U.S. Securities and Exchange
Commission Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from _____ to _____
Commission file number 0-27937
DRAGON PHARMACEUTICAL INC.
(Exact name of small business issuer as specified in its charter)
Florida 65-0142474
------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1055 West Hastings Street, Suite 1900
Vancouver, British Columbia
Canada V6E 2E9
----------------------------------------
(Address of principal executive offices)
(604) 669-8817
--------------------------
(Issuer's telephone number)
(Former address if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Number of shares of common stock outstanding as of March 31, 2004: 20,462,000
PART I.
Item 1. Financial Documents
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
March 31, 2004 December 31, 2003
--------------------------------------------------------------------------------
ASSETS
Current
Cash and short term securities $ 3,015,951 $ 3,126,667
Accounts receivable 1,262,137 1,265,676
Inventories 1,126,767 1,090,464
Prepaid and deposits 103,326 139,595
--------------------------------------------------------------------------------
Total current assets 5,508,181 5,622,402
Fixed assets 2,005,689 2,089,352
Due from related party -
Hepatitis B vaccine project 100 100
Patent rights - related party 500,000 500,000
Licence and permit 2,786,163 2,924,198
--------------------------------------------------------------------------------
Total assets $ 10,800,133 $ 11,136,052
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Accounts payable and accrued liabilities 1,342,567 1,428,257
--------------------------------------------------------------------------------
Commitments (Note 12)
Stockholders' Equity
Share capital
Authorized: 50,000,000 common shares at
par value of $0.001 each
Issued and outstanding: 20,462,000
common shares 20,462 20,462
Additional paid in capital 26,708,870 26,708,870
Accumulated other comprehensive (loss) (32,813) (32,007)
Accumulated deficit (17,238,953) (16,989,530)
--------------------------------------------------------------------------------
Total stockholders' equity 9,457,566 9,707,795
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 10,800,133 $ 11,136,052
================================================================================
The accompanying notes are an integral part of these financial statements.
2
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
-----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Compre- other Total
Common stock Additional hensive compre- Stock-
--------------------- paid-in income Deficit hensive holders's
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
Exercise of stock options for cash 128,000 128 63,872 - - - 64,000
Components of comprehensive income (loss)
- foreign currency translation - - - 3,004 - 3,004 3,004
- net (loss) for the year - - - (1,994,735) (1,994,735) - (1,994,735)
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive (loss) $(1,991,731)
=============
Balance, December 31, 2003 20,462,000 $ 20,462 $26,708,870 $(16,989,530) $(32,007) $9,707,795
================================================================================ ======================================
The accompanying notes are an integral part of these financial statements.
3
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
-----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Compre- other Total
Common stock Additional hensive compre- Stock-
--------------------- paid-in income Deficit hensive holders's
Shares Amount capital (loss) accumulated income equity
-----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 20,462,000 $20,462 $26,708,870 - $ 16,989,530) $ (32,007) $9,707,795
Components of comprehensive income (loss)
- foreign currency translation - - - (806) - (806) (806)
- net (loss) for the period - - - (249,423) (249,423) - (249,423)
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive (loss) $(250,229)
===========
Balance, March 31, 2004 20,462,000 $20,462 $26,708,870 $(17,238,953) $(32,813) $9,457,566
================================================================================ ======================================
The accompanying notes are an integral part of these financial statements.
4
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Consolidated Statements of Operations
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
Three Months Three Months
Ended March 31, Ended March 31,
2004 2003
--------------------------------------------------------------------------------
Sales $ 878,270 $ 664,322
Cost of sales 246,741 201,282
--------------------------------------------------------------------------------
Gross profit 631,529 463,040
Selling, general and
administrative expenses (678,887) (968,559)
Depreciation of property and equipment and
amortization of licence and permit (179,442) (185,299)
Research and development expenses (535) -
New market development - (15,479)
Provision for doubtful debts (27,073) (30,710)
Interest expense (769) (3,460)
Stock-based compensation - -
--------------------------------------------------------------------------------
Operating loss (255,177) (740,467)
Interest and other income 5,754 6,440
--------------------------------------------------------------------------------
Net (loss) for the period $ (249,423) $ (734,027)
================================================================================
(Loss) per share
Basic and diluted $ (0.01) $ (0.04)
================================================================================
Weighted average number of
common shares outstanding
Basic and diluted 20,462,000 20,334,000
================================================================================
The accompanying notes are an integral part of these financial statements.
5
DRAGON PHARMACEUTICAL 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,
2004 2003
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) operating activities
Net (loss) for the period $ (249,423) $ (734,027)
Adjustments to reconcile net loss to
net cash used in operating activities:
- depreciation of property and equipment and amortization
of licence and permit 231,568 239,008
- provision for doubtful debts 27,073 30,710
Changes in non-cash working capital items:
- accounts receivable (23,533) 161,310
- inventories (36,303) (31,886)
- prepaid expenses and deposits 36,268 (1,076)
- accounts payable and accrued liabilities (85,690) 12,292
-----------------------------------------------------------------------------------------------------------------------------
(100,040) (323,669)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities
Purchase of property and equipment (10,448) (16,912)
(Increase) decrease in restricted funds - 510,000
-----------------------------------------------------------------------------------------------------------------------------
(10,448) 493,088
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Loan proceeds - (483,162)
-----------------------------------------------------------------------------------------------------------------------------
Foreign exchange (gain) loss on cash
held in foreign currency (228) 730
-----------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (110,716) (313,013)
Cash and cash equivalents, beginning of period 3,126,667 4,425,766
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,015,951 $ 4,112,753
=============================================================================================================================
The accompanying notes are an integral part of these financial statements.
6
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Statements of Cash Flows
March 31, 2004
(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, 2004, and the results of operations
and cash flows for the interim periods ended March 31, 2004 and 2003.
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, 2003
included in the annual report previously filed on Form10-KSB.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
2. Proposed Business Combination
The Company has entered into an letter of intent with Oriental Wave Holding
Ltd. ("Oriental") whereby the Company would issued common shares in
exchange for all the issued and outstanding shares of Oriental. The
transaction is subject to the parties agreeing on a definitive agreement
and approval by shareholders and the regulatory authorities.
The transaction will result in the former shareholders of Oriental owning
68.35% of the issued and outstanding shares of the combined Company
resulting in accounting principles applicable to reverse acquisition being
applied to record the transaction. Under this basis of accounting, Oriental
would be the acquirer and, accordingly, the consolidated entity would be
considered to be a continuation of Oriental with the net assets of the
Company deemed to have been acquired and recorded at fair market value.
3. Accounts Receivable
---------------------------------------------------------------------------
March 31, December 31,
2004 2003
---------------------------------------------------------------------------
Trade receivables $ 1,542,580 $ 1,524,465
Allowance for doubtful accounts (333,245) (298,284)
---------------------------------------------------------------------------
1,209,335 1,226,181
Other receivables 52,802 39,495
---------------------------------------------------------------------------
$ 1,262,137 $ 1,265,676
===========================================================================
7
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Statements of Cash Flows
March 31, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
4. Inventories
---------------------------------------------------------------------------
March 31, December 31,
2004 2003
---------------------------------------------------------------------------
Raw materials $ 144,021 $ 129,650
Finished goods 88,453 107,833
Work in progress 894,293 852,981
---------------------------------------------------------------------------
1,126,767 $ 1,090,464
===========================================================================
5. Property and equipment
---------------------------------------------------------------------------
March 31, 2004
---------------------------------------
Accumulated Net book
Cost depreciation value
---------------------------------------------------------------------------
Motor vehicles $ 126,444 $ 72,041 $ 54,403
Office equipment and furniture 414,512 239,413 175,099
Leasehold improvements 1088,803 449,290 639,513
Production and lab equipment 1,619,647 745,058 874,589
Idle equipment 555,339 293,254 262,085
---------------------------------------------------------------------------
$3,804,745 $1,799,055 $2,005,689
===========================================================================
---------------------------------------------------------------------------
December 31, 2003
---------------------------------------
Accumulated Net book
Cost depreciation value
----------------------------------------------------------------------------
Motor vehicles $140,423 $ 75,996 $ 64,427
Office equipment and furniture 414,759 221,076 193,683
Leasehold improvements 1,089,006 418,888 670,118
Production and lab equipment 1,595,450 708,841 886,609
Idle equipment 555,339 280,824 274,515
----------------------------------------------------------------------------
$ 3,794,977 $1,705,625 $ 2,089,352
============================================================================
For the three-months ended March 31, 2004, depreciation expenses totalled
$94,112 (2003 - $100,987). The majority of fixed assets are located in
China.
8
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Statements of Cash Flows
March 31, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
6. Due from Related Party - Hepatitis B Vaccine Project
---------------------------------------------------------------------------
March 31, December 31,
2004 2003
---------------------------------------------------------------------------
Hepatitis B Vaccine Project $4,000,000 $4,000,000
Less : Repayment (500,000) (500,000)
Valuation allowance (3,499,900) (3,499,900)
----------------------------------------------------------------------------
$ 100 $ 100
============================================================================
(a) Pursuant to an agreement dated October 6, 2000, the Company paid
$4,000,000 for the acquisition of certain assets and technology
relating to the production of Hepatitis B vaccine. The vendor of the
transaction was a company named Alphatech Bioengineering Limited,
incorporated in Hong Kong, with two shareholders who are both
directors of the Company.
(b) Pursuant to an amended agreement dated June 5, 2001, in the event that
the Company failed to find a joint venture partner, establish a
production facility for the vaccine project or sell the project to a
third party within nine months from the date of this amended
agreement, Dr. Longbin Liu, a director of the Company (and President
and CEO of the Company at the time of the transaction) and one of the
shareholders of Alphatech, demanded to repurchase the project from the
Company. The repurchase price of $4.0 million is payable as follows:
(i) $500,000 at the date of repurchase; and
(ii) the balance to be paid within eighteen (18) months of the date of
repurchase with interest at 6% per annum. The interest will be
accrued from six months after the date of repurchase.
The Company decided not to pursue the project and Dr. Liu has repurchased
the project on the agreed terms.
The amount owing by Dr. Liu to the Company is unsecured. The Company has
chosen, given the significant amount involved and the lack of security, to
conservatively value the amount owing and has set up a provision for the
full amount, less a nominal amount of $100. The amount owing was not repaid
on the due date and the Company is pursuing collection. See note 15 also.
9
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Statements of Cash Flows
March 31, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
7. Patent Rights - Related Party
Pursuant to an agreement dated January 14, 2002, the Company entered into a
Patent Development Agreement with the Dr. Longbin Liu, a director of the
Company (and President and CEO of the Company at the time of the
transaction) and a company controlled by the Dr. Liu entitling the Company
to acquire one patent filed in the United States related to the discovery
of a new gene or protein. Consideration for the right to acquire the patent
was payment of US$500,000 (paid) and the issuance of warrants to acquire
1,000,000 common shares of the Company at a price of $2.50 per share for a
period of five years. The patent may be acquired prior to January 14, 2005
at no additional cost other than the reasonable legal costs of obtaining
the patent.
The issuance and exercise of the warrants to acquire 1,000,000 common stock
of the Company is contingent upon the success of the patent applications.
The US$500,000 will be refunded to the Company if no patent applications
have been filed by January 14, 2005. See note 15 also.
8. Licence and permit
---------------------------------------------------------------------------
March 31, December 31,
2004 2003
---------------------------------------------------------------------------
Original cost $5,012,582 $5,012,582
Accumulated amortization (2,226,419) (2,088,384)
---------------------------------------------------------------------------
$2,786,163 $ 2,924,198
===========================================================================
Amortization expense for the licence and permit for the three months ended
March 31, 2004 was $137,456 (2003 - $138,021)
The estimated amortization expense for each of the five succeeding fiscal
years is as follows:
2004 (balance of the year) $414,000
2005 $552,000
2006 $552,000
2007 $552,000
2008 $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.
10
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Statements of Cash Flows
March 31, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
9. 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,
2004, $3.8 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, 2004, the company has estimated losses, for tax
purposes, totalling approximately $8,500,000, 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, December 31,
2004 2003
---------------------------------------------------------------------------
Tax losses carried forward $ 3,345,000 $ 3,237,000
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 (4,469,000) (4,361,400)
---------------------------------------------------------------------------
$ - $ -
===========================================================================
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate, for the three months ended March 31, 2004
and 2003 are as follows:
---------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------
Federal statutory income tax rate 34% 34%
Benefit of loss carry forward (34%) (34%)
---------------------------------------------------------------------------
Effective income tax rate - -
===========================================================================
11
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Statements of Cash Flows
March 31, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
10. Stock Options and Warrants
(a) Stock Options Plans
There were no options granted during the three months ended March 31,
2004.
The following is a summary of the employee stock option information
for the period ended March 31, 2004:
---------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
---------------------------------------------------------------------------
Options outstanding at December 31, 2002 3,288,000 $ 1.82
Granted 500,000 $ 0.68
Forfeited (1,061,000) $ 0.90
Exercised (128,000) $ 0.50
---------------------------------------------------------------------------
Options outstanding at December 31, 2003
and March 31, 2004 2,599,000 $ 2.04
===========================================================================
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 - $1.00 888,500 2.52 $ 0.60 763,500 $ 0.59
$1.01 - $2.00 375,500 3.07 $ 1.70 375,500 $ 1.70
$2.01 - $3.00 60,000 0.61 $ 2.50 60,000 $ 2.50
$3.01 - $4.00 1,275,000 1.62 $ 3.13 1,275,000 $ 3.13
----------- ----------- ------------ ---------- --------
2,599,000 2.12 $ 2.04 2,474,000 $ 2.11
=========== =========== ============ ========== ========
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
12
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Statements of Cash Flows
March 31, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
10. Stock Options and Warrants (continued)
compensation expense, the following would have been its effect on the
Company's net loss:
---------------------------------------------------------------------------
March 31, March 31,
2004 2003
---------------------------------------------------------------------------
Net (loss) for the period:
- as reported $(249,423) $(734,027)
- pro-forma $(249,423) $(734,027)
---------------------------------------------------------------------------
Basic and diluted (loss) per share:
- as reported $(0.01) $(0.04)
- pro-forma $(0.01) $(0.04)
---------------------------------------------------------------------------
(b) Warrants
Share purchase warrants outstanding as at March 31, 2004:
Number Underlying Exercise Price
of Warrants Shares Per Share Expiry Date
----------- ----------- -------------- ------------------
50,000 50,000 $1.70 November 15, 2004
1,000,000* 1,000,000 $2.50 January 14, 2007
* See Notes 7 and 15
11. Related Party Transactions
(a) The Company incurred the following expenses to a director of the
Company:
---------------------------------------------------------------------------
March 31, March 31,
2004 2003
---------------------------------------------------------------------------
Management fees $- $20,000
===========================================================================
(b) Pursuant to an agreement dated January 14, 2002, the Company entered
into a Project Development Agreement with Dr. Longbin Liu ("Dr. Liu"),
a director of the Company (and President and CEO of the Company at the
time of the transaction) to continue the research and development of
G-CSF and Insulin for the Company. The Company will make payment for
the development of G-CSF as follows:
(iii)US$500,000 to be provided at the commencement of the research in
the G-CSF Project (paid);
13
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Statements of Cash Flows
March 31, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
11. Related Party Transactions (continued)
(iv) US$500,000 to be provided when cell-line and related technology is
established and animal experimentation commences in the G-CSF Project;
and
(v) 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
(vi) US$200,000 to be provided when a new drug license for G-CSF is issued
to Dragon by the SDA.
(vii)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:
(viii) US$750,000 to be provided by at the commencement of the research in
the Insulin Project (paid);
(ix) US$750,000 to be provided when cell-line and related technology is
established and animal experimentation commences in the Insulin
Project (paid);
(x) US$300,000 to be provided when a permit for clinical trials for
Insulin has been issued by the SDA;
(xi) US$200,000 to be provided when a new drug license for Insulin is
issued to Dragon by the SDA; and
(xii)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:
(xiii) 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;
(xiv)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, 2004, 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.
14
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Statements of Cash Flows
March 31, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
11. Related Party Transactions (continued)
(c) see Notes 6, 7 and 15 also.
12. Commitments
(a) 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:
2004 $ 373,105
2005 502,727
2006 370,664
2007 326,205
2008 326,205
2009 144,738
-----------------------------------------------------
Total $ 2,043,644
=====================================================
(b) The Company has contracted with a European Institute of Biotechnology,
which may develop a high yield proprietary cell line and production
process technology for the Company. Product from this most advanced
technology will be used by the Company to enter the European market,
once certain competitor's patents expire. The total cost of
development will be $615,000 (EUROS 500,000) of which $492,000 (EUROS
400,000) remains unpaid at March 31, 2004.
15
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Statements of Cash Flows
March 31, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
13. Segmented Information
The Company operates exclusively in the biotech sector. The Company's
assets and revenues are distributed as follows:
March 31, 2004 December 31,2003
----------------------------------------------------------------------------
ASSETS
North America $ 3,286,891 $3,156,953
China 7,087,715 7,079,241
Others 425,527 899,858
----------------------------------------------------------------------------
Total $ 10,800,133 $11,136,052
============================================================================
----------------------------------------------------------------------------
Three months ended Three months ended
March 31, 2004 March 31, 2003
----------------------------------------------------------------------------
REVENUE
North America $ - $ -
China 701,870 454,347
Others 176,400 209,975
----------------------------------------------------------------------------
Total $ 878,270 $ 664,322
============================================================================
14. Comparative Figures
Certain 2003 comparative figures have been reclassified to conform to the
financial statement presentation adopted for 2004.
15. Subsequent Event
The Company has entered into an agreement with Dr. Longbin Liu to settle
the amount owing to the Company from his acquisition of the Hepatitis B
Project (note 8) as well as cancel the Patent and Project Development
agreements between the parties. Under the terms of the settlement
agreement, the G-CSF, Insulin and Hepatitis B Projects, including the
rights of ownership and development obligations would revert to Dr. Liu.
In exchange, Dr Liu will pay to the Company the $3,710,000 in principal and
interest owing under the Hepatitis B Project as well as reimburse the
Company $1,330,000 that had been paid previously under the Patent and
Project Development agreements. All amounts are due December 31, 2004 and
Dr. Liu has agreed to provide 2,600,000 common shares of the Company, to be
held in escrow, as security for the amounts owing. The warrants granted to
Dr. Liu under the Patent Development agreement will be cancelled. It is a
condition of the agreement that 2,200,000 common shares of the Company be
placed in escrow by June 30, 2004.
16
Item 2. Management's Discussion and Analysis and Plan 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-KSB for the fiscal year ended December 31, 2003.
Overview
The Company (or "Dragon") was formed on August 22, 1989, under the name First
Geneva Investment Inc. First Geneva Investment's business was to evaluate
businesses for possible acquisition. On July 28, 1998, First Geneva Investment
entered into a share exchange agreement with Allwin Newtech. Allwin Newtech was
formed in 1998 for the purpose of developing and marketing pharmaceutical drugs
for sale in China. Prior to the acquisition of Allwin Newtech, First Geneva
Investment had no operations. On September 21, 1998, First Geneva Investment
changed its name to Dragon Pharmaceutical Inc.
On July 27, 1999, Dragon acquired a 75% interest in Nanjing Huaxin
Bio-pharmaceutical Co. Ltd. ("Huaxin"), which manufactures EPO in China. The
Company increased the efficiencies in the production of EPO and 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.
The Company has contracted with a European Institute of Biotechnology, that may
develop a high yield proprietary cell line and production process technology for
the Company. Product from this most advanced technology available today will be
used by the Company to enter the European market, once certain competitor's
patents expire.
Recent Events
Letter of Intent to Acquire Oriental Wave Holding Ltd. On March 24, 2004, we
announced that we entered into a letter of intent to acquire Oriental Wave
Holding Ltd. in a merger in which we will be the survivor company. If the
proposed merger is consummated, the resulting ownership of the combined company
will be approximately 31.65% for Dragon shareholders and approximately 68.35%
for Oriental Wave shareholders.
Oriental Wave Holding Ltd, incorporated in the British Virgin Islands, is a
holding company of a China-based pharmaceutical company engaged in the
production of chemical intermediates and active pharmaceutical ingredients and
formulation, marketing and sale of chemical generic drugs. Based on its 2003
audited financial statements, Oriental Wave Group had revenues of $26 million
and earnings of $7.5 million.
17
Oriental Wave Group currently has two Chinese State Food and Drug administration
("SFD&A") certified GMP production facilities on stream: a pharmaceutical
facility with a capacity of producing 1.6 billion tablets and capsules, 80
million injectables and 10 million suppositories per year as well as a chemical
plant producing clavulanic acid by a fermentation process. A third facility is
under construction for the production, by fermentation, of 7-ACA, an
intermediate for Cephalosporin antibiotics. Oriental Wave Group has a total of
approximately 280 drug approvals from the SFD&A of which about 35, mainly
anti-infectious drugs, were actively exploited in China in 2003.
On completion of the proposed merger, the combined company will be reorganized
into three major divisions: a Chemical Drug division, a Chemical Intermediate
division and a Biotech division
Completion of the proposed merger is subject to a number of conditions including
entering into a definitive agreement and all required regulatory and shareholder
approvals.
Settlement agreement with Dr. Liu. In view of the slow progress in developing
new drugs, the availability of alternative drugs, the desire to avoid conflict
of interest issues in the future and, in some cases, the high investment costs
associated with bringing the drugs into production, the Company has reached a
settlement with its research partners to discontinue further development of the
drugs under development and recover some of the development costs paid to date.
On April 4, 2004, the Company entered into an agreement with Dr. Longbin Liu and
his affiliate to settle the amount owing to the Company from his acquisition of
the Hepatitis B Vaccine Project as well as cancellation of the Patent and
Project Development agreements between the parties. Under the terms of the
settlement agreement, the G-CSF, Insulin and Hepatitis B Projects, including the
rights of ownership and development obligations would revert to Dr. Liu.
In exchange, Dr Liu will pay to the Company the $3,710,000 in principal and
interest bearing 1% owing under the Hepatitis B Project as well as reimburse the
Company $1,330,000 that had been paid previously under the Patent and Project
Development agreements. All amounts are due December 31, 2004 and the warrants
granted to Dr. Liu under the Patent Development agreement will be cancelled. Dr.
Liu has agreed to provide 2,600,000 common shares of the Company, to be held in
escrow, as security for the amounts owing. It is a condition of the agreement
that 2,200,000 common shares of the Company be placed in escrow by June 30,
2004.
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, 2004 was $878,270 compared to $664,322 for the three-month
period ending March 31, 2003. Sales in and outside of China were $701,870 and
$176,400, respectively during the three-month period ending March 31, 2004.
Sales during the three-month period ending March 31, 2003 were $454,347 in China
and $209,975 outside of China. Cost of sales for the three-months ended March
31, 2004 of $246,741 is attributed to the production costs of the pharmaceutical
products. The cost of sales for the three-months ended March 31, 2003 was
$201,282. The gross profit margin was 72% for the three-month period ending
March 31, 2004 and 70% for the three-month period ended March 31, 2003.
18
Interest income is related primarily to interest earned on cash received from
the private placement of common stock received during the third quarter of 2001
and cash from operations received since. Interest and other income for the
three-month period ended March 31, 2004 was $5,754 compared to $6,439 for the
three-month period ended March 31, 2003.
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, 2004
were $886,706. The major expenses incurred in the first quarter of 2003 was
selling expenses of $263,453 representing 30% of total expenses. The remaining
major expense items are represented by administrative expenses.
Significant operating expenses for the three-months ended March 31, 2004
included rent of $84,027, legal fees of $25,175, salaries and benefits of
$181,905, $30,685 in travel costs, insurance of $14,315 and a bad debts
provision of $27,073. There were no management fees of $20,000 were paid to
directors for services during the first quarter of 2004.
Other significant expenses for the first quarter include the depreciation of
fixed assets and amortization of license and permit of $179,442.
Comparatively, 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
were 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 of 2003 include the
depreciation of fixed assets and amortization of license and permit and land-use
rights of $185,299.
Overall, expenditures have decreased in 2004 from 2003 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
$249,423 for the three-month period ending March 31, 2004.
The Company's net and comprehensive loss for the three-month period ended March
31, 2003 was $734,027.
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-month period ended March 31,
19
2004. The loss per share for the three-month period ended March 31, 2004 was
$0.01. Common stock issuable upon the exercise of common stock options and
common stock warrants have been excluded from the net loss per share
calculations as their inclusion would be anti-dilutive.
Liquidity and Capital Resources
Dragon is a development stage pharmaceutical and biotechnological company that
has commenced the manufacture and marketing of pharmaceutical products in China
through its 100% equity interest in Nanjing Huaxin Bio-pharmaceuticals Ltd.
Previously, the Company has raised funds through equity financings to fund its
operations and to provide working capital. The Company may finance future
operations through additional equity financings.
As of March 31, 2004, the Company had $3,015,951 in cash available. This cash,
the $1,262,137 in accounts receivable and anticipated sales will be used to fund
the ongoing operations and research and development. Working capital was
$4,165,614 at March 31, 2004.
During the three-months ended March 31, 2004, the Company incurred losses of
$249,423 and the Company will continue to incur losses until sales for its
products increase. The Company will continue to fund its operations through
working capital.
Item 3. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation
of our management, including our Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined by Exchange Act Rule 13a-15(e)) as of the end of our
first fiscal quarter pursuant to Exchange Act Rule 13a-15(b). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in ensuring that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
There have been no changes in our internal control over financial reporting
identified in connection with our evaluation as of the end of the first fiscal
quarter that occurred during such quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Dragon Pharmaceutical Inc. v. Longbin Liu, Supreme Court of British Columbia,
Canada, No. S036057, filed November 10, 2003. On November 2003, we filed a
complaint against our Director and former Chairman for payment of $3,500,000,
plus interest calculated at 6% per annum, due on September 5, 2003, pursuant to
the terms of the Acquisition Agreement related to Hepatitis B Vaccine Project
entered into by the Company and the defendant on October 6, 2000, as amended on
June 5, 2001. The Company has served the complaint against the defendant but has
suspended
20
the action, pursuant to the terms of Settlement Agreement. See Part I. Item 2.
Recent Events - Settlement Agreement with Dr. Liu for more details.
Item 2. Changes in Securities.
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 Form 8-K.
(a) Exhibits.
Exhibit No.
31.1 Certification by the Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
31.2 Certification by the Principal Accounting Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
32 Certification by the Principal Executive and Financial Officers
Pursuant to Section 906 of the Sarbanes-Oxley Act
(b) Reports on Form 8-K.
Form 8-K for March 24, 2004 reporting entering into a Letter of Intent
with Oriental Wave Holdings Ltd.
Form 8-K for April 22, 2004 reporting announcing 2003 year end
results.
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)
Dated: May 6, 2004 /s/ Matthew Kavanagh
---------------------------------------
Matthew Kavanagh
Director of Finance and Corporate
Compliance and Corporate Secretary
(Duly authorized Officer and
Principal Financial Officer)
22