of marketing and
distributing biopharmaceutical products outside China. Dragon
Pharmaceuticals (Canada) Inc. ("Dragon Canada") was incorporated in British
Columbia, Canada on September 15, 2000 for the purpose of researching and
developing new biopharmaceutical products.
2. Significant Accounting Policies
(a) Basis of Consolidation
These consolidated financial statements include the accounts of the
Company and its subsidiaries, Allwin, Kailong, Huaxin, Biotrade and
Dragon Canada. All inter-company transactions and balances have been
eliminated.
(b) Principles of Accounting
These financial statements are stated in US Dollars and have been
prepared in accordance with accounting principles generally accepted
in the United States of America.
(c) Fixed Assets
Depreciation is based on the estimated useful lives of the assets and
is computed using the straight-line method.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
2. Significant Accounting Policies (continued)
Fixed assets are recorded at cost. Depreciation is provided over the
following useful lives:
Motor vehicle 10 years
Lab equipment 8 years
Office equipment and furniture 5 years
Leasehold improvements Term of lease (10 years)
Production equipment 10 years
(d) Foreign Currency Transactions
The parent company, Allwin, Kailong, Huaxin, Biotrade and Dragon
Canada maintain their accounting records in their functional
currencies (i.e., U.S. dollars, U.S. dollars, Renminbi Yuan, Renminbi
Yuan, U.S. dollars and Canadian dollars respectively). They translate
foreign currency transactions into their functional currency in the
following manner.
At the transaction date, each asset, liability, revenue and expense is
translated into the functional currency by the use of the exchange
rate in effect at that date. At the period end, monetary assets and
liabilities are translated into the functional currency by using the
exchange rate in effect at that date. The resulting foreign exchange
gains and losses are included in operations.
(e) Foreign Currency Translations
Assets and liabilities of the foreign subsidiaries (whose functional
currency is Renminbi Yuan or Canadian dollars) are translated into
U.S. dollars at exchange rates in effect at the balance sheet date.
Revenue and expenses are translated at average exchange rate. Gain and
losses from such translations are included in stockholders' equity, as
a component of other comprehensive income.
(f) Accounting 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 revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(g) Advertising Expenses
The Company expenses advertising costs as incurred. There were no
advertising expenses incurred by the Company during the period ended
June 30, 2002 and 2001.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
2. Significant Accounting Policies (continued)
(h) Income Taxes
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", which requires the
Company to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns using the
liability method. Under this method, deferred tax liabilities and
assets are determined based on the temporary differences between the
financial statements and tax bases of assets and liabilities
usingenacted tax rates in effect in the years in which the differences
are expected to reverse.
(i) Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. The
Company is disclosing this information on its Statement of
Stockholders' Equity. Comprehensive income comprises equity except
those resulting from investments by owners and distributions to
owners. SFAS No. 130 did not change the current accounting treatments
for components of comprehensive income.
(j) Financial Instruments and Concentration of Risks
Fair value of financial instruments are made at a specific point in
time, based on relevant information about financial markets and
specific financial instruments. As these estimates are subjective in
nature, involving uncertainties and matters of significant judgement,
they cannot be determined with precision. Changes in assumptions can
significantly affect estimated fair values.
The carrying value of cash and cash equivalents, term deposits,
accounts receivable, bank loans, accounts payable and accrued
liabilities approximate their fair value because of the short-term
nature of these instruments. The Company places its cash and cash
equivalents with high credit quality financial institutions. The
Company occasionally maintains balances in a financial institution
beyond the insured amount. As of June 30, 2002, the Company had
deposits of $690,000 above insured limits.
The Company is operating in China, which may give rise to significant
foreign currency risks from fluctuations and the degree of volatility
of foreign exchange rates between U.S. dollars and the Chinese
currency RMB. Financial instruments that potentially subject the
Company to concentration of credit risk consist principally of cash
and trade receivables, the balances of which are stated on the balance
sheet. The Company places its cash in high credit quality financial
institutions. Concentration of credit risk with respect to trade
receivables are limited due to the Company's large number of diverse
customers in different locations in China. The Company does not
require collateral or other security to support financial instruments
subject to credit risk.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
2. Significant Accounting Policies (continued)
(k) Licence and Permit
Licence and permit, in relation to the production and sales of
pharmaceutical products in China, is amortized on a straight-line
basis over ten years.
The carrying value of licence and permit is reviewed by management at
least annually and impairment losses, if any, are recognized when the
expected non-discounted future operating cash flows derived from the
related product licence acquired are less than the carrying value of
such licence and permit. In the event of impairment in the value of
the licence and permit, the discounted cash flows method is used to
arrive at the estimated fair value of such licence and permit.
(l) Cash and Cash Equivalents
Cash equivalents usually consist of highly liquid investments that are
readily convertible into cash with maturities of three months or less.
As at June 30, 2002, cash equivalents consist of commercial papers and
redeemable term deposits.
(m) Inventories
Inventories are stated at the lower of cost and replacement cost with
respect to raw materials and the lower of cost and net realizable
value with respect to finished goods. Cost includes direct material,
direct labour and overheads. Cost is calculated using the first-in,
first-out method. Net realizable value represents the anticipated
selling price less further costs for completion and distribution.
(n) Revenue Recognition
Sales revenue is recognized upon the delivery of goods to customers.
(o) Stock-based Compensation
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-based Compensation". SFAS 123 encourages, but does not require,
companies to adopt a fair value based method for determining expense
related to stock-based compensation. The Company continues to account
for stock-based compensation issued to employees and directors using
the intrinsic value method as prescribed under Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees"
and related Interpretations.
(p) Loss Per Share
Loss per share is computed using the weighted average number of shares
outstanding during the period. The Company adopted SFAS No. 128,
"Earnings per share". Diluted loss per share is equal to the basic
loss per share because common stock equivalents consisting of options
to acquire 3,702,000 common shares and warrants to acquire 3,200,000
common shares that are outstanding at June 30, 2002 are anti-dilutive,
however, they may be dilutive in future.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
2. Significant Accounting Policies (continued)
(q) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations. SFAS 141 applies to all business combinations
initiated after June 30, 2001. The SFAS 141 applies to all business
combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001, or later. The adoption of SFAS
141 will not have an impact on the Company's financial statements.
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142 (SFAS 142),
Goodwill and Other Intangible Assets. The provisions of SFAS 142 are
required to be applied starting with fiscal years beginning after
December 15, 2001 with earlier application permitted for entities with
fiscal years beginning after March 15, 2001 provided that the first
interim financial statements have not been previously issued. The
Statement is required to be applied at the beginning of the entity's
fiscal year and to be applied to all goodwill and other intangible
assets recognized in its financial statements to that date. The
adoption of SFAS 142 will not have an impact on the Company's
financial statements.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143 (SFAS 143), Asset
Retirement Obligations. SFAS 143 establishes accounting standards for
recognition and measurement of a liability for the costs of assets
retirement obligations. Under SFAS 143, the costs of retiring an asset
will be recorded as a liability when the retirement obligation arises
and will be amortized to expense over the life of the asset. The
adoption of SFAS 143 will not have an impact on the Company's
financial statements.
In October, 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 (SFAS 144),
Accounting for the Impairment or Disposal of Long-lived Assets. SFAS
144 supersedes SFAS 121, Accounting for the Impairment of Long-lived
Assets and Long-lived Assets to be Disposed Of, and APB Opinion 30,
Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for segments of a
business to be disposed of. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS 144 will not
have an impact on the Company's financial statements
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
3. Restricted Funds
June 30, December 31,
2002 2001
Term deposits held as collateral against bank loans $ 690,000 $ 3,139,955
Cash and cash equivalents 2,922,284 6,306,129
Cash and short term securities $ 3,612,284 $ 9,446,084
4. Accounts Receivable
June 30, December 31,
2002 2001
Trade receivable $ 1,083,259 $ 1,225,455
Allowance for doubtful accounts (206,567) (97,982)
876,692 1,127,473
Other receivable 84,371 182,213
$ 961,063 $ 1,309,686
5. Inventories
June 30, December 31,
2002 2001
Raw materials $ 116,788 $173,687
Finished goods 158,417 179,871
Work in progress 902,530 742,302
$ 1,177,735 $1,095,860
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
6. Fixed Assets
June 30, 2002
Accumulated Net book
Cost depreciation value
Motor vehicles $140,430 $39,705 $100,725
Office equipment and furniture 374,168 115,959 258,209
Leasehold improvements 1,010,306 275,739 734,567
Production and lab equipment 2,090,998 603,822 1,487,176
$ 3,615,902 $1,035,225 $2,580,677
December 31, 2001
Accumulated Net book
Cost depreciation value
Motor vehicles $100,329 $31,657 $68,672
Office equipment and furniture 267,104 85,935 181,169
Leasehold improvements 990,940 221,652 769,288
Production and lab equipment 2,020,137 504,657 1,515,480
$3,378,510 $843,901 $2,534,609
For the six months ended June 30, 2002, depreciation expenses totalled
$146,489 (2001-$79,881). The majority of fixed assets are located in China.
7. Hepatitis B Vaccine Project - Related Party
June 30, December 31,
2002 2001
Hepatitis B Vaccine Project $4,000,000 $4,000,000
Less : Repayment (500,000) -
Valuation allowance (210,000) (210,000)
$3,290,000 $3,790,000
(a) Pursuant to an agreement dated October 6, 2000, the Company paid
$4,000,000 for the acquisition of certain assets and technology
relating to the production of Hepatitis B vaccine. The vendor of the
transaction is a company named Alphatech Bioengineering Limited,
incorporated in Hong Kong, and one of the two shareholders of which is
a director and senior officer of the Company.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
7. Hepatitis B Vaccine Project - Related Party (continued)
(b) Pursuant to an amended agreement dated June 5, 2001, in the event
that the Company failed to find a joint venture partner, establish
a production facility for the vaccine project or sell the project
to a third party within nine months from the date of this amended
agreement, Dr. Longbin Liu, a senior officer and director of the
Company and one of the shareholders of Alphatech, demands to
repurchase the project from the Company. The repurchase price will
be $4.0 million payable as follows:
(i) $500,000 at the date of repurchase; and
(ii) the balance to be paid within eighteen (18) months of the
date of repurchase with interest at 6% per annum. The
interest will be accrued from six months after the date of
repurchase.
The Company decided not to pursue the Project and Dr. Liu
demanded to repurchase the Project on the agreed terms.
8. Refundable Investment deposits - Related Party
June 30, December 31,
2002 2001
Guanzhou Recomgen Biotech Co. Ltd.
- Tissue Plasminogen Activator ("TPA") Project - $400,000
Less: Valuation allowance - (28,000)
- $372,000
During the year 2000, the Company paid $400,000 to Guanzhou Recomgen
Biotech Co. Ltd. ("Guanzhou Recomgen"), a company incorporated in China,
for the funding of its TPA research and development programs with the
intention of acquiring the technology. Guanzhou Recomgen is controlled by a
senior officer and a director of the Company. The Company decided not to
proceed with the funding and the acquisition due to financial market and
economic conditions and the $400,000 was repaid in January 2002.
9. Patent Rights - Related Party
Pursuant to an agreement dated January 14, 2002, the Company entered into a
Patent Development Agreement with the President and a company controlled by
the President entitling the Company to acquire one patent filed in the
United States related to the discovery of a new gene or protein.
Consideration for the right to acquire the patent was payment of US$500,000
and the issuance of warrants to acquire 1,000,000 common shares of the
Company at a price of $2.50 per share for a period of five years. The
patent may be acquired prior to January 14, 2005 at no additional cost
other than the reasonable legal costs of obtaining the patent.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
10. Bank Loans
June 30, December 31,
2002 2001
RMB 7,800,000, bearing interest at 5.265% per annum and due on January
31, 2003. The loan is secured by the term deposit. $ - $942,312
RMB 4,000,000, bearing interest at 5.265% per annum and due on August
20, 2002. The loan is secured by the term deposit. 483,307 483,238
RMB 1,400,000 bearing interest at 5.265% per annum and due on July 26,
2002. The loan is secured by the term deposit. 169,158 169,133
RMB 2,300,000 bearing interest at 5.265% per annum and due on January
18, 2002. The loan is secured by the term deposit. - 277,862
RMB 3,150,000 bearing interest at 5.265% per annum and due on April 4,
2002. The loan is secured by the term deposit. - 380,550
RMB 3,700,000 bearing interest at 5.265% per annum and due on June 19,
2002. The loan is secured by the term deposit. - 446,995
RMB 1,555,000 bearing interest at 5.265% per annum and due on January
31, 2003. The loan is secured by the term deposit. - 187,255
Total $652,465 $2,887,345
The weighted average interest rate was 5.265% and 5.32% for the six months
ended June 30, 2002 and 2001.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
11. Income Taxes
(a) Kailong and Huaxin are subject to income taxes in China on its taxable
income as reported in its statutory accounts at a tax rate in
accordance with the relevant income tax laws applicable to
Sino-foreign equity joint venture enterprises. However, pursuant to
the same income tax laws, Kailong and Huaxin are fully exempt from
income tax for five years starting from their first profit-making year
followed by a 15% corporation tax rate for the next three years.
Allwin is not subject to income taxes.
As at June 30, 2002, the parent company, Kailong and Huaxin have
estimated losses, for tax purposes, totalling approximately
$7,790,000, which may be applied against future taxable income.
Accordingly, there is no tax expense charged to the Statement of
Operations for the six months ended June 30, 2002 and 2001. The
potential tax benefits arising from these losses have not been
recorded in the financial statements. The Company evaluates its
valuation allowance requirements on an annual basis based on projected
future operations. When circumstances change and this causes a change
in management's judgement about the realizability of deferred tax
assets, the impact of the change on the valuation allowance is
generally reflected in current income.
(b) The tax effect of temporary differences that give rise to the
Company's deferred tax asset (liability) are as follows:
June 30, December 31,
2002 2001
Tax losses carried forward $ 2,650,000 $1,850,000
Stock-based compensation - 17,700
Less: valuation allowance (2,650,000) (1,867,700)
$ - $ -
A reconciliation of the federal statutory income tax to the
Company's effective income tax rate, for the six months ended June
31, 2002 and 2001, is as follows:
2002 2001
Federal statutory income tax rate 34% 34%
Change in valuation allowance (34%) (34%)
Effective income tax rate - -
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
12. Stock Options and Warrants
(a) Stock Options Plans
The Company charged $51,975 to income during the six months ended June
30, 2001 due to the exercise price of the vested options granted being
below fair value of the Company's stock on the date of the grant.
During the six months ended June 30, 2002, the Company granted options
to purchase 920,000 shares at a price of $1.70 per share, expiring
April 25, 2007.
The following is a summary of the employee stock option information
for the period ended June 30, 2002:
Weighted Average
Shares Exercise Price
Options outstanding at December 31, 2000 3,043,000 $ 1.89
Granted 195,000 $ 1.79
Forfeited (137,500) $ 2.93
Exercised (131,000) $ 0.50
Options outstanding at December 31, 2000 2,969,500 $ 1.92
Granted 920,000 $ 1.70
Forfeited (187,500) $ 3.13
Options outstanding at June 30, 2002 3,702,000 $ 1.81
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
$0.01 - $1.00 1,257,000 1.79 $ 0.50 1,243,000 $ 0.50
$1.01 - $2.00 1,095,000 4.70 $ 1.71 1,095,000 $ 1.71
$2.01 - $3.00 60,000 2.36 $ 2.50 60,000 $ 2.50
$3.01 - $4.00 1,290,000 3.35 $ 3.13 1,290,000 $ 3.13
3,702,000 3.21 $ 1.81 3,688,000 $ 1.81
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
12. Stock Options and Warrants (continued)
The Company accounts for its stock-based compensation plan in
accordance with APB Opinion No. 25, under which no compensation is
recognized in connection with options granted to employees except if
options are granted with a strike price below fair value of the
underlying stock. The Company adopted the disclosure requirements SFAS
No. 123, Accounting for Stock-Based Compensation. Accordingly, the
Company is required to calculate and present the pro forma effect of
all awards granted. For disclosure purposes, the fair value of each
option granted to an employee has been estimated as of the date of
grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.5%, dividend yield 0%,
volatility of 89%, and expected lives of approximately 0 to 5 years.
Based on the computed option values and the number of the options
issued, had the Company recognized compensation expense, the following
would have been its effect on the Company's net loss:
June 30, 2002 June 30, 2001
Net (loss) for the period:
- as reported $(2,762,745) $(1,828,896)
- pro-forma (2,762,745) (1,829,480)
Basic and diluted (loss) per share:
- as reported $(0.14) $(0.11)
- pro-forma $(0.14) $(0.11)
(b) Warrants
Share purchase warrants outstanding as at June 30, 2002:
Number Underlying Exercise Price
of Warrants Shares Per Share Expiry Date
400,000 400,000 $3.00 November 24, 2002
3,500,000 1,750,000 $2.00 September 13, 2003
50,000 50,000 $1.70 November 15, 2004
1,000,000 1,000,000 $2.50 January 14, 2007
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
13. Related Party Transactions
(a) The Company incurred the following expenses to two directors of the
Company:
June 30, 2002 June 30,
2001
Management fees $115,000 $60,000
(b) Pursuant to an agreement dated January 14, 2002, the Company entered
into a Project Development Agreement with the President and Chief
Executive Officer of the Company (the "President") to continue the
research and development of G-CSF and Insulin for the Company. The
Company will make payment for the development of G-CSF as follows:
(i) US$500,000 to be provided at the commencement of the research in
the G-CSF Project;
(ii) US$500,000 to be provided when cell-line and related technology
is established and animal experimentation commences in the G-CSF
Project; and
(iii)US$300,000 to be provided when a permit for clinical trials for
G-CSF has been issued by the State Drug Administration of China
("SDA"); and
(iv) US$200,000 to be provided when a new drug license for G-CSF is
issued to Dragon by the SDA.
(v) US$500,000 to be paid as a bonus if the SDA issues the new drug
license for G-CSF to Dragon before January 14, 2005.
The Company will make payment for the development of Insulin as
follows:
(vi) US$750,000 to be provided by at the commencement of the research
in the Insulin Project;
(vii)US$750,000 to be provided when cell-line and related technology
is established and animal experimentation commences in the
Insulin Project;
(viii) US$300,000 to be provided when a permit for clinical trials for
Insulin has been issued by the SDA; and
(ix) US$200,000 to be provided when a new drug license for Insulin is
issued to Dragon by the SDA.
(x) US$500,000 to be paid as a bonus if the SDA issues the new drug
license for Insulin to Dragon before January 14, 2005.
13. Related Party Transactions (continued)
For both the G-CSF and Insulin Projects:
(i) If the Company elects to cease development of the project it will
forfeit any payments made and lose ownership of the Project, but
it will not be obligated to make any further payments toward the
Project;
(ii) if an application for permit for clinical trials is not submitted
within three years with respect to the G-CSF Project by or four
years with respect to the Insulin Project or if the SDA rejects
the Project for technical or scientific reasons or If development
of the Project is terminated by the President, then the President
will refund to the Company all amounts paid, without interest or
deduction, with respect to the Project within six months.
As at June 30, 2002, the Company has paid $1,500,000 and $250,000
towards the Insulin and G-CSF Projects, respectively.
(c) see Notes 7,8, and 9 also.
14. Commitments
The Company has entered into operating lease agreements with respect to
Huaxin's production plant in Nanjing, China for an amount of RMB 2,700,000
(US$326,000) per annum until June 11, 2009, and the Company's
administrative offices in Vancouver for an amount escalating from
CDN$200,000 to CDN$230,000 (US$126,000 to US$145,000) per annum until March
31, 2007. Minimum payments required under the agreements are as follows:
2002 $ 235,269
2003 458,513
2004 473,936
2005 475,069
2006 478,467
2007 - 2009 835,558
Total $2,956,811
15. Comparative Figures
Certain 2001 comparative figures have been reclassified to conform to the
financial statement presentation adopted for 2002.
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discusses the Company's financial condition and results of
operations based upon the Company's consolidated financial statements which have
been prepared in accordance with generally accepted accounting principles. It
should be read in conjunction with the Company's financial statements and the
notes thereto and other financial information included in the Company's Form
10-KSB for the fiscal year ended December 31, 2001.
Overview
The Company (or "Dragon") was formed on August 22, 1989, under the name First
Geneva Inc. First Geneva Investment's business was to evaluate businesses for
possible acquisition. On July 28, 1998, First Geneva Investment entered into a
share exchange agreement with Allwin Newtech. Allwin Newtech was formed in 1998
for the purpose of developing and marketing pharmaceutical drugs for sale in
China. Prior to the acquisition of Allwin Newtech, First Geneva Investments had
no operations. On September 21, 1998, First Geneva Investments changed its name
to Dragon Pharmaceutical Inc.
On July 27, 1999, Dragon acquired a 75% interest in Nanjing Huaxin
Bio-pharmaceutical Co. Ltd. ("Huaxin"), which manufactures EPO in China. The
Company increased the efficiencies in the production of EPO by improving a
proprietary high-yield mammalian cell line and "vectoring process" which has
been developed by Dragon. The Company successfully achieved commercial
production during the last quarter of calendar1999. In January 2002 the Company
purchased the balance of Huaxin for $1,400,000.
On September 6, 2000 Dragon incorporated Allwin Biotrade Inc. ("Biotrade").
Biotrade was incorporated for the purpose of marketing and distributing
biopharmaceutical products outside China. On September 15, 2000 Dragon
incorporated Dragon Pharmaceuticals (Canada) Inc. ("Dragon Canada"). Dragon
Canada was incorporated for the purpose of researching and developing new
biopharmaceutical products.
Results of Operations
Revenues. Revenue is generated from the sale of EPO in China by Huaxin and
throughout the developing world by Biotrade. Revenue for the three-month period
ending June 30, 2002 was $1,026,159 compared to $602,341 for the three-month
period ending June 30, 2001. Sales in and outside of China were $826,659 and
$199,500, respectively during the three-month period ending June 30, 2002. All
sales during the three-month period ending June 30, 2001 were in China. Cost of
sales for the three-months ended June 30, 2002 of $174,465 is attributed to the
production costs of the pharmaceutical products. The cost of sales for the
three-months ended June 30, 2001 was $155,726. The gross profit margin of 83%
for the three-month period ending June 30, 2002 and 85% for the six-month period
ending June 30, 2002 increased from 74% and 76% for the three-month and
six-month periods, respectively, ending June 30, 2001. The profit margin has
increased as a result of improved production efficiency.
Revenue for the six-month period ending June 30, 2002 was $2,398,966 compared to
$1,266,755 for the six-month period ending June 30, 2001. Sales in and outside
of China were $1,351,966 and $1,047,000, respectively during the six-month
period ending June 30, 2002. All sales during the six-month period ending June
30, 2001 were in China. Cost of sales for the six-months ended June 30, 2002 and
2001 were $364,989 and $302,647, respectively.
Interest income is related primarily to interest earned on cash received from
the private placement of common stock received during the third quarter of 2001
and the last quarter of 1999. Interest income for the three-months period ending
June 30, 2002 was $16,295 compared to $54,985 for the three-month period ended
June 30, 2001. Interest income for the six-months period ending June 30, 2002
was $49,902 compared to $120,243 for the six-month period ended June 30, 2001.
Interest income has decreased as the cash balance has decreased through the
funding of operations.
Expenses. Total operating expenses for the three-months ended June 30, 2002 were
$2,692,855. The major expenses incurred in the first quarter of 2002 were
research and development expenses of $1,015,796 and the selling expenses of
$473,911 representing 38% and 18% of total expenses, respectively. The remaining
major expense items are represented by administrative expenses.
Significant operating expenses for the three-months ended June 30, 2002 included
consulting fees of $162,543, loan interest of $15,605, rent of $109,906,
salaries and benefits of $124,270, $184,100 in travel costs and management fees
of $58,443. Management fees include $57,500 incurred to two directors for
services during the first quarter of 2002.
Other significant expenses for the first half of 2002 include the depreciation
of fixed assets and amortization of license and permit of $180,449.
Comparatively, total operating expenses for the second quarter of 2001 were
$1,540,264. Selling expenses represented 27% total operating expenses during
this period. Other major expenses for the three-month period ended June 30, 2001
included the depreciation of fixed assets and amortization of intangible assets
of $154,515, consulting fees of $105,402, bad debt write offs of $42,000, loan
interest of $38,313, rent of $86,638, salaries of $106,073 and management fees
of $69,146, including management fees of $42,000 paid to two director for
services rendered during the period.
Total operating expenses for the six-months ended June 30, 2002, were
$4,846,624. The major expenses incurred in the second quarter of 2002 were
research and development expenses of $1,771,368 and the selling expenses of
$951,1071 representing 37% and 20% of total expenses, respectively. The
remaining major expense items are represented by administrative expenses.
Significant operating expenses for the six-months ended June 30, 2002 included
bad debt write offs of $80,549, consulting fees of $311,280, loan interest of
$56,015, rent of $171,452, salaries and benefits of $265,956, $262,490 in travel
costs and management fees of $132,636. Management fees include $115,000 paid to
two directors for services during the six-months ended June 30, 2002.
Other significant expenses for the second half of 2002 include the depreciation
of fixed assets of and amortization of license and permit and land-use rights of
$362,107 and new market development of $162,323.
Comparatively, total operating expenses for the six-months ended June 30, 2001,
were $3,082,759. The major expense incurred in the second quarter of 2001
related to the selling of pharmaceutical products and represented approximately
32% of total expenses. The remaining major expense items are represented by
administrative expenses.
Significant operating expenses for the six-months ended June 30, 2001 included
auditing and accounting expense of $82,848, bad debt write offs of $78,825
consulting fees of $227,725, investor relations of $274,166, loan interest of
$72,306, rent of $157,968, salaries and benefits of $204,315, $119,376 in travel
costs and management fees of $104,271. Management fees include $60,000 paid to
two directors for services during the six-months ended June 30, 2001.
Other significant expenses for the second quarter of 2001 include the
depreciation of fixed assets of and amortization of license and permit and
land-use rights of $308,329 new market development of $90,171 and stock based
compensation of $51,975.
Overall, expenditures have increased in 2002 over 2001 levels due to increased
research and development and increased personnel and activity levels.
Net and Comprehensive Loss. Dragon had a net loss and a comprehensive loss of
$1,824,867 for the three-month period ending June 30, 2002.
The Company's net loss for the three-month period ended June 30, 2001, was
$972,713, which includes a minority interest loss of $65,952. The comprehensive
loss for the same period was $1,038,665.
Dragon had a net loss and a comprehensive loss of $2,762,745 for the six-month
period ending June 30, 2002.
The Company's net loss for the six-month period ended June 30, 2001, was
$1,828,896, which includes a minority interest loss of $169,512. The
comprehensive loss for the same period was $1,998,408.
Basic and Diluted Net Loss Per Share
The Company's net loss per share has been computed by dividing the net loss for
the period by the weighted average number of shares outstanding during
three-month and six-month periods ended June 30, 2002. The loss per share for
the three-month period ended June 30, 2002 was $0.09 and the loss per share for
the six-month period ended June 30, 2002 was $0.14. Common stock issuable upon
the exercise of common stock options and common stock warrants have been
excluded from the net loss per share calculations as their inclusion would be
anti-dilutive.
Liquidity and Capital Resources
Dragon is a development stage pharmaceutical and biotechnological company that
has commenced the manufacture and marketing of pharmaceutical products in China
through its 100% equity interest in Nanjing Huaxin Bio-pharmaceuticals Ltd.
Previously, the Company has raised funds through equity financings to fund its
operations and to provide working capital. The Company may finance future
operations through additional equity financings.
On October 14, 1999, the Company entered into securities purchase agreements
with two investors located in Hong Kong. Under the terms of this agreement, the
investors purchased, in the aggregate, 600,000 shares of common stock at $2.50
per share, with the Company raising in the aggregate $1.5 million.
On December 31, 1999, the Company closed a private placement raising $10,645,000
through the issue of 4,258,000 shares of common stock at a price of $2.50 per
share. $600,000 of the gross proceeds from the December 1999 offering
represented the conversion of the outstanding debt by the lenders into shares of
common stock of the Company at a price of $2.50 per share.
One million common shares were issued through the exercise of warrants that
expired on September 30, 2000. These warrants were issued to shareholders
through the acquisition of Allwin Newtech on August 17, 1998. Gross proceeds
from the exercise of the warrants were $1,000,000.
On September 14, 2001, the Company closed a private placement raising $7,000,000
through the issue of 3,500,000 shares of common stock at a price of $2.00 per
share.
As of June 30, 2002, the Company had $3,612,284 in cash available, of which
$690,000 is held as collateral for loans totaling RMB5,400,000 (US$652,465).
This cash, the $961,063 in accounts receivable and anticipated sales will be
used to fund the ongoing operations and research and development.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk, primarily related to foreign exchange.
The Company maintains its accounting records in their functional currencies
(i.e., U.S. dollars, Renminbi Yuan, and Canadian dollars respectively). They
translate foreign currency transactions into their functional currency in the
following manner.
At the transaction date, each asset, liability, revenue and expense is
translated into the functional currency by the use of the exchange rate in
effect at that date. At the period end, monetary assets and liabilities are
translated into the functional currency by using the exchange rate in effect at
that date. The resulting foreign exchange gains and losses are included in
operations.
The following table sets forth the percentage of the Company's administrative
expense by currency for the years ended December 31, 1999 and 2000 and the
six-months ended June 30, 2001 and 2002.
By Currency
December 31,2000 December 31, 2001
U.S. Dollar 22% 31%
Canadian Dollar 0% 12%
Renminbi yuan 78% 57%
Total 100% 100%
June 30,2001 June 30, 2002
U.S. Dollar 76% 26%
Canadian Dollar 0% 48%
Renminbi yuan 24% 26%
Total 100% 100%
Such administrative expense by currency may change from time to time. Further,
the Company incurred expenses in China of $1,350,069 and $1,334,159 for the
six-months ended June 30, 2001 and 2002, respectively, all of which were paid in
RMB.
The Company has not entered into any material foreign exchange contracts to
minimize or mitigate the effects of foreign exchange fluctuations on the
Company's operations. The Company exchanges Canadian dollars to fund its Chinese
operations. Based on prior years, the Company does not believe that it is
subject to material foreign exchange fluctuations. However, no assurance can be
given that this will not occur in the future.
As disclosed in Note 10 to the Company's financial statements, the Company has
entered into a series of loans in the aggregate outstanding amount of $652,465
as of June 30, 2002. The weighted average interest rate was 5.265% for the six-
months ended June 30, 2002. These loans are due on July 26, 2002 and August 20,
2002. To the extent that there may be increased interest rates during this
period, the Company will be adversely affected.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4 and 5
None.
Item 6.
(a) Exhibit 99.1 Chief Executive Officer certification
(b) Exhibit 99.2 Chief Financial Officer certification
(b) Reports on 8-K
None.
Signature
In accordance with 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.
DRAGON PHARMACEUTICALS INC.
(registrant)
Dated: August 13, 2002 /s/ Matthew Kavanagh
_________________________________
Matthew Kavanagh
Director of Finance and Corporate
Compliance and Corporate Secretary
(and authorized to sign on behalf
of the registrant)
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, (the Report) by Dragon Pharmaceutical,
Inc. (the Company), the undersigned, as the Chief Executive Officer of the
Company, hereby certifies pursuant to Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Longbin Liu
__________________________
Dr. Longbin Liu
Chief Executive Officer
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, (the Report) by Dragon Pharmaceutical,
Inc. (the Company), the undersigned, as the Chief Financial Officer of the
Company, hereby certifies pursuant to Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Matthew Kavanagh
__________________________________
Matthew Kavanagh
Director of Finance and Compliance
(acting Chief Financial Officer)