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, 2001
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)
543 Granville Street, Suite 1200
Vancouver, British Columbia
Canada V6C 1X8
(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, 2001: 16,706,000
Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet
(Expressed in U.S. Dollars)
March 31 December 31
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current
Cash and cash equivalents $ 3,037,672 $ 4,092,702
Restricted funds 2,439,970 2,247,613
Accounts receivable 1,028,051 1,166,876
Inventories 623,015 474,041
Prepaid and deposits 116,399 96,934
------------ ------------
Total current assets 7,245,107 8,078,166
Fixed assets 2,575,097 2,330,349
Investment in Hepatitis B vaccine project - related party 4,000,000 4,000,000
Refundable investment deposits - related party 372,000 372,000
Licence and permit 3,654,546 3,766,315
------------ ------------
Total assets $ 17,846,750 $ 18,546,830
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loans $ 2,477,042 $ 2,198,280
Accounts payable and accrued liabilities 1,359,815 1,435,820
------------ ------------
Total current liabilities 3,836,857 3,634,100
------------ ------------
Minority interests 825,643 929,265
------------ ------------
Commitment (Note 13)
Stockholders' Equity
Share capital
Authorized: 50,000,000 common shares at
par value of $0.001 each
Issued and outstanding: 16,706,000 common shares
(December 31, 2000 - 16,700,000) 16,706 16,700
Additional paid in capital 20,055,866 20,000,897
Accumulated other comprehensive (loss) (23,595) (25,588)
Accumulated deficit (6,864,727) (6,008,544)
------------ ------------
Total stockholders' equity 13,184,250 13,983,465
------------ ------------
Total liabilities and stockholders' equity $ 17,846,750 $ 18,546,830
============ ============
The accompanying notes are an integral part of these financial statements.
3
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Expressed in U.S. Dollars)
(Unaudited)
Accumulated
Compre- Other Total
Additional hensive Compre- Stock-
Common stock paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated Income equity
----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 10,735,000 $ 10,735 $ 15,690,734 $ (3,262,750) $ 50,049 $ 12,488,768
Issued 4,258,000 common shares
Previously allotted 4,258,000 4,258 (4,258) - - -
Additional share issuance costs
to 4,258,000 common shares issued - (5,247) - - (5,247)
Exercise stock options for cash 107,000 107 53,393 - - 53,500
Exercise warrants for cash 1,600,000 1,600 2,498,400 - - 2,500,000
Allotted 250,000 common shares
at $6.25 per share - - 1,562,500 - - 1,562,500
Stock option compensation - - 205,375 - - 205,375
Other comprehensive income
- foreign currency translation - - - (75,637) - (75,637) (75,637)
Comprehensive income
- net (loss) for the period - - - (2,745,794) (2,745,794) - (2,745,794)
---------- -------- ------------ ------------ ------------ --------- ------------
Comprehensive income (loss) $ (2,821,431)
============
Balance, December 31, 2000 16,700,000 $ 16,700 $ 20,000,897 $ (6,008,544) $ (25,588) $ 13,983,465
========== ======== ============ ` ============ ========= ============
The accompanying notes are an integral part of these financial statements.
4
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Expressed in U.S. Dollars)
(Unaudited)
Accumulated
Compre- Other Total
Additional hensive Compre- Stock-
Common stock paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated Income equity
----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 16,700,000 $ 16,700 $ 20,000,897 - $ (6,008,544) $ (25,588) $ 13,983,465
Exercise of stock options for cash 6,000 6 2,994 - - - 3,000
Other comprehensive income
- foreign currency translation - - - 1,993 - 1,993 1,993
Comprehensive (loss)
- net (loss) for the period - - - (856,183) (856,183) - (856,183)
Stock option compensation - - 51,975 - - - 51,975
---------- --------- ------------ ------------ ------------ --------- ------------
Comprehensive (loss) $ (854,190)
============
Balance, March 31, 2001 16,706,000 $ 16,706 $ 20,055,866 $ (6,864,727) $ (23,595) $ 13,184,250
========== ======== ============ ` ============ ========= ============
The accompanying notes are an integral part of these financial statements.
5
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Operations
(Expressed in U.S. Dollars)
(Unaudited)
January 1 January 1
2001 to 2000 to
March 31 March 31
2001 2000
------------ ------------
Sales $ 664,414 $ 661,785
Cost of sales 146,920 98,865
------------ ------------
Gross profit 517,494 562,920
Selling, general and
administrative expenses (1,125,808) (472,653)
Depreciation of fixed assets and
amortization of licence and permit
and land-use right (153,814) (88,233)
Research expenses (40,200) -
New market development (99,880) (12,081)
Provision for doubtful debts (36,826) (24,038)
Loan interest expense (33,993) (25,471)
Stock-based compensation (51,975) (188,365)
------------ ------------
Operating loss (1,025,002) (247,921)
Interest income 65,259 24,052
------------ ------------
Loss before minority interest (959,743) (223,869)
Minority interest 103,560 (10,911)
------------ ------------
Net (loss) for the period $ (856,183) $ (234,780)
============ ============
(Loss) per share
Basic and diluted $ (0.05) $ (0.02)
============ ============
Weighted average number of
common shares outstanding
Basic and diluted 16,701,233 11,807,933
============ ============
The accompanying notes are an integral part of these financial statements.
6
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Cash Flows
(Expressed in U.S. Dollars)
(Unaudited)
January 1 January 1
2001 to 2000 to
March 31 March 31
2001 2000
------------ ------------
Cash flows from (used in) operating activities
Net (loss) for the period $ (856,183) $ (234,780)
Adjustments to reconcile net loss to
net cash used in operating activities:
- stock-based compensation expense 51,975 188,365
- depreciation of fixed assets and amortization of
licence and permit and land-use right 197,323 122,469
- minority interests (103,560) 10,911
- provision for doubtful debts 36,826 24,038
Changes in non-cash working capital items:
- accounts receivable 101,974 (38,015)
- inventories (148,974) (87,979)
- prepaid expenses and deposits (19,465) (427,536)
- accounts payable and accrued liabilities (76,005) (460,287)
------------ ------------
(816,089) (902,814)
------------ ------------
Cash flows used in investing activities
Purchase of fixed assets (327,932) (38,360)
Increase in restricted funds (192,357) (1,513,800)
Additional cost of licence - (250,000)
------------ ------------
(520,289) (1,802,160)
------------ ------------
Cash flows from financing activities
Loan proceeds 277,842 934,840
Proceeds from issuance of shares 3,000 113,500
Proceeds from shares subscribed and allotted
in prior period, net of issuance costs - 8,786,603
Funds contributed by minority shareholders - 403,380
------------ ------------
280,842 10,238,323
------------ ------------
Foreign exchange loss on cash
held in foreign currency 506 8,318
------------ ------------
Increase (decrease) in cash and
And cash equivalents (1,055,030) 7,540,932
Cash and cash equivalents, beginning of period 4,092,702 617,262
------------ ------------
Cash and cash equivalents, end of period $ 3,037,672 $ 8,158,194
============ ============
The accompanying notes are an integral part of these financial statements.
7
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
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"). Kailong and Huaxin are in the business of research and
development, production and sales of pharmaceutical products in China.
2. Significant Accounting Policies
(a) Basis of Consolidation
(i) These consolidated financial statements include the accounts of
the Company and Its subsidiaries, Allwin, Kailong and Huaxin. 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.
(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.
8
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
2. Significant Accounting Policies (continued)
(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
Land improvements 10 years
Leasehold improvements Term of lease (10 years)
Production equipment 10 years
(d) Foreign Currency Transactions
The parent company, Allwin, Kailong and Huaxin maintain their
accounting records in their functional currencies (i.e., U.S. dollars,
U.S. dollars, Renminbi Yuan, and Renminbi Yuan, 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) are translated into U.S. dollars at
exchange rates in effect at the balance sheet date. Revenue and
expenses are translated at average exchange rate. Gain and losses from
such translations are included in stockholders' equity, as a component
of other comprehensive income.
(f) Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
9
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
2. Significant Accounting Policies (continued)
(g) Advertising Expenses
The Company expensed advertising costs as incurred. There were no
advertising expenses incurred by the Company for the period ended
March 31, 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
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. The
Company is disclosing this information on its Statement of
Stockholders' Equity. Comprehensive income comprises equity except
those resulting from investments by owners and distributions to
owners. SFAS No. 130 did not change the current accounting treatments
for components of comprehensive income.
(j) Financial Instruments and Concentration of Risks
Fair value of financial instruments are made at a specific point in
time, based on relevant information about financial markets and
specific financial instruments. As these estimates are subjective in
nature, involving uncertainties and matters of significant judgement,
they cannot be determined with precision. Changes in assumptions can
significantly affect estimated fair values.
The carrying value of cash and cash equivalents, term deposits,
accounts receivable, bank loans, accounts payable and accrued
liabilities approximate their fair value because of the short-term
nature of these instruments.
10
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
2. Significant Accounting Policies (continued)
(j) Financial Instruments and Concentration of Risks (continued)
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 licence
and permit, the discounted cash flows method is used to arrive at the
estimated fair value of such licence and permit.
(l) 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, 2001, 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.
11
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
2. Significant Accounting Policies (continued)
(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
4,658,000 warrants and 3,037,000 stock options outstanding at March
31, 2001 are anti-dilutive, however, they may be dilutive in future.
12
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
2. Significant Accounting Policies (continued)
(q) New Accounting Pronouncements
(i) The Financial Accounting Standards Board ("FASB") has issued
Interpretation No. 44 in March 2000, which addresses certain
practice issues regarding Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees. The
effective date of the interpretation was July 1, 2000.
If the terms of an option (originally accounted for as a fixed
option) are modified during the option term to change the
exercise price directly, the modified option should be accounted
for as a variable option. Variable grant accounting should be
applied to the modified option from the date of the modification
until the date of exercise. Consequently, the final measurement
of compensation expense would occur at the date of exercise. The
cancellation of an option and the issuance of a new option with a
lower exercise price shortly thereafter (e.g., within six months)
to the same individual should be considered in substance a
modified (variable) option.
The Company has no such modified option and, accordingly, the
pronouncement would have nil effect on the Company's financial
statements.
(ii) In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated
as a hedge, the objective of which is to match the timing of gain
or loss recognition on the hedging derivative with the
recognition of (I) the changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk or
(ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS No.
133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
Historically, the Company has not entered into derivatives
contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption of
the new standards on July 1, 2000 to affect its financial
statements.
13
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
3. Restricted Funds
March 31 December 31
2001 2000
---------- ----------
Term deposits held as collateral against bank loans $2,439,970 $1,736,328
Restricted for use in acquisition of fixed assets - 511,285
---------- ----------
$2,439,970 $2,247,613
========== ==========
4. Accounts Receivable
March 31 December 31
2001 2000
---------- ----------
Trade receivable $ 934,448 $ 996,100
Allowance for doubtful accounts (77,514) (40,663)
---------- ----------
856,934 955,437
Other receivable 171,117 211,439
---------- ----------
$1,028,051 $1,166,876
========== ==========
5. Inventories
March 31 December 31
2001 2000
---------- ----------
Raw materials $ 161,036 $ 72,033
Finished goods 439,416 391,469
Work in progress 22,563 10,539
---------- ----------
$ 623,015 $ 474,041
========== ==========
14
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
6. Fixed Assets
March 31, 2001
-----------------------------------------
Accumulated Net book
Cost depreciation value
---------- ------------- ----------
Motor vehicles $ 100,347 $ 19,986 $ 80,361
Office equipment and furniture 230,550 67,852 162,698
Leasehold improvements 953,639 147,570 806,069
Production and lab equipment 1,897,846 371,877 1,525,969
---------- -------- ----------
$3,182,382 $607,285 $2,575,097
========== ======== ==========
December 31, 2000
-----------------------------------------
Accumulated Net book
Cost depreciation value
---------- ------------- ----------
Motor vehicles $ 100,309 $ 15,752 $ 84,557
Office equipment and furniture 202,242 57,746 144,496
Leasehold improvements 952,364 119,234 833,130
Production and lab equipment 1,598,360 330,194 1,268,166
---------- -------- ----------
$2,853,275 $522,926 $2,330,349
========== ======== ==========
For the three-month period ended March 31, 2001, depreciation expenses totalled
$84,755 (December 31, 2000 - $269,125). All fixed assets are located in China.
7. Investment in Hepatitis B Vaccine Project - Related Party
(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.
(b) Pursuant to an amended agreement dated March 22, 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.
15
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
8. Refundable Investment deposits - Related Party
March 31 December 31
2001 2000
-------- --------
Guanzhou Recomgen Biotech Co. Ltd.
- Tissue Plasminogen Activator ("TPA") Project $400,000 $400,000
Less: Valuation allowance (28,000) (28,000)
-------- --------
$372,000 $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. Subsequent to the year-end,
due to financial market and economic conditions, the Company decided not to
proceed with the funding and the acquisition. In accordance with the
agreement, Guanzhou Recomgen and its principals agreed to refund the
$400,000 before September 30, 2001.
9. Bank Loans
March 31 December 31
2000 2000
---------- ----------
RMB 3,000,000, bearing interest at 5.85% per annum and due on
July 31, 2001 $ 362,494 $ 362,354
RMB 2,000,000, bearing interest at 5.85% per annum and due on
August 15, 2001 241,663 241,570
RMB 7,800,000, bearing interest at 5.265% per annum and due on
January 31, 2002. The loan is secured by the term deposit 942,484 942,120
RMB 4,000,000, bearing interest at 5.58% per annum and due on
June 11, 2001. The loan is secured by the term deposit 483,325 483,138
RMB 1,400,000 bearing interest at 5.58% per annum and due on
June 11, 2001. The loan is secured by the term deposit 169,164 169,098
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 277,912 -
---------- ----------
Total $2,477,042 $2,198,280
========== ==========
The weighted average interest rate was 5.48% for the three-month period
ended March 31, 2001 and 5.79% for the year ended December 31, 2000.
16
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
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 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, 2001, the parent company, Kailong and Huaxin have
estimated losses, for tax purposes, totalling approximately
$2,980,000, which may be applied against future taxable income.
Accordingly, there is no tax expense charged to the Statement of
Operations for the period ended March 31, 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 March 31
2001 2000
---------- --------
Tax loss carryforwards $1,013,000 $392,000
Stock-based compensation 17,700 64,000
Less: valuation allowance (1,030,700) (456,000)
---------- --------
$ - $ -
========== ========
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate is as follows:
March 31 March 31
2001 2000
---------- --------
Federal statutory income tax rate 34% 34%
Change in valuation allowance (34%) (34%)
---------- --------
Effective income tax rate - -
========== ========
17
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
11. Stock Options and Warrants
(a) Stock Options Plans
The Company charged $51,975 and $188,365, for the three-month periods
ended March 31, 2001 and 2000, respectively, to income 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 was no stock
option granted during the period ended March 31, 2001.
The following is a summary of the employee stock option information
for the period ended March 31, 2001:
Weighted Average
Shares Exercise Price
--------- ----------------
Options outstanding at December 31, 1999 1,520,000 $ 0.58
Granted 1,737,500 $ 3.31
Forfeitured (107,500) $ 7.00
Exercised (107,000) $ 0.50
--------- -------
Options outstanding at December 31, 2000 3,043,000 $ 1.89
Options exercised (6,000) $ 0.50
--------- -------
Options outstanding at March 31, 2001 3,037,000 $ 1.89
========= =======
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 1,422,000 2.98 $0.50 1,408,000 $0.50
$1.01 - $2.00 - - $ - - $ -
$2.01 - $3.00 20,000 3.61 $2.50 20,000 $2.50
$3.01 - $4.00 1,595,000 4.60 $3.13 1,595,000 $3.13
--------- ---- ----- --------- -----
3,037,000 3.83 $1.89 3,023,000 $1.90
========= ==== ===== ========= =====
18
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
11. 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 2 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 March 31
2001 2000
--------- ---------
Net (loss) for the period:
- as reported $(856,183) $(234,780)
- pro-forma (856,767) (235,264)
--------- ---------
Basic and diluted (loss) per share:
- as reported $(0.05) $(0.02)
- pro-forma $(0.05) $(0.02)
--------- ---------
(b) Warrants
Share purchase warrants outstanding as at March 31, 2001:
Number Underlying Exercise Price
Of Warrants Shares Per Share Expiry Date
----------- ---------- -------------- ------------
4,258,000 4,258,000 $2.50 May 1, 2001
400,000 400,000 $3.00 November 24, 2002
19
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2001
------------------------------------------------------------------------
(Expressed in U.S. Dollars)
(Unaudited)
12. Related Party Transactions
(a) The Company incurred the following expenses to a director of the
Company:
March 31 March 31
2001 2000
--------- --------
Management fees $18,000 $18,000
======= =======
(b) See Notes 8 and 9.
13. Commitment
The Company has entered into an operating lease agreement with respect
to Huaxin's production plant in Nanjing, China for an amount of RMB
3,000,000 (approximately US$362,490) per annum until June 11, 2009.
Minimum payments required under the agreement are as follows:
2002 750,000 90,620
2003 3,000,000 362,490
2004 3,000,000 362,490
2005 3,000,000 362,490
2006 3,000,000 362,490
2007 - 2009 7,375,000 891,130
------------- ------------
Total RMB20,125,000 US$2,431,710
============= ============
14. Comparative Figures
Certain 2000 comparative figures have been reclassified to conform with the
financial statement presentation adopted for 2001.
20
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discusses the Company's financial condition and results of
operations based upon the Company's consolidated financial statements which have
been prepared in accordance with generally accepted accounting principles. It
should be read in conjunction with the Company's financial statements and the
notes thereto and other financial information included in the Company's Form
10-K for the fiscal year ended December 31, 2000.
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 Biotech Co.
Ltd. which manufactures EPO in China. The Company increased the efficiencies in
the production of EPO by Nanjing Huaxin Biotech by improving a proprietary
high-yield mammalian cell line and "vectoring process" which has been developed
by Dragon. The Company successfully achieved commercial production in China
during the last quarter of calendar1999.
On March 30, 2000, the Allwin Newtech (a wholly-owned subsidiary of the Company)
entered into an agreement to increase its equity interest in Sanhe Kailong
Bio-pharmaceutical Co., Ltd. from 75% to 95%. The Company paid $250,000 and is
committed to issue 250,000 common shares to increase its equity interest. To
date, due to administrative delays, the shares have not yet been issued but are
represented as common shares allotted on the Company's financial statements.
On June 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 results primarily from the sale of EPO in China. Revenue for
the three month period ending March 31, 2001, was $664,414 compared to $661,785
for the three month period ending March 31, 2000. Cost of sales for the three
months ended March 31, 2000, of $146,920 is attributed to the production costs
21
of the pharmaceutical products. The cost of sales for the three months ended
March 31, 2000, was $98,865. During the three months ended March 31, 2001,
Dragon had interest income of $65,259. Interest income for the three months
ended March 31, 2000, was $24,052. Interest income is related primarily to
interest earned on cash received from the private placement of common stock
received during the last quarter of 1999.
Expenses. Total operating expenses for the three months ended March 31, 2001,
were $1,125,808. The major expense incurred in the first quarter of 2001 related
to the selling of pharmaceutical products and represented approximately 41% of
total expenses. The remaining major expense items are represented by
administrative expenses.
Significant operating expenses for the three months ended March 31, 2001,
included auditing expenses of $36,200, consulting fees of $122,323, legal and
corporate services of $34,414, new product line testing of $93,611, rent of
$71,330, salaries and benefits of $98,242, and management fees of $35,125.
Management fees include $18,000 paid to one director for services during the
first quarter of 2001.
Other significant expenses for the first three months of 2001 include the
depreciation of fixed assets of and amortization of license and permit and
land-use rights of $153,814, new market development of $99,880, and stock based
compensation of $51,975.
Comparatively, total operating expenses for the first quarter of 2000 were
$442,653. Selling expenses represented 39% total operating expenses during this
period. Other major expenses for the period ended March 31, 2000, included the
depreciation of fixed assets and amortization of intangible assets of $88,233,
bad debt write offs of $24,038, and loan interest of $25,471.
Net and Comprehensive Loss. Dragon had a net loss of $856,183 and a
comprehensive loss of $959,743 for the three month period ending March 31, 2001.
Calculated in the comprehensive loss for the period was a minority interest loss
of $103,560.
The Company's net loss for the three month period ended March 31, 2000, was
$234,780 which includes a minority interest loss of $10,911. The comprehensive
loss for the same period was $223,869.
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 the three
months then ended. The loss per share for the three month period ending March
31, 2001 and 2000, was $0.05 and $0.02, respectively. 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.
22
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.
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 June 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.
As of March 31, 2001 and December 31, 2000, Dragon's working capital was
$3,408,250 and $4,444,066, respectively.
Item 3.
Dragon has no long-term debt. Therefore, Dragon does not believe that a change
in interest rates will have a material effect on the Company.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4 and 5
None.
Item 6(a) Exhibits
10.12. Letter agreement between the Company and Alphatech Bioengineering Limited
modifying their agreement of October 6, 2000.
10.13. Letter of intent between Longbin Liu and the Company.
23
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 PHARMACEUTICALS INC.
(registrant)
Dated: May 14, 2001 /s/ Dr. Longbin Liu
Dr. Longin Liu
President and Chief Executive Officer and
Chief Financial Officer
(and authorized to sign on behalf of the
registrant)