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 June 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 June 30, 2000: 16,064,750
<PAGE>2
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Balance Sheet
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
ASSETS
Current
Cash and cash equivalents $ 7,997,424
Term deposit 2,000,500
Accounts receivable 883,828
Inventories 804,268
Prepaid and deposits 926,317
------------
Total current assets 12,612,337
Fixed assets 2,779,010
Initial payment on the acquisition of Hua Xin -
Licence and permit 3,989,767
------------
Total assets $ 19,381,114
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loans $ 2,027,663
Accounts payable and accrued liabilities 1,233,308
Accounts payable - related parties -
Management fees payable - related parties 12,000
------------
Total current liabilities 3,272,971
------------
Minority interests 1,340,122
------------
Commitments and contingencies (Note 10)
Stockholders' Equity
Share capital
Authorized: 50,000,000 common shares at
par value of $0.001 each
Issued and outstanding: 16,064,750 common shares 16,065
Additional paid in capital 18,449,272
Accumulated other comprehensive income (loss) (30,789)
Accumulated deficit (3,666,527)
------------
Total stockholders' equity 14,768,021
------------
Total liabilities and stockholders' equity $ 19,381,114
============
The accompanying notes are an integral part of these financial statements.
<PAGE>3
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six-month Period Ended June 30, 2000
(Unaudited)
(Expressed in US Dollars)
<TABLE>
<CAPTION>
Accumulated Total
Additional other Stock-
Common stock paid-in Comprehensive Deficit comprehensive holders'
Shares Amount capital income (loss) accumulated income (loss) equity
---------- -------- ------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 964,750 965 963,785 - - 964,750
Allotted 250,000 common shares
at $6.25 per share - - 1,562,500 - - 1,562,500
Stock option compensation - - 188,365 - - 188,365
Other comprehensive income
- foreign currency translation - - - (80,838) - (80,838) (80,838)
Comprehensive income
- net (loss) for the period - - - (403,777) (403,777) - (403,777)
---------- -------- ------------ ---------- ------------ --------- ------------
Comprehensive income (loss) $ (484,615)
==========
Balance, June 30, 2000 16,064,750 $ 16,065 $ 18,449,272 $ (3,666,527) $ (30,789) $ 14,768,021
========== ======== ============ ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>4
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
(Expressed in US Dollars)
April 1 Six Months Six Months
2000 to Ended Ended
June 30 June 30 June 30
2000 2000 1999
---------- ------------ ------------
Sales $ 797,127 $ 1,458,912 $ -
Cost of sales 167,536 266,401 -
---------- ------------ ------------
Gross profit 629,591 1,192,511 -
Selling expenses (483,941) (800,825) -
Administrative expenses
- stock-based compensation - (188,365) (12,500)
- other administrative expenses (525,463) (831,055) (145,487)
---------- ------------ ------------
Operating loss (379,813) (627,734) (157,987)
Interest income 195,273 219,325 9,399
---------- ------------ ------------
Loss before minority interest (184,540) (408,409) (148,588)
Minority interest 15,543 4,632 -
---------- ------------ ------------
Net (loss) for the period $ (168,997) $ (403,777) $ (148,588)
========== ============ ============
(Loss) per share
Basic and diluted $ (0.03) $ (0.01)
============ ============
Weighted average number of
common shares outstanding
Basic and diluted 12,966,298 10,034,724
============ ============
The accompanying notes are an integral part of these financial statements.
Comparative figures for the corresponding period from April 1, 1999 to June 30,
1999 are not available. The Company had nominal operations for the first three
months of its fiscal year ended December 31, 1999.
<PAGE>5
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Cash Flows
Six-month Period Ended June 30, 2000
(Unaudited)
(Expressed in US Dollars)
2000 1999
----------- ------------
Cash flows from (used in) operating activities
Net (loss) for the period $ (403,777) $ (148,588)
Adjustments to reconcile net loss to
net cash used in operating activities:
- loan bonus fee - 90
- stock-based compensation expense 188,365 12,500
- depreciation of fixed assets and
amortization of licence and permit 303,052 10,269
- minority interests (4,632) -
----------- ------------
83,008 (125,729)
Changes in assets and liabilities:
- accounts receivable (243,085) -
- inventories (146,302) -
- prepaid expenses and deposits (467,377) (208,740)
- accounts payable and accrued liabilities (724,142) (1,126)
----------- ------------
(1,497,898) (335,595)
----------- ------------
Cash flows used in investing activities
Purchase of fixed assets (318,708) -
Purchase of term deposits (2,000,500) -
Purchase of licence (250,000) -
Initial payment on the acquisition of Hua Xin - (1,500,000)
----------- ------------
(2,569,208) (1,500,000)
----------- ------------
Cash flows from financing activities
Loan proceeds 1,411,140 600,000
Proceeds from issuance of shares 1,018,250 -
Proceeds from shares subscribed and allotted
in prior period, net of issuance costs 8,611,603 -
Funds contributed by non-controlling interest 403,380 -
----------- ------------
11,444,373 600,000
----------- ------------
Foreign exchange gain on cash held
in foreign currency 2,895 35,535
----------- ------------
Increase in cash and cash equivalents 7,380,162 (1,200,060)
Cash and cash equivalents, beginning of period 617,262 1,380,355
----------- ------------
Cash and cash equivalents, end of period $ 7,997,424 $ 180,295
=========== ============
The accompanying notes are an integral part of these financial statements.
<PAGE>6
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
1. Nature of Business
The Company was formed on August 22, 1989 as First Geneva Investments Inc.
under the laws of the State of Florida. The Company changed its name to
Dragon Pharmaceuticals Inc. on August 31, 1998. Pursuant to a share
exchange agreement, dated July 29, 1998, the Company acquired 100% of the
issued and outstanding shares of Allwin Newtech Ltd. ("Allwin") by issuing
7,000,000 common shares of the Company. This transaction is accounted for
as a reverse acquisition (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
(a) 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.
(b) Principles of Accounting
These financial statements are stated in US Dollars and have been
prepared in accordance with accounting principles generally accepted
in the United States.
(c) Fixed Assets
Depreciation is based on the estimated useful lives of the assets and
is computed using the straight-line method. Fixed assets are recorded
at cost. Depreciation is provided over the following useful lives:
Motor vehicle 10 years
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
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(d) Foreign Currency Transactions
The parent company, Allwin, Kailong and Huaxin maintain their
accounting records in their functional currencies (i.e., U.S. dollars,
U.S. dollars, Renminbi Yuan, and Renminbi Yuan, respectively). They
translate foreign currency transactions into their functional currency
in the following manner.
At the transaction date, each asset, liability, revenue and expense is
translated into the functional currency by the use of the exchange
rate in effect at that date. At the period end, monetary assets and
liabilities are translated into the functional currency by using the
exchange rate in effect at that date. The resulting foreign exchange
gains and losses are included in operations.
(e) Foreign Currency Translations
Assets and liabilities of the foreign subsidiaries (whose functional
currency is Renminbi Yuan) are translated into U.S. dollars at
exchange rates in effect at the balance sheet date. Revenue and
expenses are translated at average exchange rate. Gain and losses from
such translations are included in stockholders' equity, as a component
of other comprehensive income.
(f) Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(g) 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
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(h) 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.
(i) 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, accounts receivable,
short-term loans, accounts payable and accrued liabilities approximate
their fair value because of the short-term maturity 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.
(j) 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
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(k) Cash and Cash Equivalents
Cash equivalents usually consist of high liquid investments with
maturities of three months or less. As at June 30, 2000, cash
equivalents consist of commercial papers and term deposits.
(l) 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.
(m) Revenue Recognition
Sales revenue is recognized upon the delivery of goods to customers.
(n) 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.
(o) 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 June 30,
2000 are anti-dilutive, however, they may be dilutive in future.
<PAGE>10
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(p) 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
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
3. Acquisition of Allwin Newtech Ltd.
Pursuant to a share exchange agreement, dated July 29, 1998, the Company
issued 7,000,000 shares in exchange for all the issued and outstanding
shares of Allwin. The transaction resulted in the former shareholders of
Allwin owning the majority of the issued and outstanding shares of the
Company. Accounting principles applicable to reverse acquisition have been
applied to record this transaction. Under this basis of accounting, Allwin
has been identified as the acquirer and, accordingly, the consolidated
entity is considered to be a continuation of Allwin with the net
liabilities of the Company deemed to have been assumed by Allwin for a fair
market value of $1,636.
The net liabilities of the Company acquired by Allwin are summarized as
follows:
Current liabilities $1,636
======
4. Acquisition of Nanjing Huaxin Bio-pharmaceutical Co. Ltd. ("Huaxin")
Huaxin, a Chinese company, which the Company owns 75%, was formed to
acquire the following assets and liabilities from another Chinese company
engaged in the development, production and sale of certain pharmaceutical
products in China. The Company paid US$3,000,000 cash for its 75% interest
on June 11, 1999. The allocation of the acquisition costs, based on
appraised values as at June 11, 1999, are as follows:
Cash and cash equivalents RMB 750,000 US$ 90,909
Inventories 2,808,382 340,410
Fixed assets 12,397,202 1,502,691
Licence and permit 20,602,798 2,497,309
Accounts payable (3,558,382) (431,319)
---------- ---------
Net asset RMB 33,000,000 US$ 4,000,000
========== =========
75% thereof RMB 24,750,000 US$ 3,000,000
========== =========
<PAGE>12
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
5. Fixed Assets
June 30, 2000
-----------------------------------------
Accumulated Net book
Cost depreciation value
----------- ------------ -----------
Motor vehicles $ 100,234 $ 7,397 $ 92,837
Land lease 905,207 37,717 867,490
Office equipment and furniture 173,070 47,185 125,885
Land improvements 14,781 3,695 11,086
Leasehold improvements 805,691 68,897 736,794
Production equipment 1,193,648 248,730 944,918
----------- --------- -----------
$ 3,192,631 $ 413,621 $ 2,779,010
=========== ========= ===========
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 $252,705 for the period ended June 30, 2000.
6. Bank Loans
RMB 3,000,000, bearing interest at 5.85% per annum
and due on August 4, 2000 $ 362,083
RMB 2,000,000, bearing interest at 5.85% per annum
and due on September 21, 2000 241,388
RMB 7,800,000, bearing interest at 5.85% per annum
and due on January 21, 2001. The loan is secured
by the term deposit. 941,415
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. 482,777
------------
Total $ 2,027,663
============
The weighted average interest rate at June 30, 2000 was 5.79%.
<PAGE>13
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
7. Income Taxes
(a) Kailong and Huaxin are subject to income taxes in China on its taxable
income as reported in its statutory accounts at a tax rate in
accordance with the relevant income tax laws applicable to
Sino-foreign equity joint venture enterprises. However, pursuant to
the same income tax laws, Kailong and Huaxin are fully exempt from
income tax for five years starting from their first profit-making year
followed by a 15% corporation tax rate for the next three years.
Allwin is not subject to income taxes.
As at June 30, 2000, the parent company, Kailong and Huaxin have
estimated losses, for tax purposes, totalling approximately
$1,256,000, which may be applied against future taxable income.
Accordingly, there is no tax expense charged to the Statement of
Operations for the period ended June 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.
(b) The tax effect of temporary differences that give rise to the
Company's deferred tax asset (liability) are as follows:
June 30, 2000
Tax loss carryforwards $ 427,000
Stock-based compensation 64,000
Less: valuation allowance (491,000)
----------
$ -
==========
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate is as follows:
June 30, 2000
-------------
Federal statutory income tax rate 34%
Change in valuation allowance (34%)
----
Effective income tax rate -
====
<PAGE>14
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
8. Stock Options and Warrants
(a) A summary of the status of the Company's stock options as of June 30,
2000 and the changes during the period then ended is presented as
follows:
Weighted Average
Shares Exercise Price
--------- ----------------
Balance outstanding, December 31, 1999 1,520,000 $ 0.58
Granted 142,500 $ 5.40
Exercised (107,000) $ 0.50
--------- ----------
Balance outstanding, June 30, 2000 1,555,500 $ 1.03
========= ==========
Balance exercisable, June 30, 2000 1,303,750 $ 1.04
========= ==========
The weighted average remaining contractual life of the options
outstanding at June 30, 2000 was 3.30 years.
(b) Stock options outstanding as at June 30, 2000:
Exercise Price
Number of Options Per Share Expiry Date
----------------- -------------- -----------
800,000 $0.50 December 16, 2003
50,000 $0.50 June 15, 2001
275,000 $0.50 November 5, 2004
235,000 $0.50 November 9, 2004
60,000 $2.50 November 9, 2004
28,000 $0.50 January 5, 2005
107,500 $7.00 February 22, 2005
(c) Share purchase warrants outstanding as at June 30, 2000:
Exercise Price
Number of Warrants Per Share Expiry Date
------------------ -------------- -----------
600,000 $2.50 October 28, 2000
4,258,000 $2.50 January 1, 2001
<PAGE>15
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
8. Stock Options and Warrants (continued)
(d) 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. $68,040 were charged to income in 2000.
<PAGE>16
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
8. Stock Options and Warrants (continued)
(d) (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.
(e) Pro-forma information regarding Loss for the period and Loss per Share
is required under SFAS 123, and has been determined as if the Company
has accounted for its stock options under the fair value method of
SFAS 123. If compensation cost for the stock option plan had been
determined based on the fair value at the grant dates for awards under
the plan, consistent with the alternative method set forth under SFAS
123, the Company's loss for the period, basic and diluted loss per
share would have been increased on a pro-forma basis as indicated
below:
2000
Net loss for the period:
- as reported $ (403,777)
- pro-forma (1,212,819)
------------
Basic and diluted loss per share:
- as reported (0.03)
- pro-forma (0.09)
------------
<PAGE>17
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
8. Stock Options and Warrants (continued)
(e) (continued)
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>
<CAPTION>
Weighted
Number of Risk Free Expected Average
Year Options Dividend Expected Interest Lives Fair Value
Granted Granted Yields Volatility Rate in Years of Options
------------- ------------ ------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
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>
9. Related Party Transactions
The Company incurred the following expenses to the directors:
June 30, 2000
-------------
Management fees $36,000
=======
10. Commitments
(a) During the period, the Company and the other shareholder of Kailong
entered into an agreement that the Company will pay US$250,000 (paid)
and issue 250,000 common shares to increase the Company's interest in
Kailong to 95%. The Company is, therefore, committed to issue the
250,000 common shares.
(b) The Company has capital expenditure commitments of US $115,000 to
purchase certain bio-technology equipment.
(c) 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$664,000). RMB 1,000,000 (US$120,700) is
payable upon the signing of the agreement. The Company paid a deposit
of RMB 500,000 (US$60,300) in 1999. The Company is committed to pay
the remaining RMB 5,000,000 (approximately US$603,700).
<PAGE>18
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
10. Commitments (continued)
(d) 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$543,100). During the period,
the Company paid a deposit of RMB 4,000,000 (US$482,800). The Company
is committed to pay the remaining RMB 500,000 (approximately
US$60,300) according to the agreement.
(e) 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$362,100) per annum until June 11, 2009.
Minimum payments required for the next five years under the agreement
are as follows:
2001 RMB 3,000,000 US$ 362,100
2002 3,000,000 362,100
2003 3,000,000 362,100
2004 3,000,000 362,100
2005 3,000,000 362,100
2006 - 2009 10,375,000 1,252,200
-----------------------------------------------------------
Total RMB 25,375,000 US$ 3,062,700
======================================= ===================
11. Non-cash Financing Activities
During the period, 250,000 common shares were allotted for the acquisition
of additional 20% interest of Kailong (see Note 10a).
12. Comparative Figures
Certain 1999 comparative figures have been reclassified to conform with the
financial statement presentation adopted for 2000.
<PAGE>19
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 EPO in China. The Company increased the efficiencies in
the production of EPO by improving a proprietary high-yield mammalian cell line
and "vectoring process" which has been developed by Dragon. The Company
successfully achieved commercial production during the last quarter of
calendar 1999.
On March 30, 2000, the Allwin Newtech (a wholly-owned subsidiary of the Company)
entered into an agreement to increase its equity interest in Sanhe Kailong
Bio-pharmaceutical Co., Ltd. from 75% to 95%. The Company paid $250,000 and is
committed to issue 250,000 common shares to increase its equity interest. To
date, due to administrative delays, the shares have not yet been issued but are
represented as common shares allotted on the Company's financial statements.
Results of Operations
The Company initiated quarterly financial reporting in September 1999. For this
reason, no comparison is available between the three and six month periods
ending June 30, 1999 and June 30, 2000. The following is management's discussion
and analysis. Because the Company is beginning production, it should not be
indicative for the anticipated results of operation for the year end December
31, 2000.
Revenues. Revenue results primarily from the sale of EPO in China. Revenue for
the three months period ending June 30, 2000, was $797,127 and revenue for the
six months ended June 30, 2000 was $1,458,912. Cost of sales for the three
months ended June 30, 2000, of $167,536 is attributed to the production costs of
the pharmaceutical products. The cost of sales for the six months ended June 30,
<PAGE>20
2000, was $266,401. During the three months ended June 30, 2000, Dragon had
interest income of $195,273. Interest income for the six months ended June 30,
2000, was $219,325. 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 June 30, 2000,
were$1,009,404. The major expense incurred in the second quarter of 2000 related
to the selling of pharmaceutical products and represented approximately 48% of
total expenses. The remaining major expense items are represented by
administrative expenses.
Significant expenses for the three months ended June 30, 2000, included
depreciation of intangible assets of $133,927, bad debt write offs of $22,142,
and loan interest of $24,434. Management fees of $32,146 include $18,000 paid to
one director for services during the second quarter ended June 30, 2000. The
depreciation of intangible assets relates to the amortization of the drug
license to produce EPO.
Total expenses for the six month period ended June 30, 2000, were $1,820,245.
The expenses relating to the selling of pharmaceutical products represented
approximately 44%. Other major expenses included stock option compensation (10%)
and other administrative expenses (46%).
Net and Comprehensive Loss. Dragon had a net loss of $184,540 and a
comprehensive loss of $168,997 for the three month period endingJune 30, 2000.
Calculated in the comprehensive loss for the period was a minority interest gain
of $15,543.
The Company's net loss for the six month period ended June 30, 2000, was
$408,409. The comprehensive loss for the same period was $403,777 which includes
a minority interest gain of $4,632.
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 six
months ended June 30, 2000. The loss per share for the six month period ending
June 30, 2000, was $0.03. 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 currently has no plans for further equity financings.
However, the Company may finance future operations through additional equity
financings, if necessary. As of June 30, 2000, the Company's working capital was
$9,339,366. As of December 31, 1999, the Company's working capital was
<PAGE>21
$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 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.
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.
During the three months ended June 30, 2000, the Company received $964,750
through the exercise of warrants. These warrants were issued to shareholders
through the acquisition of Allwin Newtech on August 17, 1998. A total of 964,750
Common Shares were issued pursuant to the exercise of these warrants. An
additional 35,250 warrants were exercised prior to the end of the three month
period but the shares had not been issued as of June 30, 2000, and are therefore
not reflected in the Consolidated Statement of Stockholders' Equity.
PART II. OTHER INFORMATION
Items 1, 3, 4 and 5
None.
Item 2.
Warrants to purchase 1,000,000 shares of common stock that were issued to 14
foreign entities or persons in connection with the merger with Allwin Newtech in
August 1998, were exercised during the quarter ended June 30, 2000. The Company
received proceeds of $1 million which will be used for working capital. The
Company relied on Regulation S as an exemption from registration under the
Securities Act of 1933.
Item 6.
(a) Exhibit 27. Financial Data Schedule
(b) Reports on 8-K
None.
<PAGE>22
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: August 11, 2000 /s/ Dr. Ken Cai
-----------------------------------
Dr. Ken Cai
Chief Financial Officer
