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 September 30, 2000
Commission file number 0-27937
DRAGON PHARMACEUTICAL INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida 65-0142474
-------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
543 Granville Street, Suite 1200
Vancouver, British Columbia
Canada V6C 1X8
-----------------------------------------
(Address of principal executive offices)
(604) 669-8817
---------------------------
(Issuer's telephone number)
(Former address if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Number of shares of common stock outstanding as of September 30, 2000:
16,100,000
<PAGE>2
PART 1. FINANCIAL STATEMENTS
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Consolidated Balance Sheet
September 30, 2000
(Unaudited)
(Expressed in US Dollars)
--------------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 7,553,866
Term deposits 2,000,500
Accounts receivable 719,875
Inventories 901,486
Prepaid and deposits 810,084
-------------------
Total current assets 11,985,811
Fixed assets 3,297,178
Licence and permit 3,878,613
-------------------
Total assets $ 19,161,602
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loans $ 2,028,936
Accounts payable and accrued liabilities 1,438,442
-------------------
Total current liabilities 3,467,378
-------------------
Minority interests 1,277,895
-------------------
Commitments and contingencies (Note 8)
Stockholders' Equity
Share capital
Authorized: 50,000,000 common shares at
par value of $0.001 each
Issued and outstanding: 16,100,000 common shares 16,100
Additional paid in capital 18,501,497
Accumulated other comprehensive income (loss) (71,766)
Accumulated deficit (4,029,502)
-------------------
Total stockholders' equity 14,416,329
-------------------
Total liabilities and stockholders' equity $ 19,161,602
===================
The accompanying notes are an integral part of these financial statements.
<PAGE>3
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine-month Period Ended September 30, 2000
(Unaudited)
(Expressed in US Dollars)
-------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulated Total
Additional other Stock-
Common stock paid-in Comprehensive Deficit comprehensive holders
Shares Amount capital income (loss) accumulated income (loss) equity
------------- --------- ------------ -------------- ------------ -------------- ------------
Balance, December 31, 1999 10,735,000 $10,735 $15,690,734 $(3,262,750) $ 50,049 $ 12,488,768
Issued 4,258,000 common shares
previously allotted 4,258,000 4,258 (4,258) - - -
Additional share issuance costs to
4,258,000 common shares issued - (5,247) - - (5,247)
Exercise stock options for cash 107,000 107 53,393 - - 53,500
Exercise warrants for cash 1,000,000 1,000 999,000 - - 1,000,000
Allotted 250,000 common shares
at $6.25 per share - - 1,562,500 - - 1,562,500
Stock option compensation - - 205,375 - - 205,375
Other comprehensive income
- foreign currency translation - - - (121,815) - (121,815) (121,815)
Comprehensive income
- net (loss) for the period - - - (766,752) (766,752) - (766,752)
------------- --------- ------------ -------------- ------------ -------------- ------------
Comprehensive income (loss)
Balance, September 30, 2000 16,100,000 $16,100 $18,501,497 $ (888,567) $(4,029,502) $ (71,766) $14,416,329
============= ========= ============ ============== ============ ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>4
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
(Expressed in US Dollars)
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
July 1 Nine Months Nine Months
2000 to Ended Ended
September 30 September 30 September 30
2000 2000 1999
------------------ ----------------- ------------------
Sales $ 739,062 $ 2,197,974 $ 333,555
Cost of sales 185,519 451,920 104,080
------------------ ----------------- ------------------
Gross profit 553,543 1,746,054 229,475
Selling expenses (596,546) (1,397,371) (213,475)
Administrative expenses
- stock-based compensation (17,010) (205,375) (12,500)
- other administrative expenses (537,410) (1,368,465) (354,632)
------------------ ----------------- ------------------
Operating loss (597,423) (1,225,157) (351,132)
Interest income 172,370 391,695 14,263
------------------ ----------------- ------------------
Loss before minority interest (425,053) (833,462) (336,869)
Minority interest 62,078 66,710 49,610
------------------ ----------------- ------------------
Net (loss) for the period $ (362,975) $ (766,752) $ (287,259)
================== ================= ==================
(Loss) per share
Basic and diluted $ (0.03) $ (0.06) $ (0.03)
================== ================= ==================
Weighted average number of
Common shares outstanding
Basic and diluted 12,812,981 12,812,981 10,053,352
================== ================= ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>5
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
Consolidated Statement of Cash Flows
Nine-month Periods Ended September 30, 2000 and 1999
(Unaudited)
(Expressed in US Dollars)
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
2000 1999
------------- --------------
Cash flows from (used in) operating activities
Net (loss) for the period $ (766,752) $ (287,259)
Adjustments to reconcile net loss to
net cash used in operating activities:
- loan bonus fee -- 90
- stock-based compensation expense 205,375 12,500
- depreciation of fixed assets and amortization of
Licence and permit 475,404 119,273
- minority interests (66,710) (49,610)
------------- --------------
(152,683) (205,006)
Changes in non-cash working capital items,
net of effect of acquisition of subsidiary:
- accounts receivable (79,132) (328,738)
- inventories (243,520) (165,724)
- prepaid expenses and deposits (342,144) (354,358)
- accounts payable and accrued liabilities (531,008) 217,438
------------- --------------
(1,348,487) (836,388)
------------- --------------
Cash flows used in investing activities
Purchase of fixed assets (895,857) (68,857)
Purchase of term deposits (2,000,500) --
Purchase of license (250,000) --
Initial payment on the acquisition of Huaxin,
net of cash acquired -- (1,410,448)
------------- --------------
(3,146,357) (1,479,305)
------------- --------------
Cash flows from financing activities
Loan proceeds 1,412,413 1,205,627
Proceeds from issuance of shares 1,053,500 --
Proceeds from shares subscribed and allotted
in prior period, net of issuance costs 8,611,603 --
Funds contributed by non-controlling interest 403,380 --
------------- --------------
11,480,896 1,205,627
------------- --------------
Foreign exchange gain on cash held
in foreign currency (49,448) 53,802
------------- --------------
Increase in cash and cash equivalents 6,936,604 (1,056,264)
Cash and cash equivalents, beginning of period 617,262 1,380,355
------------- --------------
Cash and cash equivalents, end of period $ 7,553,866 $ 324,091
============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>6
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business
The Company was formed on August 22, 1989 as First Geneva Investments
Inc. under the laws of the State of Florida. The Company changed its name
to Dragon Pharmaceutical Inc. on August 31, 1998. Pursuant to a share
exchange agreement, dated July 29, 1998, the Company acquired 100% of the
issued and outstanding shares of Allwin Newtech Ltd. ("Allwin") by
issuing 7,000,000 common shares of the Company. This transaction is
accounted for as a reverse acquisition (see Note 3). During 1998, the
Company was a development stage enterprise.
Allwin was incorporated under the laws of British Virgin Islands on
February 10, 1998. Pursuant to a Sino-Foreign Co-operative Company
contract, dated April 18, 1998, Allwin and a Chinese corporation formed a
limited liability company under the Chinese law, named as Sanhe Kailong
Bio-pharmaceutical Co., Ltd. ("Kailong"), located in Hebei Province,
China. Allwin has a 75% interest in Kailong. Pursuant to another
Sino-foreign Co-operative Company Contract, dated July 27, 1999, Allwin
completed the acquisition of a 75% interest in Nanjing Huaxin
Bio-pharmaceutical Co. Ltd. ("Huaxin"). Kailong and Huaxin are in the
business of research and development, production and sales of
pharmaceutical products in China.
2. Significant Accounting Policies
Basis of Consolidation
These consolidated financial statements include the accounts of
the Company and its subsidiaries, Allwin, Kailong and Huaxin. All
inter-company transactions and balances have been eliminated.
Principles of Accounting
These financial statements are stated in US Dollars and have been
prepared in accordance with accounting principles generally
accepted in the United States.
Fixed Assets
Depreciation is based on the estimated useful lives of the assets
and is computed using the straight-line method. Fixed assets are
recorded at cost. Depreciation is provided over the following
useful lives:
Motor vehicle 10 years
Land lease Term of lease (50 years)
Office equipment and furniture 5 years
Land improvements 10 years
Leasehold improvements Term of lease (10 years)
Production equipment 10 years
<PAGE>7
NOTES TO FINANCIAL STATEMENTS
2. Significant Accounting Policies (continued)
Foreign Currency Transactions
The parent company, Allwin, Kailong and Huaxin maintain their
accounting records in their functional currencies (i.e., U.S.
dollars, U.S. dollars, Renminbi Yuan, and Renminbi Yuan,
respectively). They translate foreign currency transactions into
their functional currency in the following manner.
At the transaction date, each asset, liability, revenue and
expense is translated into the functional currency by the use of
the exchange rate in effect at that date. At the period end,
monetary assets and liabilities are translated into the
functional currency by using the exchange rate in effect at that
date. The resulting foreign exchange gains and losses are
included in operations.
Foreign Currency Translations
Assets and liabilities of the foreign subsidiaries (whose
functional currency is Renminbi Yuan) are translated into U.S.
dollars at exchange rates in effect at the balance sheet date.
Revenue and expenses are translated at average exchange rate.
Gain and losses from such translations are included in
stockholders' equity, as a component of other comprehensive
income.
Accounting Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Income Taxes
The Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes", which
requires the Company to recognize deferred tax liabilities and
assets for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns using the liability method. Under this method, deferred
tax liabilities and assets are determined based on the temporary
differences between the financial statements and tax bases of
assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse.
<PAGE>8
NOTES TO FINANCIAL STATEMENTS
2. Significant Accounting Policies (continued)
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting
and display of comprehensive income, its components and
accumulated balances. The Company is disclosing this information
on its Statement of Stockholders' Equity. Comprehensive income
comprises equity except those resulting from investments by
owners and distributions to owners. SFAS No. 130 did not change
the current accounting treatments for components of comprehensive
income.
Financial Instruments and Concentration of Risks
Fair value of financial instruments are made at a specific point
in time, based on relevant information about financial markets
and specific financial instruments. As these estimates are
subjective in nature, involving uncertainties and matters of
significant judgement, they cannot be determined with precision.
Changes in assumptions can significantly affect estimated fair
values.
The carrying value of cash and cash equivalents, term
deposits,accounts receivable, bank loans, accounts payable and
accrued liabilities approximate their fair value because of the
short-term nature of these instruments.
The Company is operating in China, which may give rise to
significant foreign currency risks from fluctuations and the
degree of volatility of foreign exchange rates between U.S.
dollars and the Chinese currency RMB. Financial instruments that
potentially subject the Company to concentration of credit risk
consist principally of cash and trade receivables, the balances
of which are stated on the balance sheet. The Company places its
cash in high credit quality financial institutions. Concentration
of credit risk with respect to trade receivables are limited due
to the Company's' large number of diverse customers in different
locations in China. The Company does not require collateral or
other security to support financial instruments subject to credit
risk.
Licence and Permit
Licence and permit, in relation to the production and sales of
pharmaceutical products in China, is amortized on a straight-line
basis over ten years.
The carrying value of licence and permit is reviewed by
management at least annually and impairment losses, if any, are
recognized when the expected non-discounted future operating cash
flows derived from the related product licence acquired are less
than the carrying value of such licence and permit. In the event
of an impairment in the licence and permit, the discounted cash
flows method is used to arrive at the estimated fair value of
such licence and permit.
<PAGE>9
NOTES TO FINANCIAL STATEMENTS
2. Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash equivalents usually consist of highly liquid investments
which are readily convertible into cash with maturities of three
months or less. As at September 30, 2000, cash equivalents
consist of commercial papers and redeemable term deposits.
Inventories
Inventories are stated at the lower of cost and replacement cost
with respect to raw materials and the lower of cost and net
realizable value with respect to finished goods. Cost includes
direct material, direct labour and overheads. Cost is calculated
using the first-in, first-out method. Net realizable value
represents the anticipated selling price less further costs for
completion and distribution.
Revenue Recognition
Sales revenue is recognized upon the delivery of goods to
customers.
Stock-based Compensation
The Company adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting
for Stock-based Compensation". SFAS 123 encourages, but does not
require, companies to adopt a fair value based method for
determining expense related to stock-based compensation. The
Company continues to account for stock-based compensation issued
to employees and directors using the intrinsic value method as
prescribed under Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees" and related
Interpretations.
Loss Per Share
Loss per share is computed using the weighted average number of
shares outstanding during the period. The Company adopted SFAS
No. 128, "Earnings per share". Diluted loss per share is equal to
the basic loss per share because common stock equivalents
consisting of 4,858,000 warrants and 1,555,500 stock options
outstanding at September 30, 2000 are anti-dilutive, however,
they may be dilutive in future.
<PAGE>10
NOTES TO FINANCIAL STATEMENTS
2. Significant Accounting Policies (continued)
New Accounting Pronouncements
(i) The Financial Accounting Standards Board ("FASB") has issued
Interpretation No. 44 in March 2000, which addresses certain
practice issues regarding Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. The effective date of the interpretation is July
1, 2000.
If the terms of an option (originally accounted for as a
fixed option) are modified during the option term to
directly change the exercise price, the modified option
should be accounted for as a variable option. Variable grant
accounting should be applied to the modified option from the
date of the modification until the date of exercise.
Consequently, the final measurement of compensation expense
would occur at the date of exercise. The cancellation of an
option and the issuance of a new option with a lower
exercise price shortly thereafter (e.g., within six months)
to the same individual should be considered in substance a
modified (variable) option.
The Company has no such modified option and, accordingly,
the pronouncement would have nil effect on the Company's
financial statements.
(ii) In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133 requires companies to
recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes
in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133
is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
Historically, the Company has not entered into derivatives
contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption
of the new standards on July 1, 2000 to affect its financial
statements.
<PAGE>11
NOTES TO FINANCIAL STATEMENTS
3. Fixed Assets
<TABLE>
<S> <C> <C> <C>
September 30, 2000
-------------------------------------------
Accumulated Net book
Cost depreciation value
----------- ---------------- --------------
Motor vehicles $ 100,296 $ 13,601 $ 86,695
Land lease 905,775 42,270 863,505
Office equipment and furniture 189,868 45,284 144,584
Land improvements 14,791 4,067 10,724
Leasehold improvements 1,028,520 87,680 940,840
Production equipment 1,532,494 281,664 1,250,830
----------- ---------------- -------------
$3,771,744 $ 474,566 $ 3,297,178
=========== ================ ==============
</TABLE>
The government of China granted a land lease to Kailong for a period of
fifty (50) years, starting June 8, 1998. All fixed assets are located in
China.
Depreciation expense was $188,614 for the period ended September 30,
2000.
4. Bank Loans
<TABLE>
<S> <C>
RMB 3,000,000, bearing interest at 5.85% per annum and due on
August 15, 2001 $ 362,310
RMB 2,000,000, bearing interest at 5.85% per annum and due on July 31, 2001 241,540
RMB 7,800,000, bearing interest at 5.85% per annum and due on January 26, 2001. The loan
is secured by the term deposit. 942,006
RMB 4,000,000, bearing interest at 5.58% per annum and due on December 12, 2000. The
loan is secured by the term deposit. 483,080
----------
Total $2,028,936
==========
</TABLE>
The weighted average interest rate at September 30, 2000 was 5.79%.
<PAGE>12
NOTES TO FINANCIAL STATEMENTS
5. Income Taxes
Kailong and Huaxin are subject to income taxes in China on its taxable income as
reported in its statutory accounts at a tax rate in accordance with the relevant
income tax laws applicable to Sino-foreign equity joint venture enterprises.
However, pursuant to the same income tax laws, Kailong and Huaxin are fully
exempt from income tax for five years starting from their first profit-making
year followed by a 15% corporation tax rate for the next three years.
Allwin is not subject to income taxes.
As at September 30, 2000, the parent company, Kailong and Huaxin
have estimated losses, for tax purposes, totalling approximately
$1,610,000, which may be applied against future taxable income.
Accordingly, there is no tax expense charged to the Statement of
Operations for the period ended September 30, 2000. 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.
The tax effect of temporary differences that give rise to the Company's deferred
tax asset (liability) are as follows:
<TABLE>
<S> <C>
September 30, 2000
-------------------
Tax loss carryforwards $ 547,400
Stock-based compensation 70,000
Less: valuation allowance (617,400)
===================
$ -
===================
A reconciliation of the federal statutory income tax to the
Company's effective income tax rate is as follows:
September 30, 2000
-------------------
Federal statutory income tax rate 34%
Change in valuation allowance (34%)
-------------------
Effective income tax rate -
===================
</TABLE>
<PAGE>13
NOTES TO FINANCIAL STATEMENTS
6. Stock Options and Warrants
A summary of the status of the Company's stock options as of September 30, 2000
and the changes during the period then ended is presented as follows:
<TABLE>
<S> <C> <C>
Weighted Average
Shares Exercise Price
----------- ----------------
1,520,000 $ 0.58
Balance outstanding, December 31, 1999
Granted 142,500 $ 5.40
Exercised (107,000) $ 0.50
--------- ---------------
Balance outstanding, September 30, 2000 $1,555,500 $ 1.03
=========== ===============
Balance exercisable, September 30, 2000 1,303,750 $ 1.04
=========== ===============
</TABLE>
The weighted average remaining contractual life of the options
outstanding at September 30, 2000 was 3.30 years.
Stock options outstanding as at September 30, 2000:
<TABLE>
<S> <C> <C> <C>
Underlying Exercise Price
Number of Options Shares Per Share Expiry Date
----------------- ---------- --------------- -------------------
800,000 800,000 $0.50 December 16, 2003
50,000 50,000 $0.50 June 15, 2001
275,000 275,000 $0.50 November 5, 2004
235,000 235,000 $0.50 November 9, 2004
60,000 60,000 $2.50 November 9, 2004
28,000 28,000 $0.50 January 5, 2005
107,500 107,500 $7.00 February 22, 2005
Share purchase warrants outstanding as at September 30, 2000:
Number Underlying Exercise Price
of Warrants Shares Per Share Expiry Date
------------ ------------ ---------------- -------------------
600,000 600,000 $2.50 October 28, 2000
4,258,000 4,258,000 $2.50 January 1, 2001
</TABLE>
<PAGE>14
NOTES TO FINANCIAL STATEMENTS
6. Stock Options and Warrants (continued)
On December 16, 1998, the Company adopted a Stock Option Plan ("the 1998 Plan")
for grant of options to directors of the Company to purchase up to 1,200,000
common stocks. Options granted under the 1998 Plan will be exercisable from the
date of grant for a period of five years at an exercise price of $0.50 per
share. Half of the options granted vested immediately at the date of grant. The
remaining half of the options granted would vest upon the Company achieving the
ability to produce commercially acceptable and revenue generating products.
On November 5, 1999, the Company granted options to another two
directors of the Company to purchase up to 200,000 common stocks
under the same conditions as the 1998 Plan.
On June 15, 1999, the Company adopted another Stock Option Plan
("the 1999 A Plan") for the grant of options to an employee of the
Company to purchase up to 50,000 common stocks at an exercise
price of $0.50 per share. Options granted under the 1999 A Plan
will be exercisable from the date of grant for a period of two
years. Half of the respective options granted vested immediately
at the date of grant. The remaining half of the options granted
would vest upon the Company's share price closes at a price of US
$5 or greater for five (5) consecutive days.
On November 5, 1999 and November 9, 1999, the Company adopted
another Stock Option Plan ("the 1999 B Plan") for the grant of
options to employees of the Company to purchase up to 75,000
common stocks and 235,000 common stocks, respectively. Options
granted under the 1999 B Plan were vested immediately and will be
exercisable from the dates of grant for a period of five years at
an exercise price of $0.50 per share.
On November 9, 1999, the Company adopted another Stock Option Plan
("the 1999 C Plan") for the grant of options to employees of the
Company to purchase up to 60,000 common stocks. Options granted
under the 1999 C Plan were vested immediately and will be
exercisable from the date of grant for a period of five years at
an exercise price of $2.50 per share.
On January 14, 2000, the Company's share price closed at a price
of $5 for five consecutive days at $5.313 per share. Therefore,
the remaining 25,000 common stocks granted under the 1999 A Plan
became vested. $120,325 were charged to income in 2000.
On January 5, 2000, the Company adopted another Stock Option Plan
("the 2000 A Plan") for the grant of options to employees of the
Company to purchase up to 35,000 common stocks at an exercise
price of $0.50 per share for a period of five years. Options
granted under the 2000 A Plan vest over a period of two-year
period at a rate of 20% upon grant, 40% on the first anniversary
of grant, 40% on the second anniversary of grant. $85,050 were
charged to income in 2000.
<PAGE>15
NOTES TO FINANCIAL STATEMENTS
6. Stock Options and Warrants (continued)
On February 22, 2000, the Company adopted another Stock Option
Plan ("the 2000 B Plan") for the grant of options to an employee
of the Company to purchase up to 7,500 common stocks at an
exercise price of $7 per share for a period of five years. Half of
the options granted under the 2000 B Plan were vested immediately
and the remaining half will be exercisable when the Company's
share price closes at a price of $9 for five consecutive days. No
compensation expenses were charged to income on the 3,750 common
stocks vested immediately as the exercise price equals to the fair
market value at the date of grant. The compensation expense of the
remaining 3,750 common stocks would be recognized based upon the
excess of the fair market value of the stock on the vesting date
over its exercise price of $7 per share.
On February 22, 2000, the Company adopted another Stock Option
Plan ("the 2000 C Plan") for the grant of options to an employee
of the Company to purchase up to 100,000 common stocks at an
exercise price of $7 per share for a period of five years. All of
the options granted under the 2000 C Plan were vested immediately.
No compensation expenses were charged to income as the exercise
price equals to the fair market value at the date of grant.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for the grants awarded
in 1998,1999 and 2000, respectively:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Weighted
Number of Risk Free Expected Average
Year Options Dividend Expected Interest Lives Fair Value
Granted Granted Yields Volatility Rate in Years of Options
--------------- ----------- ----------- -------------- -------------- ------------- ---------------
1998 1,200,000 0% 56% 5.50% 5.00 $1.13
1999 620,000 0% 98% 4.75% 4.76 $1.918
2000 142,500 0% 108% 5.20% 5.00 $6.67
</TABLE>
<PAGE>16
NOTES TO FINANCIAL STATEMENTS
7. Related Party Transactions
The Company incurred the following expenses to the directors:
2000 1999
------- -------
Management fees $54,000 $72,000
8. Commitments
The Company has capital expenditure commitments of US $115,000 to purchase
certain bio-technology equipment.
The Company has entered into a drug licence and related technology transfer
agreement in August, 1999 for a total transfer price of RMB 5,500,000
(approximately US$664,235). RMB 1,000,000 (US$120,770) is payable upon the
signing of the agreement. The Company paid a deposit of RMB 500,000 (US$60,385)
in 1999. The Company is committed to pay the remaining RMB 5,000,000
(approximately US$603,850).
The Company entered into a drug licence ("rhTPO") and related technology
transfer agreement in August, 1999 for a total transfer price of RMB 4,500,000
(approximately US$543,480). During the period, the Company paid a deposit of RMB
4,000,000 (US$483,080). The Company is committed to pay the remaining RMB
500,000 (approximately US$60,400) according to the agreement.
The Company has entered into an operating lease agreement with respect to
Huaxin's production plant in Nanjing, China for an amount of RMB 3,000,000
(approximately US$362,310) per annum until June 11, 2009. Minimum payments
required for the next five years under the agreement are as follows:
2001 RMB 3,000,000 US$ 362,310
2002 3,000,000 362,310
2003 3,000,000 362,310
2004 3,000,000 362,310
2005 3,000,000 362,310
2006 - 2009 10,375,000 1,252,990
------------------- ---------------- ---------------
Total RMB 52,375,000 US$ 3,064,540
=================== ================ ===============
9. Non-cash Financing Activities
During the period, 250,000 common shares were allotted for the acquisition of
additional 20% interest of Kailong.
<PAGE>17
NOTES TO FINANCIAL STATEMENTS
10. Subsequent Events
Subsequent to the period end, 600,000 warrants were exercised for 600,000
shares at $2.50 per share.
11. Comparative Figures
Certain 1999 comparative figures have been reclassified to conform with the
financial statement presentation adopted for 2000.
<PAGE>18
Item 2
Management's Discussion and Analysis or Plan of Operation
The following discusses the Company's financial condition and results of
operations based upon the Company's consolidated financial statements which have
been prepared in accordance with generally accepted accounting principles. It
should be read in conjunction with the Company's financial statements and the
notes thereto and other financial information included in the Company's Form
10-KSB for the fiscal year ended December 31, 1999.
Overview
The Company (or "Dragon") was formed on August 22, 1989, under the name First
Geneva Inc. First Geneva Investment's business was to evaluate businesses for
possible acquisition. On July 28, 1998, First Geneva Investment entered into a
share exchange agreement with Allwin Newtech. Allwin Newtech was formed in 1998
for the purpose of developing and marketing pharmaceutical drugs for sale in
China. Prior to the acquisition of Allwin Newtech, First Geneva Investments had
no operations. On September 21, 1998, First Geneva Investments changed its name
to Dragon Pharmaceutical Inc.
On July 27, 1999, Dragon acquired a 75% interest in Nanjing Huaxin Biotech Co.
Ltd. which manufactures Erythropietin ("EPO") in China. The Company increased
the efficiencies in Nanjing Huaxin Biotech Co. Ltd. production of EPO by
improving a proprietary high-yield mammalian cell line and "vectoring process"
which has been developed by Dragon. The Company successfully achieved commercial
production during the last quarter of calendar1999.
On March 30, 2000, Allwin Newtech (a wholly-owned subsidiary of the Company)
entered into an agreement to increase its equity interest in Sanhe Kailong
Bio-pharmaceutical Co., Ltd. from 75% to 95%. The Company paid $250,000 and is
committed to issue 250,000 common shares to increase its equity interest. To
date, due to administrative delays, the shares have not yet been issued but are
represented as common shares allotted on the Company's financial statements.
On June 6, 2000 Dragon incorporated Allwin Biotrade Inc. ("Biotrade"). Biotrade
was incorporated for the purpose of marketing and distributing biopharmaceutical
products outside China. On September 15, 2000 Dragon incorporated Dragon
Pharmaceuticals (Canada) Inc. ("Dragon Canada"). Dragon Canada was incorporated
for the purpose of researching and developing new biopharmaceutical products.
Results of Operations
The Company initiated quarterly financial reporting in September 1999. For this
reason, no comparison is available between the three month period ending
September 30, 1999 and September 30, 2000.
Revenues. Revenue results primarily from the sale of EPO in China. Revenue for
the three months period ending September 30, 2000, was $739,062 and revenue for
the nine months ended September 30, 2000 was $2,197,974. Cost of sales for the
three months ended September 30, 2000, of $185,519 is attributed to the
production costs of the pharmaceutical products. The cost of sales for the nine
months ended September 30, 2000, was $451,920. During the three months ended
<PAGE>19
September 30, 2000, Dragon had interest income of $172,370. Interest income for
the nine months ended September 30, 2000, was $391,695. Interest income is
related primarily to interest earned on cash received from the private placement
of common stock received during the last quarter of 1999.
Expenses. Total expenses for the three months ended September 30, 2000, were
$1,115,966. The major expense incurred in the second quarter of 2000 related to
the selling of pharmaceutical products and represented approximately 53% of
total expenses. The remaining major expense items are represented by Significant
expenses for the three months ended September 30, 2000, included depreciation of
intangible assets of $90,636, office and miscellaneous expenses of $54,418, and
salaries and benefits of $73,559. Management fees of $28,054 include $18,000
paid to one director for services during the third quarter ended September 30,
2000. The depreciation of intangible assets relates to the amortization of the
drug license to produce EPO.
Total expenses for the nine month period ended September 30, 2000, were
$2,971,211. The expenses relating to the selling of pharmaceutical products
represented approximately 47%. Other major expenses included stock option
compensation (7%) and other administrative expenses (46%).
Net and Comprehensive Loss. Dragon had a net loss of $425,053 and a
comprehensive loss of $362,975 for the three month period ending September 30,
2000. Calculated in the comprehensive loss for the period was a minority
interest gain of $62,078.
The Company's net loss for the nine month period ended September 30, 2000, was
$833,462. The comprehensive loss for the same period was $766,752 which includes
a minority interest gain of $66,710.
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 nine
months ended September 30, 2000. The loss per share for the nine month period
ending September 30, 2000, was $0.06. 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 pharmaceutical and biotechnological company that has commenced the
manufacture and marketing of pharmaceutical products in China through its 75%
equity interest in Nanjing Huaxin Biotech. Previously, the Company has raised
funds through equity financings to fund its operations and to provide working
capital. The Company may finance future operations through additional equity
financings, if necessary. As of September 30, 2000, the Company's working
capital was $8,518,433. As of December 31, 1999, the Company's working capital
was $8,405,788.
In September 1998, the Company raised $1 million through the sale of 2,000,000
shares of common stock. The proceeds raised were used working capital. In April
1999, the Company entered into a $600,000 loan agreement. The $600,000 loan
beared interest at 8% and matured in six months with the right of the Company to
extend the maturity date by an additional six months in September 1999. As an
additional inducement, the Company issued 90,000 shares of common stock to the
<PAGE>20
lender. In September 1999 the Company exercised its option to extend the loan by
a period of six months. This debt was subsequently converted into common stock.
On October 14, 1999, the Company entered into securities purchase agreements
with two investors located in Hong Kong. Under the terms of this agreement, the
investors purchased, in the aggregate, 600,000 shares of common stock at $2.50
per share, with the Company raising in the aggregate $1.5 million.
Administrative expenses.
On December 31, 1999, the Company closed a private placement raising $10,645,000
through the issue of 4,258,000 shares of common stock at a price of $2.50 per
share. $600,000 of the gross proceeds from the December 1999 offering
represented the conversion of the outstanding debt by the lenders into shares of
common stock of the Company at a price of $2.50 per share.
One million common shares were issued through the exercise of warrants that
expired on June 30, 2000. These warrants were issued to shareholders through the
acquisition of Allwin Newtech on August 17, 1998. Gross proceeds from the
exercise of the warrants were $1,000,000.
PART II. OTHER INFORMATION
Items 1, 3, and 4
None.
Item 2.(c)
On October 14, 1999, Dragon Pharmaceutical sold, in the aggregate, 600,000
shares of Common Stock at $2.50 per share to two investors located in Hong Kong.
Further, as part of the securities purachse agreement, investors received
warrants to purchase 600,000 shares of common stock in the aggregate at $2.50
per share. Each warrant is exercisable for a period of one year. The issuance of
these shares of common stock and warrants were to investors residing outside the
United States and were exempt pursuant to Regulation S. The company paid one
individual who resides outside the United States a finder's fee in the amount of
$105,000. On October 13 and 17, 2000, these two investors exercised their
warrants to purchase 600,000 shares of common stock. The exercise of the warrant
was exempt from registration pursuant to Regulation S.
Item 5
Acquisition Agreement with Alphatech Bioengineering Limited
On October 6, 2000, we entered into an acquisition agreement with
Alphatech Bioengineering Limited, a Hong Kong corporation owned by Mr. Longbin
Liu and Mr. Philip Yuen. Mr. Liu is our president and one of our directors and
Mr. Yuen is one of our directors. Under the terms of the acquisition agreement,
we have agreed to purchase for $4 million Alphatech Bioengineering's rights and
technology relating to the production of Hepatitis B vaccine through the
application of genetic techniques on hamster ovary cells, including the
<PAGE>21
culturing of such cells, which act as a host expression system for the
production of Hepatitis B vaccine protein, and the purification of Hepatitis B
vaccine protein from the culture of the cells.
In connection with entering into the acquisition agreement, Alphatech
Bioengineering has made certain representations regarding the development of a
cell-line of hamster ovary cells which act as a host expression system for the
production of Hepatitis B vaccine protein including:
o the cell-line of hamster ovary cells has been developed to the stage
where the hamster ovary cells have the capacity to express Hepatitis B
vaccine protein at levels in excess of 5 mg/liter;
o the technology includes industrial scale fermentation and purification
methods that are suitable for use in the commercial production of
Hepatitis B vaccine protein for incorporation in a Hepatitis B vaccine
for humans; and
o within three months of a production facility of sufficient capacity
being fully operational for industrial production, to the reasonable
satisfaction of Alphatech Bioengineering, and staffed and equipped
with a bioreactor system and purification process for the Hepatitis B
vaccine protein:
o the technology will have the capacity to support a sustained
production at the production facility of at least 1,000,000 doses
per year of Hepatitis B vaccine protein;
o production facility of Hepatitis B vaccine protein will yield at
least 5 mg/liter from the bioreactor and the recovery of the
purified Hepatitis B vaccine protein of acceptable commercial
quality meeting the standard of the State Drug Administration of
China from media which would yield at least 50% or 2.5 mg/liter
in the first three batches of commercial production; and
o the direct production costs in China, based upon current prices,
for the first one million doses of Hepatitis B vaccine, including
all costs directly associated with the manufacture of Hepatitis B
vaccine protein, will be less than US$1.00 per dose.
In the event any of the representations and warranties made by Alphtech
Bioengineering are breached by Alphatech Bioengineering, we will have the right
to require Alphatech Bioengineering to reimburse us for the $4 million purchase
price.
Alphatech Bioengineering's rights and technology relating to the
production of Hepatitis B vaccine is in the developmental stage, and Alphatech
Bioengineering has no commercial production of or sales of Hepatitis B vaccine.
The acquisition of Alphatech Bioengineering's rights and technology relating to
the development of Hepatitis B vaccine is subject to customary representations
and conditions. The aquisition was completed on October 23, 2000.
<PAGE>22
Item 6.
(a) Exhibit 10.10 Acquisition Agreement among Hogan Pharmaceutical Inc.,
Alphatech Bioengineering Limited, Mr. Longbin Liu and Mr. Philip Yuen.
(i) Incorporated by reference to the Company's pre-effective amendment No.
3 to registration statement on Form SB-2 (SEC filing No. 333-37064)
filed on October 20, 2000.
(b) Exhibit 27. Financial Data Schedule
(c) Reports on 8-K
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: November 9, 2000 /s/ DR. KEN CAI
------------------------------------
Dr. Ken Cai
Chief Financial Officer
(and authorized to sign on behalf
of the registrant)
