SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2000 Commission File Number 0-27937
DRAGON PHARMACEUTICAL INC.
(Exact name of Registrant as specified in its charter)
Florida 65-0142474
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
543 Granville Street, Suite 1200
Vancouver, British Columbia V6C 1X8
(Address of Principal Executive Offices)
(604) 669-8817
(Registrant's telephone number including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $0.001
Indicate by check mark whether the issuer (1) has 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 issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
-------- -------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State issuer's revenues for its most recent fiscal year: $3,175,561
The aggregate market value of the issuer's voting stock held by non-affiliates
of the issuer based upon the average bid and asked prices of such stock as of
March 15, 2001, was $17,628,406.
The number of shares outstanding of the issuer's common stock as of March 15,
2001, was 16,706,000.
Documents Incorporated By Reference: None
2
With the exception of historical facts stated herein, the following
discussion may contain forward-looking statements regarding events and financial
trends which may affect Dragon Pharmaceutical Inc.'s future operating results
and financial position. Such statements are subject to risks and uncertainties
that could cause Dragon Pharmaceutical Inc.'s actual results and financial
position to differ materially from those anticipated in such forward-looking
statements. Factors that could cause actual results to differ materially
include, in addition to other factors identified in this report, that Dragon
Pharmaceutical has incurred losses since its inception and needs additional
capital to complete its business plan, all of which factors are set forth in
more detail in the sections entitled "Risks Associated With Dragon
Pharmaceutical" and "Management's Discussion and Analysis" herein. Readers of
this annual report are cautioned not to put undue reliance on "forward looking"
statements which are, by their nature, uncertain as reliable indicators of
future performance. Dragon Pharmaceutical Inc.'s disclaims any intent or
obligation to publicly update these "forward looking" statements, whether as a
result of new information, future events, or otherwise.
As used in this annual report, the terms "we," "us," "our," and the
"Dragon" shall mean Dragon Pharmaceutical Inc. and its subsidiaries unless
otherwise indicated.
Part I
Item 1. Business
General
We are a development stage pharmaceutical and biotechnological company
whose business plan is to develop, manufacture and market pharmaceutical
products in China. We have acquired a 75% interest in a drug manufacturing
company called Nanjing Huaxin Biotech Co. Ltd. located in Nanjing City, China
and are currently implementing our proprietary technology which will allow
Nanjing Huaxin Biotech to produce drugs such as EPO in an efficient and
cost-effective manner. Our strategy is to use our biotechnological expertise to
produce and market pharmaceutical products primarily in China at costs which
will be lower than those currently available.
Corporate History
Merger with First Geneva Investments, Inc.
We were originally formed on August 22, 1989, as First Geneva
Investments, Inc. First Geneva Investments was formed for the purpose of
evaluating and acquiring businesses. From 1989 to 1998, First Geneva Investments
had no significant activity. On August 17, 1998, pursuant to a share exchange
agreement, First Geneva Investments issued 7,000,000 shares of its common stock
and 2,000,000 warrants with each warrant having the right to acquire one-half
share of common stock at $0.50 per half share, or 1,000,000 shares of common
stock at $1.00 per share in the aggregate, in exchange for all of the
outstanding shares of Allwin Newtech Ltd., a British Virgin Islands corporation.
Allwin Newtech Ltd. was formed on February 10, 1998, for the purpose of
developing pharmaceutical products in China. Allwin Newtech owns certain
technology used to enhance the efficiency of producing EPO. As a result of the
acquisition, the former shareholders of Allwin Newtech became 87.5% shareholders
of First Geneva Investments and Allwin Newtech became its wholly-owned
subsidiary. On September 21, 1998, First Geneva Investments changed its named to
Dragon Pharmaceutical Inc. Prior to the reorganization, First Geneva Investments
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and its officers, directors and shareholders were not affiliated with Allwin
Newtech and its officers, directors and shareholders.
Our Joint Ventures with Other Companies
Sanhe Kailong Bio-Pharmaceutical Limited
On April 18, 1998, Allwin Newtech entered into a contract to acquire a
75% interest in a new joint venture called Sanhe Kailong Bio-pharmaceutical
Limited, a corporation organized under the laws of China. Since that time,
Allwin Newtech has increased its interest in Sanhe Kailong Bio- pharmaceutical
Limited to 95%. The other 5% joint venture partner is Sinoway Biotech Limited.
Sanhe Kailong was formed in 1998 for the purpose of developing, manufacturing
and marketing pharmaceutical products in China.
For its initial 75% interest, Allwin Newtech agreed to contribute
approximately $1,000,000 and its technology to Sanhe Kailong. For its initial
25% interest, Sinoway Biotech was to contribute a contract to purchase a license
to manufacture EPO and other drugs in China and a right to acquire a long- term
lease of 25 acres of land at a pharmaceutical park located in the Yanjiao
Special Economic Zone, China. Upon our acquisition of Allwin Newtech, we assumed
Allwin Newtech's interest in Sanhe Kailong Bio-pharmaceutical and are currently
evaluating our options under the joint venture agreement. To increase Allwin
Newtech's position from 75% to 95% in Sanhe Kailong, on March 19, 1999, we
agreed to pay $250,000 and to issue 250,000 shares of our common stock to
Sinoway Biotech. Sinoway Biotech will continue to hold the remaining 5%
interest. Messrs. Ken Cai, Greg Hall and Longbin Liu serve as directors of Sanhe
Kailong. At this time, we have neither contributed the $1,000,000 for research
and development nor our technology to Sanhe-Kailong. We have paid $250,000 to
Sinoway Biotech to increase our interest in the joint venture but have not yet
issued the 250,000 shares of stock. Due to our acquisition of Nanjing Huaxin and
its license to manufacture EPO, we determined not to pursue EPO manufacturing
through the Sanhe Kailong joint venture. Consequently, the contract to purchase
a drug manufacturing license held by Sinoway Biotech was not deemed necessary
and was therefore not contributed to Sanhe Kailong. Currently, Sanhe Kailong has
no operations. Although no decision has been made, we may consider having Sanhe
Kailong develop other pharmaceutical drugs. Sanhe Kailong was formed by Allwin
Newtech for the purpose of the joint venture. Neither we nor Allwin Newtech had
affiliation with Sinoway Biotech prior to the joint venture's formation.
Nanjing Huaxin Biotech Co. Ltd.
On July 27, 1999, Allwin Newtech closed a share transfer agreement with
the Nanjing Medical Group Ltd. whereby, effective June 11, 1999, Allwin Newtech
purchased from the Nanjing Medical Group 75% of its equity interest in Nanjing
Huaxin Biotech Co. Ltd. The total purchase price for the 75% equity interest was
$4.2 million. Of the $4.2 million, $1,218,100 had been allocated as working
capital for the joint venture. As at February 29, 2000, Dragon had fulfilled all
payment obligations for the Nanjing Huaxin acquisition.
Nanjing Huaxin Biotech Co. was formed and operates pursuant to a Sino-
Foreign Joint Venture Contract between The Nanjing Medical Group Company Limited
and Allwin Newtech. Under the terms of the Joint Venture Contract, Nanjing
Huaxin Biotech's board of directors consists of five directors of which Allwin
Newtech has the right to select three directors, including the chairman. Allwin
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Newtech has selected Messrs. Liu, Cai and Hall as its representatives. Mr. Liu
also serves as chairman to Nanjing Huaxin Biotech. The Nanjing Medical group has
the right to select the remaining two representatives.
Because of Allwin Newtech's majority ownership and majority
representatives on the Nanjing Huaxin Biotech's board, Allwin Newtech controls
Nanjing Huaxin Biotech's operations in the ordinary course of business. However,
the following transactions by Nanjing Huaxin Biotech requires the unanimous
approval by its board: (1) amending Nanjing Huaxin Biotech's articles of
association; (2) liquidating Nanjing Huaxin Biotech; (3) increasing or
decreasing Nanjing Huaxin Biotech's registered capital; (4) mortgaging Nanjing
Huaxin Biotech's assets; and (5) merging Nanjing Huaxin Biotech.
Nanjing Huaxin is located in Nanjing City, China and owns a license and
production permit for the manufacture of EPO in China. Nanjing Huaxin currently
manufactures approximately [300,000] doses of EPO annually; however we believe
that the Nanjing Huaxin EPO production has been hampered by out-of-date
technology. As part of our business strategy, we have supplied management
assistance and capital investment to upgrade Nanjing Huaxin's facilities and
implemented our production technology to increase production efficiency and
decrease production costs. Nanjing Huaxin was previously part of Nanjing
Research Institute of Military Medical Science, a corporation operated by the
Chinese military. We had no affiliation with Nanjing Medical Group or Nanjing
Huaxin Biotech prior to entering into the share transfer agreement.
Nanjing Huaxin currently produces EPO in China for kidney dialysis
applications and Chinese governmental approval for cancer therapy applications
is anticipated by the fall of 2001.
Originally, we contemplated entering the EPO market by acquiring an EPO
license and building a manufacturing facility through our interest in Sanhe
Kailong. This strategy would have required a large capital investment by us. In
light of the anticipated capital investment in Sanhe Kailong, we acquired a 75%
interest in Nanjing Huaxin which has an existing facility and necessary permits
and licenses. Nanjing Huaxin has previously been producing an estimated 300,000
vials of EPO per year and markets its EPO under the name "Ning Hong Xin." We are
currently evaluating our options regarding our investment in Sinoway Biotech.
Marketing and License Agreements
In August and October of 2000, Allwin Biotrade Ltd., our wholly-owned
subsidiary, entered into a series of marketing and license agreements.
On August 9, 2000, Allwin Biotrade entered into a marketing and license
agreement with Duopharma (Malaysia) SDN.BMD granting Duopharma an exclusive
license to sell, formulate, vial and package EPO under the name "Hemotin" for
the use in the treatment of anemia associated with chronic renal failure, as
well as for any other medical purpose approved by the governing regulatory
bodies of Malaysia or the People's Republic of China, for use in Malaysia,
Singapore, Indonesia, Brunei, East Timor, Cambodia, Thailand, Vietnam, the
Philippines, Laos, and Myanmar. Duopharma will be responsible for obtaining, at
its expense, all registrations from applicable regulatory authorities in order
to permit the sale of EPO in Duopharma's market areas, although Allwin Biotrade
will be responsible in assisting Duopharma in obtaining such approvals. Further,
Duopharma will have the right of first refusal for the sale of additional
biotechnology or pharmaceutical drugs for which Allwin Biotrade may from time to
time have rights to license or sublicense. The Duopharma marketing and license
agreement is for a period of five years, and renews automatically for successive
one year terms.
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On October 2, 2000, Allwin Biotrade entered into a marketing and license
agreement with Fargin S.A., a company having offices in Uruguay, granting Fargin
an exclusive license to sell, formulate, vial and package EPO under the names
"Hemotin" and "NingHongXin" for the use in the treatment of anaemia associated
with chronic renal failure, as well as for any other medical purpose approved by
the governing regulatory bodies of Brazil or the People's Republic of China, for
use in Brazil, the Dominican Republic, Argentina, Uruguay, Chile, and Paraguay.
Fargin will be responsible for obtaining, at its expense, all registrations from
applicable regulatory authorities in order to permit the sale of the EPO in
Fargin's designated market, although Allwin Biotrade will be responsible in
assisting Fargin in obtaining such approvals. Further, Fargin will have the
right of first refusal for the sale of additional biotechnology or
pharmaceutical drugs for which Allwin Biotrade may from time to time have rights
to license or sublicense. The Fargin marketing and license agreement is for a
period of seven years, and renews automatically for successive two year periods.
On October 8, 2000, Allwin Biotrade entered into a marketing and license
agreement with Yoo & Yoo BioTech Co., Ltd., a company having offices in the
Republic of Korea, granting Yoo & Yoo an exclusive license to sell, formulate,
vial and package EPO under the name "Hemotin" and "NingHongXin" for the use in
the treatment of anemia associated with chronic renal failure, as well as for
any other medical purpose approved by the governing regulatory bodies of the
People's Republic of China, for use in the Republic of Korea and the Democratic
People's Republic of Korea. Yoo & Yoo will be responsible for obtaining, at its
expense, all registrations from applicable regulatory authorities in order to
permit the sale of the EPO Yoo & Yoo's market areas although Allwin Biotrade
will be responsible in assisting Yoo & Yoo in obtaining such approvals. Further,
Yoo & Yoo will have the right of first refusal for the sale of additional
biotechnology or pharmaceutical drugs for which Allwin Biotrade may from time to
time have rights to license or sublicense. The Yoo & Yoo marketing and license
agreement is for a period of seven years, and renews automatically for
successive one year periods.
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 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 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
such 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;
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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 does 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 Alphatech
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.
Subsequent to the end of the fiscal year, on March 22, 2001, the Company
entered into a letter of intent with Alphatech to allow the Company to pursue
additional options for the Hepatitis B Vaccine project. Under the terms of the
letter of intent, the Company will explore different options for the Hepatitis B
Vaccine project including, but not limited to, joint venture partnerships,
establishing a production facility, and selling the project to a third party.
In the event that the Company does not find an option suitable to the
Company within nine months from the date of the Definitive Agreement, Dr.
Longbin Liu, one of the principals of Alphatech, will repurchase the Hepatitis B
Vaccine project and assume operational development. The purchase price will be
US $4.0 million, which was the purchase price which Dragon originally paid to
Alphatech.
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Pharmaceutical Products
Erythropoietin or EPO. EPO is a glycoprotein that stimulates and
regulates the rate of formation of red blood cells. In the adult human, EPO is
produced by the kidneys and acts on precursor cells to stimulate cell
proliferation and differentiation into mature red blood cells. Kidney disease
and chemotherapy or radiation therapy for treating cancer may impair the body's
ability to produce EPO and, in turn, reduce the level of red blood cells to less
than one-half that of healthy humans. The shortage of red blood cells leads to
insufficient delivery of oxygen throughout the body. The result is anemia, which
afflicts 90% of all dialysis patients. Symptoms of anemia include fatigue and
weakness.
One of the treatments for anemia is to provide EPO protein. This
treatment is administered through dialysis tubing or by injection approximately
three times per week, either intravenously or subcutaneously. EPO is most
commonly administered to people with chronic renal failure, HIV patients being
treated with anti-viral drugs, and cancer patients on chemo or radiation
therapy. The treatment is less dangerous and generates fewer adverse side
effects than the alternatives, which include blood transfusions and androgen
therapy. However, side effects of EPO may include hypertension, headaches,
shortness of breath, diarrhea, rapid heart rate and nausea.
While EPO has been tested to be effective in treating anemia, other
drugs and treatments currently exist or are in development which can treat
anemia. These alternative drugs or treatments could be proven more effective,
less expensive or preferable to the Chinese customer than EPO. The inability of
EPO to compare favorably to these alternative drugs would have an adverse affect
on our business objectives.
Proprietary Biotechnology
We have achieved enhanced efficiencies in the production of EPO by
Nanjing Huaxin by introducing a high-yield mammalian cell line developed in
China. Our scientists designed a unique plasmid vector for expression of target
genes in mammalian cells and constructed the EPO-expression CHO (Chinese Hamster
Ovary) cell line using this technology. The science behind our technology is
summarized below.
CHO cells are used for obtaining the EPO-expression cell lines. CHO
cells have the ability of proliferating indefinitely in culture and are the most
widely-used mammalian cells for producing recombinant proteins. The CHO
cell-based expression system is considered the industry standard and is used by
us for protein production.
In order to construct a CHO cell line, which expresses a particular
protein, the genetic materials encoding the sequences of the desired protein
(cDNA) are inserted into a plasmid vector. The plasmids are encapsulated in
liposomes and then used to transfect the CHO cells. In addition to delivering
the desired cDNA into CHO cells, it is the plasmid vector that largely
determines whether the high yield of the recombinant protein production by the
CHO cells has or has not been "transfected" (i.e., genetically modified by the
uptake of the genetic material). The plasmid vector will allow the amplification
of itself together with the cDNA of desired protein inside the CHO cells under
certain conditions. This will lead to a higher level production of the desired
protein by the transfected CHO cells.
In addition to the protein genetic information that the plasmid vector
transports into the CHO cells, several marker genes are also included within the
plasmids. These genes produce enzymes that can be detected to provide an
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indication that the cells are transfected. This will be used to select the
transformed cells from the unmodified cells. Some of the marker genes are used
to induce the amplification of cDNA of the desired protein in the transformed
cells. More cDNA copies would translate into a higher yield of the protein.
Through a selection process, clones of the CHO cells with stable growth and the
highest level of expression of the desired protein are selected. During this
process, various techniques are used to amplify the number of copies of the cDNA
that codes for the desired protein.
These selected clones will be expanded into large volumes and stored in
aliquots as the Master Cell Banks ("MCB") for large-scale protein production.
The CHO cell culture systems for industrial production of recombinant proteins
are variable for a few months of sustained protein production. After that, new
cells from the MCB will be scaled up for another cycle. The protein produced by
the CHO cells will be secreted into the media during the culture and the media
obtained will be used to purify the desired protein.
Research and Development
We have developed our own technology to construct a unique plasmid
vector. This plasmid vector is used for constructing a CHO cell line, which
produces EPO at high yields. We expect this technology to increase EPO
production and reduce the cost of EPO production.
The yield of our EPO-expression CHO cell line was tested at the Beijing
Institute of Microbiology and Epidemiology in May of 1999. EPO production was
calculated by measuring the EPO levels in the harvested media using ELISA. The
yield of the results exceeded the estimated yields achieved by another
manufacturer of EPO, and the estimated yields achieved by other Chinese
producers.
Our research and development is conducted in China and led by Dr. Liu.
These activities are carried out by employees of Nanjing Huaxin as well as
outside consultants.
China's EPO Market
Sales of EPO in the Chinese market have been less than elsewhere in the
world because current sales prices make it too expensive for many of the
patients who could benefit from it.
China is in the process of finalizing its health care system and health
insurance plan, and if established, the ability to purchase prescription drugs,
including EPO, is expected to increase. For example, the health insurance plan
is expected to have mandatory coverage for dialysis. A dialysis patient needs at
least 80-100 doses of EPO per year. This will translate into a market demand in
China of 50 million doses per year of EPO for dialysis alone. The coverage for
EPO application for cancer related and other types of anemia is also expected.
Considering the 2 million cases of cancer diagnosed in China each year, this
well greatly expand the EPO market. Due to the size and complexity of
instituting a healthcare system and health insurance plan in China, we are
unable to predict when such health system will be implemented or when health
insurance may become generally available.
There are three sources of EPO in the Chinese marketplace. First, Amgen
and Kirin service the market through offshore production facilities. However,
the price to the consumer is prohibitive because of tariffs and a value added
tax that combined add about 30% to the cost per vial. Second, there are
approximately 5 existing domestic producers of EPO similar to Nanjing Huaxin. We
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believe that EPO can be freely produced and sold in China without infringing the
patent rights of Kirin-Amgen (the U.S. patent holder) because no administration
protection was filed with the China before EPO was exported to China.
Furthermore, EPO is not currently subject to the U.S.-China agreement on
intellectual property.
Dragon believes that a lower price would allow non-governmental workers
the ability to afford EPO and would increase the likelihood of EPO being
included on the reimbursement list of drugs that are supplied at no charge to
government workers with prescriptions. We currently sell EPO at approximately
$11.00 per dose. We plan to maintain our costs by producing domestically, thus
avoiding import duties, and by producing with high-yield vector technology, thus
avoiding the perceived quality and inefficient yield problems of existing
domestic producers. During the last quarter of 1999, we produced 92,000 doses of
EPO and during the first quarter of this year, we produced approximately 175,000
doses. Comparative sales were 36,625 doses during the last quarter of 1999 and
58,870 doses for the first quarter of 2000. Sales for the year ended December
31, 2000, were 305,847 doses.
The third source of EPO is represented by Sinogen (China) Ltd., a Hong
Kong subsidiary of U.S.-based Sinogen International Co. Ltd. Sinogen (China)
reached an agreement in 1998 with the shareholders of the Shandong Yongming
Vivogen Pharmaceutical Co. Ltd. to establish a new joint venture to research and
develop EPO. This EPO was developed by the Nanjing Research Institute of
Military Medical Sciences and the Hainan Yalong Institute of Biomedical
Sciences. In October 1996, the Ministry of Health granted a new drug certificate
to the drug and approval to start production was received in 1997. To the best
of our knowledge, Sinogen (China) is capable of producing between 500,000 and 1
million doses of EPO per year but is currently producing less than 300,000 doses
per year. We do not know, however, the selling price of EPO per dose sold by
Sinogen (China). The EPO drug license utilized by Sinogen (China) was granted to
the former owners of the production facility. Sinogen (China) bought the
existing company with the license and the production facility. It is still
structured as a joint venture company and Sinogen (China) is the majority
shareholder.
Competition
The world market for EPO is approximately $3 billion in annual sales and
is growing. The market is dominated by three firms: Amgen Inc. of Thousand Oaks,
California; Ortho Pharmaceutical Corp., a subsidiary of Johnson & Johnson, Inc.
of New Brunswick, New Jersey; and Kirin Brewery Company, Limited of Japan. EPO
is marketed by Amgen as "Epogen," by Johnson & Johnson as "Procrit/Eprex" and by
Kirin as "Espo." A fourth participant in the international EPO market is Roche
Holding AG of Switzerland, which markets an EPO drug with a different heritage.
Amgen was granted United States rights to market EPO under a licensing
agreement with Kirin- Amgen, Inc., a joint venture between Kirin and Amgen that
was established in 1984. Johnson & Johnson acquired the rights to EPO from
Kirin-Amgen for all treatments except kidney dialysis in the United States and
for all uses outside the United States in 1985. Both Amgen and Kirin
individually manufacture and market EPO for China and Japan. These international
drug companies all have more financial resources than we do.
In addition to these international drug companies, we will be competing
with existing and potential domestic producers such as Sunshine and Sinogen.
Many of our competitors may have greater financial, technical and manufacturing
resources than we have. These resources would allow our competitors to respond
more quickly to new or emerging advancements in the drug industry and to devote
greater resources to the development, promotion and sale of their products.
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We expect to have a competitive advantage due to our high production
yield which should result in larger profit margins compared to other domestic
producers. We will continue to have our EPO product included on the government
reimbursement list although other EPO producers are also represented on this
list. However, we intend to market our EPO product at a cost that is lower than
competitors which is expected to give us a competitive advantage.
Due to China's growing market for pharmaceutical products competition
among drug producers is expected to increase during 2001. After then, we
anticipate that the EPO producers with the strongest marketing networks, best
quality and price, and highest market shares will survive to service the EPO
market in China.
Potential competition to EPO market includes other products or
technologies that are successful in treating anemia. Hoechst Marion Roussel is
currently conducting clinical trials on gene-activated erythropoietin for the
treatment of anemia, while Alkermes, Inc. of Cambridge, Massachusetts and
Johnson &Johnson are currently conducting clinical trials with a sustained
delivery formulation of Epoetin alfa for the treatment of anemia. Amgen has sole
rights to Novel Erythropoiesis Stimulating Protein, a second-generation EPO
molecule that will pose serious competition to the existing products because it
offers the possibility of less frequent dosing (i.e., once a week rather than
three times a week). Phase I clinical trials have commenced in pre-dialysis
patients, and Amgen expects to begin studies in chemotherapy-induced anemia this
year.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties that could increase their ability to reach customers in the
Chinese market. Such existing and future competition could affect our ability to
penetrate the Chinese market and generate sales revenues. Determining the
degree, intensity and duration of competition or the impact of such competition
on our financial and operating results are uncertain. No assurances can be given
that we will be able to compete successfully against current and future
competitors, and any failure to do so would have a material adverse effect on
our business.
Intellectual Property, Government Approvals and Regulations
We have received legal advice that the development, production or
marketing of EPO in China is not subject to U.S. patents currently held by
Kirin-Amgen because no corresponding patent was filed in China. Also, no
administrative protection has been filed on EPO with the Chinese government
authorities by Kirin-Amgen. In addition, we do not anticipate that any such
patent or administrative protections will be imposed by U.S.-China agreements on
intellectual property. As a result, we have not sought to obtain any rights or
licensing from patent holders for the production or marketing of EPO in China.
However, there is no assurance that U. S. patent holders or licensees may not
attempt to assert claims of patent infringement in order to curtail or prevent
the our production and sale of EPO in China.
The development and manufacture of EPO requires a license and permit
from the Ministry of Health, China. Our subsidiary Nanjing Huaxin currently is
licensed to make and sell EPO for kidney dialysis applications. It is
anticipated that governmental approval to use EPO for additional applications
such as cancer related anemia, pregnancy related anemia and surgery recovery
will be granted later this year. The Good Manufacturing Practices license
remains valid until August 18, 2005, and is renewable at that time. There are no
restrictions on the license or permits other than the requirement that the EPO
drug be manufactured in compliance with Chinese Good Manufacturing Practices,
and the drug may be sold for authorized medical purposes (such as anemia).
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Our technology is not protected by any patents or copyrights nor do we
intend to seek any such protection. We require all our research employees to
sign confidentiality agreements regarding their work. However, without patent or
copyright protection, we may not be able to prevent duplication of our vector
technology by competitors.
Doing Business in China
Our business is being conducted in China and will be subject to the
political, social and economic environment in the People's Republic of China.
China is controlled by the Communist Party of China. Under its current
leadership, China has been pursuing economic reform policies, including the
encouragement of private economic activity and greater economic
decentralization. However, the Chinese central government has exercised and
continues to exercise substantial control over virtually every sector of the
Chinese economy. Accordingly, the Chinese government actions in the future,
including any decision not to continue to support current economic reform
programs and to return to a more centrally planned economy, or regional or local
variations in the implementation of economic reform policies, could have a
significant effect on economic conditions in China or particular regions
thereof. Economic development may be further limited by the imposition of
austerity measures intended to reduce inflation, the inadequate development or
maintenance of infrastructure or the unavailability of adequate power and water
supplies, transportation, raw materials and parts, or a deterioration of the
general political, economic or social environment in the PRC, any of which could
have a material adverse effect on our business, financial condition and results
of operations. Moreover, economic reforms and growth in China have been more
successful in certain provinces than others, and the continuation or increase of
such disparities could affect the political or social stability of China.
If we were required to move our manufacturing operations outside of the
China, our potential profitability, competitiveness and market position could be
materially jeopardized, and there could be no assurance that we could continue
our operations. Our business and prospects are dependent upon agreements with
various entities controlled by Chinese governmental instrumentalities. The
failure of such entities to honor these contracts, or the inability to enforce
these contracts in China could adversely affect our business operations. There
can be no assurance that assets and business operations in China will not be
nationalized, which could result in the total loss of our investment in China.
The legal system of China relating to foreign investments is relatively
new and continues to evolve thus creating uncertainty as to the application of
its laws and regulations in particular instances. Definitive regulations and
policies with respect to such matters as the permissible percentage of foreign
investment and permissible rates of equity returns have not yet been published.
Furthermore, statements regarding these evolving policies have been conflicting,
and any such policies, as administered, are likely to be subject to broad
interpretation and discretion and to be modified, perhaps on a case-by-case
basis. As a legal system in China develops with respect to these new types of
enterprises, foreign investors may be adversely affected by new laws, changes to
existing laws (or interpretations thereof) and the preemption of provincial or
local laws by national laws. In circumstances where adequate laws exist, it may
not be possible to obtain timely and equitable enforcement thereof.
Suppliers
Nanjing Huaxin produces the materials for EPO. The medium used for
culturing cells is commercially available from several sources.
12
Customers
Our customers are those who were previous customers through Nanjing
Huaxin. We intend to expand this customer base through an expanded marketing
group at Nanjing Huaxin.
We began realizing revenue in 1999 from the sale of EPO by our
subsidiary Nanjing Huaxin. Nanjing Huaxin was producing EPO at the time of our
acquisition. However, its production yields were low and its technology
outdated. We have begun to upgrade and improve Nanjing Huaxin's production
facilities and to implement our technology to increase EPO production at these
facilities.
Employees
As of December 31, 2000, we had no employees but engaged three
consultants, Messrs. Liu, Maskerine and Walsh, to perform administrative
services. We expect to commence hiring full and/or part-time employees during
the calendar year 2001. Nanjing Huaxin has approximately 100 employees in China.
Sanhe Kailong has no employees.
Risks Associated With Dragon Pharmaceutical
We have a limited operating history and we have incurred losses since our
founding in February 1998, and expect such losses to continue for the
foreseeable future.
Since our primary business operations only commenced in July 1999, we do
not have a historical record of revenues nor an established business track
record which makes future performance very difficult to predict. There is no
assurance that we will be able to develop a sufficiently large production
capacity and customer demand to be profitable.
We have incurred operating losses since our founding and for the year
ended December 31, 2000, reported an operating loss of $3,641,231. Due to our
need to develop our manufacturing capabilities and expand our customer base, we
anticipate further operating losses through at least the current calendar year
2001 and the foreseeable future.
We may need additional capital to finance our operations and to develop
new products and if we are unable to secure additional capital, if needed, this
would adversely affect our business.
Because we currently do not have sufficient revenues to support our
activities, we intend to fund our operations with our current working capital.
If our losses continue, we may be required to raise additional capital to fund
our operations and finance our research and development. Traditionally, we have
relied primarily on the sale of common stock to meet our operations and capital
requirements. Any equity financing could result in dilution to our then-existing
stockholders. Debt financing will result in interest expense, and if convertible
into equity, could also dilute then-existing stockholders. If we were unable to
obtain financing in the amounts and on terms deemed acceptable, our business and
future success may be adversely affected.
13
Nanjing Huaxin Biotech Co. Ltd. Nanjing has had losses since our
acquisition and will continue to incur losses for the foreseeable future.
In July 1999, we acquired our 75% interest in Nanjing Huaxin Biotech Co.
Ltd. which produces EPO in China. Nanjing has recognized an operating loss for
the years ended December 31, 1999 and 2000. We expect such operating losses to
continue until the recent plant improvements and our enhanced production
technology is fully realized. Although for the years end December 31, 1999 and
2000, we realized revenues of approximately $990,000 and $3,175,561,
respectively, from our ownership interest in Nanjing, these revenues have not
been sufficient to offset operating costs due primarily to plant improvements
and implementation of our proprietary production technology. We expect to invest
an additional $1,000,000 over the next 12 months in order to complete the plant
improvements and new production processes for the manufacturing of EPO.
Our joint venture partner has the power to prohibit certain transactions
proposed by us regarding Nanjing Huaxin Biotech Co. Ltd.
Under the terms of the Sino-Foreign Joint Venture Contract of Nanjing
Huaxin Biotech Co., we, through Allwin Newtech, have the power to control
Nanjing Huaxin Biotech in the ordinary course of business. However, certain
transactions, including liquidating Nanjing Huaxin Biotech, amending Nanjing
Huaxin Biotech's articles of association, mortgaging Nanjing Huaxin Biotech's
assets, increasing or decreasing Nanjing Huaxin Biotech's registered capital and
merging Nanjing Huaxin Biotech requires the approval by our joint venture
partner. Therefore, even though we believe that a certain transaction may be
beneficial to Nanjing Huaxin Biotech and its shareholders, in the event we do
not receive the approval of our joint venture partner, we will be unable to
complete the proposed transaction involving Nanjing Huaxin Biotech.
The potential risks of political, social or economic instability in the
People's Republic of China, could adversely affect our ability to carry on or
expand our business in China.
Virtually all of the our production is conducted in China. Consequently,
an investment in our common stock may be adversely affected by the political,
social and economic environment in China. Under its current leadership, China
has been pursuing economic reform policies, including the encouragement of
private economic activity and greater economic decentralization. There can be no
assurance, however, that the Chinese government will continue to pursue such
policies, that such policies will be successful if pursued, or that such
policies will not be significantly altered from time to time. Our business and
prospects are dependent upon agreements and regulatory approval with various
entities controlled by Chinese governmental instrumentalities. Our operations
and prospects would be materially and adversely affected by the failure of such
governmental entities to grant necessary approvals or honor existing contracts,
and, if breached, it might be difficult to enforce these contracts in China. In
addition, the legal system of China relating to foreign investments is both new
and continually evolving, and currently there can be no certainty as to the
application of its laws and regulations in particular instances.
Our business plan assumes that if we can produce a low-priced EPO, a
sufficiently large EPO market will develop in China. In order to achieve the
demand for EPO, the Chinese medical community and consumers must be educated
about the uses of EPO, certain institutional developments such as health care
plans must occur and export market opportunities must be studied. No assurance
that a sufficient EPO market will develop. Further, we may be limited in our
ability to sell EPO outside of China due to EPO patent rights held by our
competitors in some other countries.
14
Our technology is not protected by any patents. Consequently, other
competitors could copy our enhanced EPO production technology and develop EPO or
other pharmaceutical drugs utilizing our technology. Furthermore, Amgen Inc.
currently holds a United States patent to develop and produce EPO and Amgen
sells EPO in China. Although no corresponding patent protection is applicable in
China, there is no assurance that our current or future production of EPO will
not be the subject of a patent infringement action in the future asserted by
patent holders or that our competitors will take political steps to prevent us
from producing EPO in China.
The exercise of outstanding warrants and options may dilute existing
stockholders and could substantially increase the number of shares which may be
sold into the market.
As of December 31, 2000, there were warrants outstanding to purchase
4,258,000 shares. Further, we have issued options to purchase an additional
3,043,000 shares of common stock. Given the limited existing market in our
common stock, the sale into the market of significant amounts of additional
common stock may have the effect of depressing our stock share price.
There are technical risks associated in commercializing our technology
which could delay or reduce the realization of lower cost production of EPO.
A key to our future success is the ability to produce EPO and other
drugs at lower costs than our competitors. Although we are currently utilizing
our proprietary technology to produce EPO at lower costs, our method for
producing EPO on a commercial basis has only recently begun. Further, although
results from recent independent tests and our early production results have been
encouraging, the ability of our technology to commercially produce EPO or other
drugs at consistent levels is still being evaluated.
We have no employment agreement with Dr. Liu, who supervises our EPO
production program and personnel. The loss of Dr. Liu's services would adversely
impact our profitability.
Our future performance is substantially dependent on the technical
expertise of Dr. Liu and other key researchers who Dr. Liu supervises. The loss
of Dr. Liu or any of our key research personnel could have a material adverse
effect on our business, development, financial condition, and operating results.
We do not have an employment agreement with Dr. Liu nor do we maintain "key
person" life insurance on Dr. Liu.
Item 2. Properties
Our corporate offices are located at 543 Granville Street, Suite 1200,
Vancouver, British Columbia, Canada V6C 1X8. We also have an office in Beijing,
located at 11th Floor, Suite 18-19, China World Tower 2, 1 Jianguomenwai Avenue,
Beijing, 100004.
Huaxin currently leases a large production facility in Nanjing, China.
Although no additional property is deemed necessary at this time, the
Sanhe Kailong joint venture has the right to purchase 25 acres of land at a
pharmaceutical park in China's Yanjiao Special Economic Zone.
15
Item 3. Legal Proceedings
We are not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market For Company's Common Equity And Related Stockholder Matters
Our common stock began trading on the NASD's OTC Bulletin Board under
the symbol "DRUG" on October 9, 1998. The following quotations reflect the high
and low bids for our common stock based on inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions. The
high and low prices of our common stock on a quarterly basis for the past two
fiscal years are as follows:
Common Stock
Quarter Ended High Low
------------- ---- ---
December 31, 2000 $3.88 $1.63
September 30, 2000 $4.56 $3.25
June 30, 2000 $8.00 $4.31
March 31, 2000 $9.00 $4.37
December 31, 1999 $3.69 $1.63
September 30, 1999 $3.38 $2.25
June 30, 1999 $3.19 $1.88
March 31, 1999 $2.00 $1.00
The approximate number of holders of record of our common stock at March
15, 2001, was 99. This number does not include stockholders who hold our
securities in street name.
Holders of common stock are entitled to receive such dividends as may be
declared by our Board of Directors. No dividends have been paid with respect to
our common stock and no dividends are anticipated to be paid in the foreseeable
future.
Item 6. Selected Financial Data
We have derived the selected consolidated statement of operations data
for the years ended December 31, 1998, 1999 and 2000, and the selected
consolidated balance sheet data as of December 31, 1999 and 2000, from our
consolidated financial statements included in this report. On August 17, 1998,
First Geneva Investments, Inc. and Allwin Newtech Ltd. entered into a
reorganization, pursuant to which all of the outstanding shares of Allwin
Newtech were acquired for 87.5% of our outstanding shares in a reverse takeover.
16
In connection with the reverse takeover, First Geneva Investments changed its
name to Dragon Pharmaceutical. Prior to the reorganization, First Geneva
Investments had no operations. Therefore, information prior to 1998 is not
meaningful and not included.
1998 1999 2000
------ ------ -----
Consolidated Statement of Operations Data
Sales $ - $ 989,539 $ 3,175,561
Cost of sales - 204,473 902,480
Operating loss (481,454) (2,865,276) (3,641,231)
Loss before minority interest (471,717) (2,845,879) (3,162,309)
Net (loss) for period (471,717) (2,791,033) (2,745,794)
Loss per share $ (0.06) $ (0.27) $ (0.17)
Consolidated Balance Sheet Data
Working capital $ 829,493 $ 8,405,788 $ 4,444,066
Total assets 2,480,813 16,740,037 18,546,830
Total liabilities 743,633 3,289,123 3,634,100
Total shareholders' equity $ 1,737,180 $ 12,488,768 $ 13,983,465
Item 7. Management's Discussion And Analysis of Financial Condition And Results
of Operations
This discussion, other than the historical financial information, may
consist of forward-looking statements that involve risks and uncertainties,
including quarterly and yearly fluctuations in results, the timely availability
of Dragon's pharmaceutical products, the impact of competitive products and
treatments, and the other risks described in this report. These forward-looking
statements speak only as of the date hereof and should not be given undue
reliance. Actual results may vary significantly from those projected.
General
The following discusses our financial condition and results of
operations based upon our consolidated financial statements which have been
prepared in accordance with generally accepted accounting principles.
We were formed on August 22, 1989, under the name First Geneva
Investments, 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 Ltd. 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. The share exchange transaction was consummated on August 17,
1998, and on September 21, 1998, First Geneva Investments changed its name to
Dragon Pharmaceutical Inc. On June 11, 1999, we acquired a 75% interest in
Nanjing Huaxin Biotech Co., Ltd. which manufactures EPO in China.
Plan of Operations
In order to expand our operations we will need additional capital. We do
not have any commitments from any source to provide additional capital. Our
current working capital will provide all anticipated capital requirements over
the next twelve months. As a result of this increased business activity, we
17
expect general and administrative expenses and compensation costs to increase
from current levels.
An essential element of the Company's business plan is to apply for and
to obtain various licenses and operating permits from various national and local
agencies of the PRC for new biodrug production and marketing. The Company
currently possesses the requisite production licenses for EPO.
Since inception, we have relied on equity financings to fund our
operations. Funds required to finance our future production expansions,
marketing efforts and ongoing business are expected to come primarily from debt
and equity financing with the remainder provided from operating revenues which
began in September, 1999. Operating revenues to date have been substantially
less than the cost of operations. However, recent financings completed by
management are deemed adequate to meet our anticipated working capital needs
over the next 12 months.
Results of Operations
For the Fiscal Years Ended December 31, 2000 and 1999
Revenues. Revenues was derived primarily from the sale of EPO in China.
Revenue for the year ended December 31, 2000, was $3,175,561, and revenue for
the year ended December 31, 1999, was $989,539. Cost of sales for the year ended
December 31, 2000, was $902,480 and $204,473 for the year ended December 31,
1999. The cost of sales is attributed to the production costs of our
pharmaceutical products. During the year ended December 31, 2000, we had
interest income of $478,922. Interest income for the year ended December 31,
1999, was $19,397. Interest income is related primarily to interest earned on
cash received from the private placement of common stock during the last quarter
of 1999.
Expenses. Total operating expenses for the year ended December 31, 2000,
were $3,946,975. The major expense incurred for the year ended December 31,
2000, related to the selling of pharmaceutical products represented
approximately 38% of the total operating expenses. The remaining major expense
items are represented by administrative expenses and include costs associated
with GMP certificate which accounted for $519,988. Major operating expenses
included office and miscellaneous expenses of $179,018, and salaries and
benefits of $236,032. Management fees of $123,000 include $72,000 paid to one
director for services during the year ended December 31, 2000.
Other significant expenses for the year ended December 31, 2000,
included depreciation of fixed assets and amortization of license and permit of
$515,106, write off of land-use rights of $257,344, research expenses of
$544,500, new market development of $279,114, and stock-based compensation of
$205,375.
Net and Comprehensive Loss. Dragon had a net loss of $2,328,847 and a
comprehensive loss of $1,979,042 for the three-month period ending December 31,
2000. Calculated in the comprehensive loss for the period was a minority
interest gain of $349,805.
Dragon's net loss for the year ended December 31, 2000, was $3,162,309.
The comprehensive loss for the same period was $2,745,794 which includes a
minority interest gain of $416,515.
18
Basic and Diluted Net Loss Per Share. Dragon'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 year 2000. The loss per share for the
year ended December 31, 2000, was $0.17. 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.
For the Fiscal Years Ended December 31, 1999 and 1998.
Revenues. For the period from February 10, 1998 to December 31, 1998,
Dragon had no revenues. For the year ended December 31, 1999, Dragon had
revenues of $989,539. Revenues were attributable to sales of pharmaceutical
drugs produced by Nanjing Huaxin subsequent to July 27, 1999. Cost of sales of
$204,473 is attributed to the production costs of the pharmaceutical products.
During 1999 Dragon had interest income of $19,397 compared to interest income of
$9,737 for the period ended December 31, 1998. Interest income is related to
interest earned on cash received from the private placement of common stock
during the last six months of 1998 and in 1999.
Expenses. Total expenses for the fiscal year ended December 31, 1999,
were $3,650,342 as compared to $481,454 for the period ended December 31, 1998.
The primary expense incurred in 1999 related to stock option compensation of
$1,876,000 and represented approximately 51% of total expenses. This
compensation included both new options granted to employees, directors and
advisors to the Company and the vesting of options granted in previous fiscal
years. Selling expenses increased from none during 1998 to $619,676 in 1999.
This increase represents the Company's increased marketing activity in China.
Other significant expenses in 1999 included loan interest of $326,623 (including
both common shares and cash), depreciation of intangible assets of $135,931,
travel of $113,415, salaries and benefits of $151,598, and management fees of
$96,000. Management fees relate to the payment of two directors for services in
the amount of $96,000 per annum. The depreciation of intangible assets relates
to the amortization of the drug license to produce EPO.
The primary expenses incurred during 1998 related to stock option
compensation of $300,000, management fees of $41,943, travel of $41,784, and
legal of $23,241. Stock option compensation of $300,000 related to stock options
granted to officers and directors of the Company, management fees of $41,943
related to the payment to two directors for services, $41,784 related to travel
to China to evaluate pharmaceutical companies and legal expenses related to the
reorganization of Allwin Newtech and the raising of capital.
Net and Comprehensive Loss. Dragon had a net loss of $2,845,879 and a
comprehensive loss of $2,791,033 for the fiscal year ending December 31, 1999,
compared to a net loss of $471,717 and a comprehensive loss of $473,862 for the
period February 10, 1998 to December 31, 1998. Calculated in the comprehensive
loss for 1999 was a minority interest gain of $54,846. The comprehensive loss
for 1998 included a foreign currency translation adjustment of $2,145 related to
Dragon's operations in China.
Liquidity and Capital Resources
Dragon is a development stage pharmaceutical and biotechnological
company that has commenced the manufacture and marketing of pharmaceutical
products in China through its 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
19
for further equity financings but may finance future operations through
additional equity financings. As of December 31, 2000 and 1999, the Company's
working capital was $4,444,066 and $8,405,788, respectively. The decrease in
working capital during 2000 was due to a private placement conducted in the
latter part of 1999 that provided gross proceeds of $10,645,000. No similar
fund-raising occurred in 2000. The Company showed Subscriptions Receivable
totaling $9,320,000 at December 31, 1999, with the balance of subscription
proceeds being received by the Company subsequent to the previous fiscal year
end.
In September 1998, the Company raised $1 million through the sale of
2,000,000 shares of common stock. The proceeds raised were for working capital.
In April 1999, the Company entered into a $600,000 loan agreement. The $600,000
loan bears interest at 8% and is due 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.
Item 7a. Quantitative And Qualitative Disclosure About Market Risk
Foreign Currency Exchange Rates
Substantially all of our business is transacted in currencies other than
the United States dollar. Our functional currency is the United States dollar.
However, the functional currency of certain subsidiaries is their local
currencies. As a result, we are subject to exposure from movements in foreign
currency exchange rates, specifically the Canadian dollar/Chinese Rmb exchange
rates. We do not use derivative financial instruments for speculative trading
purposes, nor do we hedge our foreign currency exposure to manage our foreign
currency fluctuation risk.
Interest Rate Sensitivity
As of the year ended December 31, 2000, we had no long-term debt.
Therefore, we believe we are not currently exposed to any market risks related
to interest rate sensitivity.
20
Item 8. Financial Statements And Supplemental Data
The following is a condensed summary of actual quarterly results of
operations for 1999 and 2000.
1999
-------------------------------------------------
First Second Third Fourth
---------- ----------- ----------- -----------
Revenues (1) $ - $ 333,555 $ 655,984
Gross profit - 229,475 555,591
Loss before minority interest (148,588) (188,281) (2,509,010)
Net loss (148,588) (138,671) (2,503,774)
Loss per share $ (0.01) (0.03) $ (0.27)
2000
-------------------------------------------------
First Second Third Fourth
---------- ----------- ----------- -----------
Revenues $ 661,785 $ 797,127 $ 739,062 $ 977,587
Gross profit 562,920 629,591 553,543 527,027
Loss before minority interest (223,869) (184,540) (425,053) (2,328,847)
Net loss (234,780) (168,997) (362,975) (1,979,042)
Loss per share $ (0.02) $ (0.03) $ (0.06) $ (0.17)
(1) The Company did not commence operations until the second quarter of 1999.
Therefore, no information is provided for the first quarter of 1999.
See pages F-1 to F-23 for our financial statements.
Item 9. Changes in And Disagreements With Accountants on Accounting And
Financial Disclosures
Not Applicable.
21
Part III
Item 10. Directors And Executive Officers
The directors and executive officers of Dragon, and their ages and
positions, and duration as such, are as follows:
Name Position Age Period
---- -------- --- ------
Longbin Liu President, Chief Executive 37 September 1998 - present
Officer and Director
Ken Z. Cai Director, Chief Financial 35 September 1998 - present
Officer
Shaun Maskerine Secretary/Treasurer 32 July 1998 - present
Greg Hall Director 43 September 1998 - present
Alexander Wick Director 62 September 1998 - present
Philip Yuen Pak Yiu Director 64 November 1999 - present
Dr. Yiu Kwong Sun Director 62 November 1999 - present
Directors of Subsidiaries
The directors of our three subsidiaries are as follows:
Nanjing Huaxin Sanhe Kailong
Name Position Biotech (1) (2) Allwin Newtech (2) Bio-Pharmaceutical (2)
---- -------- --------------- -------------- ------------------
Ken Cai Director X X X
Longbin Liu Director X X X
Philip Yuen Director X X
Greg Hall Director X
Jiamiao Li Director X
Weiming Xu Director X
---------------------
(1) Pursuant to the joint venture agreement, Nanjing Huaxin Biotech has a five
member board of directors with Allwin Newtech designating three of the five
members. The Nanjing Medical Group has the right to elect two directors to
Nanjing Huaxin Biotech Co. Ltd's board of directors and selected Mr.
Jiamiao Li and Mr. Weiming Xu as its representatives. Neither Mr. Jiamiao
Li nor Mr. Weiming Xu are affiliated with Dragon, and Dragon has no control
over The Nanjing Medical Group's selection.
22
(2) Dragon is the sole or controlling shareholder of each of these entities.
Consequently, Dragon has the power to appoint a majority of the Directors
in these entities. Allwin Newtech and Sanhe Kailong Bio-Pharmaceutical have
no other directors.
Business Experience
The following is a description of our executive officers and directors
and their business background for at least the past five years.
Dr. Longbin Liu, M.D. is the President, Chief Executive Officer and
Director of Dragon. He has 15 years of biotechnology experience in North
America, Japan and China, most recently as an Assistant Professor of Medicine in
the Division of Cardiovascular Medicine of the University of Massachusetts
Medical Centre where he had served since 1995, before joining Dragon in
September 1998. Dr. Liu earned his medical degree from Hunan Medical University
in 1983.
Dr. Ken Z. Cai is Chief Financial Officer and a Director of Dragon. Dr.
Cai has a Ph.D in Mineral Economics from Queen's University in Kingston,
Ontario, as well as 16 years of experience in mining, public company
administration and financing. Since February 1996, he has been a Director and
the President and Chief Executive Officer of Minco Mining and Metals
Corporation, a Toronto Stock Exchange-listed company involved in mining
exploration and development in China. Dr. Cai has extensive experience in
conducting business in China for the past 15 years and is currently the Chairman
of the Board of four Sino-foreign joint ventures.
Mr. Greg Hall is a Director of Dragon. Mr. Hall is a stockbroker with
17 years of corporate finance and public offerings experience. Since April,
1999, Mr. Hall has been a Senior Vice President of Yorkton Securities Inc. in
Vancouver, Canada. Prior to joining Yorkton Securities, Mr. Hall was with
Canaccord Capital for ten years. He is a former member/seat holder of the
Vancouver Stock Exchange. Prior to joining Canaccord Capital, Mr. Hall was the
Co-Founder of both Pacific International Securities and Georgia Pacific
Securities Corporation.
Dr. Alexander Wick is a Director of Dragon. Dr. Wick holds a doctorate
degree in synthetic organic chemistry from the Swiss Federal Institute of
Technology and has completed post-doctoral studies at Harvard University. He has
30 years of biotechnology and pharmaceuticals experience and is currently the
President of Sylachim, a chemicals and pharmaceuticals producer located in
France, which position he has held since 1995.
Mr. Philip Yuen Pak Yiu is a Director of Dragon. Mr. Yuen has been a
legal practitioner in Hong Kong since graduating from law school in London,
England in 1961. In 1965, he established the law firm of Yung, Yu, Yuen and Co.
and is now the principal partner of the firm. Mr. Yuen has over 30 years
experience in the legal field and has been a director of several large listed
companies in various industries. He is a director of the Association of
China-appointed Attesting Officers Limited in Hong Kong, a standing committee
member of the Chinese General Chamber of Commerce in Hong Kong, a member of the
National Committee of the Chinese People Political Consultative Conference and
an arbitrator for the China International Economic and Trade Arbitration
Commission.
Dr. Yiu Kwong Sun is a Director of Dragon. Dr. Sun graduated from the
University of Hong Kong Faculty of Medicine in 1967. He is a Founding Fellow of
the Hong Kong College of Family Physicians and a Fellow of the Hong Kong Academy
of Medicine. Since 1995, he has served as the
23
Chairman of the Dr. Sun Medical Centre Limited which has been operating a
network of medical centers in Hong Kong and China for the past 20 years. He is
also the Administration Partner of United Medical Practice, which manages a
large network of medical facilities throughout Hong Kong and Macau. Dr. Sun has
been a member of the Dr. Cheng Yu Fellowship Committee of Management of the
University of Hong Kong Faculty of Medicine since 1997.
Mr. Shaun Maskerine is Secretary and Treasurer of Dragon. From July 7,
1998, to November 23, 1999, he was also a director. From July 7, 1998, to
September 18, 1998, Mr. Maskerine was President of Dragon. Since January 1999,
Mr. Maskerine has been the President and Director of Aquarius Ventures Inc., a
resource based company. From March 1998 to January 1999, Mr. Maskerine was Vice
President of Finance of Aquarius Ventures. He is also the President and Director
of Global Petroleum Inc., another resource based company. He has held these
positions since September 1998. Aquarius Ventures Inc. and Global Petroleum Inc.
are both listed on the Canadian Venture Exchange. Prior to March 1998, Mr.
Maskerine was a management consultant in the hotel/tourism industry.
Ms. Anna Liu is the Controller for the Company. Ms. Liu is a Certified
General Account Candidate and has been working as an accountant for North
American companies with Chinese operations for five years. Ms. Liu received her
Masters in Economics from the University of British Columbia.
Committees of the Board
The Board has an executive committee consisting of Messrs. Liu, Cai, and
Hall. The executive committee's primary function is to administer all our daily
operating activities, including our subsidiaries and joint venture companies.
The Board has also created committees to direct our operations in each
functional area. The finance committee is comprised of Messrs. Cai, Yuen and
Hall. The technology committee is comprised of Messrs. Wick, Liu and Suen. The
investor relations committee is comprised of Messrs. Cai and Hall. The audit
committee is comprised of Alexander Wick, Ken Cai and Greg Hall.
Family Relationships
There are no family relationships between any director or executive
officer.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors, and persons who own
more than 10% of the Company's Common Stock, to file reports of ownership on
Form 3 and changes in ownership on Form 4 or 5 with the Securities and Exchange
Commission (the "SEC"). Such executive officers, directors and 10% stockholders
are also required by SEC rules to furnish the Company with copies of all Section
16(a) forms they file. Based solely upon its review of copies of such forms
received by it, or on written representations from certain reporting persons
that no other filings were required for such persons, the Company believes that,
during the year ended December 31, 2000, its executive officers, directors and
10% stockholders complied with all applicable Section 16(a) filing requirements.
All directors of the Company hold office until the next annual meeting
of the shareholders or until their successors have been elected and qualified.
24
The officers of the Company are appointed by the Board of Directors and
hold office until their death, resignation or removal from office.
Item 11. Executive Compensation
The following table sets forth the compensation of our president during
the last fiscal year 2000. No other officers or directors received annual
compensation in excess of $100,000 during the last fiscal year.
Summary Compensation Table
Annual Compensation Long Term Compensation
---------------------------------------------- --------------------------------------------------------------
Awards Payout
----------------------------- --------------
Restricted Securities LTIP All Other
Other Annual Stock Underlying Payout Compensation
Year Salary Bonus ($) Compensation ($) Award(s) Options (#) ($) ($)
------------------------------------------------------ ----------------------------- -------------------------------
Longbin Liu 2000 $72,000 -0- -0- -0- 400,000 -0- -0-
President 1999 $72,000 -0- -0- -0- -0- -0- -0-
1998 $36,000 -0- -0- -0- 300,000 -0- -0-
We have entered into oral consulting agreements with Dr. Liu and Mr.
Maskerine pursuant to which they provide administrative services to us. Dr. Liu,
as President, is paid an annual salary of $72,000 and received stock options to
purchase 300,000 shares of common stock in 1998. Mr. Maskerine, our former
president, serves as our Secretary/Treasurer and is paid an annual salary of
$45,000. Mr. Maskerine also received stock options to purchase 75,000 shares of
common stock in 1998. These consulting agreements are terminable at will.
Director Compensation
Directors are not paid cash for their services but do receive stock
options for serving as such.
Stock Option Plans
We have no stock option plan. However, the Board of Directors has
approved the issuance of stock options to our employees, directors, officers and
consultants. Unless otherwise provided by the Board, all options are exercisable
for a term of five years. As of March 15, 2001, there were options to acquire
3,043,000 shares of common stock outstanding.
25
The following table sets forth the stock options granted to Mr. Liu
during the past fiscal year:
Options Granted in the Year Ended December 31, 2000
Number of
Securities % of Total Option
Underlying Granted to Exercise of
Options Employees in Base Price
Name Granted in 2000 Fiscal Year 2000 ($/share) Expiration Date
---- --------------- ---------------- --------- ---------------
Longbin Liu 400,000 23% 3.125 November 13, 2005
The following table sets forth the option value for Mr. Liu as of
December 31, 2000. As of December 31, 2000, the per share price of one share of
common stock was $1.63 as quoted on the OTC Bulletin Board.
Fiscal Year End Option Value (December 31, 2000)
Number of Securities Underlying Value of Unexercised in the
Unexercised Options/SARs at Money Options/SARs at Fiscal
Fiscal Year End (#) Year End
Exercisable/Unexercisable Exercisable/Unexercisable
Name Options at December 31, 2000 Options at December 31, 2000
---- ---------------------------- ----------------------------
Longbin Liu 700,000 / 0 $1,060,000 / 0
Limitation of Liability and Indemnification Matters
We have adopted Section 607.0850 of the 1999 Florida Statutes, Business
Organization of the State of Florida in its bylaws. Section 607.0850 states:
(1) A corporation shall have power to indemnify any person who was or is
a party to any proceeding (other than an action by, or in the right of, the
corporation), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise against
liability incurred in connection with such proceeding, including any appeal
thereof, if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The termination of any proceeding by
judgment, order, settlement, or conviction or upon a plea of nolo contendere or
its equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation or, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
(2) A corporation shall have the power to indemnify any person, who was
or is a party to any proceeding by or in the right of the corporation to procure
a judgment in its favor by reason of the fact that the person is or was a
26
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses and amounts paid in settlement not exceeding, in the judgment
of the board of directors, the estimated expense of litigating the proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall be made under
this subsection in respect of any claim, issue, or matter as to which such
person shall have been adjudged to be to be liable unless, and only to the
extent that, the court in which such proceeding was brought, or any other court
of competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 15, 2001, certain
information with respect to the beneficial ownership of our common stock by (i)
each stockholder known by us to be the beneficial owner of more than 5% of our
common stock, (ii) each of our executive officers and directors, and (iii) each
of our directors and executive officers as a group.
As of March 15, 2001, there were 16,706,000 shares of common stock
outstanding.
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
--------------- --------- ------------
Arbora Portfolio Management
Gartenstrasse 38
Zurich, Switzerland 1,062,500 6.4%
Zhibin Cai and Yu Fongmei(2)
18 Main Street
Votian
Hubei, China 1,899,000 11.4%
Robert Friedland
No. 1 Temasek Avenue
#37-02 Millenia Tower
Singapore 039192 1,000,000(3) 5.6%
Berycon Ltd.
13/F Gloucester Tower
The 11 Pedder Street Central
Hong Kong 1,000,000(4) 5.8%
Chow Tail Fook Nominee Limited
31F New World Tower
16-18 Queens Road Central
Hong Kong 2,000,000(5) 11.5%
27
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
--------------- --------- ------------
Chimei Wu Ho
396 Chungshan Road, Sec 2
Puli Town, Taiwan 2,400,000 14.7%
Longbin Liu,
President, Chief Executive
Officer and Director 700,000(6) 4.0%
Shaun Maskerine,
Secretary 91,250(7) *
Ken Cai,
Chief Financial Officer and
Director 500,000(6) 2.9%
Greg Hall,
Director 400,000(6) 2.3%
Philip Yuen,
Director 877,500(8) 5.2%
Alexander Wick,
Director 175,000(6) 1.0%
Yiu Kwong Sun,
Director 775,000(9) 4.6%
All directors (8 persons) and
executive officers as a group 4,648,750(10) 23.6%
----------------------
* Represents less than one percent.
(1) Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed above, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject
to community property laws where applicable. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities. Shares of common stock subject to options or warrants
currently exercisable, or exercisable within sixty days, are deemed
outstanding for purposes of computing the percentage ownership of the
person holding such option or warrants, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person.
(2) Zhibin Cai is the father of Mr. Ken Cai. Yu Fong Mei is the mother of Mr.
Ken Cai. They do not reside with Mr. Ken Cai.
(3) Includes 500,000 shares of common stock owned by Newstar Securities Ltd. (a
company controlled by Mr. Friedland) with the balance representing warrants
exercisable within sixty days. Mr. Friedland is a former director who
resigned on September 8, 2000.
(4) Includes 500,000 shares which may be acquired pursuant to warrants
exercisable within sixty days.
(5) Includes 1,000,000 shares which may be acquired pursuant to warrants
exercisable within sixty days.
(6) Represents options exercisable within sixty days.
(7) Includes 6,250 shares of common stock owned with the balance representing
options exercisable within sixty days.
(8) Includes 62,500 shares of common stock owned and 215,000 shares of common
stock subject to options. Also includes 600,000 shares of common stock
owned by Global Equities Overseas Ltd. for which Mr. Yuen serves as a
director.
(9) Includes 175,000 shares of common stock subject to options exercisable
within sixty days. Also includes 600,000 shares of common stock owned by
Yukon Health Enterprise for which Mr. Sun serves as a director.
(10) Includes options and warrants to acquire 2,880,000 shares of common stock.
28
Item 13. Certain Relationships And Related Transactions
Except as otherwise indicated below, we have not been a party to any
transaction, proposed transaction, or series of transactions during the past
fiscal year in which the amount involved exceeds $60,000, and in which, to our
knowledge, any of our directors, executive officers, five percent beneficial
security holders, or any member of the immediate family of the foregoing persons
has had or will have a direct or indirect material interest.
We currently rent space for our executive offices from Minco Mining and
Metals Corporation for CDN $2,500 per month. Mr. Cai, one of our directors, is
President of Minco Mining. We believe that this rent is competitive with rent
that would be charged by a non-affiliated landlord for comparable space.
Messrs. Ken Cai, Jackson Cheng and Longbin Liu served as directors of
Sanhe Kailong at the time of entering into our joint venture with Sinoway
Biotech. Sanhe Kailong was formed, however, for the purpose of developing a
joint venture with Sinoway Biotech. Subsequent to the joint venture formation,
Mr. Cheng resigned from the Board of Sanhe Kailong and was replaced by Mr. Greg
Hall. They continue to serve as directors of Sanhe Kailong. Messrs. Ken Cai,
Philip Yuen and Longbin Liu also serve as officers and directors of Allwin
Newtech, our wholly-owned subsidiary. Messrs. Ken Cai, Longbin Liu and Philip
Yuen had served prior to the joint venture and continue to serve as three of the
five directors of Nanjing Huaxin, a joint venture in which we own a 75%
interest.
On October 6, 2000, we entered into an acquisition agreement with
Alphatech Bioengineering to acquire its rights and technology relating to
developing Hepatitis B vaccine through the application of genetic techniques on
hamster ovary cells. Alphatech Bioengineering's Hepatitis B vaccine is in the
development stage. Alphatech Bioengineering is jointly owned by Dr. Longbin Liu,
our president and a director, and Mr. Philip Yuen, one of our directors. The
purchase price is $4 million. See "Business - Acquisition Agreement with
Alphatech Bioengineering Limited."
During fiscal year 2000, the Company paid $400,000 to Guanzhou Recomgen
Biotech Co. Ltd. ("Guanzhou Recomgen"), a company incorporated in China, for the
funding of its TPA research and development programs with the intention of
acquiring the technology. Guanzhou Recomgen is controlled by Dr. Longbin Liu.
Subsequent to the year-end, due to financial market and economic conditions, the
Company decided not to proceed with the funding and the acquisition. In
accordance with the agreement, Guanzhou Recomgen and its principals agreed to
refund the $400,000 before September 30, 2001.
Pursuant to an agreement dated August 15, 1999, the Company entered into
a joint research project for the development of rhTPO drug ("rhTPO") with
Shenzhen Kelong Chuang Jian Enterprise Co. Ltd. ("Kelong"), a company
incorporated in China. Dr. Longbin Liu is a principal shareholder of Kelong. The
Company's maximum commitment to this project is US$543,540 (RMB 4,500,000).
Under the terms of the agreement, Kelong and the Company will jointly
own the drug licence of rhTPO. Kelong and the Company will then obtain its own
individual production permit of the rhTPO drug product. The Company paid
$483,140 (RMB 4,000,000) towards the early development phase of this project in
fiscal year 2000 and the amount has been accounted for as research expense. The
Company has to pay the remaining US$60,400 (RMB 500,000) for clinical testing of
the rhTPO drug after the clinical testing permit has been issued by the
regulatory authorities.
29
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are being filed as part of this report:
(1) Financial Statements
The following Financial Statements pertaining to Dragon are filed as part
of this annual report:
Report of Independent Accountants.......................................F-2
Year-end Consolidated Balance Sheets....................................F-3
Year-end Consolidated Statements of Stockholders' Equity................F-4
Year-end Consolidated Statements of Operations..........................F-6
Year-end Consolidated Statements of Cash Flows..........................F-7
Notes to Consolidated Financial Statements....................F-8 thru F-23
(2) Exhibits
Exhibit Number Name
2.1* Share Exchange Agreement with First Geneva Investments
3.1* Certificate of Incorporation and Amendments
a. Certificate of Incorporation
b. Certificate of Amendment, dated June 19, 1997
c. Certificate of Amendment of Articles of Incorporation,
dated September 21, 1998
3.2* Bylaws of First Geneva Investments, Inc., as amended
10.1* Sino-Foreign Co-operative Company Contract
10.2* Sino-Foreign Joint Venture Contract Between The Nanjing Medical
Group Company Limited and Allwin Newtech Ltd.
10.3** Consulting Agreement with E. Pernet Portfolio Management dated
June 15, 1999
10.4** Amendment to Sino-Foreign Co-operative Company Contract
10.5*** Contract to lease 25 acres of land in Yanjiao, China
10.6*** Sample Employment Agreement for technicians/employees
10.7**** Marketing and License Agreement Between Allwin Biotrade and
Fargin S.A.
10.8**** Marketing and License Agreement Between Allwin Biotrade and
Duopharma (Malaysia) SDN.BHD
10.9**** Marketing and License Agreement Between Allwin Biotrade and Yoo
& Yoo Biotech Co. Ltd.
10.10**** Acquisition Agreement Among Dragon Pharmaceuticals Inc.,
Alphatech Bioengineering Limited, Longbin Liu and Philip Yuen
30
10.11***** a. Sino Foreign Joint Venture Contract Between The Nanjing
Medical Group Company Limited and Allwin Newtech Ltd.;
b. Amendment dated November 24, 2000;
c. Amendment dated December 16, 2000; and
d. Confirmation letter of control from The Nanjing Medical
Group Company Limited to Allwin Newtech dated December 16,
2000
16.1* Letter Regarding Changes in Certifying Account
23.1 Consents of Moore Stephens Ellis Foster Ltd., Chartered
Accountants
----------------------
* Previously filed with Dragon's initial registration statement on Form
10-SB, filed with the SEC on November 4, 1999.
** Previously filed with Dragon's initial registration statement on Form SB-2,
filed with the SEC on May 15, 2000.
*** Previously filed with Dragon's amendment no. 1 to registration statement on
Form SB-2 filed with the SEC on August 3, 2000.
**** Previously filed with Dragon's amendment no. 3 to registration statement
on Form SB-2 filed with the SEC on October 20, 2000.
*****Previously filed with Dragon's amendment no. 5 to registration statement
on Form SB-2 filed with the SEC on December 26, 2000.
(b) Reports on Form 8-K:
None.
31
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 13, 2001 Dragon Pharmaceutical Inc.
a Florida Corporation
/s/ LONGBIN LIU
-----------------------
Longbin Liu, President
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Date
/s/ LONGBIN LIU
---------------------------------------- April 13, 2001
Longbin Liu
President, Director, Chief Executive
Officer, Chief Financial Officer and
Principal Financial Officer
/s/ KEN Z. CAI
---------------------------------------- April 13, 2001
Ken Z. Cai
Director
/s/ GREG HALL
---------------------------------------- April 13, 2001
Greg Hall, Director
Alexander Wick, Director
Philip Yuen Pak Yiu, Director
/s/ DR. YIU KWONG SUN
---------------------------------------- April 13, 2001
Dr. Yiu Kwong Sun, Director
F-1
DRAGON PHARMACEUTICALS INC.
& SUBSIDIARIES
Consolidated Financial Statements
(Expressed in US Dollars)
December 31, 2000 and 1999
Index
Report of Independent Accountants...................................F-2
Consolidated Balance Sheet..........................................F-3
Consolidated Statement of Stockholders' Equity......................F-4
Consolidated Statement of Operations................................F-6
Consolidated Statement of Cash Flows................................F-7
Notes to Consolidated Financial Statements..........................F-8
F-2
MOORE STEPHENS ELLIS FOSTER LTD.
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, BC Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
E-Mail: generaldelivery@ellisfoster.bc.ca
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
DRAGON PHARMACEUTICALS INC.
& SUBSIDIARIES
We have audited the consolidated balance sheets of Dragon Pharmaceuticals Inc. &
Subsidiaries ("the Company") as at December 31, 2000 and 1999 and the related
consolidated statements of stockholders' equity for the years ended December 31,
2000 and 1999, the consolidated statements of operations and cash flows for the
years ended December 31, 2000 and 1999 and the period from February 10, 1998
(inception) to December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as at
December 31, 2000 and 1999 and the results of their operations and their cash
flows for the years ended December 31, 2000 and 1999 and the period from
February 10, 1998 (inception) to December 31, 1998 in conformity with generally
accepted accounting principles in the United States.
Vancouver, Canada "MOORE STEPHENS ELLIS FOSTER LTD."
February 14, 2001 except as to Chartered Accountants
Note 8 which is as of March
22, 2001 and Note 9 which is as of
April 6, 2001
F-3
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2000 and 1999
(Expressed in US Dollars)
2000 1999
------------ ------------
ASSETS
Current
Cash and cash equivalents $ 4,092,702 $ 617,262
Restricted funds 2,247,613 -
Accounts receivable 1,166,876 640,743
Subscriptions receivable - 9,320,000
Inventories 474,041 657,966
Prepaid and deposits 96,934 458,940
------------ ------------
Total current assets 8,078,166 11,694,911
Fixed assets 2,330,349 2,642,313
Investment in Hepatitis B vaccine
project - related party 4,000,000 -
Refundable investment deposits -
related party 372,000 -
Investment in rhTPO drug project -
related party - -
Licence and permit 3,766,315 2,402,813
------------ ------------
Total assets $ 18,546,830 $ 16,740,037
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loans $ 2,198,280 $ 616,523
Accounts payable and accrued
liabilities 1,435,820 2,535,681
Accounts payable - related parties - 112,919
Management fees payable - related
parties - 24,000
------------ ------------
Total current liabilities 3,634,100 3,289,123
------------ ------------
Minority interests 929,265 962,146
------------ ------------
Commitments (Note 15)
Stockholders' Equity
Share capital
Authorized: 50,000,000 common shares
at par value of $0.001 each
Issued and outstanding: 16,700,000
common shares (1999 - 10,735,000) 16,700 10,735
Additional paid in capital 20,000,897 15,690,734
Accumulated other comprehensive
income (loss) (25,588) 50,049
Accumulated deficit (6,008,544) (3,262,750)
------------ ------------
Total stockholders' equity 13,983,465 12,488,768
------------ ------------
Total liabilities and stockholders'
equity $ 18,546,830 $ 16,740,037
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 2000 and 1999
(Expressed in US Dollars)
----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Compre- other Total
Additional hensive compre- Stock-
Common stock paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated income equity
---------- -------- ------------ ------------ ------------ --------- ------------
Balance, December 31, 1998 10,000,000 $ 10,000 $ 2,201,042 $ - $ (471,717) $ (2,145) $ 1,737,180
Issuance of common stock
for loan bonus at $2.125
per share in April, 1999 90,000 90 191,160 - - - 191,250
Issuance of common stock
pursuant to a private
placement at $2.50 per
share, net of share
issuance costs of $110,788
in October, 1999 600,000 600 1,388,612 - - - 1,389,212
Issuance of common stock
for loan bonus at $2.047
per share in October, 1999 45,000 45 92,070 - - - 92,115
Allotted 4,258,000 common stock
at $2.50 per share, less
commission payable of $703,150 - - 9,941,850 - - - 9,941,850
Other comprehensive income
- foreign currency translation - - - 52,194 - 52,194 52,194
Comprehensive income
- net (loss) for the period - - - (2,791,033) (2,791,033) - (2,791,033)
Stock option compensation - - 1,876,000 - - - 1,876,000
---------- -------- ------------ ------------ ------------ --------- ------------
Comprehensive income (loss) $ (2,738,839)
============
Balance, December 31, 1999 10,735,000 $ 10,735 $ 15,690,734 $ (3,262,750) $ 50,049 $ 12,488,768
========== ======== ============ ============ ========= ============
The accompanying notes are an integral part of these financial statements.
F-5
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 2000 and 1999
(Expressed in US Dollars)
----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Compre- other Total
Additional hensive compre- Stock-
Common stock paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated income 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 1,600,000 1,600 2,498,400 - - 2,500,000
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 - - - (75,637) - (75,637) (75,637)
Comprehensive income
- net (loss) for the period - - - (2,745,794) (2,745,794) - (2,745,794)
---------- -------- ------------ ------------ ------------ --------- ------------
Comprehensive income (loss) $ (2,821,431)
============
Balance, December 31, 2000 16,700,000 $ 16,700 $ 20,000,897 $ (6,008,544) $ (25,588) $ 13,983,465
========== ======== ============ ============ ========= ============
The accompanying notes are an integral part of these financial statements.
F-6
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Operations
(Expressed in US Dollars)
February 10
January 1 January 1 1998 (inception)
2000 to 1999 to to
December 31 December 31 December 31
2000 1999 1998
------------ ------------ -----------
Sales $ 3,175,561 $ 989,539 $ -
Cost of sales 902,480 204,473 -
------------ ------------ -----------
Gross profit 2,273,081 785,066 -
Selling, general and
administrative expenses (3,946,975) (1,239,292) (169,657)
Depreciation of fixed assets and
amortization of licence and permit (515,106) (203,394) (11,797)
Write off of land-use right
net of unpaid amount (257,344) - -
Research expenses (544,500) - -
New market development (279,114) - -
Provision for doubtful debts (63,630) (5,033) -
Loan interest expense (102,268) (326,623) -
Stock-based compensation (205,375) (1,876,000) (300,000)
------------ ------------ -----------
Operating loss (3,641,231) (2,865,276) (481,454)
Interest income 478,922 19,397 9,737
------------ ------------ -----------
Loss before minority interest (3,162,309) (2,845,879) (471,717)
Minority interest 416,515 54,846 -
------------ ------------ -----------
Net (loss) for the period $ (2,745,794) $ (2,791,033) $ (471,717)
============ ============ ===========
(Loss) per share
Basic and diluted $ (0.17) $ (0.27) $ (0.06)
============ ============ ===========
Weighted average number of
common shares outstanding
Basic and diluted 15,794,871 10,177,452 8,054,795
=========== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-7
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Cash Flows
(Expressed in US Dollars)
February 10
January 1 January 1 1998 (inception)
2000 to 1999 to to
December 31 December 31 December 31
2000 1999 1998
------------ ------------ -----------
Cash flows from (used in) operating
activities
Net (loss) for the period $ (2,745,794) (2,791,033) $ (471,717)
Adjustments to reconcile net loss to
net cash used in operating activities:
- loan bonuses - 283,365 -
- stock-based compensation expense 205,375 1,876,000 300,000
- depreciation of fixed assets and
amortization of licence and permit 669,031 263,101 11,797
- minority interests (416,515) (54,846) -
- loss on disposal of fixed assets - 12,279 -
- write off of land-use right, net of
unpaid amount 257,344 - -
- provision for doubtful debts 63,630 5,033 -
Changes in non-cash working capital items,
net of effect of acquisition of subsidiary:
- accounts receivable (561,763) (662,999) -
- inventories 183,925 (385,436) -
- prepaid expenses and deposits 362,006 (266,169) (192,771)
- accounts payable and accrued liabilities 98,112 902,328 744,633
------------ ------------ -----------
(1,884,649) (818,377) 391,942
------------ ------------ -----------
Cash flows used in investing activities
Purchase of fixed assets (900,231) (339,504) (891,914)
Increase in restricted funds (2,247,613) - -
Additional cost of licence (250,000) - -
Acquisition of Huaxin, net of cash acquired - (2,931,818) -
Investment in Hepatitis B vaccine project (4,000,000) - -
Refundable investment deposits (400,000) - -
------------ ------------ -----------
(7,797,844) (3,271,322) (891,914)
------------ ------------ -----------
Cash flows from financing activities
Loan proceeds 1,594,453 613,497 -
Proceeds from issuance of shares,
net of issuance costs 2,553,500 1,389,212 1,912,678
Proceeds from shares subscribed and allotted
in prior period, net of issuance costs 8,611,603 1,325,000 -
Funds contributed by minority shareholders 403,380 - -
------------ ------------ -----------
13,162,936 3,327,709 1,912,678
------------ ------------ -----------
Foreign exchange loss on cash
held in foreign currency (5,003) (1,103) (32,351)
------------ ------------ -----------
Increase (decrease) in cash and
and cash equivalents 3,475,440 (763,093) 1,380,355
Cash and cash equivalents, beginning of period 617,262 1,380,355 -
------------ ------------ -----------
Cash and cash equivalents, end of period $ 4,092,702 617,262 $ 1,380,355
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-8
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(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. In 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 95% 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
(i) 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.
(ii) Under the terms of Sino-Foreign Joint Venture Contract, Huaxin's
board of directors consists of five directors of which the
Company has the right to select three directors including the
chairman. Except for (1) amending Huaxin's articles of
association; (2) liquidating Huaxin; (3) increasing or decreasing
Huaxin's registered capital; (4) mortgaging Huaxin's assets; and
(5) merging Huaxin, which transactions require unanimous approval
by Huaxin's board, the Company controls Huaxin in the ordinary
course of business. Because the Company has a controlling
financial interest in Huaxin, and controls Huaxin's operations in
the ordinary course of business, the Company has accounted for
Huaxin using the consolidated method of accounting as opposed to
using the equity method.
(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.
F-9
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(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
Lab equipment 8 years
Office equipment and furniture 5 years
Land improvements 10 years
Leasehold improvements Term of lease (10 years)
Production equipment 10 years
(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.
F-10
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(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.
(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, 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.
F-11
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(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.
(k) 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 December 31, 2000, cash equivalents consist of commercial
papers and redeemable 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.
F-12
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(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
4,258,000 warrants and 3,043,000 stock options outstanding at December
31, 2000 are anti-dilutive, however, they may be dilutive in future.
(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 was July 1, 2000.
If the terms of an option (originally accounted for as a fixed
option) are modified during the option term to change the
exercise price directly, 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.
F-13
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
3. 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 Recombinant Human
Erythropoietin Injection drugs 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 assets RMB 33,000,000 US$ 4,000,000
========== =========
75% thereof RMB 24,750,000 US$ 3,000,000
========== =========
The operating results of Huaxin, commencing June 11, 1999, are included in
the statement of operations.
The following summarized proforma information assumes the acquisition had
occurred on January 1, 1998:
1999 1998
------------ ----------
Sales $ 1,315,972 $ 519,309
Net (loss) $ (2,327,063) $ (602,265)
(Loss) per share
- basic and diluted $ (0.23) $ (0.07)
------------ ----------
4. Restricted Funds
2000 1999
------------ ----------
Term deposits held as collateral
against bank loans $ 1,736,328 $ -
Restricted for use in acquisition
of fixed assets 511,285 -
------------ ----------
$ 2,247,613 $ -
============ ==========
F-14
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
5. Accounts Receivable
2000 1999
------------ ----------
Trade receivable $ 996,100 $ 624,468
Allowance for doubtful accounts (40,663) (5,033)
------------ ----------
955,437 619,435
Other receivable 211,439 21,308
------------ ----------
$ 1,166,876 $ 640,743
============ ==========
6. Inventories
2000 1999
------------ ----------
Raw materials $ 72,033 $ 66,071
Finished goods 391,469 326,599
Work in progress 10,539 265,296
------------ ----------
$ 474,041 $ 657,966
============ ==========
7. Fixed Assets
2000
--------------------------------------
Accumulated Net book
Cost depreciation value
----------- ------------ -----------
Motor vehicles $ 100,309 $ 15,752 $ 84,557
Office equipment and furniture 202,242 57,746 144,496
Leasehold improvements 952,364 119,234 833,130
Production and lab equipment 1,598,360 330,194 1,268,166
----------- ------------ -----------
$ 2,853,275 $ 522,926 $ 2,330,349
=========== ============ ===========
F-15
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
7. Fixed Assets (continued)
1999
--------------------------------------
Accumulated Net book
Cost depreciation value
----------- ------------ -----------
Motor vehicle $ 41,039 $ 2,655 $ 38,384
Land lease 924,784 29,285 895,499
Office equipment and furniture 114,182 24,292 89,890
Land improvements 14,755 3,020 11,735
Leasehold improvements 729,791 33,915 695,876
Production equipment 1,109,181 198,252 910,929
----------- ------------ -----------
$ 2,933,732 $ 291,419 $ 2,642,313
=========== ============ ===========
Depreciation expenses were $269,125, $130,835 and $11,797 for the
periods ended December 31, 2000, 1999 and 1998, respectively. All fixed
assets are located in China.
8. Investment in Hepatitis B Vaccine Project - Related Party
(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 is a company named Alphatech Bioengineering Limited,
incorporated in Hong Kong, and one of the two shareholders of which is
a director and senior officer of the Company.
(b) Subsequent to the year-end and pursuant to an amended agreement dated
March 22, 2001, in the event that the Company failed to find a joint
venture partner, establish a production facility for the vaccine
project or sell the project to a third party within nine months from
the date of this amended agreement, Dr. Longbin Liu, a senior officer
and director of the Company and one of the shareholders of Alphatech,
demands to repurchase the project from the Company. The repurchase
price will be $4.0 million payable as follows:
(i) $500,000 at the date of repurchase; and
(ii) the balance to be paid within eighteen (18) months of the date of
repurchase with interest at 6% per annum. The interest will be
accrued from six months after the date of repurchase.
F-16
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
9. Refundable Investment deposits - Related Party
Guanzhou Recomgen Biotech Co. Ltd.
- Tissue Plasminogen Activator ("TPA") Project $ 400,000
Less: Valuation allowance (28,000)
---------
$ 372,000
=========
During fiscal year 2000, the Company paid $400,000 to Guanzhou Recomgen
Biotech Co. Ltd. ("Guanzhou Recomgen"), a company incorporated in China,
for the funding of its TPA research and development programs with the
intention of acquiring the technology. Guanzhou Recomgen is controlled by a
senior officer and a director of the Company. Subsequent to the year-end,
due to financial market and economic conditions, the Company decided not to
proceed with the funding and the acquisition. In accordance with the
agreement, Guanzhou Recomgen and its principals agreed to refund the
$400,000 before September 30, 2001.
10. Investment in rhTPO Drug Project - Related Party
Pursuant to an agreement dated August 15, 1999, the Company entered into a
joint research project for the development of rhTPO drug ("rhTPO") with
Shenzhen Kelong Chuang Jian Enterprise Co. Ltd. ("Kelong"), a company
incorporated in China. A director and senior officer of the Company is a
principal shareholder of Kelong. The Company's maximum commitment to this
project is US$543,540 (RMB 4,500,000).
Under the terms of the agreement, Kelong and the Company will jointly own
the drug licence of rhTPO. Kelong and the Company will then obtain its own
individual production permit of the rhTPO drug product. The Company paid
$483,140 (RMB 4,000,000) towards the early development phase of this
project in fiscal year 2000 and the amount has been accounted for as
research expense. The Company has to pay the remaining US$60,400 (RMB
500,000) for clinical testing of the rhTPO drug after the clinical testing
permit has been issued by the regulatory authorities.
F-17
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
11. Bank Loans
2000 1999
----------- -----------
RMB 3,000,000, bearing interest at
5.85% per annum and due on July 31, 2001 $ 362,354 $ 369,914
RMB 2,000,000, bearing interest at
5.85% per annum and due on August 15, 2001 241,570 246,609
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 942,120 -
RMB 4,000,000, bearing interest at
5.58% per annum and due on June 11, 2001.
The loan is secured by the term deposit. 483,138 -
RMB 1,400,000 bearing interest at
5.58% per annum and due on June 11, 2001.
The loan is secured by the term deposits 169,098 -
----------- -----------
Total $ 2,198,280 $ 616,523
=========== ===========
The Company has arranged for a refinancing of the RMB 7.8 million loan
subsequent to the year-end. The loan is now bearing interest at 5.265% per
annum, due on January 31, 2002 and secured by the term deposit.
The weighted average interest rate was 5.79% and 5.85% for the years ended
December 31, 2000 and 1999, respectively.
F-18
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
12. 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 December 31, 2000, the parent company, Kailong and Huaxin have
estimated losses, for tax purposes, totalling approximately
$2,284,000, which may be applied against future taxable income.
Accordingly, there is no tax expense charged to the Statement of
Operations for the year ended December 31, 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:
2000 1999
---------- ----------
Tax loss carryforwards $ 776,560 $ 361,000
Stock-based compensation 70,000 638,000
Less: valuation allowance (846,560) (999,000)
---------- ----------
$ - $ -
========== ==========
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate is as follows:
2000 1999
---------- ----------
Federal statutory income tax rate 34% 34%
Change in valuation allowance (34%) (34%)
---------- ----------
Effective income tax rate - -
========== ==========
F-19
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
13. Stock Options and Warrants
(a) Stock Option Plans
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 December 20, 1999, the
Company announced that it has achieved the ability to produce
commercially acceptable and revenue-generating products and the
remaining half of the options granted (i.e., 550,000 shares) under the
1998 Plan have become vested.
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 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.
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 and consultants 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 and
consultants of the Company to purchase up to 20,000 common stocks and
40,000 common stocks, respectively. 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.
F-20
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
13. Stock Options and Warrants (continued)
(a) (continued)
On January 5, 2000, the Company adopted another Stock Option Plan
("the 2000 A Plan") for the grant of options to consultants 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.
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. The plan was subsequently cancelled
during the year.
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. The plan was
subsequently cancelled during the year.
On November 13, 2000, the Company granted directors, employees and a
consultant of the Company to purchase up to 1,125,000 common stocks,
460,000 common stocks and 10,000 common stocks, respectively. Options
granted to directors and employees of the Company were vested
immediately and will be exercisable from the date of grant for a
period of five years at an exercise price of $3.125 per share. Options
granted to a consultant of the Company was vested immediately and
exercisable from the date of grant for a period of 2 years at an
exercise price of $3.125 per share.
The Company charged $205,375 and $1,876,000 to income in the 2000 and
1999 fiscal years, respectively, on vested options having an exercise
price below the fair value of the Company's stock on the date of
grant.
F-21
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
13. Stock Options and Warrants (continued)
(b) Summary of Stock Option Activities
The following is a summary of the stock option outstanding as at
December 31, 2000:
Weighted Average
Shares Exercise Price
-------------------------------------------- --------------- -------------------
Options outstanding at February 10, 1998 - $ -
Granted 1,200,000 $ 0.50
-------------------------------------------- --------------- -------------------
Options outstanding at December 31, 1998 1,200,000 $ 0.50
Cancelled (300,000) $ 0.50
Granted 620,000 $ 0.69
-------------------------------------------- --------------- -------------------
Options outstanding at December 31, 1999 1,520,000 $ 0.58
Granted 1,737,500 $ 3.31
Forfeitured (107,500) $ 7.00
Exercised (107,000) $ 0.50
-------------------------------------------- --------------- -------------------
Options outstanding at December 31, 2000 3,043,000 $ 1.89
============================================ =============== ===================
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 1,428,000 3.24 $0.50 1,400,000 $0.50
$2.01 - $3.00 20,000 3.86 $2.50 20,000 $2.50
$3.01 - $4.00 1,595,000 4.85 $3.13 1,595,000 $3.13
--------- ---- ----- --------- -----
3,043,000 4.09 $1.89 3,015,000 $1.90
========= ==== ===== ========= =====
The following table summarizes information about options granted
during the year ended December 31, 2000:
Weighted Weighted
Average Average
Exercise Fair
Price Value
----------- -------------
Exercise price equals market price at grant date $3.37 $0.01
Exercise price is below market price at grant date $0.50 $4.54
----------- -------------
The weighted average fair value of the options granted during the year
ended December 31, 2000 was $0.11.
F-22
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
13. Stock Options and Warrants (continued)
(c) 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 89%, and expected lives of approximately 0 to 2 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:
2000 1999 1998
------------ ----------- ----------
Net (loss) for the period:
- as reported $ (2,745,794) $ (2,791,033) $ (471,717)
- pro-forma (2,746,378) (2,791,033) (471,717)
------------ ----------- ----------
Basic and diluted (loss) per share:
- as reported $(0.17) (0.27) (0.06)
- pro-forma $(0.17) (0.27) (0.06)
------------ ----------- ----------
(d) Share purchase warrants outstanding as at December 31, 2000:
Number Underlying Exercise Price
of Warrants Shares Per Share Expiry Date
----------- ---------- -------------- -----------
4,258,000 4,258,000 $2.50 March 1, 2001
14. Related Party Transactions
(a) The Company incurred the following expenses to the directors:
2000 1999 1998
------------ ----------- ----------
Management fees $72,000 $96,000 $72,000
============ =========== ==========
(b) see Notes 8, 9 and 10.
F-23
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(Expressed in US Dollars)
15. Commitment
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$362,350) per annum until June 11, 2009. Minimum payments
required under the agreement are as follows:
2002 3,000,000 362,350
2003 3,000,000 362,350
2004 3,000,000 362,350
2005 3,000,000 362,350
2006 3,000,000 362,350
2007 - 2009 7,375,000 890,780
-------------- ------------
Total RMB 22,375,000 US$2,702,503
============== =============
16. Non-cash Financing Activities
During the year, 250,000 common shares were allotted for additional licence
and permit costs.
17. Comparative Figures
Certain 1999 and 1998 comparative figures have been reclassified to conform
with the financial statement presentation adopted for 2000.