As filed with the Commission on October 20, 2000 File No. 333-37064
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
PRE-EFFECTIVE AMENDMENT NO. 3
to
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
DRAGON PHARMACEUTICAL INC.
(Name of small business issuer in its charter)
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<S> <C> <C>
Florida 2384 65-0142474
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
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543 Granville Street, Suite 1200, Vancouver, British Columbia V6C 1X8
(Address and telephone number of principal executive offices)
543 Granville Street, Suite 1200, Vancouver, British Columbia V6C 1X8
(Address of principal place of business or intended principal place of business)
Longbin Liu, President and CEO
Dragon Pharmaceutical Inc.
543 Granville Street
Suite 1200
Vancouver, British Columbia V6C 1X8
604-669-8817
(Name, address and telephone number of agent for service)
Copy to:
Daniel B. Eng, Esq.
Roger D. Linn, Esq.
Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Telephone: 916-442-0400
Approximate date of proposed sale to the public: As soon as practicable after
the registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following blocks and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
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==========================================================================================================
Proposed Proposed
maximum maximum Amount of
Title of each class of Amount to be offering price aggregate registration
securities to be registered registered per share offering price fee
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Common stock to be offered by selling
stockholders 6,700,000 $6.35(1) $42,545,000 $13,208
Common stock for resale by holders of
warrants assuming the exercise of such
warrants 4,258,000 $6.35(2) $27,038,300 $8,714
Total 10,958,000 $69,583,300 $21,922(3)
=========================================================================================================
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(1) Fee calculated in accordance with Rule 457(c) of the Securities Act of
1933, as amended ("Securities Act"). Estimated for the sole purpose of
calculating the registration fee and based upon the average quotation of
the high and low price per share of the Company's common stock on May 9,
2000, as quoted on the OTC Bulletin Board.
(2) Assumes that the holder of the warrant has exercised such warrant. Maximum
offering price per share is based upon the average quotation of the high
and low price per share of the Company's common stock on May 9, 2000, as
reported on the OTC Bulletin Board.
(3) This filing fee was previously paid.
The registrant hereby amends this registration statement on the date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on the date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>1
PROSPECTUS Subject to Completion
October 20, 2000
DRAGON PHARMACEUTICAL INC.
COMMON STOCK
----------------
This prospectus relates to the resale by the selling stockholders of up to
10,958,000 shares of common stock. Such shares of common stock includes
4,258,000 shares of common stock that may be resold by the selling stockholder
upon the exercise of warrants. The selling stockholders may sell the common
stock from time to time in the over-the-counter market at the prevailing market
price or in negotiated transactions.
We will not receive any proceeds from the resale of shares of common stock
by the selling stockholders. We will pay for expenses of this offering.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"DRUG." On October ___, 2000, the bid quotation for one share of common stock
was $___. We do not have any other securities that are currently traded on any
other exchange or quotation system.
--------------------------------
Our business is subject to many risks and an investment in our common stock
will also involve significant risks. You should carefully consider the various
Risk Factors described beginning on page 5 before investing in the common stock.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------------------------
The date of this Prospectus is October ___, 2000.
<PAGE>2
TABLE OF CONTENTS
Prospectus Summary.............................................................4
Risk Factors...................................................................5
We have a limited operating history and we have incurred losses since our
founding in February, 1998 and expect such losses to continue for the
foreseeable future.....................................................5
We may need additional capital to finance our operations and to develop
new products and if we are unable to secure additional capital, if
needed, this would adversely affect our business.......................5
Since July 1999 we have owned a 75% interest in Nanjing Huaxin Biotech Co.
Ltd. Nanjing has had losses since our acquisition and will continue to
incur losses for the foreseeable future................................5
The potential risks of political, social or economic instability in the
People's Republic of China, could adversely affect our ability to
carry on or expand our business in China...............................6
The exercise of outstanding warrants and options may dilute existing
stockholders and could substantially increase the number of shares
which may be sold into the market......................................6
There are technical risks associated in commercializing our technology
which could delay or reduce the realization of lower cost production
of EPO.................................................................6
We have no employment agreement with Dr. Liu, who supervises our EPO
production program and personnel. The loss of Dr. Liu's services would
adversely impact our profitability.....................................7
Forward-looking Statements.....................................................7
The Offering...................................................................7
Use of Proceeds................................................................8
Price Range of Common Stock....................................................8
Dividend Policy................................................................8
Management's Discussion and Analysis...........................................8
Business......................................................................11
Property......................................................................18
Management....................................................................18
Executive Compensation........................................................20
Security Ownership of Certain
Beneficial Owners and Management..............................................22
Plan of Distribution..........................................................24
<PAGE>3
Selling Stockholders..........................................................25
Certain Relationships and Related Transactions................................27
Description of Capital Stock..................................................28
Legal Proceedings.............................................................29
Legal Matters.................................................................29
Experts ......................................................................29
Available Information.........................................................29
Financial Statements ........................................................F-1
<PAGE>4
PROSPECTUS SUMMARY
Our Business
We are a pharmaceutical and biotechnological company whose business plan
is to develop, manufacture and market pharmaceutical products in China. Our
current business involves the production and sale of Erythropietin in China. To
this end, during 1999 we acquired a 75% interest in Nanjing Huaxin Biotech Ltd.,
a Chinese pharmaceutical company and one of the largest Erythropietin ("EPO")
producers in China. EPO is a prescribed drug to treat anemia caused by other
medical treatments such as chemotherapy, HIV treatment and treatment for chronic
kidney failure.
We are a Florida corporation with our business office located at 543
Granville Street, Suite 1200, Vancouver, British Columbia V6C 1X8. Our telephone
number is (604) 669-8817. We also have an office located at 11th Floor, Suite
18-19, China World Tower 2, 1 Jianguomenwai Avenue, Beijing, 100004, and our
wholly-owned subsidiary, Allwin Newtech Ltd., a corporation formed under the
laws of British Virgin Islands, maintains its business office at East Asia
Chambers, P.O. Box 901, Road Town, Tortola, British Virgin Islands.
Offering Summary
Total shares of common stock outstanding as
of October 20, 2000..........................16,700,000; 22,513,500 on a fully
diluted basis
Shares of common stock being offered for
resale by the selling stockholders...........Up to 10,958,000 shares including
4,258,000 shares that may be
resold by the selling stockholders
upon the exercise of outstanding
warrants.
Offering price...............................Market price or negotiated prices
at the time of resale.
Use of proceeds..............................We will not receive any of the
proceeds of the shares offered for
resale by the selling stockholders.
Any proceeds we receive from the
exercise of warrants will be used
for working capital and other
general corporate purposes.
OTC Bulletin Board Symbol....................DRUG
Summary of Consolidated Financial Data
For the six For the period
months ended For the year ended ended
June 30, 2000 December 31, 1999 December 31, 1998
------------- ------------------ -----------------
Revenue $ 1 ,458,912 $ 989,539 $ 0
Net loss for period (403,777) (2,791,033) (471,717)
Loss per share (0.03) (0.27) (0.06)
Working capital 9,339,366 8,405,788 829,493
Total assets 19,381,114 16,740,037 2,480,813
Stockholders' equity $ 14,768,021 $ 12,488,768 $ 1,737,180
<PAGE>5
RISK FACTORS
We have a limited operating history and we have incurred losses since our
founding in February, 1998 and expect such losses to continue for the
foreseeable future.
Since our primary business operations only commenced in July, 1999, we do
not have a historical record of revenues nor an established business track
record which makes future performance very difficult to predict. There is no
assurance that we will be able to develop a sufficiently large production
capacity and customer demand to be profitable.
We have incurred operating losses since our founding and for the six-month
period from January 1, 2000 through June 30, 2000 reported an operating loss of
$408,409. Due to our need to develop our manufacturing capabilities and expand
our customer base, we anticipate further operating losses through at least the
current calendar year 2000 and the foreseeable future.
We may need additional capital to finance our operations and to develop new
products and if we are unable to secure additional capital, if needed, this
would adversely affect our business.
Because we currently do not have sufficient revenues to support our
activities, we intend to fund our operations with our current working capital.
Further, approximately $4 million has been budgeted to finance the research and
development of the our technology utilizing our proprietary vectoring process
and our application to new products over the next 12 months. If our losses
continue, we may be required to raise additional capital to fund our operations
and finance our research and development. Traditionally, we have relied
primarily on the sale of common stock to meet our operations and capital
requirements. Any equity financing could result in dilution to our then-existing
stockholders. Debt financing will result in interest expense, and if convertible
into equity, could also dilute then-existing stockholders. If we were unable to
obtain financing in the amounts and on terms deemed acceptable, our business and
future success may be adversely affected.
Since July 1999 we have owned a 75% interest in Nanjing Huaxin Biotech Co.
Ltd. Nanjing has had losses since our acquisition and will continue to incur
losses for the foreseeable future.
In July 1999, we acquired our 75% interest in Nanjing Huaxin Biotech Co.
Ltd. which produces EPO in China. Nanjing has recognized an operating loss for
the year ending December 31, 1999, and for the six months ended June 30, 2000.
We expect such operating losses to continue until the recent plant improvements
and our enhanced production technology is fully realized. Although for the six
months ended June 30, 2000, and year end December 31, 1999, we realized revenues
of approximately $1,458,000 and $990,000 respectively, from our ownership
interest in Nanjing, these revenues have not been sufficient to offset operating
costs due primarily to plant improvements and implementation of our proprietary
production technology. We expect to invest an additional $1,000,000 over the
next 12 months in order to complete the plant improvements and new production
processes for the manufacturing of EPO.
The potential risks of political, social or economic instability in the
People's Republic of China, could adversely affect our ability to carry on or
expand our business in China.
Virtually all of the our production is conducted in China. Consequently, an
investment in our common stock may be adversely affected by the political,
social and economic environment in China. Under its current leadership, China
has been pursuing economic reform policies, including the encouragement of
private economic activity and greater economic decentralization. There can be no
assurance, however, that the Chinese government will continue to pursue such
policies, that such policies will be successful if pursued, or that such
policies will not be significantly altered from time to time. Our business and
prospects are dependent upon agreements and regulatory approval with various
entities controlled by Chinese governmental instrumentalities. Our operations
and prospects would be materially and adversely affected by the failure of such
governmental entities to grant necessary approvals or honor existing contracts,
<PAGE>6
and, if breached, it might be difficult to enforce these contracts in China. In
addition, the legal system of China relating to foreign investments is both new
and continually evolving, and currently there can be no certainty as to the
application of its laws and regulations in particular instances.
Our business plan assumes that if we can produce a low-priced EPO, a
sufficiently large EPO market will develop in China. In order to achieve the
demand for EPO, the Chinese medical community and consumers must be educated
about the uses of EPO, certain institutional developments such as health care
plans must occur and export market opportunities must be studied. No assurance
that a sufficient EPO market will develop. Further, we may be limited in our
ability to sell EPO outside of China due to EPO patent rights held by our
competitors in some other countries.
Our technology is not protected by any patents. Consequently, other
competitors could copy our enhanced EPO production technology and develop EPO or
other pharmaceutical drugs utilizing our technology. Furthermore, Amgen Inc.
currently holds a United States patent to develop and produce EPO and Amgen
sells EPO in China. Although no corresponding patent protection is applicable in
China, there is no assurance that our current or future production of EPO will
not be the subject of a patent infringement action in the future asserted by
patent holders or that our competitors will take political steps to prevent us
from producing EPO in China.
The exercise of outstanding warrants and options may dilute existing
stockholders and could substantially increase the number of shares which may be
sold into the market.
By this offering, an additional 10,958,000 shares of common stock may be
resold in the market. Of this amount, 4,258,000 shares will represent new shares
issued upon exercise of outstanding warrants. If all of these warrants are
exercised, the total number of our shares outstanding will increase by
approximately 25%. Given the limited existing market in our common stock, the
sale into the market of significant amounts of additional common stock may have
the effect of depressing our stock share price.
There are technical risks associated in commercializing our technology
which could delay or reduce the realization of lower cost production of EPO.
A key to our future success is the ability to produce EPO and other drugs
at lower costs than our competitors. Although we are currently utilizing our
proprietary technology to produce EPO at lower costs, our method for producing
EPO on a commercial basis has only recently begun. Further, although results
from recent independent tests and our early production results have been
encouraging, the ability of our technology to commercially produce EPO or other
drugs at consistent levels is still being evaluated.
We have no employment agreement with Dr. Liu, who supervises our EPO
production program and personnel. The loss of Dr. Liu's services would adversely
impact our profitability.
Our future performance is substantially dependent on the technical
expertise of Dr. Liu and other key researchers who Dr. Liu supervises. The loss
of Dr. Liu or any of our key research personnel could have a material adverse
effect on our business, development, financial condition, and operating results.
We do not have an employment agreement with Dr. Liu nor do we maintain "key
person" life insurance on Dr. Liu.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks in the section
entitled "Risk Factors," that may cause our or our industry's actual results,
levels of activity, performance or achievements to be materially
<PAGE>7
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as required by applicable law,
including the securities laws of the United States, we do not intend to update
any of the forward-looking statements to conform these statements to actual
results.
As used in this prospectus, the terms "we," "us," "our," and "Dragon" means
Dragon Pharmaceutical Inc. and its subsidiaries, unless otherwise indicated. All
dollar amounts refer to United States dollars unless otherwise noted.
THE OFFERING
The selling stockholders are offering for resale up to 10,958,000 shares of
common stock, including up to 4,258,000 shares of common stock assuming the
exercise of outstanding warrants. Set forth below are the sources of the shares
of common stock being registered for resale in this prospectus.
4,218,000 of the shares of common stock and warrants to purchase an equal
number of shares of common stock were issued in connection with a private
placement of 4,218,000 Units to 38 investors at $2.50 per Unit which occurred on
December 31, 1999. An additional 40,000 Units were sold to one investor at $2.50
per Unit on December 31, 1999. All of the subscribers were foreign investors.
Each Unit consisted of one share of common stock and a warrant to purchase one
share of common stock at $2.50 per share.
1,000,000 shares of common stock at $1.00 per share were issued in
connection with the exercise of warrants previously issued in conjunction with
our acquisition of all of the issued and outstanding shares of Allwin Newtech
Ltd. on August 17, 1998. Allwin Newtech is now our subsidiary. All of the
subscribers were foreign investors.
600,000 shares of common stock and warrants to purchase 600,000 shares of
common stock were issued pursuant to a foreign private placement which occurred
on October 19, 1999. Warrants to purchase the 600,000 shares of common stock
were exercised in October 2000. The balance of 242,000 shares of common stock
consists of 135,000 shares issued to pay off loans and 107,000 shares issued
upon the exercise of stock options.
The shares of common stock offered for resale and the shares of common
stock to be issued upon the exercise of the warrants may be sold in a secondary
offering by the selling stockholders by means of this prospectus.
USE OF PROCEEDS
We will not receive any proceeds from the resale of the common stock by the
selling stockholders. However, we will receive proceeds from the exercise of
outstanding warrants. If warrants to purchase 4,258,000 shares are exercised, we
would receive $10,645,000. Proceeds from the exercise of warrants, will be used
to finance the continued implementation of our vector technology to the
production of EPO; to fund research and development of potential new bio drugs;
increase international marketing efforts; working capital for ongoing operations
and for the potential acquisition of additional bio technologies.
PRICE RANGE OF COMMON STOCK
Our common stock began quotation on the OTC Bulleting Board under the
symbol "DRUG" on October 9, 1998. The following quotations reflect the high and
low bids for our common stock based on inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions. We
<PAGE>8
intend to apply to The Nasdaq Stock Market to list our common stock on the
SmallCap Market. The high and low prices of our common stock as quoted on the
OTC Bulletin Board, on a quarterly basis since October 9, 1998, are as follows:
Common Stock
Quarter Ended High Low
------------- ---- ---
September 30, 2000 $4.56 $3.25
June 30, 2000 $8.00 $4.31
March 31, 2000 $9.00 $4.37
December 31, 1999 $3.69 $1.63
September 30, 1999 $3.38 $2.25
June 30, 1999 $3.19 $1.88
March 31, 1999 $2.00 $1.00
December 31, 1998 $1.50 $.94
As of October 17, 2000, we had 16,700,000 shares of common stock
outstanding and approximately 83 stockholders of record. This number does not
include stockholders who hold our securities in street name. Approximately
12,646,000 shares of our common stock have a restricted securities legend.
DIVIDEND POLICY
We have not declared or paid any cash dividends since inception. We intend
to retain future earnings, if any, for use in the operation and expansion of our
business and do not intend to pay any cash dividends in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS
General
The following discusses our financial condition and results of operations
based upon our consolidated financial statements which have been prepared in
accordance with generally accepted accounting principles.
We were formed on August 22, 1989, under the name First Geneva Investments,
Inc. First Geneva Investment's business was to evaluate businesses for possible
acquisition. On July 28, 1998, First Geneva Investment entered into a share
exchange agreement with Allwin Newtech Ltd. Allwin Newtech was formed in 1998
for the purpose of developing and marketing pharmaceutical drugs for sale in
China. Prior to the acquisition of Allwin Newtech, First Geneva Investments had
no operations. The share exchange transaction was consummated on August 17, 1998
and on September 21, 1998, First Geneva Investments changed its name to Dragon
Pharmaceutical Inc. On June 11, 1999, we acquired a 75% interest in Nanjing
Huaxin Biotech Co., Ltd. which manufactures EPO in China.
We initiated financial reporting in September 1999. For this reason, no
full comparison is available for the corresponding prior year for the three and
six month period ending June 30, 2000, or for the year ended December 31, 1999.
Because we are just beginning production, the following comparison will not be
indicative of the results of operation of the year ended December 31, 2000.
<PAGE>9
Results of Operations
For the Quarter and Six-Month Period Ended June 30, 2000
Revenues. Revenues was derived primarily from the sale of EPO in China.
Revenue for the three months period ending June 30, 2000 was $797,127 and
revenue for the six months ended June 30, 2000 was $1,458,912. Cost of sales for
the second quarter of the fiscal year was $167,536 and $266,401 for the six
months ended June 30, 2000. The cost of sales is attributed to the production
costs of our pharmaceutical products. During the second quarter of 2000 we had
interest income of $195,273. Interest income for the six months ended June 30,
2000 was $219,325. Interest income is related primarily to interest earned on
cash received from the private placement of common stock during the last quarter
of 1999.
Expenses. Total expenses for the second quarter of 2000 were $1,009,404.
The major expense incurred in the second quarter of 2000 related to the selling
of pharmaceutical products and represented approximately 48% of total expenses.
The remaining major expense items are represented by administrative expenses.
Significant expenses for the second quarter included depreciation of
intangible assets of $133,927, bad debt write-offs of $22,142, and loan interest
of $24,434. Management fees of $32,146 include $18,000 paid to one director for
services during the second quarter ended June 30, 2000. The depreciation of
intangible assets relates to the amortization of the drug license to produce
EPO.
Total expenses for the six month period ended June 30, 2000, were
$1,820,245. The expenses relating to the selling of pharmaceutical products
represented approximately 44%. Other major expenses included stock option
compensation (10%) and other administrative expenses (46%).
Net and Comprehensive Loss. Dragon had a net loss of $184,540 and a
comprehensive loss of $168,997 for the three-month period ending June 30, 2000.
Calculated in the comprehensive loss for the period was a minority interest gain
of $15,543.
Dragon's net loss for the six month period ended June 30, 2000 was
$408,409. The comprehensive loss for the same period was $403,777 which includes
a minority interest gain of $4,632.
Basic and Diluted Net Loss Per Share
Dragon's net loss per share has been computed by dividing the net loss for
the period by the weighted average number of shares outstanding during the
second quarter of 2000. The loss per share for the six month period ending June
30, 2000, was $0.03. Common stock issuable upon the exercise of common stock
options and common stock warrants have been excluded from the net loss per share
calculations as their inclusion would be anti-dilutive.
For the Fiscal Years Ended December 31, 1999 and 1998
Revenues. For the period from February 10, 1998 to December 31, 1998, we
had no revenues. For the year ended December 31, 1999, we had revenues of
$989,539. Revenues were attributable to sales of pharmaceutical drugs produced
by Nanjing Huaxin subsequent to July 27, 1999. Cost of sales of $204,473 is
attributed to the production costs of the pharmaceutical products. During 1999
we had interest income of $19,397 compared to interest income of $9,737 for the
period ended December 31, 1998. Interest income is attributed to cash received
from the private placement of common stock during the last six months of 1998
and in 1999.
Expenses. Total expenses for the fiscal year ended December 31, 1999, were
$3,650,342 as compared to $481,454 for the period ended December 31, 1998. The
primary expense incurred in 1999 related to stock option compensation of
$1,876,000 and represented approximately 51% of total expenses. This
<PAGE>10
compensation included both new options granted to our employees, directors and
advisors and the vesting of options granted in previous fiscal years. Selling
expenses increased from none during 1998 to $619,676 in 1999. This increase
represents our increased marketing activity in China. Other significant expenses
in 1999 included loan interest of $326,623 (including both common shares and
cash), depreciation of intangible assets of $135,931, travel of $113,415,
salaries and benefits of $151,598, and management fees of $96,000. Management
fees relate to the payment of two directors for services in the amount of
$96,000 per annum. The depreciation of intangible assets relates to the
amortization of the drug license to produce EPO.
The primary expenses incurred during 1998 related to stock option
compensation of $300,000, management fees of $41,943, travel of $41,784, and
legal of $23,241. Stock option compensation of $300,000 related to stock options
granted to our officers and directors, management fees of $41,943 related to the
payment to two directors for services, $41,784 related to travel to China to
evaluate pharmaceutical companies and legal expenses related to the
reorganization of Allwin Newtech and the raising of capital.
Net and Comprehensive Loss. We had a net loss of $2,845,879 and a
comprehensive loss of $2,791,033 for the fiscal year ending December 31, 1999,
compared to a net loss of $471,717 and a comprehensive loss of $473,862 for the
period February 10, 1998 to December 31, 1998. Calculated in the comprehensive
loss for 1999 was a minority interest gain of $54,846. The comprehensive loss
for 1998 included a foreign currency translation adjustment of $2,145 related to
our operations in China.
Liquidity and Capital Resources
Dragon is a developing pharmaceutical and biotechnological company that has
commenced the manufacture and marketing of pharmaceutical products in China
through its 75% equity interest in Nanjing Huaxin Biotech. Previously, we raised
funds through equity financings to fund its operations and to provide working
capital. We currently have no plans for further equity financings. However, we
may finance future operations through additional equity financings, if
necessary. As of June 30, 2000 our working capital was $9,339,366. There has
been little change to our working capital of $8,405,788 at December 31, 1999 and
$8,724,344 at March 31, 2000.
In September 1998, we raised $1 million through the sale of 2,000,000
shares of common stock. The proceeds raised were for working capital. In April
1999, we entered into a $600,000 loan agreement. The $600,000 loan bears
interest at 8% and is due in 6 months with the right of Dragon to extend the
maturity date by an additional six months in September 1999. As an additional
inducement, we issued 90,000 shares of common stock to the lender. In September
1999 we exercised our option to extend the loan by a period of six months. This
debt was subsequently converted into common stock.
On October 14, 1999, we entered into securities purchase agreements with
two investors located in Hong Kong. Under the terms of this agreement, the
investors purchased, in the aggregate, 600,000 shares of common stock at $2.50
per share, resulting in our raising in the aggregate $1.5 million.
On December 31, 1999, we closed a private placement raising $10,645,000
through the issue of 4,258,000 shares of common stock at a price of $2.50 per
share. $600,000 of the gross proceeds from the December 1999 offering
represented the conversion of the outstanding debt by the lenders into shares of
Dragon's common stock at a price of $2.50 per share.
Dragon has not completed any financing activities during the first six
months of the current fiscal year.
<PAGE>11
BUSINESS
General
We are a development stage pharmaceutical and biotechnological company
whose business plan is to develop, manufacture and market pharmaceutical
products in China. We have acquired a 75% interest in a drug manufacturing
company called Nanjing Huaxin Biotech Co. Ltd. located in Nanjing City, China
and are currently implementing our proprietary technology which will allow it
Nanjing Huaxin Biotech to produce drugs such as EPO in an efficient and
cost-effective manner. Our strategy is to use our biotechnological expertise to
produce and market pharmaceutical products primarily in China at costs which
will be lower than those currently available.
Corporate History
Merger with First Geneva Investments, Inc.
We were originally formed on August 22, 1989, as First Geneva Investments,
Inc. First Geneva Investments was formed for the purpose of evaluating and
acquiring businesses. From 1989 to 1998, First Geneva Investments had no
significant activity. On August 17, 1998, pursuant to a share exchange
agreement, First Geneva Investments issued 7,000,000 shares of its common stock
and 2,000,000 warrants with each warrant having the right to acquire one-half
share of common stock at $0.50 per half share, or 1,000,000 shares of common
stock at $1.00 per share in the aggregate, in exchange for all of the
outstanding shares of Allwin Newtech Ltd., a British Virgin Islands corporation.
Allwin Newtech Ltd. was formed on February 10, 1998 for the purpose of
developing pharmaceutical products in China. Allwin Newtech owns certain
technology used to enhance the efficiency of producing EPO. As a result of the
acquisition, the former shareholders of Allwin Newtech became 87.5% shareholders
of First Geneva Investments and Allwin Newtech became its wholly-owned
subsidiary. On September 21, 1998, First Geneva Investments changed its named to
Dragon Pharmaceutical Inc. Prior to the reorganization, First Geneva Investments
and its officers, directors and shareholders were not affiliated with Allwin
Newtech and its officers, directors and shareholders.
Our Joint Ventures with Other Companies
Sanhe Kailong Bio-Pharmaceutical Limited
On April 18, 1998, Allwin Newtech entered into a contract to acquire a 75%
interest in a new joint venture called Sanhe Kailong Bio-pharmaceutical Limited,
a corporation organized under the laws of China. Since that time, Allwin Newtech
has increased its interest in Sanhe Kailong Bio-pharmaceutical Limited to 95%.
The other 5% joint venture partner is Sinoway Biotech Limited. Sanhe Kailong was
formed in 1998 for the purpose of developing, manufacturing and marketing
pharmaceutical products in China.
For its initial 75% interest, Allwin Newtech agreed to contribute
approximately $1,000,000 and its technology to Sanhe Kailong. For its initial
25% interest, Sinoway Biotech was to contribute a contract to purchase a license
to manufacture EPO and other drugs in China and a right to acquire a long-term
lease of 25 acres of land at a pharmaceutical park located in the Yanjiao
Special Economic Zone, China. Upon our acquisition of Allwin Newtech, we assumed
Allwin Newtech's interest in Sanhe Kailong Bio-pharmaceutical and are currently
evaluating our options under the joint venture agreement. To increase Allwin
Newtech's position from 75% to 95% in Sanhe Kailong, on March 19, 1999, we
agreed to pay $250,000 and to issue 250,000 shares of our common stock to
Sinoway Biotech. Sinoway Biotech will continue to hold the remaining 5%
interest. Messrs. Ken Cai, Greg Hall and Longbin Liu serve as directors of Sanhe
Kailong. At this time, we have neither contributed the $1,000,000 for research
and development nor our technology to Sanhe-Kailong. We have paid $250,000 to
Sinoway Biotech to increase our interest in the joint venture but have not yet
issued the 250,000 shares of stock. Due to our acquisition of Nanjing Huaxin and
its license to manufacture EPO, we determined not to pursue EPO manufacturing
through the Sanhe Kailong joint venture. Consequently, the contract to purchase
<PAGE>12
a drug manufacturing license held by Sinoway Biotech was not deemed necessary
and was therefore not contributed to Sanhe Kailong. Currently, Sanhe Kailong has
no operations. Although no decision has been made, we may consider having Sanhe
Kailong develop other pharmaceutical drugs. Sanhe Kailong was formed by Allwin
Newtech for the purpose of the joint venture. Neither we nor Allwin Newtech had
affiliation with Sinoway Biotech prior to the joint venture's formation.
Nanjing Huaxin Biotech Co. Ltd.
On July 27,1999, Allwin Newtech closed a share transfer agreement with the
Nanjing Medical Group Ltd. whereby, effective June 11, 1999, Allwin Newtech
purchased from the Nanjing Medical Group 75% of its equity interest in Nanjing
Huaxin Biotech Co. Ltd. The total purchase price for the 75% equity interest was
$4.2 million. Of the $4.2 million, $1,218,100 had been allocated as working
capital for the joint venture. As at February 29, 2000, Dragon had fulfilled all
payment obligations for the Nanjing Huaxin acquisition.
Nanjing Huaxin is located in Nanjing City, China and owns a license and
production permit for the manufacture of EPO in China. Nanjing Huaxin currently
manufactures approximately 300,000 doses of EPO annually; however we believe
that the Nanjing Huaxin EPO production has been hampered by out-of-date
technology. As part of our business strategy, we have supplied management
assistance and capital investment to upgrade Nanjing Huaxin's facilities and
implemented our production technology to increase production efficiency and
decrease production costs. As part of the share transfer agreement, Nanjing
Huaxin's board of directors consists of five directors of which three were
appointed by Allwin Newtech. Messrs. Ken Cai, Longbin Liu and Philip Yuen, three
of our directors, serve as directors of Nanjing Huaxin. Action by the Nanjing
Huaxin Biotech's board can be taken by simple majority approval except for
fundamental changes such as amendment to Nanjing Huaxin Biotech articles or
dissolution in which case the action must be taken by unanimous approval.
Nanjing Huaxin was previously part of Nanjing Research Institute of Military
Medical Science, a corporation operated by the Chinese military. We had no
affiliation with Nanjing Medical Group or Nanjing Huaxin Biotech prior to
entering into the share transfer agreement.
Nanjing Huaxin currently produces EPO in China for kidney dialysis
applications and Chinese governmental approval for cancer therapy applications
is anticipated by the end of 2000.
Originally, we contemplated entering the EPO market by acquiring an EPO
license and building a manufacturing facility through our interest in Sanhe
Kailong. This strategy would have required a large capital investment by us. In
light of the anticipated capital investment in Sanhe Kailong, we acquired a 75%
interest in Nanjing Huaxin which has an existing facility and necessary permits
and licenses. Nanjing Huaxin has previously been producing an estimated 300,000
vials of EPO per year and markets its EPO under the name "Ning Hong Xin." We are
currently evaluating our options regarding our investment in Sinoway Biotech.
Recent Events
Marketing and License Agreements
In August and October of 2000, Allwin Biotrade Ltd., our wholly-owned
subsidiary, entered into a series of marketing and license agreements.
On August 9, 2000, Allwin Biotrade entered into a marketing and license
agreement with Duopharma (Malaysia) SDN.BMD granting Duopharma an exclusive
license to sell, formulate, vial and package EPO under the name "Hemotin" for
the use in the treatment of anemia associated with chronic renal failure, as
well as for any other medical purpose approved by the governing regulatory
bodies of Malaysia or the People's Republic of China, for use in Malaysia,
Singapore, Indonesia, Brunei, East Timor, Cambodia, Thailand, Vietnam, the
Philippines, Laos, and Myanmar. Duopharma will be responsible for obtaining, at
its expense, all registrations from applicable regulatory authorities in order
to permit the sale of EPO in Duopharma's market areas, although Allwin Biotrade
will be responsible in assisting Duopharma in obtaining such approvals. Further,
<PAGE>13
Duopharma will have the right of first refusal for the sale of additional
biotechnology or pharmaceutical drugs for which Allwin Biotrade may from time to
time have rights to license or sublicense. The Duopharma marketing and license
agreement is for a period of five years, and renews automatically for successive
one year terms.
On October 2, 2000, Allwin Biotrade entered into a marketing and license
agreement with Fargin S.A., a company having offices in Uruguay, granting Fargin
an exclusive license to sell, formulate, vial and package EPO under the names
"Hemotin" and "NingHongXin" for the use in the treatment of anaemia associated
with chronic renal failure, as well as for any other medical purpose approved by
the governing regulatory bodies of Brazil or the People's Republic of China, for
use in Brazil, the Dominican Republic, Argentina, Uruguay, Chile, and Paraguay.
Fargin will be responsible for obtaining, at its expense, all registrations from
applicable regulatory authorities in order to permit the sale of the EPO in
Fargin's designated market, although Allwin Biotrade will be responsible in
assisting Fargin in obtaining such approvals. Further, Fargin will have the
right of first refusal for the sale of additional biotechnology or
pharmaceutical drugs for which Allwin Biotrade may from time to time have rights
to license or sublicense. The Fargin marketing and license agreement is for a
period of seven years, and renews automatically for successive two year periods.
On October 8, 2000, Allwin Biotrade entered into a marketing and license
agreement with Yoo & Yoo BioTech Co., Ltd., a company having offices in the
Republic of Korea, granting Yoo & Yoo an exclusive license to sell, formulate,
vial and package EPO under the name "Hemotin" and "NingHongXin" for the use in
the treatment of anemia associated with chronic renal failure, as well as for
any other medical purpose approved by the governing regulatory bodies of the
People's Republic of China, for use in the Republic of Korea and the Democratic
People's Republic of Korea. Yoo & Yoo will be responsible for obtaining, at its
expense, all registrations from applicable regulatory authorities in order to
permit the sale of the EPO Yoo & Yoo's market areas although Allwin Biotrade
will be responsible in assisting Yoo & Yoo in obtaining such approvals. Further,
Yoo & Yoo will have the right of first refusal for the sale of additional
biotechnology or pharmaceutical drugs for which Allwin Biotrade may from time to
time have rights to license or sublicense. The Yoo & Yoo marketing and license
agreement is for a period of seven years, and renews automatically for
successive one year periods.
Acquisition Agreement with Alphatech Bioengineering Limited
On October 6, 2000, we entered into an acquisition agreement with Alphatech
Bioengineering Limited, a Hong Kong corporation owned by Mr. Longbin Liu and Mr.
Philip Yuen. Mr. Liu is our president and one of our directors and Mr. Yuen is
one of our directors. Under the terms of the acquisition agreement, we have
agreed to purchase Alphatech Bioengineering's rights and technology relating to
the production of Hepatitis B vaccine through the application of genetic
techniques on hamster ovary cells including the culturing of such cells, which
act as a host expression system for the production of Hepatitis B vaccine
protein, and the purification of Hepatitis B vaccine protein from the culture of
such cells.
In connection with entering into the acquisition agreement, Alphatech
Bioengineering has made certain representations regarding the development of a
cell-line of hamster ovary cells which act as a host expression system for the
production of Hepatitis B vaccine protein including:
o the cell-line of hamster ovary cells has been developed to the stage
where the hamster ovary cells have the capacity to express Hepatitis B
vaccine protein at levels in excess of 5 mg/liter;
o the technology includes industrial scale fermentation and purification
methods that are suitable for use in the commercial production of
Hepatitis B vaccine protein for incorporation in a Hepatitis B vaccine
for humans; and
o within three months of a production facility of sufficient capacity
being fully operational for industrial production, to the reasonable
satisfaction of Alphatech Bioengineering, and staffed and equipped
with a bioreactor system and purification process for the Hepatitis B
vaccine protein:
<PAGE>14
o the technology will have the capacity to support a sustained
production at the production facility of at least 1,000,000 doses per
year of Hepatitis B vaccine protein;
o production facility of Hepatitis B vaccine protein will yield at least
5 mg/liter from the bioreactor and the recovery of the purified
Hepatitis B vaccine protein of acceptable commercial quality meeting
the standard of the State Drug Administration of China from media
which would yield at least 50% or 2.5 mg/liter in the first three
batches of commercial production; and
o the direct production costs in China, based upon current prices, for
the first one million does of Hepatitis B vaccine, including all costs
directly associated with the manufacture of Hepatitis B vaccine
protein, will be less than US$1.00 per dose.
In the event any of the representations and warranties made by Alphatech
Bioengineering are breached by Alphatech Bioengineering, we will have the right
to require Alphatech Bioengineering to reimburse us for the $4 million purchase
price.
Alphatech Bioengineering's rights and technology relating to the production
of Hepatitis B vaccine is in the developmental stage, and Alphatech
Bioengineering has no commercial production of or sales of Hepatitis B vaccine.
The acquisition of Alphatech Bioengineering's rights and technology relating to
the development of Hepatitis B vaccine is subject to customary representations
and conditions.
Pharmaceutical Products
Erythropoietin or EPO. EPO is a glycoprotein that stimulates and regulates
the rate of formation of red blood cells. In the adult human, EPO is produced by
the kidneys and acts on precursor cells to stimulate cell proliferation and
differentiation into mature red blood cells. Kidney disease and chemotherapy or
radiation therapy for treating cancer may impair the body's ability to produce
EPO and, in turn, reduce the level of red blood cells to less than one-half that
of healthy humans. The shortage of red blood cells leads to insufficient
delivery of oxygen throughout the body. The result is anemia, which afflicts 90%
of all dialysis patients. Symptoms of anemia include fatigue and weakness.
One of the treatments for anemia is to provide EPO protein. This treatment
is administered through dialysis tubing or by injection approximately three
times per week, either intravenously or subcutaneously. EPO is most commonly
administered to people with chronic renal failure, HIV patients being treated
with anti-viral drugs, and cancer patients on chemo or radiation therapy. The
treatment is less dangerous and generates fewer adverse side effects than the
alternatives, which include blood transfusions and androgen therapy. However,
side effects of EPO may include hypertension, headaches, shortness of breath,
diarrhea, rapid heart rate and nausea.
While EPO has been tested to be effective in treating anemia, other drugs
and treatments currently exist or are in development which can treat anemia.
These alternative drugs or treatments could be proven more effective, less
expensive or preferable to the Chinese customer than EPO. The inability of EPO
to compare favorably to these alternative drugs would have an adverse affect on
our business objectives.
Proprietary Biotechnology
We have achieved enhanced efficiencies in the production of EPO by Nanjing
Huaxin by introducing a high-yield mammalian cell line developed in China. Our
scientists designed a unique plasmid vector for expression of target genes in
mammalian cells and constructed the EPO-expression CHO (Chinese Hamster Ovary)
cell line using this technology. The science behind our technology is summarized
below.
<PAGE>15
CHO cells are used for obtaining the EPO-expression cell lines. CHO cells
have the ability of proliferating indefinitely in culture and are the most
widely-used mammalian cells for producing recombinant proteins. The CHO
cell-based expression system is considered the industry standard and is used by
us for protein production.
In order to construct a CHO cell line, which expresses a particular
protein, the genetic materials encoding the sequences of the desired protein
(cDNA) are inserted into a plasmid vector. The plasmids are encapsulated in
liposomes and then used to transfect the CHO cells. In addition to delivering
the desired cDNA into CHO cells, it is the plasmid vector that largely
determines whether the high yield of the recombinant protein production by the
CHO cells has or has not been "transfected" (i.e., genetically modified by the
uptake of the genetic material). The plasmid vector will allow the amplification
of itself together with the cDNA of desired protein inside the CHO cells under
certain conditions. This will lead to a higher level production of the desired
protein by the transfected CHO cells.
In addition to the protein genetic information that the plasmid vector
transports into the CHO cells, several marker genes are also included within the
plasmids. These genes produce enzymes that can be detected to provide an
indication that the cells are transfected. This will be used to select the
transformed cells from the unmodified cells. Some of the marker genes are used
to induce the amplification of cDNA of the desired protein in the transformed
cells. More cDNA copies would translate into a higher yield of the protein.
Through a selection process, clones of the CHO cells with stable growth and the
highest level of expression of the desired protein are selected. During this
process, various techniques are used to amplify the number of copies of the cDNA
that codes for the desired protein.
These selected clones will be expanded into large volumes and stored in
aliquots as the Master Cell Banks ("MCB") for large-scale protein production.
The CHO cell culture systems for industrial production of recombinant proteins
are variable for a few months of sustained protein production. After that, new
cells from the MCB will be scaled up for another cycle. The protein produced by
the CHO cells will be secreted into the media during the culture and the media
obtained will be used to purify the desired protein.
Research and Development
We have developed our own technology to construct a unique plasmid vector.
This plasmid vector is used for constructing a CHO cell line, which produces EPO
at high yields. We expect this technology to increase EPO production and reduce
the cost of EPO production.
The yield of our EPO-expression CHO cell line was tested at the Beijing
Institute of Microbiology and Epidemiology in May of 1999. EPO production was
calculated by measuring the EPO levels in the harvested media using ELISA. The
yield of the results exceeded the estimated yields achieved by another
manufacturer of EPO, and the estimated yields achieved by other Chinese
producers.
Our research and development is conducted in China and led by Dr. Liu.
These activities are carried out by employees of Nanjing Huaxin as well as
outside consultants.
Approximately $4 million has been budgeted to finance the research and
development of the Company's technology utilizing its proprietary vectoring
process and its application to new products over the next 12 months. This
research and development will be utilized to enhance the current manufacture of
EPO by Nanjing Huaxin.
China's EPO Market
Sales of EPO in the Chinese market have been less than elsewhere in the
world because current sales prices make it too expensive for many of the
patients who could benefit from it.
<PAGE>16
China is in the process of finalizing its health care system and health
insurance plan, and if established, the ability to purchase prescription drugs,
including EPO, is expected to increase. For example, the health insurance plan
is expected to have mandatory coverage for dialysis. A dialysis patient needs at
least 80-100 doses of EPO per year. This will translate into a market demand in
China of 50 million doses per year of EPO for dialysis alone. The coverage for
EPO application for cancer related and other types of anemia is also expected.
Considering the 2 million cases of cancer diagnosed in China each year, this
well greatly expand the EPO market. Due to the size and complexity of
instituting a healthcare system and health insurance plan in China, we are
unable to predict when such health system will be implemented or when health
insurance may become generally available.
There are three sources of EPO in the Chinese marketplace. First, Amgen and
Kirin service the market through offshore production facilities. However, the
price to the consumer is prohibitive because of tariffs and a value added tax
that combined add about 30% to the cost per vial. Second, there are
approximately 5 existing domestic producers of EPO similar to Nanjing Huaxin. We
believe that EPO can be freely produced and sold in China without infringing the
patent rights of Kirin-Amgen (the U.S. patent holder) because no administration
protection was filed with the China before EPO was exported to China.
Furthermore, EPO is not currently subject to the U.S.-China agreement on
intellectual property.
Dragon believes that a lower price would allow non-governmental workers the
ability to afford EPO and would increase the likelihood of EPO being included on
the reimbursement list of drugs that are supplied at no charge to government
workers with prescriptions. We currently sell EPO at approximately $11.00 per
dose. We plan to maintain our costs by producing domestically, thus avoiding
import duties, and by producing with high-yield vector technology, thus avoiding
the perceived quality and inefficient yield problems of existing domestic
producers. During the last quarter of 1999, we produced 92,000 doses of EPO and
during the first quarter of this year, we produced approximately 175,000 doses.
Comparative sales were 36,625 doses during the last quarter of 1999 and 58,870
doses for the first quarter of 2000.
The third source of EPO is represented by Sinogen (China) Ltd., a Hong Kong
subsidiary of U.S.-based Sinogen International Co. Ltd. Sinogen (China) reached
an agreement in 1998 with the shareholders of the Shandong Yongming Vivogen
Pharmaceutical Co. Ltd. to establish a new joint venture to research and develop
EPO. This EPO was developed by the Nanjing Research Institute of Military
Medical Sciences and the Hainan Yalong Institute of Biomedical Sciences. In
October 1996, the Ministry of Health granted a new drug certificate to the drug
and approval to start production was received in 1997. To the best of our
knowledge, Sinogen (China) is capable of producing between 500,000 and 1 million
doses of EPO per year but is currently producing less than 300,000 doses per
year. We do not know, however, the selling price of EPO per dose sold by Sinogen
(China). The EPO drug license utilized by Sinogen (China) was granted to the
former owners of the production facility. Sinogen (China) bought the existing
company with the license and the production facility. It is still structured as
a joint venture company and Sinogen (China) is the majority shareholder.
Competition
The world market for EPO is approximately $3 billion in annual sales and is
growing. The market is dominated by three firms: Amgen Inc. of Thousand Oaks,
California; Ortho Pharmaceutical Corp., a subsidiary of Johnson & Johnson, Inc.
of New Brunswick, New Jersey; and Kirin Brewery Company, Limited of Japan. EPO
is marketed by Amgen as "Epogen," by Johnson & Johnson as "Procrit/Eprex" and by
Kirin as "Espo." A fourth participant in the international EPO market is Roche
Holding AG of Switzerland, which markets an EPO drug with a different heritage.
Amgen was granted United States rights to market EPO under a licensing
agreement with Kirin-Amgen, Inc., a joint venture between Kirin and Amgen that
was established in 1984. Johnson & Johnson acquired the rights to EPO from
Kirin-Amgen for all treatments except kidney dialysis in the United States and
for all uses outside the United States in 1985. Both Amgen and Kirin
individually manufacture and market EPO for China and Japan. These international
drug companies all have more financial resources than we do.
<PAGE>17
In addition to these international drug companies, we will be competing
with existing and potential domestic producers such as Sunshine and Sinogen.
Many of our competitors may have greater financial, technical and manufacturing
resources than we have. These resources would allow our competitors to respond
more quickly to new or emerging advancements in the drug industry and to devote
greater resources to the development, promotion and sale of their products.
We expect to have a competitive advantage due to our high production yield
which should result in larger profit margins compared to other domestic
producers. We will continue to have our EPO product included on the government
reimbursement list although other EPO producers are also represented on this
list. However, we intend to market our EPO product at a cost that is lower than
competitors which is expected to give us a competitive advantage.
Due to China's growing market for pharmaceutical products competition among
drug producers is expected to increase during 2000 and probably during 2001.
After then, we anticipate that the EPO producers with the strongest marketing
networks, best quality and price, and highest market shares will survive to
service the EPO market in China.
Potential competition to EPO market includes other products or technologies
that are successful in treating anemia. Hoechst Marion Roussel is currently
conducting clinical trials on gene-activated erythropoietin for the treatment of
anemia, while Alkermes, Inc. of Cambridge, Massachusetts and Johnson &Johnson
are currently conducting clinical trials with a sustained delivery formulation
of Epoetin alfa for the treatment of anemia. Amgen has sole rights to Novel
Erythropoiesis Stimulating Protein, a second-generation EPO molecule that will
pose serious competition to the existing products because it offers the
possibility of less frequent dosing (i.e., once a week rather than three times a
week). Phase I clinical trials have commenced in pre-dialysis patients, and
Amgen expects to begin studies in chemotherapy-induced anemia this year.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties that could increase their ability to reach customers in the
Chinese market. Such existing and future competition could affect our ability to
penetrate the Chinese market and generate sales revenues. Determining the
degree, intensity and duration of competition or the impact of such competition
on our financial and operating results are uncertain. No assurances can be given
that we will be able to compete successfully against current and future
competitors, and any failure to do so would have a material adverse effect on
our business.
Intellectual Property, Government Approvals and Regulations
We have received legal advice that the development, production or marketing
of EPO in China is not subject to U.S. patents currently held by Kirin-Amgen
because no corresponding patent was filed in China. Also, no administrative
protection has been filed on EPO with the Chinese government authorities by
Kirin-Amgen. In addition, we do not anticipate that any such patent or
administrative protections will be imposed by U.S.-China agreements on
intellectual property. As a result, we have not sought to obtain any rights or
licensing from patent holders for the production or marketing of EPO in China.
However, there is no assurance that U. S. patent holders or licensees may not
attempt to assert claims of patent infringement in order to curtail or prevent
the our production and sale of EPO in China.
The development and manufacture of EPO requires a license and permit from
the Ministry of Health, China. Our subsidiary Nanjing Huaxin currently is
licensed to make and sell EPO for kidney dialysis applications. It is
anticipated that governmental approval to use EPO for additional applications
such as cancer related anemia, pregnancy related anemia and surgery recovery
will be granted later this year. The Good Manufacturing Practices license
remains valid until August 18, 2005, and is renewable at that time. There are no
restrictions on the license or permits other than the requirement that the EPO
drug be manufactured in compliance with Chinese Good Manufacturing Practices,
and the drug may be sold for authorized medical purposes (such as anemia).
<PAGE>18
Our technology is not protected by any patents or copyrights nor do we
intend to seek any such protection. We require all our research employees to
sign confidentiality agreements regarding their work. However, without patent or
copyright protection, we may not be able to prevent duplication of our vector
technology by competitors.
Doing Business in China
Our business is being conducted in China and will be subject to the
political, social and economic environment in the People's Republic of China.
China is controlled by the Communist Party of China. Under its current
leadership, China has been pursuing economic reform policies, including the
encouragement of private economic activity and greater economic
decentralization. However, the Chinese central government has exercised and
continues to exercise substantial control over virtually every sector of the
Chinese economy. Accordingly, the Chinese government actions in the future,
including any decision not to continue to support current economic reform
programs and to return to a more centrally planned economy, or regional or local
variations in the implementation of economic reform policies, could have a
significant effect on economic conditions in China or particular regions
thereof. Economic development may be further limited by the imposition of
austerity measures intended to reduce inflation, the inadequate development or
maintenance of infrastructure or the unavailability of adequate power and water
supplies, transportation, raw materials and parts, or a deterioration of the
general political, economic or social environment in the PRC, any of which could
have a material adverse effect on our business, financial condition and results
of operations. Moreover, economic reforms and growth in China have been more
successful in certain provinces than others, and the continuation or increase of
such disparities could affect the political or social stability of China.
If we were required to move our manufacturing operations outside of the
China, our potential profitability, competitiveness and market position could be
materially jeopardized, and there could be no assurance that we could continue
our operations. Our business and prospects are dependent upon agreements with
various entities controlled by Chinese governmental instrumentalities. The
failure of such entities to honor these contracts, or the inability to enforce
these contracts in China could adversely affect our business operations. There
can be no assurance that assets and business operations in China will not be
nationalized, which could result in the total loss of our investment in China.
The legal system of China relating to foreign investments is relatively new
and continues to evolve thus creating uncertainty as to the application of its
laws and regulations in particular instances. Definitive regulations and
policies with respect to such matters as the permissible percentage of foreign
investment and permissible rates of equity returns have not yet been published.
Furthermore, statements regarding these evolving policies have been conflicting,
and any such policies, as administered, are likely to be subject to broad
interpretation and discretion and to be modified, perhaps on a case-by-case
basis. As a legal system in China develops with respect to these new types of
enterprises, foreign investors may be adversely affected by new laws, changes to
existing laws (or interpretations thereof) and the preemption of provincial or
local laws by national laws. In circumstances where adequate laws exist, it may
not be possible to obtain timely and equitable enforcement thereof.
Suppliers
Nanjing Huaxin produces the materials for EPO. The medium used for
culturing cells is commercially available from several sources.
Customers
Our customers are those who were previous customers through Nanjing Huaxin.
We intend to expand this customer base through an expanded marketing group at
Nanjing Huaxin.
We began realizing revenue in 1999 from the sale of EPO by our subsidiary
Nanjing Huaxin. Nanjing Huaxin was producing EPO at the time of our acquisition.
However, its production yields were low and its technology outdated. We have
<PAGE>19
begun to upgrade and improve Nanjing Huaxin's production facilities and to
implement our technology to increase EPO production at these facilities.
Employees
As of September 30, 2000, we had no employees but engaged three
consultants, Messrs. Liu, Maskerine and Walsh, to perform administrative
services. We expect to commence hiring full and/or part-time employees during
the calendar year 2000. Nanjing Huaxin has approximately 100 employees in China.
Sanhe Kailong has no employees.
PROPERTY
Our corporate offices are located at 543 Granville Street, Suite 1200,
Vancouver, British Columbia, Canada V6C 1X8. We also have an office in Beijing,
China located at 11th Floor, Suite 18-19, China World Tower 2, 1 Jianguomenwai
Avenue, Beijing, 100004.
Nanjing Huaxin currently leases a large production facility in Nanjing,
China.
The Sanhe Kailong joint venture has the right to purchase 25 acres of land
at a pharmaceutical park in China's Yanjiao Special Economic Zone.
<PAGE>20
MANAGEMENT
Directors and Executive Officers of Dragon
The directors and executive officers of Dragon, and their ages and
positions, and duration as such, are as follows:
<TABLE>
<CAPTION>
Name Position Age Period
---- -------- --- ------
<S> <C> <C> <C>
Longbin Liu President, Chief Executive 37 September 1998 - present
Officer and Director
Shaun Maskerine Secretary/Treasurer 32 July 1998 - present
Ken Z. Cai Director, Chief Financial Officer 35 September 1998 - present
Greg Hall Director 43 September 1998 - present
Alexander Wick Director 62 September 1998 - present
Philip Yuen Pak Yiu Director 64 November 1999 - present
Dr. Yiu Kwong Sun Director 62 November 1999 - present
Robert Friedland Former Director 49 January 2000 - September 8, 2000
Jackson Cheng Former Director 34 September 1998 - January 2000
</TABLE>
Directors of Subsidiaries
The directors of our three subsidiaries are as follows:
<TABLE>
<CAPTION>
Nanjing Huaxin Sanhe Kailong
Name Position Biotech (1) (2) Allwin Newtech (2) Bio-Pharmaceutical (2)
---- -------- -------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Ken Cai Director X X X
Longbin Liu Director X X X
Philip Yuen Director X X
Greg Hall Director X
Jiamiao Li Director X
Weiming Xu Director X
</TABLE>
---------------------
(1) Pursuant to the joint venture agreement, Nanjing Huaxin Biotech has a five
member board of directors with Allwin Newtech designating three of the five
members. Nanjing Medical Group has the right to elect two directors to
Nanjing Huaxin Biotech Co. Ltd's board of directors and selected Mr.
Jiamiao Li and Mr. Weiming Xu as its representatives. Neither Mr. Jiamiao
Li nor Mr. Weiming Xu are affiliated with Dragon, and Dragon has no control
over Nanjing Medical Group's selection.
(2) Dragon is the sole or controlling shareholder of each of these entities.
Consequently, Dragon has the power to appoint a majority of the Directors
in these entities. Allwin Newtech and Sanhe Kailong Bio-Pharmaceutical have
no other directors.
<PAGE>21
Business Experience
The following is a description of our executive officers and directors and
their business background for at least the past five years.
Dr. Longbin Liu, M.D. is the President, Chief Executive Officer and
Director of Dragon. He has 15 years of biotechnology experience in North
America, Japan and China, most recently as an Assistant Professor of Medicine in
the Division of Cardiovascular Medicine of the University of Massachusetts
Medical Centre where he had served since 1995, before joining Dragon in
September 1998. Dr. Liu earned his medical degree from Hunan Medical University
in 1983.
Dr. Ken Z. Cai is Chief Financial Officer and a Director of Dragon. Dr. Cai
has a Ph.D in Mineral Economics from Queen's University in Kingston, Ontario, as
well as 16 years of experience in mining, public company administration and
financing. Since February 1996, he has been a Director and the President and
Chief Executive Officer of Minco Mining and Metals Corporation, a Toronto Stock
Exchange-listed company involved in mining exploration and development in China.
Dr. Cai has extensive experience in conducting business in China for the past 15
years and is currently the Chairman of the Board of four Sino-foreign joint
ventures.
Mr. Greg Hall is a Director of Dragon. Mr. Hall is a stockbroker with 17
years of corporate finance and public offerings experience. Since April, 1999,
Mr. Hall has been a Senior Vice President of Yorkton Securities Inc. in
Vancouver, Canada. Prior to joining Yorkton Securities, Mr. Hall was with
Canaccord Capital for ten years. He is a former member/seat holder of the
Vancouver Stock Exchange. Prior to joining Canaccord Capital, Mr. Hall was the
Co-Founder of both Pacific International Securities and Georgia Pacific
Securities Corporation.
Dr. Alexander Wick is a Director of Dragon. Dr. Wick holds a doctorate
degree in synthetic organic chemistry from the Swiss Federal Institute of
Technology and has completed post-doctoral studies at Harvard University. He has
30 years of biotechnology and pharmaceuticals experience and is currently the
President of Sylachim, a chemicals and pharmaceuticals producer located in
France, which position he has held since 1995.
Mr. Philip Yuen Pak Yiu is a Director of Dragon. Mr. Yuen has been a legal
practitioner in Hong Kong since graduating from law school in London, England in
1961. In 1965, he established the law firm of Yung, Yu, Yuen and Co. and is now
the principal partner of the firm. Mr. Yuen has over 30 years experience in the
legal field and has been a director of several large listed companies in various
industries. He is a director of the Association of China-appointed Attesting
Officers Limited in Hong Kong, a standing committee member of the Chinese
General Chamber of Commerce in Hong Kong, a member of the National Committee of
the Chinese People Political Consultative Conference and an arbitrator for the
China International Economic and Trade Arbitration Commission.
Dr. Yiu Kwong Sun is a Director of Dragon. Dr. Sun graduated from the
University of Hong Kong Faculty of Medicine in 1967. He is a Founding Fellow of
the Hong Kong College of Family Physicians and a Fellow of the Hong Kong Academy
of Medicine. Since 1995, he has served as the Chairman of the Dr. Sun Medical
Centre Limited which has been operating a network of medical centers in Hong
Kong and China for the past 20 years. He is also the Administration Partner of
United Medical Practice, which manages a large network of medical facilities
throughout Hong Kong and Macau. Dr. Sun has been a member of the Dr. Cheng Yu
Fellowship Committee of Management of the University of Hong Kong Faculty of
Medicine since 1997.
Mr. Shaun Maskerine is Secretary and Treasurer of Dragon. From July 7,
1998, to November 23, 1999, he was also a director. From July 7, 1998, to
September 18, 1998, Mr. Maskerine was President of Dragon. Since January 1999,
Mr. Maskerine has been the President and Director of Aquarius Ventures Inc., a
resource based company. From March 1998 to January 1999, Mr. Maskerine was Vice
President of Finance of Aquarius Ventures. He is also the President and Director
of Global Petroleum Inc., another resource based company. He has held these
positions since September 1998. Aquarius Ventures Inc. and Global Petroleum Inc.
<PAGE>22
are both listed on the Canadian Venture Exchange. Prior to March 1998, Mr.
Maskerine was a management consultant in the hotel/tourism industry.
Ms. Anna Liu is the Controller for the Company. Ms. Liu is a Certified
General Account Candidate and has been working as an accountant for North
American companies with Chinese operations for 5 years. Ms. Liu received her
Masters in Economics from the University of British Columbia.
Committees of the Board
The Board has an Executive Committee consisting of Messrs. Liu, Cai, and
Hall. The Executive Committee's primary function is to administer all our daily
operating activities, including our subsidiaries and joint venture companies.
The Board has also created committees to direct our operations in each
functional area. The Finance Committee is comprised of Messrs. Cai, Yuen and
Hall. The Technology Committee is comprised of Messrs. Wick, Liu and Suen. The
Investor Relations Committee is comprised of Messrs. Cai and Hall.
Family Relationships
There are no family relationships between any director or executive
officer.
EXECUTIVE COMPENSATION
The following table sets forth the compensation of our Chief Executive
Officer during the last two complete fiscal years. No other officers or
directors received annual compensation in excess of $100,000 during the last two
complete fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
---------------------------------------------- --------------------------------------------------------
Awards Payout
----------------------------- ---------
Restricted Securities LTIP All Other
Other Annual Stock Underlying Payout Compensation
Year Salary Bonus ($) Compensation ($) Award(s) Options (#) ($) ($)
-------------------------------------------------------- ----------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Longbin Liu 1999 $72,000 -0- -0- -0- -0- -0- -0-
President
1998 $36,000 -0- -0- -0- 300,000 -0- -0-
Shaun Maskerine 1998 $5,943 -0- -0- -0- 75,000 -0- -0-
Prior President
</TABLE>
-----------------------------
In September 1998, Dr. Longbin Liu replaced Mr. Maskerine as President of
Dragon. We have entered into oral consulting agreements with Dr. Liu and Mr.
Maskerine pursuant to which they provide administrative services to us. Dr. Liu,
as President, is paid an annual salary of $72,000 and received stock options to
purchase 300,000 shares of common stock. Mr. Maskerine, our former president,
serves as our Secretary/Treasurer and is paid an annual salary of $24,000. Mr.
Maskerine also received stock options to purchase 75,000 shares of common stock.
These consulting agreements are terminable at will.
<PAGE>23
Employment/Consulting Agreements
In June 1999, we entered into a one-year consulting agreement with E.
Pernet Portfolio Management for the purpose of providing financial consulting
services which was not renewed. The consultant was paid a fee and was granted
options to purchase 50,000 shares of common stock at an exercise price of $0.50
per share. This option expires June 2004. We have also entered into agreements
for the provision of technical advice with 16 individuals (Wenjuan Zhang,
Xiaoshan Liang, Wayne Zhou, Suju Zhong, Zhiqiang Han, Lin-Ling Chen, Haito Wang,
Zuze Wu, Jili Zhuang, Guangming Zhong, Jin Yuan, Fen Zhou, Youfu Li, Teresa Liu,
Sy-Jenq Loong, Minron Wang). These individuals are not paid a fee but were
granted options to purchase shares of common stock at an exercise price of $0.50
and $2.50 per share with a term of 5 years. As of June 30, 2000, we have issued
options to purchase 250,000 shares of our common stock at an exercise price of
$0.50 and 60,000 shares at an exercise price of $2.50 to our technical
consultants.
Director Compensation
Directors are not paid cash for their services but do receive stock options
for serving as such.
Stock Option Plans
We have no stock option plan. However, the Board of Directors has approved
the issuance of stock options to our employees, directors, officers and
consultants. Unless otherwise provided by the Board, all options are exercisable
for a term of five years. No option is transferable by the optionee other than
by will or the laws of descent and distribution. As of June 30, 2000, there were
options to acquire 1,555,500 shares of common stock outstanding.
The following table sets forth the stock options granted to Messrs. Liu and
Maskerine during the past fiscal year:
OPTIONS GRANTED IN THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Number of
Securities % of Total Option
Underlying Granted to Exercise of
Options Granted Employees in Base Price
Name in 1999 Fiscal Year 1999 ($/share) Expiration Date
---- --------------- ---------------- --------- ---------------
<S> <C> <C> <C> <C>
Longbin Liu 0 0 0
Shaun Maskerine 75,000 12.1% $0.50 November 5, 2004
</TABLE>
The following table sets forth the option value for Messrs. Liu and
Maskerine as of December 31, 1999. As of December 31, 1999, the per share price
of one share of common stock was $3.69 as quoted on the OTC Bulletin Board.
<PAGE>24
FISCAL YEAR END OPTION VALUE (DECEMBER 31, 1999)
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised in the
Unexercised Options/SARs at Money Options/SARs at Fiscal
Fiscal Year End (#) Year End
Exercisable/Unexercisable Options Exercisable/Unexercisable Options
Name at December 31, 1999 at December 31, 1999
---- --------------------------------- ---------------------------------
<S> <C> <C>
Longbin Liu 300,000/0 $1,060,000/0
Shaun Maskerine 75,000/0 $ 276,750/0
</TABLE>
Limitation of Liability and Indemnification Matters
We have adopted Section 607.0850 of the 1999 Florida Statutes, Business
Organization of the State of Florida in its bylaws. Section 607.0850 states:
(1) A corporation shall have power to indemnify any person who was or is a
party to any proceeding (other than an action by, or in the right of, the
corporation), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise against
liability incurred in connection with such proceeding, including any appeal
thereof, if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The termination of any proceeding by
judgment, order, settlement, or conviction or upon a plea of nolo contendere or
its equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation or, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
(2) A corporation shall have the power to indemnify any person, who was or
is a party to any proceeding by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses and amounts paid in settlement not exceeding, in the judgment
of the board of directors, the estimated expense of litigating the proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall be made under
this subsection in respect of any claim, issue, or matter as to which such
person shall have been adjudged to be to be liable unless, and only to the
extent that, the court in which such proceeding was brought, or any other court
of competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
<PAGE>25
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Ownership by Executive Officers, Directors and Principal Stockholders
The following table sets forth, as of October 17, 2000, certain information
with respect to the beneficial ownership of the our common stock by each
stockholder known by us be the beneficial owner of more than 5% of our common
stock, by each our executive officers and directors and our executive officers
and directors as a group.
As of October 17, 2000, there were 16,700,000 shares of common stock
outstanding.
<TABLE>
<CAPTION>
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
---------------- ----------- ------------
<S> <C> <C>
Arbora Portfolio Management
Gartenstrasse 38
Zurich, Switzerland 1,062,500 6.4%
Zhibin Cai and Yu Fongmei(2)
18 Main Street
Votian
Hubei, China 1,899,000 11.4%
Robert Friedland
No. 1 Temasek Avenue
#37-02 Millenia Tower
Singapore 039192 1,100,000(3) 6.4%
Berycon Ltd.
13/F Gloucester Tower
The 11 Pedder Street Central
Hong Kong 1,000,000(4) 5.8%
Chow Tail Fook Nominee Limited
31F New World Tower
16-18 Queens Road Central
Hong Kong 2,000,000(5) 11.5%
Chimei Wu Ho
396 Chungshan Road, Sec 2
Puli Town, Taiwan 2,400,000 14.7%
Longbin Liu,
President, Chief Executive Officer and Director 300,000(6) 2.2%
Shaun Maskerine,
Secretary 81,250(7) *
Ken Cai,
Chief Financial Officer and Director 200,000(6) 1.1%
Greg Hall,
Director 200,000(6) 1.1%
<PAGE>26
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
---------------- ----------- ------------
Philip Yuen,
Director 802,500(8) 4.6%
Alexander Wick,
Director 100,000(6) *
Yiu Kwong Sun,
Director 700,000(9) *
All directors (8 persons) and
executive officers as a group 3,483,750(10) 18.9%
</TABLE>
------------------------
* Represents less than one percent.
(1) Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed above, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject
to community property laws where applicable. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities. Shares of common stock subject to options or warrants
currently exercisable, or exercisable within sixty days, are deemed
outstanding for purposes of computing the percentage ownership of the
person holding such option or warrants, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person.
(2) Zhibin Cai is the father of Mr. Ken Cai. Yu Fong Mei is the mother of Mr.
Ken Cai. They do not reside with Mr. Ken Cai.
(3) Includes 500,000 shares of common stock owned by Newstar Securities Ltd. (a
company controlled by Mr. Friedland) with the balance representing options
and warrants exercisable within sixty days. Mr. Friedland is a former
director who resigned on September 8, 2000.
(4) Includes 500,000 shares which may be acquired pursuant to warrants
exercisable within sixty days.
(5) Includes 1,000,000 shares which may be acquired pursuant to warrants
exercisable within sixty days.
(6) Represents options exercisable within sixty days.
(7) Includes 6,250 shares of common stock owned with the balance representing
options exercisable within sixty days.
(8) Includes 62,500 shares of common stock owned and 140,000 shares of common
stock subject to options. Also includes 600,000 shares of common stock
owned by Global Equities Overseas Ltd. for which Mr. Yuen serves as a
director.
(9) Includes 100,000 shares of common stock subject to options exercisable
within sixty days. Also includes 600,000 shares of common stock owned by
Yukon Health Enterprise for which Mr. Sun serves as a director.
(10) Includes options and warrants to acquire 1,715,000 shares of common stock.
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell all or a portion of
the shares of common stock on any market upon which the common stock may be
quoted (currently the OTC Bulletin Board), in privately negotiated transactions
or otherwise. Such sales may be at fixed prices that may be changed, at market
prices prevailing at the time of sale, at prices related to the market prices or
at negotiated prices. The shares of common stock may be sold by the selling
stockholders by one or more of the following methods, without limitation:
(a) block trades in which the broker or dealer so engaged will attempt to
sell the shares of common stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
(b) purchases by broker or dealer as principal and resale by the broker or
dealer for its account pursuant to this prospectus;
(c) an exchange distribution in accordance with the rules of the exchange;
<PAGE>27
(d) ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
(e) privately negotiated transactions;
(f) market sales (both long and short to the extent permitted under the
federal securities laws); and
(g) a combination of any aforementioned methods of sale.
In effecting sales, brokers and dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate.
Brokers or dealers may receive commissions or discounts from the selling
stockholders or, if any of the broker-dealers act as an agent for the purchaser
of said shares, from the purchaser in amounts to be negotiated which are not
expected to exceed those customary in the types of transactions involved.
Broker-dealers may agree with the selling stockholders to sell a specified
number of the shares of common stock at a stipulated price per share. Such an
agreement may also require the broker-dealer to purchase as principal any unsold
shares of common stock at the price required to fulfill the broker-dealer
commitment to the selling stockholders if said broker-dealer is unable to sell
the shares on behalf of the selling stockholders. Broker-dealers who acquire
shares of common stock as principal may thereafter resell the shares of common
stock from time to time in transactions which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above. Such sales by a broker-dealer could be at prices and on terms
then prevailing at the time of sale, at prices related to the then-current
market price or in negotiated transactions. In connection with such resales, the
broker-dealer may pay to or receive from the purchasers of the shares,
commissions as described above. The selling stockholders may also sell the
shares of common stock in accordance with Rule 144 under the Securities Act,
rather than pursuant to this prospectus.
The selling stockholders and any broker-dealers or agents that participate
with the selling stockholders in the sale of the shares of common stock may be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with these sales. In that event, any commissions received by the
broker-dealers or agents and any profit on the resale of the shares of common
stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Furthermore, selling stockholders are
subject to Regulation M of the Securities Exchange Act of 1934. Regulation M
prohibits any activities that could artificially influence the market for
Dragon's common stock during the period when shares are being sold pursuant to
this Prospectus. Consequently, selling stockholders, particularly those who are
officers and directors of Dragon, must refrain from directly or indirectly
attempting to induce any person to bid for or purchase the common stock being
offered pursuant to this Prospectus.
From time to time, the selling stockholders may pledge their shares of
common stock pursuant to the margin provisions of their customer agreements with
their brokers. Upon a default by a selling stockholder, the broker may offer and
sell the pledged shares of common stock from time to time. Upon a sale of the
shares of common stock, the selling stockholders intend to comply with the
prospectus delivery requirements, under the Securities Act, by delivering a
prospectus to each purchaser in the transaction. We intend to file any
amendments or other necessary documents in compliance with the Securities Act
which may be required in the event any selling stockholder defaults under any
customer agreement with brokers.
Trading in our common stock may be restricted by the SEC's penny stock
regulations which may limit a stockholder's ability to buy or sell our common
stock. The SEC has adopted regulations which generally define "penny stock" to
be any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. Our common stock may be covered by the penny stock rules, which
impose additional sales practice requirements on broker-dealers who sell to
persons other than established customers and financially qualified investors.
For transactions covered by this rule, the broker-dealers must make a special
suitability determination of the purchaser and receive the purchaser's written
<PAGE>28
agreement of the transaction prior to the sale. Consequently, these rules may
affect the ability of broker-dealers to trade our common stock and affect the
ability of existing stockholders to sell their shares in the secondary market.
All expenses of the registration statement including, but not limited to,
legal, accounting, printing and mailing fees are and will be borne by us.
SELLING STOCKHOLDERS
Set forth below is a list of all stockholders who may sell shares pursuant
to this prospectus. The "No. of Shares" column represents the number of shares
owned by the selling stockholder and the number of shares underlying
warrants/options column represents the number of shares that may be acquired by
such selling stockholder within sixty days pursuant to a warrant/option. The
"total" column represents the number of shares beneficially owned by the selling
stockholders and is the sum of the number of shares and number of shares
underlying warrants/options columns. The "Common Shares Beneficially Owned
Following the Offering" assumes all shares registered are sold by the selling
stockholder.
<TABLE>
<CAPTION>
Number of Common Shares
Common Beneficially Owned
Common Stock Beneficially Shares Offered Following
Name of Stockholder Owned Prior to the Offering Hereby the Offering
------------------- --------------------------- -------------- ------------------
No. Shares
No. of Underlying No. of
Shares Warrants/Options Total % Shares %
------ ---------------- ----- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
Shares issued pursuant to exercise of
warrants issued August 17, 1998
Arbora Portfolio Management 505,000 0 505,000 3.14% 250,000 255,000 1.6%
New Dragon (No. 3) Investments Ltd. 450,000 0 450,000 * 200,000 250,000 1.5%
Bunnaton Ltd. 100,000 0 100,000 * 80,000 20,000 *
Doug Casey 20,000 0 20,000 * 20,000 0 0%
Dragon Gold Corporation 50,000 0 50,000 * 50,000 0 0%
Medi Ray Group Inc. 30,000 0 30,000 * 30,000 0 0%
Morning Sun Holdings Ltd. 300,000 0 300,000 1.86% 100,000 200,000 1.24%
Frank Juck Fai Cheng 10,000 0 10,000 * 10,000 0 0%
Yeung Kit Ming 6,350 0 6,350 * 6,350 0 0%
Corona Tung Wing Fon 2,150 0 2,150 * 2,150 0 0%
Leung Sun Yuen 12,750 0 12,750 * 12,750 0 0%
Wong Sui Kuen 2,100 0 2,100 * 2,100 0 0%
Cheung Chi Wing 2,150 0 2,150 * 2,150 0 0%
Tam Yung Ping 10,600 0 10,600 * 10,600 0 0%
Chan Tsok Hung 2,100 0 2,100 * 2,100 0 0%
Wu Cho Woon 19,100 0 19,100 * 19,100 0 0%
Chu Sung Hei 12,700 0 12,700 * 12,700 0 0%
Tim Sun 10,000 0 10,000 * 5,000 5,000 *
Amy Wing Hang Chau 20,000 0 20,000 * 20,000 0 0%
Stephanie Pui San Wong 20,000 0 20,000 * 20,000 0 0%
J Aitken Instrument Controls Inc 5,000 0 5,000 * 5,000 0 0%
Bohn Consulting Ltd. 5,000 0 5,000 * 5,000 0 0%
Perry Doell 2,500 0 2,500 * 2,500 0 0%
Zenon Dragan 2,500 0 2,500 * 2,500 0 0%
Victor Lee 5,000 0 5,000 * 5,000 0 0%
Peter McGourty 2,500 0 2,500 * 2,500 0 0%
Richard Siu 5,000 0 5,000 * 5,000 0 0%
Donald Lee 2,500 0 2,500 * 2,500 0 0%
<PAGE>29
Number of Common Shares
Common Beneficially Owned
Common Stock Beneficially Shares Offered Following
Name of Stockholder Owned Prior to the Offering Hereby the Offering
------------------- --------------------------- -------------- ------------------
No. Shares
No. of Underlying No. of
Shares Warrants/Options Total % Shares %
------ ---------------- ----- ------ ------ ----
Glen Cole 5,000 0 5,000 * 5,000 0 0%
David Boyko 6,000 0 6,000 * 6,000 0 0%
Joe Kuliasa 5,000 0 5,000 * 5,000 0 0%
Brent English 2,500 0 2,500 * 2,500 0 0%
Gary Yee 2,500 0 2,500 * 2,500 0 0%
Garth Fradette 3,750 0 3,750 * 3,750 0 0%
Doug Gittens 5,000 0 5,000 * 5,000 0 0%
Linda Wong 5,000 0 5,000 * 5,000 0 0%
Roberto Chu 50,000 0 50,000 * 50,000 0 0%
Jackson Chak Sung Cheng 30,250 0 30,250 * 30,250 0 0%
Shares issued pursuant to Loan
Agreements dated April 19, 1999
Arbora Portfolio Management 67,500 0 67,500 * 67,500 0 0%
Goldpac Investment Fund 22,500 0 22,500 * 22,500 0 0%
Huimin Liu 22,500 0 22,500 * 22,500 0 0%
Philip Pak Yiu Yuen (Director) 22,500 0 22,500 * 22,500 0 0%
Shares and warrants issued on
October 14, 1999
Yukon Health Enterprises Ltd. 600,000 0 600,000 3.66% 600,000 0 0%
(affiliate of Mr. Sun, a director)
Global Equities Overseas Ltd. 600,000 0 600,000 3.66% 600,000 0 0%
(affiliate of Mr. Yuen, a director)
Shares and warrants issued in Private 0%
Offering December 31, 1999
Zhiquan Cai 100,000 100,000 200,000 1.24% 200,000 0 0%
Yuang Chen Chu Kuo 160,000 160,000 320,000 1.97% 320,000 0 0%
Huimin Liu 90,000 90,000 180,000 1.11% 180,000 0 0%
Dragon Gold Corporation 125,000 125,000 250,000 1.54% 250,000 0 0%
Doug Casey 25,000 25,000 50,000 * 50,000 0 0%
USGI/China Region Opportunity Fund 100,000 100,000 200,000 1.24% 200,000 0 0%
Medi-Ray Group Inc 50,000 50,000 100,000 * 100,000 0 0%
Li-Yen Huang 10,000 10,000 20,000 * 20,000 0 0%
Constance Elligson 3,000 3,000 6,000 * 6,000 0 0%
Candace Greene 40,000 40,000 80,000 * 80,000 0 0%
Bunnaton Ltd. 25,000 25,000 50,000 * 50,000 0 0%
Mountainview Capital Corporation 5,000 5,000 10,000 * 10,000 0 0%
Arbora Portfolio Management 245,000 245,000 490,000 3.00% 490,000 0 0%
Goldpac Investment Fund 160,000 160,000 320,000 1.97% 320,000 0 0%
Lloyds TSB Bank plc 80,000 80,000 160,000 * 160,000 0 0%
Jean Zhang 40,000 40,000 80,000 * 80,000 0 0%
Shi You Liu 20,000 20,000 40,000 * 40,000 0 0%
Zhang Bing 20,000 20,000 40,000 * 40,000 0 0%
You Lik Chieng 10,000 10,000 20,000 * 20,000 0 0%
Gwynneth Gold Limited 150,000 150,000 300,000 1.85% 300,000 0 0%
<PAGE>30
Number of Common Shares
Common Beneficially Owned
Common Stock Beneficially Shares Offered Following
Name of Stockholder Owned Prior to the Offering Hereby the Offering
------------------- --------------------------- -------------- ------------------
No. Shares
No. of Underlying No. of
Shares Warrants/Options Total % Shares %
------ ---------------- ----- ------ ------ ----
Moon Ying Chu 20,000 20,000 40,000 * 40,000 0 0%
Charles Grose 50,000 50,000 100,000 * 100,000 0 0%
Shui Bao 40,000 40,000 80,000 * 80,000 0 0%
Yinhao Ma 10,000 10,000 20,000 * 20,000 0 0%
Maxton Investment Holdings Limited 300,000 300,000 600,000 3.66% 600,000 0 0%
Aton Ventures Fund Limited 100,000 100,000 200,000 1.24% 200,000 0 0%
Li and Fang Enterprises Ltd. 100,000 100,000 200,000 1.24% 200,000 0 0%
James Yu 10,000 10,000 20,000 * 20,000 0 0%
Xu Li 10,000 10,000 20,000 * 20,000 0 0%
Liu Guo Lan 10,000 10,000 20,000 * 20,000 0 0%
Chiu-ling Chang 10,000 10,000 20,000 * 20,000 0 0%
Alcardo Investments Limited 100,000 100,000 200,000 * 200,000 0 0%
Berycon Limited 500,000 500,000 1,000,000 6.02% 1,000,000 0 0%
Chow Tail Fook Nominee Limited 1,000,000 1,000,000 2,000,000 11.70% 2,000,000 0 0%
Newstar Securities Ltd. 500,000 600,000 1,100,000 6.02% 1,000,000 100,000 *
(affiliate of former director
Robert Friedland)
Philip Pak Yiu Yuen (Director) 40,000 40,000 80,000 * 80,000 0 0%
Shares issued pursuant to exercise of
Incentive Stock Options
Jackson Chak Sung Cheng 100,000 0 100,000 * 100,000 0 0%
Teresa Liu 1,000 0 1,000 * 1,000 0 0%
Suju Zhong 3,000 0 3,000 * 3,000 0 0%
Zhiqiang Han 3,000 0 3,000 * 3,000 0 0%
</TABLE>
-------------------------
*Less than one percent.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as otherwise indicated below, we have not been a party to any
transaction, proposed transaction, or series of transactions in which the amount
involved exceeds $60,000, and in which, to our knowledge, any of our directors,
executive officers, five percent beneficial security holders, or any member of
the immediate family of the foregoing persons has had or will have a direct or
indirect material interest.
In August 1998, pursuant to a share exchange agreement, we issued 7,000,000
shares of our common stock and warrants to purchase 1,000,000 shares of our
common stock in exchange for all of the outstanding shares of Allwin Newtech
Ltd. At the time of this transaction, Messrs. Liu, Ken Cai and Yuen were
officers or directors of Allwin Newtech. However, none of these individuals
listed in the foregoing sentence held any positions or owned shares of First
Geneva Investments, Inc., our predecessor. As a result of the acquisition; (i)
the former shareholders of Allwin Newtech became 87.5% shareholders of First
Geneva and Allwin Newtech became a wholly-owned subsidiary of First Geneva; (ii)
the President of First Geneva, Mr. Maskerine, continued as our President (until
September, 1998); and (iii) Messrs. Liu, Cai and Cheng, who were President and
<PAGE>31
directors of Allwin Newtech, became our directors. With the exception of Mr.
Maskerine, all of the other principal stockholders listed above acquired their
shares in this exchange transaction
We currently rent space for our executive offices from Minco Mining and
Metals Corporation for CDN $2,500 per month. Mr. Cai, one of our directors, is
President of Minco Mining. We believe that this rent is competitive with rent
that would be charged by a non-affiliated landlord for comparable space.
Messrs. Ken Cai, Jackson Cheng and Longbin Liu served as directors of Sanhe
Kailong at the time of entering into our joint venture with Sinoway Biotech.
Sanhe Kailong was formed, however, for the purpose of developing a joint venture
with Sinoway Biotech. Subsequent to the joint venture formation, Mr. Cheng
resigned from the Board of Sanhe Kailong and was replaced by Mr. Greg Hall. They
continue to serve as directors of Sanhe Kailong. Messrs. Ken Cai, Philip Yuen
and Longbin Liu also serve as officers and directors of Allwin Newtech, our
wholly-owned subsidiary. Messrs. Ken Cai, Longbin Liu and Philip Yuen had served
prior to the joint venture and continue to serve as three of the five directors
of Nanjing Huaxin, a joint venture in which we own a 75% interest.
Finders fees of $763,150 were paid in conjunction with the sale of Units in
December, 1999. Of this amount, $175,000 was paid to the law firm of Yung, Yu,
Yuen and Company of which Mr. Philip Yuen, a director of Dragon, is a partner.
On April 19, 1999, 135,000 shares of Dragon's common stock were issued to
four lenders as compensation for making certain loans to Dragon. One of the
lenders was Huimin Liu, the sister of Dr. Longbin Liu, who received 22,500
shares of common stock.
On October 6, 2000, we entered into an acquisition agreement with Alphatech
Bioengineering to acquire its rights and technology relating to developing
Hepatitis B vaccine through the application of genetic techniques on hamster
ovary cells. Alphatech Bioengineering's Hepatitis B vaccine is in the
development stage. Alphatech Bioengineering is jointly owned by Dr. Longbin Liu,
our president and a director, and Mr. Philip Yuen, one of our directors. The
purchase price is $4 million. See "Business - Recent Events - Acquisition
Agreement with Alphatech Bioengineering Limited."
Further, Dr. Liu also has a 90% interest in RecomGen, a private company
registered in China. RecomGen is developing tPA for treating heart attacks and
strokes. RecomGen was incorporated by Dr. Liu, and Dr. Liu's involvement in
RecomGen began prior to our establishment. We are currently in discussion with
Dr. Liu regarding the possible acquisition of technology and/or biotech products
from RecomGen. However, there is no understanding, commitment or agreement to
make such acquisition and no assurance can be given that any acquisition or
transaction with RecomGen will occur.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
$.001 par value. As of October 17, 2000, there were 16,700,000 shares of common
stock outstanding and 4,258,000 shares of common stock issuable upon exercise of
outstanding warrants and 1,555,500 shares of common stock issuable upon exercise
of outstanding options.
Common Stock
Each stockholder is entitled to one vote for each share of common stock
held on all matters submitted to a vote of stockholders, including the election
of directors.
Holders of common stock are entitled to receive the dividends as may be
declared by our Board of Directors out of funds legally available for dividends
and, in the event of liquidation, to share pro rata in any distribution of our
<PAGE>32
assets after payment of liabilities. Our Board of Directors is not obligated to
declare a dividend. It is not anticipated that dividends will be paid in the
foreseeable future.
Holders of common stock do not have preemptive rights to subscribe to
additional shares if issued by us. There are no conversion, redemption, sinking
fund or similar provisions regarding our common stock. All of the outstanding
shares of common stock are fully paid and nonassessable and assuming compliance
with the terms of the warrant, all of the shares of common stock issued upon the
exercise of the outstanding warrants will be, upon issuance, fully paid and
non-assessable.
Warrants
In connection with various acquisition, compensation and financing
transactions, we have outstanding warrants to purchase 4,258,000 shares of
common stock at $2.50 per share, which expire on January 1, 2001.
Options
As of October 17, 2000 the Company had issued options to purchase 1,555,500
shares of Common Stock to 36 individuals. Of the total, 1,388,000 are
exercisable at $0.50 per share, 60,000 are exercisable at $2.50, while the
remaining 107,500 are exercisable at $7.00 per share. All options are
exercisable for up to 5 years unless the optionholder's association with the
Company is terminated, in which case, the options must be exercised within 30
days of such termination and are cancelled thereafter.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Interwest Transfer
Company, Salt Lake City, Utah
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
LEGAL MATTERS
The validity of the shares of common stock offered by the selling
stockholders will be passed upon by the law firm of Bartel Eng Linn & Schroder,
Sacramento, California.
EXPERTS
Our consolidated balance sheets as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1999 and December 31, 1998 and for the
period from February 10, 1998 (date of inception) to December 31, 1999, included
in this prospectus have been audited by Moore Stephens Ellis Foster, independent
chartered accountants, as set forth in their report accompanying the financial
statements and are included in reliance upon the report, given on the authority
of the firm, as experts in accounting and auditing.
The balance sheet and related statements of operation, stockholder's equity
and cash flows for Nanjing Huaxin Bio-Pharmaceuticals Co., Ltd. for the years
ended December 31, 1998, and December 31, 1997, and for the period from January
1, 1999 to June 11, 1999, included in this prospectus have been audited by Moore
Stephens Ellis Foster, independent chartered accountants, as set forth in their
report accompanying the financial statement and are included in reliance upon
the report, given on the authority of the firm, as experts in accounting and
auditing.
<PAGE>33
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2, together with all
amendments and exhibits, with the Securities and Exchange Commission. This
prospectus, which forms a part of that registration statement, does not contain
all information included in the registration statement. Certain information is
omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any of our contracts or
other documents, the references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contracts or documents. You may review a copy of the registration
statement at the Securities and Exchange Commission's public reference room, and
at Securities and Exchange Commission's regional offices located at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, 13th Floor, New York, New York 10048. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our filings and the registration statement can
also be reviewed by accessing the Securities and Exchange Commission's website
at http://www.sec.gov.
FINANCIAL STATEMENTS
Our financial statements are filed as follows:
Report of Independent Accountants..........................................F-1
December 31, 1999 Year-end Consolidated Balance Sheets.....................F-2
December 31, 1999 Year-end Consolidated Statements of Stockholders' Equity.F-3
December 31, 1999 Year-end Consolidated Statements of Operations...........F-4
December 31, 1999 Year-end Consolidated Statements of Cash Flows...........F-5
Notes to Consolidated Financial Statements........................F-6 thru F-19
Consolidated Balance Sheet (Unaudited) as of June 30, 2000.................F-20
Consolidated Statement of Stockholders' Equity (Unaudited)
For the Six Months Ended June 30, 2000...................................F-21
Consolidated Statements of Operation (Unaudited)
For the Three and Six Months Ended June 30, 2000.........................F-22
Consolidated Statements of Cash Flow (Unaudited)
For the Six Months Ended June 30, 2000...................................F-23
Notes to Consolidated Financial Statements.......................F-24 thru F-36
The financial statements pertaining to Nanjing Huaxin are as followed:
Report of Independent Accountants..........................................F-37
Year-end Balance Sheets....................................................F-38
Year-end Statements of Stockholders' Equity................................F-39
Year-end Statements of Operations..........................................F-40
Year-end Statements of Cash Flows..........................................F-41
Notes to Financial Statements....................................F-42 thru F-47
The following pro forma financial statements pertaining to the acquisition
of Nanjing Huaxin are as follows:
Pro Forma Statements of Operations.........................................F-48
Notes to Pro Forma Financial Statements....................................F-49
<PAGE>F-1
MOORE STEPHENS ELLIS FOSTER LTD.
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, BC Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
E-Mail: [email protected]
-------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
DRAGON PHARMACEUTICALS INC.
& SUBSIDIARIES
We have audited the consolidated balance sheets of Dragon Pharmaceuticals Inc. &
Subsidiaries ("the Company") as at December 31, 1999 and 1998 and the related
consolidated statements of stockholders' equity, operations and cash flows for
the year ended December 31, 1999 and the period from February 10, 1998
(inception) to December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as at
December 31, 1999 and 1998 and the results of their operations and their cash
flows for the year ended December 31, 1999 and the period from February 10, 1998
(inception) to December 31, 1998 in conformity with generally accepted
accounting principles in the United States.
Vancouver, Canada "MOORE STEPHENS ELLIS FOSTER LTD."
March 22, 2000 Chartered Accountants
------------------------------------------------------------------------------
MS
An independently owned and operated member of Moore Stephens North America, Inc.
Members in principal cities throughout North America. Moore Stephens North
America, Inc. is a member of Moore Stephens International Limited, members in
principal cities throughout the world.
<PAGE>F-2
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1999 and 1998
(Expressed in US Dollars)
1999 1998
------------ ------------
ASSETS
Current
Cash and cash equivalents $ 617,262 $ 1,380,355
Accounts receivable 640,743 -
Subscriptions receivable 9,320,000 -
Inventories 657,966 -
Prepaid and deposits 458,940 192,771
------------ ------------
Total current assets 11,694,911 1,573,126
Fixed assets 2,642,313 907,687
Licence and permit 2,402,813 -
------------ ------------
Total assets $ 16,740,037 $ 2,480,813
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loans $ 616,523 $ -
Accounts payable and accrued liabilities 2,535,681 652,317
Accounts payable - related parties 112,919 55,316
Management fees payable - related parties 24,000 36,000
------------ ------------
Total current liabilities 3,289,123 743,633
------------ ------------
Minority interests 962,146 -
------------ ------------
Commitments and contingencies (Note 12)
Stockholders' Equity
Share capital
Authorized: 50,000,000 common shares at
par value of $0.001 each
Issued and outstanding: 10,735,000 common shares
(1998 - 10,000,000) 10,735 10,000
Additional paid in capital 15,690,734 2,201,042
Accumulated other comprehensive income 50,049 (2,145)
Accumulated deficit (3,262,750) (471,717)
------------ ------------
Total stockholders' equity 12,488,768 1,737,180
------------ ------------
Total liabilities and stockholders' equity $ 16,740,037 $ 2,480,813
============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE>F-3
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Period from February 10, 1998 (inception) to December 31, 1999 (Expressed in US
Dollars)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulated
other Total
Common Stock Additional Compre- compre- Stock-
---------------------- paid-in hensive Deficit hensive holders
Shares Amount capital income (loss) accumulated income equity
----------- --------- ------------ ------------- ----------- ---------- -----------
Balance, February 10, 1998 1,000,000 $ 1,000 $ -- $ -- $ (2,636) $ -- $ (1,636)
Capitalization of accumulated
eficit on reverse acquisition -- -- (2,636) -- 2,636 -- --
Reverse acquisiton of Allwin
Newtech Ltd. on July 29,
1998 7,000,000 7,000 940,678 -- -- -- 947,678
Issuance of common stock at
$0.50 per share, net of offering
costs of $35,000 in December,
1998 2,000,000 2,000 963,000 -- -- -- 965,000
Stock option compensation -- -- 300,000 -- -- -- 300,000
Other comprehensive income
- foreign currency translation
adjustment -- -- -- (2,145) -- (2,145) (2,145)
Comprehensive income
- net (loss) for the period -- -- -- (471,717) (471,717) -- (471,717)
----------- --------- ------------ ------------- ----------- ---------- -----------
Comprehensive income (loss) (473,862)
=============
Balance, December 31, 1998 10,000,000 10,000 2,201,042 (471,717) (2,145) 1,737,180
Issuance of common stock for loan
bonus at at $2.125 per share
in April, 1999 90,000 90 191,160 -- -- 191,250
Issuance of common stock pursuant
to a private placement at $2.50
per share, net of share
issuance costs of $110,788 in
October, 1999 600,000 600 1,388,612 -- -- 1,389,212
Issuance of common stock for
loan bonus at $2.047 per share
in October, 1999 45,000 45 92,070 -- -- 92,115
Allotted 4,258,000 common stock
at $2.50 per share, less
commission payable of $703,150 -- -- 9,941,850 -- -- 9,941,850
Other comprehensive income
- foreign currency translation -- -- -- 52,194 -- 52,194 52,194
Comprehensive income
- net (loss) for the period -- -- -- (2,791,033) (2,791,033) -- (2,791,033)
Stock option compensation -- -- 1,876,000 -- -- 1,876,000
----------- --------- ------------ ------------- ----------- ---------- ------------
Comprehensive income (loss) $ (2,738,839)
=============
Balance, December 31, 1999 10,735,000 $ 10,735 $ 15,690,734 $(3,262,750) $ 50,049 $12,488,768
=========== ========= ============ =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-4
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Operations
(Expressed in US Dollars)
February 10
January 1 1998 (inception)
1999 to to
December 31 December 31
1999 1998
------------ ---------------
Sales $ 989,539 $ -
Cost of sales 204,473 -
------------ ---------------
Gross profit 785,066 -
Selling expenses (619,676) -
Administrative expenses
- stock-based compensation (1,876,000) (300,000)
- other administrative expenses (1,154,666) (181,454)
------------ ---------------
Operating loss (2,865,276) (481,454)
Interest income 19,397 9,737
------------ ---------------
Loss before minority interest (2,845,879) (471,717)
Minority interest 54,846 -
------------ ---------------
Net (loss) for the period $ (2,791,033) $ (471,717)
============ ===============
(Loss) per share
Basic and diluted $ (0.27) $ (0.06)
============ ===============
Weighted average common shares outstanding
Basic and diluted 10,177,452 8,054,795
============ ===============
The accompanying notes are an integral part of these financial statements.
<PAGE>F-5
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Cash Flows
(Expressed in US Dollars)
<TABLE>
<CAPTION>
January 1 February 10, 1998
1999 to (inception) to
December 31 December 31
1999 1998
------------- -----------------
<S> <C> <C>
Cash flows from (used in) operating activities
Net (loss) for the period $ (2,791,033) $ (471,717)
Adjustments to reconcile net loss to
net cash used in operating activities:
- loan bonuses 283,365 -
- stock-based compensation expense 1,876,000 300,000
- depreciation of fixed assets and amortization of
Licence and permit 263,101 11,797
- minority interests (54,846) -
- loss on disposal of fixed assets 12,279 -
------------- ------------
(411,134) (159,920)
Changes in assets and liabilities:
- accounts receivable (657,966) -
- inventories (385,436) -
- prepaid expenses and deposits (266,169) (192,771)
- accounts payable and accrued liabilities 902,328 744,633
------------- ------------
(818,377) 391,942
------------- ------------
Cash used in investing activities
Acquisition of Huaxin, net of cash acquired (2,931,818) -
Purchase of fixed assets (339,504) (891,914)
------------- ------------
(3,271,322) (891,914)
------------- ------------
Cash flows from financing activities
Loan proceeds 613,497 -
Shares issued and allotted, net of
Issuance costs 2,714,212 1,912,678
------------- ------------
3,327,709 1,912,678
------------- ------------
Foreign exchange loss on cash held
in foreign currency (1,103) (32,351)
------------- ------------
Increase (decrease) in cash and cash equivalents (763,093) 1,380,355
Cash and cash equivalents, beginning of period 1,380,355 -
------------- ------------
Cash and cash equivalents, end of period $ 617,262 $ 1,380,355
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-6
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
1. Nature of Business
The Company was formed on August 22, 1989 as First Geneva Investments Inc.
under the laws of the State of Florida. The Company changed its name to
Dragon Pharmaceuticals Inc. on August 31, 1998. Pursuant to a share
exchange agreement, dated July 29, 1998, the Company acquired 100% of the
issued and outstanding shares of Allwin Newtech Ltd. ("Allwin") by issuing
7,000,000 common shares of the Company. This transaction is accounted for
as a reverse acquisition (see Note 4). During 1998, the Company was a
development stage enterprise.
Allwin was incorporated under the laws of British Virgin Islands on
February 10, 1998. Pursuant to a Sino-Foreign Co-operative Company
contract, dated April 18, 1998, Allwin and a Chinese corporation formed a
limited liability company under the Chinese law, named as Sanhe Kailong
Bio-pharmaceutical Co., Ltd. ("Kailong"), located in Hebei Province, China.
Allwin has a 75% interest in Kailong. Pursuant to another Sino-foreign
Co-operative Company Contract, dated July 27, 1999, Allwin completed the
acquisition of a 75% interest in Nanjing Huaxin Bio-pharmaceutical Co. Ltd.
("Huaxin"). Kailong and Huaxin are in the business of research and
development, production and sales of pharmaceutical products in China.
2. Significant Accounting Policies
(a) Basis of Consolidation
These consolidated financial statements include the accounts of the
Company and its subsidiaries, Allwin, Kailong and Huaxin. All
inter-company transactions and balances have been eliminated.
(b) Principles of Accounting
These financial statements are stated in US Dollars and have been
prepared in accordance with accounting principles generally accepted
in the United States.
(c) Fixed Assets
Depreciation is based on the estimated useful lives of the assets and
is computed using the straight-line method. Fixed assets are recorded
at cost. Depreciation is provided over the following useful lives:
Motor vehicle 10 years
Land lease Term of lease (50 years)
Office equipment and furniture 5 years
Land improvements 10 years
Leasehold improvements Term of lease (10 years)
Production equipment 10 years
<PAGE>F-7
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(d) Foreign Currency Transactions
The parent company, Allwin, Kailong and Huaxin maintain their
accounting records in their functional currencies (i.e., U.S. dollars,
U.S. dollars, Renminbi Yuan, and Renminbi Yuan, respectively). They
translate foreign currency transactions into their functional currency
in the following manner.
At the transaction date, each asset, liability, revenue and expense is
translated into the functional currency by the use of the exchange
rate in effect at that date. At the period end, monetary assets and
liabilities are translated into the functional currency by using the
exchange rate in effect at that date. The resulting foreign exchange
gains and losses are included in operations.
(e) Foreign Currency Translations
Assets and liabilities of the foreign subsidiaries (whose functional
currency is Renminbi Yuan) are translated into U.S. dollars at
exchange rates in effect at the balance sheet date. Revenue and
expenses are translated at average exchange rate. Gain and losses from
such translations are included in stockholders' equity, as a component
of other comprehensive income.
(f) Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(g) Income Taxes
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", which requires the
Company to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns using the
liability method. Under this method, deferred tax liabilities and
assets are determined based on the temporary differences between the
financial statements and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse.
<PAGE>F-8
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(h) Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. The
Company is disclosing this information on its Statement of
Stockholders' Equity. Comprehensive income comprises equity except
those resulting from investments by owners and distributions to
owners. SFAS No. 130 did not change the current accounting treatments
for components of comprehensive income.
(i) Financial Instruments and Concentration of Risks
Fair value of financial instruments are made at a specific point in
time, based on relevant information about financial markets and
specific financial instruments. As these estimates are subjective in
nature, involving uncertainties and matters of significant judgement,
they cannot be determined with precision. Changes in assumptions can
significantly affect estimated fair values.
The carrying value of cash and cash equivalents, accounts receivable,
short-term loans, accounts payable and accrued liabilities approximate
their fair value because of the short-term maturity of these
instruments.
The Company is operating in China, which may give rise to significant
foreign currency risks from fluctuations and the degree of volatility
of foreign exchange rates between U.S. dollars and the Chinese
currency RMB. Financial instruments that potentially subject the
Company to concentration of credit risk consist principally of cash
and trade receivables, the balances of which are stated on the balance
sheet. The Company places its cash in high credit quality financial
institutions. Concentration of credit risk with respect to trade
receivables are limited due to the Company's' large number of diverse
customers in different locations in China. The Company does not
require collateral or other security to support financial instruments
subject to credit risk.
(j) Licence and Permit
Licence and permit, in relation to the production and sales of
pharmaceutical products in China, is amortized on a straight-line
basis over ten years.
The carrying value of licence and permit is reviewed by management at
least annually and impairment losses, if any, are recognized when the
expected non-discounted future operating cash flows derived from the
related product licence acquired are less than the carrying value of
such licence and permit. In the event of an impairment in the licence
and permit, the discounted cash flows method is used to arrive at the
estimated fair value of such licence and permit.
<PAGE>F-9
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(k) Cash and Cash Equivalents
Cash equivalents usually consist of high liquid investments with
maturities of three months or less. As at December 31, 1999, cash and
cash equivalents consist of cash only.
(l) Inventories
Inventories are stated at the lower of cost and replacement cost with
respect to raw materials and the lower of cost and net realizable
value with respect to finished goods. Cost includes direct material,
direct labour and overheads. Cost is calculated using the first-in,
first-out method. Net realizable value represents the anticipated
selling price less further costs for completion and distribution.
(m) Revenue Recognition
Sales revenue is recognized upon the delivery of goods to customers.
(n) Stock-based Compensation
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-based Compensation". SFAS 123 encourages, but does not require,
companies to adopt a fair value based method for determining expense
related to stock-based compensation. The Company continues to account
for stock-based compensation issued to employees and directors using
the intrinsic value method as prescribed under Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees"
and related Interpretations.
(o) Loss Per Share
Loss per share is computed using the weighted average number of shares
outstanding during the period. The Company adopted SFAS No. 128,
"Earnings per share". Diluted loss per share is equal to the basic
loss per share because common stock equivalents consisting of
2,600,000 warrants and 1,520,000 stock options outstanding at December
31, 1999 are anti-dilutive, however, they may be dilutive in future.
<PAGE>F-10
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(p) New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has had on its
agenda a project to address certain practice issues regarding
Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees. The FASB plans on issuing various
interpretations of APB Opinion No. 25 to address these practice
issues. The proposed effective date of these interpretations would be
in the issuance date of the final Interpretation, which is expected to
be in the middle of the year 2000.
If the terms of an option (originally accounted for as a fixed option)
are modified during the option term to directly change the exercise
price, the modified option should be accounted for as a variable
option. Variable grant accounting should be applied to the modified
option from the date of the modification until the date of exercise.
Consequently, the final measurement of compensation expense would
occur at the date of exercise. The cancellation of an option and the
issuance of a new option with a lower exercise price shortly
thereafter (e.g., within six months) to the be same individual should
be considered in substance a modified (variable) option.
The Company has no such modified option as at December 31, 1999, and,
accordingly, the pronouncement would have nil effect on the Company's
financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 requires companies to recognize all derivatives contracts
as either assets or liabilities in the balance sheet and to measure
them at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging derivative with
the recognition of (i) the changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June
15, 2000.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standards
on July 1, 2000 to affect its financial statements.
<PAGE>F-11
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
3. Subscription Receivable
In December, 1999, the Company allotted 4,258,000 shares of its common
stocks at $2.50 per share pursuant to a private placement. The proceeds of
part of the allotment (i.e., 240,000 shares) have been converted from a
cash loan of $600,000 raised in 1999. As at December 31, 1999, additional
cash proceeds of $725,000 were received. The balance of $9,320,000 were
received in January, 2000. A total commission payable of $703,150 is
included in accounts payable and accrued liabilities.
4. Acquisition of Allwin Newtech Ltd.
Pursuant to a share exchange agreement, dated July 29, 1998, the Company
issued 7,000,000 shares in exchange for all the issued and outstanding
shares of Allwin. The transaction resulted in the former shareholders of
Allwin owning the majority of the issued and outstanding shares of the
Company. Accounting principles applicable to reverse acquisition have been
applied to record this transaction. Under this basis of accounting, Allwin
has been identified as the acquirer and, accordingly, the consolidated
entity is considered to be a continuation of Allwin with the net
liabilities of the Company deemed to have been assumed by Allwin for a fair
market value of $1,636.
The net liabilities of the Company acquired by Allwin are summarized as
follows:
Current liabilities $1,636
5. Acquisition of Nanjing Huaxin Bio-pharmaceutical Co. Ltd. ("Huaxin")
Huaxin, a Chinese company, which the Company owns 75%, was formed to
acquire the following assets and liabilities from another Chinese company
engaged in the development, production and sale of certain pharmaceutical
products in China. The Company paid US$3,000,000 cash for its 75% interest
on June 11, 1999. The allocation of the acquisition costs, based on
appraised values as at June 11, 1999, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Cash and cash equivalents RMB 750,000 US$ 90,909
Inventories 2,808,382 340,410
Fixed assets 12,397,202 1,502,691
Licence and permit 20,602,798 2,497,309
Accounts payable (3,558,382) (431,319)
-------------------------------------------- ------- -------------- -------- ------------
Net asset RMB US$
============================================ ======= ============== ======== ============
75% thereof RMB 24,750,000 US$ 3,000,000
============================================ ======= ============== ======== ============
</TABLE>
The operating results of Huaxin from June 11, 1999 to December 31, 1999,
are included in the statement of operations.
<PAGE>F-12
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
5. Acquisition of Nanjing Huaxin Bio-pharmaceutical Co. Ltd. ("Huaxin")
(continued)
The following summarized proforma information assumes the acquisition had
occurred on January 1, 1998:
1999 1998
----------- -----------
Net sales $ 1,315,972 $ 519,309
Net loss $(2,327,063) $ (602,265)
Loss per share - basic and diluted
- Net loss $ (0.23) $ (0.07)
----------- -----------
6. Fixed Assets
1999
----------------------------------------
Accumulated Net book
Cost depreciation value
----------- ------------ -----------
Motor vehicle $ 41,039 $ 2,655 $ 38,384
Land lease 924,784 29,285 895,499
Office equipment and furniture 114,182 24,292 89,890
Land improvements 14,755 3,020 11,735
Leasehold improvements 729,791 33,915 695,876
Production equipment 1,109,181 198,252 910,929
----------- ------------ -----------
$ 2,933,732 $ 291,419 $ 2,642,313
=========== ============ ===========
1999
----------------------------------------
Accumulated Net book
Cost depreciation value
----------- ------------ -----------
Land lease $ 903,614 $ 10,542 $ 893,072
Office equipment and furniture 1,483 148 1,335
Land improvement 14,755 1,475 13,280
----------- ------------ -----------
$ 919,852 $ 12,165 $ 907,687
=========== ============ ===========
The government of China granted a land lease to Kailong for a period of
fifty (50) years, starting June 8, 1998. All fixed assets are located in
China.
Depreciation expense was $130,835 and $11,797 for the periods ended
December 31, 1999 and 1998, respectively.
<PAGE>F-13
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
7. Bank Loans
RMB 3,000,000, bearing interest at 5.85% per
annum and due on August 4, 2000 $ 369,914
RMB 2,000,000, bearing interest at 5.85% per
annum and due on September 21, 2000 246,609
-----------
Total $ 616,523
===========
The weighted average interest rate at December 31, 1999 was 5.85%.
8. Income Taxes
(a) Kailong and Huaxin are subject to income taxes in China on its taxable
income as reported in its statutory accounts at a tax rate in
accordance with the relevant income tax laws applicable to
Sino-foreign equity joint venture enterprises. However, pursuant to
the same income tax laws, Kailong and Huaxin are fully exempt from
income tax for five years starting from their first profit-making year
followed by a 15% corporation tax rate for the next three years.
Allwin is not subject to income taxes.
As at December 31, 1999, the parent company, Kailong and Huaxin have
estimated losses, for tax purposes, totalling approximately
$1,062,000, which may be applied against future taxable income.
Accordingly, there is no tax expense charged to the Statement of
Operations for the years ended December 31, 1999 and 1998. The
potential tax benefits arising from these losses have not been
recorded in the financial statements. The Company evaluates its
valuation allowance requirements on an annual basis based on projected
future operations. When circumstances change and this causes a change
in management's judgement about the realizability of deferred tax
assets, the impact of the change on the valuation allowance is
generally reflected in current income.
<PAGE>F-14
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
8. Income Taxes (continued)
(b) The tax effect of temporary differences that give rise to the
Company's deferred tax asset (liability) are as follows:
1999 1998
----------- -----------
Tax loss carryforwards $ 361,000 $ 58,000
Stock-based compensation 638,000 102,000
Less: valuation allowance (999,000) (160,000)
----------- -----------
$ - $ -
=========== ===========
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate is as follows:
1999 1998
----------- -----------
Federal statutory income tax rate 34% 34%
Change in valuation allowance (34%) (34%)
----------- -----------
Effective income tax rate - -
=========== ===========
9. Non-cash Financing Activities
In 1999, the Company issued 135,000 common shares as loan bonuses for the
$600,000 loan raised. The loan has been converted into an allotment of
240,000 common shares at $2.50 per share as at December 31, 1999 (see Note
3).
In 1998, the Company issued 7,000,000 common shares in exchange for all the
issued and outstanding shares of Allwin.
<PAGE>F-15
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
10. Stock Options and Warrants
(a) A summary of the status of the Company's stock options as of December
31, 1999 and 1998 and the changes during the periods then ended is
presented as follows:
Weighted Average
Shares Exercise Price
--------- ----------------
Balance, February 10, 1998 - $ -
Granted 1,200,000 $ 0.50
--------- ----------
Balance outstanding, December 31, 1998 1,200,000 $ 0.50
--------- ----------
Balance exercisable, December 31, 1998 600,000 $ 0.50
========= ==========
Balance outstanding, January 1, 1999 1,200,000 $ 0.50
Cancelled (300,000) $ 0.50
Granted 620,000 $ 0.69
--------- ----------
Balance outstanding, December 31, 1999 1,520,000 $ 0.58
========= ==========
Balance exercisable, December 31, 1999 1,495,000 $ 0.58
========= ==========
The weighted average remaining contractual life of the options
outstanding at December 31, 1999 was 4.31 years.
(b) Stock options outstanding as at December 31, 1999:
Number of Underlying Exercise Price
Options Shares Per Share Expiry Date
--------- ---------- -------------- -----------
900,000 900,000 $0.50 December 16, 2003
50,000 50,000 $0.50 June 15, 2001
275,000 275,000 $0.50 November 5, 2004
235,000 235,000 $0.50 November 9, 2004
60,000 60,000 $2.50 November 9, 2004
(c) Share purchase warrants outstanding as at December 31, 1999:
Number of Underlying Exercise Price
Options Shares Per Share Expiry Date
--------- ---------- -------------- -----------
2,000,000 1,000,000 $1.00 June 30, 2000
600,000 600,000 $2.50 October 28, 2000
<PAGE>F-16
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
10. Stock Options and Warrants (continued)
(d) On December 16, 1998, the Company adopted a Stock Option Plan ("the
1998 Plan") for grant of options to directors of the Company to
purchase up to 1,200,000 common stocks. Options granted under the 1998
Plan will be exercisable from the date of grant for a period of five
years at an exercise price of $0.50 per share. Half of the options
granted vested immediately at the date of grant. The remaining half of
the options granted would vest upon the Company achieving the ability
to produce commercially acceptable and revenue generating products.
On November 5, 1999, the Company granted options to another two
directors of the Company to purchase up to 200,000 common stocks under
the same conditions as the 1998 Plan.
On June 15, 1999, the Company adopted another Stock Option Plan ("the
1999 A Plan") for the grant of options to an employee of the Company
to purchase up to 50,000 common stocks at an exercise price of $0.50
per share. Options granted under the 1999 A Plan will be exercisable
from the date of grant for a period of two years. Half of the
respective options granted vested immediately at the date of grant.
The remaining half of the options granted would vest upon the
Company's share price closes at a price of US $5 or greater for five
(5) consecutive days.
On November 5, 1999 and November 9, 1999, the Company adopted another
Stock Option Plan ("the 1999 B Plan") for the grant of options to
employees of the Company to purchase up to 75,000 common stocks and
235,000 common stocks, respectively. Options granted under the 1999 B
Plan were vested immediately and will be exercisable from the dates of
grant for a period of five years at an exercise price of $0.50 per
share.
On November 9, 1999, the Company adopted another Stock Option Plan
("the 1999 C Plan") for the grant of options to employees of the
Company to purchase up to 60,000 common stocks. Options granted under
the 1999 C Plan were vested immediately and will be exercisable from
the date of grant for a period of five years at an exercise price of
$2.50 per share.
$300,000 was charged to income in 1998 on the 600,000 shares (under
the 1998 Plan) that were immediately vested on the date of grant. No
compensation expense was charged to income on the remaining 600,000
shares subject to certain conditions being achieved. 150,000 of these
shares have since then been cancelled and another 100,000 shares have
been granted in 1999. However, the compensation expense of these
550,000 shares would be recognized based upon the excess of the fair
market value of the stock on the vesting date over its exercise price
of $0.50 per share.
On December 20, 1999, the Company announced that it has achieved the
ability to produce commercially acceptable and revenue-generating
products and the remaining half of the options granted (i.e., 550,000
shares) under the 1998 Plan have become vested. The fair market value
of the stock on the vesting date was $2.875 per share and $1,306,250
were charged to income in 1999.
<PAGE>F-17
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
10. Stock Options and Warrants (continued)
(d) (continued)
In addition, $569,750 was charged to income in 1999 on the 335,000
shares of the 1999 A and B Plans and 100,000 shares of the 1998 Plan
granted in 1999 that were immediately vested on the date of grant. No
compensation expenses were charged to the 60,000 shares of the 1999 C
Plan as the exercise price is above the fair market value at the date
of grant. No compensation expenses were charged to income on the
remaining 25,000 shares of the 1999 A Plan subject to certain
conditions being achieved. However, the compensation expenses of these
25,000 shares would be recognized based upon the excess of the fair
market value of the stock on the vesting date over its exercise price
of $0.50 per share.
(e) Pro-forma information regarding Loss for the period and Loss per Share
is required under SFAS 123, and has been determined as if the Company
has accounted for its stock options under the fair value method of
SFAS 123. If compensation cost for the stock option plan had been
determined based on the fair value at the grant dates for awards under
the plan, consistent with the alternative method set forth under SFAS
123, the Company's loss for the period, basic and diluted loss per
share would have been increased on a pro-forma basis as indicated
below:
1999 1998
------------ ------------
Net loss for the period:
- as reported $ (2,791,033) $ (471,717)
- pro-forma (3,231,273) (1,527,717)
------------ ------------
Basic and diluted loss per share:
- as reported (0.27) (0.06)
- pro-forma (0.32) (0.19)
------------ ------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for the grants awarded in 1998 and
1999, respectively:
Weighted
Number of Risk Free Expected Average
Year Options Dividend Expected Interest Lives Fair Value
Granted Granted Yields Volatility Rate in Years of Options
---------- --------- -------- ---------- -------- -------- ----------
1998 1,200,000 0% 56% 5.50% 5 $1.13
1999 50,000 0% 98% 4.75% 2 $3.354
1999 570,000 0% 98% 4.75% 5 $1.792
<PAGE>F-18
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
11. Related Party Transactions
The Company incurred the following expenses to the directors:
1999 1998
------------- ------------
Management fees $96,000 $72,000
============= ============
12. Commitments
(a) The other shareholder ("Chinese investor") of Kailong, who has a 25%
interest, has entered into a drug licence and related technology
transfer agreement. Under the agreement, the Chinese investor has to
pay RMB 8 Million (approximately US$1 million) in order to obtain the
licence. Pursuant to an agreement signed between the Company and the
Chinese investor on July 10, 1998, the Company will pay the RMB 8
Million licence fee for the Chinese investor and the ownership of drug
licence and related technology will be transferred to the Company when
the drug licence is obtained. The Company has paid RMB1.6Million
(US$197,287) as deposit. The transferor of the licence defaulted on
the agreement and the deposit was returned to the Chinese investor.
Subsequent to the 1999 year-end, the Company and the Chinese investor
entered into an agreement that the Company will pay US$250,000 to
increase its interest to 95%. The RMB 1.6 million deposit kept by the
Chinese investor is treated as a partial payment of US$200,000 towards
the US$250,000 as agreed, the Company is, therefore, committed to pay
a further US$50,000.
(b) The Company has capital expenditure commitments of US $115,000 to
purchase bio-technology equipment.
(c) The Company has entered into a drug licence and related technology
transfer agreement in August, 1999 for a total transfer price of RMB
5,500,000 (approximately US$678,000). RMB 1,000,000 (US$123,304) is
payable upon the signing of the agreement. As at December 31, 1999,
the Company paid RMB 500,000 (US$61,652). The Company is, therefore,
committed to pay the remaining RMB 5,000,000 (approximately
US$616,348).
<PAGE>F-19
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(Expressed in US Dollars)
12. Commitments (continued)
(d) The Company has entered into operating lease agreement with respect to
Huaxin's production plant in Nanjing, China for an amount of RMB
3,000,000 (approximately US$379,920) per annum until June 11, 2009.
Minimum payments required for the next five years under the agreement
are as follows:
2000 RMB 3,000,000 US$ 369,920
2001 3,000,000 369,920
2002 3,000,000 369,920
2003 3,000,000 369,920
2004 3,000,000 369,920
2005 - 2009 13,375,000 1,649,200
============== ==============
Total RMB 28,375,000 US$ 3,498,800
============== ===============
13. Subsequent Events
(a) Subsequent to the 1999 year-end, the Company advanced a further
US$1,500,000 to complete its capital contribution commitment in Huaxin
(see Note 5).
(b) Subsequent to the 1999 year-end, 104,000 stock options were exercised
at $0.50 per share and 10,000 share purchase warrants were exercised
at $1.00 per share (see Note 10).
(c) Subsequent to the 1999 year-end, the Company granted 35,000 stock
options at an exercise price of $0.50 per share, expiring January 5,
2004 and 107,500 stock options at an exercise price of $7.00 per
share, expiring February 22, 2005, to employees of the Company.
14. Comparative Figures
Certain 1998 comparative figures have been reclassified to conform with the
financial statement presentation adopted for 1999.
<PAGE>F-20
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Balance Sheet
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
ASSETS
Current
Cash and cash equivalents $ 7,997,424
Term deposit 2,000,500
Accounts receivable 883,828
Inventories 804,268
Prepaid and deposits 926,317
------------
Total current assets 12,612,337
Fixed assets 2,779,010
Initial payment on the acquisition of Hua Xin -
Licence and permit 3,989,767
------------
Total assets $ 19,381,114
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loans $ 2,027,663
Accounts payable and accrued liabilities 1,233,308
Accounts payable - related parties -
Management fees payable - related parties 12,000
------------
Total current liabilities 3,272,971
------------
Minority interests 1,340,122
------------
Commitments and contingencies (Note 10)
Stockholders' Equity
Share capital
Authorized: 50,000,000 common shares at
par value of $0.001 each
Issued and outstanding: 16,064,750 common shares 16,065
Additional paid in capital 18,449,272
Accumulated other comprehensive income (loss) (30,789)
Accumulated deficit (3,666,527)
------------
Total stockholders' equity 14,768,021
------------
Total liabilities and stockholders' equity $ 19,381,114
============
The accompanying notes are an integral part of these financial statements.
<PAGE>F-21
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six-month Period Ended June 30, 2000
(Unaudited)
(Expressed in US Dollars)
<TABLE>
<CAPTION>
Accumulated Total
Additional other Stock-
Common stock paid-in Comprehensive Deficit comprehensive holders'
Shares Amount capital income (loss) accumulated income (loss) equity
---------- -------- ------------ ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 10,735,000 $ 10,735 $ 15,690,734 $ (3,262,750) $ 50,049 $ 12,488,768
Issued 4,258,000 common shares
previously allotted 4,258,000 4,258 (4,258) - - -
Additional share issuance costs
to 4,258,000 common shares issued - (5,247) - - (5,247)
Exercise stock options for cash 107,000 107 53,393 - - 53,500
Exercise warrants for cash 964,750 965 963,785 - - 964,750
Allotted 250,000 common shares
at $6.25 per share - - 1,562,500 - - 1,562,500
Stock option compensation - - 188,365 - - 188,365
Other comprehensive income
- foreign currency translation - - - (80,838) - (80,838) (80,838)
Comprehensive income
- net (loss) for the period - - - (403,777) (403,777) - (403,777)
---------- -------- ------------ ---------- ------------ --------- ------------
Comprehensive income (loss) $ (484,615)
==========
Balance, June 30, 2000 16,064,750 $ 16,065 $ 18,449,272 $ (3,666,527) $ (30,789) $ 14,768,021
========== ======== ============ ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-22
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
(Expressed in US Dollars)
April 1 Six Months Six Months
2000 to Ended Ended
June 30 June 30 June 30
2000 2000 1999
---------- ------------ ------------
Sales $ 797,127 $ 1,458,912 $ -
Cost of sales 167,536 266,401 -
---------- ------------ ------------
Gross profit 629,591 1,192,511 -
Selling expenses (483,941) (800,825) -
Administrative expenses
- stock-based compensation - (188,365) (12,500)
- other administrative expenses (525,463) (831,055) (145,487)
---------- ------------ ------------
Operating loss (379,813) (627,734) (157,987)
Interest income 195,273 219,325 9,399
---------- ------------ ------------
Loss before minority interest (184,540) (408,409) (148,588)
Minority interest 15,543 4,632 -
---------- ------------ ------------
Net (loss) for the period $ (168,997) $ (403,777) $ (148,588)
========== ============ ============
(Loss) per share
Basic and diluted $ (0.03) $ (0.01)
============ ============
Weighted average number of
common shares outstanding
Basic and diluted 12,966,298 10,034,724
============ ============
The accompanying notes are an integral part of these financial statements.
Comparative figures for the corresponding period from April 1, 1999 to June 30,
1999 are not available. The Company had nominal operations for the first three
months of its fiscal year ended December 31, 1999.
<PAGE>F-23
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Cash Flows
Six-month Period Ended June 30, 2000
(Unaudited)
(Expressed in US Dollars)
2000 1999
----------- ------------
Cash flows from (used in) operating activities
Net (loss) for the period $ (403,777) $ (148,588)
Adjustments to reconcile net loss to
net cash used in operating activities:
- loan bonus fee - 90
- stock-based compensation expense 188,365 12,500
- depreciation of fixed assets and
amortization of licence and permit 303,052 10,269
- minority interests (4,632) -
----------- ------------
83,008 (125,729)
Changes in assets and liabilities:
- accounts receivable (243,085) -
- inventories (146,302) -
- prepaid expenses and deposits (467,377) (208,740)
- accounts payable and accrued liabilities (724,142) (1,126)
----------- ------------
(1,497,898) (335,595)
----------- ------------
Cash flows used in investing activities
Purchase of fixed assets (318,708) -
Purchase of term deposits (2,000,500) -
Purchase of licence (250,000) -
Initial payment on the acquisition of Hua Xin - (1,500,000)
----------- ------------
(2,569,208) (1,500,000)
----------- ------------
Cash flows from financing activities
Loan proceeds 1,411,140 600,000
Proceeds from issuance of shares 1,018,250 -
Proceeds from shares subscribed and allotted
in prior period, net of issuance costs 8,611,603 -
Funds contributed by non-controlling interest 403,380 -
----------- ------------
11,444,373 600,000
----------- ------------
Foreign exchange gain on cash held
in foreign currency 2,895 35,535
----------- ------------
Increase in cash and cash equivalents 7,380,162 (1,200,060)
Cash and cash equivalents, beginning of period 617,262 1,380,355
----------- ------------
Cash and cash equivalents, end of period $ 7,997,424 $ 180,295
=========== ============
The accompanying notes are an integral part of these financial statements.
<PAGE>F-24
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
1. Nature of Business
The Company was formed on August 22, 1989 as First Geneva Investments Inc.
under the laws of the State of Florida. The Company changed its name to
Dragon Pharmaceuticals Inc. on August 31, 1998. Pursuant to a share
exchange agreement, dated July 29, 1998, the Company acquired 100% of the
issued and outstanding shares of Allwin Newtech Ltd. ("Allwin") by issuing
7,000,000 common shares of the Company. This transaction is accounted for
as a reverse acquisition (see Note 3). During 1998, the Company was a
development stage enterprise.
Allwin was incorporated under the laws of British Virgin Islands on
February 10, 1998. Pursuant to a Sino-Foreign Co-operative Company
contract, dated April 18, 1998, Allwin and a Chinese corporation formed a
limited liability company under the Chinese law, named as Sanhe Kailong
Bio-pharmaceutical Co., Ltd. ("Kailong"), located in Hebei Province, China.
Allwin has a 75% interest in Kailong. Pursuant to another Sino-foreign
Co-operative Company Contract, dated July 27, 1999, Allwin completed the
acquisition of a 75% interest in Nanjing Huaxin Bio-pharmaceutical Co. Ltd.
("Huaxin"). Kailong and Huaxin are in the business of research and
development, production and sales of pharmaceutical products in China.
2. Significant Accounting Policies
(a) Basis of Consolidation
These consolidated financial statements include the accounts of the
Company and its subsidiaries, Allwin, Kailong and Huaxin. All
inter-company transactions and balances have been eliminated.
(b) Principles of Accounting
These financial statements are stated in US Dollars and have been
prepared in accordance with accounting principles generally accepted
in the United States.
(c) Fixed Assets
Depreciation is based on the estimated useful lives of the assets and
is computed using the straight-line method. Fixed assets are recorded
at cost. Depreciation is provided over the following useful lives:
Motor vehicle 10 years
Land lease Term of lease (50 years)
Office equipment and furniture 5 years
Land improvements 10 years
Leasehold improvements Term of lease (10 years)
Production equipment 10 years
<PAGE>F-25
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(d) Foreign Currency Transactions
The parent company, Allwin, Kailong and Huaxin maintain their
accounting records in their functional currencies (i.e., U.S. dollars,
U.S. dollars, Renminbi Yuan, and Renminbi Yuan, respectively). They
translate foreign currency transactions into their functional currency
in the following manner.
At the transaction date, each asset, liability, revenue and expense is
translated into the functional currency by the use of the exchange
rate in effect at that date. At the period end, monetary assets and
liabilities are translated into the functional currency by using the
exchange rate in effect at that date. The resulting foreign exchange
gains and losses are included in operations.
(e) Foreign Currency Translations
Assets and liabilities of the foreign subsidiaries (whose functional
currency is Renminbi Yuan) are translated into U.S. dollars at
exchange rates in effect at the balance sheet date. Revenue and
expenses are translated at average exchange rate. Gain and losses from
such translations are included in stockholders' equity, as a component
of other comprehensive income.
(f) Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(g) Income Taxes
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", which requires the
Company to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns using the
liability method. Under this method, deferred tax liabilities and
assets are determined based on the temporary differences between the
financial statements and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse.
<PAGE>F-26
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(h) Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. The
Company is disclosing this information on its Statement of
Stockholders' Equity. Comprehensive income comprises equity except
those resulting from investments by owners and distributions to
owners. SFAS No. 130 did not change the current accounting treatments
for components of comprehensive income.
(i) Financial Instruments and Concentration of Risks
Fair value of financial instruments are made at a specific point in
time, based on relevant information about financial markets and
specific financial instruments. As these estimates are subjective in
nature, involving uncertainties and matters of significant judgement,
they cannot be determined with precision. Changes in assumptions can
significantly affect estimated fair values.
The carrying value of cash and cash equivalents, accounts receivable,
short-term loans, accounts payable and accrued liabilities approximate
their fair value because of the short-term maturity of these
instruments.
The Company is operating in China, which may give rise to significant
foreign currency risks from fluctuations and the degree of volatility
of foreign exchange rates between U.S. dollars and the Chinese
currency RMB. Financial instruments that potentially subject the
Company to concentration of credit risk consist principally of cash
and trade receivables, the balances of which are stated on the balance
sheet. The Company places its cash in high credit quality financial
institutions. Concentration of credit risk with respect to trade
receivables are limited due to the Company's large number of diverse
customers in different locations in China. The Company does not
require collateral or other security to support financial instruments
subject to credit risk.
(j) Licence and Permit
Licence and permit, in relation to the production and sales of
pharmaceutical products in China, is amortized on a straight-line
basis over ten years.
The carrying value of licence and permit is reviewed by management at
least annually and impairment losses, if any, are recognized when the
expected non-discounted future operating cash flows derived from the
related product licence acquired are less than the carrying value of
such licence and permit. In the event of an impairment in the licence
and permit, the discounted cash flows method is used to arrive at the
estimated fair value of such licence and permit.
<PAGE>F-27
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(k) Cash and Cash Equivalents
Cash equivalents usually consist of high liquid investments with
maturities of three months or less. As at June 30, 2000, cash
equivalents consist of commercial papers and term deposits.
(l) Inventories
Inventories are stated at the lower of cost and replacement cost with
respect to raw materials and the lower of cost and net realizable
value with respect to finished goods. Cost includes direct material,
direct labour and overheads. Cost is calculated using the first-in,
first-out method. Net realizable value represents the anticipated
selling price less further costs for completion and distribution.
(m) Revenue Recognition
Sales revenue is recognized upon the delivery of goods to customers.
(n) Stock-based Compensation
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-based Compensation". SFAS 123 encourages, but does not require,
companies to adopt a fair value based method for determining expense
related to stock-based compensation. The Company continues to account
for stock-based compensation issued to employees and directors using
the intrinsic value method as prescribed under Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees"
and related Interpretations.
(o) Loss Per Share
Loss per share is computed using the weighted average number of shares
outstanding during the period. The Company adopted SFAS No. 128,
"Earnings per share". Diluted loss per share is equal to the basic
loss per share because common stock equivalents consisting of
4,858,000 warrants and 1,555,500 stock options outstanding at June 30,
2000 are anti-dilutive, however, they may be dilutive in future.
<PAGE>F-28
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(p) New Accounting Pronouncements
(i) The Financial Accounting Standards Board ("FASB") has issued
Interpretation No. 44 in March 2000, which addresses certain
practice issues regarding Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees. The
effective date of the interpretation is July 1, 2000.
If the terms of an option (originally accounted for as a fixed
option) are modified during the option term to directly change
the exercise price, the modified option should be accounted for
as a variable option. Variable grant accounting should be applied
to the modified option from the date of the modification until
the date of exercise. Consequently, the final measurement of
compensation expense would occur at the date of exercise. The
cancellation of an option and the issuance of a new option with a
lower exercise price shortly thereafter (e.g., within six months)
to the same individual should be considered in substance a
modified (variable) option.
The Company has no such modified option and, accordingly, the
pronouncement would have nil effect on the Company's financial
statements.
(ii) In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated
as a hedge, the objective of which is to match the timing of gain
or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk or
(ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS No.
133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
Historically, the Company has not entered into derivatives
contracts either to hedge existing risks or for speculative
purposes. Accordingly, the Company does not expect adoption of
the new standards on July 1, 2000 to affect its financial
statements.
<PAGE>F-29
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
3. Acquisition of Allwin Newtech Ltd.
Pursuant to a share exchange agreement, dated July 29, 1998, the Company
issued 7,000,000 shares in exchange for all the issued and outstanding
shares of Allwin. The transaction resulted in the former shareholders of
Allwin owning the majority of the issued and outstanding shares of the
Company. Accounting principles applicable to reverse acquisition have been
applied to record this transaction. Under this basis of accounting, Allwin
has been identified as the acquirer and, accordingly, the consolidated
entity is considered to be a continuation of Allwin with the net
liabilities of the Company deemed to have been assumed by Allwin for a fair
market value of $1,636.
The net liabilities of the Company acquired by Allwin are summarized as
follows:
Current liabilities $1,636
======
4. Acquisition of Nanjing Huaxin Bio-pharmaceutical Co. Ltd. ("Huaxin")
Huaxin, a Chinese company, which the Company owns 75%, was formed to
acquire the following assets and liabilities from another Chinese company
engaged in the development, production and sale of certain pharmaceutical
products in China. The Company paid US$3,000,000 cash for its 75% interest
on June 11, 1999. The allocation of the acquisition costs, based on
appraised values as at June 11, 1999, are as follows:
Cash and cash equivalents RMB 750,000 US$ 90,909
Inventories 2,808,382 340,410
Fixed assets 12,397,202 1,502,691
Licence and permit 20,602,798 2,497,309
Accounts payable (3,558,382) (431,319)
---------- ---------
Net asset RMB 33,000,000 US$ 4,000,000
========== =========
75% thereof RMB 24,750,000 US$ 3,000,000
========== =========
<PAGE>F-30
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
5. Fixed Assets
June 30, 2000
-----------------------------------------
Accumulated Net book
Cost depreciation value
----------- ------------ -----------
Motor vehicles $ 100,234 $ 7,397 $ 92,837
Land lease 905,207 37,717 867,490
Office equipment and furniture 173,070 47,185 125,885
Land improvements 14,781 3,695 11,086
Leasehold improvements 805,691 68,897 736,794
Production equipment 1,193,648 248,730 944,918
----------- --------- -----------
$ 3,192,631 $ 413,621 $ 2,779,010
=========== ========= ===========
The government of China granted a land lease to Kailong for a period of
fifty (50) years, starting June 8, 1998. All fixed assets are located in
China.
Depreciation expense was $252,705 for the period ended June 30, 2000.
6. Bank Loans
RMB 3,000,000, bearing interest at 5.85% per annum
and due on August 4, 2000 $ 362,083
RMB 2,000,000, bearing interest at 5.85% per annum
and due on September 21, 2000 241,388
RMB 7,800,000, bearing interest at 5.85% per annum
and due on January 21, 2001. The loan is secured
by the term deposit. 941,415
RMB 4,000,000, bearing interest at 5.58% per annum
and due on December 12, 2000. The loan is secured
by the term deposit. 482,777
------------
Total $ 2,027,663
============
The weighted average interest rate at June 30, 2000 was 5.79%.
<PAGE>F-31
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
7. Income Taxes
(a) Kailong and Huaxin are subject to income taxes in China on its taxable
income as reported in its statutory accounts at a tax rate in
accordance with the relevant income tax laws applicable to
Sino-foreign equity joint venture enterprises. However, pursuant to
the same income tax laws, Kailong and Huaxin are fully exempt from
income tax for five years starting from their first profit-making year
followed by a 15% corporation tax rate for the next three years.
Allwin is not subject to income taxes.
As at June 30, 2000, the parent company, Kailong and Huaxin have
estimated losses, for tax purposes, totalling approximately
$1,256,000, which may be applied against future taxable income.
Accordingly, there is no tax expense charged to the Statement of
Operations for the period ended June 30, 2000. The potential tax
benefits arising from these losses have not been recorded in the
financial statements. The Company evaluates its valuation allowance
requirements on an annual basis based on projected future operations.
When circumstances change and this causes a change in management's
judgement about the realizability of deferred tax assets, the impact
of the change on the valuation allowance is generally reflected in
current income.
(b) The tax effect of temporary differences that give rise to the
Company's deferred tax asset (liability) are as follows:
June 30, 2000
Tax loss carryforwards $ 427,000
Stock-based compensation 64,000
Less: valuation allowance (491,000)
----------
$ -
==========
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate is as follows:
June 30, 2000
-------------
Federal statutory income tax rate 34%
Change in valuation allowance (34%)
----
Effective income tax rate -
====
<PAGE>F-32
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
8. Stock Options and Warrants
(a) A summary of the status of the Company's stock options as of June 30,
2000 and the changes during the period then ended is presented as
follows:
Weighted Average
Shares Exercise Price
--------- ----------------
Balance outstanding, December 31, 1999 1,520,000 $ 0.58
Granted 142,500 $ 5.40
Exercised (107,000) $ 0.50
--------- ----------
Balance outstanding, June 30, 2000 1,555,500 $ 1.03
========= ==========
Balance exercisable, June 30, 2000 1,303,750 $ 1.04
========= ==========
The weighted average remaining contractual life of the options
outstanding at June 30, 2000 was 3.30 years.
(b) Stock options outstanding as at June 30, 2000:
Exercise Price
Number of Options Per Share Expiry Date
----------------- -------------- -----------
800,000 $0.50 December 16, 2003
50,000 $0.50 June 15, 2001
275,000 $0.50 November 5, 2004
235,000 $0.50 November 9, 2004
60,000 $2.50 November 9, 2004
28,000 $0.50 January 5, 2005
107,500 $7.00 February 22, 2005
(c) Share purchase warrants outstanding as at June 30, 2000:
Exercise Price
Number of Warrants Per Share Expiry Date
------------------ -------------- -----------
600,000 $2.50 October 28, 2000
4,258,000 $2.50 January 1, 2001
<PAGE>F-33
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
8. Stock Options and Warrants (continued)
(d) On December 16, 1998, the Company adopted a Stock Option Plan ("the
1998 Plan") for grant of options to directors of the Company to
purchase up to 1,200,000 common stocks. Options granted under the 1998
Plan will be exercisable from the date of grant for a period of five
years at an exercise price of $0.50 per share. Half of the options
granted vested immediately at the date of grant. The remaining half of
the options granted would vest upon the Company achieving the ability
to produce commercially acceptable and revenue generating products.
On November 5, 1999, the Company granted options to another two
directors of the Company to purchase up to 200,000 common stocks under
the same conditions as the 1998 Plan.
On June 15, 1999, the Company adopted another Stock Option Plan ("the
1999 A Plan") for the grant of options to an employee of the Company
to purchase up to 50,000 common stocks at an exercise price of $0.50
per share. Options granted under the 1999 A Plan will be exercisable
from the date of grant for a period of two years. Half of the
respective options granted vested immediately at the date of grant.
The remaining half of the options granted would vest upon the
Company's share price closes at a price of US $5 or greater for five
(5) consecutive days.
On November 5, 1999 and November 9, 1999, the Company adopted another
Stock Option Plan ("the 1999 B Plan") for the grant of options to
employees of the Company to purchase up to 75,000 common stocks and
235,000 common stocks, respectively. Options granted under the 1999 B
Plan were vested immediately and will be exercisable from the dates of
grant for a period of five years at an exercise price of $0.50 per
share.
On November 9, 1999, the Company adopted another Stock Option Plan
("the 1999 C Plan") for the grant of options to employees of the
Company to purchase up to 60,000 common stocks. Options granted under
the 1999 C Plan were vested immediately and will be exercisable from
the date of grant for a period of five years at an exercise price of
$2.50 per share.
On January 14, 2000, the Company's share price closed at a price of $5
for five consecutive days at $5.313 per share. Therefore, the
remaining 25,000 common stocks granted under the 1999 A Plan became
vested. $120,325 were charged to income in 2000.
On January 5, 2000, the Company adopted another Stock Option Plan
("the 2000 A Plan") for the grant of options to employees of the
Company to purchase up to 35,000 common stocks at an exercise price of
$0.50 per share for a period of five years. Options granted under the
2000 A Plan vest over a period of two-year period at a rate of 20%
upon grant, 40% on the first anniversary of grant, 40% on the second
anniversary of grant. $68,040 were charged to income in 2000.
<PAGE>F-34
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
8. Stock Options and Warrants (continued)
(d) (continued)
On February 22, 2000, the Company adopted another Stock Option Plan
("the 2000 B Plan") for the grant of options to an employee of the
Company to purchase up to 7,500 common stocks at an exercise price of
$7 per share for a period of five years. Half of the options granted
under the 2000 B Plan were vested immediately and the remaining half
will be exercisable when the Company's share price closes at a price
of $9 for five consecutive days. No compensation expenses were charged
to income on the 3,750 common stocks vested immediately as the
exercise price equals to the fair market value at the date of grant.
The compensation expense of the remaining 3,750 common stocks would be
recognized based upon the excess of the fair market value of the stock
on the vesting date over its exercise price of $7 per share.
On February 22, 2000, the Company adopted another Stock Option Plan
("the 2000 C Plan") for the grant of options to an employee of the
Company to purchase up to 100,000 common stocks at an exercise price
of $7 per share for a period of five years. All of the options granted
under the 2000 C Plan were vested immediately. No compensation
expenses were charged to income as the exercise price equals to the
fair market value at the date of grant.
(e) Pro-forma information regarding Loss for the period and Loss per Share
is required under SFAS 123, and has been determined as if the Company
has accounted for its stock options under the fair value method of
SFAS 123. If compensation cost for the stock option plan had been
determined based on the fair value at the grant dates for awards under
the plan, consistent with the alternative method set forth under SFAS
123, the Company's loss for the period, basic and diluted loss per
share would have been increased on a pro-forma basis as indicated
below:
2000
Net loss for the period:
- as reported $ (403,777)
- pro-forma (1,212,819)
------------
Basic and diluted loss per share:
- as reported (0.03)
- pro-forma (0.09)
------------
<PAGE>F-35
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
8. Stock Options and Warrants (continued)
(e) (continued)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for the grants awarded in 1998,1999
and 2000, respectively:
<TABLE>
<CAPTION>
Weighted
Number of Risk Free Expected Average
Year Options Dividend Expected Interest Lives Fair Value
Granted Granted Yields Volatility Rate in Years of Options
------------- ------------ ------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
1998 1,200,000 0% 56% 5.50% 5.00 $1.13
1999 620,000 0% 98% 4.75% 4.76 $1.918
2000 142,500 0% 108% 5.20% 5.00 $6.67
</TABLE>
9. Related Party Transactions
The Company incurred the following expenses to the directors:
June 30, 2000
-------------
Management fees $36,000
=======
10. Commitments
(a) During the period, the Company and the other shareholder of Kailong
entered into an agreement that the Company will pay US$250,000 (paid)
and issue 250,000 common shares to increase the Company's interest in
Kailong to 95%. The Company is, therefore, committed to issue the
250,000 common shares.
(b) The Company has capital expenditure commitments of US $115,000 to
purchase certain bio-technology equipment.
(c) The Company has entered into a drug licence and related technology
transfer agreement in August, 1999 for a total transfer price of RMB
5,500,000 (approximately US$664,000). RMB 1,000,000 (US$120,700) is
payable upon the signing of the agreement. The Company paid a deposit
of RMB 500,000 (US$60,300) in 1999. The Company is committed to pay
the remaining RMB 5,000,000 (approximately US$603,700).
<PAGE>F-36
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(Unaudited)
(Expressed in US Dollars)
10. Commitments (continued)
(d) The Company entered into a drug licence ("rhTPO") and related
technology transfer agreement in August, 1999 for a total transfer
price of RMB 4,500,000 (approximately US$543,100). During the period,
the Company paid a deposit of RMB 4,000,000 (US$482,800). The Company
is committed to pay the remaining RMB 500,000 (approximately
US$60,300) according to the agreement.
(e) The Company has entered into an operating lease agreement with respect
to Huaxin's production plant in Nanjing, China for an amount of RMB
3,000,000 (approximately US$362,100) per annum until June 11, 2009.
Minimum payments required for the next five years under the agreement
are as follows:
2001 RMB 3,000,000 US$ 362,100
2002 3,000,000 362,100
2003 3,000,000 362,100
2004 3,000,000 362,100
2005 3,000,000 362,100
2006 - 2009 10,375,000 1,252,200
-----------------------------------------------------------
Total RMB 25,375,000 US$ 3,062,700
======================================= ===================
11. Non-cash Financing Activities
During the period, 250,000 common shares were allotted for the acquisition
of additional 20% interest of Kailong (see Note 10a).
12. Comparative Figures
Certain 1999 comparative figures have been reclassified to conform with the
financial statement presentation adopted for 2000.
<PAGE>F-37
MOORE STEPHENS ELLIS FOSTER LTD.
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, BC Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
E-Mail: [email protected]
-----------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD
We have audited the balance sheets of Nanjing Huaxin Bio-pharmaceuticals Co.
Ltd. ("the Company") as at June 11, 1999, December 31, 1998 and 1997, and the
related statements of stockholders' equity, operations and cash flows for the
years ended December 31, 1998 and 1997 and the period from January 1, 1999 to
June 11, 1999. 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 audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at June 11, 1999, December
31, 1998 and 1997 and the results of its operations and cash flows for the years
ended December 31, 1998 and 1997 and the period from January 1, 1999 to June 11,
1999 in conformity with generally accepted accounting principles in the United
States.
Vancouver, Canada /s/ "MOORE STEPHENS ELLIS FOSTER LTD."
February 29, 2000 Chartered Accountants
--------------------------------------------------------------------------------
MS An independently owned and operated member of Moore Stephens North America,
Inc. Members in principal cities throughout North America.
Moore Stephens North America, Inc. is a member of Moore Stephens International
Limited, members in principal cities throughout the world.
<PAGE>F-38
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Balance Sheet
(Expressed in US Dollars)
<TABLE>
<S> <C> <C> <C>
June 11 December 31 December 31
1999 1999 1998
-------------- ------------- -------------
ASSETS
Current
Cash and cash equivalents $ 82,621 $ 158,257 $ 102,318
Accounts receivable 535,182 355,451 206,217
Inventories 193,478 162,937 69,852
-------------- ------------- -------------
811,281 676,645 378,387
Fixed assets 1,349,501 1,419,483 1,570,998
-------------- ------------- -------------
Total assets $ 2,160,782 $ 2,096,128 $ 1,949,385
============== ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loan $ - $ - $ 120,482
Accounts payable and accrued liabilities 63,939 17,736 19,246
Due to parent company,
non-interest bearing 633,289 840,204 553,825
-------------- ------------- -------------
Total liabilities 697,228 857,940 693,553
-------------- ------------- -------------
Commitments
Stockholders' Equity
Registered capital 602,410 602,410 602,410
Additional paid in capital 1,361,812 1,287,113 1,139,467
Accumulated deficit (500,668) (651,335) (486,045)
============== ============== =============
Total stockholders' equity 1,463,554 1,238,188 1,255,832
============== ============== =============
Total liabilities and stockholders' equity 2,160,782 $ 2,096,128 $ 1,949,385
============== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-39
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Statement of Stockholders' Equity
Period from January 1, 1997 to June 11, 1999
(Expressed in US Dollars)
<TABLE>
<S> <C> <C> <C> <C>
Additional Total
Registered Paid-up Accumulated Stockholders'
Capital Capital Deficit Equity
------------- ------------- ------------- --------------
Balance, December 31, 1996 $ 602,410 $ -- $ -- $ 602,410
Net (loss) for the year -- -- (486,045) (486,045)
Fixed assets contributed by parent company -- 1,007,231 -- 1,007,231
Non-cash interest expense charged by parent company -- 33,200 -- 33,200
Non-cash services provided by parent company -- 99,036 -- 99,036
------------- ------------- ------------- --------------
Balance, December 31, 1997 602,410 1,139,467 (486,045) 1,255,832
Net (loss) for the year -- -- (165,290) (165,290)
Non-cash interest expense charged by parent company -- 46,200 -- 46,200
Non-cash services provided by parent company -- 101,446 -- 101,446
------------- ------------- ------------- --------------
Balance, December 31, 1998 602,410 1,287,113 (651,335) 1,238,188
Net (loss) for the period -- -- 150,667 150,667
Non-cash interest expense charged by parent company -- 30,000 -- 30,000
Non-cash services provided by parent company -- 44,699 -- 44,699
------------- ------------- ------------- --------------
Balance, June 11, 1999 $ 602,410 $ 1,361,812 $ (500,668) $ 1,463,554
============= ============= ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-40
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Statement of Operations
(Expressed in US Dollars)
-------------------------------------------------------------------------------
January 1 January 1 January 1
1999 to 1998 to 1997 to
June 11 December 31 December 31
1999 1998 1997
------------- -------------- -------------
Sales $ 732,659 $ 1,000,790 $ 228,067
Cost of sales 145,556 470,023 138,230
------------- -------------- -------------
Gross profit 587,103 530,767 89,837
------------- -------------- -------------
Expenses
Research and development 23,616 210,101 32,516
Selling 279,648 282,399 167,679
General and administrative 133,172 203,557 375,687
------------- -------------- -------------
436,436 696,057 575,882
------------- -------------- -------------
Net income (loss) for the period $ 150,667 $ (165,290) $ (486,045)
============= ============== =============
The accompanying notes are an integral part of these financial statements.
<PAGE>F-41
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Statement of Cash Flows
(Expressed in US Dollars)
------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
January 1 January 1 January 1
1999 to 1998 to 1997 to
June 11 December 31 December 31
1999 1998 1997
----------- ------------ ------------
Cash flows from (used in)
operating activities
Net income (loss) for the period $ 150,667 (165,290) $(486,045)
Adjustments to reconcile net loss to
net cash used in operating activities:
- depreciation 74,652 176,889 46,097
- non-cash interest expense charged
by parent company 30,000 46,200 33,200
- non-cash services provided by
parent company 44,699 101,446 99,036
----------- ------------ ------------
300,018 159,245 (307,712)
Changes in assets and liabilities:
- accounts receivable (179,731) (149,234) (206,217)
- inventories (30,541) (93,085) (69,852)
- accounts payable and accrued liabilities 46,203 (1,510) 19,246
----------- ------------ ------------
135,949 (84,584) (564,535)
----------- ------------ ------------
Cash used in investing activities
Purchase of fixed assets (4,670) (25,374) (609,864)
----------- ------------ ------------
Cash flows from (used in)
financing activities
Advance from (repayment to) parent company (206,915) 286,379 553,825
Proceeds (repayment) of short-term loan -- (120,482) 120,482
----------- ------------ ------------
(206,915) 165,897 674,307
----------- ------------ ------------
Increase (decrease) in cash and
cash equivalents (75,636) 55,939 (500,092)
Cash and cash equivalents,
beginning of period 158,257 102,318 602,410
----------- ------------ ------------
Cash and cash equivalents,
end of period $ 82,621 158,257 $ 102,318
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-42
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Notes to Financial Statements
June 11, 1999, December 31, 1998 and 1997
------------------------------------------------------------------------------
(Expressed in US Dollars)
1. Nature of Business
The Company was incorporated on January 23, 1996 under the laws of China
and is in the business of research and development, production and sales of
pharmaceutical products in China.
2. Significant Accounting Policies
(a) Principles of Accounting
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
(b) Currency of Presentation
These financial statements, which were originally presented in
Chinese RMB, the currency of the Company's primary economic
environment, are being translated into U.S. Dollars at the
exchange rate of US$1=RMB8.3 for the convenience of the readers.
(c) Capital Assets
Fixed assets are recorded at cost less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the
assets on a straight-line basis at the following annual rates:
Office equipment and furniture 20%
Leasehold improvements Terms of the lease (10 years)
Production equipment 10%
(d) Inventories
Inventories are stated at the lower of cost and replacement cost
with respect to raw materials and the lower of cost and net
realizable value with respect to finished goods. Cost includes
direct material, direct labour and overheads. Cost is calculated
using the first-in, first-out method. Net realizable value
represents the anticipated selling price less all further costs
for completion and distribution.
(e) Accounting Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
<PAGE>F-43
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Notes to Financial Statements
June 11, 1999, December 31, 1998 and 1997
------------------------------------------------------------------------------
(Expressed in US Dollars)
2. Significant Accounting Policies (continued)
(f) Financial Instruments and Concentration of Risks
The carrying amounts of cash and cash equivalents, accounts
receivable, short-term loan, accounts payable and accrued liabilities
and amount due to the parent company approximate their respective fair
value due to the short-term nature of these financial instruments.
The Company is not exposed to significant interest and foreign
currency risk arising from these financial instruments. The Company
has minimal concentration of credit risks and does not require
collateral to support these financial instruments.
(g) Cash and Cash Equivalents
Cash equivalents usually consist of highly liquid investments with
maturities of three months or less. As at June 11, 1999, December 31,
1998 and 1997, cash and cash equivalents consist of cash only.
(h) Research and Development
The Company expenses research and development costs as incurred.
(i) Income Taxes
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", which requires the
Company to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns using the
liability method. Under this method, deferred tax liabilities and
assets are determined based on the temporary differences between the
financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse.
(j) Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. The
Company is disclosing this information on its Statement of
Stockholders' Equity. Comprehensive income comprises equity except
those resulting from investments by owners and distributions to
owners. SFAS NO. 130 did not change the current accounting treatments
for components of comprehensive income.
<PAGE>F-44
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Notes to Financial Statements
June 11, 1999, December 31, 1998 and 1997
------------------------------------------------------------------------------
(Expressed in US Dollars)
Fixed Assets
1999
-------------------------------------
Accumulated Net book
Cost depreciation value
---------- --------------- ----------
Office equipment and furniture $ 78,581 $ 22,199 $ 56,382
Production equipment 848,818 155,483 693,335
Leasehold improvements 719,741 119,957 599,784
----------- --------------- ----------
$1,647,140 $ 297,639 $1,349,501
=========== =============== ==========
1998
--------------------------------------
Accumulated Net book
Cost depreciation value
----------- --------------- ----------
Office equipment and furniture $ 77,142 $ 15,906 $ 61,236
Production equipment 845,587 117,113 728,474
Leasehold improvements 719,741 89,968 629,773
----------- --------------- ----------
$1,642,470 $ 222,987 $1,419,483
=========== =============== ==========
1997
--------------------------------------
Accumulated Net book
Cost depreciation value
----------- --------------- ----------
Office equipment and furniture $ 61,219 $ 2,485 $ 58,734
Production equipment 836,135 25,619 810,516
Leasehold improvements 719,741 17,993 701,748
----------- --------------- ----------
$1,617,095 $ 46,097 $1,570,998
=========== =============== ==========
Depreciation expense was $74,652, $176,889 and $46,097 for the period ended
June 11, 1999, and years ended December 31, 1998 and 1997, respectively.
Inventories
1999 1998 1997
--------- --------- ----------
Raw materials $ 54,767 $ 30,581 $ 34,545
Work-in-progress 65,217 29,549 31,779
Finished goods 73,494 102,807 3,528
--------- --------- ----------
$193,478 $162,937 $ 69,852
========= ========= ==========
<PAGE>F-45
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Notes to Financial Statements
June 11, 1999, December 31, 1998 and 1997
------------------------------------------------------------------------------
(Expressed in US Dollars)
5. Bank Loan
The loan bears interest at 0.79% per month and was due on November 17,
1998.
6. Income Taxes
The Company is subject to income taxes in China on its taxable income as
reported in its statutory accounts at a tax rate in accordance with the
relevant income tax laws applicable to bio-technology enterprises. The
Company is subject to a corporation tax rate of 33% on its taxable income.
As at June 11, 1999, the Company have estimated losses, for tax purposes,
totalling approximately $501,000, which may be applied against future
taxable income. Accordingly, there is no tax expense charged to the
Statement of Operations for the years ended December 31, 1997 and 1998 and
for the period ended June 11, 1999. The potential tax benefits arising from
these losses have not been recorded in the financial statements. The
Company evaluates its valuation allowance requirements on an annual basis
based on projected future operations. When circumstances change and this
causes a change in management's judgement about the realizability of
deferred tax assets, the impact of the change on the valuation allowance is
generally reflected in current income.
The tax effect of temporary differences that give rise to the Company's
deferred tax asset (liability) are as follows:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---------- ----------- -----------
Tax loss carryforwards $ 215,000 $ 215,000 $ 160,000
Set off against net income for the period (50,000) -- --
Less: valuation allowance (165,000) (215,000) (160,000)
---------- ----------- -----------
$ - $ - $ -
========== =========== ===========
</TABLE>
<PAGE>F-46
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Notes to Financial Statements
June 11, 1999, December 31, 1998 and 1997
------------------------------------------------------------------------------
(Expressed in US Dollars)
7. Related Party Transactions
(a) The following services or goods were provided by the parent company:
1999 1998 1997
---------- ---------- ----------
Equipment leasing $ 3,989 $ 15,957 $ 3,989
Interest expense 30,000 46,200 33,200
Quality control expenses 7,803 18,728 4,682
Rent 50,201 120,482 30,120
Repairs and maintenance 7,530 18,072 4,518
Research and development 18,180 53,868 8,591
Staff benefits 42,892 97,832 95,422
Transportation 1,807 3,614 3,614
---------- ---------- ----------
Total expenses $ 162,402 $ 374,753 $ 184,136
========== ========== ==========
The above expenses are included in the statement of operations as follows:
1999 1998 1997
---------- ---------- -----------
Cost of sales $ 80,547 $ 191,524 $ 72,718
Research and development 22,169 69,825 12,580
Selling 18,014 41,089 40,077
General and administrative 41,672 72,315 58,761
---------- ---------- -----------
$ 162,402 $ 374,753 $ 184,136
========== ========== ===========
These expenses were provided at cost or, if they were shared expenses,
allocation was based on estimated proportional usage. Interest expense
was charged at the annual prime rate on amount owed. Management
believes that the method of provision is reasonable.
(b) In 1997, the Company received $1,609,641 of fixed assets from its
parent company. The Company paid cash of $602,410 to purchase these
fixed assets and the remaining $1,007,231 was credited as additional
paid-up capital of the Company. These fixed assets were transferred at
net book value and are included in fixed assets. Management believes
that the transfer value is reasonable.
<PAGE>F-47
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Notes to Financial Statements
June 11, 1999, December 31, 1998 and 1997
------------------------------------------------------------------------------
(Expressed in US Dollars)
8. Non-cash Investing and Financing Activities
(a) In 1997, the parent company contributed $1,007,231 in fixed assets to
the Company. This amount is included in the $1,609,642 fixed assets
described in Note 7(b).
(b) The parent company provided non-cash services in transportation and
staff housing benefits totalling $44,699, $101,446 and $99,036 for the
period ended June 11, 1999, and the years ended December 31, 1998 and
1997, respectively, to the Company. These expenses were charged to
operations and disclosed in Note 7(a).
(c) Interest expenses of $33,200 in fiscal 1997 based on a prime interest
rate of 6% per annum, $46,200 in fiscal 1998 based on a prime interest
rate of 5.5% per annum and $30,000 in fiscal 1999 on a prime interest
rate of 4.75% per annum were recorded by the Company on amounts owed
to its parent company. These non-cash expenses were charged to
operations and disclosed in Note 7(a).
9. Subsequent Event
Subsequent to June 11, 1999, the Company disposed of its cash, inventories,
fixed assets and drug distribution licence and manufacturing permit for
total proceeds of US$4,000,000.
The transaction resulted in a gain of approximately $2.7 million.
<PAGE>
DRAGON PHARMACEUTICALS INC.
& SUBSIDIARIES
Unaudited Pro-forma Consolidated Statement of Operations
(Expressed in US Dollars)
December 31, 1999
Unaudited Pro-forma Consolidated Statement of Operations
Notes to Unaudited Pro-forma Consolidated
Statement of Operations
<PAGE>F-48
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Unaudited Pro-forma Consolidated Statement of Operations
Year Ended December 31, 1999
(Expressed in US Dollars)
<TABLE>
<S> <C> <C> <C> <C> <C>
Huaxin
Dragon January 1
*Year Ended 1999 to
December 31 June 11 Pro-forma Pro-forma
1999 1999 Combined Adjustments Combined
-------------- ------------ ------------ -------------- -------------
Sales $ 989,539 $ 732,659 $ 1,722,198 $ -- $ 1,722,198
Cost of sales 204,473 145,556 350,029 56,197 (a) 406,226
-------------- ------------ ------------ -------------- -------------
Gross profit 785,066 587,103 1,372,169 (56,197) 1,315,972
Interest income 19,397 -- 19,397 -- 19,397
Research and development expenses -- (23,616) (23,616) -- (23,616)
Selling expenses (619,676) (279,648) (899,324) -- (899,324)
Administrative expenses
- stock-based compensation (1,876,000) -- (1,876,000) -- (1,876,000)
- other administrative expenses (1,154,666) (133,172) (1,287,838) (113,770)(a) (1,401,608)
-------------- ------------ ------------ -------------- -------------
Income (Loss) before minority interest (2,845,879) 150,667 (2,695,212) (169,967) (2,865,179)
Minority interest 54,846 -- 54,846 (4,825)(b) 50,021
-------------- ------------ ------------ -------------- -------------
Net income (loss) for the period $(2,791,033) $ 150,667 $(2,640,366) $ (174,792) $(2,815,158)
============== ============ ============ ============== =============
(Loss) per share
Basic and diluted $ (0.27) $ (0.28)
============== ============ ============ ============== =============
Weighted average common
shares outstanding
Basic and diluted 10,177,452 10,177,452
============== ============ ============ ============== =============
</TABLE>
* Included Huaxin's operating results from June 11, 1999 onwards
The accompanying notes are an integral part of this unaudited pro-forma
consolidated statement of operations
<PAGE>F-49
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to the Unaudited Pro-forma Consolidated Statement of Operations
December 31, 1999
(Expressed in US Dollars)
-------------------------------------------------------------------------------
1. Basis of Presentation
The unaudited pro-forma consolidated statement of operations reflects
adjustments to Dragon Pharmaceuticals Inc. and Subsidiaries' ("the
Company") historical consolidated statement of operations for the year
ended December 31, 1999, to give effect to the acquisition of Nanjing
Huaxin Bio-pharmaceutical Co. Ltd. ("Huaxin") which was completed on June
11, 1999, as if it had occurred on January 1, 1999.
The unaudited pro-forma consolidated statement of operations has been
prepared based on the purchase method of accounting. It does not purport to
be indicative of the results which would actually have been obtained if the
combination had been in effect on the date indicated or which may be
obtained in the future.
The pro-forma calculation presented here are shown for comparative purposes
only, and it should be noted that the Company's historical financial
statements would reflect the effects of the acquisition only from the date
(June 11, 1999) such acquisition occurred.
The unaudited pro-forma consolidated statement of operations has been
prepared by management based upon the historical financial statements
included elsewhere herein and as filed on Form 10-K. The unaudited
pro-forma consolidated statement of operations should be read in
conjunction with the Company's historical consolidated statement of
operations for the year ended December 31, 1999 and related notes.
2. Pro-forma Adjustments
(a) These pro-forma adjustments relate to the increase of amortization of
fixed assets, licence and permits based on the acquisition costs of
these assets.
(b) The pro-forma adjustment related to the allocation of net income for
the period from January 1, 1999 to June 11, 1999 to minority interest.
<PAGE>II-1
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Dragon has adopted Section 607.0850 of the 1999 Florida Statutes, Business
Organization of the State of Florida in its bylaws. Section 607.0850 states:
(1) A corporation shall have power to indemnify any person who was or is a
party to any proceeding (other than an action by, or in the right of, the
corporation), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise against
liability incurred in connection with such proceeding, including any appeal
thereof, if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The termination of any proceeding by
judgment, order, settlement, or conviction or upon a plea of nolo contendere or
its equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation or, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
(2) A corporation shall have the power to indemnify any person, who was or
is a party to any proceeding by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses and amounts paid in settlement not exceeding, in the judgment
of the board of directors, the estimated expense of litigating the proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall be made under
this subsection in respect of any claim, issue, or matter as to which such
person shall have been adjudged to be to be liable unless, and only to the
extent that, the court in which such proceeding was brought, or any other court
of competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, or persons controlling Dragon
pursuant to the foregoing provisions, we have been informed that, in the opinion
of the SEC, that type of indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by us in
connection with the issuance and distribution of the securities being registered
hereunder. No expenses shall be borne by the Selling Stockholders. All of the
amounts shown are estimates, except for the SEC Registration Fees.
SEC registration fee $ 21,922
Printing and engraving expenses $ 3,000
Accounting fees and expenses $ 5,000
<PAGE>II-2
Legal fees and expenses $ 40,000
Transfer agent and registrar fees $ 2,000
Fees and expenses for qualification
under state securities laws $ 5,000
Miscellaneous $ 5,000
Total $ 81,922
Item 26. Recent Sales of Unregistered Securities
On August 17, 1998, Dragon Pharmaceutical (formerly First Geneva
Investments, Inc.) issued 7,000,000 shares of common stock and warrants to
purchase 1,000,000 shares of common stock in exchange for all the outstanding
shares of Allwin Newtech Ltd., a British Virgin Islands corporation, from 20
shareholders of Allwin Newtech. The shares were issued to investors residing
outside of the United States. The issuance of the Dragon Pharmaceutical shares
of common stock were deemed exempt pursuant to Regulation S. No commissions were
paid. All 1,000,000 warrants were exercised during the first six months of 2000.
On September 28, 1998, Dragon Pharmaceutical sold 2,000,000 shares of
common stock to 11 investors. The Company had reasonable grounds to believe that
each purchaser was capable of evaluating the merits and risks of his investment
and bearing the economic risks of his investment. The Company had not raised,
over the prior twelve months, more than one million dollars inclusive of the
proceeds from this offering. Accordingly, Dragon Pharmaceuticals relied on Rule
504 of Regulation D as an exemption from registration. No commissions were paid.
On April 19, 1999, Dragon Pharmaceutical entered into loan agreements with
four lenders. A part of the loan transaction, Dragon Pharmaceutical issued
135,000 share of common stock. The shares were issued to lenders residing
outside the United States. The issuance of these shares were deemed exempt from
registration pursuant to Regulation S. No commissions were paid.
On October 14, 1999, Dragon Pharmaceutical sold, in the aggregate, 600,000
shares of Common Stock at $2.50 per share to two investors located in Hong Kong.
Further, as part of the securities purchase agreement, investors received
warrants to purchase 600,000 shares of common stock in the aggregate at $2.50
per share. Each warrant is exercisable for a period of one year. The issuance of
these shares of common stock and warrants were to investors residing outside the
United States and were exempt pursuant to Regulation S. The Company paid one
individual who resides outside the United States a finder's fee in the amount of
$105,000. On October 13 and 17, these two investors exercised their warrants to
purchase 600,000 share of common stock. The exercise of the warrant was exempt
from registration pursuant to Regulation S.
On December 31, 1999, Dragon completed an offering of 4,218,000 Units at a
price of $2.50 per Unit. Each Unit consisted of one share of Common Stock and a
warrant to purchase an additional share of Common Stock at $2.50 for a period of
one year. This offering raised gross proceeds of $10,545,000. The issuance of
these Units were to investors residing outside the United States and were exempt
from registration pursuant to Regulation S. The Company paid 11 entities or
individuals who reside outside of the United States finder's fees in the
aggregate amount of $703,150. One of the individuals who received a finder's fee
in the amount of $175,000 was Mr. Philip Yuen, a director of the Company.
On December 31, 1999, Dragon issued 40,000 Units to one accredited investor
at a price of $2.50 per Unit for gross proceeds to Dragon of $100,000. Each Unit
consisted of one share of Common Stock and a warrant to purchase an additional
share of Common Stock at an exercise price of $2.50 per share for a period of
one year. The transaction was private in nature and the Company had reasonable
grounds to believe that the Purchasers were accredited investors, capable of
evaluating the merits and risks of his investment and bearing the economic
<PAGE>II-3
risks of his investment and acquired the units for investment purposes.
Accordingly, the issuance of these Units was deemed exempt from registration
pursuant to Rule 506 and Section 4(6) of the Securities Act. No commission was
paid.
Since August 1998, Dragon has, from time-to-time, issued stock options to
various of its officers and employees as compensation. The following is a
breakdown of these stock option grants.
During 1998, Dragon issued options to purchase 1,200,000 shares of its
common stock at an exercise price of $.50 per share. These options were
granted to seven directors whom Dragon had reasonable grounds to believe
were capable of evaluating the merits and risks of the Company, had access
to all relevant information about Dragon, had acquired the options for
their own account and were located offshore. Accordingly, the issuances
were deemed to be exempt from registration pursuant to Regulation S or
Section 4(2) of the Securities Act. No commissions were paid.
During 1999 Dragon issued options to purchase 620,000 shares of its
common stock at exercise prices ranging from $0.50 to $2.50 per share.
During 1999, 300,000 options were cancelled. The granted options were
issued to 24 individuals including two directors and one financial and 21
technical consultants whom Dragon had reasonable grounds to believe were
capable of evaluating the merits and risks of the Company, had access to
all relevant information about Dragon, had acquired the options for their
own account and were located offshore. Accordingly, the issuances were
deemed to be exempt from registration pursuant to Regulation S or Section
4(2) of the Securities Act. No commissions were paid.
During the first six months of 2000, Dragon issued options to purchase
142,500 shares of its common stock at an exercise price ranging from $0.50
to $7.00 per share. The options were granted to six persons consisting of
one director, one employee and four technical consultants whom Dragon had
reasonable grounds to believe were capable of evaluating the merits and
risks of the Company, had access to all relevant information about Dragon,
had acquired the options for their own account, and were located offshore.
Accordingly, the issuances were deemed to be exempt from registration
pursuant to Regulation S or Section 4(2) of the Securities Act. In
addition, during this time period, 107,000 options were exercised. No
commission were paid.
Item 27. Exhibits
The following Exhibits are filed with this Prospectus:
Exhibit Number Name
2.1* Share Exchange Agreement with First Geneva Investments
3.1* Certificate of Incorporation and Amendments
a. Certificate of Incorporation
b. Certificate of Amendment, dated June 19, 1997
c. Certificate of Amendment of Articles of Incorporation,
dated September 21, 1998
3.2* Bylaws of First Geneva Investments, Inc., as amended
5*** Opinion of Bartel Eng Linn & Schroder regarding the legality
of the securities being registered
10.1* Sino-Foreign Co-operative Company Contract
<PAGE>II-4
10.2* Sino-Foreign Joint Venture Contract
10.3** Consulting Agreement with E. Pernet Portfolio Management
dated June 15, 1999
10.4** Amendment to Sino-Foreign Co-operative Company Contract
10.5*** Contract to lease 25 acres of land in Yanjiao, China
10.6*** Sample Employment Agreement for technicians/employees
10.7 Marketing and License Agreement Between Allwin Biotrade and
Fargin S.A.
10.8 Marketing and License Agreement Between Allwin Biotrade and
Duopharma (Malaysia) SDN. BHD
10.9 Marketing and License Agreement Between Allwin Biotrade and
Yoo & Yoo Biotech Co. Ltd.
10.10 Acquisition Agreement Among Dragon Pharmaceuticals Inc.,
Alphatech Bioengineering Limited, Longbin Liu and Philip
Yuen
16.1* Letter Regarding Changes in Certifying Account.
23.1*** Consent of Bartel Eng Linn & Schroder contained in Exhibit 5
23.2 Consents of Moore Stephens Ellis Foster Ltd., Chartered
Accountants
----------------------
* Previously filed with Dragon's initial registration statement on Form
10-SB, filed with the SEC on November 4, 1999.
** Previously filed with Dragon's initial registration statement on Form SB-2,
filed with the SEC on May 15, 2000.
*** Previously filed with Dragon's Amendment #1 to registration statement on
Form SB-2 filed with the SEC on August 3, 2000.
Item 28. Undertakings
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include: (a) any
prospectus required by Section 10(a)(3) of the Securities Act; (b) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information in the registration statement; and (c) any
additional or changed material information with respect to the plan of
distribution not previously disclosed in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act, each of the post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of the securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Dragon pursuant to the foregoing provisions, or otherwise, Dragon has been
advised that in the opinion of the Commission that type of indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against said
<PAGE>II-5
liabilities (other than the payment by Dragon of expenses incurred or paid by a
director, officer or controlling person of Dragon in the successful defense of
any action, suit or proceeding) is asserted by the director, officer or
controlling person in connection with the securities being registered, Dragon
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of the issue.
(5) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
<PAGE>II-6
SIGNATURE
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this pre-effective
amendment no. 3 to registration statement to be signed on its behalf by the
undersigned, in the City of Vancouver, Province of British Columbia, on October
16, 2000.
DRAGON PHARMACEUTICAL INC.
a Florida Corporation
/S/ LONGBIN LIU
LONGBIN LIU, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Date
/S/LONGBIN LIU October 16, 2000
LONGBIN LIU
President, Director, Chief Executive
Officer
/S/KEN Z. CAI October 16, 2000
KEN Z. CAI
Director, Chief Financial Officer
and Principal Financial Officer
/S/GREG HALL October 16, 2000
GREG HALL, Director
/S/ALEXANDER WICK October 11, 2000
ALEXANDER WICK, Director
/S/PHILIP YUEN PAK YIU October 16, 2000
PHILIP YUEN PAK YIU, Director
/S/DR. YIU KWONG SUN October 16, 2000
DR. YIU KWONG SUN, Director
