Dragon Pharmaceutical Inc. (“Dragon” or the “Company” (TSX: DDD; OTC BB: DRUG) announced today that, as a result of a review of its accounting policies and applicable accounting pronouncements, the Company has concluded that the reduction of a future retirement benefit obligation related to the acquisition of a land use right from an unrelated former state-owned enterprise in China by Oriental Wave Holding Limited (“Oriental Wave”) in July 2003, should have been accounted for as a reduction to the recorded cost of the land use right instead of as a non-operating gain from extinguishment of debt, as previously disclosed in Oriental Wave’s 2004 financial statements. As a result, Oriental Wave’s 2004 financial statements will be restated to reflect such change in accounting treatment.
The reduction of the future retirement benefit obligation during 2004, totaling $1.135 million, which was recognized as a non-operating gain, should have been treated as a reduction to the recorded cost of the land use right. This adjustment will be reflected in a restatement retroactive to June 2004. As a result of the restatement, the total assets of Oriental Wave at the end of 2004 will be reduced by $1.12 million to $90.34 million, or 1.22% of the total assets prior to the restatement. On a going forward basis, any similar reduction of the retirement benefit obligation will be treated as a reduction to the recorded cost of the land use right.
Since Oriental Wave’s 2004 financial results became the opening balance of Dragon’s 2005 financials due to the reverse merger in January 2005, the Company has also restated its financial statements for the three months ended March 31, 2005 to reflect the impact from the restatement of Oriental Wave’s 2004 financial statements. As a result of this restatement, Dragon’s net income for the three months ended March 31, 2005 increased by $5,676 to $1,240,756, and total assets decreased by $1.12 million to $96.15 million at March 31, 2005, equivalent to 1.15% of total assets prior to the restatement. Earnings per share of $0.02 did not change for the three months ended March 31, 2005.
The restatement involved the accounting treatment of a non-cash transaction during the year ended December 31, 2004 and the three months ended March 31, 2005. The restatement did not affect the cashflow or liabilities and had no significant effect on the operations, financial position or cash flows of the Company. As a result of the restatement, future amortization expense with respect to the land use right will decrease accordingly over the 50 year amortization period.
The Company has filed its Quarterly Report on Form 10-QSB for the three months ended June 30, 2005 with the Securities and Exchange Commission today. The restated financial statements for Oriental Wave for the year ended December 31, 2004 will be filed under Form 8-K and the restated financial statements for the three months ended March 31, 2005 will be filed by amendment shortly thereafter.