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, 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 (IRS Employer
of incorporation Identification No.)
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 March 31, 2003: 20,334,000
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
----------------------------------------------------------------------------------------------------------------------------------
March 31, 2003 December 31, 2002
----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current
Cash and short term securities $ 4,112,753 $ 4,935,766
Accounts receivable 757,025 949,045
Inventories 1,240,163 1,208,277
Prepaid and deposits 155,627 154,551
----------------------------------------------------------------------------------------------------------------------------------
Total current assets 6,265,568 7,247,639
Fixed assets 2,336,538 2,420,613
Due from related party - Hepatitis B vaccine project 100 100
Patent rights - related party 500,000 500,000
Licence and permit 3,337,974 3,475,740
----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 12,440,180 $ 13,644,092
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loans $ - $ 483,162
Accounts payable and accrued liabilities 1,537,696 1,525,404
----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,537,696 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) (34,026) (35,011)
Accumulated deficit (15,728,822) (14,994,795)
----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 10,902,484 11,635,526
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 12,440,180 $ 13,644,092
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
2
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Compre- other Total
Common stock Additional hensive compre- Stock-
------------------ paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated income equity
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 20,331,000 $ 20,331 $ 26,624,741 - $ (9,743,849) $ (25,008) $ 16,876,215
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.
3
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 - - - 985 - 985 985
- net (loss) for the year - - - (734,027) (734,027) - (734,027)
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive (loss) $ (733,042)
===========
Balance, March 31, 2003 20,334,000 $ 20,334 $ 26,644,998 $ (15,728,822) $ (34,026) $ 10,902,484
================================================================================ =========================================
The accompanying notes are an integral part of these financial statements.
4
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Operations
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months
Ended March Ended March
31, 2003 31, 2002
------------------------------------------------------------------------------------------------------------------------------
Sales $ 664,322 $ 1,372,808
Cost of sales 201,282 190,524
------------------------------------------------------------------------------------------------------------------------------
Gross profit 463,040 1,182,284
Selling, general and
administrative expenses (968,559) (1,096,460)
Depreciation of fixed assets and
amortization of licence and permit (185,299) (181,658)
Net write off of land-use right and fixed assets - (1,225)
Research and development expenses - (755,572)
New market development (15,479) (52,588)
Provision for doubtful debts (30,710) (25,856)
Loan interest expense (3,460) (40,410)
Stock-based compensation - -
-------------------------------------------------------------------------------------------------------------------------------
Operating loss (740,467) (971,485)
Interest income 6,440 33,607
--------------------------------------------------------------------------------------------------------------------------------
Net (loss) for the period $ (734,027) $ (937,878)
================================================================================================================================
(Loss) per share
Basic and diluted $ (0.04) $ (0.05)
================================================================================================================================
Weighted average number of
common shares outstanding
Basic and diluted 20,334,000 20,331,000
================================================================================================================================
The accompanying notes are an integral part of these financial statements.
5
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
-----------------------------------------------------------------------------------------------------------------------------
Three Months Three Months
Ended March 31, Ended March 31,
2003 2002
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) operating activities
Net (loss) for the year $ (734,027) $ (937,878)
Adjustments to reconcile net loss to
net cash used in operating activities:
- depreciation of fixed assets and amortization of
licence and permit 239,008 181,658
- net write off of land-use right and fixed assets - 1,225
- provision for doubtful debts 30,710 25,856
Changes in non-cash working capital items:
- accounts receivable 161,310 (557,582)
- inventories (31,886) (15,076)
- prepaid expenses and deposits (1,076) (130,091)
- accounts payable and accrued liabilities 12,292 (188,416)
- management fees payable - related parties - (208,167)
-----------------------------------------------------------------------------------------------------------------------------
(323,669) (1,828,471)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities
Purchase of fixed assets (16,912) (44,392)
(Increase) decrease in restricted funds 510,000 299,985
Acquisition of Patent rights - (500,000)
Acquisition of balance of Huaxin - (1,400,000)
Refundable investment deposits - 400,000
-----------------------------------------------------------------------------------------------------------------------------
493,088 (1,244,407)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Loan proceeds (483,162) (278,177)
-----------------------------------------------------------------------------------------------------------------------------
Foreign exchange (gain) loss on cash
held in foreign currency 730 (3,884)
-----------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (313,013) (3,354,939)
Cash and cash equivalents, beginning of period 4,425,766 6,306,129
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,112,753 $ 2,951,190
=============================================================================================================================
The accompanying notes are an integral part of these financial statements.
6
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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 March 31, 2003, and the results of operations
and cash flows for the interim periods ended March 31, 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 Form 10-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
----------------------------------------------------------------- -------------------- --------------------
March 31, 2003 December 31, 2002
----------------------------------------------------------------- -------------------- --------------------
Term deposits held as collateral against bank loans $ - $510,000
Cash and cash equivalents 4,112,753 4,425,766
----------------------------------------------------------------- -------------------- --------------------
Cash and short term securities $ 4,112,753 $ 4,935,766
================================================================= ==================== ====================
3. Accounts Receivable
----------------------------------------------------------------- -------------------- --------------------
March 31, 2003 December 31, 2002
----------------------------------------------------------------- -------------------- --------------------
Trade receivables $ 968,243 $ 1,141,896
(309,745) (279,018)
Allowance for doubtful accounts
----------------------------------------------------------------- -------------------- --------------------
658,498 862,878
98,527 86,167
Other receivables
----------------------------------------------------------------- -------------------- --------------------
$ 757,025 $ 949,045
================================================================= ==================== ====================
7
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
4. Inventories
------------------------------------------------------------------ -------------------- -------------------
March 31, 2003 December 31, 2002
------------------------------------------------------------------ -------------------- -------------------
Raw materials $ 130,041 $ 135,710
118,575 88,857
Finished goods
991,547 983,710
Work in progress
------------------------------------------------------------------ -------------------- -------------------
$ 1,240,163 $ 1,208,277
================================================================== ==================== ===================
5. Fixed Assets
-------------------------------------------- --------------------------------------------------------------
March 31, 2003
--------------------------------------------------------------
Accumulated Net book
Cost depreciation value
-------------------------------------------- ------------------- ---------------------- -------------------
Motor vehicles $140,406 $ 57,031 $ 83,375
Office equipment and furniture 399,880 163,656 236,224
Leasehold improvements 1,066,208 366,168 700,040
Production and lab equipment 2,055,433 738,534 1,316,899
-------------------------------------------- ------------------- ---------------------- -------------------
$ 3,661,927 $ 1,352,389 $ 2,336,538
============================================ =================== ====================== ===================
-------------------------------------------- --------------------------------------------------------------
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 three months ended March 31, 2003, depreciation expenses totalled $100,987 (2002 - $95,675).
The majority of fixed assets are located in China.
6. Due from Related Party - Hepatitis B Vaccine Project
----------------------------------------------------------------- -------------------- --------------------
March 31, 2003 December 31, 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
================================================================= ==================== ====================
8
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
(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.
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.
9
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
8. Licence and permit
------------------------------------------------------------------- -------------------- ------------------
March 31, 2003 December 31, 2002
------------------------------------------------------------------- -------------------- ------------------
Original cost $5,012,582 $5,012,582
Accumulated amortization 1,674,608 1,536,842
------------------------------------------------------------------- -------------------- ------------------
$ 3,337,974 $ 3,475,740
=================================================================== ==================== ==================
Amortization expenses for the licence and permit for the three months ended
March 31, 2003 was $138,021 (2002 - $137,898).
The estimated amortization expense for each of the five succeeding fiscal
years is as follows:
2003 $414,000
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.
9. Bank Loans
--------------------------------------------------------------------------- -------------- -----------------
March 31, 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 three
months ended March 31, 2003 and 2002.
10
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
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 March 31,
2003, $3.5 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 March 31, 2003, the company has estimated losses, for tax
purposes, totalling approximately $7,875,000, 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:
----------------------------------------------------------- ------------------- -------------------
March 31, 2003 December 31, 2002
----------------------------------------------------------- ------------------- -------------------
$ 2,675,000 $ 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 (3,799,400) (3,684,400)
----------------------------------------------------------- ------------------- -------------------
$ - $ -
=========================================================== =================== ===================
A reconciliation of the federal statutory income tax to the Company's effective
income tax rate, for the three months ended March 31, 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
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
11. Stock Options and Warrants
(a) Stock Options Plans
There were no options granted during the three months ended March 31,
2003. Subsequent to March 31, 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 March 31, 2003:
------------------------------------------------------ ------------------ ------------------------
Weighted Average
Shares Exercise Price
------------------------------------------------------ ------------------ ------------------------
Options outstanding at December 31, 2000 3,043,000 $ 1.89
Granted 195,000 $ 1.79
Forfeited (137,500) $ 2.93
Exercised (131,000) $ 0.50
------------------------------------------------------ ------------------ ------------------------
Options outstanding at December 31, 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 and March
31, 2003
3,288,000 $ 1.82
====================================================== ================== ========================
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 1,226,500 1.03 $ 0.50 1,226,500 $ 0.50
$1.01 - $2.00 726,500 4.05 $ 1.70 726,500 $ 1.70
$2.01 - $3.00 60,000 1.61 $ 2.50 60,000 $ 2.50
$3.01 - $4.00 1,275,000 2.62 $ 3.13 1,275,000 $ 3.13
------------------------- --------- ---------- --------
3,288,000 2.32 $ 1.82 3,288,000 $ 1.82
=========== ============= ========= ========== ========
12
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
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 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:
------------------------------------------------------------ ------------------ ------------------
March 31, 2003 March 31, 2002
------------------------------------------------------------ ------------------ ------------------
Net (loss) for the period:
- as reported $ (734,027) $ (937,878)
- pro-forma $ (734,027) $ (937,878)
------------------------------------------------------------ ------------------ ------------------
Basic and diluted (loss) per share:
- as reported $ (0.04) $ (0.05)
- pro-forma $ (0.04) $(0.05)
------------------------------------------------------------ ------------------ ------------------
(b) Warrants
Share purchase warrants outstanding as at March 31, 2003:
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
13
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
12. Related Party Transactions
(a) The Company incurred the following expenses to a director (2002: two
directors) of the Company:
--------------------------------------------------------------- ----------------- ----------------
March 31, 2003 March 31, 2002
--------------------------------------------------------------- ----------------- ----------------
Management fees $ 20,000 $57,500
=============================================================== ================= ================
(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; and
(iv) US$200,000 to be provided when a new drug license for Insulin is
issued to Dragon by the SDA.
14
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
12. Related Party Transactions (continued)
(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 March 31, 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 5 and 6 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 $ 347,289
2004 479,011
2005 480,184
2006 483,700
2007 365,851
2008 - 2009 470,841
-----------------------------------------------------
Total $ 2,626,876
=====================================================
15
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 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:
March 31, 2003 December 31,2002
-----------------------------------------------------------------------------------------------------------------
ASSETS
North America $3,804,593 $4,144,668
China 8,161,267 9,020,882
Others 474,320 478,542
-----------------------------------------------------------------------------------------------------------------
Total $12,440,180 $13,644,092
=================================================================================================================
------------------------------------------------------------------------------------------------------------------
Three months ended Three months ended
March 31, 2003 March 31, 2002
------------------------------------------------------------------------------------------------------------------
REVENUE
North America $ - $ -
China 454,347 525,308
Others 209,975 847,500
------------------------------------------------------------------------------------------------------------------
Total $ 664,322 $ 1,372,808
==================================================================================================================
15. Comparative Figures
Certain 2002 comparative figures have been reclassified to conform to the
financial statement presentation adopted for 2003.
16
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 Inc. First Geneva Investment's business was to evaluate businesses for
possible acquisition. On July 28, 1998, First Geneva Investment entered into a
share exchange agreement with Allwin Newtech. Allwin Newtech was formed in 1998
for the purpose of developing and marketing pharmaceutical drugs for sale in
China. Prior to the acquisition of Allwin Newtech, First Geneva Investments had
no operations. On September 21, 1998, First Geneva Investments changed its name
to Dragon Pharmaceutical Inc.
On July 27, 1999, Dragon acquired a 75% interest in Nanjing Huaxin
Bio-pharmaceutical Co. Ltd. ("Huaxin"), which manufactures EPO in China. The
Company increased the efficiencies in the production of EPO by improving a
proprietary high-yield mammalian cell line and "vectoring process" which has
been developed by Dragon. The Company successfully achieved commercial
production during the last quarter of 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 March 31, 2003 was $664,322 compared to $1,372,808 for the three-month
period ending March 31, 2002. Sales in and outside of China were $454,347 and
$209,975, respectively during the three-month period ending March 31, 2003.
Sales during the three-month period ending March 31, 2002 were $525,308 in China
and $847,500 outside of China. The overseas sales during the three-month period
ending March 31, 2002 included delivery of a $700,000 order to be used by the
purchaser for new drug research and development. Cost of sales for the
three-months ended March 31, 2003 of $201,282 is attributed to the production
costs of the pharmaceutical products. The cost of sales for the three-months
ended March 31, 2002 was $190,282. The gross profit margin was 70% for the
three-month period ending March 31, 2003 and 86% for the three-month period
17
ended March 31, 2002. The profit margin has decreased as the Company sold some
product with short term expiry dates at a reduced price.
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 March 31, 2003 was $6,439
compared to $33,607 for the three-month period ended March 31, 2002.
Interest income has decreased as interest rates have declined and as the cash
balance has decreased through the funding of operations.
Expenses. Total operating expenses for the three-months ended March 31, 2003
were $1,203,507. The major expenses incurred in the first quarter of 2003 was
selling expenses of $505,672 representing 42% of total expenses. The remaining
major expense items are represented by administrative expenses.
Significant operating expenses for the three-months ended March 31, 2003
included rent of $88,199, salaries and benefits of $191,393, $66,338 in travel
costs, insurance of $30,166 and a bad debts provision of $30,710. Management
fees of $20,000 were paid to a director for services during the first quarter of
2003.
Other significant expenses for the first quarter include the depreciation of
fixed assets and amortization of license and permit of $185,299.
Comparatively, total operating expenses for the three-months ended March 31,
2002 were $2,153,768. The major expenses incurred in the first quarter of 2002
were research and development expenses of $755,572 and the selling expenses of
$477,196 representing 35% and 22% of total expenses, respectively. The remaining
major expense items are represented by administrative expenses.
Significant operating expenses for the three-months ended March 31, 2002
included consulting fees of $148,737, loan interest of $40,410, rent of $61,546,
salaries and benefits of $141,686, $78,390 in travel costs and management fees
of $76,193. Management fees include $57,500 incurred to two directors for
services during the first quarter of 2002.
Other significant expenses for the first quarter of 2002 include the
depreciation of fixed assets and amortization of license and permit and land-use
rights of $181,658.
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
$734,027 for the three-month period ending March 31, 2003.
18
The Company's net and comprehensive loss for the three-month period ended March
31, 2002 was $937,878.
Basic and Diluted Net Loss Per Share
The Company's loss of $0.04 per share has been computed by dividing the loss for
the period by the weighted average number of shares outstanding during
three-month period ended March 31, 2003. Common stock issuable upon the exercise
of common stock options and common stock warrants have been excluded from the
net loss per share calculations as their inclusion would be anti-dilutive.
Liquidity and Capital Resources
Dragon is a development stage pharmaceutical and biotechnological company that
has commenced the manufacture and marketing of pharmaceutical products in China
through its 100% equity interest in Nanjing Huaxin Bio-pharmaceuticals Ltd.
Previously, the Company has raised funds through equity financings to fund its
operations and to provide working capital. The Company may finance future
operations through additional equity financings.
On October 14, 1999, the Company entered into securities purchase agreements
with two investors located in Hong Kong. Under the terms of this agreement, the
investors purchased, in the aggregate, 600,000 shares of common stock at $2.50
per share, with the Company raising in the aggregate $1.5 million.
On December 31, 1999, the Company closed a private placement raising $10,645,000
through the issue of 4,258,000 shares of common stock at a price of $2.50 per
share. $600,000 of the gross proceeds from the December 1999 offering
represented the conversion of the outstanding debt by the lenders into shares of
common stock of the Company at a price of $2.50 per share.
One million common shares were issued through the exercise of warrants that
expired on September 30, 2000. These warrants were issued to shareholders
through the acquisition of Allwin Newtech on August 17, 1998. Gross proceeds
from the exercise of the warrants were $1,000,000.
On September 14, 2001, the Company closed a private placement raising $7,000,000
through the issue of 3,500,000 shares of common stock at a price of $2.00 per
share.
As of March 31, 2003, the Company had $4,112,753 in cash available. This cash,
the $757,025 in accounts receivable and anticipated sales will be used to fund
the ongoing operations and research and development. Working capital was
$4,727,872 at March 31, 2003.
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.
19
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
three-months ended March 31, 2003 and 2002.
By Currency
December 31, 2001 December 31, 2002
U.S. Dollar 31% 27%
Canadian Dollar 12% 46%
Renminbi Yuan 57% 27%
Total 100% 100%
March 31, 2002 March 31, 2003
U.S. Dollar 21% 20%
Canadian Dollar 39% 60%
Renminbi Yuan 40% 20%
Total 100% 100%
Such administrative expense by currency may change from time to time. Further,
the Company incurred expenses in China of $600,358 and $757,520 for the
three-months ended March 31, 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
20
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.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on From 8-K.
(a) Exhibit 99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
(b) Reports on 8-K
None.
21
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DRAGON PHARMACEUTICAL INC.
(registrant)
/s/MATTHEW KAVANAGH
Dated: May 12, 2003 ----------------------------------
Matthew Kavanagh
Director of Finance and Corporate
compliance and Corporate Secretary
(duly authorized Officer and
Principal Financial Officer)
22
Section 302 Certification
CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-Q
I, Alexander Wick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dragon Pharmaceutical
Inc. ("Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
23
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 16, 2003
/s/ ALEXANDER WICK
--------------------------------
Alexander Wick, President and
Chief Executive Officer
24
Section 302 Certification
CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-Q
I, Matthew Kavanagh, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dragon Pharmaceutical
Inc. ("Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
25
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003
/s/ MATTHEW KAVANAGH
---------------------------
Matthew Kavanagh, Principal
Financial Officer
26