1
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 March 31, 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 March 31, 2002: 20,331,000
2
Part 1. Financial Information
Item 1. Financial Statements
3
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
------------------------------------------------------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current
Cash and short term securities $ 5,791,160 $ 9,446,084
Accounts receivable 1,813,412 1,309,686
Inventories 1,110,936 1,095,860
Prepaid and deposits 270,431 140,340
------------------------------------------------------------------------------------------------------------------------------------
Total current assets 8,985,939 11,991,970
Fixed assets 2,534,096 2,534,609
Investment in Hepatitis B vaccine project - related party 3,790,000 3,790,000
Refundable investment deposits - related party - 372,000
Patent rights - related party 500,000 -
Licence and permit 3,889,721 3,316,458
----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 19,699,756 $ 22,005,037
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loans $ 2,609,168 $ 2,887,345
Accounts payable and accrued liabilities 1,130,522 1,318,938
Management fees payable - related parties 25,833 234,000
----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,765,523 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, 2000 - 16,700,000) 20,331 20,331
Additional paid in capital 26,624,741 26,624,741
Accumulated other comprehensive (loss) (29,112) (25,008)
Accumulated deficit (10,681,727) (9,743,849)
----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 15,934,233 16,876,215
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 19,699,756 $ 22,005,037
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
4
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
Accumulated
Compre- other Total
Common stock Additional Hensive compre- 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.
5
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
Accumulated
Compre- other Total
Common stock Additional hensive compre- 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 - - - (4,104) - (4,104) (4,104)
Comprehensive (loss)
- net (loss) for the year - - - (937,878) (937,878) - (937,878)
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive (loss) $(941,982)
=============
Balance, March 31, 2002 20,331,000 $ 20,331 $ 26,624,741 $(10,681,727) $(29,112) $(15,934,233)
============================================================================== ========================================
The accompanying notes are an integral part of these financial statements.
6
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended March 31, 2002 and 2001
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
2002 2001
------------------------------------------------------------------------------------------------------------------------------
Sales $ 1,372,808 $ 664,414
Cost of sales 190,524 146,920
------------------------------------------------------------------------------------------------------------------------------
Gross profit 1,182,284 517,494
Selling, general and
administrative expenses (1,096,460) (1,125,808)
Depreciation of fixed assets and
amortization of licence and permit (181,658) (153,814)
Net write off of land-use right and fixed assets (1,225) -
Research and development expenses (755,572) (40,200)
New market development (52,588) (99,880)
Provision for doubtful debts (25,856) (36,826)
Loan interest expense (40,410) (33,993)
Stock-based compensation - (51,975)
------------------------------------------------------------------------------------------------------------------------------
Operating loss (971,485) (1,025,002)
Interest income 33,607 65,259
------------------------------------------------------------------------------------------------------------------------------
Loss before minority interest (937,878) (959,743)
Minority interest - 103,560
------------------------------------------------------------------------------------------------------------------------------
Net (loss) for the period $ (937,878) $ (856,183)
==============================================================================================================================
(Loss) per share
Basic and diluted $ (0.05) $ (0.05)
==============================================================================================================================
Weighted average number of
common shares outstanding
Basic and diluted 20,331,000 16,701,233
==============================================================================================================================
The accompanying notes are an integral part of these financial statements.
7
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 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 year $ (937,878) $ (856,183)
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 181,658 197,323
- minority interests - (103,560)
- net write off of land-use right and fixed assets 1,225 -
- provision for doubtful debts 25,856 36,826
Changes in non-cash working capital items:
- accounts receivable (557,582) 101,974
- inventories (15,076) (148,974)
- prepaid expenses and deposits (130,091) (19,465)
- accounts payable and accrued liabilities (188,416) (76,005)
- management fees payable - related parties (208,167) -
-----------------------------------------------------------------------------------------------------------------------------
(1,828,471) (816,089)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities
Purchase of fixed assets (44,392) (327,932)
(Increase) decrease in restricted funds 299,985 (192,357)
Acquisition of Patent rights (500,000) -
Acquisition of balance of Huaxin (1,400,000) -
Refundable investment deposits 400,000 -
-----------------------------------------------------------------------------------------------------------------------------
(1,244,407) (520,289)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Loan proceeds (278,177) 277,842
Proceeds from issuance of shares, net of issuance costs - 3,000
-----------------------------------------------------------------------------------------------------------------------------
(278,177) 280,842
-----------------------------------------------------------------------------------------------------------------------------
Foreign exchange (gain) loss on cash
held in foreign currency (3,884) 506
-----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
and cash equivalents (3,354,939) (1,055,030)
Cash and cash equivalents, beginning of period 6,306,129 4,092,702
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,951,190 $ 3,037,672
=============================================================================================================================
The accompanying notes are an integral part of these financial statements.
8
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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
(i) 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.
(ii) Under the terms of Sino-Foreign Joint Venture Contract, Huaxin's board
of directors consists of five directors of which the Company has the right
to select three directors including the chairman. Except for (1) amending
Huaxin's articles of association; (2) liquidating Huaxin; (3) increasing or
decreasing Huaxin's registered capital; (4) mortgaging Huaxin's assets; and
(5) merging Huaxin, which transactions require unanimous approval by
Huaxin's board, the Company controls Huaxin in the ordinary course of
business. Because the Company has a controlling financial interest in
Huaxin, and controls Huaxin's operations in the ordinary course of
business, the Company has accounted for Huaxin using the consolidated
method of accounting as opposed to using the equity method.
9
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
(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.
(c) Fixed Assets
Depreciation is based on the estimated useful lives of the assets and is
computed using the straight-line method. 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.
10
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
(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
March 31, 2002 and 2001.
(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 using
enacted 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.
11
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
(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 routinely maintains balances in a financial institution beyond
the insured amount. As of March 31, 2002, the Company had deposits of
$45,000 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.
(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 an 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.
12
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
2. Significant Accounting Policies (continued)
(l) Cash and Cash Equivalents
Cash equivalents usually consist of highly liquid investments which
are readily convertible into cash with maturities of three months or
less. As at March 31, 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 2,969,500 common shares and warrants to acquire 3,200,000
common shares that are outstanding at March 31, 2002 are
anti-dilutive, however, they may be dilutive in future.
13
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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.
14
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
3. Restricted Funds
------------------------------------------------------------------- ------------------- -------------------
March 31, 2002 December 31, 2001
------------------------------------------------------------------- ------------------- -------------------
Term deposits held as collateral against bank loans $2,839,970 $3,139,955
Cash and cash equivalents 2,951,190 6,306,129
------------------------------------------------------------------- ------------------- -------------------
Cash and short term securities $5,791,160 $9,446,084
=================================================================== =================== ===================
4. Accounts Receivable
------------------------------------------------------------------ -------------------- -------------------
March 31, 2002 December 31, 2001
------------------------------------------------------------------ -------------------- -------------------
Trade receivable $1,776,194 $1,225,455
Allowance for doubtful accounts (151,823) (97,982)
------------------------------------------------------------------ -------------------- -------------------
1,624,371 1,127,473
Other receivable 189,041 182,213
------------------------------------------------------------------ -------------------- -------------------
$1,813,412 $1,309,686
================================================================== ==================== ===================
5. Inventories
------------------------------------------------------------------ -------------------- -------------------
March 31, 2002 December 31, 2001
------------------------------------------------------------------ -------------------- -------------------
Raw materials $146,105 $173,687
Finished goods 173,271 179,871
Work in progress 791,560 742,302
------------------------------------------------------------------ -------------------- -------------------
$1,110,936 $1,095,860
================================================================== ==================== ===================
15
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
6. Fixed Assets
-------------------------------------------- --------------------------------------------------------------
March 31, 2002
--------------------------------------------------------------
Accumulated Net book
Cost depreciation value
-------------------------------------------- ------------------- ---------------------- -------------------
Motor vehicles $100,317 $35,674 $64,643
Office equipment and furniture 335,348 101,616 233,732
Leasehold improvements 998,404 248,691 749,713
Production and lab equipment 2,039,274 553,266 1,486,008
-------------------------------------------- ------------------- ---------------------- -------------------
$3,473,343 $939,247 $2,534,096
============================================ =================== ====================== ===================
-------------------------------------------- --------------------------------------------------------------
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 three months ended March 31, 2002, depreciation expenses
totalled $95,675 (2001 - $84,755). The majority of fixed assets are
located in China.
7. Investment in Hepatitis B Vaccine Project - Related Party
----------------------------------------------------------------- -------------------- --------------------
March 31, 2002 December 31, 2001
----------------------------------------------------------------- -------------------- --------------------
Hepatitis B Vaccine Project $4,000,000 $4,000,000
Less: Valuation allowance (210,000) (210,000)
----------------------------------------------------------------- -------------------- --------------------
$3,790,000 $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.
16
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
7. Investment in 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.
Subsequent to March 31, 2002, 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
----------------------------------------------------------------- -------------------- --------------------
March 31, 2002 December 31, 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.
17
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
10. Bank Loans
------------------------------------------------------------------------- --------------- ------------------
March 31, 2002 December 31, 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. $942,200 $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. 483,178 483,238
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. 169,113 169,133
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. 380,504 380,550
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. 446,941 446,995
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. 187,232 187,255
------------------------------------------------------------------------- --------------- ------------------
Total $2,609,168 $2,887,345
========================================================================= =============== ==================
The weighted average interest rate was 5.265% and 5.48% for the three
months ended March 31, 2002 and 2001.
18
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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 March 31, 2002, the parent company, Kailong and Huaxin have
estimated losses, for tax purposes, totalling approximately
$6,175,000, which may be applied against future taxable income.
Accordingly, there is no tax expense charged to the Statement of
Operations for the three months ended March 31, 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:
----------------------------------------------------------- ------------------- -------------------
March 31, 2002 December 31, 2001
----------------------------------------------------------- ------------------- -------------------
Tax losses carried forward $2,100,000 $1,850,000
Stock-based compensation - 17,700
Less: valuation allowance (2,100,000) (1,867,700)
----------------------------------------------------------- ------------------- -------------------
$ - $ -
=========================================================== =================== ===================
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate, for the three months ended March 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 - -
=========================================================== =================== ===================
19
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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 three months ended
March 31, 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. There were no options granted during the three months ended
March 31, 2002.
Subsequent to March 31, 2002, the Company cancelled options to
purchase 187,500 shares at a price of $3.125 per share and granted
options to purchase 920,000 shares at a price of $1.70 per share.
The following is a summary of the employee stock option information
for the period ended March 31, 2002:
------------------------------------------------------ ------------------ ------------------------
Weighted Average
Shares Exercise Price
------------------------------------------------------ ------------------ ------------------------
Options outstanding at December 31, 1999 1,520,000 $ 0.58
Granted 1,737,500 $ 3.31
Forfeited (107,500) $ 7.00
Exercised (107,000) $ 0.50
------------------------------------------------------ ------------------ ------------------------
------------------------------------------------------ ------------------ ------------------------
Options outstanding at December 31, 2000 $ 1.89
Granted 195,000 $ 1.79
Forfeited (137,500) $ 2.93
Exercised (131,000) $ 0.50
------------------------------------------------------ ------------------ ------------------------
Options outstanding at December 31, 2001
and March 31, 2002
2,969,500 $ 1.92
====================================================== ================== ========================
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 2.04 $ 0.50 1,243,000 $ 0.50
$1.01 - $2.00 175,000 4.33 $ 1.79 175,000 $ 1.79
$2.01 - $3.00 60,000 2.61 $ 2.50 60,000 $ 2.50
$3.01 - $4.00 1,477,500 3.6 $ 3.13 1,477,500 $ 3.13
------------------------- ------------- ---------- -------------
2,969,500 2.97 $ 1.92 2,955,500 $ 1.93
=============== ===== ============= ========== =============
20
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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:
------------------------------------------------------------ ------------------ ------------------
March 31, 2002 March 31, 2001
------------------------------------------------------------ ------------------ ------------------
Net (loss) for the period:
- as reported $(937,878) $(856,183)
- pro-forma (937,878) (856,767)
------------------------------------------------------------ ------------------ ------------------
Basic and diluted (loss) per share:
- as reported $(0.05) $(0.05)
- pro-forma $(0.05) $(0.05)
------------------------------------------------------------ ------------------ ------------------
(b) Warrants
Share purchase warrants outstanding as at December 31, 2001:
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
21
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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:
--------------------------------------------------------------- ----------------- ----------------
March 31, 2002 March 31, 2001
--------------------------------------------------------------- ----------------- ----------------
Management fees $57,500 $18,000
=============================================================== ================= ================
(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, 2004.
The Company will make payment for the development of Insulin as
follows:
(i) US$750,000 to be provided by at the commencement of the research
in the Insulin Project;
(ii) US$750,000 to be provided when cell-line and related technology
is established and animal experimentation commences in the
Insulin Project;
(iii)US$300,000 to be provided when a permit for clinical trials for
Insulin has been issued by the SDA; and
(iv) US$200,000 to be provided when a new drug license for Insulin 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 Insulin to Dragon before January 14, 2005.
22
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
13. Related Party Transactions (continued)
(a) 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 with in six months
(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 $347,837
2003 452,312
2004 467,023
2005 468,104
2006 471,345
2007 - 2009 833,574
-----------------------------------------------------
Total US$3,040,195
-----------------------------------------------------
15. Comparative Figures
Certain 2001 comparative figures have been reclassified to conform to the
financial statement presentation adopted for 2002.
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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
Biopharmaceuticals 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 March 31, 2002 was $1,372,808 compared to $664,414 for the three-month
period ending March 31, 2001. Sales in and outside of China were $525,308 and
$847,500, respectively during the three-month period ending March 31, 2002. All
sales during the three-month period ending March 31, 2001 were in China. Cost of
sales for the three-months ended March 31, 2002 of $190,524 is attributed to the
production costs of the pharmaceutical products. The cost of sales for the
three-months ended March 31, 2001 was $146,920.
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
March 31, 2002 was $33,607 compared to $65,259 for the three-month period ended
March 31, 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 March 31, 2002
were $2,153,768. The major expenses incurred in the first quarter of 2002 were
research and development expenses of $755,572 and the selling expenses of
$477,196 representing 35% and 22% of total expenses, respectively. The remaining
major expense items are represented by administrative expenses.
24
Significant operating expenses for the three-months ended March 31, 2002
included consulting fees of $148,737, loan interest of $40,410, rent of $61,546,
salaries and benefits of $141,686, $78,390 in travel costs and management fees
of $76,193. Management fees include $57,500 incurred to two directors for
services during the first quarter of 2002.
Other significant expenses for the fist quarter of 2002 include the depreciation
of fixed assets and amortization of license and permit and land-use rights of
$181,658.
Comparatively, total operating expenses for the first quarter of 2001 were
$1,542,496. Selling expenses represented 37% total operating expenses during
this period. Other major expenses for the three-month period ended March 31,
2001 included the depreciation of fixed assets and amortization of intangible
assets of $153,814, consulting fees of $122,323, bad debt write offs of $36,826,
loan interest of $33,993, rent of $71,330, salaries of $95,242 and management
fees of $35,125, including management fees of $18,000 paid to a director for
services rendered during the period.
Overall, expenditures have increased in 2001 over 2000 levels due to increased
personnel and activity levels.
Net and Comprehensive Loss. Dragon had a net loss and a comprehensive loss of
$937,878 for the three-months ended March 31, 2002.
The Company's net loss for the three-month period ended March 31, 2001, was
$959,743, which includes a minority interest share of the loss of $103,560. The
comprehensive loss for the same period was $856,183.
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-months ended March 31, 2002. The loss per share for the three-month period
ended March 31, 2002 was $0.05. 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 75% equity interest in Nanjing Huaxin Biotech. 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.
25
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 March 31, 2002, the Company had $5,791,160 in unrestricted cash available,
and working capital of $5,220,416. This cash and working captial will be used to
fund the ongoing operations and research and development of the Company for the
next 21 months.
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, 2000 and 2001 and quarters
ended March 31, 2001 and 2002.
By Currency
December 31, 2001 December 31, 2002
----------------- ------------------
U.S. Dollar 22% 31%
Canadian Dollar 0% 12%
Renminbi yuan 78% 57%
Total 100% 100%
26
March 31, 2001 March 31, 2002
---------------- ------------------
U.S. Dollar 36% 41%
Canadian Dollar 0% 13%
Renminbi yuan 64% 45%
Total 100% 100%
Such administrative expense by currency may change from time to time. Further,
the Company incurred expenses in China of $427,000 and $503,000 for the quarters
ended March 31, 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 United States 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 $2,609,168
as of March 31, 2002. The weighted average interest rate was 5.265% for the
three months ended March 31, 2002. Some of these loans are due beginning on
April 4, 2002 and ending on January 31, 2003. To the extent that there may be an
increase in interest rates during this period, the Company could be adversely
affected.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4, 5 and 6
None.
27
Signatures
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 PHARMACEUTICAL INC.
(registrant)
Dated: May 13, 2002 /s/ Matthew Kavanagh
----------------------------------------
Matthew Kavanagh
Director of Finance and Corporate
Compliance and Corporate Secretary
(Authorized to sign on behalf of the
registrant)