SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2005
Commission File Number 0-27937
Dragon Pharmaceutical Inc.
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(Exact name of small business issuer)
Florida 65-0142474
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(State of other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
650 West Georgia Street, Suite 310
Vancouver, British Columbia V6B 4N9
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(Address of Principal Executive Offices)
www.dragonpharma.com
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(Registrant's Internet Address)
(604) 669-8817
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(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
Check whether the issuer is not required to file reports pursuant to Section 13
or Section 15(d) of the Exchange Act. [ ]
Check 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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Indicate by check mark whether the registrant is a shell Company: Yes No X
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Our revenues for the year ended December 31, 2005 was $56,237,000.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates, computed by reference to the price at which the common equity
was sold, or the average bid and asked priced of such common equity, as of March
15, 2006 was $10,773,120.
The number of shares outstanding of the issuer's common stock as of March 15,
2006, was 62,878,004.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format: Yes No. X
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1
TABLE OF CONTENTS
PART I .........................................................................................3
ITEM 1. DESCRIPTION OF BUSINESS..............................................................3
ITEM 2. DESCRIPTION OF PROPERTY.............................................................21
ITEM 3. LEGAL PROCEEDINGS...................................................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................22
PART II ........................................................................................22
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................22
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...........................23
ITEM 7. FINANCIAL STATEMENTS................................................................28
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE..............57
ITEM 8A. CONTROLS AND PROCEDURES.............................................................57
ITEM 8B. OTHER INFORMATION...................................................................58
PART III ........................................................................................58
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT...................................58
ITEM 10. EXECUTIVE COMPENSATION..............................................................61
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.........................................................62
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................64
ITEM 13. EXHIBITS ...........................................................................65
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES..............................................68
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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, has a substantial amount of
liabilities, and has recently completed its acquisition of Oriental Wave
Holding, Ltd., all of which factors are set forth in more detail in the sections
entitled "Item 1. Business Risks Associated With Dragon Pharmaceutical" and
"Item 6. Management's Discussion and Analysis or Plan of Operation" 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. Further, unless otherwise indicated, reference to dollars
shall mean United States dollars.
General
We are a diversified pharmaceutical company with three key business units
consisting of a Chemical division for bulk Active Pharmaceutical Ingredient
(API) and pharmaceutical intermediates, a Biotech Division for biologics and a
Pharma division for formulated generic drugs, such as powder for injections and
oral formulations.
Dragon currently has four production facilities in Datong, China, including
three GMP production facilities certified by Chinese State Food and Drug
Administration ("SFDA") : a pharmaceutical facility with a capacity of producing
tablets, capsules, powder for injectables and suppositories, one biotech
facility producing Erythropoietin ("EPO") injectables and one chemical facility
producing bulk clavulanic acid. The fourth facility produces bulk 7-ACA, an
intermediate for Cephalosporin antibiotics by a fermentation process. 7-ACA is
an intermediate and no GMP is required for the production facility. The Company
now has 329 drugs approved by the Chinese SFDA of which 101 are sold in the
Chinese markets while products from the Chemical and Biotech division are also
sold in selected international markets.
As discussed below, the Company completed the acquisition of Oriental Wave
Holding Ltd. ("Oriental Wave") on January 12, 2005 which transformed us from a
single product company into a diversified pharmaceutical company with three key
business units consisting of a Biotech Division for biotech products, a Chemical
division for bulk pharmaceutical intermediate and API and a Pharma division for
formulated generic drugs, such as powder for injections and oral formulations.
The Company's headquarters, located in Vancouver, accommodates corporate
functions such as financial reporting, SEC compliance, corporate finance,
investor relations, international sales and marketing and regulatory affairs for
international product approval. The Company also has a Corporate office in
Beijing, China to manage all the businesses in China including strategy
formulation in the Chinese market, product development, production and sales and
marketing management. Through the acquisition, the Company has significantly
increased the size of operations through Oriental Wave with approximately 1,800
employees, over 1,200 contract sales representatives in China, and approximately
63 key products in 101 different dosages and presentations currently in the
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market. The Company maintains a sales network of over 1,200 sales
representatives in 63 contracted sales offices throughout China for Pharma
products sales and marketing, while it uses a direct sales model through the
in-house sales department to sell Chemical products to other domestic and
international pharmaceutical companies.
Corporate History
The Company was originally formed on August 22, 1989, as First Geneva
Investments, Inc. First Geneva Investments was formed for the purpose of
evaluating and acquiring businesses. On August 17, 1998, the Company acquired
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. On September 21, 1998, First Geneva Investments
changed its named to Dragon Pharmaceutical Inc.
On January 12, 2005, we completed the acquisition of Oriental Wave.
Oriental Wave is principally engaged in the production and sale of
pharmaceutical products. In connection with the acquisition of Oriental Wave,
the Company issued 44,502,004 shares of common stock to the three prior owners
of Oriental Wave. As a result, these three prior owners of Oriental Wave
collectively own 70.78% of our outstanding shares. The acquisition of Oriental
Wave allows us to expand our range of products, leverage both companies'
marketing networks in China and in international markets, and improve our
ability to execute our combined business strategy.
Oriental Wave, incorporated in the British Virgin Islands, is a holding
company of Shanxi Weiqida Pharmaceutical Ltd. ("Shanxi Weiqida"), a China based
pharmaceutical company engaged in the production, marketing and sale of
pharmaceutical intermediates, active pharmaceutical ingredients and generic
formulation drugs.
Significant subsidiary
Shanxi Weiqida Pharmaceutical Ltd. ("Shanxi Weiqida") was primarily formed
and organized through the acquisition of assets from three Chinese companies.
Two of these acquisitions were completed out of bankruptcy procedures of
state-owned pharmaceutical companies.
Shanxi Weiqida was formed in January 2002 as a Chinese domestic company. At
the time it was established, Shanxi Weiqida acquired, for no cost, from Shanxi
Tongling Pharmaceutical Co., Ltd., or Shanxi Tongling, all drug production
permits, and product licenses of Datong No. 2 Pharmaceutical Factory, or Datong
No. 2 Pharmaceutical. The assets of Datong No. 2 Pharmaceutical were acquired by
Shanxi Tongling in June 2001 out of bankruptcy for RMB 42.3 million, or
approximately $5.1 million. Shanxi Tongling was founded in 1994 by Mr. Han, our
current Chief Executive Officer.
In April 2002 Shanxi Weiqida acquired from Shanxi Tongzhen Pharmaceutical
Co. Ltd., or Shanxi Tongzhen, all of its product licenses and production permits
in consideration for assuming approximately RMB 6.7 million, or approximately
$0.8 million, of bank debt upon the liquidation of Shanxi Tongzhen.
In June 2002, Shanxi Weiqida purchased the assets relating to a capsules
and injectables production line, including certain equipment, inventory,
receivables and product licenses and related production permits, from Aurobindo
Tongling (Datong) Pharmaceutical Co., Ltd., or Aurobindo Tongling (Datong), for
consideration of approximately RMB 33.75 million, or approximately $4.1 million.
At the time of the transaction, Mr. Han was also the Chairman of Aurobindo
Tongling (Datong).
4
In August 2002, the control of Shanxi Weiqida was transferred to Canadian
First Pharmaceutical Co., Ltd., or Canadian First Pharmaceutical, and Shanxi
Weiqida was re-established as a Wholly Foreign Owned Enterprise under Chinese
Law. Canadian First Pharmaceutical was controlled by Mr. Han. As a result,
Canadian First Pharmaceutical became the holding company of Shanxi Weiqida and
had no other operations or business other than Shanxi Weiqida. In March 2003,
Canadian First Pharmaceutical transferred its entire ownership in Shanxi Weiqida
to Oriental Wave. Oriental Wave has no other operations or business other than
Shanxi Weiqida.
In September 2002, Shanxi Weiqida acquired out of bankruptcy all assets of
Datong Pharmaceutical Factory, or Datong Pharmaceutical, a state-owned
enterprise, including the land use rights of Datong Pharmaceutical. Pursuant to
the acquisition agreement entered into with the Datong Economic Committee of the
Datong Municipal Government, Shanxi Weiqida acquired the assets in consideration
for assuming all liabilities related to the employees of Datong Pharmaceutical.
The agreement requires Shanxi Weiqida to pay the former employees of Datong
Pharmaceutical certain minimum wages and health care costs until the date of
their re-employment, retirement or death, whichever occurs first. Shanxi Weiqida
has arranged for the re-employment or retirement of approximately 85% of the
Datong Pharmaceutical employees.
In February 2003, Shanxi Weiqida commenced construction of a Clavulanic
acid manufacturing facility, which was completed in August 2003. Pilot
production began in August 2003 and full-scale production began in January 2004.
Construction of Shanxi Weiqida's 7-ACA workshop was completed in December 2003
and pilot production of 7-ACA commenced on July 1, 2004. In July 2005, the
Company started to ramp up the production.
As a result of the acquisitions and expansions described above, Shanxi
Weiqida has developed into a comprehensive, integrated GMP certified
pharmaceutical and development company. Shanxi Weiqida owns production
capabilities to manufacture both pharmaceutical drugs and bulk pharmaceutical
API and pharmaceutical intermediates through its Pharma Division and Chemical
Division. In its 258,300 square feet manufacturing campus, the Pharma Division
operates one powder for injection workshop, one general formulation workshop and
one sterilized bulk drug workshop. In its 818,100 square feet manufacturing
campus, the Chemical Division produces Clavulanic Acid and 7-ACA.
In August, 2005, the Company closed its Biotech production facility in
Nanjing, China and started the relocation of the Biotech production facility to
a site next to the Chemical Division campus in Datong, China. The new Biotech
production facility was completed at the end of December, 2005 and the Company
received the GMP certification for this new facility from the Chinese SFDA on
December 29, 2005. It is expected that production at this new facility will
begin during the first quarter of 2006.
Shanxi Weiqida's head office is located in a special economic region in
China. According to the tax laws for foreign enterprises, Shanxi Weiqida was
granted a two-year national income tax exemption beginning in the first year
after it became profitable and a 50% national income tax reduction for the
following three years. Shanxi Weiqida became profitable in 2003. According to
the current tax policy, the applicable tax rate for Shanxi Weiqida for 2005,
2006 and 2007 is 18%.
Business Segments
The Company operates three key business units consisting of a Chemical
division for bulk pharmaceutical API and intermediate such as Clavulanic acid
and 7-ACA, a Pharma division for formulated drugs, including prescription drugs,
over-the-counter drugs, and sterilized bulk drugs and a Biotech division for
biologics products, such as Erythropoietin or EPO.
5
Chemical Division
The Chemical Division's facilities are located on Datong Gongnong Road,
Datong City, Shanxi Province, China. The Chemical Division produces the bulk
pharmaceutical intermediates and API to sell to other pharmaceutical companies
for further processing and formulation into finished products. The Chemical
Division manages the production of Clavulanic acid and 7-ACA for both Chinese
and international markets. The designed production capacity for Clavulanic
Potassium and 7-ACA were 30 tons and 400 tons respectively. After the Company's
investment in the process optimization and technology improvement, the current
production capacity reaches 50 tons and 600 tons for Clavulanic Potassium and
7-ACA respectively. The production for Clavulanic Acid was started in January
2004 and the production of 7-ACA was started in July 2004. One of the key
products in Chemical Division is Clavulanic acid, a drug that combines with
antibiotics increase the effectiveness of the antibiotics. Dragon is currently
the only producer of Clavulanic acid in China. Another key product in the
Chemical Division is 7-ACA, an intermediate for Cephalosporin antibiotics. The
600-ton production capacity of 7-ACA positions Dragon among the main producers
in the world. The export of 7-ACA to India commenced in 2004. In 2004, Dragon's
Chemical Division entered into a 3-year long term supply agreement with a large
Indian pharmaceutical company and the Company currently set a target to sell 50%
of production to the Indian market. The Chemical Division operates its business
strategies to upgrade its technology in order to improve yields and lower
production cost, to develop 7-ACA and Clavulanic acid downstream bulk products,
and to apply for approvals in the US and EU to enter into European and North
American markets.
On June 30, 2004, the Company also entered a non-binding letter of intent
with an arm's length customer to provide this customer with third party
manufacturing services for the production of Abamectin, an antibiotics used in
agriculture. The production facility was completed by the customer but the
customer is in the process of reconsidering the product portfolio to be produced
in such facility due to the market condition of Abamectin. It is expected that
the production in such facility will be delayed towards the end of 2006.
Pharma Division
The Pharma Division's operations are located in the Datong Economic and
Technology Development Zone, Datong City, Shanxi Province, China. Pharma
Division produces chemical generic, mainly anti-infectious, drugs. The Pharma
Division currently holds approximately 319 product approvals from SFDA, of which
only 85 prescription, over-the-counter and sterilized bulk products in different
dosages and presentations are currently commercialized in China. At the end of
December, 2005, the Company completed a new workshop for the freeze-drying of
temperature sensitive pharmaceutical products. Among these products is
Levofloxacin, a product marketed by the Company whose production was outsourced
to a third party contract manufacturer. The Pharma Division operates its
business strategies to focus on the expansion and development of the Chinese
market by managing its product portfolio and selecting potential products for
commercialization.
Biotech Division
The Biotech Division's facility was relocated to Datong, China from its
original production site in Nanjing City, China at the end of December, 2005.
The new EPO production site is adjacent to the campus of the Chemical division,
which already includes the entire basic infrastructure such as power, steam,
purified water supply and water treatment facilities. The relocation of the EPO
production site to Datong will allow the Company to capitalize on the existing
production infrastructure and the efficiency of unified operational management.
In the new facility, it is anticipated that the capacity for bulk EPO will be
doubled to 120 grams and the capacity for sterile vialing will be tripled to 5
million vials. The sole product of the Biotech Division is Erythropoietin or
EPO, an injectable that stimulates red blood cell development. Dragon's Biotech
Division develops, manufactures and markets generic EPO with China and
developing countries as the current core markets, and has already been approved
and sold in 9 countries: China, India, Egypt, Brazil, Peru, Ecuador,
6
Trinidad-Tobago, Dominican Republic and Kosovo. Currently, Dragon's EPO is sold
only in countries where there is no patent protection. In the past, Dragon was
preparing to enter the European market with a new EPO product under development
in Austria. However, in January 2006, the Company sold the development contract
with the Austrian partner to a related party for $1 million cash and assumption
of all obligations under the contract. (See "Certain Relationship And Related
Transactions")
The Biotech Division operates its business strategies to increase market
share through the integration of its sales network with the Pharma division and
to increase the sales in surgical usage as one of the two approved surgical
indication suppliers.
Products
The following table describes the top five products of the Company in terms of
revenue contribution.
No. Drug Name Category Presentation Treatment % of 2005 Revenues
--- --------- -------- ------------ --------- ------------------
1. 7-ACA Pharmaceutical Bulk An intermediate for 32.35%
Intermediate Cephalosporin antibiotics.
2. Clavulanic API Bulk For use together with 16.25%
Acid antibiotics to make the
antibiotics more effective
and longer-lasting
3. EPO Biologic Injectable For use in the treatment of: 6.80%
anemia caused by chronic renal
failure, and surgery
4. Mezlocillin Penicillin Power for For use in the treatment of: 6.09%
injection Febrile, granulocytopenic cancer
patients
5. Sulbactam Penicillin Powder for For use in the treatment of 4.89%
Amoxicillin injection infections of the lungs throat,
sinuses, kidneys, bladder and
skin.
Total 66.38%
Pharma Division
The Company, through Shanxi Weiqida, owns approximately 319 product
licenses and permits issued by the SFDA in eight presentation formats: 133 types
of tablets, 15 types of granules, 10 types of suppositories, 23 types of
capsules, 76 types of powders for injection, 18 types of bulk pharmaceutical
chemicals, and 44 types of injectables. In 2005 the Company produced and
marketed 85 of the possible 319 products it was entitled to sell.
The Pharma Division of operates in both the prescription and
over-the-counter pharmaceutical market segments. It primarily produces
anti-microbial drugs that fall within the anti-infectious and synthetic
anti-bacterial segments. The following chart shows the categories of drugs
produced by the Pharma Division.
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Antimicrobial
|
|
|
--------------------------------------------------------------------------------------------------
| | | | | |
| | | | | |
Anti-infection Synthetic Others Anti- Anti-fungi Anti-viral
Drugs(1) Anti-bacteria(1) mycobacteria Drugs Drugs
| |
| |
| '-----------------------------------------------------
| |
| |
|-----Penecillins (1)------------------ Sulbactam Amoxicillin (1) |---- Sulfonamides
| | |
| | |
| |---- MezlocilLin (1) |---- Quinolones (1) ---------- Levoflaxin (1)
|---- Cephalosporins(1)------ | |
| | | |
| | |---- Cloxacillin (1) |---- Nitroimidazoles (1)------ Metronidazole (1)
| | | |
|---- Aminoglycosides | | |
| | |---- Ampicillin Cloxacillin (1) '---- Nitrofurans
| | |
| | |
|---- Amphenicols | |---- Amoxicillin
| | |
| | |
| | |---- Phenoxvnethu Penicillin Pottasium (1)
|---- Tetracylines | |
| | |
| | '---- Amoxicillin Clavulanate Potassium (1)
| |
|---- Macrolides(1) ------ |
| | |--------- Ceftriaxon (1)
| | |
| | |
| | |--------- Cefadroxl (1)
| | |
| | |
| | '--------- Cefotaxime Sodium (1)
| |
| |
| '------------ Roxithromycin (1)
|
|
'----- Others(1)-----------
|
|
'----------- Fosformycin Sodioum (1)
(1) Products produced by Shanxi Weiqida
Chemical Division
The Chemical Division currently produces Clavulanic acid and 7-ACA.
Clavulanic acid is used together with antibiotics to make the antibiotics more
effective and longer-lasting. 7-ACA is an intermediate which is converted into
active pharmaceutical ingredients to produce Celphalosporin antibiotics.
Clavulanic acid. Beta-lactam antibiotics, such as the penicillins and
cephalosporins, act by disrupting the development of bacterial cells walls thus
causing the disintegration of the bacteria. However, some bacteria have acquired
the genes to produce enzymes which inactivate this mode of action - so called
beta-lactamases and thus drastically reducing the efficacy of this class of
antibiotics. Clavulanic acid acts to inhibit the effectiveness of bacterial
beta-lactamases since they are much more inclined to bond to Clavulanic acid
than to beta-lactam antibiotics. In this way, bacterial beta-lactamases miss
their target and the antibiotic has free access to the bacterial wall which it
affects.
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The Company's Clavulanic acid technology and production process was
licensed and transferred from Alpha Process Trust Reg., or Alpha Trust. With the
commencement of the production of Clavulanic acid in January 2004, the Company
became the first commercial scale producer in China. By being the first producer
in China, the Company believes it has a competitive advantage over other
manufacturers to fulfill demands for Clavulanic acid domestically as well as
internationally.
7-ACA.7 -ACA is made from Cephalosporin C and is a key intermediate for
synthesizing cephalosporin antibiotics, the a-lactam antibiotics family. Target
the synthesis of peptidoglycan layer of the bacterial cell wall. Produced by the
fermentation of a filamentous fungus (Cephalosporium acremonium now known as
Acremonium chrysogenum), cephalosporin C in the fermentation broth is isolated
from the biomass by filtration. The strongly hydrophilic Cephalosporin C is
purified by laborious adsorption and ion exchange steps. Cephalosporin C can be
a free acid or a salt (sodium, potassium or zinc). The conversion of
Cephalosporin C to 7-ACA has 2 methods, chemical process, and enzymatic process.
The Company adopts the chemical process in the conversion of Cephalosporin C.
Biotech Division
The Company's primary product of the Biotech division is EPO, a
glycoprotein that stimulates and regulates the rate of formation of red blood
cells. In adult humans, 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 symptoms 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. 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 treatments 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, there are
other drugs and treatments currently that exist or are in development that can
treat anemia. These alternative drugs or treatments could be proven more
effective, less expensive or preferable to customers than EPO. The inability of
EPO to compare favorably to these alternative drugs could have an adverse affect
on our business.
9
Sales and Marketing
Sales from the Pharma Division are made solely in China and from the
Chemical and Biotech Divisions in China and overseas. The table below sets forth
the Company's sales by product segments:
2004 2005
------------------------------------ ------------ --------- ------------ -------
$ Million % $ Million %
------------------------------------ ------------ --------- ------------ -------
Pharma Division
China 24.77 100% 25.08 100
International (outside of China) -
Chemical Division
China 2.80 66% 17.69 65%
International (outside of China) 1.45 34% 9.64 35%
------------------------------------ ------------ --------- ------------ -------
Biotech Division
China - 3.02 79%
International - 0.81 21%
------------------------------------ ------------ --------- ------------ -------
Total 29.02 100% 56.24 100%
All above sales of the Pharma Division and the Chemical Division were made
in China. The Company expects to add international sales in the coming futures
as the Company is actively exploring the unregulated markets, such as India and
other developing countries, for the Chemical division products and will
eventually extend its market coverage to regulated markets such as Europe and
North America.
During 2004 and 2005, sales to the Company's five largest customers
accounted for approximately 12.4% and 32.9% of the Company's sales,
respectively; while sales to the Company's largest customer accounted for
approximately 2.7%% and 11.9% of the Company's sales, respectively. Currently,
except for the Aurobindo Biopharma contract, the Company has historically made
its sales through purchase orders and not through long-term contracts.
Sales Models
The Company maintains different sales and distribution models for the
Pharma, Biotech and Chemical Divisions. For the Pharma and Biotech Divisions,
the Company sells through sales agents or its 63 sales offices throughout China.
Each sales office is managed by a Sales Manager employed by the Company, who is
responsible for marketing, promoting and selling the division's products as well
as managing sales representatives. The Company has over 1,200 sales
representatives located throughout China. These sales representatives pay
regular site visits to pharmacy wholesalers and retailers, hospitals and
distributors to conduct market research, gather opinions on products and promote
the Company's products.
For the Chemical Division, the Company uses a direct sales model with sales
made through the sales department located in Datong City. The customers for the
Chemical Division are other pharmaceutical companies which will use the products
for further processing and formulation.
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Pricing Policy
Approximately 46 out of the 89 products from the Pharma Division and
Biotech Division of the Company, accounting for approximately 34% of 2004
company total sales and 27% of 2005 company total sales, are subject to retail
price controls imposed by the government administration authorities or other
relevant authorities in China. The main objective of price control policy is to
set an upper limit to the retail prices of pharmaceutical products in order to
prevent excessive increases in the prices of pharmaceutical products. The
Company's products from Chemical Division are not subject to retail price
control and are market-priced products.
Facilities
The Company has a headquarters in Vancouver, Canada to provide certain
corporate functions of the Company, such as Finance, Investor Relations,
International Regulatory Affairs and International marketing. The Company has
one manufacturing facility for the Pharma Division and two manufacturing
facilities for the Chemical Division in Datong. China. The Company's biotech
facility was originally located in Nanjing, China but was closed in August, 2005
and relocated to Datong, China.
Company's manufacturing facility of the Pharma Division has a size of
approximately 258,300 square feet and is located in the Datong Economic and
Technology Development Zone in Datong City, Shanxi Province of China. This
fully-integrated facility includes an office building, three production
workshops (formulation drugs, sterilized bulk drugs and powder for injections)
that house a total of eight production lines (four in the formulations workshop,
one in the sterilized bulk drugs workshop and three in the powder for injections
workshop), utility infrastructure, quality assurance and quality control and
warehouse area. The Company holds the land use right for this facility until
June 2047.
Company's Chemical and Biotech Division facilities are also located in
Datong City. This campus, with a total area of approximately 947,200 square
feet, houses the Clavulanic acid production facility, power, boiler, steam and
water facilities and 7-ACA production facility and EPO production facility. The
land use right for this facility expires in August 2053.
All manufacturing facilities of the Company that are required to be GMP
certified, have been certified under current Chinese regulations. Company's GMP
certificate for the Pharma Division facility will expire and is subject to
recertification in August 2008 and the GMP certificate for the Clavulanic acid
facility of the Chemical division will expire and is subject to recertification
in January 2009. The Company was granted the GMP certificate for its biotech
facility on December 29, 2005. Such GMP certificate will expire and is subject
to recertification in December 2010. The 7-ACA facility does not need to be GMP
certified. All the facilities of the Company have been designed to meet
potential production demands into the foreseeable future.
Competition
Chemical Division
Clavulanic acid. The world production of Clavulanic acid is dominated by
manufacturers located in Europe. Among them, Lek Pharmaceutical and Chemical
Company of Slovenia, SmithKline Beecham Pharmaceuticals of Britain, Deva Holding
A.S. of Turkey, Amifarma S.L. of Spain and DSM of the Netherlands, are the
leading manufacturers of Clavulanic acid.
There are currently only four companies that obtained the product approval
of bulk Clavulanic acid in China. The Company is currently the only manufacturer
of such product in China. However, it is expected that Zhangjiakou International
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Pharmaceutical, Shanghai Antibioticos and Zhuhai Lianbang Pharmaeutical will
enter the Chinese market during 2006.
7-ACA
Production of 7-ACA is concentrated among a few European and Chinese
manufacturers. The Company will face significant competition from these
companies. The Company's competitors include Antibioticos, a subsidiary of the
Fidia Group of Italy and Biochemie, a subsidiary of Novartis of Switzerland. In
addition, in the Chinese market there are four leading Chinese manufacturers:
China Pharmaceutical, Shangdong Lukang Pharmaceutical, Fuzhou Pharmaceutical and
Harbin Pharmaceutical.
Pharma Division
The world market for anti-infectious drugs is highly competitive and
producers in this market include some of the largest pharmaceutical companies,
including Pfizer Inc., GlaxoSmithKline, Schering-Plough, Abbott Laboratories and
Sandoz.
There are numerous pharmaceutical manufacturers of anti-infectious drugs in
China. The top four producers are Harbin Pharmaceutical Group Holding Co., Ltd.,
Shijiazhuang Pharmaceutical Group Co., Ltd., Shanghai Pharmaceutical Co., Ltd.
and North China Pharmaceutical Co., Ltd. All these companies or their affiliates
are publicly traded companies listed on the Shanghai or Hong Kong stock
exchanges. All of these competitors are substantially larger than the Company as
they were all state-owned enterprises before becoming public and some of them
are still partially owned by the Chinese government. These larger competitors
may enjoy the benefits of economies of scale and therefore be able to afford to
sell competing products at lower prices than the Company. This may have an
adverse effect on the Company's profitability.
Biotech Division
We have estimated that the world market for EPO to be approximately $9
billion in annual sales and believe the market 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 Chinese 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 competitors to respond
more quickly to new or emerging advances in the drug industry and to devote
greater resources to the development, promotion and sale of their products.
Potential competition in the EPO market includes other products or
technologies that are successful in treating anemia. Amgen has sole right 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).
12
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. 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
Intellectual Property
The Company, through its subsidiary, Shanxi Weiqida, has 15 registered
trademarks and has applied for registration of another 19 trademarks in China.
The Company has not applied to patent any of its products, techniques or
procedures.
Other than obtaining product protection from the SFDA for each of the new
products developed, The Company does not have any other measures to prevent any
infringement of its intellectual property rights. Currently, three of the
Company's manufactured pharmaceutical products, is entitled to protection with
which the SFDA will not issue additional drug permits other than those already
issued during the protection period. The following table illustrates our
products with protection period and their respective expiration dates.
Product Name Expiration
----------------------------------------------------------------- --------------
Levofloxacin Hydrochloride for Injection May 2006
Sulbactan Sodium Amoxicillin Sodium for Injection April 2006
Mezlocillin Sodium - Sulbactam Sodium for Injection December 2009
Regulation of the Chinese Pharmaceutical Industry
The modernization of regulations for the pharmaceutical industry is
relatively new in China and the manner and extent to which this industry is
regulated will continue to evolve. As a pharmaceutical company, Shanxi Weiqida
is subject to the Pharmaceutical Administrative Law, which governs the
licensing, manufacture, marketing and distribution of pharmaceutical products in
China. Additionally, Shanxi Weiqida is subject to varying degrees of regulation
by governmental agencies in China.
Principal supervisory authority in the industry. SFDA is the principal
supervisory authority in the pharmaceutical industry in China. It was
established in March 2003 on the basis of the former State Drug Administration
of China, which was established in March 1998. The SFDA is responsible for the
administrative and technological supervision of the research, production and
trading of pharmaceutical products and the consolidated supervision of the
safety management of food, health care and cosmetic products.
Certificates, permits and licenses for pharmaceutical manufacturing and
trading enterprises. A pharmaceutical production enterprise or pharmaceutical
trading enterprise must apply for the relevant permit from the relevant
regulatory department in China. The Industry and Commerce Administration
Department will issue a "business license" only after the pharmaceutical
regulatory department has considered the application and approved the issue of a
"pharmaceutical production permit" or "pharmaceutical trading permit". Such
permits are valid for a period of five years and application for renewal must be
made six months prior to its expiry date. A new permit will be issued after
reassessment, examination and approval by the relevant pharmaceutical regulatory
department.
13
Good Manufacturing Practices ("GMP"). GMP is a set of standards in respect
of quality management of the manufacturing of pharmaceutical products which is
promoted by the World Health Organization ("WHO"). These are applicable to the
entire pharmaceutical production process and the key working procedures for the
production of raw materials which affect the quality of finished medicine
products. Many countries have formulated their own requirements for GMP based on
the GMP promoted by WHO. The Administration Center of Pharmaceutical
Certification of the SFDA is responsible for pharmaceutical GMP certification in
China. A GMP certificate is valid for a term of five years and application for
renewal has to be submitted three months prior to its expiration date.
Registration of pharmaceutical products. All pharmaceutical products
proposed to be sold in China (including previously unapproved drugs, changes in
the form or method of administration of previously approved drugs and imported
pharmaceutical products) are required to be registered and obtain an approved
pharmaceutical number granted by the SFDA. The procedures for applying for
registration of pharmaceutical products can be generally divided into the
following stages:
o after completion of the pre-clinical research of the new medicine,
application for registration of the new medicine must be submitted to
the drug regulatory authorities at the provincial level for review.
The drug regulatory authorities at the provincial level, after
completion of its review, may submit its opinion and report to the
SFDA for review;
o if all the requirements are complied with, the SFDA will issue a
notice of acceptance and proceed with its assessment on whether to
grant the approval for conducting the clinical research on the new
medicine;
o after obtaining the approval for conducting the clinical research by
the SFDA, the applicant may proceed with the relevant clinical
research (which is generally divided into three phases) at
institutions with the appropriate qualifications;
o after completion of the relevant clinical research, the applicant must
submit its clinical research report together with the relevant
supporting documents to the drug regulatory authorities at the
provincial level and provide the raw materials of the new medicine to
the China Examination Bureau of Pharmaceutical and Biological Products
(the "China Examination Bureau");
o the China Examination Bureau will arrange for the conduct of
examination of the raw materials supplied by the relevant medicine
examination institutes which will then issue the examination result
report;
o the drug regulatory authorities at the provincial level must then
review the relevant documents, conduct site inspection, exam samples
and, thereafter, submit its opinion, inspection reports and other
application materials to the SFDA for review; and
o if all the regulations are complied with, a certificate of new
medicine and a pharmaceutical approval number (if the applicant has a
valid Pharmaceutical Products Production Permit and the requisite
production conditions for the new medicine) will be granted by the
SFDA.
Prescription medicines and over-the-counter medicines. Prescription
medicines must be dispensed, purchased and taken with the prescription of
practicing doctors or assistant doctors. Purchase of over-the-counter medicines
do not require doctors' prescriptions and can be dispensed, purchased and taken
by users. The SFDA is responsible for the selection, approval, publication, and
revision of the over-the-counter medicine catalogue.
14
Wholesalers of prescription and over-the-counter medicines and retailers of
prescription and over-the-counter type A medicines must hold a "pharmaceutical
trading enterprise permit". Commercial entities may engage in the retail of
over-the-counter type B medicines subject to the approval of the provincial
pharmaceutical regulatory authorities or their delegated bureaus. Prescription
medicines may be advertised only in medical journals and over-the-counter
medicines may be advertised in the mass media.
Import and export restriction. Imported pharmaceutical products are
required to meet certain safety and quality standards set by the Chinese
government. In addition, these products should have been approved for sale in
the country or region where they are manufactured. If the products are not
approved in the foreign countries, they can be imported only subject to the
approval from the SFDA. The export of pharmaceutical products when there is
shortage of supply in China may be restricted or prohibited.
Price control. In July 2000, in order to enhance market competition of the
pharmaceutical industry and to reduce medical expenses, the former State
Development and Planning Commission of the PRC promulgated a new policy in
respect of reforming the price control of pharmaceutical products in China.
According to the policy, the price of pharmaceutical products is subject to the
control of the price supervising bureau at state and provincial levels. The
bureau generally classifies pharmaceutical products into two groups: (1)
government-pricing pharmaceutical products; and (2) market-pricing
pharmaceutical products.
Pharmaceutical products where prices are determined by National Development
and Reform Commission of the PRC are limited to Category A pharmaceutical
products listed in Medicine Catalogue of National Basic Medical Insurance and
pharmaceutical products with monopolistic attributes (including anaesthetic
medicines, certain type of psychiatric medicines, vaccines and contraceptive
drugs). The price of Category B pharmaceutical products listed in the Medicine
Catalogue of National Basic Medical Insurance are determined by the price
supervising bureau at the provincial level according to the price determination
policies adopted by the Central Government.
On November 21, 2000, the former State Development and Planning Commission
of the PRC promulgated Notice Regarding Rules on Application for Approval for
the Prices of Pharmaceutical Products set by the PRC Government, stating that:
(i) for all pharmaceutical products first launched in China as listed in
the price index of the State Development and Planning Commission of China, drug
manufacturing enterprises are required to submit their price-setting
applications to the price supervising bureau at the provincial level. The
provincial price supervising bureau would then transfer such applications to the
former State Development and Planning Commission of the PRC after review for
further approval;
(ii) for all new pharmaceutical products first launched in China as listed
in the price index of the provincial government, drug manufacturing enterprises
are required to submit their price-setting applications to price supervising
bureau at the provincial level;
(iii) for the patented pharmaceutical products, Categories 1 and 2 new
pharmaceutical products not listed in Medicine Catalogue of National Basic
Medical Insurance, after trial production in China, drug manufacturing
enterprises are required to submit their price-setting applications to the price
supervising bureau at the provincial level for preliminary approval when they
make applications for formal production. Then the provincial price supervising
bureau would then transfer such applications to the former State Development and
Planning Commission of the PRC to determine the price;
(iv) for the patented pharmaceutical products, Categories 1 and 2
pharmaceutical products not listed in Medicine Catalogue of National Basic
Medical Insurance, which are not required to be carried out trial production in
China, drug manufacturing enterprises are required to submit their price-setting
15
applications to the price supervising bureau at the provincial level for
approval after one year from obtaining of the production approval or the first
import permit. Then the provincial price supervising bureau would then transfer
such applications to the Economic Planning Commission of China for further
approval; and
(v) for all pharmaceutical products currently sold in China market as
listed in The Price Index of the Provincial and the State Development and
Planning Commission of China, before new prices are set by the relevant price
supervising authorities according to the market survey information, drug
manufacturing enterprises can sell their products at the then prevailing price.
Approximately 46 out of the 89 products from the Pharma Division and
Biotech Division of the Company, accounting for approximately 34% of its 2004
sales and 27 % of its sales of 2005, are subject to government imposed retail
price controls in China. If manufacturing costs increase for products of the
Company that are subject to price ceilings, and the retail price for those
products is not adjusted upwards, the Company's profitability may be adversely
affected.
Reimbursement. Only those drugs that appear on the provincial and municipal
reimbursement lists are covered by the national medical insurance system, which
may favor locally-manufactured products as they may be lower cost alternatives.
The State Development Planning Commission of China has announced its intention
to re-examine the pricing of drugs in China.
Product liability. Product liability claims may arise if harmful products
are sold to members of the public or if there are any alleged harmful effects
from the consumption of the products. Under current Chinese laws, manufacturers
and vendors of defective products in China may incur civil and criminal
liability for loss and injury caused by such products.
Research and Development.
Dragon's research and development activities mainly focus on two
objectives: the development of generic drugs, including new presentations and
dosage forms of already approved generic drugs, and the improvement of product
quality and production technology. In order to fulfill those objectives, the
research and development department utilizes both internal and external
resources, such as cooperation with universities and other research
laboratories. From time to time the Company, through its subsidiary, has
established on-going collaborations on product development and production
techniques development with external research institutes such as universities
and other research laboratories. However, the Company has no long term
arrangements with these universities
Total expenditures on research and development for the years ended December
31, 2005 and 2004 were $208,414 and $193,188, respectively.
Geographical Breakdown.
81% and 95% of the Company's revenues for the year ended December 31, 2005
and 2004, respectively, were derived from customers located in China. The
Company had sales of $6,593,391 and $644,100 in the Chemical and Biotech
Divisions to customers in India, representing 13% of the Company's revenues for
the year ended December 31, 2005. 99% and 100%, respectively, of the Company's
assets at December 31, 2005 and 2004 were located in China.
Suppliers
The Company uses many different raw materials in the manufacturing process
of its pharmaceutical products. The Company mainly sources its raw materials in
China, but also purchases raw materials from some overseas markets. The Company
has not entered into any supply contracts with any of its suppliers which exceed
16
twelve months. During 2005, the Company did not experience any significant
difficulties in sourcing raw materials and the management of the Company does
not anticipate that, if required, it will face any material difficulties in
sourcing its raw materials from alternative suppliers.
Customers
For the Chemical division, our customers are pharmaceutical formulation
companies that purchase our API and pharmaceutical intermediate for further
processing and formulation into finished products.
For the Pharma division and the Chinese customers for the Biotech
division, our customers are hospitals in China which purchase our products
through their logistic partners. Hospitals, in turn, sells our products to
patients.
For the international customers of the Biotech division, our customers
are our licensees which purchase the products from us and then resell it to
hospitals.
Employees
As of December 31, 2005, the Company has 11 in North America and 1,784
employees in China. None of our workforce is a member of a union and there were
no labor disputes.
Business Risks Associated with Dragon Pharmaceutical
An investment in our common stock involves a high degree of risks. Before
you invest, you should carefully consider the risks described below. If any of
the following risks occur, our financial condition or results of operations
could be materially harmed.
Certain Officers and Directors have significant control.
Messrs. Han and Weng and Ms. Liu, who are officers and/or Directors, own,
in the aggregate, 70.78%of our issued and outstanding shares of common stock. As
a result, these shareholders will be able to control certain corporate
governance matters requiring shareholders' approval. Such matters may include
the approval of significant corporate transactions requiring a majority vote
without seeking other shareholders' approval. They will also have the ability to
control other matters requiring shareholder approval including our election of
directors which could result in the entrenchment of management.
The acquisition may fail to achieve the expected benefits.
We have completed the acquisition of Oriental Wave in January 12, 2005 in
an effort to obtain additional sales and operating efficiencies, among other
benefits. These expected benefits may not be achieved. Whether we ultimately
realize these benefits will depend on a number of factors, many of which are
outside our control including our success in integrating Oriental Wave's
operations, technological changes, the impact of competitive forces, and other
general market conditions or economic factors specific to the pharmaceutical
industry in general. Even if we are able to integrate our respective operations
and if economic conditions remain stable, there can be no assurance that the
anticipated benefits will ever be achieved. The failure to achieve such benefits
could have a material adverse effect on the business, results of operations and
financial condition of the combined company.
Dragon has a negative working capital and we must restructure our short-term
loans.
As of December 31, 2005, Dragon had a negative working capital of $13.31
million, including short-term notes due of $13.48 million. As a result, Dragon
must, during the upcoming twelve months, negotiate with its banks to restructure
17
or renew its notes. Assuming that Dragon is successful in renegotiating its
notes and that vendors continue to work with Dragon as to their accounts
payables, Dragon believes that it will be able to continue to fund its
operations from product sales for the near future. However, this negative
working capital may limit Dragon's growth, since the majority of its earnings
will be used to pay accounts payable and existing debts. Further, if Dragon is
unsuccessful in restructuring and renewing its notes or if vendors demand
immediate payment, these actions will adversely affect operations and may
require Dragon to sell certain assets to pay off liabilities.
Dragon relies heavily on the sale of a few products.
Dragon's top five products for 2004 were Amoxicillin Sulbactam for
injection, Mezlocillin for injection, Ampicillin Cloxacillin for injection,
Metronidazole for injection, and clavulanic acid, while the top five products
for 2005 were 7-ACA, EPO, clavulanic acid, Mezlocillin, and Amoxicillin
Sulbactam. The top five products sold by Dragon amounted to approximately $18.83
million and $37.33 million of its sales during 2004 and 2005, respectively,
representing approximately 65% and 66% of Dragon's overall sales for those
periods. Although we do not anticipate that there will be a material change in
demand for these products, a change in demand for these products due to world
competition, market forces or other factors outside of its control, could
adversely affect our sales and net income.
Shanxi Weiqida is required to contribute a portion of its net income to Reserve
Funds which may not be distributed.
By law, Shanxi Weiqida is required to contribute at least 10% of its after
tax net income (as determined in accordance with Chinese GAAP) into a reserve
fund until the reserve is equal to 50% of Shanxi Weiqida's registered capital, a
further percentage of its after tax net income, as determined by Shanxi
Weiqida's Board of Directors, into a staff welfare fund, and into an enterprise
expansion fund if determined by the Board of Directors. The reserve fund and
enterprise expansion fund are recorded as part of shareholders' equity but are
not available for distribution to shareholders other than in the case of
liquidation, while the staff welfare fund is recorded as a liability, and is not
available for distribution to shareholders. As a result of this requirement, the
amount of net income available for distribution to shareholders will be limited.
We intend to raise additional capital through the issuance of equity securities
that will dilute the ownership other shareholders.
We intend to raise additional capital through the issuance of our equity
securities to finance our growth and reduce short-term debt and other
liabilities. No assurance can be given that we will be successful in our
efforts. Further the issuance of equity securities will reduce other
shareholders' ownership in us.
We may be subject to product liability claims in the future that could harm our
business and reputation.
Product liability claims may arise if harmful products are sold to members
of the public or if there are any alleged harmful effects from the consumption
of our products. Under current Chinese laws, manufacturers and vendors of
defective products in China may incur liability for loss and injury caused by
such products, including having their business licenses revoked and facing
criminal liability. Consistent with industry practice in China, Shanxi Weiqida
does not carry liability insurance coverage. Should any product liability claim
be brought against us, there is no assurance that it would not have an adverse
impact on our business, profitability or business reputation.
18
We will be dependent upon the services of Mr. Han
Mr. Yanlin Han is our largest shareholder and serves as our CEO and
Chairman of the Board. As a result, our operations will be dependent on Mr. Han
who has been the driving force behind the Company. If something happens to Mr.
Han, this could divert management's time and attention and adversely affect our
ability to conduct the combined business effectively.
Dragon relies heavily on the China market and changes in the market could harm
our business
During 2004 and 2005, 95% and 81% of Dragon's sales, respectively, were
derived from China. It is anticipated that Dragon's products in China will
continue to represent a significant portion of sales in the near future. As a
result of its reliance on the China market, the operating results and financial
performance of Dragon is completed could be affected by any adverse changes in
economic, political and social conditions in China. For example, if legislative
proposals for pharmaceutical product pricing, reimbursement levels, approval
criteria or manufacturing requirements should be proposed and adopted, such new
legislation or regulatory requirements may have a material adverse effect on our
financial condition, results of operations or cash flows. In addition, we will
be subject to varying degrees of regulation and licensing by governmental
agencies in China. At this time, we are unaware of any China legislative
proposals that could adversely affect our business. There can be no assurance
that future regulatory, judicial and legislative changes will not have a
material adverse effect on Dragon, that regulators or third parties will not
raise material issues with regard to compliance or non-compliance with
applicable laws or regulations or that any changes in applicable laws or
regulations will not have a material adverse effect on Shanxi Weiqida or our
operations.
Certain products are subject to price controls and if the related manufacturing
costs increase, our potential profits may be harmed.
In July 2000, in an effort to enhance market competition in the
pharmaceutical industry and to reduce medical expenses, the former State
Development and Planning Commission of the People's Republic of China
promulgated a new policy to reform the price control of pharmaceutical products
in China. According to the policy, the price of pharmaceutical products and
biotech products is subject to the control by government bureaus at state and
provincial levels. In the event that the sale prices of our products are limited
by government bureaus at the state and provincial levels, this may have an
adverse effect on our net income, especially if our costs associated with those
products increase. Approximately 46 out of the 89 products from the Pharma
Division and Biotech Division of the Company, accounting for approximately 34%
of 2004 sales and 27% of 2005 sales, are subject to governmental imposed retail
price controls in China. If manufacturing costs increase for products that are
subject to price ceilings, and the retail price for those products is not
adjusted upwards, our profitability may be adversely affected.
Dragon is required to maintain compliance with GMP standards.
All pharmaceutical manufacturers in China, including Shanxi Weiqida, a
subsidiary of Dragon, are required to comply with certain Good Manufacturing
Practice, or GMP, standards by certain time limits and, if not met, their
pharmaceutical manufacturing enterprise permits will be revoked or they will not
be renewed and accordingly production will have to be terminated. A GMP
certificate is valid for five years from the issuance date of such certificate.
Shanxi Weiqida has been accredited with all GMP certificates it requires
for its production facilities. Shanxi Weiqida's GMP certificate for the Pharma
division facility will expire and is subject to recertification in August 2008,
the GMP certificate for the Clavulanic acid facility of the Chemical division
will expire and is subject to recertification in January 2009, and the GMP
certificate for the EPO and freeze-dry facility of the Biotech division will
expire and is subject to recertification in December 2010. The standard of
compliance required in connection with GMP certificates may change from time to
19
time, which may give rise to substantial compliance burdens and increase Shanxi
Weiqida's costs in the future. If the recertification of any required
GMP-related status is not granted, the relevant operations of Shanxi Weiqida may
have to be terminated which in turn would have an adverse impact on our
profitability.
Currency conversion and exchange control could adversely effect our operations
and profitability.
The sales and expenses of Shanxi Weiqida are substantially settled in
Renminbi, or RMB, however, our financial statements are reported in U.S.
dollars. Accordingly, our net income, the value of our assets and our ability to
pay dividends, if any, in U.S. dollars may be adversely affected by negative
changes in the exchange rate of RMB against the U.S. dollar or other currencies.
Major reforms have been introduced to the foreign exchange control system
of China. In 1994, the previous dual exchange rate system for RMB was abolished
and a unified floating exchange rate system, based largely on supply and demand,
was introduced. Since December 1996, under the rules of International Monetary
Fund, or IMF, China has provided a free exchange of current accounts, while
capital accounts have been subject to foreign exchange control. Foreign exchange
transactions under a capital account, including foreign currency-denominated
borrowings from foreign banks and principal payments in respect of foreign
currency-denominated obligations, continue to be subject to significant foreign
exchange controls and require the approval of the State Administration of
Foreign Exchange. However, the payment in and transfer of foreign exchange for
current international transactions, such as the payment of dividends or other
distributions to shareholders, is deemed a current account and therefore is not
subject to Chinese government controls or restrictions. Although China's
commitment to IMF is unlikely to change, limitations on foreign exchange could
affect our ability to obtain foreign exchange for capital expenditures and we
continue to be exposed to negative changes in exchange rates.
On July 22, 2005, the Chinese government decided to no longer peg the value
of the Renminbi to the US dollar but rather to a basket of currencies of its
largest trading partners. The result was an appreciation of the Renminbi of
approximately 2% against the value of the US dollar (and a further 0.5% increase
over the balance of the year). The effect of the revaluation was an increase in
the assets, liabilities, revenues and expenses of the Company and a foreign
currency gain included in comprehensive income.
Dragon does not have patent protection and is subject to substantial
competition.
Dragon competes in the generic drug segment of the pharmaceutical industry
and has no patent protection for any of its products. Many pharmaceutical
companies compete in the same market segment with similar products or products
having comparable medicinal applications or therapeutic effects which may be
used as direct substitutes for Dragon's products. Further, many of these
competitors are larger and have greater resources and market presence than
Dragon. Larger competitors may, as a result of economies of scale, be able to
afford to sell competing products at lower prices than Dragon. This will have an
adverse effect on Dragon's profitability. These competitors include Harbin
Pharmaceutical Group Holding Co. Ltd, Shijiazhuang Pharmaceutical Group Co.,
Shanghai Pharmaceutical Co., Ltd. and North China Pharmaceutical Co., Ltd.. As a
result of the lack of patent protection, competitors with potential substitutes
could launch similar products in the market with their prices analogous with or
lower than those manufactured and sold by Dragon. Further, the lack of patent
protection could also attract an even greater number of competitors who believe
they can develop products that are substantially similar to those of Dragon at a
lower cost.
Expansion into overseas markets could pose additional risks.
Dragon plans to expand sales of products from its Pharma and Chemical
Divisions into overseas markets including developing and developed countries.
These markets are untested for Dragon's products and Dragon, as well as the
combined company after the acquisition, faces risks in expanding the business
overseas, which include differences in regulatory product testing requirements,
20
patent protection, taxation policy, legal systems and rules, marketing costs,
fluctuations in currency exchange rates and changes in political and economic
conditions.
Chinese economic planning could negatively impact the pharmaceutical market in
which our products are sold.
China has a long history of a planned economy and is still subject to plans
formulated by the Central Chinese government. In recent years, the Chinese
government has introduced economic reforms aimed at transforming the Chinese
economy from a planned economy into a market economy with socialist
characteristics. These economic reforms allow greater utilization of market
forces in the allocation of resources and greater autonomy for enterprises in
their operations. However, many rules and regulations implemented by the Chinese
government are still at an early stage of development and further refinements
and amendments are necessary to enable the economic system to develop into a
more market oriented form. No assurance can be given that any change in economic
conditions as a result of the economic reform and macroeconomic measures adopted
by the Chinese government will have a positive impact on the Chinese economic
development or its pharmaceutical sector, which is the market where our products
are sold. At the same time, there can be no assurance that such measures will be
consistent and effective or that we will benefit from or will be able to
capitalize on all such reforms.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate administrative offices were 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 (approximately $155,000 to $178,000) per annum until March 31, 2007.
Subsequent to December 31, 2005, the Company subleased its old office space
and entered into a new operating lease agreement in Vancouver at Suite 310, 650
West Georgia street, Vancouver, British Columbia, Canada covering 2,222 square
feet for approximately CDN$73,000 ($60,000) per annum until March 31, 2011. The
Company anticipates recovering $124,000 and $41,000 during fiscal 2006 and 2007,
respectively, under its sublease agreement.
Company's manufacturing facility of the Pharma Division with a total of
approximately 258,300 square feet is located in the Datong Economic and
Technology Development Zone in Datong City, Shanxi Province of China. This
fully-integrated facility includes a headquarters building, three production
workshops (formulation drugs, sterilized bulk drugs and powder for injections)
that house a total of eight production lines (four in the formulations workshop,
one in the sterilized bulk drugs workshop and three in the powder for injections
workshop), utility infrastructure, quality assurance and quality control and
warehouse area. The Company holds the land use right for this facility until
June 2047.
Company's Chemical facility and the new facility for the Biotech Division
are also located in Datong City. This campus, with a total area of approximately
947,200 square feet, houses the Clavulanic acid production facility, power,
boiler, steam and water facilities and 7-ACA production facility and EPO
production facility. The land use right for this campus expires in August 2053.
The Company's biotech facility was originally located in Nanjing, China but
was closed in August, 2005 and relocated to the campus that houses the Chemical
division.
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ITEM 3. LEGAL PROCEEDINGS
Dragon Pharmaceutical Inc. v. Longbin Liu, Supreme Court of British
Columbia, Canada, No. S036057, filed November 10, 2003. On November 2003, we
filed a complaint against our former Director and Chairman for payment of
$3,500,000, plus interest calculated at 6% per annum, due on September 5, 2003,
pursuant to the terms of the Acquisition Agreement related to Hepatitis B
Vaccine Project entered into by us and Dr. Liu on October 6, 2000, as amended on
June 5, 2001.
On April 4, 2004, we entered into a comprehensive settlement with Dr. Liu
and Novagen, a company controlled by Dr. Liu, to settle the amount owed to us by
Dr. Liu as a result of his acquisition of the Hepatitis B Project. The
settlement agreement provides that the Hepatitis B Project and Patent and
Project Development agreements dated January 14, 2002, as amended, have been
cancelled. Further, pursuant to the settlement agreement, the G-CSF, Insulin and
Hepatitis B Projects, including rights of ownership and development obligations
would revert to Dr. Liu.
In exchange, Dr Liu agreed to pay us $3,710,000 in principal and interest
owing under the Hepatitis B Project as well as reimburse us $1,330,000 that had
been paid previously under the Patent and Project Development agreements. All
amounts were due on December 31, 2004 and Dr. Liu has agreed to provide
2,600,000 common shares of the Company, to be held in escrow, as security for
the amounts owing. The warrants granted to Dr. Liu under the Patent Development
agreement were also cancelled. Pursuant to the settlement agreement 2,231,000
common shares of the Company were placed in escrow. Finally, as part of the
settlement agreement each party agreed to mutually release the other party for
any prior claims against each other.
Dr. Liu has failed to pay us the amounts due on December 31, 2004. We have
foreclosed on Dr. Liu's 2,231,000 shares of common stock that were pledged as
security and will cancel the shares. After foreclosing on such shares, the
balance owe to us by Dr. Liu amounts to approximately $2.48 million and we are
currently considering what further actions we may take against Dr. Liu.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for shareholders vote during the fourth quarter.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began quotation on the OTC Bulletin Board on October
9, 1998 under the symbol "DRUG". In addition, our shares of common stock are
listed on the Toronto Stock Exchange under the symbol "DDD" and are quoted on
the Berlin-Bremen Exchange, the Frankfurt Exchange and the XETRA Exchange under
the symbol "DRP". The OTC Bulletin Board represents our primary market
representing approximately 92.4% of our trading volume. Our common stock being
quoted and traded on the Berlin-Bremen Exchange, Frankfurt Exchange and XETRA
Exchange are without the Company's prior knowledge. The following quotations
reflect the high and low bids for our common stock on a quarterly basis for the
past two fiscal years as quoted on the OTC Bulletin Board. These quotations are
based on inter-dealer prices, without retail mark-up, mark-down or commission
and may not represent actual transactions.
22
Common Stock
--------------------------
Quarter Ended High Low
-------------------------------- ----------- -------------
December 31, 2005 $0.85 $0.51
September 30, 2005 $1.00 $0.69
June 30, 2005 $1.03 $0.75
March 31, 2005 $1.26 $0.80
December 31, 2004 $1.41 $0.80
September 30, 2004 $1.01 $0.83
June 30, 2004 $1.10 $0.67
March 31, 2004 $1.22 $0.81
Holders
As of March 15, 2006, there were 74 registered holders of our common stock.
As many of the shares of common stock are held in street name, there may be
additional beneficial holders of our common stock.
Dividend Policy
We have paid no dividends on our common stock since our inception and may
not do so in the future. For the foreseeable future, we expect earnings, if any,
will be retained to finance the growth of the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Except for statements of historical facts, this section contains
forward-looking statements involving risks and uncertainties. You can identify
these statements by forward-looking words including "believes," "considers,"
"intends," "expects," "may," "will," "should," "forecast," or "anticipates," or
the negative equivalents of those words or comparable terminology, and by
discussions of strategies that involve risks and uncertainties. Forward-looking
statements are not guarantees of our future performance or results, and our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors." This section should be read in conjunction with our
consolidated financial statements.
The following discusses the Company's financial condition and results of
operations for the years ended December 31, 2005 and 2004 based upon the
Company's consolidated financial statements which have been prepared in
accordance with the United States generally accepted accounting principles. Due
to the fact that Dragon's acquisition of Oriental Wave Holding Limited
("Oriental Wave") on January 12, 2005 is deemed to be a reverse-take-over
transaction, the following discussion reflects the Company's results of
operations for the year ended December 31, 2005, including the results of
Oriental Wave for the full year and the results of Dragon's biotech business for
the period of January 12, 2005 to December 31, 2005. Comparatively, the results
of operations for the year ended December 31, 2004 only reflected the Pharma and
Chemical businesses of Oriental Wave.
Results of Operations for the Fiscal Years Ended December 31, 2005 and 2004
Sales for the year ended December 31, 2005 increased 94% to $56.24 million
from $29.02 million for the same period in 2004. $45.63 million or approximately
81% of the sales for the year ended December 31, 2005 were generated from the
sales of products in the Chinese market, and the remaining $10.61 million or
23
approximately 19% were generated from the sales of products in the international
markets (outside of China) 95% of the sales for the year ended December 31, 2004
were generated from the sale of products in the Chinese market. In the year
ended December 31, 2005, $25.08 million or approximately 45% of the sales were
from the Pharma Division, $27.33 million or 48% of sales were from the Chemical
Division, and $3.83 million or 7% of sales were from the Biotech Division. For
the same period in 2004, 85% of sales were from the Pharma Division and 15% of
sales were from the Chemical Division which commenced operation on January 1,
2004. The increase in sales for the year ended December 31, 2005 as compared to
the prior year was primarily due to increase in sales from the Chemical and
Biotech Division.
Cost of sales for the year ended December 31, 2005 was $42.30 million
compared to $16.14 million for the same period of 2004. The cost of sales is
attributed to the production costs of Dragon's pharmaceutical products with the
increase in the cost of sales related to the growth in products and sales in the
Chemical Division. Gross profit and gross margin for the year ended December 31,
2005 were $13.95 million and 25% compared to $12.88 million and 44% for the same
period of 2004. The decrease in gross margin was mainly due to a change in the
product mix from the previous year with the significant increase in the Chemical
Division revenues. The Chemical Division, whose facilities were brand new in
2004 and was ramping up production in 2005 which incurs higher production and
operation cost, especially depreciation expenses, increased the cost of sales
significantly during the year ended December 31, 2005.
Divisional Revenues and Gross Margin Analysis
The Company's businesses are organized under three business divisions: the
Chemical Division, the Pharma Division and the Biotech Division.
Chemical Division
The Chemical Division's revenues for the year ended December 31, 2005 were
$27.33 million, representing a 543% increase from the revenues of $4.25 million
during the same period in 2004. The increase is due to the introduction of 7-ACA
and the expansion of Clavulanic acid sales outside China. The Chemical division
was new in 2004 as only the Clavulanic acid facility had started production and
the sales during 2004 were only made to Chinese customers. Since then, the
Company started the production of the 7-ACA production facility and the Company
has received export permits to sell three clavulanic acid products to the Indian
market.
The Chemical Division's gross margin for the year ended December 31, 2005
was 4% compared to 5% for the year ended December 31, 2004. The gross margin for
the division was low as the Company has increased and expanded the
infrastructure, and the fixed manufacturing costs associated, and was in the
process of ramping up production to cost efficient levels. The initial Chemical
Division production in 2004 was limited to Clavulanic acid and was produced with
older, smaller scale production infrastructure. The Company constructed the new
production infrastructure (power, steam, purified water supply and water
treatment) during 2004 as the old production infrastructure was insufficient to
produce the amount of Clavulanic acid and 7-ACA desired. The new facilities have
greatly increased production capacity but also have significantly higher fixed
costs in the form of depreciation cost ($4.31 million and $2.03 million for the
years ended December 31, 2005 and 2004, respectively) of the new facilities
constructed and overhead of the utilities costs to power the new facilities.
These fixed costs are expected to fall significantly, on a percentage basis,
when the anticipated production levels are achieved
Pharma Division
The Pharma Division's revenues for the year ended December 31, 2005 were
$25.08 million, accounting for 45% of the total revenues of the Company.
Comparatively, Pharma Division's revenues were $24.77 million for the same
period in 2004, contributing 85% of the total revenues of the Company. The
lowering of percentage of revenues from the Pharma division to the Company was
24
due to the tremendous growth of the brand new Chemical division achieved during
2005. The overall gross margin for the division for the year ended December 31,
2005 was 40% as compared to 51% for the same period of 2004. The lowering of
gross profit was mainly due to the price control by the government as well as a
change in sales model for Pharma Division products. The company implemented a
new sales model for Pharma Division products to recognize selling prices and
gross profits lower than those under the original sales model but, under the new
sales model, the Company also lowers the selling expenses with a faster payment
collection cycle which will be reflected in lower account receivables.
Biotech Division
The Biotech Division's revenues for the year ended December 31, 2005 were
$3.83 million representing 7% of the Company's revenues for the year. Gross
margin for the year ended December 31, 2005 was at 73%. The acquisition of
Oriental Wave by Dragon completed on January 12, 2005 was accounted for as a
reverse-take-over transaction. As a result, only revenues from the Biotech
Division from January 12, 2005 to December 31, 2005 were included in the
Company's revenues for 2005 and no revenues from the Biotech Division were
included in the 2004 financials.
On a pro-forma basis (assuming the reverse-take-over had occurred at the
beginning of the year), for the year ended December 31, 2005, Biotech Division's
revenues were $3.97 million representing a 7% increase from the 2004 level. The
increase in total sales for the year ended December 31, 2005 came from an
increase in the sales in the Chinese market. .
Biotech Division's pro-forma gross margin for the year ended December 31,
2005 was 73% compared to 58% for the same period of 2004. The 2004 margin was
unusually low as the Company wrote-down the cost (approximately $400,000) of
bulk EPO produced from the bioreactor cell line as the product could only be
sold for research purposes.
Other Income/Expense During the year ended December 31, 2005, the Company
recognized a net other expense of $0.62 million. This amount primarily consisted
of $1.33 million of interest expense and $0.26 million in acquired research and
development costs that were written off during the year and was partially offset
by $0.89 million from funds released by a Chinese Government Liquidator related
to Datong Pharmaceutical. The other expense for the year ended December 31, 2004
was 0.21 million.
Expenses. Total operating expenses were $12.60 million for the year ended
December 31, 2005. The major category of operating expenses was General and
Administration expenses of $6.67 million, Selling expense of $4.84 million, and
Depreciation and Amortization expenses of $1.09 million. Total operating
expenses were $5.86 million for the year ended December 31, 2004 with the major
expenses being General and Administration expenses of $1.91 million, Selling
expense of $3.67 million, and Depreciation and Amortization expenses of $0.28
million. During the year ended December 31, 2005, the General and Administration
expenses included $2.40 million for salaries, compensation and benefits, $0.72
million for travel expenses, $0.48 for professional fees, $0.43 million for rent
and $0.96 for product testing costs compared to $0.25 million for salaries,
compensation and benefits and $0.46 million for travel expenses, and $0.30
million for professional fees for the same period in 2004.
The increase in operating expenses of $6.74 million for the year ended
December 31, 2005 as compared to the same period for the prior year reflects the
increased overhead related to the operations of both the Pharma and Chemical
Divisions in 2005 (compared to just the Pharma Division and one of the two
facilities of the Chemical Division in 2004) and the addition of the Biotech
operations and the head office in Vancouver.
25
Net Income. Dragon had a net income of $0.18 million for the year ended
December 31, 2005 compared to a net income of $6.36 million for the same period
in 2004.
Comprehensive Income. Dragon had foreign currency translation income of
$0.75 million as other comprehensive income for the year ended December 31,
2005. The foreign currency translation income results from translation of the
financial statements expressed in RMB to United States Dollar.
On July 22, 2005, the Chinese government decided to no longer peg the value
of the Renminbi to the US dollar but rather to a basket of currencies of its
largest trading partners. The result was an appreciation of the Renminbi of
approximately 2% against the value of the US dollar (and a further 0.5% increase
over the balance of the year). The effect of the revaluation was an increase in
the assets, liabilities, revenues and expenses of the Company and a foreign
currency gain included in comprehensive income.
Basic Net Income Per Share. Dragon's net income per share has been computed
by dividing the net income for the period by the weighted average number of
shares outstanding during the same period. Net income per share for the year
ended December 31, 2005 was $0.00 per share and $0.14 for the year ended
December 31, 2004. The weighted average number of shares outstanding during year
ended December 31, 2005 was 62,273,862 and was 44,502,004 shares during year
ended December 31, 2004. The outstanding common stock options have no
significant dilutive effect on the weighted average number of shares
outstanding.
Dividends of the PRC subsidiary may only be distributed after allowance has
been made for i) recovery of losses, if any; ii) appropriations to the reserve
fund; iii) appropriations to the staff welfare fund; and iv) appropriations to
an enterprise expansion fund if determined by the Board of Directors. Under
current regulation, appropriations to the reserve fund should be at least 10% of
the after tax net income determined in accordance with the PRC GAAP until the
reserve is equal to 50% of PRC subsidiary's registered capital; appropriations
to the staff welfare fund are at a percentage, as determined by the Board of
Directors, of the after tax net income determined in accordance with the PRC
GAAP; appropriations to the enterprise expansion fund are made at the discretion
of the Board of Directors. The reserve fund and enterprise expansion fund are
recorded as part of shareholders' equity but are not available for distribution
to shareholders other than in liquidation; while the staff welfare fund is
recorded as a liability and is not for distribution to shareholders. As at
December 31, 2005, the Company's reserve fund is $1.91 million, 7.70% of the
Company's registered capital.
Liquidity and Capital Resources
As of December 31, 2005, Dragon had current liabilities of $41.30million
and current assets of $27.99 million, including cash balance of $1.31 million
and accounts receivables of $7.91 million. The working capital deficiency is
mainly due to the additional bank loan and payables incurred to finance its
working capital requirement for the Chemical Division and investment in the new
EPO workshop and Freeze-dry Injectable workshop.
The Company has developed and is implementing a plan to decrease its debt
and increase its working capital which will allow the Company to continue
operations.
To meet these objectives, the Company plans to seek additional equity
through the conversion of some of its liabilities and expects to raise funds
through a private investment in order to support existing operations and expand
the range and scope of its business. The Company has also significantly
increased production levels to generate additional cash flow under contracted
supply agreements. In addition, the Company intends to continue to renegotiate
and extend loans, as required, when they become due, as has been done in the
past. There is no assurance that such additional funds will be available for the
Company on acceptable terms, if at all. If adequate funds are not available or
not available on acceptable terms, the Company may be required to scale back or
abandon some activities. Management believes that actions presently taken
provide the opportunity for the Company to continue as a going concern. The
Company's ability to achieve these objectives cannot be determined at this time.
26
As of December 31, 2005, Dragon had current liabilities of $41,303,095 as
follows:
Accounts Payable $6,476,539
Accrued Retirement Benefits - current portion $90,714
Other Payables and Accrued Expenses $17,866,466
Due to Related Companies $61,993
Notes payable $ 3,327,829
Loans Payable-Short Term:
Loan payable to a bank, interest rate of 7.395% per
annum, guaranteed by a third party, due April 2006 $594,796
Loan payable to a bank, interest rate of 6.039% per
annum, secured by leasehold land and fixed assets of
$3,031,680, due April 2006 $1,858,736
Loan payable to a bank, interest rate of 6.136% per
annum, secured by leasehold land and fixed assets of
$5,127,112, due May 2006 $3,717,472
Loan payable to a bank, interest rate of 7.254% per
annum, secured by leasehold land and fixed assets of
$1,230,706, due September 2006 $619,579
Loan payable to a bank, interest rate of 7.254% per
annum, secured by leasehold land and fixed assets of
$721,832, due September 2006 $208,178
Loan payable to a bank, interest rate of 5.76% per
annum, secured by leasehold land and fixed assets of
$9,506,733, due November 2006 $6,480,793
Loans Payable - Short Term Subtotal $13,479,554
Total Current Liabilities $41,303,095
The Accounts payable were incurred as part of the normal course of business
of Dragon while other payables and accrued expenses were incurred as part of the
investment in establishing the Chemical Division and investment in the new EPO
workshop and Freeze-dry Injectable workshop.
As of December 31, 2005, Dragon had outstanding short-term loans (less than
one year term) totaling $13.48 million. Dragon believes that it will be
successful in the renegotiating loans due based on the assumption that the
Company has enhanced its ability to generate additional cash flow from its
operation since the loans were originally entered into. Since then, the
Company's Chemical Division commenced production and began generating revenues
and cash flow. Further, it entered into a three-year long term supply contract
with a large Indian pharmacutiucal company to provide its products from the
Chemical Division.
Long-term Liabilities:
At December 31, 2005, Dragon had long-term liabilities of $27,433,624 as
follows:
Long-term accounts payable, discounted at 6.5% $12,216,832
Long-term retirement benefits $620,396
Loan Payable - Long Term
Loan payable to a bank, interest rate of 6.039%
per annum, secured by leasehold land and
fixed assets of $3,679,937, due April 2007 $6,815,366
Loan payable to a company, nonnterest bearing
and unsecured, due June 30, 2007 $4,709,643
Loan payable to a company, nonnterest bearing
and unsecured, due December 31, 2007 $3,071,387
Loan Payable - Long Term $14,596,396
Total Long-term Liabilities $27,433,624
27
As of December 31, 2005, the Company had long-term retirement benefits of
$0.62 million, which was incurred in July 2003 when Shanxi Weiqida acquired land
and buildings from a government liquidator in exchange for assuming certain
future employment, healthcare and land acquisition costs of the factory and its
former employees during July 2003. The Company is required to pay certain
minimum wages and health care costs until the date of their employment,
retirement or death, whichever occurs first. The total amount of the liabilities
assumed on the closing date was $8.90 million, which approximated the appraised
value of the land. As of December 31, 2005, Shanxi Weiqida had employed 674
former employees, and 237 former employees have retired. Shanxi Weiqida has
calculated the related asset value by computing the net present value of the
future expected payments to the remaining 143 employees assuming an interest
rate of 3%. As of December 31, 2005, 143 former employees of Datong
Pharmaceutical remained as the obligation of Dragon.
Dragon had long-term loans payables (one to two years) totaling
approximately $14.60 million due April through December 2007, in addition to
long-term accounts payable of $14.27 million which will become due between June
2007 and December 2008. The long-term accounts payable, which are non-interest
bearing, have been discounted at 6.5% and are carried in the financial
statements at $12.22 million.
During the year ended December 31, 2005, Dragon financed its operations,
development of its new EPO and freeze-dry injectable facilities, and increased
production level at its Chemical Division through operating revenues, accounts
payables and short-term loans. The Company had anticipated that it would
increase its production level through an equity financing. However, as discussed
below, the anticipated financing has taken longer than expected. As a result,
Dragon was not able to increase its production level as quickly as anticipated.
However, during July 2005, Dragon was able to increase its production level of
7-ACA, one of the key products of the Chemical Division, from 30% (of the
original capacity of 400 tons) to approximately 60% (of the newly improved
capacity of 600 tons) and believes that its sales of the Chemical Division will
increase. Dragon intends to seek additional funding through equity financing to
improve its financial position, which may include conversion of certain
receivables by certain vendors of Shanxi Weiqida into Dragon common stock.
Subsequent to December 31, 2005, the Company entered into a Loan agreement
with a bank for $2,478,315 bearing interest at a rate of 6.138% per annum,
secured by fixed assets of $10,787,902, and is due in January 2007.
ITEM 7. FINANCIAL STATEMENTS
The following Financial Statements pertaining to Dragon are filed as part
of this annual report:
Report of Independent Registered Public Accounting Firms..........29
Year-end Consolidated Balance Sheets..............................31
Year-end Consolidated Statements of Stockholders' Equity..........32
Year-end Consolidated Statements of Operations....................33
Year-end Consolidated Statements of Cash Flows....................34
Notes to Consolidated Financial Statements........................35
28
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Dragon Pharmaceutical Inc.
We have audited the consolidated balance sheet of Dragon Pharmaceutical Inc. as
at December 31, 2005 and the consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion in these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the consolidated financial position of the Company as at
December 31, 2005 and the consolidated results of its operations and its cash
flows for the year then ended in accordance with U.S. generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Company's recurring
working capital deficiency raise substantial doubt about its ability to continue
as a going concern. Management's plan in regard to these matters is also
described in Note 1 (A). These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The restated consolidated financial statements as at December 31, 2004 and for
the year then ended were audited by other auditors who expressed an opinion
without reservation on those statements in their report dated March 14, 2005,
except for Note 20, as to which the date is September 16, 2005.
Vancouver, Canada, /s/ Ernst & Young LLP
January 26, 2006, Chartered Accountants
(except for Note 21 which is of March 28, 2006)
29
LOGO
WEB & COMPANY, P.A.
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of:
Oriental Wave Holding Limited and Subsidiary
We have audited the accompanying consolidated balance sheet of Oriental Wave
Holding Limited and subsidiary as of December 31, 2004, and the related
statements of operations and comprehensive income, changes in stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of Oriental Wave Holding
Limited and subsidiary as of December 31, 2004 and the results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 20, the Company restated its consolidated financial
statements for the year ended December 3 1,2004.
/s/ Webb & Company, P.A.
WEBB & COMPANY, P.A.
Boynton Beach, Florida
March 14, 2005, except for Note 20, as to which the date is September 16, 2005
--------------------------------------------------------------------------------
1501 Corporate Drive Suite 290 . Boynton Beach, FL 33426
Telephone: (561) 752-1721 . Fax: (561) 734-8562
www.cpawebb.com
30
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
(Basis of Presentation - Note 1)
ASSETS
------
RESTATED
(NOTE 20)
December, 31, December 31,
Notes 2005 2004
---------- ------------------- ---------------
CURRENT ASSETS
Cash and cash equivalents 19 $ 1,311,378 $ 910,425
Restricted cash 11,19 3,327,829 -
Accounts receivable, net of allowances 2 7,906,720 6,675,298
Inventories, net 3 14,131,735 16,623,906
Value added tax receivable - 162,443
Other receivables - 2,213,842
Prepaid expenses 1,316,688 911,228
------------------- --------------
Total Current Assets 27,994,350 27,497,142
------------------- --------------
PROPERTY AND EQUIPMENT, NET 5,10 69,227,688 62,396,316
OTHER ASSETS
Intangible assets, net 7 3,367,066 432,769
Investments -cost 12,392 12,077
Goodwill 965,000 -
------------------- --------------
Total Other Assets 4,344,458 444,846
------------------- --------------
TOTAL ASSETS $ 101,566,496 $ 90,338,304
------------ =================== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,476,539 $ 3,047,485
Accrued retirement benefits 8 90,714 114,432
Other payables and accrued liabilities 9 17,866,466 17,705,163
Loans payable - short-term 10 13,479,554 12,884,057
Notes payable 11 3,327,829 -
Due to related companies 4 61,993 4,660,984
------------------- --------------
Total Current Liabilities 41,303,095 38,412,121
------------------- --------------
LONG-TERM LIABILITIES
Long term accounts payable 12 12,216,832 17,250,874
Long term retirement benefits 8 620,396 870,321
Loans payable - long-term 10 14,596,396 10,938,699
Due to related companies 4 - 1,328,502
------------------- ---------------
Total Long-Term Liabilities 27,433,624 30,388,396
------------------- ---------------
TOTAL LIABILITIES 68,736,719 68,800,517
------------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS' EQUITY
Authorized: 200,000,000 common shares at par value of $0.001 each
Issued and outstanding: 62,878,004 (December 31, 2004: 44,502,004)
common shares 62,878 44,502
Additional paid-in capital 24,317,830 13,983,002
Retained earnings 5,099,891 -
Reserves 2,628,008 7,562,432
Accumulated other comprehensive income 750,102 -
Due from stockholders (28,932) (52,149)
------------------- --------------
Total Stockholders' Equity 32,829,777 21,537,787
------------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 101,566,496 $ 90,338,304
------------------------------------------ =================== ==============
The accompanying notes are an integral part of these consolidated financial statements.
31
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
RESTATED
(NOTE 20)
Note 2005 2004
------- -------------- -----------------
NET SALES 13 $ 56,244,794 $ 29,023,130
COST OF SALES 42,295,839 16,140,305
-------------- -----------------
GROSS PROFIT 13,948,955 12,882,825
-------------- -----------------
OPERATING EXPENSES
Selling expense 4,839,138 3,666,839
General and administrative expenses 6,672,665 1,911,308
Depreciation and amortization 1,088,766 278,449
-------------- -----------------
Total Operating Expenses 12,600,569 5,856,596
-------------- -----------------
INCOME FROM OPERATIONS 1,348,386 7,026,229
OTHER INCOME (EXPENSE)
Interest expense (1,332,046) (216,634)
Other income 109,393 61,881
Funds Released by Chinese Government Liquidator
14 885,864 -
Other expense
(281,793) (57,230)
-------------- -----------------
Total other income (expenses) (618,582) (211,983)
-------------- -----------------
INCOME BEFORE TAXES 729,804 6,814,246
INCOME TAX EXPENSE 17 547,234 451,823
-------------- -----------------
NET INCOME 182,570 6,362,423
OTHER COMPREHENSIVE INCOME
Foreign currency translation 750,102 -
-------------- -----------------
COMPREHENSIVE INCOME $ 932,672 $ 6,362,423
============== =================
Earnings per share - basic and diluted $ 0.00 $ 0.14
============== =================
Weighted average number of shares outstanding during the
year - basic 62,273,862 44,502,004
============== =================
- diluted 62,610,110 44,502,004
============== =================
The accompanying notes are an integral part of these consolidated financial statements.
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
RESTATED Accumulated
Common Stock Additional (NOTE 20) RESTATED other RESTATED
------------------- Paid-In Retained (NOTE 20) comprehen- Due from (NOTE 20)
Shares Amount Capital Earnings Reserves sive loss Stockholder Total
---------- -------- ----------- ----------- ---------- -------- --------- -----------
Balance, December 31, 2003,
adjusted for the effect of
recapitalization of reverse
acquisition (Note 6(B)) 44,502,004 $44,502 $7,841,363 $6,054,864 $1,286,784 $ - $(228,148) $14,999,365
Registered capital appropriation
(Note 16(A)) - - 6,141,639 (6,141,639) - - - -
Notes receivable - stockholders - - - - - - 175,999 175,999
Net income for the year ended
December 31, 2004 - - - 6,362,423 - - - 6,362,423
Transfer from retained earnings for
reserves - - - (6,275,648) 6,275,648 - - -
---------- -------- ----------- ----------- ---------- -------- --------- -----------
Balance, December 31, 2004 44,502,004 $44,502 13,983,002 - 7,562,432 - (52,149) 21,537,787
Reverse acquisition (6(B)) 8,376,000 18,376 7,919,370 - - - - 7,937,746
Related party debt settled for
equity (Note 18) - - 2,415,458 - - - - 2,415,458
Notes receivable - stockholders - - - - - - 23,217 23,217
Comprehensive income (loss)
- foreign currency translation - - - - - 750,102 - 750,102
Transfer from appropriated earnings -
to retained earnings 5,204,022 (5,204,022) -
- to liabilities (Note 16(B)) (17,103) (17,103)
Transfer from retained earnings for
reserves (Note 16(B)) (286,701) 286,701 -
Net income for the year - - - 182,570 - - - 182,570
---------- -------- ----------- ----------- ---------- -------- --------- -----------
Balance, December 31, 2005 62,878,004 $ 62,878 $24,317,830 $5,099,891 $2,628,008 $750,102 $(28,932) $32,829,777
========== ======== =========== =========== ========== ======== ========= ===========
The accompanying notes are an integral part of these consolidated financial statements.
33
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
RESTATED
(NOTE 20)
2005 2004
-------------- ---------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 182,570 $ 6,362,423
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization 5,881,649 2,673,367
Provision for doubtful accounts 101,703 124,574
Provision for (recovery from) obsolete inventories (229,684) 613,378
Loss on disposition of assets 54,592 -
Write-off of acquired research and development (Note 6(B)) 265,000 -
Funds Released by Chinese Government Liquidator (Note 14) (745,828) -
Changes in operating assets and liabilities, net of effect of reverse
acquisition (Note 6(B)), (increase) decrease in:
Accounts receivable 246,257 (2,532,519)
Inventories 3,699,143 (9,749,199)
Value added tax receivable 164,028 (162,443)
Prepaid expenses 25,283 (792,158)
Other receivables 2,187,880 (1,323,183)
Deposits - 1,355,793
Increase (decrease) in:
Accounts payable 3,315,993 (4,611,167)
Other payables and accrued expenses (4,354,077) 21,377,537
------------ ----------------
Net Cash Provided By (Used In) Operating Activities 10,794,509 13,336,403
------------ ----------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchase of property and equipment (12,156,051) (28,147,929)
Purchase of investment - (12,077)
Cash and cash equivalents acquired in connection with reverse acquisition (Note 6(B)) 2,103,481 -
------------ ----------------
Net Cash Provided By (Used In) Investing Activities (10,052,570) (28,160,006)
------------ ----------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from loans payable 3,575,670 14,561,887
Due to related companies (3,994,813) 480,351
Due from stockholder 47,501 175,999
---------- ----------------
Net Cash Provided By (Used In) Financing Activities (371,642) 15,218,237
---------- ----------------
LOSS ON TRANSLATION OF FOREIGN CURRENCY 30,656 -
---------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 400,953 394,634
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 910,425 515,791
---------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,311,378 $ 910,425
========== =================
Cash paid during the year for interest expense $1,318,590 $ 216,634
========== =================
Cash paid during the year for income taxes $ 598,787 $ 285,328
========== =================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During
March 2005, $2,415,458 of loans payable to an entity related to a director of
the Company was converted into equity of the Company (Note 18).
The Company capitalized interest of $242,066 and $666,927 during 2005 and 2004,
respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
34
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A) Organization and Basis of Presentation
Pursuant to a share purchase agreement, dated June 11, 2004, Dragon
Pharmaceutical Inc. (the "Company") acquired 100% of the issued and
outstanding shares of Oriental Wave Holding Limited ("Oriental Wave") by
issuing 44,502,004 common shares of the Company. This transaction was
completed on January 12, 2005 and has been accounted for as a reverse
acquisition (See Note 6(B)). Accounting principles applicable to reverse
acquisition has been applied to record the acquisition. Under this basis of
accounting, Oriental Wave is the acquirer and, accordingly, the
consolidated entity is considered to be a continuation of Oriental Wave
with the net assets of the Company deemed to have been acquired and
recorded at its fair market value. The Statements of operations includes
the results of Oriental Wave for the year ended December 31, 2005 and those
of the Company from January 13 to December 31, 2005.
Oriental Wave was incorporated in the British Virgin Islands on January 7,
2003. Shanxi Weiqida Pharmaceutical Company Limited ("Shanxi Weiqida"), a
People's Republic of China limited liability company was incorporated on
January 22, 2002. Shanxi Weiqida is principally engaged in research and
development, manufacturing, and selling of pharmaceutical products in the
People's Republic of China ("PRC").
During 2003, Shanxi Weiqida's shareholders exchanged 100% of their
ownership of Shanxi Weiqida for 50,000 shares of Oriental Wave under a
reorganization plan. The transfer was accounted for as a reorganization of
entities under common control as the companies were beneficially owned by
identical shareholders and share common management. The financial
statements have been prepared as if the reorganization had occurred
retroactively.
The consolidated financial statements include the accounts of the Company
and its 100% owned subsidiaries: Oriental Wave, Shanxi Weiqida, Beijing
Weixang Bio-tech Co. Ltd., Allwin Newtech Ltd., Sanhe Kailong
Bio-pharmaceutical Co., Ltd., Nanjing Huaxin Bio-pharmaceutical Co. Ltd.
("Huaxin"), Allwin Biotrade Inc. and Dragon Pharmaceuticals (Canada) Inc.
All significant intercompany balances and transactions have been eliminated
upon consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with U.S. generally accepted accounting principles, which
contemplate continuation of the Company as a going concern. The Company has
a working capital deficiency, however, the Company has developed and is
implementing a plan to decrease its debt and increase its working capital
which will allow the Company to continue operations.
To meet these objectives, the Company plans to seek additional equity
through the conversion of some of its liabilities and expects to raise
funds through a private investment in order to support existing operations
and expand the range and scope of its business. The Company has also
significantly increased production levels to generate additional cash flow
under contracted supply agreements. In addition, the Company intends to
continue to renegotiate and extend loans, as required, when they become
due, as has been done in the past. There is no assurance that such
additional funds will be available for the Company on acceptable terms, if
at all. If adequate funds are not available or not available on acceptable
terms, the Company may be required to scale back or abandon some
activities. Management believes that actions presently taken provide the
opportunity for the Company to continue as a going concern. The Company's
ability to achieve these objectives cannot be determined at this time.
35
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. These financial statements do not include any
adjustments that might result from this uncertainty.
(B) Use of Estimates
In preparing consolidated financial statements in conformity with U.S.
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reported period. Actual results could differ from those estimates.
(C) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents.
(D) Accounts Receivable
The Company extends unsecured credit to its customers in the ordinary
course of business but mitigates the associated risks by performing credit
checks and actively pursuing past due accounts. An allowance for doubtful
accounts is established and recorded based on management's assessment of
the credit history with the customer and current relationships with them.
(E) Investments
During the twelve months ended December 31, 2004, the Company made an
investment in a private company of $12,077. The investment represents less
than 1% of the total equity outstanding of the private company outstanding
as of December 31, 2005. The private company investment is carried at cost
and written down to fair market value when indications exist that this
investment has other than temporarily declined in value. As of December 31,
2005, no impairment in the value of the investment has been recorded.
(F) Inventories
Inventories are stated at the lower of cost or replacement cost with
respect to raw materials and the lower of cost and net realizable value
with respect to finished goods and work-in-progress, cost being determined
on a weighted average basis. The Company provides inventory allowances
based on excess and obsolete inventories determined principally by customer
demand and product expiration dates.
(G) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Expenditures for additions, major renewals and betterments are capitalized
and expenditures for maintenance and repairs are charged to expense as
incurred.
Depreciation is provided on a straight-line basis, less estimated residual
value over the assets estimated useful lives. The estimated useful lives
are as follows:
36
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
Buildings 50 Years
Plant and machinery 10 Years
Motor vehicles 8 Years
Furniture, fixtures and
equipment 5 Years
Leasehold improvements Term of Lease (5 - 10 years)
Land use rights are stated at cost, less accumulated amortization. The land
use rights are amortized over the term of the relevant rights of 50 years
from the date of acquisition.
Depreciable assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable
based on projected undiscounted cash flows associated with the assets. A
loss is recognized for the difference between the fair value and the
carrying amount of the assets. Fair value is determined based upon market
quote, if available, or is based on valuation techniques.
(H) Fair Value of Financial Instruments
The carrying amount of the Company's cash and cash equivalents,
receivables, investments, amounts due to and from related parties and loans
and other payables approximates their fair value. The fair value of the
loans payables are estimated using discounted cash flow analysis, based
upon the Company's current borrowing rates, and approximate their carrying
value.
(I) Intangible Assets
Intangible assets represent acquired customer bases and product technology,
licenses and permits for the production and sales of pharmaceutical
products in China and are amortized on a straight-line basis over a period
of seven or ten years.
Intangible assets are tested for impairment whenever events or
circumstances indicate that a carrying amount may not be recoverable. An
impairment loss would be recognized when the carrying amount of an asset
exceeds the estimated undiscounted cash flows used in determining the fair
value of the assets. The amount of the impairment loss to be recorded is
calculated by the excess of the assets carrying value over its fair value.
Fair value is determined using a discounted cash flow analysis.
(J )Goodwill
Goodwill represents the excess of the cost of investments in subsidiaries
over the fair value of the net identifiable assets acquired. The Company
reviews the goodwill of all of its reporting units on at least an annual
basis to ensure its fair value is in excess of its carrying value in the
financial statements. Any impairment in the value of goodwill is charged to
income in the period such impairment is determined.
(K) Revenue Recognition
The Company recognizes revenue, net of estimated provisions for returns,
rebates and sales allowances from the sale of pharmaceutical products at
the time when the product is delivered to the customer. Revenues are
recognized only when the Company has transferred to the customer the
significant risk and rewards of ownership of the goods, title to the
products transfers, the amount is fixed and determinable, evidence of an
37
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
agreement exists, there is reasonable assurance of collection of the sales
proceeds, the Company has no future obligations and the customer bears the
risk of loss.
(L) Advertising Costs
Advertising costs are expensed as incurred. Advertising expense totaled
$71,755 and $63,692 for the years ended December 31, 2005 and 2004,
respectively.
(M) Research and Development
Research and development costs related to both present and future products
are expensed as incurred. Total expenditures on research and development
charged to general and administrative expenses for the years ended December
31, 2005 and 2004 were $208,414 and $193,188, respectively.
(N) Income Taxes
The Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement
109"). Under Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The Company
located its factories in a special economic region in China. This economic
region allows foreign enterprises a two-year income tax exemption from
central government tax beginning in the first year after they become
profitable, being the year commencing on January 1, 2003 to December 31,
2004 and a 50% income tax reduction for the following three years, being
2005 to 2007. Shanxi Weiqida was approved as a wholly owned foreign
enterprise in October 2002.
(O) Foreign Currency Translation
Shanxi Weiqida, Huaxin and Dragon Pharmaceutical (Canada) Inc .maintain
their accounting records in their functional currencies (ie. Renminbi Yuan,
Renminbi Yuan and Canadian dollar, respectively), however, the Company
reports in U.S. dollars. Transactions denominated in currencies other than
US dollars translated into United States dollars using period end exchange
rates as to assets and liabilities and average exchange rates as to
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transaction occurred. Net gains and losses
resulting from foreign exchange translations are included in the statements
of operations and stockholder's equity as other comprehensive gain (loss).
The revenues and expenses of the Company which are maintained in RMB are
translated to U.S. dollars at US$1.00 = RMB 8.20 during the year with the
assets and liabilities of the Company maintained in RMB translated to U.S.
dollars at US$1.00 = RMB 8.07.
(P) Other Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. The Company is disclosing
this information on its Statement of Stockholders' Equity. Comprehensive
income comprises equity except those resulting from investments by owners
and distributions to owners.
38
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
(Q) Segments
The Company operates in three reportable segments, Chemical Division,
Pharma Division and Biotech Division.
(R) Earnings Per Share
Earnings per share are computed using the weighted average number of shares
outstanding during the period. Diluted earnings per share, as determined
using the treasury method, is equal to the basic income per share as common
stock equivalents consisting of options to acquire 6,737,500 common shares
that are outstanding at December 31, 2005 (2004: Nil) are not significantly
dilutive, however, they may be dilutive in the future.
(S) Reclassifications
Certain 2004 balances have been reclassified to conform to the 2005
presentation.
(T) Stock Based Compensation
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-based Compensation", as amended by SFAS No. 148 "Accounting for
Stock-based Compensation - Transition and Disclosure - An amendment of SFAS
No. 123". SFAS 123 encourages, but does not require, companies to adopt a
fair value based method for determining expense related to stock-based
compensation. The Company continues to account for stock-based compensation
issued to employees and directors using the intrinsic value method as
prescribed under Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations(Note
1(U)). The Company has a stock option plan which is disclosed in detail in
Note 16(c).
(U) Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs--an
amendment of ARB No. 43, Chapter 4", which is the result of the FASB's
project to reduce differences between U.S. and international accounting
standards. SFAS No. 151 requires idle facility costs, abnormal freight,
handling costs, and amounts of wasted materials (spoilage) be treated as
current-period costs. Under this concept, if the costs associated with the
actual level of spoilage or production defects are greater than the costs
associated with the range of normal spoilage or defects, the difference
would be charged to current-period expense, not included in inventory
costs. SFAS No. 151 will be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is
not expected to have an impact on the Company's consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation". SFAS 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity
instruments for goods or services. This Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS 123(R) requires that the fair value
of such equity instruments be recognized as expense in the historical
financial statements as services are performed. Prior to SFAS 123(R), only
certain pro-forma disclosures of fair value were required. SFAS 123(R) will
be adopted by the Company effective as of the beginning of the first
interim and annual reporting period that begins after December 15, 2005 and
will result in the Company recording a non-cash stock based compensation
based upon the fair value of the options at the time.
39
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
In May 2005, the FASB issued Statement of Financial Accounting Standards
SFAS No. 154, "Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires
retrospective application to prior periods' financial statements for
changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change.
SFAS 154 also requires that retrospective application of a change in
accounting principle be limited to the direct effects of the change.
Indirect effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS
154 also requires that a change in depreciation, amortization, or depletion
method for long-lived, non-financial assets be accounted for as a change in
accounting estimate effected by a change in accounting principle. SFAS 154
is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. Early adoption is permitted
for accounting changes and corrections of errors made in fiscal years
beginning after the date this Statement is issued. The adoption of this new
accounting pronouncement is not expected to have a material impact on its
consolidated financial position, results of operations or cash flows.
NOTE 2 ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2005 and December 31, 2004 consisted of
the following:
December 31, 2005 December 31, 2004
-------------------- -------------------
Trade and other receivables $ 8,409,047 $ 6,799,872
Less: allowance for doubtful accounts 502,327 124,574
-------------------- -------------------
Accounts receivable, net $ 7,906,720 $ 6,675,298
==================== ===================
For the ended December 31, 2005, the Company recorded a provision for
doubtful accounts of $101,703 in the Consolidated Statements of Operations
compared to $124,574 for the year ended December 31, 2004.
NOTE 3 INVENTORIES
Inventories at December 31, 2005 and December 31, 2004 consisted of the
following:
December 31, 2005 December 31, 2004
-------------------- -------------------
Raw materials $ 4,144,900 $ 4,287,604
Work-in-progress 6,280,283 10,994,088
Finished goods 4,523,663 2,302,073
-------------------- -------------------
14,948,846 17,583,765
Less: provision for obsolescence 817,111 959,859
-------------------- -------------------
$ 14,131,735 $ 16,623,906
==================== ===================
40
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
For the year ended December 31, 2005, the Company recorded a recovery from
obsolete inventories of $229,684, in the Consolidated Statements of
Operations compared to a provision for obsolete inventories of $613,378 for
the year ended December 31, 2004.
NOTE 4 DUE TO RELATED PARTIES
The amounts due to related parties at December 31, 2005 and December 31,
2004 are unsecured and non-interest bearing:
December 31, 2005 December 31, 2004
------------------ -------------------
$ - $ 1,328,502
Due to a company owned by a stockholder and
director due March 2006
Due to the spouse of a shareholder and director 61,993
Due to a company owned by a stockholder and
director due March 2006 - 4,660,984
------------------ -------------------
61,993 5,989,486
Less: current maturities 61,993 4,660,984
------------------ -------------------
$ - $ 1,328,502
================== ===================
NOTE 5 PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 2005
and December 31, 2004:
December 31, 2005
-----------------------------------------------------------
Accumulated Net Book
Cost Depreciation Value
---------------- ------------------ ---------------
Plant and equipment $ 46,673,710 $ 7,350,550 $ 39,323,160
Land use rights and buildings 21,312,872 743,593 20,569,279
Motor vehicles 752,919 218,136 534,783
Furniture and office equipment 3,066,099 1,252,221 1,813,878
Leasehold improvements 1,020,949 1,018,504 2,445
Construction in progress 6,984,143 - 6,984,143
---------------- ------------------ ---------------
$ 79,810,692 $ 10,583,004 $ 69,227,688
================ ================== ===============
41
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
December 31, 2004
---------------------------------------------------------
Accumulated Net Book
Cost Depreciation Value
--------------- ----------------- ---------------
Plant and equipment $ 41,154,014 $ 2,293,918 $ 38,860,096
Land use rights and buildings 18,552,438 370,169 18,182,269
Motor vehicles 611,261 55,166 556,095
Furniture and office equipment 2,499,188 392,511 2,106,677
Construction in progress 2,691,179 - 2,691,179
--------------- ----------------- ---------------
$ 65,508,080 $ 3,111,764 $ 62,396,316
=============== ================= ===============
Depreciation expense for years ended the December 31, 2005 and 2004 was
$5,352,714 and $2,612,981, respectively. Land use rights and equipment with
a net book value of $23.3 million are pledged as collateral for $19.7
million in loans payable (Note 10).
NOTE 6 ACQUISITIONS
(A) Land Use Rights
During July 2003, the Company acquired Land Use Rights and buildings from a
government liquidator in exchange for assuming certain future employment
and healthcare costs of its former employees and Land Use Rights
acquisition costs of the factory. The agreement requires the Company to pay
certain minimum wages and health care costs until the date of their
employment, retirement or death, whichever occurs first. The maximum amount
of the liabilities assumed on the closing date was $8,897,685 which
approximates the appraised value of the Land Use Rights acquired. The
Company has calculated the related asset value by computing the estimated
fair value of the future expected payments to the remaining employees
assuming an interest rate of 3% and has recorded the Land Use Rights at
$3,332,907 (See Notes 8 and 15(D)). Subsequent to the acquisition the
Company rehired a number of the former employees, reducing the expected
future payments required. The Company has accounted for the reduction of
the obligation by reducing the amount of Land Use Rights recorded.
The cost of Land Use Rights as at December 31, 2005 and 2004 is as follows:
RESTATED
December 31, (NOTE 20)
2005 December 31, 2004
---------------- --------------------------
Original Cost recorded $ 3,332,907 $ 3,332,907
Less: reduction of future accrued retirement
benefit 1,389,799 1,135,238
---------------- --------------------------
Cost of Land Use Rights $ 1,943,108 $ 2,197,669
================ ==========================
42
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
The Land Use Rights, which are included in Property and equipment in the
consolidated balance sheet, have been reduced by $254,561 during the year
ended December 31, 2005 (2004: $1,135,238) and will be reduced in the
future should payments be further reduced due to additional former
employees being rehired.
(B) Oriental Wave Holding Limited
The Company completed the acquisition of Oriental Wave on January 12, 2005
whereby the Company issued 44,502,004 common shares in exchange for all of
the issued and outstanding shares of Oriental Wave. The acquisition
represented an important strategic step in strengthening the competitive
position of the Company. The transaction has been approved by the Company's
shareholders and the regulatory authorities, who also approved an increase
in the authorized share capital to 200,000,000 common shares.
This transaction resulted in the former shareholders of Oriental Wave
owning 68.35% of the issued and outstanding shares of the combined entity
as of January 12, 2005. Accounting principles applicable to reverse
acquisition has been applied to record the acquisition. Under this basis of
accounting, Oriental Wave is the acquirer and, accordingly, the
consolidated entity is considered to be a continuation of Oriental Wave
with the net assets of the Company deemed to have been acquired and
recorded at its fair market value of approximately $7.9 million. The
Statement of operations includes the results of Oriental Wave for the year
ended December 31, 2005 and those of the Company from January 13 to
December 31, 2005.
The allocation of the net assets acquired is as follows:
Cash and cash equivalents $ 2,103,481
Accounts receivable 1,527,554
Inventories 549,189
Prepaid and deposits 100,421
---------------------
Total Current Assets 4,280,645
Property and equipment 785,742
Intangible assets 3,380,222
In-process research and development 265,000
Goodwill 965,000
---------------------
Total Assets 9,676,609
Less accounts payables and accrued liabilities (1,738,863)
---------------------
Net assets acquired $ 7,937,746
=====================
The intangible assets consist of the production technology and license and
customer base acquired and are being amortized over a period of seven
years. The in-process research and development costs of $265,000 were
written-off to other expense subsequent to the acquisition.
43
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
A summarized statement of operations for the Company for the twelve days
ended January 12, 2005 is as follows:
Sales $ 145,435
Gross Profit 109,059
Total operating expenses 166,881
Loss for the period $ (57,822)
Pro-forma financial information for the year ended December 31, 2004,
assuming the acquisition occurred January 1, 2004, are as follows:
2004
----------------------
Sales $32,728,391
Gross profit 15,042,058
Net income 5,419,705
Earnings per share $ 0.08
NOTE 7 INTANGIBLE ASSETS
The Company acquired $603,865 in licenses from a company related to a
director in 2002 with the balance being recorded pursuant to the reverse
acquisition of Oriental Wave (Note 6(B)).
Intangible assets consist of the following as of December 31, 2005 and
December 31, 2004:
December 31, 2005 December 31, 2004
------------------ -------------------
Production technology $ 1,670,223 $ -
Product licenses 1,217,905 603,865
Customer base 1,160,000 -
------------------ --------------
4,048,128 603,865
Less: accumulated amortization 681,062 171,096
------------------ --------------
$ 3,367,066 $ 432,769
================== ==============
Amortization expense for years ended December 31, 2005 and 2004 was
$528,935 and $60,386, respectively.
44
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
NOTE 8 ACCRUED RETIREMENT BENEFITS
During July 2003, the Company acquired Land Use Rights and buildings from
a government liquidator. The present value of the accrued retirement
benefits assumed is recorded at December 31, 2005 and December 31, 2004
as follows:
December 31, 2005 December 31, 2004
------------------- -------------------
Total liabilities assumed at closing date $ 8,897,685 $ 8,897,685
Less: reduction of liability due to re-employment (4 ,949,474) (4,949,474)
Less: net present value of liabilities initially not
expected to be paid (615,304) (615,304)
------------------- -------------------
Present value of expected liabilities at closing date 3,332,907 3,332,907
Less: amounts paid and adjustment for liabilities not
expected to be paid 2,621,797 2,348,154
------------------- -------------------
711,110 984,753
Less: current portion 90,714 114,432
------------------- -------------------
$ 620,396 $ 870,321
=================== ===================
Under the terms of the contract with the liquidator, the Company will
remain contingently liable for these liabilities until the date of
retirement or re-employment for each employee (See Notes 6(A) and 15).
NOTE 9 OTHER PAYABLES AND ACCRUED LIABILITIES
Other payables and accrued liabilities at December 31, 2005 and December
31, 2004 consist of the following:
December 31, 2005 December 31, 2004
---------------------- -------------------------
Machinery and equipment payable $ 4,253,448 $ 6,687,924
Non-interest bearing demand loans 1,416,357 362,319
Current portion of long term payables 7,157,013 5,693,464
Accrued expenses 1,147,101 666,734
Value added tax payables 277,052 -
Income taxes payable 144,499 166,495
Other taxes payable 159,809 121,054
Deposits received from customers 3,311,187 4,007,173
---------------------- -------------------------
$ 17,866,466 $ 17,705,163
====================== =========================
45
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
NOTE 10 LOANS PAYABLE
The Loans payable, denominated in Renminbi Yuan, are as follows:
December 31, 2005 December 31, 2004
------------------ --------------------
RMB 6.68 million Loan payable to a bank, interest rate of $ - $ 806,763
6.372% per annum, guaranteed by a third party, due
June 2005
RMB 30 million Loan payable to a bank, interest
rate of 6.138% per annum, secured by property and
equipment of $5,127,329, due November 2005 3,623,188
RMB 70 million Loan payable to a bank, interest
rate of 6.039% per annum, secured by property and
equipment, due April 2005 - 8,454,106
RMB 4.8 million Loan payable to a bank, interest
rate of 8.874% per annum, guaranteed by an
unrelated third party, due April 2006 594,796 -
RMB 15,000,000 Loan payable to a bank, interest
rate of 6.138% per annum, secured by property and
equipment of $3,031,680, due April 2006 1,858,736 -
RMB 30 million Loan payable to a bank, interest
rate of 6.138% per annum, secured by property and
equipment of $5,127,112, due May 2006 3,717,472
RMB 5 million Loan payable to a bank, interest
rate of 7.254% per annum, secured by property and
equipment of $1,230,706, due September 2006 619,579 -
RMB 1.6 million Loan payable to a bank, interest
rate of 7.254% per annum, secured by property and
equipment of $721,832, due September 2006 208,178 -
RMB 52.3 million Loan payable to a bank, interest
rate of 6.92% per annum, secured by property and
equipment of $9,506,733, due November 2006 6,480,793 6,316,426
RMB 55 million Loan payable to a bank, interest
rate of 6.336% per annum, secured by property and
equipment of $3,679,937, due April 2007 6,815,366 -
RMB 38 million Loan payable to a company,
non-interest bearing and unsecured, due June 30,
2007 4,709,643 4,622,273
46
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
RESTATED
(NOTE 20)
December 31, 2005 December 31, 2004
------------------ --------------------
RMB 24.79 million Loan payable to a company,
non-interest bearing and unsecured, due December 2007 3,071,387 -
------------------ --------------------
28,075,950 23,822,756
Less current maturities 13,479,554 12,884,057
------------------ --------------------
$ 14,596,396 $ 10,938,699
================== ====================
Maturities are as follows:
Fiscal year ended December 31,
2006 $ 13,479,554
2007 14,596,396
-------------------
$ 28,075,950
===================
NOTE 11 NOTES PAYABLE
The Company has issued a number of notes payable to vendors totaling
$3,327,829. These notes are due between February 2006 and June 2006, are
non-interest bearing and are secured by $3,327,829 in bank deposits. The
bank deposits may be used only for the purpose of repaying the notes.
NOTE 12 LONG TERM ACCOUNTS PAYABLE
December 31, December 31,
2005 2004
-------------- ------------
Non interest bearing amounts payable
to contractors related to the
acquisition of plant and equipment.
The amounts have been discounted using
a rate of 6.5% as a result of term
modifications made in 2005. The discount
has been applied against the cost of the
plant and equipment acquired. $ 12,216,832 $ 17,250,874
============ =============
During the year the Company accreted interest of $146,949 (2004: $Nil).
Future annual payments are as follows:
2007 $ 1,855,261
2008 12,409,757
-------------
$ 14,265,018
=============
47
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
NOTE 13 SEGMENTS
The Company operates in three reportable segments, the Pharma Division,
Chemical Division and Biotech Division. The Pharma Division produces
chemical generic, mainly anti-infectious, drugs. The Chemical Division
produces the bulk intermediate or ingredient to sell to other
pharmaceutical companies for further processing and formulation into
finished products. The Biotech Division produces Erythropoietin or EPO, an
injection that stimulates red blood cell. The accounting policies of the
segments are the same as described in the summary of significant accounting
policies. The Company evaluates segment performance based on gross profit.
All sales by division were to external customers (see Note 19 also). As a
result, the components of gross profit for one segment may not be
comparable to another segment. The following is a summary of the Company's
segment information for the years ended December 31, 2005 and 2004 and as
of December 31, 2005 and December 31, 2004.
Chemical Pharma Biotech
Division Division Division Total
--------------- --------------- -------------- ----------------
2005
Sales $ 27,326,459 $ 25,084,011 $ 3,834,324 $ 56,244,794
Gross profit 1,084,543 10,081,972 2,782,440 13,948,955
Depreciation and amortization 4,307,874 689,986 883,789 5,881,649
As at December 31, 2005
Total assets 75, 831,748 17,601,551 8,133,197 101,566,496
Additions to long-lived assets 10,238,939 116,961 1,800,151 12,156,051
Intangible assets 47,336 382,072 2,937,658 3,367,066
2004
Year ended December 31, 2004
Sales $ 4,248,906 $ 24,774,224 $ - $ 29,023,130
Gross profit 216,380 12,666,445 - 12,882,825
Depreciation and amortization RESTATED 7
(NOTE 20) 2,033,933 639,434 - 2,673,36
As at December 31, 2004
Total assets 4
RESTATED (NOTE 20) 66,726,390 23,611,914 - 90,338,30
Additions to long-lived assets 27,295,156 852,773 - 28,147,929
Intangible assets - 432,769 - 432,769
48
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
NOTE 14 OTHER INCOME - Funds Released by Chinese Government Liquidator
In July 2003, the Company, through Shanxi Weiqida, acquired out of
bankruptcy the Land Use Rights of a state-owned enterprise. (Please also
refer to Note 6(A)) After entering into this transaction, the Company was
approached by an unrelated state agency to administer certain benefits
payable to former employees of the agency (the government liquidator) as
the Company had already established an infrastructure to make payments to
these employees for settlement of liabilities related to the transaction.
As a result, during 2004, the Company received $1,751,208 from the
government liquidator, for the settlement of human resources related
expenses of the bankrupt enterprise. As well, during the first quarter of
2005, a separate municipal agency, the Datong Municipal Government,
approved the transfer of a fund with a balance of $140,036 originally
reserved for the employee housing welfare as part of the liquidation
process of the state-owned enterprise. The two agencies, unrelated to the
acquisition, allowed the Company to retain the cash balance of $745,828 as
well as the reserve of $140,036 as payment for services provided by the
Company. As a result, the Company recorded other income of $885,864 during
the current year to reflect the above transactions.
NOTE 15 COMMITMENTS AND CONTINGENCIES
(A) Employee Benefits
The full time employees of Shanxi Weiqida are entitled to employee benefits
including medical care, worker compensation, unemployment insurance and
pension benefits through a Chinese government mandated multi-employer
defined contribution plan. The Company is required to accrue for those
benefits based on certain percentages of the employees' salaries. The total
provision for such employee benefits was $442,536 and $642,856 for the
years ended December 31, 2005 and 2004, respectively. The Company is
required to make contributions to the plans out of the amounts accrued for
medical and pension benefits. The Chinese government is responsible for the
medical benefits and the pension liability to be paid to these employees.
(B) Loan Guarantee
The Company has guaranteed a bank loan to a supplier in the amount of
$2,478,000 (RMB20 million) due on July 16, 2006. Interest on the loan is
charged at 7.905% and the bank has the right to seek settlement from the
Company for payment should the supplier fail to repay the loan. There is no
recourse or possible recovery for the Company should the suppliers default
on their bank loans. The maximum potential amount of future payments
(undiscounted) that the Company could be required to make is $2,584,000
(RMB20.85 million). The Company provided the guarantees to these suppliers
to maintain a good business relationship.
The Company has also issued a guarantee to a bank as security for loans to
a third party vendor of $2,478,000 (RMB20 million) due on September 26,
2007 and $3,718,000 (RMB30 million) due on October 27, 2007. Interest is
charged at the bank's base rate plus 5.9475 %. The bank has the right to
seek settlement from the Company for payment should the third party vendor
fail to repay the loan. The maximum potential amount of future payments
(undiscounted) that the Company could be required to make is $ 6,855,000
(RMB55.32 million). This vendor has pledged assets totaling $8,699,000
(RMB70.2 million) to the Company for this guarantee.
49
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
(C) Capital Commitments
According to the Articles of Association of Shanxi Weiqida, the Company has
to fulfil registered capital of $19,704,877 (RMB 159,018,360) within five
years from December 16, 2003. As of December 31, 2005, the Company has
fulfilled $15,037,562 (RMB 121,353,123) of registered capital requirement
and has registered capital commitments of $4,667,316 (See Note 16(A)).
(D) Contingent Employment Benefits
During July 2003, the Company acquired land and buildings from a government
liquidator in exchange for assuming certain future employment, healthcare
and land acquisition costs of the factory and its former employees. Under
the terms of the contract with the liquidator, the Company will remain
contingently liable for these liabilities until the earliest of date of
retirement, re-employment or death for each employee. As of December 31,
2005, the Company has rehired 674 former employees, 237 employees have
retired and 143 former employees remain unemployed. If the Company is
unable to provide continued employment to these remaining unemployed
individuals, it will be liable to pay them each approximately $55 per month
until his or her date of retirement, at age 60 or 50, respectively, or
death, whichever comes first (See Notes 6 & 8).
(E) Operating Leases
The Company has entered into an operating lease agreement for their
administrative offices in Vancouver for an amount escalating from
CDN$200,000 to CDN$232,000 (US$170,000 to US$198,000) per annum until March
31, 2007. Minimum payments required under the agreement are as follows:
2006 $ 198,322
2007 49,949
Total $ 248,271
Subsequent to December 31, 2005, the Company subleased the premises and
entered into a new lease agreement (see Note 21(a)).
The Company closed Huaxin's production in Nanjing, effective July 31, 2005,
and has completed construction of a new facility in Datong, China at the
site of the manufacturing facilities of Oriental Wave. The Company
negotiated the termination of its lease, without penalty, though the
Company agreed to relinquish some fixtures and equipment with a carrying
value of RMB 2.23 million ($271,500) to the landlord in exchange for the
forgiveness of RMB785,000 ($96,000) in past rent payable. In addition, the
Company paid approximately RMB 600,000 ($70,000) relating to severance and
benefit costs associated with the closure.
(F) Cell Line Development
The Company has contracted with a European Institute of Biotechnology to
develop a high yield proprietary cell line and production process
technology for the Company. Product from this advanced technology will be
used by the Company to enter the European market, once certain competitor's
patents expire. The total cost of development is $592,000 (EUROS 500,000)
of which $355,000 (EUROS 300,000) is yet to be incurred as of December 31,
2005.
Subsequent to December 31, 2005, the Company disposed of the cell line and
related obligations. (see Note 21(b)).
50
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
NOTE 16 STOCKHOLDERS' EQUITY
(A) Capital Contribution (See note 15(C))
On January 31, 2005 and on February 22, 2005 Oriental Wave paid Shanxi
Weiqida $479,988 and $198,682, respectively, towards its registered capital
requirement under Chinese law. During 2004, Shanxi Weiqida appropriated
$6,141,639 in retained earnings and applied it toward the registered
capital requirement.
(B) Reserves
Pursuant to PRC regulations, Shanxi Weiqida is required to make
appropriations to reserves funds, comprising the reserve fund, staff
welfare fund and enterprise expansion fund, based on after-tax net income
determined in accordance with generally accepted accounting principles of
the People's Republic of China (the "PRC GAAP"). Appropriation to the
reserve fund should be at least 10% of the after tax net income determined
in accordance with the PRC GAAP until the reserve is equal to 50% of Shanxi
Weiqida's registered capital. The reserve fund is established for covering
the potential loss. Appropriations to the staff welfare fund are at a
percentage, as determined by the Board of Directors, of the after tax net
income determined in accordance with the PRC GAAP. The staff welfare fund
is established for the purpose of providing employee facilities and other
collective benefits to the employees. Appropriations to the enterprise
expansion fund are made at the discretion of the Board of Directors. The
enterprise expansion fund is established for expanding business operation.
The reserve fund and enterprise expansion fund are recorded as part of
shareholders' equity but are not available for distribution to shareholders
other than in liquidation; while the staff welfare fund is recorded as a
liability and is not for distribution to shareholders. The appropriations
for reserves are made by the Board of Directors on an annual basis. During
the year the Company transferred $5,204,022 in excess appropriations made
in prior years from reserves to retained earnings. The Company also
appropriated reserves of $286,701 based upon the current year's after tax
net income.
(C) Stock Options
The Company has adopted the 2005 Stock Option Plan, effective August 13,
2005, which allows for the granting of options to Directors and Employees
for a period of up to ten years. The Company did not grant any options
during the year ended December 31, 2004. During the year ended December 31,
2005, the Company granted options to its directors and employees to
purchase 5,920,000 shares at a weighted average price of $0.91 per share,
with 2,260,000 shares at exercise price of $1.18 (being the market price at
the time) expiring on January 12, 2010 and 3,660,000 shares at exercise
price of $0.74 (being the market price at the time) expiring on September
30, 2010. Options to purchase 4,320,000 shares were exercisable immediately
with 400,000 options becoming available on January 12, 2006, 400,000
options becoming available on September 30, 2006, 400,000 options becoming
available on January 12, 2007 and the balance of 400,000 options vesting on
September 30, 2007.
51
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
The following summarizes stock option information for the year ended
December 31, 2005:
--------------------------------------------------------------- ----------------------- -----------------------
Weighted
Shares Average
Exercise Price
--------------------------------------------------------------- ----------------------- -----------------------
Options outstanding at December 31, 2003 2,599,000 $ 2.04
Forfeited (705,000) $ 1.57
Exercised (145,000) $ 0.50
--------------------------------------------------------------- ----------------------- -----------------------
Options outstanding at December 31, 2004 1,749,000 $ 2.36
Granted 5,920,000 $ 0.91
Forfeited (1,231,500) $ 2.93
--------------------------------------------------------------- -------------------- ------------------------
Options outstanding at December 31, 2005 6,437,500 $ 0.92
=============================================================== ==================== ========================
See Note 21(d) also.
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------- -------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
--------------------- --------------------- -------------------- ------------------ ------------------- -----------------
$0.01 - $1.00 4,010,000 4.53 $0.73 3,197,500 $0.73
$1.01 - $2.00 2,427,500 3.85 $1.22 1,627,500 $1.23
--------- ---- ----- --------- -----
6,437,500 4.27 $0.92 4,825,000 $0.90
========= ==== ===== ========= =====
The Company accounts for its stock-based compensation plan in accordance
with APB Opinion No. 25, under which no compensation is recognized in
connection with options granted to employees and directors except if
options are granted with a strike price below fair value of the underlying
stock. The Company adopted the disclosure requirements SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, the Company is
required to calculate and present the pro forma effect of all awards
granted. For disclosure purposes, the fair value of each option granted to
an employee has been estimated as of the date of grant using the
Black-Scholes option pricing model with the following assumptions:
risk-free interest rate of 5.5%, dividend yield 0%, volatility of 90%, and
expected lives of approximately 0 to 5 years. The weighted average fair
value of the options granted during the period was $0.69 for the options
granted in January 2005 and $0.43 for the options granted in September
2005. Based on the computed option values and the number of the options
issued, had the Company recognized compensation expense, the following
would have been its effect on the Company's net income and earnings per
share:
52
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
------------------------------------------------ ------------------- ------------------
RESTATED
(NOTE 20)
For the year ended December 31, 2005 2004
------------------------------------------------ ------------------- ------------------
Net income for the period:
- as reported $ 182,570 $6,362,423
- pro-forma ($2,419,044) $6,362,423
------------------------------------------------ ------------------- ------------------
Basic and diluted income per share:
- as reported $0.00 $0.14
- pro-forma ($0.04) $0.14
------------------------------------------------ ------------------- ------------------
NOTE 17 INCOME TAXES
(a) Shanxi Weijida and Huaxin are subject to income taxes in China on
their taxable income as reported in their statutory accounts at a tax
rate in accordance with the relevant income tax laws.
Oriental Wave, Allwin Newtech Ltd. and Allwin Biotrade Inc are BVI
companies and are not subject to income taxes. Dragon Pharmaceutical
Inc. and Dragon Pharmaceutical (Canada) Inc. are U.S. and Canadian
companies, respectively, and are subject to taxes in those
jurisdictions.
The Company has structured its business and operations on an
international basis. The Company's history is that they have also been
involved in a number of business combinations. As a result the Company
could be involved in various investigations, claims and tax reviews
that arise in the ordinary course of business activities. Each of
these matters is subject to various uncertainties and it is possible
that some of these matters may be resolved unfavourably to the
Company. The Company has established an accrual for matters that are
probable and can be reasonably estimated. Management believes that any
liability that may ultimately result from the resolution of these
matters in excess of amounts provided will not have a material adverse
effect on the financial position or results of operations of the
Company.
(b) The tax effect of temporary differences that give rise to significant
components of the deferred tax assets (liability) are as follows:
December 31, December 31,
2005 2004
-------------- --------------
Excess (deficiency) of tax cost
over net book value of:
Inventory $ 477,054 $ 186,664
Property and equipment 2,353,111 1,692,170
Other net assets (liabilities) (612,414) 415,806
Losses carried forward 3,706,881 -
-------------- -------------
Total deferred tax assets 5,924,632 2,294,640
Less: valuation allowance (5,924,632) (2,294,640)
---------------- --------------
Net deferred tax assets $ - $ -
=============== ==============
53
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
The valuation allowance is reviewed periodically. When circumstance
change and this causes a change in management's judgment about the
realizeability of deferred tax assets, the impact of the change on the
valuation allowance is generally reflected in current income,
The company has non-capital losses carried forward of US $7.9 million
in Canada expiring between 2008 and 2015 and US $3.0 million in the US
expiring in 2021. As a result of the acquisition of Oriental Wave, a
change in ownership under IRC Section 382 has occurred. As a result of
the change in ownership, the U.S. pre-acquisition losses of the
Company would be limited in their use to offset post-acquisition
income earned by the U.S. entity. The Company has not determined the
limitation amount. The amount of losses being carried forward that are
subject to this limitation is approximately $3 million.
All income and taxes are attributable to foreign and continuing
operations. A reconciliation of the federal statutory income tax, at
the statutory rate of 35% to the Company's effective income tax rate,
for the years ended December 31, 2005 and 2004 are as follows:
2005 2004
----------------- ----------------
Income before taxes $ 729,804 $6,814,246
Statutory tax rate 35 % 35 %
----------------- ----------------
Income tax expense at statutory tax rates 255,431 2,384,986
Foreign tax rate differential (498,905) (2,032,733)
Expenses not deductible for income tax purposes 49,373 -
Tax exempted income (147,314) 99,570
Non-recognition of benefit of loss carry forward 888,649 -
----------------- ----------------
Income tax expense $ 547,234 $ 451,823
================= ================
NOTE 18 RELATED PARTY TRANSACTIONS
During March 2005, $2,415,458 of loans payable to an entity related to a
director of the Company was converted into equity of the Company.
See Notes 4, 7 and 21(b) also.
NOTE 19 CONCENTRATIONS AND RISKS
81% and 95% of the Company's revenues for the years ended December 31, 2005
and 2004, respectively, were derived from customers located in China. The
Company had sales of $6,593,391 and $644,100 in the Chemical and Biotech
Divisions to customers in India , representing 13% of the Company's
revenues for the year ended December 31, 2005. 99% and 100%, respectively
of its assets at December 31, 2005 and 2004 were located in China.
Sales to the Company's five largest customers accounted for approximately
32.9% and 12.4% of the Company's sales for the years ended December 31,
2005 and 2004, respectively; while sales to the Company's largest customer
accounted for approximately 11.9% and 2.7%%, respectively. Amounts owing
from one customer represented 11.8% of the Company's trade and other
receivables at December 31, 2005.
The Company is exposed to the risk arising from changing interest rates. A
detailed analysis of the Company's Loans Payable, together with their
respective interest rates and maturity dates, are included in Note 10.
The majority of the Company's assets, liabilities, revenues and expenses
are denominated in Renminbi, which was tied to the US Dollar and is now
tied to a basket of currencies of China's largest trading partners, is not
a freely convertible currency. The appreciation of the Renminbi against the
US Dollar would result in an increase in the assets, liabilities, revenues
and expenses of the Company and a foreign currency gain included in
comprehensive income. Conversely, the devaluation of the Renminbi against
the US Dollar would result in a decrease in the assets, liabilities,
revenues and expenses of the Company and a foreign currency loss included
in comprehensive income. At December 31, 2005, approximately US$774,369 of
the cash and cash equivalents (December 31, 2004: US$885,681) and all of
the restricted cash are held in Renminbi.
54
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
NOTE 20 RESTATEMENT
As a result of a review of its accounting policies and applicable
accounting pronouncements, the Company has concluded that the reduction of
a future retirement benefit obligation related to the acquisition of a Land
Use Right from a former state-owned enterprise in China by Oriental Wave
Holding Limited ("Oriental Wave") in July 2003, should have been accounted
for as a reduction to the recorded cost of the Land Use Right instead of as
a non-operating gain from extinguishment of debt, as previously disclosed
in Oriental Wave's 2004 financial statements. As a result, Oriental Wave's
2004 financial statements have been restated retroactive to June 2004 to
reflect such change in accounting treatment.
The reduction of the future retirement benefit obligation during 2004,
totaling $1,135,238 million, which was recognized as a non-operating gain,
has been recorded as a reduction to the cost of the Land Use Right. On a
going forward basis, any similar reduction of the retirement benefit
obligation will be treated as a reduction to the recorded cost of the Land
Use Right. The effect on the financial statements is as follows:
As at December 31, 2004
--------------------------------------
Previously
Restated Reported
----------------- -----------------
Current assets $25,283,300 $25,283,300
Property and equipment 62,396,316 63,520,202
Other assets 2,658,688 2,658,688
----------------- -----------------
Total assets $ 90,338,304 $ 91,462,190
================= =================
Liabilities $ 68,800,517 $ 68,800,517
----------------- -----------------
Share capital 14,027,504 14,027,504
Retained earnings 7,562,432 8,686,318
Due from shareholder (52,149) (52,149)
----------------- -----------------
Total equity 21,537,787 22,661,673
----------------- -----------------
Total liabilities and equity $ 90,338,304 $ 91,462,190
================= =================
Year ended
December 31, 2004
-----------------------------------------
Previously
Restated Reported
-------------------- -----------------
Net Sales $ 29,023,130 $ 29,023,130
Cost of sales 16,140,305 16,140,305
-------------------- -----------------
Gross profit 12,882,825 12,882,825
Operating expenses 5,856,596 5,867,948
-------------------- -----------------
Income from operations 7,026,229 7,014,877
Other income (expense) (211,983) 923,255
-------------------- -----------------
Income before taxes 6,814,246 7,938,132
Income tax expense 451,823 451,823
-------------------- -----------------
Net income $ 6,362,423 $ 7,486,309
==================== =================
Net Income per share $ 0.14 $ 0.17
==================== =================
55
DRAGON PHARMACEUTICAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Expressed in US Dollars
NOTE 21 SUBSEQUENT EVENTS
(a) Subsequent to December 31, 2005, the Company subleased its current
office space and entered into a new operating lease agreement in
Vancouver for approximately CDN$73,000 (US$60,000) per annum until
March 31, 2011. Revised total minimum payments required under the new
and old (Note 15(e)) leases are as follows:
2006 $ 260,675
2007 $ 111,203
2008 $ 61,750
2009 $ 61,750
2010 $ 61,750
Thereafter $ 15,437
-----------------------------------------------------
$ 572,565
======================================================
The Company anticipates recovering $124,000 and $41,000 during fiscal
2006 and 2007, respectively, under its sublease agreement.
(b) Subsequent to December 31, 2005, the Company disposed of the cell
line, and all applicable obligations relating, thereto, being
developed for the Company to enter the European market. The cell line
was sold to a Company controlled by a Director of the Company who was
also the President of the Company prior to the transaction. The cell
line had a carrying value of $0 and was sold for $1 million.
(c) Subsequent to December 31, 2005, the Company entered into a Loan
agreement with a bank for $2,478,315 bearing interest at a rate of
6.138% per annum, secured by property and equipment of $10,787,902,
and is due in January 2007.
(d) Subsequent to December 31, 2005, the Company cancelled options to
acquire 500,000 shares at an exercise price of $0.74 that were granted
on September 30, 2005.
56
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND
ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company was informed that Moore Stephens Ellis Foster Ltd. Chartered
Accountants ("Moore Stephens"), who had served as our independent accountants
for the year ended December 31, 2004, had merged with and into Ernst & Young LLP
on May 5, 2005. On July 10, 2005, the Company's board of directors formally
approved the engagement of Ernst & Young as the Company's independent registered
public accounting firm for 2005. On July 12, 2005, the former Moore Stephens
representative who is now associated with Ernst & Young informed the Company
that the merger of Moore Stephens into Ernst & Young on May 5, 2005, effectively
constituted their resignation as the Company's independent accountant
responsible for auditing its financial statements, and that effective as of such
date, Moore Stephens no longer acted as the Company's independent registered
public accountant. Therefore, Ernst & Young LLP was engaged as the independent
registered public accounting firm of the Registrant.
Moore Stephens' report on the Company's financial statements for the year
ended December 31, 2004 did not contain an adverse opinion or a disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope, or
accounting principles.
During the period covered by the report of Moore Stephens and up to the
effective date of resignation, the Company had no disagreements with Moore
Stephens, whether or not resolved, on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Moore Stephens, would have
caused Moore Stephens to make reference to the subject matter of the
disagreement in connection with its reports.
During the Company's previous two fiscal years and up to the effective date
of resignation, the Company did not consult with Ernst & Young regarding any of
the items described under Item 304(a)(1)(iv)(B), Item 304(a)(2) or Item 304(b)
of Regulation S-B.
As the acquisition of Oriental Wave Holdings Ltd was deemed to be a
reverse-take-over transaction, Oriental Wave is considered to be the parent
company for accounting purposes The independent accountant for Oriental Wave for
the year ended December 31, 2004 was Webb & Company P.A.
ITEM 8A. CONTROLS AND PROCEDURES.
We carried out an evaluation, under the supervision and with the
participation of the our management, including our Chief Executive Officer and
Chief Financial Officer, about the effectiveness of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of the end of the period covered by this
Form 10-KSB are effective in ensuring that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Commission's rules and forms.
There were no changes to internal controls over financial reporting during
the fiscal year.
57
ITEM 8B. OTHER INFORMATION
On January 6, 2006, Dragon Pharmaceutical, Inc. (the "Company") entered
into an Assignment and Assumption agreement that, effective February 2, 2006,
sold all of the Company's right, title and interest in its Development and
Manufacturing Agreement dated October 31, 2003 between the Company and Polymun
Scientific Immunubiological Forschung EmGH ("Polymun") to AS Biotech AG, a
company controlled by Dr. Alexander Wick, a director of the Company, for $1
million and assumption of all liabilities under the Development and
Manufacturing Agreement.
Under the terms of the Development and Manufacturing Agreement, Polymun
would develop a new EPO cell-line for the European market pursuant to which the
Company would be granted a non-exclusive license to make, use, sell, offer to
sell, input and/or export EPO in a specific market area. Under the terms of the
Development and Manufacturing Agreement, the Company was responsible to make
certain milestone payments to Polymun and was required to purchase certain
quantities of EPO produced by Polymun. At the time the Assignment and Assumption
Agreement was entered into, Polymun had produced no EPO.
In light of the time, effort and costs to develop a new line of EPO in
Europe, the Company decided to sell the contract. No penalty was incurred with
the sale.
The sale was approved by all directors of the Company present at the
meeting with Dr. Wick abstaining.
Effective February 2, 2006, Dr. Wick resigned as president to the Company.
He still remains as a director to the Company.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
As of December 31, 2005, we had eight directors consisting of Mr. Han, Mr.
Weng, Ms. Liu, Dr. Wick, Dr. Sun, Mr. Mak, Mr. Frey and Mr. Li. At the annual
meeting of shareholders held on August 1, 2005, Mr. Han, Mr. Weng, Ms. Liu, Dr.
Wick and Dr. Sun were re-elected as directors. The Board subsequently appointed
Mr. Mak, Mr. Frey and Mr. Li as directors. The following describes the
background for Mr. Han, Mr. Weng, Ms. Liu, Dr. Wick, Dr. Sun, Mr. Mak, Mr. Frey
and Mr. Li.
Description of Current Directors
Mr. Yanlin Han, age 42, is the Chief Executive Officer and the Chairman of
the Board of Director of Dragon, positions he assumed in January 2005. He has
been the Chairman of Oriental Wave and responsible for the overall strategic
planning and direction of Oriental Wave starting the date he founded the
company. Mr. Han has over 20 years of experience in the pharmaceutical industry
in many positions like material buyer, product sales and manager for state-own
companies in China and has very extensive sales and production management
experience in China. He founded his private company named Shanxi Tongling
Pharmaceutical Company in 1994, which became the vehicle to acquire state-own
pharmaceutical companies through bankruptcy process or contractual management
agreements. Mr. Han set up a joint venture with a large Indian pharmaceutical
company to produce pharmaceutical intermediates with mass fermentation
technology. Mr. Han also serves as the Vice-President of Shanxi Province Foreign
58
Investment Enterprise Association and Vice-President of Datong City Trade
Council. Mr. Han graduated from Shanxi Institute of Economic Management in 1986.
Mr. Zhanguo Weng, age 51, had been a Director of the Company since January
2005. Mr. Weng is the Vice President, China Operation, a Director of Dragon and
the Chairman of Oriental Wave, responsible for the overall daily operations of
Shanxi Weiqida. Mr. Weng has over 25 years of experience in pharmaceutical
industry including being the General Manager for Shanxi Tongzhen Pharmaceutical
Co. Ltd. from August 1997 to January 2002 and Superintendent for Datong No. 2
Pharmaceutical Factory from June 1992 to August 1997. He graduated from the
Business Administration faculty of Shanxi Broadcasting University in 1986 and
has also participated the Senior Program of MBA (Pharmaceutical Line) of
People's University of China for two years.
Ms. Xuemei Liu, age 36, has been a Director of the Company since January
2005. Ms. Liu is currently the Chairman of Tera Science & Technology Development
Co. Ltd. which engages in a wide range of investment projects in real estate
development, coal trading and media and publishing industry. Prior to her
present position as Chairman of Tera Science & Technology Development Co. Ltd.,
Ms. Liu was the vice general manager of Beijing Chemical Baifeng Investment
Corporation Futures Broker Company from 1996 to 1999. Ms. Liu graduated from
Beijing University with a Bachelor degree in 1996 and graduated from the
Graduate School of the Chinese Academy of Social Sciences with a Master degree
in 1998.
Dr. Alexander Wick, Ph.D., age 68, has been a Director of Dragon since 1998
and was the President from 2002 until his resignation effective on February 2,
2006. 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%
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. Yiu Kwong Sun, M.D., age 62, has been a Director of Dragon since 1999.
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 Tung Fellowship Committee of Management of the
University of Hong Kong Faculty of Medicine since 1997.
Mr. Peter Mak, age 45, is a fellow of the Chartered Association of
Certified Accountants in UK as well as a fellow of the Hong Kong Institute of
Certified Public Accountant. Mr. Mak was formerly the Managing Partner of Arthur
Andersen Southern China and also a partner of Arthur Andersen Worldwide. Through
his twenty years of accounting and financial practices, Mr. Mak has extensive
knowledge and experience in Chinese and international acscounting standards. He
is also the independent director or financial advisor for several public
companies listed in United States and Hong Kong.
Mr. Heinz Frey, age 68, graduated from University of Berne, Switzerland in
1966, has 30 years of experience in the telecommunication industry, security
manufacturing and service industry. He has broad experience in the management of
various sizes of companies with global presence, financing and controlling of
international companies, leading development, production, sales and finance
departments. He is also a board member of various companies.
59
Mr. Jin Li, age 38, is currently a senior advisor of Phycos International
Co., Ltd. Prior to joining Phycos, he was a partner at the international law
firm, Linklaters. Mr. Li studied biochemistry at Peking University in China and
received his Master of Science degree in Biochemistry from the University of
Michigan and his doctoral degree from Law School of University of Columbia. He
has more than ten years of experience in international IPOs, M&A and business
transactions.
Description of Executive Officers
The following sets forth our executive officers.
Name Position Age
Yanlin Han Chief Executive Officer and Director 42
Zhanguo Weng Vice President, China Operation 51
Alexander Wick President until February 2, 2006 68
Maggie Deng Chief Operating Officer 38
Garry Wong Chief Financial Officer 35
For a description of Mr. Han, Mr. Weng and Dr. Wick, please see their
biographies above under "Description of Current Directors."
Maggie Deng is the Chief Operating Officer of the company, holding bachelor
degree from Tsinghua University in China. Ms. Deng has over 10 years of
experience working in or with public companies as investment banker, mainly on
IPOs and secondary offering for Chinese companies on domestic stock exchange as
well as international ones. Ms. Deng was the senior manager of China
International Capital Corporation, a Morgan Stanley joint venture investment
banking firm in China, from 1998 to 2001. Ms. Deng moved to Canada in 2001 and
held a position of Assistant to President in a start-up biotech company in
Vancouver.
Garry Wong is the Chief Financial Officer of the Company since January
2005. Prior to his current position, Mr. Wong served as our Executive Assistant
to President and CEO from February 2002 to January 2005. Before joining us, Mr.
Wong was a team member of the Global Mergers and Acquisitions Group at Nortel
Networks since 1996. He managed and executed transactions consisteing of
acquisitions, divestitures, equity investments, spin-offs, public market listing
and joint ventures, in Europe, North America, Asia and the Middle East. Mr. Wong
is a Chartered Financial Analyst who received an International MBA degree from
York University, Canada with double majors in Corporate Finance and Greater
China studies and a Bachelor degree in Business Administration from University
of Hong Kong.
Director's Compensation
Directors are not routinely compensated for their services. However, from
time to time, Board members are awarded stock options as determined by the
Board. The exercise price of the options is based on the fair market value of
the underlying shares of common stock at the time of grant. No directors receive
any compensation during 2005. At a directors meeting held on January 12, 2005,
Ms. Liu, Dr. Sun and Dr. Wick were granted options to purchase 200,000, 200,000,
and 400,000 shares of common stock, respectively, at $1.18 per share which
represented the closing per share price as of that date. At a directors meeting
held on September 30, 2005, Mr. Han, Mr. Weng, Ms. Liu, Dr. Wick,, Dr. Sun, Mr.
Mak, Mr. Frey and Mr. Li were granted options to purchase 500,000, 300,000,
200,000, 400,000, 200,000, 200,000, 200,000 and 200,000 shares of common stock,
respectively, at $0.74 per share which represented the closing per share price
as of that date.
60
Audit Committee
During 2004, we previously had an audit committee that consisted of Mr.
Philip Yuen Pak Yin and Dr. Yiu Kwong Sun. During the latter part of 2004, Mr.
Yuen resigned from the audit committee. In light of Mr. Yuen's resignation that
left one remaining member, the audit committee functions were then handled by
the Board of Directors. On September 30, 2005, the Board appointed Mr. Mak, Mr.
Frey and Mr. Li to the Audit Committee. Mr. Mak, the Chairman of the Audit
Committee, is an expert within the meaning of Item 401 of Regulation S-B
Code of Ethics
The Company has adopted a Code of Ethics that is applicable to the
officers, directors and employees of the Company, including the Company's
principal executive officer, principal financial officer, principal accounting
officer, controller, or persons performing similar functions. The Code of Ethics
is available on the Company's website at www.dragonpharma.com. Amendments to and
waivers from the Code of Ethics will also be disclosed on the Company's website.
ITEM 10. EXECUTIVE COMPENSATION
Compensation Summary
The following table summarizes all compensation earned by or paid to our
Chief Executive Officer and other Executive officers who received compensation
in excess of $100,000 during year 2005.
Summary Compensation Table
------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long Term Compensation
--------------------------------------------------------------------- --------------------------------------------------
Awards Payout
-------------------------------------
Restricted Securities LTIP All Other
Other Annual Stock Underlying Payout Compensation
Year Salary Bonus ($) Compensation ($) Award(s) Options (#) ($) ($)
------------------------------------------------------------------------------------------------------------------------
Yanlin Han 2005 $156,263 -0- -0- -0- 500,000 -0- -0-
C.E.O.
------------------------------------------------------------------------------------------------------------------------
Alexander Wick 2005 $0 (1) -0- -0- -0- 800,000 -0- -0-
President 2004 $0 (1) -0- -0- -0- -0- -0- -0-
2003 $0 (1) -0- -0- -0- 200,000 -0- -0-
------------------------------------------------------------------------------------------------------------------------
Maggie Deng 2005 $104,175 -0- -0- -0- 400,000 -0- -0-
C.O.O
------------------------------------------------------------------------------------------------------------------------
Garry Wong 2005 $106,654 -0- -0- -0- 400,000 -0- -0-
C.F.O.
------------------------------------------------------------------------------------------------------------------------
(1) Dr. Wick was appointed President of the Company in September 2002 and
resigned on February 2, 2006. He is not paid for his services, but is
reimbursed for expenses he incurs in the course of performing his duties
for us. He received an option to purchase 200,000 shares of common stock at
$0.68 per share in 2003 and options to purchase 400,000 shares of common
stock at $1.18 per share and 400,000 shares of common stock at $0.74 per
share in 2005.
61
Option Grants in 2005
The Company granted options to purchase 2,260,000 shares at an exercise
price of $1.18 per share on January 12, 2005 and 3,660,000 shares at an exercise
price of $0.74 per share on September 30, 2005.
Aggregated Option Exercises in Last Fiscal Year and Ten-Year Options/SAR
Repricings
There was no repricing of options for the fiscal year ended December 31,
2005.
Fiscal Year End Option Values
The following table sets forth for our executive officer named in the
Summary Compensation Table the number and value of exercisable and
un-exercisable options as at December 31, 2005.
Number of Securities Value of Unexercised
Shares Underlying Unsecured Options In-The-Money Options
Acquired at December 31, 2005 at December 31, 2005 (1)
on Value ------------------------------- -------------------------------
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ---------- ------------ ------------- -------------- ------------ ---------------
Yanlin Han 0 -- 500,000 - 0 -
Alexander Wick 0 -- 1,000,000 - 0 -
Maggie Deng 0 -- 400,000 - 0 -
Garry Wong 0 -- 420,000 - 0 -
(1) Based upon the closing price of a share of our common stock of $0.64 per
share at December 31, 2005.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table shows the amount of our common stock (symbol: TSX:DDD;
OTCBB:DRUG; Berlin, Frankfurt and XETRA: DRP) beneficially owned (unless
otherwise indicated) by each shareholder known by us to be the beneficial owner
of more than 5% of our common stock, by our named executive officer and current
directors and the executive officers and directors as a group. Except as
otherwise indicated, all information is as of March 15, 2006
Shares
Beneficially Owned(1)
Name & Address of Beneficial Owner Number Percent
---------------------------------- ------------- ---------
Yanlin Han
Chief Executive Officer and Director 31,651,403(2) 50.3%
c/o 1055 Hastings Street, Suite 1900
Vancouver, British Columbia V6E 2E9
62
Shares
Beneficially Owned(1)
Name & Address of Beneficial Owner Number Percent
---------------------------------- ------------- ---------
Zhanguo Weng
Vice President, China Operation and Director 9,200,401(3) 14.6%
c/o 1055 Hastings Street, Suite 1900
Vancouver, British Columbia V6E 2E9
Xuemei Liu 7.4%
Director 4,650,200(4)
c/o 1055 Hastings Street, Suite 1900
Vancouver, British Columbia V6E 2E9
Alexander Wick,
President and Director
1,300,000(5) 2.1%
Yiu Kwong Sun,
Director 1,100,000(6) 1.7%
Peter Mak,
Director 200,000 (7) 0.3%
Heinz Frey,
Director 200,000 (7) 0.3%
Jin Li,
Director 200,000 (7) 0.3%
Maggie Deng
Chief Operating Officer 400,000 (7) 0.6%
Garry Wong
Chief Financial Officer 420,000 (7) 0.7%
All directors and executive officers as a group (10 persons) 49,322,004(8) 78.4%
----------------------------------
(1) Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed above, based on information furnished by such owners or
publicly available, have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options or warrants currently exercisable, or exercisable within sixty
days, are deemed outstanding for purposes of computing the percentage
ownership of the person holding such option or warrants, but are not deemed
outstanding for purposes of computing the percentage ownership of any other
person.
(2) Includes options to purchase 500,000 shares.
(3) Includes options to
purchase 300,000 shares.
(4) Includes options to purchase 400,000 shares.
(5) Includes options to purchase 1,000,000 shares.
63
(6) Includes 400,000 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 director and officer.
(7) Represents options exercisable within sixty days.
(8) Includes options and warrants to acquire 4,020,000 shares of common stock.
Compliance with Section 16 of The Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our executive officers and
directors to file reports of ownership and changes in ownership of our common
stock with the SEC. Executive officers and directors are required by SEC
regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3, 4 and 5 delivered to us as filed with the
Securities and Exchange Commission, we believe that our executive officers and
directors and persons who own more than 10% of our common stock timely filed all
required reports pursuant to Section 16(a) of the Exchange Act.
Equity Compensation Plan Information
Our shareholders approved a share option plan at our Annual Meeting held on
December 18, 2001, authorizing 4,500,000 shares for issuance under the plan. At
our Annual Meeting held on August 12, 2005, our shareholders approved another
share option plan authorizing the issuance of a further 15,000,000 shares. The
following table provides aggregate information as of December 31, 2005 with
respect to all compensation plans (including individual compensation
arrangements) under which equity securities are authorized for issuance.
----------------------------- -------------------------- --------------------------- --------------------------
A B C
----------------------------- -------------------------- --------------------------- --------------------------
Number of securities
remaining available for
future issuance under
Number of securities to equity compensation
be issued upon exercise Weighted-average exercise plans (excluding
of outstanding options, price of outstanding securities reflected in
Plan Category and warrants options, and warrants column A)
----------------------------- -------------------------- --------------------------- --------------------------
Equity compensation plans 6,437,500 $0.92 12,786,500
approved by security holders
----------------------------- -------------------------- --------------------------- --------------------------
Equity compensation plans
not approved by 0 - 0
security holders
----------------------------- -------------------------- --------------------------- --------------------------
Total 6,437,500 $0.92 12,786,500
----------------------------- -------------------------- --------------------------- --------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the past two years, we have been a party to transactions involving
certain of our directors or executive officers. See also Notes 4, 7 and 21(b) to
our financial statements.
64
On April 4, 2004, we entered into an agreement with Dr. Longbin Liu, a
former director, and his affiliate to settle the amount owing to us from his
acquisition of the Hepatitis B Vaccine Project as well as cancellation of the
Patent and Project Development agreements between the parties. Under the terms
of the settlement agreement, the G-CSF, Insulin and Hepatitis B Projects,
including the rights of ownership and development obligations would revert to
Dr. Liu.
In exchange, Dr Liu agreed to pay us the $3,710,000 in principal and
interest owing under the Hepatitis B Project as well as reimburse us $1,330,000
that had been paid previously under the Patent and Project Development
agreements. All amounts were due December 31, 2004 and the warrants granted to
Dr. Liu under the Patent Development agreement were cancelled. Dr. Liu has
agreed to provide 2,600,000 common shares of the Company, to be held in escrow,
as security for the amounts owing.
Dr. Liu did not repay the amounts owing on December 31, 2004 and forfeited
the 2,231,000 common shares of the Company that were held in escrow for as
security for the amount owing. These shares, which were subsequently cancelled
by the Company, were valued at $2,606,486 and resulted in the Company realizing
a recovery of $2,106,486 of the amount that had been written-down in prior
years.
Dr. Liu is still indebted to the Company in the amount of approximately
$2.48 million with this debt accruing interest at the rate of 6% per annum. This
debt is carried on the Company's books at $100. The Board is considering what
steps, if any, it intends to take against Dr. Liu.
Subsequent to December 31, 2005, the Company disposed of the cell line, and
all applicable obligations relating, thereto, being developed for the Company to
enter the European market. The cell line was sold to AS Biotech AG, a Swiss
company controlled by Dr. Alexander Wick, a Director of the Company who was also
the President of the Company prior to the transaction. The cell line had a
carrying value of $0 and was sold for $1 million and the assumption of all
obligations under the agreement.
ITEM 13. EXHIBITS
(a) Exhibits
Exhibit Number Name
2.1(a) Share Exchange Agreement with First Geneva Investments
3.1(a) 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 Amended and Restated Bylaws
10.1(a) Sino-Foreign Co-operative Company Contract
10.2(a) Sino-Foreign Joint Venture Contract Between The Nanjing
Medical Group Company Limited and Allwin Newtech Ltd.
10.3(b) Consulting Agreement with E. Pernet Portfolio Management
dated June 15, 1999
10.4(b) Amendment to Sino-Foreign Co-operative Company Contract
65
10.5(c) Contract to lease 25 acres of land in Yanjiao, China
10.6(c) Sample Employment Agreement for technicians/employees
10.7(d) Marketing and License Agreement Between Allwin Biotrade and
Fargin S.A.
10.8(d) Marketing and License Agreement Between Allwin Biotrade and
Duopharma (Malaysia) SDN.BHD
10.9(d) Marketing and License Agreement Between Allwin Biotrade and
Yoo & Yoo Biotech Co. Ltd.
10.10(d) Acquisition Agreement Among Dragon Pharmaceuticals Inc.,
Alphatech Bioengineering Limited, Longbin Liu and Philip
Yuen
10.11(e) 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(f) Joint research project with the Company and Shenzhen Kelong
Chuang Jian Enterprise Co.
10.13(f) Patent Development Agreement with Dr. Longbin Liu and
Novagen
10.14(f) Project Development Agreement with Dr. Liu
10.15(g) 2001 Stock Option Plan
10.16(h) Waivers of Certain Conditions to the Shares Purchase
Agreement
10.17(h) Escrow Agreement among Dragon Pharmaceutical, Oriental Wave
Holding Limited, Yanlin Han, Zhanguo Weng and Xuemei Liu.
10.18(i) Collaboration Agreement Among Transworld Pharmaceuticals
Corporation Inc. and Toray Trading Corp. and Dragon
Pharmaceutical Inc.
10.19(i) Agent Agreement Among Allwin Biotrade, Inc., Jiangsu Wuzhong
Industry Co. Ltd. and Jiangsu Wuzhong Industry Co. Ltd.
Suzhuo Zhang Kai Bio-Pharmaceuticals Plant
10.20(i) Development and Manufacturing Agreement Between Dragon
Pharmaceutical Inc. and Polymun Scientific Immunbiologische
Forschung GmbH
10.21(i) Agreement for Advance and Long Term Supply of Products
between Aurobindo (Datong) Bio-Pharma Co. Ltd. and Shanxi
Weiqida Pharmaceutical Co. Ltd.
10.22(i) Technology Transfer Agreement between Shanxi Weiqida
Pharmaceutical Co., Ltd. and Alpha Process Trust Reg.
66
10.23(i) Manufacturing Agreement for Dry-freeze Levoflaxacin
Injectable by and between Shanxi Weiqida Pharmaceutical Co.
and Shanxi Pude Pharmaceutical Co. Ltd.
10.24(i) Technology Transfer Agreement between Shanxi Weiqida
Pharmaceutical Co., Ltd. and Alpha Process Trust Reg.
10.25(k) 2005 Stock Option Plan
10.26 Purchase Agreement between the Company and AS Biotech AG
23.1 Consent of Ernst & Young LLP., Chartered Accountants
23.2 Consent of Webb & Company, P.A.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
99.1(j) Code of Ethics
----------------------
(a) Previously filed with Dragon's initial registration statement on Form
10-SB, filed with the SEC on November 4, 1999.
(b) Previously filed with Dragon's initial registration statement on Form
SB-2, filed with the SEC on May 15, 2000.
(c) Previously filed with Dragon's amendment no. 1 to registration
statement on Form SB-2 filed with the SEC on August 3, 2000.
(d) Previously filed with Dragon's amendment no. 3 to registration
statement on Form SB-2 filed with the SEC on October 20, 2000.
(e) Previously filed with Dragon's amendment no. 5 to registration
statement on Form SB-2 filed with the SEC on December 26, 2000.
(f) Previously filed with Dragon's Form 10-K filed with the SEC on April
1, 2002. (g) Incorporated by reference to Dragon's proxy statement for
the Annual Meeting held on December 17, 2001.
(h) Incorporated by reference to Form 8-K filed on January 18, 2005
67
(i) Incorporated by reference to Form 8-K filed on March 2, 2005, portions
of which have been omitted for confidential treatment.
(j) Incorporated by reference to Form 10-KSB for the year ended December
31, 2004 filed on April 23, 2004.
(k) Incorporated by reference to the Company's proxy statement for 2005.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
For the year ended December 31, 2005 Moore Stephens, until their
resignation on May 5, 2005, and Ernst & Young were engaged by us to provide
non-audit services. For the year ended December 31, 2004 Webb and Company were
engaged by Oriental Wave to provide non-audit services During the years ended
December 31, 2005 and 2004 the following fees were paid for services provided by
Ernst & Young and Moore Stephens and by Webb and Company.
As the acquisition of Oriental Wave Holdings Ltd was deemed to be a
reverse-take-over transaction, Oriental Wave is considered to be the parent
company for accounting purposes The independent accountant for Oriental Wave for
the year ended December 31, 2004 was Webb & Company P.A.
For the year ended December 31, 2005, Moore Stephens and Ernst & Young were
engaged by us to provide non-audit services. For the year ended December 31,
2004 Webb and Company were engaged by Oriental Wave to provide non-audit
services. During the years ended December 31, 2005 and 2004, the following fees
were paid for services provided by Ernst & Young and Moore Stephens and by Webb
and Company.
Audit Fees. The aggregate fees paid for the annual audit of financial
statements included in our Annual Report for the year ended December 31, 2005
and 2004 and the review of our quarterly reports for such years, amounted to
approximately $210,000 paid to Ernst & Young and $174,800 paid to Webb &
Company, respectively.
Audit Related Fees. For the years ended December 31, 2005 and 2004 we paid
$Nil and $Nil to Ernst & Young and Webb and Company for other audit related
fees.
Tax Fees. For the year ended December 31, 2005 and 2004, we paid no fees to
Ernst & Young and Webb and Company for tax fees.
All Other Fees. For the years ended December 31, 2005 and 2004, we paid no
fees to Ernst & Young and Webb and Company for any non-audit services.
The above-mentioned fees are set forth as follows in tabular form:
2005 2004
---- ----
Audit Fees $210,000 $174,800
Audit Related Fees -0- -0-
Tax Fees -0- -0-
All Other Fees -0- -0-
68
Audit Committee Approval of Audit and Non-Audit Services of Independent
Accountants
The Audit Committee approves all audit and non-audit services provided by
the independent auditors. These services may include audit services,
audit-related services, tax services and other services. The independent
accountants and management are required to periodically report to the Audit
Committee regarding the extent of services provided by the independent
accountants, and the fees for the services performed to date. No non-audit
services were provided by our independent accountants in 2005.
69
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 28, 2006 Dragon Pharmaceutical Inc.,
a Florida Corporation
/s/ Yanlin Han
----------------------------------------
Yanlin Han, Chief Executive Officer
(Principal Executive Officer)
In accordance with the Exchange Act, 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/ Yanlin Han March 28, 2006
-------------------------------------
Mr. Yanlin Han, Chairman of the Board
/s/ Zhanguo Weng March 28, 2006
-------------------------------------
Mr. Zhanguo Weng, Director
/s/ Dr. Yiu Kwong Sun March 28, 2006
-------------------------------------
Dr. Yiu Kwong Sun, Director
/s/ Dr. Alexander Wick March 28, 2006
-------------------------------------
Dr. Alexander Wick, Director
/s/ Xuemei Liu March 28, 2006
-------------------------------------
Ms. Xuemei Liu, Director
/s/ Peter Mak March 28, 2006
-------------------------------------
Mr. Peter Mak, Director
/s/ Heinz Frey March 28, 2006
-------------------------------------
Mr. Heinz Frey, Director
70
/s/ Jin Li March 28, 2006
-------------------------------------
Mr. Jin Li, Director
/s/ Garry Wong March 28, 2006
-------------------------------------
Garry Wong, Chief Financial Officer
(Principal Financial and Accounting Officer)
71