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 Commission File Number 0-27937
December 31, 2002
DRAGON PHARMACEUTICAL INC.
(Exact name of Registrant as specified in its charter)
Florida 65-0142474
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1055 Hastings Street, Suite 1900
Vancouver, British Columbia V6E 2E9
(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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
----- -----
State issuer's revenues for its most recent fiscal year: $7,362,248.
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
the last business day of the most recently completed second fiscal quarter was
$21,652,530.
The number of shares outstanding of the issuer's common stock as of March 15,
2003, was 20,334,000.
Documents Incorporated By Reference: None
With the exception of historical facts stated herein, the following
discussion may contain forward-looking statements regarding events and financial
trends that 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 that 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", "the Company"
and "Dragon" shall mean Dragon Pharmaceutical Inc. and its subsidiaries unless
otherwise indicated.
Part I
Item 1. Business
General
We are a pharmaceutical and biotechnological company whose business plan is
to develop and manufacture pharmaceutical products in China and market
pharmaceutical products in China and developing countries. In 1999, we acquired
a 75% interest in a drug manufacturing company called Nanjing Huaxin
Bio-pharmaceutical Co., Ltd. ("Nanjing Huaxin") located in Nanjing City, China
and are implementing our proprietary technology, which allows Nanjing Huaxin 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 and developing countries at costs
that will be lower than those currently available. We acquired the remaining 25%
interest in Nanjing Huaxin in January 2002, and now have an 100% interest in
Nanjing Huaxin.
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
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Dragon Pharmaceutical Inc. Prior to the reorganization, First Geneva Investments
and its officers, directors and shareholders were not affiliated with Allwin
Newtech and its officers, directors and shareholders.
Our Joint Ventures and Acquisitions
Sanhe Kailong Bio-Pharmaceutical Limited
On April 18, 1998, Allwin Newtech entered into a contract to acquire a 75%
interest in a 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. 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. Sanhe Kailong was formed by
Allwin Newtech for the purpose of the joint venture. Neither we nor Allwin
Newtech had an affiliation with Sinoway Biotech prior to the joint venture's
formation. Currently, Sanhe Kailong has no operations and the Company has
decided to dissolve Sanhe Kailong.
Nanjing Huaxin Bio-pharmaceutical 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 Bio-pharmaceutical Co, Ltd. ("Nanjing Hiaxin") 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. In January 2002 we acquired the balance of the 25% interest from
Nanjing Medical Group for $1,400,000.
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 that 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."
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Nanjing Huaxin is located in Nanjing City, China and owns a license and
production permit for the manufacture of EPO in China. In 2002 and 2001, Nanjing
Huaxin manufactured approximately 3.3 million doses compared to 550,000 doses in
2000. 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 use of our EPO in surgery is
expected in early 2003. Clinical trials for cancer therapy applications of our
EPO are expected to be completed in late 2003.
Pharmaceutical Products
All projects concerning the Dragon pipeline products are evaluated by staff
members and, where necessary, by independent scientists with a view on their
economic viability at the projected launch date of the respective recombinant
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
alternative treatment that 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 that 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.
Slow-Release EPO. In June 2001, Dragon entered into an agreement related to
a novel, slow-release formulation for EPO with Transworld Pharmaceuticals Corp.
of Portugal and Renapharm AB of Sweden. This was a highly significant
development for Dragon that may ultimately be instrumental in placing the
Company beside the leaders in the EPO marketplace.
The agreement provides Dragon with sole worldwide manufacturing rights as
well as exclusive marketing rights to Asia, including China, Japan, Korea, and
Southeast Asia. Transworld Pharmaceuticals, an international distributor of
blood related products and biotechnology drugs, will have exclusive marketing
rights to all markets outside Asia.
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A pilot clinical trial conducted in 101 patients at the University
Hospital, Uppsala University in Sweden, assessed the monthly administration of
EPO in this slow release formulation compared to the four times per week
administration of conventional EPO. The total dose of each form of EPO was
identical. The results of the study showed that monthly administration of the
slow release formulation had the same therapeutic effect as four times per week
conventional EPO with the added advantage of requiring less frequent injections.
The potential market for sustained release or long-lasting EPO is estimated
by Amgen and industry analysts at $5 billion per year, with application in the
treatment of anemia in patients with kidney failure and cancer patients
undergoing chemotherapy.
Prior to the 2004 expiry of the EPO gene patent, generic forms of EPO may
only be sold in non-patent covered markets outside North America, the European
Union, Japan, Australia, and New Zealand. Given that our slow-release
formulation incorporates Dragon's generic EPO, initial sales will focus on the
developing world markets not protected by the EPO gene patent. After 2004, our
slow-release formulation would not be restricted by any existing patents and
would be eligible for marketing worldwide, excluding North America.
Dragon plans to proceed with finalizing formulation and preclinical studies
following which we will file our submission with the Chinese SDA seeking
permission to begin clinical trials. According to our agreement, each partner
will participate in the final development of the formulation. Dr. Bo Danielson
MD, PhD, Managing Director of Renapharm and developer of this slow-release
formulation, will serve as lead clinical and technical advisor to the project.
Dr. Danielson is recognized as a world expert on EPO, having participated in
over 75 published clinical studies involving EPO.
Thrombopoietin (TPO). TPO is a protein produced mainly in the liver that
stimulates the production of platelets by bone marrow. Platelets (or
thrombocytes) are critical to blood clotting and wound healing, and are often
diminished in patients receiving cancer chemotherapy, or in those with liver or
other relevant diseases, causing a condition called thrombocytopenia (a reduced
level of platelets). This condition can result in uncontrolled bleeding or
bruising and is currently treated by blood transfusions.
The introduction of effective platelet stimulating drugs, such as TPO, will
greatly improve our ability to treat chemotherapy-related platelet deficiencies.
They may also have application for increasing platelet levels in surgical
patients who donate their own blood prior to surgery for transfusion during
surgery.
TPO has not yet been commercialized in any market. Genentech owns the TPO
gene patent and is co-developing TPO produced in a mammalian CHO (Chinese
Hamster Ovary) cell culture system with Pharmacia-Upjohn. Their product is
currently in Phase III clinical trials.
Dragon acquired co-development rights to a CHO cell system for the
production of TPO in May of 2000, with Dragon's portion of remaining product
development costs is fixed at $60,000. Dragon has decided to no longer pursue
development of TPO and is pursuing the sale of the technology to a third party.
Granulocyte-Colony Stimulating Factor (G-CSF). G-CSF stimulates the bone
marrow to produce neutrophils, or leukocytes, a type of white blood cell that
helps the body fight infection and disease. When white blood cells are reduced
in number, a condition known as "leukopenia", susceptibility to infection
increases dramatically. Cancer radiation and chemotherapy often diminish or
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destroy the leukocytes, as does advanced HIV infection. White blood cell counts
are also low in patients with acute myelogenous leukemia and in people receiving
bone marrow transplants.
The introduction of G-CSF products has markedly decreased the potential for
infection in patients with leukopenia by rapidly increasing the white blood cell
production by bone marrow and reestablishing their protective function. The
worldwide G-CSF market, currently valued at $1.3 billion per year, was developed
by Amgen and its multinational partners Hoffmann-La Roche and Kirin using a
bacterial cell line technology. Boehringer Mannheim is producing G-CSF using a
CHO cell line. The G-CSF gene patent expires in 2006.
We have completed cloning of the G-CSF gene and have commenced cell line
development. Remaining development time, if completed, is estimated at 1.5 to 2
years at an approximate cost of $1.5 million in addition to the $0.5 million
already spent.
Human Insulin. Insulin is a peptide hormone that is secreted by cells of
the Islets of Langerhans in the pancreas. Insulin plays a critical role in
glucose homeostasis (i.e. balancing the level of glucose in the blood) by
regulating the production and storage of glucose in the liver, along with the
uptake and metabolism of glucose in the body's tissue. Glucose is the primary
energy source for the body and, therefore, insulin regulation is a critical
factor to normal metabolism. In addition, insulin also regulates the metabolism
of lipids and proteins.
Diabetes is the name given to a disorder of glucose level in the blood,
which is primarily related to defects in insulin production, regulation, or
reception. The commonest forms of insulin disorders are Type I and Type II
diabetes. All Type I or IDDN (insulin-dependent diabetes mellitus) diabetics
require insulin therapy, as do approximately 20% of Type II or NIDDM
(non-insulin dependent diabetes mellitus) patients.
1998 worldwide incidence of diabetes was estimated at 135 million people,
10% of whom have Type I disease. This figure is projected to double to 300
million by 2025 due to improved diagnosis, aging of the population, diet,
obesity and lifestyle. The cost of insulin varies greatly between countries,
from a low of $3 per vial to over $20 per vial. Among the major producers of
injectable recombinant insulin are Novo Nordisk and Eli Lilly, each with over
40% of the world market. Hoechst and several other companies account for the
remaining 20%. Novo-Nordisk's and Eli Lilly's patent on human insulin expires in
2002.
To date, we have completed the cloning of the insulin genes and the cell
line has been constructed. We have confirmed that the cell line can produce
functional insulin protein at a yield suitable for development into industrial
production. The Amino Acid Sequence Analysis showed that the Insulin produced by
the cell line has identical Amino Acid to that produced naturally in humans ("N
Terminal Amino Acid Sequence"). The protein is currently being tested in
animals.
Since insulin is already an established drug, we will only be required to
conduct Phase II clinical trials in China prior to submitting for regulatory
approval. We anticipate that, if completed, the time to complete submission of
our New Drug License in China will be 1.5 to 2 years at an additional
development cost of $1.0 million in addition to the $1.5 million already paid.
Hepatitis B Vaccine. Hepatitis B is a viral disease that causes both acute
and chronic hepatitis (inflammation of the liver) and accounts for over 1
million deaths per year. An estimated 2 billion people are infected with
Hepatitis B virus (HBV) worldwide. Although relatively rare in North America,
Hepatitis B infection is endemic in parts of Asia. It is estimated that there
are 300 to 350 million carriers throughout China, Southeast Asia, the
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Philippines, Africa, and the Middle East. According to a recent Chinese
government survey, an estimated 10% of the Chinese population either have active
Hepatitis B or are chronic carriers of the disease.
The 1999 global market for Hepatitis B vaccines is estimated at $708
million, broken down by market as follows with less than 8% of sales generated
in the developing regions of the world. These vaccines typically cost $20 - $30
per injection, making them prohibitively expensive for precisely those regions
where they are most needed.
There are many competitors in the Hepatitis B vaccine market. There are no
potential patent infringement issues to consider as a gene patent was never
issued for the Hepatitis B vaccine antigen.
On October 6, 2000, we entered into an acquisition agreement with Alphatech
Bioengineering Limited, a Hong Kong corporation owned by Dr. Longbin Liu and Mr.
Philip Yuen, two directors of the Company (at the time the acquistion agreement
was entered into, Dr. Liu was our President and CEO). Under the terms of the
acquisition agreement, we agreed to purchase for $ 4 million Alphatech
Bioengineering's rights and technology relating to the production of Hepatitis B
vaccine through the application of genetic techniques on hamster ovary cells
including the 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.
Given the high costs involved in clinical trials for vaccines and the
requirement for a separate vaccine production facility, it was our intention to
maximize the value of our CHO cell line-based Hepatitis B vaccine product by
licensing it out or beginning co-development with a partner in the near term,
rather than delay product development and commercialization until we could fund
it internally. As a result, on June 5, 2001, we amended the agreement with
Alphatech Bioengineering to allow us to pursue additional options for the
Hepatitis B Vaccine project. We were unsuccessful in finding either a licensee
or co-development partner and Dr. Liu exercised his right to repurchase the
Hepatitis B vaccine project. Dr. Liu has repurchased the Hepatitis B vaccine
project from us for the original purchase price of $4 million of which $500,000
has been paid and the balance of $3.5 million, plus interest accruing at 6% per
annum from September 2002, due September 5, 2003.
The $3.5 million owed by Dr. Liu to us is unsecured. We have requested that
Dr. Liu provide collateral for the amount due to us; however, Dr. Liu, while
reaffirming his intention to abide by the terms of the amended agreement and pay
the amount owing plus accrued interest when due, has declined to do so.
The $3.5 million is not due until September 2003. However, due to the
significant amount involved, and the lack of security or collateral securing
payment, we have chosen to conservatively value the amount due and have written
off the full amount due to us less a nominal amount of $100. We fully intend to
pursue collection of the full amount owing, including accrued interest, when
due. See Management's Discussion and Analysis of Financial Condition and Results
of Operations under Item 7.
Proprietary Biotechnology
The science behind our technology is summarized below.
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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.
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
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
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.
Further, we are conducting research and development to develop and market
other pharmaceutical drugs. In order to save costs, we do not have our own
research department. However, as discussed below, we have entered into certain
agreements with Dr. Longbin Liu, the Chairman of the Board of Directors (who was
our President and CEOat the time of the transactions), or with companies in
which Dr. Liu may control or have an interest into develop new project for us.
These agreements may lead to conflicts of interests. See Risk Factors - "Our
directors and officers may have interest in some transactions that may cause
conflicts," " Certain Relationships And Related Transactions" and Notes 8, 9, 10
and 15 to our financial statements.
The Company has entered into a Patent Development Agreement dated January
14, 2002 with Dr. Liu, who was the President and CEO of Dragon at the time, and
Novagen Holding Inc. ("Novagen") whereby the Company has the first right to
select and acquire one patent resulting from the discovery of a new gene or
protein. This option to acquire a patent has a term of three years from the date
of the agreement. Novagen is a research and development company located in
Vancouver. Under the agreement Novagen and Dr. Liu shall be responsible for all
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development costs up to filing of the patent application. The Company will be
required to reimburse Novagen and Dr. Liu for legal costs related to the patent
filing and will be responsible for all costs related to the subsequent
development and commercialization of the project.
In consideration of the rights under this agreement, the Company has paid
Dr. Liu and Novagen $500,000 and issued warrants exercisable for 1,000,000
shares of the Company at an exercise price of $2.50 per share for a term of five
years. If the Company chooses not to select a project patent within the three
years following the execution of the agreement, Dr. Liu's warrants may be
cancelled.
Dr. Liu and a team of research scientists trained in North America and
China have been involved in the research and development of novel drug projects
since 1995. The research and development focus is on the discovery of new gene
proteins with broad application in the areas of oncology and cardiovascular
disease. Several projects are in the late stages of drug discovery and it is
anticipated that the first filing of a United States patent will occur in 2003.
The Company has also entered into a Project Development Agreement with Dr.
Liu dated January 14, 2002 whereby Dr. Liu has agreed to conduct certain
development projects on behalf of the Company in consideration of the Company
providing funding for the projects. Dr. Liu has agreed to conduct projects for
the research and development of G-CSF and recombinant Human Insulin protein and
it is the work of him and his scientists that are referred to above.
International Market outside of China
Through our wholly owned subsidiary, Allwin Biotrade Ltd., we have entered
into a series of marketing and license agreements. In general, Allwin Biotrade
Ltd. has entered into an exclusive or non-exclusive marketing and license
agreement with a local pharmaceutical distribution companies to sell, formulate,
vial and package Dragon's EPO. In most cases the local pharmaceutical
distribution company is responsible for obtaining, at its expense, all
registration from applicable regulatory authorities in order to permit the sale
of our EPO in the covered area. Further, the local pharmaceutical distribution
company has the right of first refusal for the sale of additional
biotechnological or pharmaceutical drugs for which Allwin Biotrade may from time
to time have right to licenses or sublicense. The marketing and license
agreements range from five to seven years, and are subject to renewals.
Currently, Allwin Biotrade has marketing and license agreements covering
135 countries.,
Due to the initial implementation of the marketing and licensing agreement,
and the seeking of regulatory approval to sell EPO in these countries, we have
yet to make significant sales pursuant to these marketing and license
agreements. We have, however, been approved to sell and have sold our EPO in
Brazil, Egypt, India and Peru and have made a significant sale of our EPO for
research purposes.
China's EPO Market
We believe that sales of EPO in the Chinese market can be increased in the
future 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. If the health insurance plans covers
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dialysis, this may 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 will 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, when health insurance may become generally available and
whether we will benefit from it.
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 high because of tariffs and a value added taxes that
combined add about 30% to the cost per vial. Second, there are approximately
five existing domestic producers of EPO similar to Nanjing Huaxin. We 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 administrative
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 the price imposed by the
Chinese Government. Production for the years ended December 31, 2002 and 2001
was approximately 3,300,000 doses as compared to the production of 550,000 doses
in 2000. We plan to maintain our costs by producing domestically in China, thus
avoiding import duties. Comparative sales were 850,000 vialed doses in 2002,
595,000 doses during 2001 and 389,000 doses in 2000. Dragon also had sold some
EPO in bulk during 2002 for research purposes for $3.7 million.
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.
Competition
The world market for EPO is approximately $8 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 are competing with
existing and potential domestic producers such as Sunshine SS Pharma and
Sinogen. Many of our competitors may have greater financial, technical and
manufacturing resources than we have. These resources would allow our
10
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.
Due to China's growing market for pharmaceutical products, competition
among drug producers is expected to increase during 2003. 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. Dragon
has set up the necessary organization in China to become a significant player.
Potential competition to EPO market includes other products or technologies
that are successful in treating 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).
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 surgery recovery will be
granted later this year and for additional applications such as cancer related
anemia and pregnancy related anemia will be granted in 2003. 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).
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.
11
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.
Geographical Breakdown.
We recently entered into new marketing and license agreements for the sale
of our EPO outside of China. Sales of $3,002,898 were made within China and
sales of $4,359,350 were made outside of China during the year ended December
31, 2002.
Segments
We operate in one segment only. We focus on the development and sale of
pharmaceutical products.
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
introduce our bioreactor technology to increase EPO production at these
facilities.
New Dragon Management and Organization
At a Dragon Board Meeting Held in Nanjing in September 2002, in the
presence of all Board Members, Dr. Longbin Liu resigned as President and Chief
Executive Officer of Dragon and was appointed Chairman of the Board, replacing
Dr. Ken Cai who remains on the Board. The function of CEO has been entrusted to
an Executive Committee comprised of Dr. Cai, Mr. Philip Yuen and is presided
over by Dr. Alexander Wick.
This committee has since taken a number of measures to change Dragon from a
costly research centered company into a company which aims to rapidly increase
sales of its EPO through the existing and new channels, cut costs of the
organization and finance on-going and future research projects with the proceeds
of our sales. Steps have been undertaken to close the Beijing and Hong Kong
representative offices and to convert the Vancouver operations into a focused,
lean organization capable of reaching the Company's goals.
A new and very experienced person, Dr. Yin Zhong, has taken over Nanjing
Huaxin as General Manager and is streamlining the China operations
Employees
As of December 31, 2002, we had 11 employees in North America. Nanjing
Huaxin has approximately 150 employees in China. Sanhe Kailong has no employees.
None of the Company's workforce is unionized and there have not been any labor
disputes.
13
Risks Associated With Dragon Pharmaceutical
We have a limited operating history and we have incurred losses since our
founding in February 1998, and there is no guarantee of profit in the 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 losses since our founding and for the year ended December
31, 2002, reported a net loss of $5,250,946.
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.
Nanjing Huaxin Bio-Pharmaceutical Co, Ltd. Nanjing has had losses since our
acquisition and there is no guarantee of profit in the future.
In July 1999, we acquired our 75% interest in Nanjing Huaxin
Bio-pharmaceutical Co, Ltd. which produces EPO in China. We increased our
interest in Nanjing Huaxin to 100% in January 2002. Nanjing has incurred
operating losses in each year since acquisition. Although for the years end
December 31, 1999, 2000, 2001 and 2002, we realized revenues of approximately
$990,000 , $3,175,561, $3,073,885 and $7,362,248, respectively, from our
ownership interest in Nanjing, these revenues have not been sufficient to offset
costs due primarily to drug research and development costs, plant improvements
and implementation of our proprietary production technology and.
Our directors and officers may have interest in some transactions that may
cause conflicts.
We have entered into, and in the future may enter into, transactions with
certain member of our Board or officers or with companies that they control or
have a significant interest in. For example, we acquired technology from
Alphatech Bioengineering, relating to the production of Hepatitis B vaccine,
which is owned by Dr. Longbin Liu and Mr. Philip Yuen, two of our directors. In
connection with the Hepatitis B vaccine, we wrote-off a $3.5 million note due to
us by Dr. Liu. In addition, we have entered into a Patent development Agreement
and Project Development Agreement with Dr. Liu. These agreements were entered
into so that we would not be required to staff and fund our own research and
development program. However, these directors and officers will be subject to
various potential conflicts of interest. See "Business - Our Joint Ventures and
Acquisitions" and "Research and Development" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
14
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.
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.
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, 2002, there were warrants outstanding to purchase
2,800,000 shares at prices ranging from $1.70 to $2.50 per share. Further, we
have granted options to purchase an additional 3,288,000 shares of common stock
with a weighted average exercise price of $1.82 per share. 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.
15
Item 2. Properties
Our corporate offices are located at 1055 West Hastings, Suite 1900,
Vancouver, British Columbia, Canada V6E 2E9. The Company leases the 6,432 square
foot premise for an amount escalating from CDN$200,000 to CDN$230,000
(US$127,000 to US$146,000) per annum until March 31, 2007
Huaxin currently leases a 90,000 square foot production facility in
Nanjing, China at 293-2 Zhong Shan Dong Road, Nanjing, China 210002. for an
amount of RMB 2,700,000 (US$326,134) per annum, until June 11, 2009.
The Company has closed down its representative office in Beijing and has
terminated the lease on Company representative office in Hong Kong, effective
April 30, 2003.
All of our existing facilities adequately meet our current needs.
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
Price Range of Common Stock
Our common stock began quotation on the OTC Bulletin Board under the symbol
"DRUG" on October 9, 1998. The following quotations reflect the high and low
bids for our common stock on a quarterly basis for the past two fiscal years.
These quotation are based on inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Common Stock
Quarter Ended High Low
------------- ---- ----
December 31, 2002 $0.95 $0.60
September 30, 2002 $1.49 $0.75
June 30, 2002 $1.95 $1.07
March 31, 2002 $1.90 $1.53
December 31, 2001 $2.05 $1.86
September 30, 2001 $3.47 $1.75
June 30, 2001 $4.13 $1.40
March 31, 2001 $2.94 $1.56
16
Holders
The approximate number of holders of record of our common stock at March
15, 2003, was 125. This number does not include stockholders who hold our
securities in street name.
Dividend Policy
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.
Recent Sales of Unregistered Securities
None.
Equity Compensation Plan Information
The following table provides aggregate information as of the end of the
fiscal year ended December 31, 2002 with respect to all compensation plans
(including individual compensation arrangements) under which equity securities
are authorized for issuance.
------------------------------- ---------------------------- ---------------------------- ----------------------------
A B C
------------------------------- ---------------------------- ---------------------------- ----------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column A)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security holders 3,288,000 $1.82 1,212,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders 1,050,000 $2.46 0
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 4,338,000 $1.98 1,212,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
17
Item 6. Selected Financial Data
We have derived the selected consolidated statement of operations data for
the years ended December 31, 1999, 2000, 2001 and 2002, and the selected
consolidated balance sheet data as of December 31, 1999, 2000, 2001 and 2002,
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.
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.
1999 2000 2001 2002
---- ---- ---- ----
Consolidated Statement of Operations Data
Sales $ 989,539 $ 3,175,561 $ 3,073,885 $ 7,362,248
Cost of sales 204,473 902,480 583,878 978,637
Operating income (loss) (2,865,276) (3,158,091) (4,016,366) 118,968
(Loss) before minority interest (2,845,879) (3,162,309) (3,975,908) (5,250,946)
Net (loss) for period (2,791,033) (2,745,794) (3,735,305) (5,250,946)
Loss per share $ (0.27) $ (0.17) $ (0.21) $ (0.26)
Consolidated Balance Sheet Data
Working capital $ 8,405,788 $ 4,444,066 $ 7,551,687 $ 5,239,073
Total assets 16,740,037 18,546,830 22,005,037 13,644,092
Total liabilities 3,289,123 3,634,100 4,440,283 2,008,566
Total shareholders' equity $12,488,768 13,983,465 16,876,215 11,635,526
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.
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
18
Nanjing Huaxin which manufactures EPO in China. In January 2002 we acquired the
balance of the 25% interest from Nanjing Medical Group for $1,400,000.
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
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, 2002 and 2001
Revenues. Revenues were derived primarily from the sale of EPO. Revenues
for the year ended December 31, 2002, were $7,362,248 and revenues for the year
ended December 31, 2001, were $3,073,885. Sales in and outside of China were
$3,002,898 and $4,359,350, respectively during the year ended December 31, 2002
compared to $2,630,182 and $443,703, respectively during the year ended December
31, 2001. The sales during 2002 outside of China included delivery of a $3.7
million in orders to one customer to be used by the purchaser for new drug
research and development. Cost of sales for the year ended December 31, 2002,
was $978,637 and $583,878 for the year ended December 31, 2001. The cost of
sales is attributed to the production costs of our pharmaceutical products.
During the year ended December 31, 2002, we had interest income of $146,986.
Interest income for the year ended December 31, 2001, was $250,458. Interest
income is related primarily to interest earned on cash received from the private
placements of common stock during the third quarter of 2001 and from cash
received from international sales in 2002.
Expenses. Total expenses for the year ended December 31, 2002, were
$8,364,643. The major expenses for the year ended December 31, 2002 were
$2,100,000 paid for the development of insulin and G-CSF and selling expenses of
$2,094,820, each representing 25% of total expenses. The remaining major expense
items are represented by administrative expenses and include office and
miscellaneous expenses of $213,657, legal and auditing of $156,646, consulting
fees of $533,270, rent of $394,004, travel of $456,427 and salaries and benefits
of $587,515. Management fees of $247,968 include $192,500 paid to two directors
for services during the year ended December 31, 2002.
Other significant expenses for the year ended December 31, 2002, included
depreciation of fixed assets and amortization of license and permit of $736,361,
19
provision for doubtful accounts of $216,709, new market development of $178,471,
interest expense of $70,944 and stock-based compensation of $18,760.
Net and Comprehensive Loss. Dragon significantly increased its operating
income for the year ended December 31, 2002 to $118,968 compared to operating
losses of $(4,016,366) and $(3,158,091) for the years ended December 31, 2001
and 2000, respectively. The Company had a net loss and a comprehensive loss of
$4,114,597 for the three-month period ending December 31, 2002. Dragon's net
loss and comprehensive loss for the year ended December 31, 2002, was
$5,250,946.
The main reason for the large loss recorded was the Company's decision to
fund the development of insulin and G-CSF and the decision to write-down the
amount of $3.5 million owed by Dr. Liu in payment for the Hepatitis B Vaccine
Project to a nominal value of $100. The amount owed is not due until September
2003. Although, Dr. Liu has reaffirmed his intention to abide by the terms of
the amended agreement and pay the amount owing, plus accrued interest, when due,
,given the significant amount involved and the lack of security or collateral
securing payment of the obligation, the Company has chosen to conservatively
value the amount owed. The Company fully intends to pursue collection of the
full amount, when due, and the amount collected will be recorded as
non-operating income when received.
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 2001. The loss per share for the year
ended December 31, 2002, was $0.26. 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, 2001 and 2000
Revenues. Revenues were derived primarily from the sale of EPO in China.
Revenues for the year ended December 31, 2001, were $3,073,885, and revenues for
the year ended December 31, 2000, were $3,175,561. Cost of sales for the year
ended December 31, 2000, was $583,878 and $902,480 for the year ended December
31, 2000. The cost of sales is attributed to the production costs of our
pharmaceutical products. During the year ended December 31, 2001, we had
interest income of $250,458. Interest income for the year ended December 31,
2000, was $478,922. Interest income is related primarily to interest earned on
cash received from the private placements of common stock during the last
quarter of 1999 and the third quarter of 2001.
Expenses. Total operating expenses for the year ended December 31, 2001,
were $6,716,373. The major expense incurred for the year ended December 31,
2001, was related to the selling of pharmaceutical products which represented
approximately 30% of the total operating expenses. The remaining major expense
items are represented by administrative expenses and include office and
miscellaneous expenses of $266,123, legal and auditing of $232,785, investor
relations expenses of $405,268, rent of $306,246, travel of $428,651 and
salaries and benefits of $374,575. Management fees of $424,952 include $336,000
paid to two directors for services during the year ended December 31, 2001.
Other significant expenses for the year ended December 31, 2001, included
depreciation of fixed assets and amortization of license and permit of $597,042,
research expenses of $105,096, new market development of $211,194, interest
expense of $154,644and stock-based compensation of $51,975.
20
Net and Comprehensive Loss. Dragon had a net loss of $1,214,794 and a
comprehensive loss of $1,168,627 for the three-month period ending December 31,
2001. Calculated in the comprehensive loss for the period was a minority
interest gain of $46,167.
Dragon's net loss for the year ended December 31, 2001, was $3,975,908. The
comprehensive loss for the same period was $3,735,305 which includes a minority
interest gains of $240,603.
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 2001. The loss per share for the year
ended December 31, 2001, was $0.21. Common stock issuable upon the exercise of
common stock options and common stock warrants have been excluded from the net
loss per share calculations as their inclusion would be anti-dilutive.
Liquidity and Capital Resources
Dragon is a development stage pharmaceutical and biotechnological company
that has commenced the manufacture and marketing of pharmaceutical products in
China through its subsidiary, Nanjing Huaxin. Previously, the Company has raised
funds through equity financings to fund its operations and to provide working
capital. The Company currently has no plans for further equity financings but
may finance future operations through additional equity financings. As of
December 31, 2002 and 2001, the Company's working capital was $5,366,073 and
$7,551,687, respectively. The decrease in working capital during 2002 was due to
the requirement to fund operations, particularly the $2,100,000 spent to fund
the Company's development of insulin and G-CSFduring the year.
In September 1998, the Company raised $1 million through the sale of
2,000,000 shares of common stock. The proceeds raised were used for working
capital. In April 1999, the Company entered into a $600,000 loan agreement. The
$600,000 loan bore interest at 8% and was 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 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. As discussed below, this debt was subsequently converted
into common stock in 1999.
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.
On September 14, 2001, the Company closed a private placement raising
$7,000,000 through the issue of 3,500,000 shares of common stock at a price of
$2.00 per share.
As of December 31, 2002, the Company had $4,935,766 in cash available, of
which $510,000 is held as collateral for a loan of RMB4, 000,000 (US$483,162),
which was repaid subsequent to December 31, 2002. This cash, the $949,045 in
accounts receivable, the $3,500,000 owed to the Company in repayment for the
Hepatitis B Vaccine Project and anticipated sales will be used to fund the
ongoing operations and research and development during the upcoming year.
21
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, 2002, we had no long-term debt.
Therefore, we believe we are not currently exposed to any market risks related
to interest rate sensitivity.
Item 8. Financial Statements And Supplemental Data
The following is a condensed summary of actual quarterly results of
operations for 2002 and 2001.
2002
----------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------
Revenues $ 1,372,808 $ 1,026,159 $ 3,777,326 $ 1,185,956
Gross profit 1,182,284 851,693 3,316,338 1,033,296
Income (Loss) before tax & minority interest (937,878) (1,824,867) 1,626,399 (3,987,597)
Net income (loss) (937,878) (1,824,867) 1,626,399 (4,114,597)
Income (loss) per share $ (0.05) $ (0.09) $ 0.08 $ (0.20)
2001
----------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------
Revenues $ 664,414 $ 602,341 $ 787,682 $ 1,019,448
Gross profit 517,494 446,614 673,745 852,154
Loss before minority interest (959,743) (1,038,665) (762,706) (1,214,794)
Net loss (856,183) (972,713) (737,782) (1,168,627)
Loss per share $ (0.05) $ (0.06) $ (0.04) $ (0.07)
See also pages F-1 to F-22 to our financial statements.
Item 9. Changes in And Disagreements With Accountants on Accounting And
Financial Disclosures
Not Applicable.
22
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
---- -------- --- ------
Alexander Wick President and Executive 64 September 2002 - present
Director
Director September 1998 - present
Longbin Liu Chairman of the Board 39 September 2002 - present
President, Chief Executive September 1998 - September 2002
Officer and Director
Ken Z. Cai Executive Director, 37 September 1998 - present
Greg Hall Director 45 September 1998 - present
Philip Yuen Pak Yiu Executive Director 66 November 1999 - present
Dr. Yiu Kwong Sun Director 59 November 1999 - present
James Harris VP Marketing 49 January 2003 - present
Robert Walsh Director, Corporate 42 January 2003 - present
Development
VP Marketing April 2000 - present
Matthew Kavanagh Director, Finance and 47 July 2001 - present
Compliance
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. Alexander Wick, Ph.D. is the President and 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 had leading positions in the pharmaceutical research
departments of F. Hoffmann-La Roche in the United States and Switzerland and
Synthelabo in France (Director of Chemical Research and Development) for over 25
years in the field of antibiotics, prostaglandius, vitamins, cardiovascular CNS
and AIDS. In 1995 he created the fine chemicals company Sylachim S.A., a 100%
23
subsidiary of Synthelabo, active in chemical intermediates and API's for the
world's largest pharmaceutical companies (turnover of over 100 million Euros)
and was its President until its acquisition by the German conglomerate mg
Technologies (Dynamit-Nobel GmbH) in 2001.
Dr. Ken Z. Cai, Ph.D. is a Director of Dragon. Dr. Cai has a Ph.D in
Mineral Economics from Queen's University in Kingston, Ontario, as well as 18
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 17
years and is currently the Chairman of the Board of four Sino-foreign joint
ventures.
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. Longbin Liu, M.D. is the Chairman of the Board of Directors of Dragon.
From September 1998 to September 2002, Mr. Liu was the President of Dragon. He
has 17 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. Liu was the President and
Chief Executive Officer of Dragon from September 1998 until his resignation in
September 2002.
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 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. Greg Hall is a Director of Dragon. Mr. Hall is a stockbroker with 18
years of corporate finance and public offerings experience. Since November 2001,
Mr. Hall has been a Senior Vice President of Golden Capital Securities Ltd. in
Vancouver, Canada. Prior to joining Golden Capital, Mr. Hall was with Yorkton
Securities Inc for 3 years and 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.
Mr. James Harris is the Vice President Marketing and Sales for the Company.
Mr. Harris has over 22 years of experience within the above field in several
capacities of increasing responsibility, working with various firms ranging from
large multinationals to small generic companies. Mr. Harris spent eight years
24
with Amgen most recently as a National Accounts Manager and ten years with Bayer
in various sales and marketing capacities.
Mr. Robert Walsh is the Director of Corporate Development for the Company.
Mr. Walsh joined the Company in April of 2000 as Vice President Marketing and
Sales, responsible for comprehensive oversight of the Company's international
marketing initiatives. Mr. Walsh served for 22 years in Special Operations and
Medical Intelligence assignments in the U.S. Army. Prior to joining the Company,
Mr. Walsh held the position of International Marketing Manager with a
Seattle-based biotechnology company.
Matthew Kavanagh, CA is Director, Finance and Corporate Compliance for the
Company. Mr. Kavanagh joined the Company in July 2001. He has 14 years as a
Chartered Accountant in both public practice and industry. For the eight years
prior to joining Dragon, Mr. Kavanagh was the Controller and Senior Financial
Officer for a publicly listed venture capital corporation and, most recently,
for a private international auction and liquidation company.
Committees of the Board
The audit committee is comprised of Philip Yuen, Greg Hall and Dr. Sun. The
Compensation Committee is comprised of Messrs. Wick, Yuen and Sun. The corporate
governance committee is comprised of Messrs. Hall, Sun, and Yuen
Family Relationships
There are no family relationships between any director or executive
officer.
Section 16(a) Beneficial Ownership Reporting Compliance
All directors of the Company hold office until the next annual meeting of
the shareholders or until their successors have been elected and qualified.
The officers of the Company are appointed by the Board of Directors and
hold office until their death, resignation or removal from office.
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, 2001, its executive officers, directors and 10%
stockholders complied with all applicable Section 16(a) filing requirements.
25
Item 11. Executive Compensation
The following table sets forth the compensation of our president and other
Named Executives during fiscal years 2002, 2001 and 2000. No other officers or
directors received annual compensation in excess of $100,000 during this period.
Summary Compensation Table
Annual Compensation Long Term Compensation
-------------------------------------------- --------------------------------------------------------
Awards Payout
--------------------------- ----------
Restricted Securities LTIP All Other
Other Annual Stock Underlying Payout ($) Compensation ($)
Year Salary Bonus ($) Compensation ($) Award(s) Options (#)
------------------------------------------------------- --------------------------- ----------------------------
Alexander Wick 2002 $ 0(2) -0- -0- -0- -0- -0- -0-
President
Longbin Liu 2002 -0- -0- $112,500(1)(2) -0- -0- -0- -0-
President 2001 $168,000(1) -0- -0- -0- -0- -0- -0-
2000 $72,000(1) -0- -0- -0- 400,000 -0- -0-
Ken Cai 2002 -0- -0- $80,000(1) -0- -0- -0- -0-
Director 2001 $168,000(1) -0- -0- -0- -0- -0- -0-
(1) We had entered into oral consulting agreements with Dr. Liu and Dr. Cai
pursuant to which they provided administrative services to the Company. Dr. Liu,
as President, was paid $150,000 annually while Dr. Cai is paid $80,000 annually.
The compensation figures for the year ended December 31, 2001, include
retroactive recognition of amounts owing from prior to January 1, 2001. These
consulting agreements are terminable at will.
(2) Dr. Liu resigned as President and Chief Executive Officer in September
2002 as he desired to commit more time to Research and Development activities.
Dr. Wick was appointed President in September 2002 and has not drawn any
compensation.
Director Compensation
Other than disclosed above, directors are not paid cash for their services
but do receive stock options for serving as such.
Stock Option Plans
The shareholders of the Company approved the share option plan at the
Annual General Meeting held on December 18, 2001. There are currently 4,500,000
shares reserved under the plan. As of March 15, 2003, there were options to
acquire 3,288,000 shares of common stock outstanding.
There were no options granted to Executive Officers during the past fiscal
year.
26
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
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, 2003, 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, 2003, there were 20,334,000 shares of common stock
outstanding.
27
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
-------------------------------------------- ------------- --------------
Hui Min Liu
5 Lin hui City
Guan Zhen Lao Zheng Street
Hunan, China 2,247,000 11.1%
Chow Tai Fook Nominee Limited
31F New World Tower
16-18 Queens Road Central 9.8%
Hong Kong 2,000,000
Longbin Liu, 700,000(2) 3.4%
Director
Ken Cai,
Director 500,000(2) 2.5%
Greg Hall,
Director 400,000(2) 2.0%
Philip Yuen,
Director 831,500(3) 4.1%
Alexander Wick,
President and Director 175,000(2) *
Yiu Kwong Sun,
Director 775,000(4) 3.8%
James Harris,
VP, Marketing and Sales 0 *
Robert Walsh,
Director of Corporate Development 90,000(2) *
Matthew Kavanagh,
Director of Finance and Corporate Compliance 70,000(2) *
All directors and executive officers (9 persons) 3,541,500(5) 17.4%
as a group
----------------------
* 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
28
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) Represents options exercisable within sixty days.
(3) Includes 56,500 shares of common stock owned and 175,000 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.
(4) 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.
(5) Includes options to acquire 2,285,000 shares of common stock.
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.
During 2000 and 2001, we rented 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 was
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 and
Nanjing Huaxin, our wholly-owned subsidiaries
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
and Mr. Philip Yuen, two of our directors. On June 5, 2001, the Company amended
the agreement with Alphatech to allow the Company to pursue additional options
for the Hepatitis B Vaccine project. Under the terms of the amended agreement,
the Company would 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 did not find an option regarding the Hepatitis B
Vaccine project suitable to the Company within nine months from the date of the
Amended Agreement, Dr. Longbin Liu, one of the principals of Alphatech, would
repurchase the Hepatitis B Vaccine project and assume operational development
for a purchase price of $4.0 million, which was the purchase price that Dragon
originally paid to Alphatech. Dr. Liu was the President and CEO of Dragon at the
time of both transactions. The Company decided not to pursue the project and Dr.
Liu demanded to repurchase the project on the agreed terms. Dr. Liu has paid the
Company $500,000 with the balance of $3.5 million, plus interest accruing at 6%
per annum from September 2002, due September 5, 2003. The purchase price was $4
million. See "Business - Alphatech Bioengineering Limited" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
amendment to the acquisition agreement with Alphatech Bioengineering allowing
Dr. Liu the right to repurchase the Hepatitis B Vaccine project was entered into
prior to the enactment of the Sarbanes-Oxley Act.
29
The amount owing by Dr. Liu to the Company is unsecured. The Company has
requested that Dr. Liu provide collateral for the amount owing, however, Dr.
Liu, while reaffirming his intention to abide by the terms of the amended
agreement and pay the amount owing plus accrued interest when due, has declined
to do so.
The amount owing is not due until September 2003. However, given the
significant amount involved and the lack of security or collateral securing
payment, the Company has chosen to conservatively value the amount owing and has
set up a provision for the full amount, less a nominal amount of $100,. The
Company fully intends to pursue collection of the full amount owing, including
accrued interest, when due. The amount collected will be recorded as
non-operating income when received.
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.
During 2001, the Company decided not to proceed with the funding and acquisition
due to financial market and economic conditions. Guanzhou Recomgen and its
principals refunded the $400,000 during 2002.
Pursuant to an agreement dated August 15, 1999, Dragon 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. Dragon's maximum
commitment to this project is $543,540 (RMB 4,500,000). Under the terms of the
agreement, Kelong and Dragon will jointly own the drug license of rhTPO. Kelong
and Dragon will then obtain its own individual production permit of the rhTPO
drug product. Dragon 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. Dragon remaining obligation was $60,400 (RMB 500,000) for
clinical testing of the rhTPO drug after the clinical testing permit has been
issued by the regulatory authorities. Dragon has decided to no longer pursue
development of TPO and is pursuing the sale of the technology to a third party.
We have entered into a Patent Development Agreement with Dr. Longbin Liu
and Novagen whereby we have the first right to select and acquire one patent
resulting from the discover of a new gene or protein. In consideration of the
right under the Patent Development Agreement, we paid Dr. Liu and Novagen
$500,000 in the aggregate and warrants to purchase 1,000,000 shares of common
stock at an exercise price of $2.50 per share.
We have entered into a Project Development Agreement with Dr. Liu dated
January 14, 2002 whereby Dr. Liu has agreed to conduct the research and
development of G-CSF and Insulin for Dragon. Dragon will make payment for the
development of G-CSF as follows: (i) $500,000 to be provided at the commencement
of the research in the G-CSF Project; (ii) $500,000 to be provided when
cell-line and related technology is established and animal experimentation
commences in the G-CSF Project; and (iii) $300,000 to be provided when a permit
for clinical trials for G-CSF has been issued by the State Drug Administration
of China ("SDA"); (iv) $200,000 to be provided when a new drug license for G-CSF
is issued to Dragon by the SDA and (v)S$500,000 to be paid as a bonus if the SDA
issues the new drug license for G-CSF to Dragon before January 14, 2004.
Dragon will make payment for the development of Insulin as follows: (i)
$750,000 to be provided by at the commencement of the research in the Insulin
Project; (ii) $750,000 to be provided when cell-line and related technology is
established and animal experimentation commences in the Insulin Project; (iii)
$300,000 to be provided when a permit for clinical trials for Insulin has been
30
issued by the SDA; (iv) $200,000 to be provided when a new drug license for
Insulin is issued to Dragon by the SDA and (v)$500,000 to be paid as a bonus if
the SDA issues the new drug license for Insulin to Dragon before January 14,
2005.
For both the G-CSF and Insulin Projects: (i) If Dragon elects to cease
development of the project it will forfeit any payments made and lose ownership
of the Project, but it will not be obligated to make any further payments toward
the Project; and (ii) if an application for permit for clinical trials is not
submitted within three years with respect to the G-CSF Project by or four years
with respect to the Insulin Project or if the SDA rejects the Project for
technical or scientific reasons or if development of the project is terminated
by Dr. Liu, then the Dr. Liu will refund to Dragon all amounts paid, without
interest or deduction, with respect to the Project with in six months. Under the
terms of the Project Development Agreement, we paid Dr. Liu $2,000,000 during
2002.
Item 14. Controls and Procedures.
Within the 90 days prior to the date of this Form 10-K, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, of the design and operation of the Company's
disclosure and internal controls and procedures pursuant to Exchange Act Rule
13a-14. The review identified a number of areas where there could be
improvements to increase the effectiveness of controls and the Company is
currently in the process of improving the controls and procedures in these
areas. Notwithstanding the above, the Company's President and Chief Executive
Officer along with the Company's Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are sufficient enough to ensure
adequate and appropriate disclosure of material information relating to the
Company (including its consolidated subsidiaries) required to be included in
this Form 10-K.
There have been no significant changes in the Company's internal controls
or in other factors, which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation, other than those
being undertaken to increase the effectiveness of controls as discussed above.
Item 15. 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-1
Year-end Consolidated Balance Sheets..............................F-2
Year-end Consolidated Statements of Stockholders' Equity..........F-3
Year-end Consolidated Statements of Operations....................F-5
Year-end Consolidated Statements of Cash Flows....................F-6
Notes to Consolidated Financial Statements..............F-7 thru F-24
31
(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
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
10.12 + Joint research project with the Company and Shenzhen
Kelong Chuang Jian Enterprise Co.
10.13 + Development Agreement with Dr. Longbin Liu and Novagen
10.14 + Project Development Agreement with Dr. Liu
32
Exhibit Number Name
-------------- ----
21 Subsidiaries of the registrant are Nanjing Huaxin Bio-
pharmaceutical Co., Ltd.
23.1 Consent of Moore Stephens Ellis Foster Ltd., Chartered
Accountants
99.1 Certificate under section 906.
----------
* 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.
+ Previously filed with Dragon's Form 10-K filed with the SEC on April 1, 2002.
(b) Reports on Form 8-K:
None.
33
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 16, 2003 Dragon Pharmaceutical Inc.
a Florida Corporation
/s/Alexander Wick
------------------------------
Alexander Wick, President
(Principal Executive Officer)
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/Alexander Wick
-------------------------------------------- April 16, 2003
Alexander Wick, President and Director
(Principal Executive Officer)
/s/Longbin Liu
-------------------------------------------- April 16, 2003
Longbin Liu, Director
/s/Ken Z. Cai
-------------------------------------------- April 23, 2003
Ken Z. Cai, Director
/s/Greg Hall
-------------------------------------------- April 16, 2003
Greg Hall, Director
/s/Philip Yuen Pak Yiu
-------------------------------------------- April 23, 2003
Philip Yuen Pak Yiu, Director
/s/Dr. Yiu Kwong Sun
-------------------------------------------- April 23, 2003
Dr. Yiu Kwong Sun, Director
/s/Matthew Kavanagh
-------------------------------------------- April 15, 2003
Matthew Kavanagh, Director of Finance and Compliance
(Principal Financial and Accounting Officer)
CERTIFICATION
I, Alexander Wick, certify that:
1. I have reviewed this annual report on Form 10-K of Dragon Pharmaceutical
Inc. ("Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls;
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 16, 2003
/s/Alexander Wick
-----------------------------------------------
Alexander Wick
President and Executive Director
CERTIFICATION
I, Matthew Kavanagh, certify that:
1. I have reviewed this annual report on Form 10-K of Dragon Pharmaceutical
Inc. ("Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls;
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 16, 2003
/s/Matthew Kavanagh
--------------------------------------------
Matthew Kavanagh
Director of Finance and Compliance