As filed with the Commission on May 15, 2000 File No. ___________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
DRAGON PHARMACEUTICAL INC.
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(Name of small business issuer in its charter)
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Florida 2384 65-0142474
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(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 IX8
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(Address and telephone number of principal executive offices)
543 Granville Street, Suite 1200, Vancouver, British Columbia V6C IX8
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(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 IX8
604-669-8817
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(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>ii
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
- --------------------------------------- -------------- ---------------- ---------------- ------------
Common Stock to be offered by Selling
Stockholders 7,279,000 $6.35(1) $ 46,221 $12,202.52
Common Stock for resale by holders of
Warrants assuming the exercise of such
Warrants 5,798,000 $6.35(2) $36,817,300 $ 9,719.77
Total 13,077,000 $ 82,721 $21,922.29
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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 reported on the NASD 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 NASD OTC Bulletin Board.
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
May 15, 2000
DRAGON PHARMACEUTICAL INC.
COMMON STOCK
--------------------------
Certain stockholders of Dragon Pharmaceutical Inc. are hereby offering up
to 13,077,000 shares of Common Stock in connection with (i) the resale of shares
of Common Stock held by the Selling Stockholders, and (ii) the resale of shares
of Common Stock held by the Selling Stockholders assuming the exercise of
certain outstanding Warrants.
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.
Dragon's Common Stock is listed in the NASD "OTC Bulletin Board" under the
symbol "DRUG." On March 31, 2000, the bid quotation for one share of Common
Stock was $7.00. We do not have any securities that are currently traded on any
other exchange or quotation system. The Selling Stockholders will attempt to
sell the shares being offered in this Prospectus at the best market price
obtainable.
All dollar amounts refer to US dollars unless otherwise indicated.
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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.
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The date of this Prospectus is May 15, 2000.
<PAGE>2
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................3
RISK FACTORS..................................................................4
THE OFFERING..................................................................8
USE OF PROCEEDS...............................................................8
PRICE RANGE OF COMMON STOCK...................................................9
DILUTION......................................................................9
DIVIDEND POLICY..............................................................10
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATIONS...................................................10
General .....................................................................11
Results of Operations........................................................11
Liquidity and Capital Resources..............................................12
BUSINESS.....................................................................13
MANAGEMENT...................................................................19
OPTIONS GRANTED IN THE YEAR ENDED DECEMBER 31, 1999..........................23
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.........................................26
PLAN OF DISTRIBUTION.........................................................28
DESCRIPTION OF CAPITAL STOCK.................................................34
LEGAL PROCEEDINGS............................................................35
LEGAL MATTERS................................................................35
EXPERTS .....................................................................35
AVAILABLE INFORMATION........................................................35
FINANCIAL STATEMENTS AND SCHEDULES...........................................35
<PAGE>3
PROSPECTUS SUMMARY
This summary is intended to highlight information contained elsewhere in
this Prospectus. Consequently, this summary does not contain all of the
information that you should consider before investing in our Common Stock. You
should carefully read the entire Prospectus, including the documents and
information incorporated by reference into it. This Prospectus contains
forward-looking statements that are subject to risks and uncertainties,
including those risk factors discussed elsewhere in this Prospectus.
Our Business
Dragon Pharmaceutical Inc. ("Dragon" or "we" or the "Company"), a
Florida corporation, is a development stage pharmaceutical and biotechnological
company whose business plan is to develop, manufacture and market pharmaceutical
products in China. Dragon's proprietary technology will allow it to produce
drugs such as Erythropietin ("EPO") in an efficient and cost effective manner.
Dragon's strategy is to use its biotechnological expertise to produce and market
pharmaceutical products primarily in China through the acquisition of a
manufacturing license and access to a production facility in China. To this end,
Dragon acquired a 75% interest in Nanjing Huaxin Biotech Ltd., a Chinese
pharmaceutical company and the largest domestic producer of Erythropoietin
(EPO). Since the acquisition, Huaxin's facilities have been upgraded to increase
the production yield and decrease the cost of production for EPO.
We initially plan to produce and market in China, the drug Erythropietin
which is a glycoprotein that stimulates and regulates the rate of formation of
red blood cells. EPO is used to offset the effects of kidney disease,
chemotherapy and radiation therapy for treating cancer.
We have achieved enhanced efficiencies in the production of EPO by
utilizing a proprietary high-yield mammalian cell line and "vectoring process"
which has been developed by Dragon.
We will market EPO in China through Nanjing Huaxin whose marketing team
has increased significantly since the acquisition of Nanjing Huaxin by Dragon.
Dragon is a Florida corporation with its business offices located at 543
Granville Street, Suite 1200, Vancouver, British Columbia V6C IX8. Its telephone
number is (604) 669-8817. Dragon also has offices located at 11th Floor, Suite
18-19, China World Tower 2, 1 Jianguomenwai Avenue, Beijing, 100004. Dragon has
one wholly-owned subsidiary, Allwin Newtech Ltd., a corporation formed under the
laws of British Virgin Islands which maintains its business office at East Asia
Chambers, P.O. Box 901, Road Town, Tortola, British Virgin Islands.
Summary Of Risk Factors
An investment in Dragon's Common Stock involves a number of risks which
should be carefully considered and evaluated. These risks would include:
o The fact that Dragon is a development stage company and has only a
limited history of operating revenues; that the operating revenues are
dependent on the sale of one drug; and to date the revenues have not
been sufficient to cover expenses;
o The technology involved in developing Dragon's new method for
commercially producing EPO is relatively new;
<PAGE>4
o The regulatory challenges of investing and doing business in China.
For a more complete discussion of risk factors relevant to an investment
in our Common Stock see the "Risk Factors" section.
The Offering
The Selling Stockholders are registering for resale 13,077,000 shares of
Dragon's Common Stock which they currently own or could acquire through the
exercise of outstanding warrants.
Summary Consolidated Financial Data
The summarized consolidated financial data presented below should be
read in conjunction with the more detailed financial statements of Dragon and
notes thereto which are included elsewhere in this Prospectus along with the
section entitled "Management's Discussion and Analysis and Plan of Operations."
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For the period from
February 10, 1998
For the year ended For the period ended (Inception) to
December 31, 1999 December 31, 1998 December 31, 1999
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Revenue $ 1,008,936 $ 9,737 $ 1,018,673
Loss from operations (2,701,033) (471,717) (3,262,750)
Loss per Share (0.27) (0.06) N/A
Working Capital 8,405,788 1,737,180 8,405,788
(Deficit)
Total Assets 16,740,037 2,480,813 16,740,037
Stockholders' Equity 12,488,768 1,737,180 12,488,768
(Deficit)
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RISK FACTORS
An investment in Dragon's Common Stock involves a number of very
significant risks. You should carefully consider the following risks and
uncertainties in evaluating Dragon and its business before purchasing shares.
Dragon is a Development Stage Company with Limited Operating History Which Makes
Future Performance Very Difficult to Predict.
We are a development stage company which is primarily involved in the
development, manufacture and marketing of the drug EPO. As a development stage
company, we do not have a historical record of sales and revenues nor an
established business track record.
Our ability to successfully produce and sell EPO in China will depend on
our ability to, among other things:
<PAGE>5
o Continue to improve our technology to produce EPO in reliable
quantities and at lower costs;
o Develop and expand the market for EPO in China; and
o Obtain additional approvals and/or cooperation of the government of
the People's Republic of China ("PRC") as necessary in the future to
produce and market EPO in China.
Given our limited operating history and revenues, there can be no
assurance that we will be able to achieve any of these goals and develop a
sufficiently large customer base to be profitable.
Lack of Profits and Negative Cash Flow.
For the years ended December 31, 1999 and 1998, Dragon incurred
comprehensive net losses of $2,791,033 and $471,717, respectively. As a result
of these losses and negative cash flows from operations, Dragon's ability to
continue operations will be dependent upon the availability of capital from
outside sources unless and until it achieves profitability.
Dragon Will Need Substantial Capital in the Future to Fund its Business Growth.
Due to Limited Revenues, this Capital Will Have to Be Obtained from Outside
Sources. The Sale of Additional Equity to Raise Additional Funds Would Have a
Dilutive Effect on Stockholder's Ownership.
Given the risks in undertakings of this nature, there can be no
assurance that actual cash requirements will not exceed our estimates. In
particular, additional capital may be required in the event that:
o We incur unexpected technical or regulatory difficulties in expanding
our business operations in China;
o We incur delays and additional expenses relating to our enhanced
manufacturing technology for EPO; or
o We incur any significant unanticipated expenses.
The occurrence of any of the aforementioned events could adversely
affect our ability to meet our business plans.
We may depend on outside capital to pay for the research and development
and manufacturing of additional products. Such outside capital may include the
sale of additional stock and/or commercial borrowing. There can be no assurance
that capital will continue to be available if necessary to meet these
development costs or, if the capital is available, it will be on terms
acceptable to us. The issuance of additional equity securities by us would
result in a significant dilution in the equity interests of our current
stockholders. Obtaining commercial loans, assuming those loans would be
available, will increase our liabilities and future cash commitments.
If we were unable to obtain financing in the amounts and on terms deemed
acceptable, our business and future success may be adversely affected.
There Are Technical Risks Associated with Dragon's Technology Which Could Delay
or Reduce the Realization of Lower Cost Production of EPO.
We are currently utilizing our vector technology to produce EPO at lower
costs, but our method for producing EPO on a commercial basis has only recently
begun. Although results from recent independent tests and our production results
<PAGE>6
have been encouraging, the ability of the current cell line to produce EPO at
consistent levels is still being evaluated.
No Assurance That EPO Market Will Expand in China.
We believe that there will be a large enough market to justify a large
volume of EPO vials although we have not proven this to be the case. Among other
marketing issues, vials of EPO must be lower priced, the Chinese medical
community and consumers must be educated about the EPO, and export market
opportunities must be studied. Further, we may be limited in our ability to sell
EPO outside of China in some other countries due to EPO patent rights held by
our competitors.
Lack of Patent and Copyright Protections for Dragon's Technologies Could Result
in Duplication or Infringement Allegations by Competitors.
Our technology is not protected by any patents or copyrights.
Consequently, other competitors could copy our enhanced EPO production
technology.
Furthermore, Amgen Inc. currently holds a United States patent to
develop and produce EPO. 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 an infringement action in the future asserted
by the holders of patent rights in the manufacture of EPO.
The Loss of Dragon's Key Technical Individuals Would Have an Adverse Impact on
Future Development.
Our performance is substantially dependent on the technical expertise of
Dr. Liu and other key researchers. The loss of Dr. Liu or any of Dragon's key
research personnel could have a material adverse effect on our business,
development, financial condition, and operating results. We do not maintain "key
person" life insurance on Dr. Liu.
We Are Significantly Smaller than Some of Our Competitors and Consequently, We
May Lack the Financial Resources Needed to Increase Market Share.
We will encounter competition from other drug manufacturers and
distributors and from other applicants for licenses and production permits in
China. China's growing market for pharmaceutical products has attracted new
market participants as well as expansion by established participants resulting
in substantial and increasing competition. Many of our present and future
competitors in the pharmaceutical market have substantially greater:
o financial, marketing, technical and manufacturing resources;
o name recognition, and
o experience in China.
Our competitors may be able 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.
While we believe that our drug technology is competitive in producing
EPO at a cost lower than our competitors, no assurances can be given that those
competitors, in the future, will not succeed in developing better or more cost
effective production techniques.
<PAGE>7
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 China.
This type of existing and future competition could affect our ability to form
and maintain agreements with our marketing partners. 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.
The EPO Drug Must Compete with Alternative Drugs and Treatments.
While EPO has been tested to be effective in treating anemia, other
drugs and treatments currently exist or are in development which can also 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.
Risks Relating to Doing Business in the People's Republic of China.
Virtually all of the Company's production is conducted in China.
Consequently, investment in the Company may be adversely affected by the
political, social and economic environment in the People's Republic of China
("PRC"). Under its current leadership, the PRC 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 PRC
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. Moreover, economic reforms and growth in the PRC 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
the PRC.
Our business and prospects are dependent upon agreements with various
entities controlled by PRC governmental instrumentalities. Our operations and
prospects would be materially and adversely affected by the failure of such
governmental entities to honor these contracts, and, if breached, it might be
difficult to enforce these contracts in the PRC. Furthermore, our activities in
the PRC are by law subject, in some circumstances, to administrative review and
approval by various national and local agencies of the PRC government. The
inability to obtain such approvals could have a material adverse effect on the
Company's business, financial condition and results of operations.
The PRC does not have a well-developed, consolidated body of law
governing foreign investment enterprises. As a result, the administration of
laws and regulations by government agencies may be subject to considerable
discretion and variation. In addition, the legal system of the PRC 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. If for any reason we were required to discontinue or move
our manufacturing operations outside of the PRC, our profitability,
competitiveness and market position could be materially jeopardized, and there
can be no assurance that we could continue our manufacturing operations
elsewhere.
Trading of Our Stock May Be Restricted by the SEC's Penny Stock Regulations
Which May Limit a Stockholder's Ability to Buy and Sell our Stock.
The U.S. Securities and Exchange Commission 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. Dragon's securities 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 "accredited investors." The term "accredited investor" refers
generally to institutions with assets in excess of $5,000,000 or individuals
with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse. For transactions covered by this rule, the
broker-dealers must make a special suitability determination of the purchaser
and receive the purchaser's written agreement of the transaction prior to the
sale. Consequently, these rules may affect the ability of broker-dealers
<PAGE>8
to trade Dragon's securities and affect the ability of existing stockholders to
sell their shares in the secondary market.
Concentration of Voting Share Ownership Could Allow a Relatively Few
Stockholders to Influence the Affairs of Dragon.
Stockholders owning a majority (i.e. 51%) of Dragon's outstanding voting
stock represent the ultimate control over Dragon's affairs. Four stockholders
currently control approximately 34% of the outstanding shares of Dragon's Common
Stock. As a result of this ownership, these Stockholders will be able to
influence share voting regarding the election of directors and approving major
transactions.
No Dividends are Expected to be Declared in the Foreseeable Future.
We have not declared or paid any dividends on our Common Stock since our
inception, and we do not anticipate paying any such dividends for the
foreseeable future.
THE OFFERING
The Selling Stockholders are offering for resale up to 7,279,000 shares
of Common Stock and up to 5,858,000 shares of Common Stock assuming the exercise
of outstanding warrants.
4,258,000 of the shares of Common Stock and the Warrants were issued in
connection with a private placement of 4,258,000 Units to investors at $2.50 per
Unit. Each Unit consists of one share of Common Stock and a Warrant to purchase
one share of Common Stock at $2.50 per share.
2,119,000 shares and warrants to purchase an additional 940,000 shares
at $1.00 per share, which are being registered for resale in this Prospectus,
were issued in connection with Dragon's acquisition of all of the issued and
outstanding shares of Allwin Newtech Ltd. Allwin Newtech is now a subsidiary of
Dragon. An additional 60,000 shares being registered were issued pursuant to the
exercise of warrants issued in connection with the acquisition of Allwin Newtech
Ltd.
The balance of 1,442,000 shares of common stock were issued pursuant to
foreign placements or stock bonuses to certain creditors of Dragon or the
exercise of incentive 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
the Warrants referred to in this Prospectus. The proceeds from the exercise of
Warrants, if any, will be used for corporate working capital.
<PAGE>9
PRICE RANGE OF COMMON STOCK
Dragon's Common Stock began trading on the NASD's OTC Bulleting Board
under the symbol "DRUG" on October 9, 1998. The following quotations reflect the
high and low bids for Dragon's Common Stock based on inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions. The high and low prices of Dragon's Common Stock on a quarterly
basis since October 9, 1998, are as follows:
Common Stock
Quarter Ended High Low
- --------------------- ------ -------
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
October 9, 1998 $ .75 $ .75
Our management is of the view that our market capitalization, being the
number of shares of our Common Stock outstanding multiplied by the trading price
of those shares, may not reflect the true value of the Company. The actual daily
trading volume of our Common Stock over the past three months has averaged less
than 56,900 shares which indicates that the ability of our Stockholders to
realize the current trading price of the shares they hold may fluctuate if any
substantial number of shares were to be offered for sale. In addition, due to
the extremely limited nature of the market for our Common Stock, any significant
trading may have a dramatic effect on the price of our Common Stock.
As of March 31, 2000, we had 15,160,000 shares of Common Stock
outstanding and approximately 83 stockholders of record. This number does not
include stockholders who hold our securities in street name.
12,160,000 of the currently outstanding shares of Dragon's common stock
are subject to the resale limitations of Rule 144 of the Securities Act. Of the
shares subject to the resale limitations of Rule 144 outstanding as of March 31,
2000, 7,000,000 shares of common stock have been held for at least one year
and, as a result, could be sold pursuant to the terms and limitations of Rule
144(e).
DILUTION
During 1999, Dragon has issued shares of its common stock for $2.50 per
share as compared to an offering price of approximately $6.35 per share pursuant
to this Prospectus.
The following table illustrates the per share dilution to an investor
purchasing the common stock offered herein assuming the sale of the shares at a
price of $6.35 per share.
Purchase price per Share $ 6.35
Net tangible book value per Share
based on Dragon's December 31,
1999 financial statements(1)(2) $ 1.086
<PAGE>10
Increase to Selling Stockholders
attributable to the sale of shares of
Common Stock in this Offering $ 3.85
Dilution per Share to Investors(3) $ 5.544
Dilution to Investors as a percent of
offering price 83.62 %
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(1) Net tangible book value per Share is determined by dividing the number of
shares outstanding into the tangible net worth of Dragon (tangible assets
less liabilities as of December 31, 1999). (See Dragon's Consolidated
Balance Sheet as of December 31, 1999 at page F-2 of this Prospectus.)
(2) Net tangible book value per share is based upon the shares outstanding as
of December 31, 1999.
(3) Dilution is determined by subtracting net tangible book value per share
from the amount paid per share by new Investors.
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
AND PLAN OF OPERATIONS
This discussion, other than the historical financial information, may
consist of forward-looking statements that involve risks and uncertainties,
including quarterly and yearly fluctuations in results, the timely availability
of Dragon's pharmaceutical products, the impact of competitive products and
treatments, and the other risks described in this report. These forward-looking
statements speak only as of the date hereof and should not be given undue
reliance. Actual results may vary significantly from those projected.
Plan of Operations
In order to expand our operations we will need additional capital. We
do not have any commitments from any source to provide additional capital. Our
current working capital will provide all anticipated capital requirements over
the next twelve months. Approximately $4 million has been budgeted to finance
the research and development of the Company's technology and its application to
new products over the next 12 months. As a result of this increased business
activity, we expect general and administrative expenses and compensation costs
to increase from current levels.
An essential element of the Company's business plan is to apply for and
to obtain various licenses and operating permits from various national and local
agencies of the PRC for new biodrug production and marketing. The Company
currently possesses the requisite production licenses for EPO.
Since inception, we have relied on equity financings to fund our
operations. Funds required to finance our future production expansions,
marketing efforts and ongoing business are expected to come primarily from debt
and equity financing with the remainder provided from operating revenues which
began in September, 1999. Operating revenues to date have been substantially
less than the cost of operations. However, recent financings completed by
<PAGE>11
management are deemed adequate to meet our anticipated working capital needs
over the next 12 months.
General
The following discusses the Company's financial condition and results of
operations based upon the Company's consolidated financial statements which have
been prepared in accordance with generally accepted accounting principles.
The Company was formed on August 22, 1989, under the name First Geneva 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. On September 21, 1998, First Geneva Investments changed its name
to Dragon Pharmaceutical Inc. On July 27, 1999 Dragon acquired a 75% interest in
Nanjing Huaxin Biotech Co., Ltd. which manufactures EPO in China.
Results of Operations
For the Fiscal Years Ended December 31, 1999 and 1998.
Revenues. For the period from February 10, 1998 to December 31, 1998, Dragon had
no revenues. For the year ended December 31, 1999, Dragon had revenues of
$989,539. Revenues were attributable to sales of pharmaceutical drugs produced
by Nanjing Huaxin subsequent to July 27, 1999. Cost of sales of $204,473 is
attributed to the production costs of the pharmaceutical products. During 1999
Dragon had interest income of $19,397 compared to interest income of $9,737 for
the period ended December 31, 1998. Interest income is related to interest
earned on cash received from the private placement of common stock during the
last six months of 1998 and in 1999.
Expenses. Total expenses for the fiscal year ended December 31, 1999 were
$3,650,342 as compared to $481,454 for the period ended December 31, 1998. The
primary expense incurred in 1999 related to stock option compensation of
$1,876,000 and represented approximately 51% of total expenses. This
compensation included both new options granted to employees, directors and
advisors to the Company and the vesting of options granted in previous fiscal
years. Selling expenses increased from none during 1998 to $619,676 in 1999.
This increase represents the Company's increased marketing activity in China.
Other significant expenses in 1999 included loan interest of $326,623 (including
both common shares and cash), depreciation of intangible assets of $135,931,
travel of $113,415, salaries and benefits of $151,598, and management fees of
$96,000. Management fees relate to the payment of two directors for services in
the amount of $96,000 per annum. The depreciation of intangible assets relates
to the amortization of the drug license to produce EPO.
The primary expenses incurred during 1998 related to stock option compensation
of $300,000, management fees of $41,943, travel of $41,784, and legal of
$23,241. Stock option compensation of $300,000 related to stock options granted
to officers and directors of the Company, management fees of $41,943 related to
the payment to two directors for services, $41,784 related to travel to China to
evaluate pharmaceutical companies and legal expenses related to the
reorganization of Allwin Newtech and the raising of capital.
Net and Comprehensive Loss. Dragon had a net loss of $2,845,879 and a
comprehensive loss of $2,791,033 for the fiscal year ending December 31, 1999
compared to a net loss of $471,717 and a comprehensive loss of $473,862 for the
period February 10, 1998 to December 31, 1998. Calculated in the comprehensive
loss for 1999 was a minority interest gain of $54,846. The comprehensive loss
for 1998 included a foreign currency translation adjustment of $2,145 related to
Dragon's operations in China.
<PAGE>12
Liquidity and Capital Resources
Dragon is a development stage pharmaceutical and biotechnological company that
has commenced the manufacture and marketing of pharmaceutical products in China
through its 75% equity interest in Nanjing Huaxin Biotech. Previously, the
Company has raised funds through equity financings to fund its operations and to
provide working capital. The Company currently has no plans for further equity
financings but may finance future operations through additional equity
financings. As of December 31, 1999 and 1998 the Company's working capital was
$8,405,788 and $829,493, respectively. The increase in working capital during
1999 was due to a private placement conducted in the latter part of 1999 that
provided gross proceeds of $10,645,000. The Company showed Subscriptions
Receivable totaling $9,320,000 at December 31, 1999 with the balance of
subscription proceeds being received by the Company subsequent to the previous
fiscal year end.
In September 1998, the Company raised $1 million through the sale of 2,000,000
shares of common stock. The proceeds raised were for working capital. In April
1999, the Company entered into a $600,000 loan agreement. The $600,000 loan
bears interest at 8% and is due in 6 months with the right of the Company to
extend the maturity date by an additional six months in September 1999. As an
additional inducement, the Company issued 90,000 shares of common stock to the
lender. In September 1999 the Company exercised its option to extend the loan by
a period of 6 months. This debt was subsequently converted into common stock.
On October 14, 1999, the Company entered into securities purchase agreements
with two investors located in Hong Kong. Under the terms of this agreement, the
investors purchased, in the aggregate, 600,000 shares of common stock at $2.50
per share, with the Company raising in the aggregate $1.5 million.
On December 31, 1999 the Company closed a private placement raising $10,645,000
through the issue of 4,258,000 shares of common stock at a price of $2.50 per
share. $600,000 of the gross proceeds from the December 1999 offering
represented the conversion of the outstanding debt by the lenders into shares of
common stock of the Company at a price of $2.50 per share.
---------------------------
<PAGE>13
BUSINESS
General
Dragon is a development stage pharmaceutical and biotechnological
company whose business plan is to develop, manufacture and market pharmaceutical
products in China. Dragon has acquired a 75% interest in a drug manufacturing
company located in Nanjing City, China and is currently implementing its
proprietary technology which will allow it to produce drugs such as
Erythropoietin (EPO) in an efficient and cost-effective manner. Dragon's
strategy is to use its 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.
Dragon was originally formed on August 22, 1989, as First Geneva
Investments, Inc. First Geneva Investments was formed for the purpose of
evaluating and acquiring businesses. 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 warrants to purchase 1,000,000 shares of its Common Stock 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.
Dragon's Joint Ventures with Other Companies
On April 18, 1998, Allwin Newtech entered into a contract to acquire a
75% interest in 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 has contributed a contract to purchase a
license to manufacture EPO and other drugs in China and a right to purchase 25
acres of land at a pharmaceutical park located in the Yanjiao Special Economic
Zone, China. Sanhe Kailong has yet to begin operations. Upon the acquisition of
Allwin Newtech's stock by Dragon, Dragon assumed Allwin Newtech's position in
this joint venture and is currently evaluating its option under the joint
venture agreement. To increase Allwin Newtech's position from 75% to 95% in
Sanhe Kailong, Dragon has agreed to pay $250,000 and 250,000 shares of Dragon's
Common Stock. Payment of the funds and issuance of the shares has not yet
occurred.
On July 27,1999, Allwin Newtech entered into a share transfer agreement
with the Nanjing Medical Group Ltd. whereby Allwin Newtech will have the right
to purchase from the Nanjing Medical Group up to 75% of its equity interest in
Nanjing Huaxin Biotech Co. Ltd. under the terms of the share transfer agreement.
The total purchase price for the 75% equity interest was $4.2 million. Of the
$4.2 million, $1,218,100 has 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.
<PAGE>14
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 Dragon
believes the Nanjing Huaxin EPO production has been hampered by out-of-date
technology. As part of our business strategy, Dragon has supplied management
assistance and capital investment to upgrade Huaxin's facilities and implemented
Dragon's production technology to increase production efficiency and decrease
production costs. Nanjing Huaxin's board of directors shall consist of five
directors of which three shall be appointed by Allwin Newtech. Nanjing Huaxin
was previously part of Nanjing Research Institute of Military Medical Science, a
corporation operated by the Chinese military.
Pharmaceutical Product
Erythropoietin. 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.
Nanjing Huaxin currently produces EPO in China for kidney dialysis
applications and Chinese governmental approval for cancer therapy applications
is anticipated by July of 2000.
Originally, we contemplated entering the EPO market by acquiring an EPO
license and building a manufacturing facility which would have required a large
capital investment. We are currently evaluating various options and have
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."
Proprietary Biotechnology
Dragon's Technology. We have achieved enhanced efficiencies in the
production of EPO by Nanjing Huaxin by introducing a high-yield mammalian cell
line developed in China. Our scientists designed a unique plasmid vector for
expression of target genes in mammalian cells and constructed the EPO-expression
CHO (Chinese Hamster Ovary) cell line using this technology. The science behind
our technology is summarized below.
CHO cells are used for obtaining the EPO-expression cell lines. CHO
cells have the ability of proliferating indefinitely in culture and are the most
widely-used mammalian cells for producing recombinant proteins. The CHO
cell-based expression system is considered the industry standard and is used by
us for protein production.
In order to construct a CHO cell line, which expresses a particular
protein, the genetic materials encoding the sequences of the desired protein
(cDNA) are inserted into a plasmid vector. The plasmids are encapsulated in
liposomes and then used to transfect the CHO cells. In addition to delivering
the desired cDNA into CHO cells, it is the plasmid vector that largely
determines whether the high yield of the recombinant protein production by
<PAGE>15
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.
China's Markets
China's Pharmaceutical Market
We believe China's pharmaceutical market is large and shows signs of
continued expansion. The market has grown steadily since 1990, according to a
U.S. Department of Commerce article (1998), "China- Drugs and Pharmaceuticals"
detailing how the number of foreign-invested pharmaceutical ventures had
increased from less than a dozen in the late 1980s to more than 1,800 today. New
entrants in the Chinese pharmaceutical market in the past decade have included
Johnson & Johnson, Bristol Myers Squibb, Hoffman La Roche and Hoechst Marion
Roussel.
Growth factors in the Chinese market include:
o Increasing population
o Increasing age of the population
o Increasing wealth
o Increasing awareness of Western medicines
<PAGE>16
IMS, a market research firm, has estimated that, based on factory
exit-prices, sales revenues of Western medicines in China were $5 billion in
1997 and could reach $9 billion by 2002. Market shares include 39% for
infectious drugs, 13% for digestive drugs and 11% for cardiovascular drugs.
Approximately two-thirds of drugs are produced locally, while imports and joint
venture products each represent about 15% of total supply.
The increase of certain illnesses and diseases is also necessitating
the need for modern medicines in China. The South China Morning Post reported
that: (i) sexually transmittable diseases have increased more than 72-fold since
1985; (ii) hepatitis and tuberculosis are rampant in many rural areas of China;
and (iii) hypertension affects up to 80 million people.
The Economist Intelligence Unit estimates that there are 38,000 retail
pharmacies in China. Many are state-owned or are linked to government or
military hospitals, but independent chains and locations in department and
convenience stores are starting to emerge.
Payment for EPO in China is primarily by the Health Reimbursement
System of the government or directly by individuals. The government is currently
reforming the health care system and a health insurance system will most likely
be established.
China's EPO Market
Sales of EPO in the Chinese market have been less than elsewhere in the
world because current sales prices of $20 to $40 per vial made it too expensive
for many of the patients who could benefit from it.
However, if China's health care system and health insurance plan are
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.
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 PRC before EPO
was exported to China. Furthermore, EPO is not currently subject to the
U.S.-China agreement on intellectual property.
The Company 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 plan to attain this range of lower
costs by producing domestically, thus avoiding import duties, and by producing
with high-yield vector technology, thus avoiding the quality and inefficient
yield problems of existing domestic producers.
The third source of EPO is represented by Sinogen (China) Ltd.,
("Sinogen"), a Hong Kong subsidiary of U.S.-based Sinogen International Co. Ltd.
Sinogen 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
<PAGE>17
certificate to the drug and approval to start production was received in 1997.
To the best of our knowledge, Sinogen is currently producing between 500,000 and
1 million doses of EPO per year. The EPO drug license utilized by Sinogen was
granted to the former owners of the production facility. Sinogen bought the
existing company with the license and the production facility. It is still
structured as a joint venture company and Sinogen 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. ("Ortho"), a subsidiary of Johnson
& Johnson, Inc. ("J&J") of New Brunswick, New Jersey; and Kirin Brewery Company,
Limited ("Kirin") of Japan. EPO is marketed by Amgen as "Epogen," by J&J 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 U.S. rights to market EPO under a licensing agreement
with Kirin-Amgen, Inc. ("Kirin-Amgen"), a joint venture between Kirin and Amgen
that was established in 1984. J&J acquired the rights to EPO from Kirin-Amgen
for all treatments except kidney dialysis in the U.S. and for all uses outside
the U.S. in 1985. Both Amgen and Kirin individually manufacture and market EPO
for China and Japan. These international drug companies all have more financial
resources than we do.
In addition to these international drug companies, we will be competing
with existing and potential domestic producers such as Sunshine and Sinogen.
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 will market our product at a cost that is lower than
competitors which is expected to give us a competitive advantage.
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 expanded EPO market in China.
Potential competition to EPO includes other products or technologies
that are successful in attacking 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 J&J 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 ("NESP"), 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 is 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.
<PAGE>18
Intellectual Property, Government Approvals and Regulations
Dragon has received legal advice to the effect 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 Company's production of EPO in China.
The development and manufacture of EPO requires a license from the
Ministry of Health, China. Our subsidiary Nanjing Huaxin currently is licensed
to market 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.
Our technology is not protected by any patents or copyrights nor do we
intend to seek any such protection. We require all research employees to sign
confidentiality agreements regarding their work for Dragon. However, without
patent or copyright protection, we may not be able to prevent duplication of our
vector technology by competitors.
Doing Business in China
The Company's business is being conducted in China and will be subject
to the political, social and economic environment in the People's Republic of
China ("PRC"). The PRC is controlled by the Communist Party of China. Under its
current leadership, the PRC has been pursuing economic reform policies,
including the encouragement of private economic activity and greater economic
decentralization. However, the PRC central government has exercised and
continues to exercise substantial control over virtually every sector of the PRC
economy. Accordingly, PRC 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 the PRC 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 the Company's business, financial condition and
results of operations. Moreover, economic reforms and growth in the PRC 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
the PRC.
If the Company were required to move its manufacturing operations
outside of the PRC, the Company's profitability, competitiveness and market
position could be materially jeopardized, and there could be no assurance that
the Company could continue its manufacturing operations. The Company's business
and prospects are dependent upon agreements with various entities controlled by
PRC governmental instrumentalities. The failure of such entities to honor these
contracts, or the inability to enforce these contracts in the PRC could
adversely affect the Company's business operations. There can be no assurance
that assets and business operations in the PRC will not be nationalized, which
could result in the total loss of the Company's investments in that country.
The legal system of the PRC 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
<PAGE>19
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 the PRC 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 EPO raw materials itself. 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.
Dragon started realizing revenue in 1999 from the sale of EPO by its
subsidiary Nanjing Huaxin. Nanjing Huaxin was producing EPO at the time of the
acquisition by Dragon. However, its production yields were low and its
technology outdated. Dragon has upgraded and improved the production facilities
of Nanjing Huaxin and implemented its technology to increase EPO production at
these facilities.
Employees
As of March 31, 2000, Dragon had no employees but engaged two
consultants (Messrs. Liu and Maskerine) to perform administrative services.
Dragon expects to commence hiring full and/or part-time employees during the
year 2000. Nanjing Huaxin has over 100 employees in China.
PROPERTY
The Company's corporate offices are located at 543 Granville Street,
Suite 1200, Vancouver, British Columbia, Canada V6C 1X8. Dragon also has an
office in Beijing, located at 11th Floor, Suite 18-19, China World Tower 2, 1
Jianguomenwai Avenue, Beijing, 100004.
Huaxin currently leases a large production facility in Nanjing, China.
Although no additional property is deemed necessary at this time, the
Sanhe Kailong joint venture has the right to purchase 25 acres of land at a
pharmaceutical park in China's Yanjiao Special Economic Zone.
MANAGEMENT
Directors and Executive Officers of Dragon
The present directors, executive officers, key employees and
consultants of Dragon, their ages, positions held in Dragon, and duration as
such, are as follows:
<TABLE>
<S> <C> <C> <C>
Name Position Age Period
- --------------------- ----------------------------- ----- ---------------------------
Longbin Liu President, Chief Executive 37 September 1998 - present
Officer and Director
<PAGE>20
Name Position Age Period
- --------------------- ----------------------------- ----- -------------------------------
Shaun Maskerine Secretary/Treasurer 32 July 1998 - present
Ken Z. Cai Director, Chief Financial 35 September 1998 - present
Officer
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 Director 49 January 2000 - present
Jackson Cheng Director 34 September 1998 - January 2000
</TABLE>
Business Experience
The following is a description of Dragon's 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. 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. He is currently 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. He has been a
Senior Vice President of Yorkton Securities Inc. in Vancouver since April 1999.
He is a former member/seat holder of the Vancouver Stock Exchange. Mr. Hall was
the Co- Founder of both Pacific International Securities and Georgia Pacific
Securities Corporation.
Mr. Robert Friedland became a Director of Dragon on January 21, 2000.
Mr. Friedland is Chairman and President of Ivanhoe Capital Corporation, a
Singapore-based venture capital company with worldwide interests in resource and
high-tech companies. Mr. Friedland is Chairman and President of Ivanhoe Mines
and Deputy Chairman of Ivanhoe Energy, which is active in China in partnership
with China National Petroleum Corporation. Mr. Friedland was named Developer of
the Year in 1996 by the Canadian Prospectors and Developers Association of
Canada for his work in establishing and financing international mining and
exploration companies, including Diamond Fields, and owner and developer of the
Voisey's Bay nickel deposit, which was sold to INCO Limited for CDN $4.3
billion.
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.
<PAGE>21
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. He is 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. Jackson Cheng was a Director of Dragon. He is the President of
Ulink Marketing Inc. of Hong Kong (project finance) and is also CFO of an
engineering consulting firm. Subsequent to December 31, 1999, Mr. Cheng resigned
from his position as a Director of Dragon.
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. He is also the President and Director of Global
Petroleum Inc., another resource based company). He has held these positions
since September 1998. Aquarius Ventures Inc. and Global Petroleum Inc. are both
listed on the Canadian Venture Exchange.
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 primary functions of the Executive Committee is to administer all
daily operating activities of the Company, its subsidiaries, and joint venture
companies. The Board has also created committees to direct the operation of each
functional area of the Company. 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors, and persons who own
more than 10% of the Company's Common Stock, to file reports of ownership on
Form 3 and changes in ownership on Form 4 or 5 with the Securities and Exchange
Commission (the "SEC"). Such executive officers, directors and 10% stockholders
are also required by SEC rules to furnish the Company with copies of all Section
16(a) forms they file. Based solely upon its review of copies of such forms
<PAGE>22
received by it, or on written representations from certain reporting persons
that no other filings were required for such persons, the Company believes that,
during the year ended December 31, 1999, its executive officers, directors and
10% stockholders complied with all applicable Section 16(a) filing requirements.
All directors of the Company hold office until the next annual meeting
of the shareholders or until their successors have been elected and qualified.
The officers of the Company are appointed by the Board of Directors and
hold office until their death, resignation or removal from office.
EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Company's Chief
Executive Officer during the last three complete fiscal years. No other officers
or directors received annual compensation in excess of $100,000 during the last
two complete fiscal years.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
--------------------------------------------------- ---------------------------------------------------------
Awards Payout
-------------------------------- --------------
Other Restricted
Annual Stock Securities LTIP All Other
Bonus Compensation Award(s) Underlying Payout Compensation
Year Salary $ ($) $ Options (#) ($) ($)
--------- ----------- ------- ---------------- ------------- --------------- ----------- ----------
Longbin Liu 1999 $72,000(1) -0- -0- -0- -0- -0- -0-
1998 $36,000 300,000
Shaun Maskerine 1998 5,943(1) -0- -0- -0- 75,000 -0- -0-
- -----------------------------
</TABLE>
(1) Pursuant to an oral consulting contract.
During 1998, Dr. Longbin Liu replaced Mr. Maskerine as President.
Dragon has entered into oral consulting agreements with Dr. Liu and Mr.
Maskerine pursuant to which they provide administrative services to Dragon. Dr.
Liu, as President, is paid an annual salary of $72,000 and includes stock
options to purchase 300,000 shares of common stock pursuant to a stock option
agreement. Mr. Maskerine remains as Secretary/Treasurer of the Company and is
paid an annual salary of $24,000 and includes stock options to purchase 75,000
shares of common stock pursuant to a stock option agreement. These consulting
agreements are terminable at will.
Employment/Consulting Agreements
In June, 1999, Dragon entered into a one-year consulting agreement with
E. Pernet Portfolio Management for the purpose of providing financial consulting
services. The consultant is paid a fee and was granted options to purchase
50,000 shares of Common Stock at an exercise price of $0.50 per shares. This
option expires June, 2004. The Company has 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,
<PAGE>23
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. To date, Dragon has issued options to
purchase 250,000 shares of its common stock at an exercise price of $0.50 and
60,000 shares at an exercise price of $2.50 to the Company's technical
consultants.
Stock Option Plans
Dragon has no Stock Option Plan. The Board of Directors has currently
approved to limit the number of options available to employees, directors and
officers of Dragon at 1,500,000. Unless otherwise provided by the Board, all
options are exercisable for a term of five years. Each option is exercisable
only so long as the optionee remains as a director or employee of Dragon. No
option is transferable by the optionee other than by will or the laws of descent
and distribution. As of December 31, 1999, options to acquire 1,520,000 shares
of common stock were outstanding. As of March 31, 2000 there were 1,562,500
options outstanding.
<TABLE>
<S> <C> <C> <C> <C>
OPTIONS GRANTED IN THE YEAR ENDED DECEMBER 31, 1999
Number of
Securities % of Total Option
Underlying Granted to Exercise of
Options Granted Employees in Base Price
Name in 1999 Fiscal Year 1999 ($/share) Expiration Date
- ---------------------- ---------------- ------------------- ------------- ------------------
Shaun Maskerine 75,000 12.1% $0.50 November 5, 2004
Ernst Pernet 50,000 8.06% $0.50 June 15, 2001
Philip Yuen 100,000 16.33% $0.50 November 4, 2004
Yiu Kwong Sun 100,000 16.33% $0.50 November 4, 2004
Shi You Liu 20,000 3.23% $0.50 November 9, 2004
Ling-Ling Chen 10,000 1.61% $0.50 November 9, 2004
Wayne Zhou 5,000 0.81% $0.50 November 9, 2004
Xiaoshan Liang 5,000 0.81% $0.50 November 9, 2004
Wenjuan Zhang 20,000 3.23% $0.50 November 9, 2004
Guangming Zhong 10,000 1.61% $0.50 November 9, 2004
Youfu Li 5,000 0.81% $0.50 November 9, 2004
Sy-Jeng Loong 5,000 0.81% $0.50 November 9, 2004
Lijiang Yu 7,500 1.21% $0.50 November 9, 2004
Jili Zhuang 10,000 1.61% $0.50 November 9, 2004
Feng Zhou 5,000 0.81% $0.50 November 9, 2004
Haitao Wang 20,000 3.23% $0.50 November 9, 2004
Zuze Wu 10,000 1.61% $0.50 November 9, 2004
Minghu Luo 35,000 5.65% $2.50 November 9, 2004
Minghu Luo 25,000 4.03% $0.50 November 9, 2004
Tongchun Na 10,000 1.61% $0.50 November 9, 2004
Jun Gao 10,000 1.61% $0.50 November 9, 2004
Mingchuan Mao 10,000 1.61% $0.50 November 9, 2004
Hua Zeng 7,500 1.21% $0.50 November 9, 2004
Jin Yuan 5,000 0.81% $0.50 November 9, 2004
Mingrong Wang 10,000 1.61% $0.50 November 9, 2004
Liu Ya 25,000 4.03% $0.50 November 9, 2004
Liu Ya 25,000 4.03% $2.50 November 9, 2004
</TABLE>
<PAGE>24
<TABLE>
<S> <C> <C> <C> <C>
OPTIONS GRANTED IN THE CURRENT YEAR (through 3/31/00)
Number of % of Total
Securities Option Granted
Underlying Options to Employees in Exercise of Base
Name Granted in 1999 Fiscal Year 1999 Price ($/share) Expiration Date
- ------------------- -------------------- ----------------- ----------------- ------------------
Suju Zhong 15,000 10.5% $0.50 January 5, 2004
Teresa Liu 5,000 5.3% $0.50 January 5, 2004
Zhinqiang Han 15,000 10.5% $0.50 January 5, 2004
Robin Martin 7,500 5.3% $7.00 February 22, 2005
Robert Friedland 100,000 68.4% $7.00 February 22, 2005
</TABLE>
<TABLE>
<S> <C> <C>
FISCAL YEAR END OPTION VALUE (DECEMBER 31, 1999)
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
- ---------------------- ---------------------------------- ----------------------------------
Longbin Liu 300,000/0 1,060,000/0
Ken Cai 200,000/0 738,000/0
Greg Hall 200,000/0 738,000/0
Jackson Cheng 100,000/0 369,000/0
Alexander Wick 100,000/0 369,000/0
Philip Yuen 100,000/0 369,000/0
Yiu Kwong Sun 100,000/0 369,000/0
Shaun Maskerine 75,000/0 276,750/0
Ernst Pernet 50,000/0 184,500/0
Shi You Liu 20,000/0 73,800/0
Ling-Ling Chen 10,000/0 36,900/0
Wayne Zhou 5,000/0 18,450/0
Xiaoshan Liang 5,000/0 18,450/0
Wenjuan Zhang 20,000/0 73,800/0
Guangming Zhong 10,000/0 36,900/0
Youfu Li 5,000/0 18,450/0
Sy-Jeng Loong 5,000/0 18,450/0
Lijiang Yu 7,500/0 27,675/0
Jili Zhuang 10,000/0 36,900/0
Feng Zhou 5,000/0 18,450/0
Haitao Wang 20,000/0 73,800/0
Zuze Wu 10,000/0 36,900/0
Minghu Luo 35,000/0 129,500/0
Minghu Luo 25,000/0 92,250/0
Tongchun Na 10,000/0 36,900/0
Jun Gao 10,000/0 36,900/0
Mingchuan Mao 10,000/0 36,900/0
<PAGE>25
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
- ---------------------- ---------------------------------- ----------------------------------
Hua Zeng 7,500/0 27,675/0
Jin Yuan 5,000/0 18,450/0
Mingrong Wang 10,000/0 36,900/0
Liu Ya 25,000/0 92,250/0
Liu Ya 25,000/0 92,250/0
*The value of unexercised in-the-money options is based on a per share price of
$3.69 as quoted on the OTC Bulletin Board on December 31, 1999.
VALUE OF OPTIONS GRANTED IN THE CURRENT YEAR (through 3/31/00)
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
- ---------------------- ---------------------------------- ----------------------------------
Suju Zhong 3,000/12,000 19,125/76,500
Teresa Liu 1,000/4,000 6,375/25,500
Zhinqiang Han 3,000/12,000 19,125/76,500
Robin Martin 3,750/3,750 23,906/23,906
Robert Friedland 100,000/0 637,500/0
</TABLE>
* The value of unexercised in-the-money options is based on a per share price
of $6.375 as quoted on the OTC Bulletin Board on February 29, 2000.
Limitation of Liability and Indemnification Matters
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.
<PAGE>26
(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 indeminity for such expenses which
such court shall deem proper.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth, as of March 31, 2000, certain
information with respect to the beneficial ownership of the Company's Common
Stock by each stockholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock.
As of March 31, 2000, there were 15,160,000 shares of Common Stock
outstanding.
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
- ------------------------------- ------------- ---------------
Arbora Portfolio Management(2)
Gartenstrasse 38
Zurich, Switzerland 812,500 5.4%
Zhibin Cai
18 Main Street
Votian
Hubei, China 999,000 6.6%
Yu Fongmei
317 Meilhai Garden, Fontain
Beijing, China 900,000 5.9%
Chimei Wu Ho
396 Chungshan Road, Sec 2
Puli Town, Taiwan 2,400,000(3) 15.9%
- -----------------------------
(1) Except as otherwise indicated, the Company believes 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 SEC 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 60 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.
<PAGE>27
(2) Arbora Portfolio Management is an entity jointly owned and managed by
Ulrich Rued and Rudy Hugi.
(3) Represents options exercisable within sixty days.
Officers and Directors
The following table sets forth, as of March 31, 2000, certain
information with respect to the beneficial ownership of the Company's Common
Stock by each executive officer and director of the Company and the holdings of
all officers and directors as a group.
Number of Percentage
Name and Address Shares (1) Beneficially Owned
- --------------------------------- -------------- ------------------
Longbin Liu 300,000(2) 1.9%
Shaun Maskerine 81,250(3) *
Ken Cai 200,000(2) 1.3%
Greg Hall 200,000(2) 1.3%
Philip Yuen 162,500(4) 1.1%
Robert Friedland 600,000(5) 3.9%
Alexander Wick 100,000(2) *
Yiu Kwong Sun 100,000(2) *
All directors (8 persons) and
executive officers as a group 1,743,750(6) 6.7%
- ------------------------
(1) Except as otherwise indicated, the Company believes 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 SEC 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 60 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) Represents options exercisable within sixty days.
(3) Includes 6,250 shares of Common Stock owned with the balance representing
options exercisable within sixty days.
(4) Includes 62,500 shares of Common Stock owned with the balance representing
options exercisable within sixty days.
(5) Includes 500,000 shares of Common Stock owned by a company controlled by
Mr. Friedland with the balance representing options exercisable within
sixty days.
(6) Includes options to acquire 1,175,000 shares of Common Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as otherwise indicated below, Dragon has 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 its knowledge, any of its directors,
<PAGE>28
officers, five percent beneficial security holder, 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, Dragon issued
7,000,000 shares of its Common Stock and warrants to purchase 1,000,000 shares
of its 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. None of these individuals listed in the
foregoing sentence held any positions or owned shares of First Geneva
Investments, Inc. (the company which is now Dragon). 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 Dragon; (ii) the President of First Geneva, Mr. Maskerine, continued as
President of Dragon (until September, 1998); and (iii) Messrs. Liu, Cai and
Cheng, who were President and directors of Allwin Newtech, assumed the position
of directors with Dragon. With the exception of Mr. Maskerine, all of the other
Principal Stockholders listed above acquired their shares in this exchange
transaction
Dragon currently rents space for its executive offices from Minco
Mining and Metals Corporation for CDN $2,500 per month. Mr. Cai (a director of
Dragon) is President of Minco Mining. Dragon believes this rent is competitive
with rent that would be charged by a non-affiliated landlord for comparable
space.
Messrs. Ken Cai, Greg Hall and Longbin Liu are directors of Sanhe
Kailong, the joint venture between Dragon and Sinoway Biotech. Messrs. Ken Cai,
Greg Hall and Longbin Liu also serve as officers and directors of Allwin
Newtech, a wholly-owned subsidiary of Dragon. Messrs. Ken Cai, Longbin Liu and
Philip Yuen serve as directors of Nanjing Huaxin, a company in which Dragon owns
a 75% interest.
Dr. Longbin Liu has interests in two additional pharmaceutical
companies currently developing biotech products. Alphatech Bioengineering Co. is
a private company registered in Hong Kong. Alphatech is currently developing
GM-CSF and HbsAg vaccine. Both projects are in the pre-clinical stage. Dr. Liu
has a 50% equity interest in Alphatech. RecomGen Biotech Co., Ltd. is a private
company registered in China. RecomGen is developing tPA for treating heart
attacks and strokes. Dr. Liu holds a 90% equity interest in RecomGen. Dragon
may, at some time in the future, enter into negotiations with both or either of
these companies to acquire technology and/or biotech products. Both of the
companies were incorporated and Dr. Liu's involvement in both projects began
prior to the establishment of Dragon.
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;
(d) ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
<PAGE>29
(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.
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.
Subscription Procedures
All expenses of the registration statement including, but not limited
to, legal, accounting, printing and mailing fees are and will be borne by
Dragon.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Interwest
Transfer Company, Salt Lake City, Utah.
<PAGE>30
DRAGON PHARMACEUTICAL INC
REGISTRATION STATEMENT - SHAREHOLDER LIST - AS AT
MARCH 31, 2000
<TABLE>
<S> <C> <C> <C> <C>
# Shares Underlying Total Shares Registered as Percent
Name # of Shares Warrants Registered of Total I/O
- ------------------------------------------ ------------- ---------------------- -------------- ----------------------
Zhiquan Cai 100,000 100,000 200,000 1.31%
Yuang Chen Chu Kuo 160,000 160,000 320,000 2.09%
Huimin Lui 112,500 90,000 202,500 1.33%
Dragon Gold Corporation 225,000 175,000 400,000 2.61%
Doug Casey 65,000 45,000 110,000 0.72%
USGI/China Region Opportunity Fund 100,000 100,000 200,000 1.31%
Med-Ray Group Inc. 110,000 80,000 190,000 1.25%
Li-Yen Huang 10,000 10,000 20,000 0.13%
Constance Elligson 3,000 3,000 6,000 0.04%
Candace Greene 40,000 40,000 80,000 0.53%
Bunnaton Ltd. 185,000 105,000 290,000 1.90%
Mountainview Capital Corporation 5,000 5,000 10,000 0.07%
Arbora Portfolio Management 812,500 495,000 1,307,500 8.35%
Goldpac Investment Fund 182,500 160,000 342,500 2.24%
Lloyds TSB Bank plc 80,000 80,000 160,000 1.05%
Jean Zhang 40,000 40,000 80,000 0.53%
Shi You Liu 20,000 20,000 40,000 0.26%
Zhang Bing 20,000 20,000 40,000 0.26%
You Lik Chieng 10,000 10,000 20,000 0.13%
Gwynneth Gold Limited 150,000 150,000 300,000 1.96%
<PAGE>31
# Shares Underlying Total Shares Registered as Percent
Name # of Shares Warrants Registered of Total I/O
- ------------------------------------------ ------------- ---------------------- -------------- ----------------------
Moon Ying Chu 20,000 20,000 40,000 0.26%
Charles Grose 50,000 50,000 100,000 0.66%
Shui Bao 40,000 40,000 80,000 0.53%
Yinhao Ma 10,000 10,000 20,000 0.13%
Maxton Investment Holdings Limited 300,000 300,000 600,000 3.88%
Aton Ventures Fund Limited 100,000 100,000 200,000 1.31%
Li and Fang Enterprises Ltd. 100,000 100,000 200,000 1.31%
James Yu 10,000 10,000 20,000 0.13%
Xu Li 10,000 10,000 20,000 0.13%
Liu Guo Lan 10,000 10,000 20,000 0.13%
Chiu-ling Chang 10,000 10,000 20,000 0.13%
Alcardo Investments Limited 100,000 100,000 200,000 1.31%
Berycon Limited 500,000 500,000 1,000,000 6.39%
Chow Tai Fook Nominee Limited 1,000,000 1,000,000 2,000,000 12.38%
Newstar Securities Limited 500,000 500,000 1,000,000 6.39%
Philip Pak Yiu Yuen 62,500 40,000 102,500 0.67%
Yukon Health Enterprises Ltd 300,000 300,000 600,000 3.88%
Global Equities Overseas Ltd 300,000 300,000 600,000 3.88%
Cazilhac International BVI 200,000 0 200,000 1.32%
New Dragon (No. 3) Investments Ltd 400,000 200,000 600,000 3.91%
Morning Sun Holdings Ltd. 200,000 100,000 300,000 1.97%
Frank Juck Fai Cheng 30,000 0 30,000 0.20%
Cresvale 0 0 0 0.00%
<PAGE>32
# Shares Underlying Total Shares Registered as Percent
Name # of Shares Warrants Registered of Total I/O
- ------------------------------------------ ------------- ---------------------- -------------- ----------------------
Yeung Kit Ming 10,000 5,000 15,000 0.10%
Corona Tung Wing Fon 4,300 2,150 6,450 0.04%
Leung Sun Yuen 25,500 12,750 38,250 0.25%
Wong Sui Kuen 4,200 2,100 6,300 0.04%
Cheung Chi Wing 4,300 2,150 6,450 0.04%
Tam Tyung Ping 21,200 10,600 31,800 0.21%
Chan Tsok Hung 4,200 2,100 6,300 0.04%
Wu Cho Woon 38,200 19,100 57,300 0.38%
Chu Sung Hei 20,000 10,000 30,000 0.20%
Foo Tak Lam 8,100 4,050 12,150 0.08%
Tim Sun 10,000 5,000 15,000 0.10%
Amy Wing Hang Chau 60,000 0 60,000 0.40%
Stephanie Pui San Wong 40,000 20,000 60,000 0.40%
J Aitken Instrument Controls Inc 10,000 0 10,000 0.07%
Bohn Consulting Ltd 10,000 0 10,000 0.07%
Perry Doell 5,000 0 5,000 0.03%
Zenon Dragan 5,000 0 5,000 0.03%
Victor Lee 10,000 0 10,000 0.07%
Peter McGourty 5,000 0 5,000 0.03%
Richard Siu 10,000 0 10,000 0.07%
Donald Lee 5,000 0 5,000 0.03%
RTI Automation Inc 10,000 0 10,000 0.07%
DAB Automation Inc 12,000 0 12,000 0.08%
<PAGE>33
# Shares Underlying Total Shares Registered as Percent
Name # of Shares Warrants Registered of Total I/O
- ------------------------------------------ ------------- ---------------------- -------------- ----------------------
Joe Kuliasa 10,000 0 10,000 0.07%
Roberto Chu 30,000 20,000 50,000 0.33%
Teresa Liu 1,000 0 1,000 0.01%
Zhiqiang Han 3,000 0 3,000 0.02%
Suju Zhong 3,000 0 3,000 0.02%
Jackson Chak Sung Cheng 217,000 95,000 312,000 2.05%
TOTAL SHARES TO REGISTER 7,279,000
TOTAL SHARES UNDERLYING WARRANTS 5,798,000
TO REGISTER
TOTAL SECURITIES BEING REGISTERED 13,077,000
TOTAL SHARES ISSUED AND
OUTSTANDING 15,160,000
Calcuation Example - Z. Cai
Total Shares 100,000
Shares Underlying Warrants 100,000
Registered as % of Issued and Outstanding = Total Shares including Shares and
Underlying Warrants
Total Issued and Outstanding + Shares
Underlying Warrants
= 100000+100000
15160000+100000
1.3%
</TABLE>
<PAGE>34
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of Common
Stock, $.001 par value. As of March 31, 2000, there were 15,160,000 shares of
Common Stock outstanding and 5,798,000 shares of Common Stock issuable upon
exercise of outstanding warrants.
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
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 the Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable and 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, Dragon has issued the following warrants, all of which are
exercisable into shares of Common Stock:
<TABLE>
<S> <C> <C> <C> <C>
# of Shares Covered
Issue Date Price/Share Exercisable Exercise Expiration Date
----------- -------------------- ------------- ----------- -----------------
10/12/98 1,000,000(1) 10/12/98 $1.00 6/30/00
10/28/99 600,000 10/28/99 $2.50 10/28/00
1/1/00 4,258,000 1/1/00 $2.50 1/1/01
</TABLE>
- -------------------------
(1) Since issued, 120,000 warrants (representing the issuance of 60,000 common
shares) have been exercised.
Options
The Company has issued options to purchase 1,562,500 shares of Common
Stock to thirty-six individuals. Of the total, 1,395,000 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.
<PAGE>35
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
The Company's 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.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2, together with all
amendments and exhibits, with the SEC. 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 contract or other document of Dragon, the references are
not necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract or document. You may
review a copy of the registration statement at the SEC's public reference room,
and at the SEC'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 SEC 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 SEC's website at
http://www.sec.gov.
FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Financial Statements
(a) The following Financial Statements pertaining to Dragon are filed as
part of this Prospectus:
Report of Independent Accountants.............................................................F-2
Year-end Consolidated Balance Sheets..........................................................F-3
Year-end Consolidated Statements of Operations................................................F-4
Year-end Consolidated Statements of Stockholders' Equity......................................F-5
Year-end Consolidated Statements of Cash Flows................................................F-6
Notes to Consolidated Financial Statements..........................................F-7 thru F-19
<PAGE>35
(b) The following Financial Statements pertaining to Nanjing Huaxin
are filed as part of this Prospectus:
Report of Independent Accountants............................................................F-20
Year-end Balance Sheets.....................................................................F-21
Year-end Statements of Stockholders' Equity.................................................F-22
Year-end Statements of Operations...........................................................F-23
Year-end Statements of Cash Flows...........................................................F-24
Notes to Financial Statements......................................................F-25 thru F-30
(c) The following Pro Forma Financial Statements pertaining to Dragon
and Nanjing Huaxin are filed as part of this Prospectus:
Index to Pro-Forma Statements................................................................F-31
Pro Forma Statements of Operations...........................................................F-32
Notes to Pro Forma Financial Statements......................................................F-33
</TABLE>
<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
Legal fees and expenses $ 40,000
<PAGE>II-2
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 share 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.
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 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, each investor
received warrants to purchase 300,000 shares of Common Stock 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. No commissions were
paid.
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.
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 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.
<PAGE>II-3
Item 27. Exhibits
The following Exhibits are filed with this Prospectus:
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 (To be filed)
10.1* Sino-Foreign Co-operative Company Contract
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.
16.1* Letter Regarding Changes in Certifying Account.
23.1 Consent of Bartel Eng Linn & Schroder contained in Exhibit 5
23.2 Consent 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.
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.
<PAGE>II-4
(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 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-5
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 registration
statement to be signed on its behalf by the undersigned, in the City of
Vancouver, Province of British Columbia, on April 30, 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 April 30, 2000
- -------------------------------------
Longbin Liu
President, Director, Chief Executive
Officer
/s/ KEN Z. CAI April 30, 2000
- ------------------------------------
Ken Z. Cai
Director, Chief Financial Officer
and Principal Financial Officer
/s/ GREG HALL April 30, 2000
- ------------------------------------
Greg Hall, Director
/s/ ROBERT FRIEDLAND, April 30, 2000
- ------------------------------------
Robert Friedland, Director
/s/ ALEXANDER WICK April 30, 2000
- ------------------------------------
Alexander Wick, Director
/s/ PHILIP YUEN PAK YIU April 30, 2000
- ------------------------------------
Philip Yuen Pak Yiu, Director
/s/ DR. YIU KWONG SUN April 30, 2000
- ------------------------------------
Dr. Yiu Kwond Sun , Director
<PAGE>F-1
DRAGON PHARMACEUTICALS INC.
& SUBSIDIARIES
Consolidated Financial Statements
(Expressed in US Dollars)
December 31, 1999 and 1998
Index
Report of Independent Accountants
Consolidated Balance Sheet
Consolidated Statement of Stockholders' Equity
Consolidated Statement of Operations
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>F-2
MOORE STEPHENS ELLIS FOSTER LTD.
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, BC Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
E-Mail: [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-3
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1999 and 1998
(Expressed in US Dollars)
<TABLE>
<S> <C> <C>
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
==================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> F-4
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
Common stock Compre- other Total
----------------------- Additional hensive compre- Stock-
paid-in Income Deficit hensive holders
Shares Amount capital (loss) accumulated income equity
------------ --------- ------------ ----------- --------------- --------- -------------
Balance, February 10, 1998 1,000,000 $ 1,000 $ - $ - $ (2,636)$ - $ (1,636)
Capitalization of accumulated deficit
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-7
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Operations
(Expressed in US Dollars)
<TABLE>
<S> <C> <C>
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 -
Interest income 19,397 9,737
Selling expenses (619,676) -
Administrative expenses
- stock-based compensation (1,876,000) (300,000)
- other administrative expenses (1,154,666) (181,454)
----------------- ------------------
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
================= ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-6
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statement of Cash Flows
(Expressed in US Dollars)
<TABLE>
<S> <C> <C>
February 10
January 1 1998 (inception)
1999 to to
December 31 December 31
1999 1998
------------------- -------------------
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
- monority 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 902,328 743,633
------------------- -------------------
(818,377) 390,942
------------------- -------------------
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 1,913,678
------------------- -------------------
3,327,709 1,913,678
------------------- -------------------
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-7
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-8
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-9
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-10
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-11
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
(i) 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.
(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-12
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$3,000,000 cash for its 75% interest.
The allocation of the acquisition costs, based on appraised values, are as
follows:
Cash and cash equivalents RMB 750,000 US$ 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
================= ================
The operating results of Huaxin from June 11, 1999 to December 31, 1999,
are included in the statement of operations.
<PAGE>F-13
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:
<TABLE>
<S> <C> <C>
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)
------------ -----------
</TABLE>
6. Fixed Assets
<TABLE>
<S> <C> <C> <C>
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
============== ============= ===========
1998
---------------------------------------------------------
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
============== ============= ===========
</TABLE>
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-14
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-15
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- -------------------------------------------------------------------------------
(Expressed in US Dollars)
8. Income Taxes (continued)
The tax effect of temporary differences that give rise to the Company's
deferred tax asset (liability) are as follows:
<TABLE>
<S> <C> <C>
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 - -
=========== ============
</TABLE>
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).
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:
<TABLE>
<S> <C> <C>
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
=========== =================
</TABLE>
The weighted average remaining contractual life of the options outstanding
at December 31, 1999 was 4.31 years.
<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)
(b) Stock options outstanding as at December 31, 1999:
Number of Shares Exercise Price Expiry Date
---------------- -------------- -----------------
900,000 $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
(c) Share purchase warrants outstanding as at December 31, 1999:
Number of Shares Exercise Price Expiry Date
----------------- -------------- -----------------
2,000,000 $1.00 June 30, 2000
600,000 $2.50 October 28, 2000
(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.
<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)
$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.
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:
<TABLE>
<S> <C> <C>
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)
------------- ------------
</TABLE>
<PAGE>F-18
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- -------------------------------------------------------------------------------
(Expressed in US Dollars)
10. 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 and
1999, respectively:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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.
<PAGE>F-19
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- -------------------------------------------------------------------------------
(Expressed in US Dollars)
12. Commitments (continued)
(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).
(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
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 "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-21
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-22
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-23
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Statement of Operations
(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
-------------- -------------- --------------
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)
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-24
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-25
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Notes to Financial Statements
June 11, 1999, December 31, 1998 and 1997
(Expressed in US Dollars)
- --------------------------------------------------------------------------------
Nature of Business
1. 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-26
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-27
NANJING HUAXIN BIO-PHARMACEUTICALS CO. LTD.
Notes to Financial Statements
June 11, 1999, December 31, 1998 and 1997
(Expressed in US Dollars)
- --------------------------------------------------------------------------------
3. Fixed Assets
<TABLE>
<S> <C> <C> <C>
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
============= ================= ==============
</TABLE>
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.
4. 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-28
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-29
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:
<TABLE>
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
The above expenses are included in the statement of operations as follows:
<TABLE>
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
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-30
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>31
DRAGON PHARMACEUTICALS INC.
& SUBSIDIARIES
Unaudited Pro-forma Consolidated Statement of Operations
(Expressed in US Dollars)
December 31, 1999
Index
Unaudited Pro-forma Consolidated Statement of Operations
Notes to Unaudited Pro-forma Consolidated
Statement of Operations
<PAGE>32
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>33
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.
TECHNICAL ADVISOR AGREEMENT
THIS AGREEMENT is dated the 15th day of June, 1999
BETWEEN:
Dragon Pharmaceuticals
12th Floor - 543 Granville Street
Vancouver, B.C.
V6C 1X8
(the "Client")
-and-
Mr. Ernest Pernet
E. Pernet Portfolio Management
Barengrasse 25
PO Box 6568
Zurich, CH 8023, Switzerland
(the "Consultant")
WHEREAS the Client desires to engage the Advisor to provide services to the
Client for the term of this Agreement and the Advisor has agreed to provide such
services, all in consideration and upon the terms and conditions contained
herein;
NOW THEREFORE it is hereby agreed as follows:
1. Services
The Client agrees to engage the Consultant to act as financial
consultant on an as needed basis. Specific requirements of the services
will vary and will be agreed on between the Client and the Consultant
at such time that the services are being retained.
2. Term
Except as otherwise provided in this Agreement, the Client agrees to
engage the Advisor to provide the Services for a term of one year from
June 15, 1999 to June 15, 2000.
<PAGE>
3. Fee
a) The Client agrees to pay the Consultant a fee for the Services
provided by the Consultant under the Agreement in accordance with
invoices submitted to the client for services rendered. All valid
invoices will be paid by the Client within 30 days of receipt.
b) The Client shall be responsible for all sales taxes (including goods
and services taxes) due to respect of the fees paid to the Consultant.
c) The Consultant will be granted, as soon as available, 50,000 options
with an exercise price of $0.50 per share and an expiration term of
five years.
4. Expenses
The Client shall pay for or reimburse the Consultant for all reasonable,
ordinary and necessary expenses incurred by the Consultant in the ordinary
course of performing the Services upon presentation of proper accounts
statements, invoices or receipts for such items. All expenses should be
agreed to in writing by the Client prior to being authorized by the
Consultant. Only those expenses that have been pre-approved by the Client
shall be reimbursable.
5. Independent Contract
The Consultant's relationship with the Client as created by this Agreement
is that of an independent contractor for the purposes of the Income Tax Act
(Canada) and any similar provincial taxing legislation. It is intended that
the Consultant shall have general control and direction over the manner in
which the services are to be provided to the Client under this Agreement.
Nothing contained in this Agreement shall be regarded or construed as
creating any relationship (whether by way of employer/employee, agency
joint venture, association, or partnership) between the parties other than
as an independent contractor as set forth herein.
6. Time and Effort
The Advisor shall be free to devote such portion of the Advisor's time,
energy, effort and skill as the Advisor sees fit, and to perform the
Advisor's duties when and where the Advisor sees fit, so long as the
<PAGE>
Advisor performs the Services set out in this Agreement in a timely and
professional fashion.
7. Confidential Information
(a) The Advisor acknowledges that certain of the material and information
made available to the Advisor by the Client in the performance of the
Services (the "Confidential Information") will be of a confidential
nature. The Advisor recognizes that the Confidential Information is
the sole and exclusive property of the Client, and the Advisor shall
use its best efforts and exercise utmost diligence to protect and
maintain the confidentiality of the Confidential Information. The
Advisor shall not, directly or indirectly, use the Confidential
Information for its own benefit, or disclose to another any
Confidential Information, whether or not acquired, learned, obtained
or developed by the Advisor alone or in conjunction with others,
except as such disclosure or use may be required in connection with
the performance of the Services or as may be consented to in writing
by the Client.
(b) The Confidential Information is and shall remain the sole and
exclusive property of the Client regardless of whether such
information was generated by the Advisor or by others, and the Advisor
agrees that upon termination of this Agreement it shall deliver
promptly to the Client all such tangible parts of the Confidential
Information including records, data, notes, reports, proposals, client
lists, correspondence, materials, marketing or sales information,
computer programs, equipment, or other documents or property which are
in the possession or under the control of the Advisor without
retaining copies thereof.
(c) Each of the foregoing obligations of the Advisor in this clause shall
also apply to any confidential information of customers, joint venture
parties, contractors and other entities, of any nature whatsoever,
with whom the Client or any associate or affiliate of the Client has
business relations.
(d) Notwithstanding the foregoing provisions of this clause, the Advisor
shall not be liable for the disclosure or use of any of the
Confidential Information to the extent that:
(i) the Confidential Information is or becomes available to the
public from a source other than the Advisor and through no fault
of the Advisor; or
(ii) the Confidential Information is lawfully obtained by the Advisor
from a third party or a source outside of this Agreement.
(e) The covenants and agreements contained in this clause shall survive
the termination of this agreement.
<PAGE>
8. Other Services
The Advisor will be free to perform consulting and other services to the
Advisor's other clients during the term of this Agreement, provided
however, that the Advisor shall ensure that the Advisor is able to perform
the Services pursuant to this Agreement in a timely and professional
fashion. The Advisor agrees not to perform services for the Advisor's other
clients which may create a conflict of interest or interfere with the
Advisor's duties pursuant to this Agreement.
9. Termination
(a) In the event that the Advisor breaches this Agreement, or otherwise
fails to perform the Services in accordance with the terms of this
Agreement, the Client may terminate this Agreement immediately and
without notice for cause. Either party may terminate this Agreement at
any time, without cause or reason, upon two months advance written
notice to the other.
(b) Upon termination of this Agreement:
(i) the Client's obligations to the Advisor under this Agreement
shall terminate except for the Client's obligation to pay any
fees and expenses in accordance with the terms of this Agreement,
to the date of termination; and
(ii) the Advisor's obligations to the Client under this Agreement
shall terminate except those obligations which are specifically
expressed to survive the termination of this Agreement.
(iii) this contract may be renewed by mutual consent.
10. Indemnification
(a) The Client undertakes to, and does hereby agree to, indemnify the
Advisor and its directors, officers and employees against any and all
actions, suits, claims, costs, and demands, losses, damages and
expenses which may be brought against or suffered by them or which
they may sustain, pay or incur by reason of the Advisor's performance
of the Services under this Agreement, with the exception of any such
actions, suits, claims, costs and demands, losses damages and expenses
caused by the willful misconduct or gross negligence of the Advisor or
any of its directors, officers or employees.
<PAGE>
11. Governing Law
This Agreement shall be governed by the laws of the Province of British
Columbia and the federal laws of Canada applicable therein.
12. Severability
If any provision of this Agreement, or the application of such provision to
any person or in any circumstance, shall be determined to be invalid,
unlawful or unenforceable, the remaining provisions of this Agreement, and
the application of such provision to any circumstance other than that to
which it is held to be invalid, unlawful or unenforceable, shall not be
affected thereby.
13. Amendments
Any amendment to this Agreement must be in writing and signed by both
parties hereto.
14. Time of Essences
Time shall be of the essence in this Agreement.
15. Entire Agreement
This is the entire Agreement between the Client and the Advisor with
respect to the consulting services to be provided by the Advisor to the
Client and supersedes any prior agreements with respect to such services
whether written or oral.
16. Notices
Notices hereunder shall be in writing and must be either personally
delivered or sent by double registered mail to the address(es) set forth
above. A party may change the address set forth above by proper notice to
the other.
17. No Waiver
The failure of any party to insist upon the strict performance of a
covenant or obligation hereunder, irrespective of the length of time for
which such failure continues, shall not be a waiver of such party's right
to demand strict performance in the future. No consent or waiver, express
or implied, to or of any breach or default in the performance of any
covenant or obligation hereunder shall constitute a consent or waiver to of
any other breach or default in the performance of the same or of any other
obligation hereunder.
<PAGE>
18. Assignment
This Agreement is personal in nature and may not be assigned by either
party hereto.
19. Enurement
This Agreement shall be binding upon and shall enure to the benefit of each
of the parties hereto and their respective employees and permitted
successors or assigns.
IN WITNESS WHEREOF the parties hereto have signed this Agreement as of the day
and year first above written.
Per:
Mr. Greg Hall
Director
Mr. Ernest Pernet
BENEFICIAL INTEREST CHANGING AGREEMENT
THIS AGREEMENT is executed and effective as of this 19th day of March 2000.
Between
Sanhe Yianjiao Sinoway Biotech Co., Ltd. ("Sinoway")
And
Dragon Pharmaceutical Inc., USA
WHEREAS
1. Allwin Newtech Ltd. ("Allwin") is a wholly owned subsidiary of Dragon
Pharmaceutical Inc. ("Dragon");
2. Sanhe Kailong Biopharmaceutical Co., Ltd. ("Kailong") is a
sino-foreign joint venture company established between Allwin and
Sinoway;
3. Allwin and Sinoway currently hold 75% and 25% of the Beneficial
Interest in Kailong respectively;
4. Both parties wish to change their beneficial interest in Kailong.
NOW THEREFORE, for and in consideration of the premises and of the mutual
representations, warranties, covenants, and agreements set forth in this
Agreement, and for other good and valuable consideration, the parties hereby
agree as follows:
1. Sinoway agreed to reduce its Beneficial Interest in Kailong from 25%
to 5%.
2. Allwin's beneficial interest in Kailong shall increase from 75% to 95%
accordingly.
3. In compensation for Sinoway to reduce its beneficial interest, Dragon
shall:
(a) make payment of US$250,000.00 to Sinoway, payable in Chinese Reminbi.
The payment shall be made within five (5) days from the execution of
this agreement.
(b) Issue 250,000 common shares of Dragon to Sinoway. No special
restriction shall be placed on the shares issued.
4. This agreement shall be governed by and construed under the laws of the
People's Republic of China.
<PAGE>
5. This Agreement shall inure to the benefit of, and be binding upon, the
parties hereto and their respective heirs, executors, and successors.
6. This agreement has Chinese version and English version. Both versions
have equal power.
IN WITNESS WHEREOF, this agreement has been executed as of 19th day of March,
2000 in Beijing, China.
Sanhe Yianjiao Sinoway Biotech Co., Ltd.
Per: ________________________________
Dragon Pharmaceutical Inc., USA
Per: _________________________________
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]
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INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Dragon Pharmaceuticals
Inc. and Subsidiaries on Form SB-2 of our audited financial statements as of
December 31, 1999, appearing in the Prospectus, which is part of this
Registration Statement, and of our report dated March 22, 2000, relating to the
financial statements appearing in this Registration Statement. We also consent
to the reference to us under the heading "Experts" in such Prospectus.
Vancouver, Canada "MOORE STEPHENS ELLIS FOSTER LTD."
May 15, 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.
