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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from _____ to _____
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12 b-2 of the Exchange act). Yes [ ] No [X]
Number of shares of common stock outstanding as of June 30, 2003: 20,334,000
Item 1. Financial Information
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
----------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current
Cash and short term securities $ 3,870,273 $ 4,935,766
Accounts receivable 936,732 949,045
Inventories 1,186,940 1,208,277
Prepaid and deposits 157,956 154,551
----------------------------------------------------------------------------------------------------------------------------------
Total current assets 6,151,901 7,247,639
Fixed assets 2,257,798 2,420,613
Due from related party - Hepatitis B vaccine project 100 100
Patent rights - related party 500,000 500,000
Licence and permit 3,199,994 3,475,740
----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 12,109,793 $ 13,644,092
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loans $ - $ 483,162
Accounts payable and accrued liabilities 1,440,544 1,525,404
----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,440,544 2,008,566
----------------------------------------------------------------------------------------------------------------------------------
Commitments (Note 13)
Stockholders' Equity
Share capital
Authorized: 50,000,000 common shares at
par value of $0.001 each
Issued and outstanding: 20,334,000 common shares 20,334 20,334
Additional paid in capital 26,644,998 26,644,998
Accumulated other comprehensive (loss) (30,836) (35,011)
Accumulated deficit (15,965,247) (14,994,795)
----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 10,669,249 11,635,526
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 12,109,793 $ 13,644,092
==================================================================================================================================
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
Common stock Additonal 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
Exercise of stock options for cash 3,000 3 1,497 - - - 1,500
Stock based compensation - - 18,760 - - - 18,760
Components of comprehensive income (loss)
- foreign currency translation - - - (10,003) - (10,003) (10,003)
- net (loss) for the year - - - (5,250,946) (5,250,946) - (5,250,946)
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive (loss) $(5,260,949)
============
Balance, December 31, 2002 20,334,000 $20,334 $26,644,998 $(14,994,795) $(35,011) $11,635,526
=========================================================================== =========================================
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
Common stock Additional hensive compre- Stock-
------------------------ paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated income equity
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 20,334,000 $20,334 $26,644,998 - $(14,994,795) $(35,011) $11,635,526
Components of comprehensive income (loss)
- foreign currency translation - - - 4,175 - 4,175 4,175
- net (loss) for the year - - - (970,452) (970,452) - (970,452)
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive (loss) $(966,277)
==========
Balance, June 30, 2003 20,334,000 $20,334 $26,644,998 $(15,965,247) $(30,836) $10,669,249
================================================================================ =====================================
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,
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------------------
Sales $1,007,686 $ 1,026,159 $1,672,009 $2,398,966
Cost of sales 326,988 174,465 528,269 364,989
------------------------------------------------------------------------------------------------------------------------------------
Gross profit 680,698 851,694 1,143,740 2,033,977
Selling, general and
administrative expenses (723,743) (1,316,578) (1,692,302) (2,413,037)
Depreciation of fixed assets and
amortization of licence and
permit and land-use right (183,896) (180,449) (369,195) (362,107)
Net write off of land-use right and fixed assets - - - (1,225)
Research expenses - (1,015,796) - (1,771,368)
New market development (8,234) (109,735) (23,713) (162,323)
Provision for doubtful debts (10,701) (54,693) (41,412) (80,549)
Loan interest expense (929) (15,605) (4,389) (56,015)
Stock-based compensation - - - -
------------------------------------------------------------------------------------------------------------------------------------
Operating loss (246,805) (1,841,162) (987,271) (2,812,647)
Interest income 10,381 16,295 16,819 49,902
------------------------------------------------------------------------------------------------------------------------------------
Net (loss) for the period $(236,424) $(1,824,867) $(970,452) $(2,762,745)
====================================================================================================================================
(Loss) per share
Basic and diluted $ (0.01) $ (0.09) $ (0.05) $ (0.14)
====================================================================================================================================
Weighted average number of
common shares outstanding
Basic and diluted 20,334,000 20,331,000 20,334,000 20,331,000
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended June 30, 2003 and 2002
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
-----------------------------------------------------------------------------------------------------------------------------
2003 2002
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) operating activities
Net (loss) for the year $ (970,452) $ (2,762,745)
Adjustments to reconcile net loss to
net cash used in operating activities:
- depreciation of fixed assets and amortization of
licence and permit 477,415 362,107
- net write off of land-use right and fixed assets - 1,225
- provision for doubtful debts 41,412 80,549
Changes in non-cash working capital items:
- accounts receivable (29,098) 240,074
- inventories 21,337 (81,875)
- prepaid expenses and deposits (3,405) (82,736)
- accounts payable and accrued liabilities (84,860) (79,566)
- management fees payable - related parties - (138,167)
-----------------------------------------------------------------------------------------------------------------------------
(547,651) (2,461,134)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities
Purchase of fixed assets (38,559) (133,444)
(Increase) decrease in restricted funds 510,000 2,449,955
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
-----------------------------------------------------------------------------------------------------------------------------
471,441 1,316,511
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Loan proceeds (483,162) (2,234,880)
-----------------------------------------------------------------------------------------------------------------------------
Foreign exchange (gain) loss on cash
held in foreign currency 3,879 (4,342)
-----------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (555,493) (3,383,845)
Cash and cash equivalents, beginning of period 4,425,766 6,306,129
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,870,273 $ 2,922,284
=============================================================================================================================
The accompanying notes are an integral part of these financial statements.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
1. Basis of Presentation
The accompanying unaudited interim consolidated balance sheets, statements
of operations and cash flows reflected all adjustments, consisting of
normal recurring adjustments and other adjustments, that are, in the
opinion of management, necessary for a fair presentation of the financial
position of the Company, at June 30 , 2003, and the results of operations
and cash flows for the interim periods ended June 30, 2003 and 2002.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instruction for Form 10-Q pursuant to the
rules and regulations of Securities and Exchange Commission and, therefore,
do not include all information and notes normally provided in audited
financial statements and should be read in conjunction with the Company's
consolidated financial statements for the year ended December 31, 2002
included in the annual report previously filed on Form10-K.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
2. Restricted Funds
---------------------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 3,870,273 $ 4,425,766
Term deposits held as collateral against bank loans - 510,000
---------------------------------------------------------------------------------------------------------
Cash and short term securities $ 3,870,273 $ 4,935,766
=========================================================================================================
3. Accounts Receivable
---------------------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
---------------------------------------------------------------------------------------------------------
Trade receivables $ 1,162,073 $ 1,141,896
(320,439) (279,018)
Allowance for doubtful accounts
---------------------------------------------------------------------------------------------------------
841,633 862,878
95,099 86,167
Other receivables
---------------------------------------------------------------------------------------------------------
$936,732 $ 949,045
=========================================================================================================
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
4. Inventories
---------------------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
---------------------------------------------------------------------------------------------------------
Raw materials $ 155,412 $ 135,710
Finished goods 98,287 88,857
Work in progress 933,241 983,710
---------------------------------------------------------------------------------------------------------
$1,186,940 $ 1,208,277
=========================================================================================================
5. Fixed Assets
----------------------------------------------------------------------------------------------------------
June 30, 2003
---------------------------------------------------------------
Accumulated Net book
Cost depreciation value
----------------------------------------------------------------------------------------------------------
Motor vehicles $ 140,406 $ 63,350 $ 77,056
Office equipment and furniture 415,042 182,903 232,139
Leasehold improvements 1,067,093 396,129 670,964
Production and lab equipment 2,063,318 785,679 1,277,639
----------------------------------------------------------------------------------------------------------
$ 3,685,859 $ 1,428,061 $2,257,798
==========================================================================================================
----------------------------------------------------------------------------------------------------------
December 31, 2002
---------------------------------------------------------------
Accumulated Net book
Cost depreciation value
----------------------------------------------------------------------------------------------------------
Motor vehicles $ 140,388 $ 50,103 $ 90,285
Office equipment and furniture 385,462 144,199 241,263
Leasehold improvements 1,065,313 336,503 728,810
Production and lab equipment 2,052,260 692,005 1,360,255
----------------------------------------------------------------------------------------------------------
$ 3,643,423 $ 1,222,810 $2,420,613
==========================================================================================================
For the six months ended June 30, 2003, depreciation expenses totalled
$201,374 (2002 - $146,489). The majority of fixed assets are located in
China.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
6. Due from Related Party - Hepatitis B Vaccine Project
---------------------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
---------------------------------------------------------------------------------------------------------
Hepatitis B Vaccine Project $4,000,000 $4,000,000
Less : Repayment (500,000) (500,000)
Valuation allowance (3,499,900) (3,499,900)
---------------------------------------------------------------------------------------------------------
$ 100 $ 100
=========================================================================================================
(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 was a
company named Alphatech Bioengineering Limited, incorporated in Hong Kong,
with two shareholders who are both directors of the Company.
(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 director of the Company (and President and CEO of the Company at the
time of the transaction) and one of the shareholders of Alphatech, demanded
to repurchase the project from the Company. The repurchase price of $4.0
million is 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 has repurchased
the project on the agreed terms.
The amount owing by Dr. Liu to the Company is unsecured. The Company has
chosen, given the significant amount involved and the lack of security, to
conservatively value the amount owing and has set up a provision for the
full amount, less a nominal amount of $100.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
7. Patent Rights - Related Party
Pursuant to an agreement dated January 14, 2002, the Company entered into a
Patent Development Agreement with the Dr. Longbin Liu, a director of the
Company (and President and CEO of the Company at the time of the
transaction) and a company controlled by the Dr. Liu 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 (paid) 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.
The issuance and exercise of the warrants to acquire 1,000,000 common stock
of the Company is contingent upon the success of the patent applications.
The US$500,000 will be refunded to the Company if no patent applications
have been filed by January 14, 2005.
8. Licence and permit
---------------------------------------------------------------------------
June 30, December 31,
2003 2002
---------------------------------------------------------------------------
Original cost $5,012,582 $5,012,582
Accumulated amortization 1,812,588 1,536,842
---------------------------------------------------------------------------
$ 3,199,994 $ 3,475,740
===========================================================================
Amortization expenses for the licence and permit for the six months ended
June 30, 2003 was $276,041 (2002 - $275,956)
The estimated amortization expense for each of the five succeeding fiscal
years is as follows:
2003 (balance of the year) $276,000
2004 $552,000
2005 $552,000
2006 $552,000
2007 $552,000
The above amortization expense forecast is an estimate. Actual amounts of
amortization expense may differ from estimated amounts due to additional
intangible asset acquisitions, changes in foreign currency exchange rates,
impairment of intangible assets, accelerated amortization of licence and
permit, and other events.
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
9. Bank Loans
----------------------------------------------------------------------------------------------------------
June 30, December 31,
2003 2002
----------------------------------------------------------------------------------------------------------
RMB 4,000,000, bearing interest at 3.394% per annum and due on February
26, 2003. The loan was secured by the term deposit. $ - $ 483,162
----------------------------------------------------------------------------------------------------------
Total $ - $ 483,162
==========================================================================================================
The weighted average interest rate was 3.394% and 5.265% for the six months
ended June 30, 2003 and 2002.
10. 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.
Allwin and Biotrade are not subject to income taxes. As at June 30,
2003, $3.7 million of unremitted earnings attributable to
international companies were considered to be indefinitely invested.
No provision has been made for taxes that might be payable if these
earnings were remitted to the United States. The company's intention
is to reinvest these earnings permanently or to repatriate the
earnings when it is tax effective to do so. It is not practicable to
determine the amount of incremental taxes that might arise were these
earnings to be remitted.
As at June 30, 2003, the company has estimated losses, for tax
purposes, totalling approximately $8,200,000, which may be applied
against future taxable income. 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,
2003 2002
-------------------------------------------------------------------------------------------------
$ 2,790,000 $ 2,560,000
Tax losses carried forward
Stock-based compensation 6,400 6,400
Provision for amount owing from Hepatitis B Vaccine
Project 1,118,000 1,118,000
Less: valuation allowance (3,914,400) (3,684,400)
-------------------------------------------------------------------------------------------------
$ - $ -
=================================================================================================
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
10. Income Taxes (continued)
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate, for the three months ended June 30, 2003 and
2002 are as follows:
---------------------------------------------------------------------------
2003 2002
---------------------------------------------------------------------------
Federal statutory income tax rate 34% 34%
Benefit of loss carry forward (34%) (34%)
---------------------------------------------------------------------------
Effective income tax rate - -
===========================================================================
11. Stock Options and Warrants
(a) Stock Options Plans
During the six months ended June 30, 2003 the Company granted options
to purchase 500,000 shares at a price of $0.68 per share, at a time
when the market price was $0.48 per share.
The following is a summary of the employee stock option information
for the period ended June 30, 2003:
------------------------------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
------------------------------------------------------------------------------------------------
Options outstanding at December 31, 2001 2,969,500 $ 1.92
Granted 920,000 $ 1.70
Forfeited (598,500) $ 2.30
Exercised (3,000) $ 0.50
------------------------------------------------------------------------------------------------
Options outstanding at December 31, 2002 3,288,000 $ 1.82
Granted 500,000 $ 0.68
Forfeited (296,000) $ 1.67
------------------------------------------------------------------------------------------------
Options outstanding at June 30, 2003 3,492,000 $ 1.67
================================================================================================
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
11. Stock Options and Warrants (continued)
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 1,716,500 1.94 $ 0.55 1,591,500 $ 0.54
$1.01 - $2.00 440,500 3.82 $ 1.70 440,500 $ 1.70
$2.01 - $3.00 60,000 1.36 $ 2.50 60,000 $ 2.50
$3.01 - $4.00 1,275,000 2.38 $ 3.13 1,275,000 $ 3.13
---------- ------ --------- ---------- ---------
3,492,000 2.32 $ 1.67 3,367,000 $ 1.71
========== ====== ========= ========== =========
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 90%, 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, June 30,
2003 2002
---------------------------------------------------------------------------
Net (loss) for the period:
- as reported $ (970,452) $(2,762,745)
- pro-forma $ (970,452) (2,762,745)
---------------------------------------------------------------------------
Basic and diluted (loss) per share:
- as reported $(0.05) $(0.14)
- pro-forma $(0.05) $(0.14)
---------------------------------------------------------------------------
(b) Warrants
Share purchase warrants outstanding as at June 30, 2003:
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
Number Underlying Exercise Price
of Warrants Shares Per Share Expiry Date
----------- ---------- -------------- -------------
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
* See Note 7
12. Related Party Transactions
(a) The Company incurred the following expenses to a director (2002: two
directors) of the Company:
----------------------------------------------------------------------
June 30, June 30,
2003 2002
----------------------------------------------------------------------
Management fees $ 40,000 $115,000
======================================================================
(b) Pursuant to an agreement dated January 14, 2002, the Company entered
into a Project Development Agreement with Dr. Longbin Liu ("Dr. Liu"),
a director of the Company (and President and CEO of the Company at the
time of the transaction) 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 (paid);
(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:
(i) US$750,000 to be provided by at the commencement of the research
in the Insulin Project (paid);
(ii) US$750,000 to be provided when cell-line and related technology
is established and animal experimentation commences in the
Insulin Project (paid);
(iii)US$300,000 to be provided when a permit for clinical trials for
Insulin has been issued by the SDA;
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
12. Related Party Transactions (continued)
(iv) US$200,000 to be provided when a new drug license for Insulin is
issued to Dragon by the SDA; and
(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.
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 or four
years with respect to the Insulin Project or if the SDA rejects
the Projects for technical or scientific reasons or If
development of the Project is terminated by Dr. Liu, then Dr. Liu
will refund to the Company all amounts paid, without interest or
deduction, with respect to the Project within six months.
As at June 30, 2003, the Company has paid a total of $1,500,000 and
$500,000 towards the Insulin and G-CSF Projects, respectively. The
Company has paid an additional $100,000 to a company controlled by Dr.
Liu to produce Insulin samples for drug registration purposes.
(c) see Notes 6 and 7 also.
13. 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$326,200) 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$136,000 to US$157,000) per annum until March
31, 2007. Minimum payments required under the agreements are as follows:
2003 $ 274,240
2004 491,659
2005 492,928
2006 496,736
2007 369,134
2008 - 2009 470,841
---------------------------------------
Total $ 2,595,938
=======================================
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
14. Segmented Information
The Company operates exclusively in the biotech sector. The Company's
assets and revenues are distributed as follows:
June 30, 2003 December 31,2002
-----------------------------------------------------------------------------------------------------------------
ASSETS
North America $ 3,425,332 $ 4,144,668
China 7,812,546 9,020,882
Others 871,915 478,542
-----------------------------------------------------------------------------------------------------------------
Total $ 12,109,793 $13,644,092
=================================================================================================================
------------------------------------------------------------------------------------------------------------------
Six months ended Six months ended
June 30, 2003 June 30, 2002
------------------------------------------------------------------------------------------------------------------
REVENUE
North America $ - $ -
China 1,031,242 1,351,966
Others 640,767 1,047,000
------------------------------------------------------------------------------------------------------------------
Total $ 1,672,009 $ 2,398,966
==================================================================================================================
15. Comparative Figures
Certain 2002 comparative figures have been reclassified to conform to the
financial statement presentation adopted for 2003.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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-K for the fiscal year ended December 31, 2002.
Overview
The Company (or "Dragon") was formed on August 22, 1989, under the name First
Geneva Investment 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
Investment had no operations. On September 21, 1998, First Geneva Investment
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 calendar 1999. 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 Pharmaceutical (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, 2003 was $1,007,686 compared to $1,026,159 for the three-month
period ending June 30, 2002. Sales in and outside of China were $576,894 and
$430,792, respectively during the three-month period ending June 30, 2003. Sales
during the three-month period ending June 30, 2002 were $826,659 in China and
$199,500 outside of China. Cost of sales for the three-months ended June 30,
2003 of $326,988 is attributed to the production costs of the pharmaceutical
products. The cost of sales for the three-months ended June 30, 2002 was
$174,465. The gross profit margin was 68% for the three-month period ending June
30, 2003 and 83% for the three-month period ended June 30, 2002. The profit
margin decreased during the three months ended June 30, 2003 because the Company
decided to sell and sold some product with short-term expiry dates at a reduced
price.
Revenue for the six-month period ending June 30, 2003 was $1,672,009 compared to
$2,398,966 for the six-month period ending June 30, 2002. Sales in and outside
of China were $1,031,242 and $640,767, respectively during the six-month period
ending June 30, 2003. Sales during the six-month period ending June 30, 2002
were $1,351,966 in China and $1,047,000 outside of China. The overseas sales
during the six-month period ending June 30, 2002 included delivery of a $700,000
bulk order to be used by the purchaser for new drug research and development.
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.
Interest income for the three-months period ended June 30, 2003 was $10,381
compared to $16,295 for the three-month period ended June 30, 2002. Interest
income for the six-months period ended June 30, 2003 was $16,819 compared to
$49,902 for the six-month period ended June 30, 2002.
Interest income has decreased as interest rates have declined and as the cash
balance has decreased to fund the Company's operations.
Expenses. Total operating expenses for the three-months ended June 30, 2003 were
$927,504. The major expenses incurred in the second quarter of 2003 was selling
expenses of $287,667 representing 31% of total expenses. The remaining major
expense items are represented by administrative expenses.
Significant operating expenses for the three-months ended June 30, 2003 included
rent of $123,912, salaries and benefits of $198,586, $34,055 in travel costs and
a bad debts provision of $10,701. Management fees of $20,000 were paid to a
director for services during the second quarter of 2003.
Other significant expenses for the second quarter include the depreciation of
fixed assets and amortization of license and permit of $183,896.
Comparatively, total operating expenses for the three-months ended June 30, 2002
were $2,692,855. The major expenses incurred in the second 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.
Administrative expenses represent the remaining major expense items.
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 second quarter of 2002.
Other significant expenses for the second quarter of 2002 include the
depreciation of fixed assets and amortization of license and permit and land-use
rights of $180,449.
Total operating expenses for the six-months ended June 30, 2003 were $2,131,011.
The major expense incurred in the first half of 2003 was selling expense of
$793,339 representing 37% of total expenses. The remaining expense items are
primarily administrative expenses.
Significant operating expenses for the six-months ended June 30, 2003 included
rent of $212,111, salaries and benefits of $389,978, $100,393 in travel costs
and a bad debts provision of $41,412. Management fees of $40,000 were paid to a
director for services during the first half of 2003.
Other significant expenses for the first half of the year include the
depreciation of fixed assets and amortization of license and permit of $369,195.
Comparatively, total operating expenses for the six-months ended June 30, 2002,
were $4,846,624. The major expenses incurred in the first half of 2002 were
research and development expenses of $1,771,368 and the selling expenses of
$951,107 representing 37% and 20% of total expenses, respectively.
Administrative expenses represent the remaining expense items.
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.
Overall, expenditures have decreased in 2003 from 2002 levels as the Company has
streamlined operations, closed its Beijing and Hong Kong representative offices
and diligently pursued cutting costs in all areas, where practical.
Net and Comprehensive Loss. Dragon had a net loss and a comprehensive loss of
$236,424 for the three-month period ending June 30, 2003 compared to $1,824,867
for the same period last year.
The Company's net and comprehensive loss of $970,452 for the six-month period
ending June 30, 2003 compared to $2,762,745 for the same period last year.
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, 2003. The loss per share for
the three-month period ended June 30, 2003 was $0.01 and the loss per share for
the six-month period ended June 30, 2003 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 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.
As of June 30, 2003, the Company had $3,870,237 in cash available. This cash,
the $936,732 in accounts receivable and anticipated sales will be used to fund
the ongoing operations and research and development. Working capital was
$4,711,357 at June 30, 2003.
During the six months ended June 30, 2003, the Company incurred losses of
$970,452 and the Company will continue to incur losses until sales for its
products increase. The Company will continue to fund its operations through
working capital.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
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, 2001 and 2002 and the
six-months ended June 30, 2003 and 2002.
By Currency
December 31, December 31,
2001 2002
U.S. Dollar 31% 27%
Canadian Dollar 12% 46%
Renminbi Yuan 57% 27%
Total 100% 100%
June 30, 2002 June 30, 2003
U.S. Dollar 26% 15%
Canadian Dollar 48% 66%
Renminbi Yuan 26% 19%
Total 100% 100%
Such administrative expense by currency may change from time to time. Further,
the Company incurred expenses in China of $1,334,159 and $965,968 for the
six-months ended June 30, 2003 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.
Item 4. Controls and Procedures
-------------------------------
Within the 90 days prior to the date of this Form 10-Q, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, of the design and operation of the Company's disclosure and internal
controls and procedures pursuant to Exchange Act Rule 13a-14. The review
identified a number of areas where there could be improvements to increase the
effectiveness of controls and the Company is currently in the process of
improving the controls and procedures in these areas. Notwithstanding the above,
the Company's President and Chief Executive Officer along with the Company's
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are sufficient enough to ensure adequate and appropriate
disclosure of material information relating to the Company (including its
consolidated subsidiaries) required to be included in this Form 10-Q.
There have been no significant changes in the Company's internal controls or in
other factors, which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation, other than those being
undertaken to increase the effectiveness of controls as discussed above.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
On June 26 2003, the shareholders elected the following five persons to serve as
directors until the next annual meeting:
In Favour Against Withheld
--------- ------- --------
Dr. Alexander Wick 9,249,115 0 49,694
Dr. Longbin Liu 8,578,115 0 720,694
Dr. Ken Z. Cai 9,249,615 0 49,194
Dr. Y.K. Sun 9,249,815 0 48,994
Mr. Philip Yuen 9,249,615 0 49,194
In addition, the shareholders ratified the reappointment of Moore Stephens Ellis
Foster Ltd. as the Company's independent accountants as follows:
In Favour Against Withheld
--------- ------- --------
9,257,076 22,400 0
Item 5. Other Information.
None
Item 6. Exhibits and Reports on From 8-K.
(a) Exhibits.
Exhibit No.
31.1 Certification by the Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act
31.2 Certification by the Principal Accounting Officer Pursuant to Section
302 of the Sarbanes-Oxley Act
32 Certification by the Principal Executive and Financial Officers
Pursuant to Section 906 of the Sarbanes-Oxley Act
(b) Reports on Form 8K.
On May 29, 2003, the Company filed a Current Report on Form 8-K,
regarding first quarter results for 2003.
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.
/s/ Matthew Kavanagh
Dated: August 14, 2003 ----------------------------------
Matthew Kavanagh
Director of Finance and Corporate
Compliance and Corporate Secretary
(duly authorized Officer and
Principal Financial Officer)