SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1999 Commission File Number 0-27937
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DRAGON PHARMACEUTICAL INC.
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(Exact name of Registrant as specified in its charter)
FLORIDA 65-0142474
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(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
543 Granville Street, Suite 1200
Vancouver, British Columbia V6C 1X8
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (604) 669-8817
Securities registered under Section 12(b) of the Exchange Act: None. Securities
registered under Section 12(g) of the Exchange Act: Common Stock, par value
$0.001.
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $-0-
The aggregate market value of the issuer's voting stock held by non-affiliates
of the issuer based upon the average bid and asked prices of such stock as of
March 31, 2000, was $80,767,031.
The number of shares outstanding of the issuer's common stock as of February 29,
2000, was 15,093,000.
Documents Incorporated By Reference:
Certain exhibits required by Item 13 have been incorporated by reference
from the Company's Form 10-SB filed on November 4, 1999.
Transitional Small Business Disclosure Format: Yes No X
<PAGE>2
PART I
ITEM 1. BUSINESS
General
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, 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.
Dragon initially plans to produce and market in China, the drug
Erythropietin which is a glyoprotein 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.
Dragon has 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.
Dragon 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.
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.
<PAGE>3
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.
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 glyoprotein 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.
Anemia can be treated by providing 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.
<PAGE>4
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 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.
<PAGE>5
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. 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.
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
o Increasing incidents of certain illnesses and diseases
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 new national health insurance system is
expected to 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
<PAGE>6
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
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.
<PAGE>7
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.
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. In
addition , we do not anticipate that any such patent protections will be imposed
by U.S.-China agreements or 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.
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.
<PAGE>8
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
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.
<PAGE>9
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 February 29, 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.
Risks Associated with Company's Developing Business
Dragon is a development stage company which is primarily involved in
the development, manufacture and marketing of the drug EPO. As a development
stage company, we have only a limited history of sales and revenues and no
established business track record.
Our ability to successfully produce and sell EPO in China will depend
on our ability to, among other things:
o Develop and expand the market for EPO in China; and
o Obtain additional approvals and/or cooperation of the
government of the PRC as necessary in the future relating to
additional applications to produce and market other drugs 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.
We will depend almost exclusively on outside capital to pay for the
research and development 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 be available if necessary to us 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.
Although we are currently utilizing our technology to produce EPO at
lower costs, our method for producing EPO on a commercial basis has only
recently begun. Although results from recent independent tests and our
production results have been encouraging, the ability of the current cell line
to produce EPO at consistent levels is still in the process of being evaluated.
Our technology is not protected by any patents or copyrights. Although
we treat our technology as proprietary in nature, other competitors could copy
our enhanced EPO production technology.
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:
<PAGE>10
o financial, marketing, technical and manufacturing resources;
o name recognition, and
o experience in China.
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.
Virtually all of the Company's production is conducted in China.
Consequently, the Company's business 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. Economic development may be limited as well by the imposition of austerity
measures intended to reduce inflation, the inadequate development or maintenance
of infrastructure 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. If for
any reason we were required to move our manufacturing operations outside of the
PRC, our profitability, competitiveness and market position could be materially
jeopardized, and there could be no assurance that we could continue our
manufacturing operations elsewhere.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
<PAGE>11
PART II
ITEM 5 MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a. Principal Market or Markets. Dragon's Common Stock began trading on
the NASD's OTC Bulletin Board under the symbol "DRUG" on October 9,
1998. The following quotations reflect the high and low bids for
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
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Quarter Ended High Low
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December 31, 1999 $3.69 $1.63
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September 30, 1999 $3.38 $2.25
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June 30, 1999 $3.19 $1.88
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March 31, 1999 $2.00 $1.00
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December 31, 1998 $1.50 $ .94
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October 9, 1998 $ .75 $ .75
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b. Approximate Number of Holders of Common Stock. The approximate number
of holders of record of Dragon's common stock at February 29, 2000
was 83. This number does not include stockholders who hold Dragon's
securities in street name.
c. Dividends. Holders of common stock are entitled to receive such
dividends as may be declared by Dragon's Board of Directors. No
dividends have been paid with respect to Dragon's common stock and no
dividends are anticipated to be paid in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion, other than the historical financial information, may
consist of forward-looking statements that involve risks and uncertainties,
including quarterly and yearly fluctuations in results, the timely
availability of Dragon's pharmaceutical products, the impact of competitive
products and treatments, and the other risks described in this report. These
forward-looking statements speak only as of the date hereof and should not be
given undue reliance. Actual results may vary significantly from those
projected.
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.
<PAGE>12
Since inception, we have relied on equity financings to fund our
operations. Funds required to finance our future production expansions,
marketing efforts and ongoing business are expected to come primarily from debt
and equity financing with the remainder provided from operating revenues which
began in September, 1999. Operating revenues to date have been substantially
less than the cost of operations. However, recent financings completed by
management are deemed adequate to meet our anticipated working capital needs
over the next 12 months.
Management's Discussion and Analysis
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. 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
<PAGE>13
the payment to two directors for services, $41,784 related to travel to China to
evaluate pharmaceutical companies and legal expenses related to the
reorganization of Allwin Newtech and the raising of capital.
Net and Comprehensive Loss. Dragon had a net loss of $2,845,879 and a
comprehensive loss of $2,791,033 for the fiscal year ending December 31, 1999
compared to a net loss of $471,717 and a comprehensive loss of $473,862 for the
period February 10, 1998 to December 31, 1998. Calculated in the comprehensive
loss for 1999 was a minority interest gain of $54,846. The comprehensive loss
for 1998 included a foreign currency translation adjustment of $2,145 related to
Dragon's operations in China.
Liquidity and Capital Resources
Dragon is a development stage pharmaceutical and biotechnological company that
has commenced the manufacture and marketing of pharmaceutical products in China
through its 75% equity interest in Nanjing Huaxin Biotech. Previously, the
Company has raised funds through equity financings to fund its operations and to
provide working capital. The Company currently has no plans 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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are set forth on pages F-1 through F-19 attached as
an exhibit to this document. See "Item 13. Exhibits and Reports on Form 8-K."
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not Applicable.
<PAGE>14
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
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
-------------------------------------- ----------------------------------- ---------- ------------------------------
Shaun Maskerine Secretary/Treasurer 32 July 1998 - present
-------------------------------------- ----------------------------------- ---------- ------------------------------
Ken Z. Cai Director, Chief Financial Officer 35 September 1998 - present
-------------------------------------- ----------------------------------- ---------- ------------------------------
Greg Hall Director 43 September 1998 - present
-------------------------------------- ----------------------------------- ---------- ------------------------------
Alexander Wick Director 61 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
<PAGE>15
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.
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 the 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 Accountant 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
<PAGE>16
functional area of the Company. The Finance Committee is comprised of Messrs.
Cai, Yuen and Hall. The Technical Committee is comprised of Messrs. Wick, Liu
and Yuen. The Promotions 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
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.
ITEM 10. 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 $100,000 during the last
two complete fiscal years.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
---------------------------------------------- -----------------------------------------------------------
Awards Payout
-----------------------------------------------------------
Restricted
Other Annual Stock Securities LTIP All Other
Bonus ($) Compensation ($) Award(s) ($) Underlying Payout ($) Compensation($)
Year Salary Option s (#)
----- ---------- ---------- ---------------- ------------- ------------- ---------- --------------
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.
<PAGE>17
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 (George Wang, Xiaoshan Liang,
Wayne Zhou, Suju Zhong, Zhiqiang Han, Lin-Ling Chen, Haito Wang, Zuze Wu, Jili
Zhuang, Guangming Zhong, Jin Yuan, Fen Zhou, Youfu Li, Teresa Liu, Sy-Jenq
Loong, Minron Wang). These individuals are not paid a fee but were granted
options to purchase shares of Common Stock at an exercise price of $0.50 and
$2.50 per share with a term of 5 years. 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 $2.50 to the Company's technical
consultants.
Stock Option Plans
Dragon has no Stock Option Plan. The Board of Directors has currently
approved to limit the number of options available to employees, directors and
officers of Dragon at 1,500,000. Unless otherwise provided by the Board, all
options are exercisable for a term of five years. Each option is exercisable
only so long as the optionee remains as a director or employee of Dragon. No
option is transferable by the optionee other than by will or the laws of descent
and distribution. As of December 31, 1999, options to acquire 1,520,000 shares
of common stock were outstanding. As of February 29, 2000 there were 1,562,000
options outstanding.
<TABLE>
<S> <C> <C> <C> <C>
OPTIONS GRANTED IN THE YEAR ENDED DECEMBER 31, 1999
Number of
Securities % of Total Option
Underlying Granted to Exercise of
Options Granted Employees in Fiscal Base Price
Name in 1999 Year 1999 ($/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% $0.50 November 9, 2004
<PAGE>18
Number of
Securities % of Total Option
Underlying Granted to Exercise of
Options Granted Employees in Fiscal Base Price
Name in 1999 Year 1999 ($/share) Expiration Date
-------------------- ---------------- -------------------- ------------ -----------------
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>
FISCAL YEAR END OPTION VALUE (DECEMBER 31, 1999)
<TABLE>
<S> <C> <C>
Number of Securities Underlying
Unexercised Options/SARs at Fiscal Value of Unexercised in the Money
Year End (#) Options/SARs at Fiscal 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
<PAGE>19
Number of Securities Underlying
Unexercised Options/SARs at Fiscal Value of Unexercised in the Money
Year End (#) Options/SARs at Fiscal Year End
Exercisable/Unexercisable Options Exercisable/Unexercisable Options
Name at December 31, 1999 at December 31, 1999
- ------------------- ---------------------------------- ---------------------------------
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
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
- -------------------------
</TABLE>
*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.
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.
(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.
<PAGE>20
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 29, 2000, certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each stockholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, (ii) each executive officer and
director of the Company, and (iii) each director and executive officer of the
Company as a group.
As of February 29, 2000, there were 15,093,000 shares of Common Stock
outstanding.
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
- ------------------------------ ------------- -------------
Arbora Portfolio Management
Gartenstrasse 38
Zurich, Switzerland 812,500 5.8%
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 15.9%
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.
<PAGE>21
(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 exercised within sixty
days.
(6) Includes options to acquire 1,100,000 shares of Common Stock.
ITEM 12. 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, 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 Cheng
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are being filed as part of this report:
(1) Financial Statements
The following Financial Statements pertaining to Dragon are filed
as part of this Prospectus:
<TABLE>
<S> <C>
Report of Independent Accountants..............................................................F-2
Year-end Consolidated Balance Sheets...........................................................F-3
Year-end Consolidated Statements of Stockholders' Equity.......................................F-4
Year-end Consolidated Statements of Operations.................................................F-5
Year-end Consolidated Statements of Cash Flows.................................................F-6
Notes to Consolidated Financial Statements...........................................F-7 thru F-19
</TABLE>
<PAGE>22
<TABLE>
<S> <C> <C>
(2) Exhibits
EXHIBIT NO.
DESCRIPTION LOCATION
-----------------------------------------------------------------------------------------------------
3.1 - 3.4 Articles of Incorporation and Bylaws Incorporated by reference to Exhibits
No. 3.1 - 3.4 to the Company's Form
10-SB filed on November 4, 1999
10.1 Sino-Foreign Co-operative Company Incorporated by reference to Exhibit
No. 10.1 to the Company's Form
10-SB filed on November 4, 1999
10.2 Sino-Foreign Joint Venture Contract Incorporated by reference to Exhibit
No. 10.2 the Company's Form
10-SB filed on November 4, 1999
16.1 Letter regarding Changes in Certifying Incorporated by reference to Exhibit
Accountant No. 16.1 to the Company's Form
10-SB filed on November 4, 1999
</TABLE>
(b) Reports on Form 8-K:
None.
<PAGE>23
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 28, 2000 DRAGON PHARMACEUTICAL INC.
a Florida Corporation
/S/ LONGBN LIU
--------------------------
Longbin Liu, President
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates stated.
Signatures Date
- -------------------------------------- --------------
/S/LONGBIN LIU March 28, 2000
-------------------------------------
Longbin Liu
President, Director, Chief Executive
Officer
/S/KEN Z. CAI March 31, 2000
------------------------------------
Ken Z. Cai
Director, Chief Financial Officer
and Principal Financial Officer
/S/GREG HALL March 24, 2000
- -------------------------------------
Greg Hall, Director
March ___, 2000
ROBERT FRIEDLAND, Director
/S/ALEXANDER WICK March 29, 2000
- -------------------------------------
Alexander Wick, Director
/S/PHILIP YUEN PAK YIU March 31, 2000
- --------------------------------------
Philip Yuen Pak Yiu, Director
/S/DR. YIU KWONG SUN
- -------------------------------------
Dr. Yiu Kwong Sun, Director March 29, 2000
<PAGE>
<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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-KSB FOR DRAGON PHARMACEUTICAL INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 617,262
<SECURITIES> 0
<RECEIVABLES> 9,960,743
<ALLOWANCES> 0
<INVENTORY> 657,966
<CURRENT-ASSETS> 11,694,911
<PP&E> 5,308,227
<DEPRECIATION> 263,101
<TOTAL-ASSETS> 16,740,037
<CURRENT-LIABILITIES> 3,289,123
<BONDS> 0
0
0
<COMMON> 10,735
<OTHER-SE> 12,478,033
<TOTAL-LIABILITY-AND-EQUITY> 16,740,037
<SALES> 989,539
<TOTAL-REVENUES> 1,008,936
<CGS> 204,473
<TOTAL-COSTS> 3,799,969
<OTHER-EXPENSES> 1,876,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 326,623
<INCOME-PRETAX> (2,791,033)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,791,033)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,791,033)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
