U.S. Securities and Exchange
Commission Washington, D.C. 20549
Form 10-QSB/A
Amendment No. 1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 June 30, 2004: 20,582,000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DRAGON PHARMACEUTICAL INC.
& SUBSIDIARIES
Consolidated Financial Statements
(Unaudited - Prepared by Management)
(Expressed in U.S. Dollars)
June 30, 2004
Index
Consolidated Balance Sheets
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
----------------------------------------------------------------------------------------------------------------------------------
As Restated
(see notes 1, 17)
June 30, 2004 December 31, 2003
----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current
Cash and short term securities $ 2,608,594 $ 3,126,667
Accounts receivable 1,407,671 1,265,676
Inventories 1,130,847 1,090,464
Due from director 500,100 -
Prepaid and deposits 92,670 139,595
----------------------------------------------------------------------------------------------------------------------------------
Total current assets 5,739,882 5,622,402
Fixed assets 1,912,249 2,089,352
Due from related party - Hepatitis B vaccine project - 100
Patent rights - related party - 500,000
Licence and permit and other assets 2,803,178 2,924,198
----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 10,455,309 $ 11,136,052
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Accounts payable and accrued liabilities 1,325,780 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: 20,582,000 common shares 20,582 20,462
Additional paid in capital 26,768,750 26,708,870
Accumulated other comprehensive (loss) (32,845) (32,007)
Accumulated deficit (17,626,958) (16,989,530)
----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,129,529 9,707,795
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 10,455,309 $ 11,136,052
==================================================================================================================================
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'
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.
4
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'
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
Exercise of stock options for cash 120,000 120 59,880 60,000
Components of comprehensive income (loss)
- foreign currency translation - - - (838) - (838) (838)
- net (loss) for the period - - - (637,428) (637,428) - (637,428)
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive (loss) $(638,266)
===========
Balance, June 30, 2004 20,582,000 $20,582 $26,768,750 $(17,626,958) $(32,845) $9,129,529
============================================================================== ======================================
The accompanying notes are an integral part of these financial statements.
5
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Consolidated Statement of Operations
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
------------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Sales $908,145 $1,007,686 $1,786,415 $1,672,009
Cost of sales 194,755 326,988 441,497 528,269
------------------------------------------------------------------------------------------------------------------------------------
Gross profit 713,390 680,698 1,344,918 1,143,740
Selling, general and
administrative expenses (784,051) (723,743) (1,462,937) (1,692,302)
Depreciation of fixed assets and
amortization of licence and
permit and land-use right (179,412) (183,896) (358,854) (369,195)
Net write off of land-use right and fixed assets - - - -
Research and development expenses (151,472) - (152,007) -
New market development (12,404) (8,234) (12,404) (23,713)
Provision for doubtful debts 6,257 (10,701) (20,816) (41,412)
Interest expense (747) (929) (1,516) (4,389)
Stock-based compensation - - - -
------------------------------------------------------------------------------------------------------------------------------------
Operating loss (408,439) (246,805) (663,616) (987,271)
Interest income 20,435 10,381 26,189 16,819
------------------------------------------------------------------------------------------------------------------------------------
Net (loss) for the period $(388,004) $(236,424) $(637,427) $(970,452)
====================================================================================================================================
(Loss) per share
Basic and diluted $ (0.02) $ (0.01) $ (0.03) $ (0.05)
====================================================================================================================================
Weighted average number of
common shares outstanding
Basic and diluted 20,560,022 20,334,000 20,511,011 20,334,000
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
6
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
-----------------------------------------------------------------------------------------------------------------------------
2004 2003
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) operating activities
Net (loss) for the period $ (637,428) $ (970,452)
Adjustments to reconcile net loss to
net cash used in operating activities:
- depreciation of property and equipment and amortization
of licence and permit 473,564 477,415
- provision for doubtful debts 20,816 41,412
Changes in non-cash working capital items:
- accounts receivable (162,811) (29,098)
- inventories (40,383) 21,337
- prepaid expenses and deposits 46,925 (3,405)
- accounts payable and accrued liabilities (102,477) (84,860)
-----------------------------------------------------------------------------------------------------------------------------
(401,794) (547,651)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities
Purchase of property and equipment (20,486) (38,559)
(Increase) in other assets (155,000) -
(Increase) decrease in restricted funds - 510,000
-----------------------------------------------------------------------------------------------------------------------------
(175,486) 471,441
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Issuance of common shares 60,000 -
Loan proceeds - (483,162)
-----------------------------------------------------------------------------------------------------------------------------
60,000 (483,162)
-----------------------------------------------------------------------------------------------------------------------------
Foreign exchange (gain) loss on cash
held in foreign currency (793) 3,879
-----------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (518,073) (555,493)
Cash and cash equivalents, beginning of period 3,126,667 4,425,766
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,608,594 $ 3,870,273
=============================================================================================================================
The accompanying notes are an integral part of these financial statements.
7
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
1. Significant Accounting Development
As disclosed in Note 17, the Company is restating its Consolidated Balance
Sheet as at June 30, 2004 to reinstate an allotment of 250,000 common
shares. The shares were allotted fulfil the Company's obligation to its
Sanhe Kailong Bio-pharmaceutical Limited Joint Venture partner as a result
of the Company decision to pursue the development of manufacturing and
selling EPO through Nanjing Huaxin Bio-phamacuetical Co. Ltd. instead of
Sanhe Kailong Bio-pharmaceutical.
For purposes of the Form 10-QSB/A, and in accordance with Rule 12b-15 under
the Securities Exchange Act of 1934, the Company has amended and restated
in its entirety each item of the Form 10-QSB that was affected by the
restatement. In order to preserve the nature and character of the
disclosures provide in the Form 10-QSB as they were originally, filed, no
attempt was made to modify or update any disclosures except those required
to reflect the effects of the restatement.
2. Basis of Presentation
The accompanying unaudited interim consolidated balance sheets, statements
of operations and cash flows reflected all adjustments, consisting of
normal recurring adjustments and other adjustments, that are, in the
opinion of management, necessary for a fair presentation of the financial
position of the Company, at June 30, 2004, and the results of operations
and cash flows for the interim periods ended June 30, 2004 and 2003.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instruction for Form 10-QSB 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 Form 10-KSB.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
3. Proposed Business Combination
The Company has entered into a definitive Share Purchase Agreement with
Oriental Wave Holding Ltd. ("Oriental") whereby the Company would issue its
common shares in exchange for all the issued and outstanding shares of
Oriental. The transaction is subject to approval by the Company's
shareholders and the regulatory authorities.
If the acquisition is consummated, the former shareholders of Oriental will
own 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.
8
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
4. Accounts Receivable
---------------------------------------------------------------------------
June 30, December 31,
2004 2003
---------------------------------------------------------------------------
Trade receivables $ 1,683,549 $ 1,524,465
Allowance for doubtful accounts (326,967) (298,284)
----------------------------------------------------------------- ---------
1,356,582 1,226,181
Other receivables 51,088 39,495
----------------------------------------------------------------- ---------
$ 1,407,670 $ 1,265,676
===========================================================================
5. Inventories
---------------------------------------------------------------------------
June 30, December 31,
2004 2003
---------------------------------------------------------------------------
Raw materials $ 112,109 $ 129,650
Finished goods 106,160 107,833
Work in progress 912,578 852,981
---------------------------------------------------------------------------
$ 1,130,847 $ 1,090,464
===========================================================================
6. Due from director
The Company entered into an agreement with Dr. Longbin Liu, a director of
the Company, to settle the amount owing to the Company from his acquisition
of the Hepatitis B Project (note 7) as well as cancel the Patent (note 8)
and Project Development (note 12) 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, of which 2,200,000
common shares have been placed in escrow as of June 30, 2004. The warrants
granted to Dr. Liu under the Patent Development agreement havel been
cancelled.
The carrying value of the amount due from Dr. Liu is equivalent to the
previous carrying value of the Patent Rights and the Hepatitis B Project
amount owing.
9
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
7. Property and equipment
------------------------------------------- --------------------------------------------------------------
June 30, 2004
---------------------------------------------------------
Accumulated Net book
Cost depreciation value
-------------------------------------------- ------------------- ---------------------- -------------------
Motor vehicles $ 126,444 $ 77,731 $ 48,713
Office equipment and furniture 412,688 256,629 156,059
Leasehold improvements 1,088,528 479,646 608,882
Production and lab equipment 1,630,604 794,094 836,510
Idle equipment 555,339 293,254 262,085
-------------------------------------------- ------------------- ---------------------- -------------------
$3,813,603 $1,901,354 $1,912,249
============================================ =================== ====================== ===================
-------------------------------------------- --------------------------------------------------------------
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 six-months ended June 30, 2004, depreciation expenses totalled
$197,589 (2003 - $201,374). The majority of fixed assets are located in
China.
8. Due from Related Party - Hepatitis B Vaccine Project
---------------------------------------------------------------------------
June 30, December 31,
2004 2003
---------------------------------------------------------------------------
Hepatitis B Vaccine Project $ - $4,000,000
Less : Repayment - (500,000)
Valuation allowance - (3,499,900)
---------------------------------------------------------------------------
$ - $ 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 the 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:
10
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
8. Due from Related Party - Hepatitis B Vaccine Project (Continued)
(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.
In April 2002, 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 was unsecured. The Company
chose, given the significant amount involved and the lack of security, to
conservatively value the amount owing and set up a provision in fiscal 2002
for the full amount, less a nominal amount of $100. Dr. Liu defaulted on
repayment in September 2003 but subsequently renegotiated repayment terms
with the Company (see note 5).
9. 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 $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 $500,000 will be refunded to the Company if no patent applications have
been filed by January 14, 2005. The Company has reached settlement with Dr.
Liu on this and other projects (note 5) and the warrants have been
cancelled
10. Licence and permit and other assets
---------------------------------------------------------------------------
June 30, December 31,
2004 2003
---------------------------------------------------------------------------
Original cost $5,012,582 $5,012,582
Accumulated amortization (2,364,404) (2,088,384)
---------------------------------------------------------------------------
Licence and permit 2,648,178 2,924,198
Other assets 155,000 -
---------------------------------------------------------------------------
$2,803,178 $ 2,924,198
===========================================================================
Amortization expense for the licence and permit for the six-months ended
June 30, 2004 was $275,975 (2003 - $275,956)
11
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
10. Licence and permit and other assets (Continued)
The estimated amortization expense for each of the five succeeding fiscal
years is as follows:
2004 (balance of the year) $276,000
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.
11. Income Taxes
(a) Kailong and Huaxin are subject to income taxes in China on its taxable
income as reported in its statutory accounts at a tax rate in
accordance with the relevant income tax laws.
Allwin and Biotrade are not subject to income taxes. As at June 30,
2004, $3.9 million of unremitted earnings attributable to
international companies were considered to be indefinitely invested.
No provision has been made for taxes that might be payable if these
earnings were remitted to the United States. The Company's intention
is to reinvest these earnings permanently or to repatriate the
earnings when it is tax effective to do so. It is not practicable to
determine the amount of incremental taxes that might arise were these
earnings to be remitted.
As at June 30, 2004, the Company has estimated losses, for tax
purposes, totalling approximately $10,100,000, which may be applied
against future taxable income. The potential tax benefits arising from
these losses have not been recorded in the financial statements. The
Company evaluates its valuation allowance requirements on an annual
basis based on projected future operations. When circumstances change
and this causes a change in management's judgement about the
realizability of deferred tax assets, the impact of the change on the
valuation allowance is generally reflected in current income.
(b) The tax effect of temporary differences that give rise to the
Company's deferred tax asset (liability) are as follows:
----------------------------------------------------------------------
June 30, December 31,
2004 2003
----------------------------------------------------------------------
Tax losses carried forward $ 3,451,000 $ 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 (4,575,400) (4,361,400)
----------------------------------------------------------------------
$ - $ -
======================================================================
12
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
11. Income Taxes (Continued)
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate, for the three months ended June 30, 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 - -
======================================================================
12. Stock Options and Warrants
(c) Stock Options Plans
There were no options granted during the six months ended June 30,
2004.
The following is a summary of the employee stock option information
for the period ended June 30, 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 2,599,000 $ 2.04
Forfeited (482,500) $ 1.96
Exercised (120,000) $ 0.50
------------------------------------------------------ ------------------ ------------------------
Options outstanding at June 30, 2004 1,996,500 $ 2.16
====================================================== ================== ========================
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 - $1.00 588,500 2.39 $ 0.61 563,500 $ 0.60
$1.01 - $2.00 308,000 2.82 $ 1.70 308,000 $ 1.70
$2.01 - $3.00 25,000 0.361 $ 2.50 25,000 $ 2.50
$3.01 - $4.00 1,075,000 1.372 $ 3.13 1,075,000 $ 3.13
------------------------- ----------------------------- ------------- ------------ -----------
1,996,500 1.88 $ 2.16 1,971,500 $ 2.17
========= ========= ============= ============ ===========
13
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
12. Stock Options and Warrants (Continued)
The Company accounts for its stock-based compensation plan in
accordance with APB Opinion No. 25, under which no compensation is
recognized in connection with options granted to employees except if
options are granted with a strike price below fair value of the
underlying stock. The Company adopted the disclosure requirements SFAS
No. 123, Accounting for Stock-Based Compensation. Accordingly, the
Company is required to calculate and present the pro forma effect of
all awards granted. For disclosure purposes, the fair value of each
option granted to an employee has been estimated as of the date of
grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.5%, dividend yield 0%,
volatility of 90%, and expected lives of approximately 0 to 5 years.
Based on the computed option values and the number of the options
issued, had the Company recognized compensation expense, the following
would have been its effect on the Company's net loss:
----------------------------------------------------------------------
June 30, June 30,
2004 2003
----------------------------------------------------------------------
Net (loss) for the period:
- as reported $(663,616) $ (970,452)
- pro-forma $(663,616) $ (970,452)
------------------------------------------------------------ ---------
Basic and diluted (loss) per share:
- as reported $(0.03) $(0.05)
- pro-forma $(0.03) $(0.05)
----------------------------------------------------------------------
(b) Warrants
Share purchase warrants outstanding as at June 30, 2004:
Number Underlying Exercise Price
of Warrants Shares Per Share Expiry Date
----------- ---------- -------------- -----------
50,000 50,000 $1.70 November 15, 2004
13. Related Party Transactions
(a) The Company incurred the following expenses to a director of the
Company:
----------------------------------------------------------------------
June 30, 2004 June 30, 2003
----------------------------------------------------------------------
Management fees $- $40,000
======================================================================
(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:
14
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
13. Related Party Transactions (Continued)
(i) $500,000 to be provided at the commencement of the research in
the G-CSF Project (paid);
(ii) $500,000 to be provided when cell-line and related technology is
established and animal experimentation commences in the G-CSF
Project;
(iii)$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");
(iv) $200,000 to be provided when a new drug license for G-CSF is
issued to Dragon by the SDA; and
(v) $500,000 to be paid as a bonus if the SDA issues the new drug
license for Insulin to Dragon before January 14, 2005.
The Company will make payment for the development of Insulin as
follows:
(i) $750,000 to be provided by at the commencement of the research in
the Insulin Project (paid);
(ii) $750,000 to be provided when cell-line and related technology is
established and animal experimentation commences in the Insulin
Project (paid);
(iii)$300,000 to be provided when a permit for clinical trials for
Insulin has been issued by the SDA;
(iv) $200,000 to be provided when a new drug license for Insulin is
issued to Dragon by the SDA; and
(v) $500,000 to be paid as a bonus if the SDA issues the new drug
license for Insulin to Dragon before January 14, 2005.
For both the G-CSF and Insulin Projects:
(i) If the Company elects to cease development of the project it will
forfeit any payments made and lose ownership of the Project, but
it will not be obligated to make any further payments toward the
Project;
(ii) if an application for permit for clinical trials is not submitted
within three years with respect to the G-CSF Project or four
years with respect to the Insulin Project or if the SDA rejects
the Projects for technical or scientific reasons or If
development of the Project is terminated by Dr. Liu, then Dr. Liu
will refund to the Company all amounts paid, without interest or
deduction, with respect to the Project within six months.
As at June 30, 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. The
Company has reached settlement with Dr. Liu on this and other projects
(note 5).
(b) see Notes 5, 6, and 7 also.
15
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
14. Commitments
(a)The Company has entered into operating lease agreements with respect to
Huaxin's production plant in Nanjing, China for an amount of $326,200 (RMB
2,700,000) per annum until June 11, 2009, and the Company's administrative
offices in Vancouver for an amount escalating from $136,000 to $157,000
(CDN$200,000 to CDN$230,000) per annum until March 31, 2007. Minimum
payments required under the agreements are as follows:
2004 $ 246,782
2005 494,835
2006 498,684
2007 369,646
2008 326,205
2009 144,738
-----------------------------------------------------
Total $ 2,080,889
=====================================================
(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 $609,000
(EUROS 500,000) of which $365,000 (EUROS 300,000) remains unpaid at June
30, 2004.
15. Segmented Information
The Company operates exclusively in the biotech sector. The Company's
assets and revenues are distributed as follows:
June 30, 2004 December 31,2003
---------------------------------------------------------------------------
ASSETS
North America $ 2,932,489 $3,156,953
China 6,696,907 7,079,241
Other 525,913 899,858
---------------------------------------------------------------------------
Total $ 10,455,309 $11,136,052
===========================================================================
---------------------------------------------------------------------------
Six months ended Six months ended
June 30, 2004 June 30, 2003
---------------------------------------------------------------------------
REVENUE
North America $ - $ -
China 1,359,515 1,031,242
Other 429,490 640,767
---------------------------------------------------------------------------
Total $1,786,415 $ 1,672,009
===========================================================================
16. Comparative Figures
Certain 2003 comparative figures have been reclassified to conform to the
financial statement presentation adopted for 2004.
16
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
17. Restatement
These financial statements have been restated to reinstate the 250,000
common shares that were previously allotted to the Company's Sanhe Kailong
Bio-pharmaceutical Limited.("Kailong") Joint Venture partner.
Kailong was a Joint Venture through which the Company would manufacture and
sell its EPO in China. Kailong was created to grant the Company's Joint
Venture partner a 25% interest in the Company's EPO business in China. The
Company then determined that it would take too long to bring Kailong into
production and instead, acquired Nanjing Huaxin Bio-pharmaceutical Co. Ltd.
("Huaxin") which had an existing production facility and the required
manufacturing licenses and sales permits.
In March 2000, the Company entered into an agreement with its Kailong Joint
Venture partner to fulfil the Company's obligation to allow the Kailong
Joint Venture partner to participate in the Company's EPO business and to
eliminate the Joint Venture partner's claim to a 25% interest in Huaxin.
Under the agreement, the Company agreed to pay $250,000 and issue 250,000
common shares of the Company. The Company accounted for the transaction at
the time by recording the shares allotted at the share price in effect at
the time. The cash was paid in the year 2000, but the shares have not yet
been issued.
In the second quarter of 2004, the Company was finalizing the share
exchange agreement with Oriental Wave Holding Limited ("Oriental Wave") in
which the Company would be required to issue shares to Oriental Wave based
on the current shares outstanding and on obligations to issue shares in the
future. At that time, the Company reversed the original allotment of the
250,000 shares on the basis that Kailong was going to be dissolved and the
shares were not going to be issued.
It has subsequently been determined that the Company is still required to
issue the 250,000 shares to its Kailong Joint Venture partner and the
financial statements have been amended to reinstate the 250,000 common
shares that were previously allotted.
17
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Expressed in U.S. Dollars)
(Unaudited - Prepared by Management)
--------------------------------------------------------------------------------
17. Restatement (Continued)
As a result of the foregoing the Consolidated Balance Sheet of the Company
has been restated as follows:
As of June 30, 2004
---------------------------------------------
Previously
Restated Reported
-------------------- ---------------------
Total current assets $ 5,739,882 $ 5,739,882
Fixed assets 1,912,249 1,912,249
Licence and permit and other assets 2,803,178 1,240,678
-------------------- ---------------------
Total assets $ 10,455,309 $ 8,892,809
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 1,325,780 $ 1,325,780
-------------------- ---------------------
Share capital 20,582 20,582
Additional paid in capital 26,768,750 25,206,250
Accumulated other comprehensive (loss) (32,845) (32,845)
Accumulated deficit (17,626,958) (17,626,958)
-------------------- ---------------------
Total stockholders' equity 9,129,529 7,567,029
-------------------- ---------------------
Total liabilities and stockholders' equity $ 10,455,309 $ 8,892,809
==================== =====================
The correction of the above did not have any effect on the Consolidated
Balance Sheet as of December 31, 2003 or the Consolidated Statements of
Operations or Cash Flows for either the six months ended June 30, 2004 or
2003.
18
PART II. OTHER INFORMATION
Item 6. Exhibits.
(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.
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment Number 1 to Form 10-QSB for the
quarterly period ended June 30, 2004 to be signed on its behalf by the
undersigned, thereunto duly authorized.
DRAGON PHARMACEUTICAL INC.
(registrant)
Dated: November 22, 2004 /s/ Matthew Kavanagh
--------------------------------------
Matthew Kavanagh
Director of Finance and Corporate
Compliance and Corporate Secretary
(Duly authorized Officer and
Principal Financial Officer)
19
EXHIBIT 31.1
Section 302 Certification of Principal Executive Officer
I, Alexander Wick, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Dragon
Pharmaceutical Inc.;
2. Based on my knowledge, this 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 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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) Omitted
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonable likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls
over financial reporting.
Date: November 22, 2004 /s/ Alexander Wick
------------------------------------
Alexander Wick, President and
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
Section 302 Certification of Principal Financial Officer
I, Matthew Kavanagh, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Dragon
Pharmaceutical Inc.;
2. Based on my knowledge, this 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 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 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-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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) Omitted
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonable likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls
over financial reporting.
Date: November 22, 2004 /s/ Matthew Kavanagh
-------------------------------
Matthew Kavanagh,
Principal Financial Officer
EXHIBIT 32
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF
TITLE 18, UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of Title 18, United States Code), each of the
undersigned officers of Dragon Pharmaceutical Inc., a Florida corporation (the
"Company"), does hereby certify with respect to the Quarterly Report of the
Company on Form 10-QSB for the quarter ended June 30, 2004 as filed with the
Securities and Exchange Commission (the "Form 10-QSB") that, to the best of
their knowledge:
(1) the Form 10-QSB fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Form 10-QSB fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: November 22, 2004 /s/ Alexander Wick
-------------------------------------
Alexander Wick
President and Chief Executive Officer
Dated: November 22, 2004 /s/ Matthew Kavanagh
-------------------------------------
Matthew Kavanagh
Principal Financial Officer