SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2001 Commission File Number 0-27937
DRAGON PHARMACEUTICAL INC.
(Exact name of Registrant as specified in its charter)
Florida 65-0142474
(State of other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
1055 Hastings Street Street, Suite 1900
Vancouver, British Columbia V6E 2E9
(Address of Principal Executive Offices)
(604) 669-8817
(Registrant's telephone number including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
par value $0.001
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes X
No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K 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-K or any
amendment to this Form 10-K. [ ]
State issuer's revenues for its most recent fiscal year: $3,073,885
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 15, 2002, was $27,765,375.
The number of shares outstanding of the issuer's common stock as of March 15,
2002, was 20,331,000.
Documents Incorporated By Reference: None
2
With the exception of historical facts stated herein, the following
discussion may contain forward-looking statements regarding events and financial
trends that may affect Dragon Pharmaceutical Inc.'s future operating results and
financial position. Such statements are subject to risks and uncertainties that
could cause Dragon Pharmaceutical Inc.'s actual results and financial position
to differ materially from those anticipated in such forward-looking statements.
Factors that could cause actual results to differ materially include, in
addition to other factors identified in this report, that Dragon Pharmaceutical
has incurred losses since its inception and needs additional capital to complete
its business plan, all of which factors are set forth in more detail in the
sections entitled "Risks Associated With Dragon Pharmaceutical" and
"Management's Discussion and Analysis" herein. Readers of this annual report are
cautioned not to put undue reliance on "forward looking" statements that are, by
their nature, uncertain as reliable indicators of future performance. Dragon
Pharmaceutical Inc.'s disclaims any intent or obligation to publicly update
these "forward looking" statements, whether as a result of new information,
future events, or otherwise.
As used in this annual report, the terms "we", "us", "our", "the Company"
and "Dragon" shall mean Dragon Pharmaceutical Inc. and its subsidiaries unless
otherwise indicated.
Part I
Item 1. Business
General
We are a development stage pharmaceutical and biotechnological company
whose business plan is to develop and manufacture pharmaceutical products in
China and market pharmaceutical products in China and developing countries. In
1999, we acquired a 75% interest in a drug manufacturing company called Nanjing
Huaxin Bio-pharmaceutical Co; Ltd. ("Nanjing Huaxin") located in Nanjing City,
China and are currently implementing our proprietary technology, which will
allow Nanjing Huaxin to produce drugs such as EPO in an efficient and
cost-effective manner. Our strategy is to use our biotechnological expertise to
produce and market pharmaceutical products primarily in China and developing
countries at costs that will be lower than those currently available. Subsequent
to December 31, 2001, we acquired the remaining 25% interest in Nanjing Huaxin.
Corporate History
Merger with First Geneva Investments, Inc.
We were originally formed on August 22, 1989, as First Geneva Investments,
Inc. First Geneva Investments was formed for the purpose of evaluating and
acquiring businesses. From 1989 to 1998, First Geneva Investments had no
significant activity. On August 17, 1998, pursuant to a share exchange
agreement, First Geneva Investments issued 7,000,000 shares of its common stock
and 2,000,000 warrants with each warrant having the right to acquire one-half
share of common stock at $0.50 per half share, or 1,000,000 shares of common
stock at $1.00 per share in the aggregate, in exchange for all of the
outstanding shares of Allwin Newtech Ltd., a British Virgin Islands corporation.
Allwin Newtech Ltd. was formed on February 10, 1998, for the purpose of
developing pharmaceutical products in China. Allwin Newtech owns certain
technology used to enhance the efficiency of producing EPO. As a result of the
acquisition, the former shareholders of Allwin Newtech became 87.5% shareholders
of First Geneva Investments and Allwin Newtech became its wholly owned
subsidiary. On September 21, 1998, First Geneva Investments changed its named to
Dragon Pharmaceutical Inc. Prior to the reorganization, First Geneva Investments
3
and its officers, directors and shareholders were not affiliated with Allwin
Newtech and its officers, directors and shareholders.
Our Joint Ventures and Acquisitions
Sanhe Kailong Bio-Pharmaceutical Limited
On April 18, 1998, Allwin Newtech entered into a contract to acquire a 75%
interest in a joint venture called Sanhe Kailong Bio-pharmaceutical Limited, a
corporation organized under the laws of China. Since that time, Allwin Newtech
has increased its interest in Sanhe Kailong Bio-pharmaceutical Limited to 95%.
The other 5% joint venture partner is Sinoway Biotech Limited. Sanhe Kailong was
formed in 1998 for the purpose of developing, manufacturing and marketing
pharmaceutical products in China.
For its initial 75% interest, Allwin Newtech agreed to contribute
approximately $1,000,000 and its technology to Sanhe Kailong. For its initial
25% interest, Sinoway Biotech was to contribute a contract to purchase a license
to manufacture EPO and other drugs in China and a right to acquire a long-term
lease of 25 acres of land at a pharmaceutical park located in the Yanjiao
Special Economic Zone, China. Upon our acquisition of Allwin Newtech, we assumed
Allwin Newtech's interest in Sanhe Kailong Bio-pharmaceutical and are currently
evaluating our options under the joint venture agreement. To increase Allwin
Newtech's position from 75% to 95% in Sanhe Kailong, on March 19, 1999, we
agreed to pay $250,000 and to issue 250,000 shares of our common stock to
Sinoway Biotech. Sinoway Biotech will continue to hold the remaining 5%
interest. Messrs. Ken Cai, Greg Hall and Longbin Liu serve as directors of Sanhe
Kailong. At this time, we have neither contributed the $1,000,000 for research
and development nor our technology to Sanhe Kailong. We have paid $250,000 to
Sinoway Biotech to increase our interest in the joint venture but have not yet
issued the 250,000 shares of stock. Due to our acquisition of Nanjing Huaxin and
its license to manufacture EPO, we determined not to pursue EPO manufacturing
through the Sanhe Kailong joint venture. Consequently, the contract to purchase
a drug manufacturing license held by Sinoway Biotech was not deemed necessary
and was therefore not contributed to Sanhe Kailong. Currently, Sanhe Kailong has
no operations. Although no decision has been made, we may consider having Sanhe
Kailong develop other pharmaceutical drugs. Sanhe Kailong was formed by Allwin
Newtech for the purpose of the joint venture. Neither we nor Allwin Newtech had
affiliation with Sinoway Biotech prior to the joint venture's formation.
Nanjing Huaxin Bio-pharmaceutical Co, Ltd.
On July 27, 1999, Allwin Newtech closed a share transfer agreement with the
Nanjing Medical Group Ltd. whereby, effective June 11, 1999, Allwin Newtech
purchased from the Nanjing Medical Group 75% of its equity interest in Nanjing
Huaxin Bio-pharmaceutical Co, Ltd. The total purchase price for the 75% equity
interest was $4.2 million. Of the $4.2 million, $1,218,100 had been allocated as
working capital for the joint venture. As at February 29, 2000, Dragon had
fulfilled all payment obligations for the Nanjing Huaxin acquisition. In January
2002 we acquired the balance of the 25% interest from Nanjing Medical Group for
$1,400,000.
Nanjing Huaxin Biotech Co. was formed and operates pursuant to a
Sino-Foreign Joint Venture Contract between The Nanjing Medical Group Company
Limited and Allwin Newtech. Under the terms of the Joint Venture Contract,
Nanjing Huaxin's board of directors consists of five directors of which Allwin
Newtech has the right to select three directors, including the chairman. Allwin
Newtech has selected Messrs. Liu, Cai and Yuen as its representatives. Mr. Liu
also serves as chairman to Nanjing Huaxin Biotech. The Nanjing Medical group has
the right to select the remaining two representatives.
4
Because of Allwin Newtech's majority ownership and majority representatives
on the Nanjing Huaxin Biotech's board, Allwin Newtech controls Nanjing Huaxin
Biotech's operations in the ordinary course of business. However, the following
transactions by Nanjing Huaxin Biotech requires the unanimous approval by its
board: (1) amending Nanjing Huaxin Biotech's articles of association; (2)
liquidating Nanjing Huaxin Biotech; (3) increasing or decreasing Nanjing Huaxin
Biotech's registered capital; (4) mortgaging Nanjing Huaxin Biotech's assets;
and (5) merging Nanjing Huaxin Biotech.
Nanjing Huaxin is located in Nanjing City, China and owns a license and
production permit for the manufacture of EPO in China. In 2001, Nanjing Huaxin
manufactured approximately 3.3 million doses of compared to 550,000 doses in
2000. As part of our business strategy, we have supplied management assistance
and capital investment to upgrade Nanjing Huaxin's facilities and implemented
our production technology to increase production efficiency and decrease
production costs. Nanjing Huaxin was previously part of Nanjing Research
Institute of Military Medical Science, a corporation operated by the Chinese
military. We had no affiliation with Nanjing Medical Group or Nanjing Huaxin
Biotech prior to entering into the share transfer agreement.
Nanjing Huaxin currently produces EPO in China for kidney dialysis
applications and Chinese governmental approval for surgery is anticipated in mid
2002. Clinical trials for cancer therapy applications are expected to be
completed in 2002.
Originally, we contemplated entering the EPO market by acquiring an EPO
license and building a manufacturing facility through our interest in Sanhe
Kailong. This strategy would have required a large capital investment by us. In
light of the anticipated capital investment in Sanhe Kailong, we acquired a 75%
interest in Nanjing Huaxin that has an existing facility and necessary permits
and licenses. Nanjing Huaxin has previously been producing an estimated 300,000
vials of EPO per year and markets its EPO under the name "Ning Hong Xin." We are
currently evaluating our options regarding our investment in Sanhe Kailong.
Alphatech Bioengineering Limited
On October 6, 2000, we entered into an acquisition agreement with Alphatech
Bioengineering Limited, a Hong Kong corporation owned by Dr. Longbin Liu and Mr.
Philip Yuen. Dr. Liu is the president of the Company and one of our directors
and Mr. Yuen is one of our directors. Under the terms of the acquisition
agreement, we have agreed to purchase Alphatech Bioengineering's rights and
technology relating to the production of Hepatitis B vaccine through the
application of genetic techniques on hamster ovary cells including the culturing
of such cells, which act as a host expression system for the production of
Hepatitis B vaccine protein, and the purification of Hepatitis B vaccine protein
from the culture of such cells.
In connection with entering into the acquisition agreement, Alphatech
Bioengineering has made certain representations regarding the development of a
cell-line of hamster ovary cells which act as a host expression system for the
production of Hepatitis B vaccine protein including:
o the cell-line of hamster ovary cells has been developed to the stage
where the hamster ovary cells have the capacity to express Hepatitis B
vaccine protein at levels in excess of 5 mg/liter;
o the technology includes industrial scale fermentation and purification
methods that are suitable for use in the commercial production of
Hepatitis B vaccine protein for incorporation in a Hepatitis B vaccine
for humans; and
5
o within three months of a production facility of sufficient capacity
being fully operational for industrial production, to the reasonable
satisfaction of Alphatech Bioengineering, and staffed and equipped
with a bioreactor system and purification process for the Hepatitis B
vaccine protein:
o the technology will have the capacity to support a sustained
production at the production facility of at least 1,000,000 doses
per year of Hepatitis B vaccine protein;
o production facility of Hepatitis B vaccine protein will yield at
least 5 mg/liter from the bioreactor and the recovery of the
purified Hepatitis B vaccine protein of acceptable commercial
quality meeting the standard of the State Drug Administration of
China from media which would yield at least 50% or 2.5 mg/liter
in the first three batches of commercial production; and
o the direct production costs in China, based upon current prices,
for the first one million does of Hepatitis B vaccine, including
all costs directly associated with the manufacture of Hepatitis B
vaccine protein, will be less than US$1.00 per dose.
In the event any of the representations and warranties made by Alphatech
Bioengineering are breached by Alphatech Bioengineering, Dragon will have the
right to require Alphatech Bioengineering to reimburse us for the $4 million
purchase price.
Alphatech Bioengineering's rights and technology relating to the production
of Hepatitis B vaccine is in the developmental stage, and Alphatech
Bioengineering has no commercial production of or sales of Hepatitis B vaccine.
The acquisition of Alphatech Bioengineering's rights and technology relating to
the development of Hepatitis B vaccine is subject to customary representations
and conditions.
On June 5, 2001, the Company amended the agreement with Alphatech to allow
the Company to pursue additional options for the Hepatitis B Vaccine project.
Under the terms of the amended agreement, the Company will explore different
options for the Hepatitis B Vaccine project including, but not limited to, joint
venture partnerships, establishing a production facility, and selling the
project to a third party.
In the event that the Company does not find an option regarding the
Hepatitis B Vaccine project suitable to the Company within nine months from the
date of the Amended Agreement, Dr. Longbin Liu, one of the principals of
Alphatech, will repurchase the Hepatitis B Vaccine project and assume
operational development. The purchase price will be US $4.0 million, which was
the purchase price that Dragon originally paid to Alphatech.
Pharmaceutical Products
Erythropoietin or EPO. EPO is a glycoprotein that stimulates and regulates
the rate of formation of red blood cells. In the adult human, EPO is produced by
the kidneys and acts on precursor cells to stimulate cell proliferation and
differentiation into mature red blood cells. Kidney disease and chemotherapy or
radiation therapy for treating cancer may impair the body's ability to produce
EPO and, in turn, reduce the level of red blood cells to less than one-half that
6
of healthy humans. The shortage of red blood cells leads to insufficient
delivery of oxygen throughout the body. The result is anemia, which afflicts 90%
of all dialysis patients. Symptoms of anemia include fatigue and weakness.
One of the treatments for anemia is to provide EPO protein. This treatment
is administered through dialysis tubing or by injection approximately three
times per week, either intravenously or subcutaneously. EPO is most commonly
administered to people with chronic renal failure, HIV patients being treated
with anti-viral drugs, and cancer patients on chemo or radiation therapy. The
treatment is less dangerous and generates fewer adverse side effects than
alternative treatment that include blood transfusions and androgen therapy.
However, side effects of EPO may include hypertension, headaches, shortness of
breath, diarrhea, rapid heart rate and nausea.
While EPO has been tested to be effective in treating anemia, other drugs
and treatments currently exist or are in development that can treat anemia.
These alternative drugs or treatments could be proven more effective, less
expensive or preferable to the Chinese customer than EPO. The inability of EPO
to compare favorably to these alternative drugs would have an adverse affect on
our business objectives.
Slow-Release EPO. In June 2001, Dragon entered into an agreement related to
a novel, slow-release formulation for EPO with Transworld Pharmaceuticals Corp.
of Portugal and Renapharm AB of Sweden. This was a highly significant
development for Dragon that may ultimately be instrumental in placing the
Company beside the leaders in the EPO marketplace.
The agreement provides Dragon with sole worldwide manufacturing rights as
well as exclusive marketing rights to Asia, including China, Japan, Korea, and
SE Asia. Transworld Pharmaceuticals, an international distributor of blood
related products and biotechnology drugs, will have exclusive marketing rights
to all markets outside Asia.
A pilot clinical trial conducted in 101 patients at the University
Hospital, Uppsala University in Sweden, assessed the monthly administration of
EPO in this slow release formulation compared to the four times per week
administration of conventional EPO. The total dose of each form of EPO was
identical. The results of the study showed that monthly administration of the
slow release formulation had the same therapeutic effect as four times per week
conventional EPO with the added advantage of requiring less frequent injections.
To the best of our knowledge, we are one of only two companies worldwide
developing a sustained release formulation for EPO which has been tested in
humans. The other competitor is Amgen Inc., with sole rights to Aranesp, a long
lasting EPO formulation based on a second-generation EPO molecule. Aranesp was
recently approved in the EU for the treatment of chronic renal failure and is
under review by the FDA for the same indication. The drug is in Phase I/II
studies to treat anemia associated with chemotherapy.
The potential market for sustained release or long-lasting EPO is estimated
by Amgen and industry analysts at $5 billion per year, with application in the
treatment of anemia in patients with kidney failure and cancer patients
undergoing chemotherapy.
Prior to the 2004 expiry of the EPO gene patent, generic forms of EPO may
only be sold in non-patent covered markets outside North America, the European
Union, Japan, Australia, and New Zealand. Given that our slow-release
formulation incorporates Dragon's generic EPO, initial sales will focus on the
developing world markets not protected by the EPO gene patent. After 2004, our
slow-release formulation would not be restricted by any existing patents and
would be eligible for marketing worldwide.
7
Dragon plans to proceed immediately with finalizing formulation and
preclinical studies following which we will file our submission with the Chinese
SDA seeking permission to begin clinical trials. According to our agreement,
each partner will participate in the final development of the formulation. Dr.
Bo Danielson MD, PhD, Managing Director of Renapharm and developer of this
slow-release formulation, will serve as lead clinical and technical advisor to
the project. Dr. Danielson is recognized as a world expert on EPO, having
participated in over 75 published clinical studies involving EPO.
Thrombopoietin (TPO). TPO is a protein produced mainly in the liver that
stimulates the production of platelets by bone marrow. Platelets (or
thrombocytes) are critical to blood clotting and wound healing, and are often
diminished in patients receiving cancer chemotherapy, or in those with liver or
other relevant diseases, causing a condition called thrombocytopenia (a reduced
level of platelets). This condition can result in uncontrolled bleeding or
bruising and is currently treated by blood transfusions.
The introduction of effective platelet stimulating drugs, such as TPO, will
greatly improve our ability to treat chemotherapy-related platelet deficiencies.
They may also have application for increasing platelet levels in surgical
patients who donate their own blood prior to surgery for transfusion during
surgery. Results of Phase I/II randomized, placebo controlled clinical trials
have shown that TPO increases platelet counts when used prior to or subsequent
to chemotherapy and that it is generally well tolerated.
TPO has not yet been commercialized in any market. Genentech owns the TPO
gene patent and is co-developing TPO produced in a mammalian CHO cell culture
system with Pharmacia-Upjohn. Their product is currently in Phase III clinical
trials.
Dragon acquired co-development rights to a Pichia yeast culture system for
the production of TPO in May of 2000. We believe that our Pichia yeast system
will produce a higher yield than the mammalian CHO cell line. Cell line
development and all pre-clinical studies have been completed and the product is
now poised to enter human clinical trials in China. We anticipate that
completion of Phase 1, 2 and 3 clinical trials through to Chinese product
approval will take 2 to 3 years. Dragon's portion of remaining product
development costs is fixed at $60,000.
Granulocyte-Colony Stimulating Factor (G-CSF).G-CSF stimulates the bone
marrow to produce neutrophils, or leukocytes, a type of white blood cell that
helps the body fight infection and disease. When white blood cells are reduced
in number, a condition known as "leukopenia", susceptibility to infection
increases dramatically. Cancer radiation and chemotherapy often diminish or
destroy the leukocytes, as does advanced HIV infection. White blood cell counts
are also low in patients with acute myelogenous leukemia and in people receiving
bone marrow transplants.
The introduction of G-CSF products has markedly decreased the potential for
infection in patients with leukopenia by rapidly increasing the white blood cell
production by bone marrow and reestablishing their protective function. The
worldwide G-CSF market, currently valued at $1.3 billion per year, was developed
by Amgen and its multinational partners Hoffman La-Roche and Kirin using a
bacterial cell line technology. Boehringer Mannheim is producing G-CSF using a
CHO cell line. The G-CSF gene patent expires in 2006.
Dragon's G-CSF expression technology is based on a Pichia yeast cell line
that we believe will have a markedly greater production yield than both the
E.coli and CHO cell lines used by our competitors. Proteins produced using
Pichia yeast cell cultures may also cause fewer side effects since there are no
bacterial toxins in the final product. We have completed cloning of the G-CSF
gene and are poised to begin cell line development. Remaining development time
is estimated at 2 - 2.5 years at an approximate cost of $2.0 million.
8
Human Insulin. Insulin is a peptide hormone that is secreted by cells of
the Islets of Langerhans in the pancreas. Insulin plays a critical role in
glucose homeostasis (i.e. balancing the level of glucose in the blood) by
regulating the production and storage of glucose in the liver, along with the
uptake and metabolism of glucose in the body's tissue. Glucose is the primary
energy source for the body and, therefore, insulin regulation is a critical
factor to normal metabolism. In addition, insulin also regulates the metabolism
of lipids and proteins.
Diabetes is the name given to a disorder of glucose level in the blood,
which is primarily related to defects in insulin production, regulation, or
reception. The commonest forms of insulin disorders are Type I and Type II
diabetes. All Type 1 or IDDN (insulin-dependent diabetes mellitus) diabetics
require insulin therapy, as do approximately 20% of Type II or NIDDM
(non-insulin dependent diabetes mellitus) patients.
In 1998 worldwide incidence of diabetes was estimated at 135 million
people, 10% of whom have Type I disease. This figure is projected to double to
300 million by 2025 due to improved diagnosis, aging of the population, diet,
obesity and lifestyle. The cost of insulin varies greatly between countries,
from a low of $3 per vial to over $20 per vial. Among the major producers of
injectable recombinant insulin are Novo Nordisk and Eli Lilly, each with over
40% of the world market. Hoechst and several other companies account for the
remaining 20%. Novo-Nordisk's and Eli Lilly's patent on human insulin expires in
2002.
Dragon has cloned the insulin gene and is ready to begin development of a
Pichia yeast cell line for insulin. Since insulin is already an established
drug, we will only be required to conduct Phase II clinical trials in China
prior to submitting for regulatory approval. We anticipate that time from
initiation of preclinical studies to submission of our New Drug License in China
will be 2.5 - 3 years at an additional development cost of $2.5 million.
Hepatitis B Vaccine. Hepatitis B is a viral disease that causes both acute
and chronic hepatitis (inflammation of the liver) and accounts for over 1
million deaths per year. An estimated 2 billion people are infected with
Hepatitis B virus (HBV) worldwide. Although relatively rare in North America,
Hepatitis B infection is endemic in parts of Asia. It is estimated that there
are 300 to 350 million carriers throughout China, Southeast Asia, the
Philippines, Africa, and the Middle East. According to a recent Chinese
government survey, an estimated 10% of the Chinese population either have active
Hepatitis B or are chronic carriers of the disease.
The 1999 global market for Hepatitis B vaccines is estimated at $708
million, broken down by market as follows with less than 8% of sales generated
in the developing regions of the world. These vaccines typically cost $20 - $30
per injection, making them prohibitively expensive for precisely those regions
where they are most needed.
There are many competitors in the Hepatitis B vaccine market. There are no
potential patent infringement issues to consider as a gene patent was never
issued for the Hepatitis B vaccine antigen.
Dragon is currently seeking either a licensee or co-development partner for
our CHO cell line-based Hepatitis B vaccine product. Given the high costs
involved in clinical trials for vaccines and the requirement for a separate
vaccine production facility, it is our intention to maximize the value of this
technology by licensing it out or beginning co-development with a partner in the
near term, rather than delay product development and commercialization until we
can fund it internally.
9
Proprietary Biotechnology
We have achieved enhanced efficiencies in the production of EPO by Nanjing
Huaxin by introducing a high-yield mammalian cell line developed in China. Our
scientists designed a unique plasmid vector for expression of target genes in
mammalian cells and constructed the EPO-expression CHO (Chinese Hamster Ovary)
cell line using this technology. The science behind our technology is summarized
below.
CHO cells are used for obtaining the EPO-expression cell lines. CHO cells
have the ability of proliferating indefinitely in culture and are the most
widely-used mammalian cells for producing recombinant proteins. The CHO
cell-based expression system is considered the industry standard and is used by
us for protein production.
In order to construct a CHO cell line, which expresses a particular
protein, the genetic materials encoding the sequences of the desired protein
(cDNA) are inserted into a plasmid vector. The plasmids are encapsulated in
liposomes and then used to transfect the CHO cells. In addition to delivering
the desired cDNA into CHO cells, it is the plasmid vector that largely
determines whether the high yield of the recombinant protein production by the
CHO cells has or has not been "transfected" (i.e., genetically modified by the
uptake of the genetic material). The plasmid vector will allow the amplification
of itself together with the cDNA of desired protein inside the CHO cells under
certain conditions. This will lead to a higher level production of the desired
protein by the transfected CHO cells.
In addition to the protein genetic information that the plasmid vector
transports into the CHO cells, several marker genes are also included within the
plasmids. These genes produce enzymes that can be detected to provide an
indication that the cells are transfected. This will be used to select the
transformed cells from the unmodified cells. Some of the marker genes are used
to induce the amplification of cDNA of the desired protein in the transformed
cells. More cDNA copies would translate into a higher yield of the protein.
Through a selection process, clones of the CHO cells with stable growth and the
highest level of expression of the desired protein are selected. During this
process, various techniques are used to amplify the number of copies of the cDNA
that codes for the desired protein.
These selected clones will be expanded into large volumes and stored in
aliquots as the Master Cell Banks ("MCB") for large-scale protein production.
The CHO cell culture systems for industrial production of recombinant proteins
are variable for a few months of sustained protein production. After that, new
cells from the MCB will be scaled up for another cycle. The protein produced by
the CHO cells will be secreted into the media during the culture and the media
obtained will be used to purify the desired protein.
Research and Development
We have developed our own technology to construct a unique plasmid vector.
These activities are carried out by employees of Nanjing Huaxin as well as
outside consultants. The 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.
10
Further, we are conducting research and development to develop and market
other pharmaceutical drugs. In order to save costs, we do not have our own
research and development department. However, as discussed below, we have
entered into certain agreements with Dr. Longbin Liu, our president, or with
companies in which Dr. Liu may control or have an interest into develop new
project for us. These agreements may lead to conflicts of interests. See "Risk
Factors - Our directors and officers may have interest in some transactions that
may cause conflicts," "Certain Relationships And Related Transactions" and Notes
7, 8, 12, and 15 to our financial statements.
The Company has entered into a Patent Development Agreement January 14,
2002, with Dr. Liu and Novagen Holding Inc. ("Novagen") whereby the Company has
the first right to select and acquire one patent resulting from the discovery of
a new gene or protein. This option to acquire a patent has a term of three years
from the date of the agreement. Novagen is a research and development company
located in Vancouver. Under the agreement Novagen and Dr. Liu shall be
responsible for all development costs up to filing of the patent application.
The Company will be required to reimburse Novagen and Dr. Liu for legal costs
related to the patent filing and will be responsible for all costs related to
the subsequent development and commercialization of the project.
In consideration of the rights under this agreement, the Company has paid
Dr. Liu and Novagen US $500,000 and issued warrants exercisable for 1,000,000
shares of the Company at an exercise price of US $2.50 per share for a term of
five years. If the Company chooses not to select a project patent within the
three years following the execution of the agreement, Dr. Liu's warrants may be
cancelled.
Dr. Liu and a team of research scientists trained in North America and
China have been involved in the research and development of novel drug projects
since 1995. The research and development focus is on the discovery of new gene
proteins with broad application in the areas of oncology and cardiovascular
disease. Several projects are in the late stages of drug discovery and it is
anticipated that the first filing of a United States patent will occur in 2002.
The research projects conducted by Dr. Liu have been incorporated into Novagen.
The Company has entered into a Project Development Agreement with Dr. Liu
dated January 14, 2002, whereby Dr. Liu has agreed to conduct certain
development projects on behalf of the Company in consideration of the Company
providing funding for the projects. Dr. Liu has agreed to conduct projects for
the research and development of G-CSF and recombinent Human Insulin protein. As
part of the Project Development Agreement, the Company intends to enter into a
consulting agreement with Dr. Liu to compensate him for the services he will be
providing to the Company pursuant to the Project Development Agreement.
Marketing and License Agreements
Through our wholly-owned subsidiary, Allwin Biotrade Ltd., we have entered
into a series of marketing and license agreements. In general, Allwin Biotrade
Ltd. has entered into an exclusive marketing and license agreement with a local
pharmaceutical distribution companies to sell, formulate, vial and package
specific EPO. In most cases the local pharmaceutical distribution company is
responsible for obtaining, at its expense, all registration from applicable
regulatory authorities in order to permit the sale of EPO in the covered area.
Further, the local pharmaceutical distribution company has the right of fist
refusal for the sale of additional biotechnological or pharmaceutical drugs for
which Allwin Biotrade may from time to time have right to licenses or
sublicense. The marketing and license agreements range from for a period five to
seven years, and subject to renewals.
11
Currently, Allwin Biotrade has marketing and license agreements covering
the following countries: Malaysia, Singapore, Indonesia, Brunei, East Timor,
Cambodia, Thailand, Vietnam, Philippines, Laos, Myanmar, Brazil, the Dominican
Republic, Argentina, Uruguay, Chile, Paraguay, Poland, Hungary, Russia, Ukraine,
Azerbaijan, Bulgaria, Czech Republic, Slovakia, Moldova, Croatia, Serbia,
Slovenia, Byelorussia, Kazakhstan, Uzbekistan, Kirgizstan, Georgia, Mongolia,
Armenia, Romania, Estonia, Latvia, Lithuania, Portugal, Spain, Sweden, Finland,
Norway, Denmark, Iceland, Switzerland, Malta, Pakistan, East Timor, Lebanon,
Jordan, Iran, Iraq, Libya, Syria, Angola, Mozambique, Cabo Verde, Sao Tome e
Principe, Guinea-Bissau, Kenya, South Africa, Namibia, Madagasca, Brazil, the
Dominican Republic, Argentina, Uruguay, Chile, Paraguay, Guatemala, Honduras, El
Salvador, Costa Rica, Nicaragua, Belize, Panama, Columbia, Venezuela, Ecuador,
Bolivia, Haiti, Aruba, Jamaica, Trinidad-Tobago, Cuba, Martinique Guyana, French
Guyana, Surinam and Barbados, Taiwan, Turkey, South Korea and North Korea,
Bangladesh, India, Mauritius, Sri Lanka, Ethiopia, Ghana, Kenya, South Africa,
Sudan, Tanzania, Uganda, Zambia Zimbabwe, Indonesia, Singapore, Vietnam and
Nigeria.
Due to the initial implementation of the marketing and licensing agreement,
and the seeking of regulatory approval to sell EPO in these countries, we have
yet to make significant sales pursuant to these marketing and license
agreements.
China's EPO Market
We believe that sales of EPO in the Chinese market can be increased because
current sales prices make it too expensive for many of the patients who could
benefit from it.
China is in the process of finalizing its health care system and health
insurance plan, and if established, the ability to purchase prescription drugs,
including EPO, is expected to increase. For example, the health insurance plan
is expected to have mandatory coverage for dialysis. A dialysis patient needs at
least 80-100 doses of EPO per year. If the health insurance plans covers
dialysis, this may translate into a market demand in China of 50 million doses
per year of EPO for dialysis alone. The coverage for EPO application for cancer
related and other types of anemia is also expected. Considering the 2 million
cases of cancer diagnosed in China each year, this will greatly expand the EPO
market. Due to the size and complexity of instituting a healthcare system and
health insurance plan in China, we are unable to predict when such health system
will be implemented, when health insurance may become generally available and
whether we will benefit from it.
There are three sources of EPO in the Chinese marketplace. First, Amgen and
Kirin service the market through offshore production facilities. However, the
price to the consumer is high because of tariffs and a value added taxes that
combined add about 30% to the cost per vial. Second, there are approximately
five existing domestic producers of EPO similar to Nanjing Huaxin. We believe
that EPO can be freely produced and sold in China without infringing the patent
rights of Kirin-Amgen (the U.S. patent holder) because no administration
protection was filed with the China before EPO was exported to China.
Furthermore, EPO is not currently subject to the U.S.-China agreement on
intellectual property.
Dragon believes that a lower price would allow non-governmental workers the
ability to afford EPO and would increase the likelihood of EPO being included on
the reimbursement list of drugs that are supplied at no charge to government
workers with prescriptions. We currently sell EPO at approximately $5.00 to
$6.00 per dose. Production for the year ended December 31, 2001, was
approximately 3,300,000 doses compared to the previous years production of
550,000 doses. We plan to maintain our costs by producing domestically in China,
thus avoiding import duties, and by producing with high-yield vector technology,
thus avoiding the perceived quality and inefficient yield problems of other
Chinese producers. Comparative sales were 595,000 doses during 2001 compared to
389,000 doses in 2000.
12
The third source of EPO is represented by Sinogen (China) Ltd., a Hong Kong
subsidiary of U.S.-based Sinogen International Co. Ltd. Sinogen (China) reached
an agreement in 1998 with the shareholders of the Shandong Yongming Vivogen
Pharmaceutical Co. Ltd. to establish a new joint venture to research and develop
EPO. This EPO was developed by the Nanjing Research Institute of Military
Medical Sciences and the Hainan Yalong Institute of Biomedical Sciences. In
October 1996, the Ministry of Health granted a new drug certificate to the drug
and approval to start production was received in 1997. To the best of our
knowledge, Sinogen (China) is capable of producing between 500,000 and 1 million
doses of EPO per year but is currently producing less than 300,000 doses per
year. We do not know, however, the selling price of EPO per dose sold by Sinogen
(China). The EPO drug license utilized by Sinogen (China) was granted to the
former owners of the production facility. Sinogen (China) bought the existing
company with the license and the production facility. It is still structured as
a joint venture company and Sinogen (China) is the majority shareholder.
Competition
The world market for EPO is approximately $6 billion in annual sales and is
growing. The market is dominated by three firms: Amgen Inc. of Thousand Oaks,
California; Ortho Pharmaceutical Corp., a subsidiary of Johnson & Johnson, Inc.
of New Brunswick, New Jersey; and Kirin Brewery Company, Limited of Japan. EPO
is marketed by Amgen as "Epogen," by Johnson & Johnson as "Procrit/Eprex" and by
Kirin as "Espo." A fourth participant in the international EPO market is Roche
Holding AG of Switzerland, which markets an EPO drug with a different heritage.
Amgen was granted United States rights to market EPO under a licensing
agreement with Kirin-Amgen, Inc., a joint venture between Kirin and Amgen that
was established in 1984. Johnson & Johnson acquired the rights to EPO from
Kirin-Amgen for all treatments except kidney dialysis in the United States and
for all uses outside the United States in 1985. Both Amgen and Kirin
individually manufacture and market EPO for China and Japan. These international
drug companies all have more financial resources than we do.
In addition to these international drug companies, we will be competing
with existing and potential domestic producers such as Sunshine and Sinogen.
Many of our competitors may have greater financial, technical and manufacturing
resources than we have. These resources would allow our competitors to respond
more quickly to new or emerging advancements in the drug industry and to devote
greater resources to the development, promotion and sale of their products.
Assuming we achieve specified levels of production, we expect to have a
competitive advantage due to our high production yield which should result in
larger profit margins compared to other Chinese domestic producers. We will
continue to have our EPO product included on the government reimbursement list
although other EPO producers are also represented on this list. However, we
intend to market our EPO product at a cost that is lower than competitors which
is expected to give us a competitive advantage.
Due to China's growing market for pharmaceutical products competition among
drug producers is expected to increase during 2002. We anticipate that the EPO
producers with the strongest marketing networks, best quality and price, and
highest market shares will survive to service the EPO market in China.
Potential competition to EPO market includes other products or technologies
that are successful in treating anemia. Hoechst Marion Roussel is currently
conducting clinical trials on gene-activated erythropoietin for the treatment of
anemia, while Alkermes, Inc. of Cambridge, Massachusetts and Johnson & Johnson
are currently conducting clinical trials with a sustained delivery formulation
13
of Epoetin alfa for the treatment of anemia. Amgen has sole rights to Novel
Erythropoiesis Stimulating Protein, a second-generation EPO molecule that will
pose serious competition to the existing products because it offers the
possibility of less frequent dosing (i.e., once a week rather than three times a
week). Phase I clinical trials have commenced in pre-dialysis patients, and
Amgen expects to begin studies in chemotherapy-induced anemia this year.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties that could increase their ability to reach customers in the
Chinese market. Such existing and future competition could affect our ability to
penetrate the Chinese market and generate sales revenues. Determining the
degree, intensity and duration of competition or the impact of such competition
on our financial and operating results are uncertain. No assurances can be given
that we will be able to compete successfully against current and future
competitors, and any failure to do so would have a material adverse effect on
our business.
Intellectual Property, Government Approvals and Regulations
We have received legal advice that the development, production or marketing
of EPO in China is not subject to U.S. patents currently held by Kirin-Amgen
because no corresponding patent was filed in China. Also, no administrative
protection has been filed on EPO with the Chinese government authorities by
Kirin-Amgen. In addition, we do not anticipate that any such patent or
administrative protections will be imposed by U.S.-China agreements on
intellectual property. As a result, we have not sought to obtain any rights or
licensing from patent holders for the production or marketing of EPO in China.
However, there is no assurance that U. S. patent holders or licensees may not
attempt to assert claims of patent infringement in order to curtail or prevent
the our production and sale of EPO in China.
The development and manufacture of EPO requires a license and permit from
the Ministry of Health, China. Our subsidiary Nanjing Huaxin currently is
licensed to make and sell EPO for kidney dialysis applications. It is
anticipated that governmental approval to use EPO for suregery recovery will be
granted later this year and for additional applications such as cancer related
anemia and pregnancy-related anemia will be granted in 2003. The Good
Manufacturing Practices license remains valid until August 18, 2005, and is
renewable at that time. There are no restrictions on the license or permits
other than the requirement that the EPO drug be manufactured in compliance with
Chinese Good Manufacturing Practices, and the drug may be sold for authorized
medical purposes (such as anemia).
Our technology is not protected by any patents or copyrights nor do we
intend to seek any such protection. We require all our research employees to
sign confidentiality agreements regarding their work. However, without patent or
copyright protection, we may not be able to prevent duplication of our vector
technology by competitors.
Doing Business in China
Our business is being conducted in China and will be subject to the
political, social and economic environment in the People's Republic of China.
China is controlled by the Communist Party of China. Under its current
leadership, China has been pursuing economic reform policies, including the
encouragement of private economic activity and greater economic
decentralization. However, the Chinese central government has exercised and
continues to exercise substantial control over virtually every sector of the
Chinese economy. Accordingly, the Chinese government actions in the future,
including any decision not to continue to support current economic reform
programs and to return to a more centrally planned economy, or regional or local
variations in the implementation of economic reform policies, could have a
significant effect on economic conditions in China or particular regions
14
thereof. Economic development may be further limited by the imposition of
austerity measures intended to reduce inflation, the inadequate development or
maintenance of infrastructure or the unavailability of adequate power and water
supplies, transportation, raw materials and parts, or a deterioration of the
general political, economic or social environment in the PRC, any of which could
have a material adverse effect on our business, financial condition and results
of operations. Moreover, economic reforms and growth in China have been more
successful in certain provinces than others, and the continuation or increase of
such disparities could affect the political or social stability of China.
If we were required to move our manufacturing operations outside of the
China, our potential profitability, competitiveness and market position could be
materially jeopardized, and there could be no assurance that we could continue
our operations. Our business and prospects are dependent upon agreements with
various entities controlled by Chinese governmental instrumentalities. The
failure of such entities to honor these contracts, or the inability to enforce
these contracts in China could adversely affect our business operations. There
can be no assurance that assets and business operations in China will not be
nationalized, which could result in the total loss of our investment in China.
The legal system of China relating to foreign investments is relatively new
and continues to evolve thus creating uncertainty as to the application of its
laws and regulations in particular instances. Definitive regulations and
policies with respect to such matters as the permissible percentage of foreign
investment and permissible rates of equity returns have not yet been published.
Furthermore, statements regarding these evolving policies have been conflicting,
and any such policies, as administered, are likely to be subject to broad
interpretation and discretion and to be modified, perhaps on a case-by-case
basis. As a legal system in China develops with respect to these new types of
enterprises, foreign investors may be adversely affected by new laws, changes to
existing laws (or interpretations thereof) and the preemption of provincial or
local laws by national laws. In circumstances where adequate laws exist, it may
not be possible to obtain timely and equitable enforcement thereof.
Suppliers
Nanjing Huaxin produces the materials for EPO. The medium used for
culturing cells is commercially available from several sources.
Customers
Our customers are those who were previous customers through Nanjing Huaxin.
We intend to expand this customer base through an expanded marketing group at
Nanjing Huaxin.
We began realizing revenue in 1999 from the sale of EPO by our subsidiary
Nanjing Huaxin. Nanjing Huaxin was producing EPO at the time of our acquisition.
However, its production yields were low and its technology outdated. We have
begun to upgrade and improve Nanjing Huaxin's production facilities and to
implement our technology to increase EPO production at these facilities.
Employees
As of December 31, 2001, we had 12 employees in North America. Nanjing
Huaxin has approximately 150 employees in China. Sanhe Kailong has no employees.
15
Risks Associated With Dragon Pharmaceutical
We have a limited operating history and we have incurred losses since our
founding in February 1998, and there is no guarantee of profit in the future.
Since our primary business operations only commenced in July 1999, we do
not have a historical record of revenues nor an established business track
record which makes future performance very difficult to predict. There is no
assurance that we will be able to develop a sufficiently large production
capacity and customer demand to be profitable.
We have incurred operating losses since our founding and for the year ended
December 31, 2001, reported an operating loss of $4,226,366.
We may need additional capital to finance our operations and to develop new
products and if we are unable to secure additional capital, if needed, this
would adversely affect our business.
Because we currently do not have sufficient revenues to support our
activities, we intend to fund our operations with our current working capital.
If our losses continue, we may be required to raise additional capital to fund
our operations and finance our research and development. Traditionally, we have
relied primarily on the sale of common stock to meet our operations and capital
requirements. Any equity financing could result in dilution to our then-existing
stockholders. Debt financing will result in interest expense, and if convertible
into equity, could also dilute then-existing stockholders. If we were unable to
obtain financing in the amounts and on terms deemed acceptable, our business and
future success may be adversely affected.
Nanjing Huaxin Bio-pharmaceutical Co, Ltd. Nanjing has had losses since our
acquisition and there is no guarantee of profit in the future.
In July 1999, we acquired our 75% interest in Nanjing Huaxin
Bio-pharmaceutical Co, Ltd. which produces EPO in China. Nanjing has incurred
operating losses in each year since acquisition. Although for the years end
December 31, 1999, 2000 and 2001, we realized revenues of approximately $990,000
, $3,175,561 and $3,073,885, respectively, from our ownership interest in
Nanjing, these revenues have not been sufficient to offset operating costs due
primarily to plant improvements and implementation of our proprietary production
technology.
Our directors and officers may have interest in some transactions that may
cause conflicts.
We have entered into, and in the future may enter into, transactions with
certain member of our Board or officers or with companies that they control or
have a significant interest in. For example, we acquired technology from
Alphatech Bioengineering, relating to the production of Hepatitis B vaccine,
which is owned by Dr. Longbin Liu and Mr. Philip Yuen, two of our directors. In
addition we have entered into a Patent development Agreement and Project
Development Agreement with Dr. Liu. These agreements were entered into so that
we would not be required to staff and fund our own research and development
program. However, these directors and officers will be subject to various
potential conflicts of interest. See "Business - Our Joint Ventures and
Acquisitions" and "Research and Development."
16
The potential risks of political, social or economic instability in the
People's Republic of China, could adversely affect our ability to carry on or
expand our business in China.
Virtually all of the our production is conducted in China. Consequently, an
investment in our common stock may be adversely affected by the political,
social and economic environment in China. Under its current leadership, China
has been pursuing economic reform policies, including the encouragement of
private economic activity and greater economic decentralization. There can be no
assurance, however, that the Chinese government will continue to pursue such
policies, that such policies will be successful if pursued, or that such
policies will not be significantly altered from time to time. Our business and
prospects are dependent upon agreements and regulatory approval with various
entities controlled by Chinese governmental instrumentalities. Our operations
and prospects would be materially and adversely affected by the failure of such
governmental entities to grant necessary approvals or honor existing contracts,
and, if breached, it might be difficult to enforce these contracts in China. In
addition, the legal system of China relating to foreign investments is both new
and continually evolving, and currently there can be no certainty as to the
application of its laws and regulations in particular instances.
Our business plan assumes that if we can produce a low-priced EPO, a
sufficiently large EPO market will develop in China. In order to achieve the
demand for EPO, the Chinese medical community and consumers must be educated
about the uses of EPO, certain institutional developments such as health care
plans must occur and export market opportunities must be studied. No assurance
that a sufficient EPO market will develop. Further, we may be limited in our
ability to sell EPO outside of China due to EPO patent rights held by our
competitors in some other countries.
Our technology is not protected by any patents. Consequently, other
competitors could copy our enhanced EPO production technology and develop EPO or
other pharmaceutical drugs utilizing our technology. Furthermore, Amgen Inc.
currently holds a United States patent to develop and produce EPO and Amgen
sells EPO in China. Although no corresponding patent protection is applicable in
China, there is no assurance that our current or future production of EPO will
not be the subject of a patent infringement action in the future asserted by
patent holders or that our competitors will take political steps to prevent us
from producing EPO in China.
The exercise of outstanding warrants and options may dilute existing
stockholders and could substantially increase the number of shares that may be
sold into the market.
As of December 31, 2001, there were warrants outstanding to purchase
2,200,000 shares at prices ranging from $1.70 to $3.00 per share. Further, we
have granted options to purchase an additional 2,969,500 shares of common stock
with a weighted average exercise price of $1.93 per share. Given the limited
existing market in our common stock, the sale into the market of significant
amounts of additional common stock may have the effect of depressing our stock
share price.
There are technical risks associated in commercializing our technology
which could delay or reduce the realization of lower cost production of EPO.
A key to our future success is the ability to produce EPO and other drugs
at lower costs than our competitors. Although we are currently utilizing our
proprietary technology to produce EPO at lower costs, our method for producing
EPO on a commercial basis has only recently begun. Further, although results
from recent independent tests and our early production results have been
encouraging, the ability of our technology to commercially produce EPO or other
drugs at consistent levels is still being evaluated.
17
We have no employment agreement with Dr. Liu, who supervises our EPO
production program and personnel. The loss of Dr. Liu's services would adversely
impact our profitability.
Our future performance is substantially dependent on the technical
expertise of Dr. Liu and other key researchers who Dr. Liu supervises. The loss
of Dr. Liu or any of our key research personnel could have a material adverse
effect on our business, development, financial condition, and operating results.
We do not have an employment agreement with Dr. Liu nor do we maintain "key
person" life insurance on Dr. Liu.
Item 2. Properties
Our corporate offices are located at 1055 West Hastings, Suite 1900,
Vancouver, British Columbia, Canada V6E 2E9. We also have an office in Beijing,
located at 11th Floor, Suite 18-19, China World Tower 2, 1 Jianguomenwai Avenue,
Beijing, 100004.
Huaxin currently leases a 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
We are not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
The following was the result of a vote of Common Share holders:
(a) The Company held its Annual General Meeting on December 17, 2001, at
the Company's head office. The number of Common Shares voted at the meeting,
either in person or by proxy, were 13,248,431.
(b) The following Directors were re-elected:
Voted For Withheld
---------- --------
Dr. Longbin Liu, M.D. 13,203,106 43,825
Dr. Ken Z. Cai 13,203,106 43,825
Mr. Greg Hall 13,203,106 43,825
Dr. Alexander Wick 13,203,106 43,825
Mr. Philip Yuen Pak Yiu 13,203,106 43,825
Dr. Yiu Kwong Sun 13,203,106 43,825
(c) The stockholders approved the adoption of our 2001 Stock Option Plan
allowing the issuance of up to 4,500,000 shares of common stock as follows:
8,417,829 shares of Common Stock voted for;
166,522 shares of Common Stock voted against;
4,664,080 shares of Common Stock abstained from voting.
18
Part II
Item 5. Market For Company's Common Equity And Related Stockholder Matters
Our common stock began quotation on the OTC Bulletin Board under the symbol
"DRUG" on October 9, 1998. The following quotations reflect the high and low
bids for our common stock on a quarterly basis for the past two fiscal years.
These quotation are based on inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Common Stock
Quarter Ended High Low
---------------------------- -------- --------
December 31, 2001 $2.05 $1.86
September 30, 2001 $3.47 $1.75
June 30, 2001 $4.13 $1.40
March 31, 2001 $2.94 $1.56
December 31, 2000 $3.88 $1.63
September 30, 2000 $4.56 $3.25
June 30, 2000 $8.00 $4.31
March 31, 2000 $9.00 $4.37
The approximate number of holders of record of our common stock at March
15, 2002, was 125. This number does not include stockholders who hold our
securities in street name.
Holders of common stock are entitled to receive such dividends as may be
declared by our Board of Directors. No dividends have been paid with respect to
our common stock and no dividends are anticipated to be paid in the foreseeable
future.
Item 6. Selected Financial Data
We have derived the selected consolidated statement of operations data for
the years ended December 31, 1998, 1999, 2000 and 2001, and the selected
consolidated balance sheet data as of December 31, 1999, 2000 and 2001, from our
consolidated financial statements included in this report. On August 17, 1998,
First Geneva Investments, Inc. and Allwin Newtech Ltd. entered into a
reorganization, pursuant to which all of the outstanding shares of Allwin
Newtech were acquired for 87.5% of our outstanding shares in a reverse takeover.
In connection with the reverse takeover, First Geneva Investments changed its
name to Dragon Pharmaceutical. Prior to the reorganization, First Geneva
Investments had no operations. Therefore, information prior to 1998 is not
meaningful and not included.
1998 1999 2000 2001
------------- ------------- ------------- -------------
Consolidated Statement of
Operations Data
Sales $ - $ 989,539 $ 3,175,561 $ 3,073,885
Cost of sales - 204,473 902,480 583,878
Operating loss (481,454) (2,865,276) (3,641,231) (4,226,366)
Loss before minority interest (471,717) (2,845,879) (3,162,309) (3,975,908)
Net (loss) for period (471,717) (2,791,033) (2,745,794) (3,735,305)
Loss per share $ (0.06) $ (0.27) $ (0.17) $ (0.21)
19
1998 1999 2000 2001
------------- ------------- ------------- -------------
Consolidated Balance Sheet Data
Working capital $ 829,493 $ 8,405,788 $ 4,444,066 $ 7,551,687
Total assets 2,480,813 16,740,037 18,546,830 22,005,037
Total liabilities 743,633 3,289,123 3,634,100 4,440,283
Total shareholders' equity $ 1,737,180 $ 12,488,768 13,983,465 16,876,215
Item 7. Management's Discussion And Analysis of Financial Condition And Results
of Operations
This discussion, other than the historical financial information, may
consist of forward-looking statements that involve risks and uncertainties,
including quarterly and yearly fluctuations in results, the timely availability
of Dragon's pharmaceutical products, the impact of competitive products and
treatments, and the other risks described in this report. These forward-looking
statements speak only as of the date hereof and should not be given undue
reliance.
General
The following discusses our financial condition and results of operations
based upon our consolidated financial statements which have been prepared in
accordance with generally accepted accounting principles.
We were formed on August 22, 1989, under the name First Geneva Investments,
Inc. First Geneva Investment's business was to evaluate businesses for possible
acquisition. On July 28, 1998, First Geneva Investment entered into a share
exchange agreement with Allwin Newtech Ltd. Allwin Newtech was formed in 1998
for the purpose of developing and marketing pharmaceutical drugs for sale in
China. Prior to the acquisition of Allwin Newtech, First Geneva Investments had
no operations. The share exchange transaction was consummated on August 17,
1998, and on September 21, 1998, First Geneva Investments changed its name to
Dragon Pharmaceutical Inc. On June 11, 1999, we acquired a 75% interest in
Nanjing Huaxin which manufactures EPO in China. In January 2002 we acquired the
balance of the 25% interest from Nanjing Medical Group for $1,400,000.
Plan of Operations
In order to expand our operations we will need additional capital. We do
not have any commitments from any source to provide additional capital. Our
current working capital will provide all anticipated capital requirements over
the next twelve months. As a result of this increased business activity, we
expect general and administrative expenses and compensation costs to increase
from current levels.
An essential element of the Company's business plan is to apply for and to
obtain various licenses and operating permits from various national and local
agencies of the PRC for new biodrug production and marketing. The Company
currently possesses the requisite production licenses for EPO.
Since inception, we have relied on equity financings to fund our
operations. Funds required to finance our future production expansions,
marketing efforts and ongoing business are expected to come primarily from debt
and equity financing with the remainder provided from operating revenues which
began in September 1999. Operating revenues to date have been substantially less
than the cost of operations. However, recent financings completed by management
are deemed adequate to meet our anticipated working capital needs over the next
12 months.
20
Results of Operations
For the Fiscal Years Ended December 31, 2001 and 2000
Revenues. Revenues were derived primarily from the sale of EPO in China.
Revenues for the year ended December 31, 2001, were $3,073,885, and revenues for
the year ended December 31, 2000, were $3,175,561. Cost of sales for the year
ended December 31, 2000, was $583,878 and $902,480 for the year ended December
31, 2000. The cost of sales is attributed to the production costs of our
pharmaceutical products. During the year ended December 31, 2001, we had
interest income of $250,458. Interest income for the year ended December 31,
2000, was $478,922. Interest income is related primarily to interest earned on
cash received from the private placements of common stock during the last
quarter of 1999 and the third quarter of 2001.
Expenses. Total operating expenses for the year ended December 31, 2001,
were $6,716,373. The major expense incurred for the year ended December 31,
2001, was related to the selling of pharmaceutical products which represented
approximately 30% of the total operating expenses. The remaining major expense
items are represented by administrative expenses and include office and
miscellaneous expenses of $266,123, legal and auditing of $232,785, investor
relations expenses of $405,268, rent of $306,246, travel of $428,651 and
salaries and benefits of $374,575. Management fees of $424,952 include $336,000
paid to two directors for services during the year ended December 31, 2001.
Other significant expenses for the year ended December 31, 2001, included
depreciation of fixed assets and amortization of license and permit of $597,042,
research expenses of $105,096, new market development of $211,194, interest
expense of $154,644and stock-based compensation of $51,975.
Net and Comprehensive Loss. Dragon had a net loss of $1,214,794 and a
comprehensive loss of $1,168,627 for the three-month period ending December 31,
2001. Calculated in the comprehensive loss for the period was a minority
interest gain of $46,167.
Dragon's net loss for the year ended December 31, 2001, was $3,975,908. The
comprehensive loss for the same period was $3,735,305 which includes a minority
interest gains of $240,603.
Basic and Diluted Net Loss Per Share. Dragon's net loss per share has been
computed by dividing the net loss for the period by the weighted average number
of shares outstanding during the year 2001. The loss per share for the year
ended December 31, 2001, was $0.21. Common stock issuable upon the exercise of
common stock options and common stock warrants have been excluded from the net
loss per share calculations as their inclusion would be anti-dilutive.
For the Fiscal Years Ended December 31, 2000 and 1999
Revenues. Revenues were derived primarily from the sale of EPO in China.
Revenues for the year ended December 31, 2000, were $3,175,561, and revenues for
the year ended December 31, 1999, were $989,539. Cost of sales for the year
ended December 31, 2000, was $902,480 and $204,473 for the year ended December
31, 1999. The cost of sales is attributed to the production costs of our
pharmaceutical products. During the year ended December 31, 2000, we had
interest income of $478,922. Interest income for the year ended December 31,
1999, was $19,397. Interest income is related primarily to interest earned on
cash received from the private placement of common stock during the last quarter
of 1999.
21
Expenses. Total operating expenses for the year ended December 31, 2000,
were $3,946,975. The major expense incurred for the year ended December 31,
2000, was related to the selling of pharmaceutical products which represented
approximately 38% of the total operating expenses. The remaining major expense
items are represented by administrative expenses and include costs associated
with GMP certificate which accounted for $519,988. Major operating expenses
included office and miscellaneous expenses of $179,018, and salaries and
benefits of $236,032. Management fees of $123,000 include $72,000 paid to one
director for services during the year ended December 31, 2000.
Other significant expenses for the year ended December 31, 2000, included
depreciation of fixed assets and amortization of license and permit of $515,106,
write off of land-use rights of $257,344, research expenses of $544,500, new
market development of $279,114, and stock-based compensation of $205,375.
Net and Comprehensive Loss. Dragon had a net loss of $2,328,847 and a
comprehensive loss of $1,979,042 for the three-month period ending December 31,
2000. Calculated in the comprehensive loss for the period was a minority
interest gain of $349,805.
Dragon's net loss for the year ended December 31, 2000, was $3,162,309. The
comprehensive loss for the same period was $2,745,794 which includes a minority
interest gains of $416,515.
Basic and Diluted Net Loss Per Share. Dragon's net loss per share has been
computed by dividing the net loss for the period by the weighted average number
of shares outstanding during the year 2000. The loss per share for the year
ended December 31, 2000, was $0.17. Common stock issuable upon the exercise of
common stock options and common stock warrants have been excluded from the net
loss per share calculations as their inclusion would be anti-dilutive.
Liquidity and Capital Resources
Dragon is a development stage pharmaceutical and biotechnological company
that has commenced the manufacture and marketing of pharmaceutical products in
China through its 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, 2001 and 2000, the Company's working capital was
$7,551,687 and $4,444,066, respectively. The increase in working capital during
2001 was due to a private placement completed in the September 2001 that
provided gross proceeds of $7,000,000. No similar fund-raising occurred in 2000.
In September 1998, the Company raised $1 million through the sale of
2,000,000 shares of common stock. The proceeds raised were used for working
capital. In April 1999, the Company entered into a $600,000 loan agreement. The
$600,000 loan bore interest at 8% and was due in six months with the right of
the Company to extend the maturity date by an additional six months in September
1999. As an inducement, the Company issued 90,000 shares of common stock to the
lender. In September 1999 the Company exercised its option to extend the loan by
a period of six months. As discussed below, this debt was subsequently converted
into common stock in 1999.
On October 14, 1999, the Company entered into securities purchase
agreements with two investors located in Hong Kong. Under the terms of this
agreement, the investors purchased, in the aggregate, 600,000 shares of common
stock at $2.50 per share, with the Company raising in the aggregate $1.5
million.
22
On December 31, 1999, the Company closed a private placement raising
$10,645,000 through the issue of 4,258,000 shares of common stock at a price of
$2.50 per share. $600,000 of the gross proceeds from the December 1999 offering
represented the conversion of the outstanding debt by the lenders into shares of
common stock of the Company at a price of $2.50 per share.
On September 14, 2001, the Company closed a private placement raising
$7,000,000 through the issue of 3,500,000 shares of common stock at a price of
$2.00 per share.
Item 7a. Quantitative And Qualitative Disclosure About Market Risk
Foreign Currency Exchange Rates
Substantially all of our business is transacted in currencies other than
the United States dollar. Our functional currency is the United States dollar.
However, the functional currency of certain subsidiaries is their local
currencies. As a result, we are subject to exposure from movements in foreign
currency exchange rates, specifically the Canadian dollar/Chinese Rmb exchange
rates. We do not use derivative financial instruments for speculative trading
purposes, nor do we hedge our foreign currency exposure to manage our foreign
currency fluctuation risk.
Interest Rate Sensitivity
As of the year ended December 31, 2001, we had no long-term debt.
Therefore, we believe we are not currently exposed to any market risks related
to interest rate sensitivity.
Item 8. Financial Statements And Supplemental Data
The following is a condensed summary of actual quarterly results of
operations for 2000 and 2001.
2000
First Second Third Fourth
---------- ---------- ---------- -----------
Revenues $ 661,785 $ 797,127 $ 739,062 $ 977,587
Gross profit 562,920 629,591 553,543 527,027
Loss before minority interest (223,869) (184,540) (425,053) (2,328,847)
Net loss (234,780) (168,997) (362,975) (1,979,042)
Loss per share $ (0.02) $ (0.01) $ (0.03) $ (0.11)
2001
First Second Third Fourth
---------- ---------- ---------- -----------
Revenues $ 664,414 $ 602,341 $ 787,682 $ 1,019,448
Gross profit 517,494 446,614 673,745 852,154
Loss before minority interest (959,743) (1,038,665) (762,706) (1,214,794)
Net loss (856,183) (972,713) (737,782) (1,168,627)
Loss per share $ (0.05) $ (0.06) $ (0.04) $ (0.07)
See pages F-1 to F-22 for our financial statements.
23
Item 9. Changes in And Disagreements With Accountants on Accounting And
Financial Disclosures
Not Applicable.
Part III
Item 10. Directors And Executive Officers
The directors and executive officers of Dragon, and their ages and
positions, and duration as such, are as follows:
Name Position Age Period
- ---- -------- --- ------
Longbin Liu President, Chief 38 September 1998 - present
Executive Officer and
Director
Ken Z. Cai Director 36 September 1998 - present
Greg Hall Director 44 September 1998 - present
Alexander Wick Director 63 September 1998 - present
Philip Yuen Pak Yiu Director 65 November 1999 - present
Dr. Yiu Kwong Sun Director 58 November 1999 - present
Robert Walsh VP Marketing 41 April 2000 - present
Rita Jervis VP Corporate Development 44 December 2000 - present
Matthew Kavangh Director, Finance and 46 July 2001 - present
Compliance
Directors of Subsidiaries
The directors of our three subsidiaries are as follows:
Sanhe Kailong
Name Position Nanjing Huaxin(1)(2) Allwin Newtech (2) Bio-Pharmaceutical (2)
- ---- -------- -------------------- ------------------ ----------------------
Ken Cai Director X X X
Longbin Liu Director X X X
Philip Yuen Director X X
Greg Hall Director X
Jiamiao Li Director X
Weiming Xu Director X
_____________________
(1) Pursuant to the joint venture agreement, Nanjing Huaxin Biotech has a five
member board of directors with Allwin Newtech designating three of the five
members. The Nanjing Medical Group has the right to elect two directors to
24
Nanjing Huaxin Biotech Co. Ltd's board of directors and selected Mr.
Jiamiao Li and Mr. Weiming Xu as its representatives. Neither Mr. Jiamiao
Li nor Mr. Weiming Xu are affiliated with Dragon, and Dragon has no control
over The Nanjing Medical Group's selection.
(2) Dragon is the sole or controlling shareholder of each of these entities.
Consequently, Dragon has the power to appoint a majority of the Directors
in these entities. Allwin Newtech and Sanhe Kailong Bio-Pharmaceutical have
no other directors.
Business Experience
The following is a description of our executive officers and directors and
their business background for at least the past five years.
Dr. Longbin Liu, M.D. is the President, Chief Executive Officer and
Director of Dragon. He has 16 years of biotechnology experience in North
America, Japan and China, most recently as an Assistant Professor of Medicine in
the Division of Cardiovascular Medicine of the University of Massachusetts
Medical Centre where he had served since 1995, before joining Dragon in
September 1998. Dr. Liu earned his medical degree from Hunan Medical University
in 1983.
Dr. Ken Z. Cai is Chairman of the Board of Directors of Dragon. Dr. Cai has
a Ph.D in Mineral Economics from Queen's University in Kingston, Ontario, as
well as 17 years of experience in mining, public company administration and
financing. Since February 1996, he has been a Director and the President and
Chief Executive Officer of Minco Mining and Metals Corporation, a Toronto Stock
Exchange-listed company involved in mining exploration and development in China.
Dr. Cai has extensive experience in conducting business in China for the past 16
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 18
years of corporate finance and public offerings experience. Since November 2001,
Mr. Hall has been a Senior Vice President of Golden Capital Securities Ltd. in
Vancouver, Canada. Prior to joining Golden Capital, Mr. Hall was with Yorkton
Securities Inc for 3 years and Canaccord Capital for ten years. He is a former
member/seat holder of the Vancouver Stock Exchange. Prior to joining Canaccord
Capital, Mr. Hall was the Co-Founder of both Pacific International Securities
and Georgia Pacific Securities Corporation.
Dr. Alexander Wick is a Director of Dragon. Dr. Wick holds a doctorate
degree in synthetic organic chemistry from the Swiss Federal Institute of
Technology and has completed post-doctoral studies at Harvard University. He has
30 years of biotechnology and pharmaceuticals experience and is currently the
President of Sylachim, a chemicals and pharmaceuticals producer located in
France, which position he has held since 1995.
Mr. Philip Yuen Pak Yiu is a Director of Dragon. Mr. Yuen has been a legal
practitioner in Hong Kong since graduating from law school in London, England in
1961. In 1965, he established the law firm of Yung, Yu, Yuen and Co. and is now
the principal partner of the firm. Mr. Yuen has over 30 years experience in the
legal field and has been a director of several large listed companies in various
industries. He is a director of the Association of China-appointed Attesting
Officers Limited in Hong Kong, a standing committee member of the Chinese
General Chamber of Commerce in Hong Kong, a member of the National Committee of
the Chinese People Political Consultative Conference and an arbitrator for the
China International Economic and Trade Arbitration Commission.
Dr. Yiu Kwong Sun is a Director of Dragon. Dr. Sun graduated from the
University of Hong Kong Faculty of Medicine in 1967. He is a Founding Fellow of
the Hong Kong College of Family Physicians and a Fellow of the Hong Kong Academy
25
of Medicine. Since 1995, he has served as the Chairman of the Dr. Sun Medical
Centre Limited which has been operating a network of medical centers in Hong
Kong and China for the past 20 years. He is also the Administration Partner of
United Medical Practice, which manages a large network of medical facilities
throughout Hong Kong and Macau. Dr. Sun has been a member of the Dr. Cheng Yu
Fellowship Committee of Management of the University of Hong Kong Faculty of
Medicine since 1997.
Mr. Robert Walsh is Vice President Marketing and Sales for the Company. Mr.
Walsh joined the Company in April of 2000 and is responsible for comprehensive
oversight of the Company's international marketing initiatives. Mr. Walsh served
for 22 years in Special Operations and Medical Intelligence assignments in the
U.S. Army. Prior to joining the Company, Mr. Walsh held the position of
International Marketing Manager with a Seattle-based biotechnology company.
Ms. Rita Jervis, RN, B.Comm. is Vice President Corporate Development for
the Company. Ms. Jervis has 15 years of strategic planning, product development
and marketing experience in the biotechnology industry. Ms. Jervis held
marketing and project management positions with QLT Inc. prior to forming a
biotechnology consulting firm through which she worked with many emerging health
sector companies in hands-on project management and interim senior executive
roles. In addition to her work with industry, Ms. Jervis served as founding
Managing Director of BIRC Corporation, a biotechnology venture capital
organization, and Executive Director of both the B.C. Biotechnology Alliance and
the B.C. Consortium for Clinical Trials.
Matthew Kavanagh, CA is Director, Finance and Corporate Compliance for the
Company. Mr. Kavanagh joined the Company in July 2001. He has 14 years as a
Chartered Accountant in both public practice and industry. For the past eight
years, Mr. Kavanagh has been the Controller and Senior Financial Officer for a
publicly listed venture capital corporation and, most recently, for a private
international auction and liquidation company.
Committees of the Board
The audit committee is comprised of Alexander Wick, Philip Yuen and Greg
Hall. The Compensation Committee is comprised of Messrs. Wick, Yuen and Hall.
The corporate governance committee is comprised of Messrs. Hall, Wick, and Yuen
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, 2001, its executive officers, directors and 10%
stockholders complied with all applicable Section 16(a) filing requirements.
26
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 11. Executive Compensation
The following table sets forth the compensation of our president during the
last fiscal year 2001. No other officers or directors received annual
compensation in excess of $100,000 during the last fiscal year.
Summary Compensation Table
Annual Compensation Long Term Compensation
--------------------------------------------- -------------------------------------------------
Awards Payout
---------------------- ------------------------
Restricted Securities LTIP All Other
Other Annual Stock Underlying Payout Compensation
Year Salary Bonus ($) Compensation ($) Award(s) Options (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------------
Longbin Liu 2001 $168,000 -0- -0- -0- -0- -0- 0-
President 2000 $ 72,000 -0- -0- -0- 400,000 -0- -0-
1999 $ 72,000 -0- -0- -0- -0- -0- -0-
Ken Cai 2001 $168,000 -0- -0- -0- -0- -0- -0-
Chairman
We have entered into oral consulting agreements with Dr. Liu and Dr. Cai
pursuant to which they provide administrative services to the Company. Dr. Liu,
as President, is paid an annual salary of $120,000 while Dr. Cai is paid an
annual salary of $72,000. The annual compensation for Drs. Lui and Cai was
increased to $150,000 and $80,000 respectively, effective January 1, 2002. The
compensation figures for the year ended December 31, 2001, include retroactive
recognition of amounts owing from prior to January 1, 2001. These consulting
agreements are terminable at will.
Director Compensation
Other than disclosed above, directors are not paid cash for their services
but do receive stock options for serving as such.
Stock Option Plans
The shareholders of the Company approved the share option plan at the
Annual General Meeting held on December 18, 2001. There are currently 4,500,000
shares reserved under the plan. As of March 15, 2002, there were options to
acquire 2,969,500 shares of common stock outstanding.
There were no options granted to Executive officers during the past fiscal
year.
27
Limitation of Liability and Indemnification Matters
We have adopted Section 607.0850 of the 1999 Florida Statutes, Business
Organization of the State of Florida in its bylaws. Section 607.0850 states:
(1) A corporation shall have power to indemnify any person who was or is a
party to any proceeding (other than an action by, or in the right of, the
corporation), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise against
liability incurred in connection with such proceeding, including any appeal
thereof, if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The termination of any proceeding by
judgment, order, settlement, or conviction or upon a plea of nolo contendere or
its equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation or, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
(2) A corporation shall have the power to indemnify any person, who was or
is a party to any proceeding by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses and amounts paid in settlement not exceeding, in the judgment
of the board of directors, the estimated expense of litigating the proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall be made under
this subsection in respect of any claim, issue, or matter as to which such
person shall have been adjudged to be to be liable unless, and only to the
extent that, the court in which such proceeding was brought, or any other court
of competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 15, 2002, certain information
with respect to the beneficial ownership of our common stock by (i) each
stockholder known by us to be the beneficial owner of more than 5% of our common
stock, (ii) each of our executive officers and directors, and (iii) each of our
directors and executive officers as a group.
28
As of March 15, 2002, there were 20,331,000 shares of common stock
outstanding.
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
- ------------------------------------------ -------------- ---------------
Hui Min Liu
5 Lin hui City
Guan Zhen Lao Zheng Street
Hunan, China 2,247,000 11.1%
Chow Tai Fook Nominee Limited
31F New World Tower
16-18 Queens Road Central
Hong Kong 2,000,000 9.8%
Longbin Liu,
President, Chief Executive Officer and
Director 700,000(2) 3.4%
Ken Cai,
Director 500,000(2) 2.5%
Greg Hall,
Director 400,000(2) 2.0%
Philip Yuen,
Director 831,500(3) 4.1%
Alexander Wick,
Director 175,000(2) *
Yiu Kwong Sun,
Director 775,000(4) 3.8%
Robert Walsh,
VP, Marketing and Sales 50,000(2) *
Rita Jervis,
VP, Corporate Development 75,000(2) *
Matthew Kavanagh,
Director of Finance and Corporate
Compliance 0 *
All directors (9 persons) and executive
officers as a group 3,506,500(5) 17.2%
______________________
* Represents less than one percent.
(1) Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed above, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject
to community property laws where applicable. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities. Shares of common stock subject to options or warrants
currently exercisable, or exercisable within sixty days, are deemed
outstanding for purposes of computing the percentage ownership of the
person holding such option or warrants, but are not deemed outstanding for
purposes of computing the percentage ownership of any other person.
(2) Represents options exercisable within sixty days.
29
(3) Includes 56,500 shares of common stock owned and 175,000 shares of common
stock subject to options. Also includes 600,000 shares of common stock
owned by Global Equities Overseas Ltd. for which Mr. Yuen serves as a
director.
(4) Includes 175,000 shares of common stock subject to options exercisable
within sixty days. Also includes 600,000 shares of common stock owned by
Yukon Health Enterprise for which Mr. Sun serves as a director.
(5) Includes options and warrants to acquire 2,250,000 shares of common stock.
Item 13. Certain Relationships And Related Transactions
Except as otherwise indicated below, we have not been a party to any
transaction, proposed transaction, or series of transactions during the past
fiscal year in which the amount involved exceeds $60,000, and in which, to our
knowledge, any of our directors, executive officers, five percent beneficial
security holders, or any member of the immediate family of the foregoing persons
has had or will have a direct or indirect material interest.
During 2000,we rented space for our executive offices from Minco Mining and
Metals Corporation for CDN $2,500 per month. Mr. Cai, one of our directors, is
President of Minco Mining. We believe that this rent was competitive with rent
that would be charged by a non-affiliated landlord for comparable space.
Messrs. Ken Cai, Jackson Cheng and Longbin Liu served as directors of Sanhe
Kailong at the time of entering into our joint venture with Sinoway Biotech.
Sanhe Kailong was formed, however, for the purpose of developing a joint venture
with Sinoway Biotech. Subsequent to the joint venture formation, Mr. Cheng
resigned from the Board of Sanhe Kailong and was replaced by Mr. Greg Hall. They
continue to serve as directors of Sanhe Kailong. Messrs. Ken Cai, Philip Yuen
and Longbin Liu also serve as officers and directors of Allwin Newtech, our
wholly-owned subsidiary. Messrs. Ken Cai, Longbin Liu and Philip Yuen had served
prior to the joint venture and continue to serve as three of the five directors
of Nanjing Huaxin, a joint venture in which we own a 75% interest.
On October 6, 2000, we entered into an acquisition agreement with Alphatech
Bioengineering to acquire its rights and technology relating to developing
Hepatitis B vaccine through the application of genetic techniques on hamster
ovary cells. Alphatech Bioengineering's Hepatitis B vaccine is in the
development stage. Alphatech Bioengineering is jointly owned by Dr. Longbin Liu,
our president and a director, and Mr. Philip Yuen, one of our directors. The
purchase price is $4 million. See "Business - Alphatech Bioengineering Limited."
During fiscal year 2000, the Company paid $400,000 to Guanzhou Recomgen
Biotech Co. Ltd. ("Guanzhou Recomgen"), a company incorporated in China, for the
funding of its TPA research and development programs with the intention of
acquiring the technology. Guanzhou Recomgen is controlled by Dr. Longbin Liu.
Subsequent to the year-end, due to financial market and economic conditions, the
Company decided not to proceed with the funding and the acquisition. In
accordance with the agreement, Guanzhou Recomgen and its principals agreed to
refund the $400,000 which was paid subsequent to December 31, 2001.
Pursuant to an agreement dated August 15, 1999, the Company entered into a
joint research project for the development of rhTPO drug ("rhTPO") with Shenzhen
Kelong Chuang Jian Enterprise Co. Ltd. ("Kelong"), a company incorporated in
China. Dr. Longbin Liu is a principal shareholder of Kelong. The Company's
maximum commitment to this project is US$543,540 (RMB 4,500,000).
Under the terms of the agreement, Kelong and the Company will jointly own
the drug license of rhTPO. Kelong and the Company will then obtain its own
individual production permit of the rhTPO drug product. The Company paid
$483,140 (RMB 4,000,000) towards the early development phase of this project in
30
fiscal year 2000 and the amount has been accounted for as research expense. The
Company has to pay the remaining US$60,400 (RMB 500,000) for clinical testing of
the rhTPO drug after the clinical testing permit has been issued by the
regulatory authorities.
We have entered into a Patent Development Agreement with Dr. Lonbin Liu and
Novagen whereby we have the first right to select and acquire one paten
resulting from the discover of a new gene or protein. In consideration of the
right unde the Patent Development Agreement, we paid Dr. Liu and Novagen
$500,000 and warrants to purchase 1,000,000 shares of common stock at an
exercise price of $2.50 per share.
We have entered into a Project Development Agreement with Dr. Liu dated
January 14, 2002 whereby Dr. Liu has agreed to conduct the research and
development of G-CSF and Insulin for the Company. The Company will make payment
for the development of G-CSF as follows: (i)US$500,000 to be provided at the
commencement of the research in the G-CSF Project; (ii) US$500,000 to be
provided when cell-line and related technology is established and animal
experimentation commences in the G-CSF Project; and (iii) US$300,000 to be
provided when a permit for clinical trials for G-CSF has been issued by the
State Drug Administration of China ("SDA"); (iv) US$200,000 to be provided when
a new drug license for G-CSF is issued to Dragon by the SDA; and (v) U.S$500,000
to be paid as a bonus if the SDA issues the new drug license for G-CSF to Dragon
before January 14, 2004.
The Company will make payment for the development of Insulin as follows:
(i) US$750,000 to be provided by at the commencement of the research in the
Insulin Project; (ii) US$750,000 to be provided when cell-line and related
technology is established and animal experimentation commences in the Insulin
Project; (iii) US$300,000 to be provided when a permit for clinical trials for
Insulin has been issued by the SDA; (iv) US$200,000 to be provided when a new
drug license for Insulin is issued to Dragon by the SDA and (v) US$500,000 to be
paid as a bonus if the SDA issues the new drug license for Insulin to Dragon
before January 14, 2004.
For both the G-CSF and Insulin Projects: (i) If the Company elects to cease
development of the project it will forfeit any payments made and lose ownership
of the Project, but it will not be obligated to make any further payments toward
the Project; and (ii) if an application for permit for clinical trials is not
submitted within three years with respect to the G-CSF Project by or four years
with respect to the Insulin Project or if the SDA rejects the Project for
technical or scientific reasons or if development of the project is terminated
by the President, then the President will refund to the Company all amounts
paid, without interest or deduction, with respect to the Project with in six
months.
31
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are being filed as part of this report:
(1) Financial Statements
The following Financial Statements pertaining to Dragon are filed as
part of this annual report:
Report of Independent Accountants..................................F-1
Year-end Consolidated Balance Sheets...............................F-2
Year-end Consolidated Statements of Stockholders' Equity...F-3 and 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-21
(2) Exhibits
Exhibit Number Name
------------- ----
2.1* Share Exchange Agreement with First Geneva Investments
3.1* Certificate of Incorporation and Amendments
a. Certificate of Incorporation
b. Certificate of Amendment, dated June 19, 1997
c. Certificate of Amendment of Articles of Incorporation, dated
September 21, 1998
3.2* Bylaws of First Geneva Investments, Inc., as amended
10.1* Sino-Foreign Co-operative Company Contract
10.2* Sino-Foreign Joint Venture Contract Between The Nanjing Medical Group
Company Limited and Allwin Newtech Ltd.
10.3** Consulting Agreement with E. Pernet Portfolio Management dated June 15,
1999
10.4** Amendment to Sino-Foreign Co-operative Company Contract
10.5*** Contract to lease 25 acres of land in Yanjiao, China
10.6*** Sample Employment Agreement for technicians/employees
10.7**** Marketing and License Agreement Between Allwin Biotrade and Fargin S.A.
10.8**** Marketing and License Agreement Between Allwin Biotrade and Duopharma
(Malaysia) SDN.BHD
10.9**** Marketing and License Agreement Between Allwin Biotrade and Yoo & Yoo
Biotech Co. Ltd.
32
10.10**** Acquisition Agreement Among Dragon Pharmaceuticals Inc., Alphatech
Bioengineering Limited, Longbin Liu and Philip Yuen
10.11***** a. Sino Foreign Joint Venture Contract Between The Nanjing Medical
Group Company Limited and Allwin Newtech Ltd.;
b. Amendment dated November 24, 2000;
c. Amendment dated December 16, 2000; and
d. Confirmation letter of control from The Nanjing Medical Group
Company Limited to Allwin Newtech dated December 16, 2000
10.12 Joint research project with the Company and Shenzhen Kelong Chuang Jian
Enterprise Co.
10.13 Development Agreement with Dr. Longbin Liu and Novagen
10.14 Project Development Agreement with Dr. Liu
16.1* Letter Regarding Changes in Certifying Account
23.1 Consent of Moore Stephens Ellis Foster Ltd., Chartered Accountants
______________________
* Previously filed with Dragon's initial registration statement on Form 10-SB,
filed with the SEC on November 4, 1999.
**Previously filed with Dragon's initial registration statement on Form SB-2,
filed with the SEC on May 15, 2000.
*** Previously filed with Dragon's amendment no. 1 to registration statement on
Form SB-2 filed with the SEC on August 3, 2000.
****Previously filed with Dragon's amendment no. 3 to registration statement on
Form SB-2 filed with the SEC on October 20, 2000.
*****Previously filed with Dragon's amendment no. 5 to registration statement on
Form SB-2 filed with the SEC on December 26, 2000.
(b) Reports on Form 8-K:
None.
33
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 2002 Dragon Pharmaceutical Inc.
a Florida Corporation
/s/ Longbin Liu
Longbin Liu, President
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Date
/s/ Longbin Liu
- ------------------------------------------- March 27, 2002
Longbin Liu
President, Director and Chief Executive
Officer
/s/ Ken Z. Cai
- ------------------------------------------- March 27, 2002
Ken Z. Cai
Director
/s/ Greg Hall
- ------------------------------------------- March 27, 2002
Greg Hall, Director
/s/ Alexander Wick
- ------------------------------------------- March 27, 2002
Alexander Wick, Director
/s/ Philip Yuen Pak Yiu
- ------------------------------------------- March 27, 2002
Philip Yuen Pak Yiu, Director
/s/ Dr. Yiu Kwong Sun
- ------------------------------------------- March 27, 2002
Dr. Yiu Kwong Sun, Director
/s/ Matthew Kavanagh
- ------------------------------------------- March 27, 2002
Matthew Kavanagh, Director, Finance and
Corporate Compliance (principal accounting
officer)
F-1
MOORE STEPHENS ELLIS FOSTER LTD.
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, BC Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
E-Mail: [email protected]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
DRAGON PHARMACEUTICALS INC.
& SUBSIDIARIES
We have audited the consolidated balance sheets of Dragon Pharmaceuticals Inc. &
Subsidiaries ("the Company") as at December 31, 2001 and 2000, and the related
consolidated statements of stockholders' equity for the years ended December 31,
2001 and 2000, the consolidated statements of operations and cash flows for the
years ended December 31, 2001 and 2000. 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, 2001 and 2000 and the results of their operations and their cash
flows for the years ended December 31, 2001 and 2000 in conformity with
generally accepted accounting principles in the United States.
Vancouver, Canada "MOORE STEPHENS ELLIS FOSTER LTD."
February 28, 2002 CHARTERED ACCOUNTANTS
F-2
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
2001 2000
ASSETS
Current
Cash and short term securities $ 9,446,084 $ 6,340,315
Accounts receivable 1,309,686 1,166,876
Inventories 1,095,860 474,041
Prepaid and deposits 140,340 96,934
------------ ------------
Total current assets 11,991,970 8,078,166
Fixed assets 2,534,609 2,330,349
Investment in Hepatitis B vaccine project - related party 3,790,000 4,000,000
Refundable investment deposits - related party 372,000 372,000
Licence and permit 3,316,458 3,766,315
------------ ------------
Total assets $ 22,005,037 $ 18,546,830
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current
Bank loans $ 2,887,345 $ 2,198,280
Accounts payable and accrued liabilities 1,318,938 1,435,820
Management fees payable - related parties 234,000 -
------------ ------------
Total current liabilities 4,440,283 3,634,100
------------ ------------
Minority interests 688,539 929,265
------------ ------------
Commitment (Note 13)
Stockholders' Equity
Share capital
Authorized: 50,000,000 common shares at
par value of $0.001 each
Issued and outstanding: 20,331,000 common shares
(December 31, 2000 - 16,700,000) 20,331 16,700
Additional paid in capital 26,624,741 20,000,897
Accumulated other comprehensive (loss) (25,008) (25,588)
Accumulated deficit (9,743,849) (6,008,544)
------------ ------------
Total stockholders' equity 16,876,215 13,983,465
------------ ------------
Total liabilities and stockholders' equity $ 22,005,037 $ 18,546,830
============ =============
The accompanying notes are an integral part of these financial statements.
F-3
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2001 and 2000
(Expressed in U.S. Dollars)
Page 1 of 2
Accumulated
Compre- other Total
Additional hensive compre- Stock-
Common stock paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated income equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 10,735,000 $ 10,735 $ 15,690,734 $(3,262,750) $ 50,049 $ 12,488,768
Issued 4,258,000 common shares
previously allotted 4,258,000 4,258 (4,258) - - -
Additional share issuance costs
to 4,258,000 common shares issued - (5,247) - - (5,247)
Exercise stock options for cash 107,000 107 53,393 - - 53,500
Exercise warrants for cash 1,600,000 1,600 2,498,400 - - 2,500,000
Allotted 250,000 common shares
at $6.25 per share - - 1,562,500 - - 1,562,500
Stock option compensation - - 205,375 - - 205,375
Other comprehensive income
- foreign currency translation - - - (75,637) - (75,637) (75,637)
Comprehensive income
- net (loss) for the year - - - (2,745,794) (2,745,794) - (2,745,794)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (2,821,431)
============
Balance, December 31, 2000 16,700,000 $ 16,700 $ 20,000,897 $(6,008,544) $(25,588) $ 13,983,465
=========================================================================== ======================================
The accompanying notes are an integral part of these financial statements.
F-4
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2001 and 2000
(Expressed in U.S. Dollars)
Page 2 of 2
Accumulated
Compre- other Total
Additional hensive compre- Stock-
Common stock paid-in income Deficit hensive holders'
Shares Amount capital (loss) accumulated income equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 16,700,000 $ 16,700 $ 20,000,897 - $(6,008,544) $(25,588) $ 13,983,465
Exercise of stock options for cash 131,000 131 65,369 - - - 65,500
Issuance of common stock pursuant
to a private placement at $2.00
per share, net of share issuance
costs of $490,000, in September 3,500,000 3,500 6,506,500 - - - 6,510,000
Other comprehensive income
- foreign currency translation - - - 580 - 580 580
Comprehensive (loss)
- net (loss) for the year - - - (3,735,305) (3,735,305) - (3,735,305)
Stock option compensation - - 51,975 - - - 51,975
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive (loss) $(3,734,725)
===========
Balance, December 31, 2001 20,331,000 $ 20,331 $ 26,624,741 $(9,743,849) $(25,008) $16,876,215
=========================================================================== ======================================
The accompanying notes are an integral part of these financial statements.
F-5
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 2001 and 2000
(Expressed in U.S. Dollars)
2001 2000
------------ -------------
Sales $ 3,073,885 $ 3,175,561
Cost of sales 583,878 902,480
------------ -------------
Gross profit 2,490,007 2,273,081
Selling, general and administrative expenses $ (5,328,110) (3,946,975)
Depreciation of fixed assets and
amortization of licence and permit (597,042) (515,106)
Net write off of land-use right and fixed assets (1,012) (257,344)
Research expenses (105,096) (544,500)
New market development (211,194) (279,114)
Provision for doubtful debts (267,300) (63,630)
Loan interest expense (154,644) (102,268)
Stock-based compensation (51,975) (205,375)
------------ -------------
Operating loss (4,226,366) (3,641,231)
Interest income 250,458 478,922
------------ -------------
Loss before minority interest (3,975,908) (3,162,309)
============ =============
Minority interest 240,603 416,515
============ =============
Net (loss) for the year $ (3,735,305) $ (2,745,794)
============ =============
(Loss) per share
Basic and diluted $ (0.21) $ (0.17)
============ =============
Weighted average number of
common shares outstanding
Basic and diluted 17,810,411 15,794,871
============ =============
The accompanying notes are an integral part of these financial statements.
F-6
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2001 and 2000
(Expressed in U.S. Dollars)
2001 2000
------------- ------------
Cash flows from (used in) operating activities
Net (loss) for the year $ (3,735,305) $ (2,745,794)
Adjustments to reconcile net loss to
net cash used in operating activities:
- stock-based compensation expense 51,975 205,375
- depreciation of fixed assets and amortization of
licence and permit 697,042 669,031
- minority interests (240,603) (416,515)
- net write off of land-use right and fixed assets 1,012 257,344
- provision for doubtful debts 267,300 63,630
------------- ------------
Changes in non-cash working capital items:
- accounts receivable (200,110) (561,763)
- inventories (621,819) 183,925
- prepaid expenses and deposits (43,406) 362,006
- accounts payable and accrued liabilities (116,882) 98,112
- management fees payable - related parties 234,000 -
------------- ------------
(3,806,796) (1,884,649)
------------- ------------
Cash flows used in investing activities
Purchase of fixed assets (352,069) (900,231)
Increase in restricted funds (892,342) (2,247,613)
Additional cost of licence - (250,000)
Investment in Hepatitis B vaccine project - (4,000,000)
Refundable investment deposits - (400,000)
------------- ------------
(1,244,411) (7,797,844)
------------- ------------
Cash flows from financing activities
Loan proceeds 689,065 1,594,453
Proceeds from issuance of shares, net of issuance costs 6,575,500 2,553,500
Proceeds from shares subscribed and allotted
in prior period, net of issuance costs - 8,611,603
Funds contributed by minority shareholders - 403,380
------------- ------------
7,264,565 13,162,936
------------- ------------
Foreign exchange (gain) loss on cash
held in foreign currency 69 (5,003)
------------- ------------
Increase (decrease) in cash and
and cash equivalents 2,213,427 3,475,440
Cash and cash equivalents, beginning of year 4,092,702 617,262
------------- ------------
Cash and cash equivalents, end of year $ 6,306,129 $ 4,092,702
============= ============
The accompanying notes are an integral part of these financial statements.
F-7
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. 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.
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 95% 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 is inactive and Huaxin is in the business of research
and development, production and sales of pharmaceutical products in China.
Allwin Biotrade Inc. ("Biotrade) was incorporated under the laws of British
Virgin Islands on June 6, 2000, for the purpose of marketing and
distributing biopharmaceutical products outside China. Dragon
Pharmaceuticals (Canada) Inc. ("Dragon Canada") was incorporated in British
Columbia, Canada on September 15, 2000, for the purpose of researching and
developing new biopharmaceutical products.
2. Significant Accounting Policies
(a) Basis of Consolidation
(i) These consolidated financial statements include the accounts of
the Company and its subsidiaries, Allwin, Kailong, Huaxin,
Biotrade and Dragon Canada. All inter-company transactions and
balances have been eliminated.
(ii) Under the terms of Sino-Foreign Joint Venture Contract, Huaxin's
board of directors consists of five directors of which the
Company has the right to select three directors including the
chairman. Except for (1) amending Huaxin's articles of
association; (2) liquidating Huaxin; (3) increasing or decreasing
Huaxin's registered capital; (4) mortgaging Huaxin's assets; and
(5) merging Huaxin, which transactions require unanimous approval
by Huaxin's board, the Company controls Huaxin in the ordinary
course of business. Because the Company has a controlling
financial interest in Huaxin, and controls Huaxin's operations in
the ordinary course of business, the Company has accounted for
Huaxin using the consolidated method of accounting as opposed to
using the equity method.
F-8
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
(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
Lab equipment 8 years
Office equipment and furniture 5 years
Leasehold improvements Term of lease (10 years)
Production equipment 10 years
(d) Foreign Currency Transactions
The parent company, Allwin, Kailong, Huaxin, Biotrade and Dragon
Canada maintain their accounting records in their functional
currencies (i.e., U.S. dollars, U.S. dollars, Renminbi Yuan, Renminbi
Yuan, U.S. dollars and Canadian dollars 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 or Canadian dollars) 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-9
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
(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) Advertising Expenses
The Company expenses advertising costs as incurred. There were no
advertising expenses incurred by the Company during the years ended
December 31, 2001 and 2000.
(h) 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.
(i) Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. The
Company is disclosing this information on its Statement of
Stockholders' Equity. Comprehensive income comprises equity except
those resulting from investments by owners and distributions to
owners. SFAS No. 130 did not change the current accounting treatments
for components of comprehensive income.
F-10
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
(j) 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, term deposits,
accounts receivable, bank loans, accounts payable and accrued
liabilities approximate their fair value because of the short-term
nature of these instruments. The Company places its cash and cash
equivalents with high credit quality financial institutions. The
Company routinely maintains balances in a financial institution beyond
the insured amount. As of December 31, 2001, the Company had deposits
of $1,151,000 above insured limits. As of December 31, 2000, the
Company had no deposits in a bank beyond insured limits.
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.
(k) 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 value of
the licence and permit, the discounted cash flows method is used to
arrive at the estimated fair value of such licence and permit.
F-11
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
(l) Cash and Cash Equivalents
Cash equivalents usually consist of highly liquid investments which
are readily convertible into cash with maturities of three months or
less. As at December 31, 2001, cash equivalents consist of commercial
papers and redeemable term deposits.
(m) 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.
(n) Revenue Recognition
Sales revenue is recognized upon the delivery of goods to customers.
(o) 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.
(p) 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 options
to acquire 2,969,500 common shares and warrants to acquire 2,200,000
common shares that are outstanding at December 31, 2001 are
anti-dilutive, however, they may be dilutive in future.
F-12
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
2. Significant Accounting Policies (continued)
(q) New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations. SFAS 141 applies to all business combinations
initiated after June 30, 2001. The SFAS 141 applies to all business
combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001, or later. The adoption of SFAS
141 will not have an impact on the Company's financial statements.
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142 (SFAS 142),
Goodwill and Other Intangible Assets. The provisions of SFAS 142 are
required to be applied starting with fiscal years beginning after
December 15, 2001 with earlier application permitted for entities with
fiscal years beginning after March 15, 2001 provided that the first
interim financial statements have not been previously issued. The
Statement is required to be applied at the beginning of the entity's
fiscal year and to be applied to all goodwill and other intangible
assets recognized in its financial statements to that date. The
adoption of SFAS 142 will not have an impact on the Company's
financial statements.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143 (SFAS 143), Asset
Retirement Obligations. SFAS 143 establishes accounting standards for
recognition and measurement of a liability for the costs of assets
retirement obligations. Under SFAS 143, the costs of retiring an asset
will be recorded as a liability when the retirement obligation arises
and will be amortized to expense over the life of the asset. The
adoption of SFAS 143 will not have an impact on the Company's
financial statements.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 (SFAS 144),
Accounting for the Impairment or Disposal of Long-lived Assets. SFAS
144 supersedes SFAS 121, Accounting for the Impairment of Long-lived
Assets and Long-lived Assets to be Disposed Of, and APB Opinion 30,
Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for segments of a
business to be disposed of. SFAS 144 is effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS 144 will not
have an impact on the Company's financial statements
F-13
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
3. Restricted Funds
2001 2000
---------- ----------
Term deposits held as collateral against bank loans $3,139,955 $1,736,328
Cash for use in acquisition of fixed assets - 511,285
---------- ----------
Restricted funds 3,139,955 2,247,613
Cash and cash equivalents 6,306,129 4,092,702
---------- ----------
Cash and short term securities $9,446,084 $6,340,315
========== ==========
4. Accounts Receivable
2001 2000
---------- ----------
Trade receivable $1,225,455 $ 996,100
Allowance for doubtful accounts (97,982) (40,663)
---------- ----------
1,127,473 955,437
Other receivable 182,213 211,439
---------- ----------
$1,309,686 $1,166,876
========== ==========
5. Inventories
2001 2000
---------- ----------
Raw materials $173,687 $ 72,033
Finished goods 179,871 391,469
Work in progress 742,302 10,539
---------- ----------
$1,095,860 $474,041
---------- ----------
F-14
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
6. Fixed Assets
2001
--------------------------------------------------
Accumulated Net book
Cost depreciation value
--------------- ------------------ ---------------
Motor vehicles $100,329 $31,657 $68,672
Office equipment and furniture 267,104 85,935 181,169
Leasehold improvements 990,940 221,652 769,288
Production and lab equipment 2,020,137 504,657 1,515,480
--------------- ------------------ ---------------
$3,378,510 $843,901 $2,534,609
=============== ================== ===============
2000
--------------------------------------------------
Accumulated Net book
Cost depreciation value
--------------- ------------------ ---------------
Motor vehicles $ 100,309 $ 15,752 $ 84,557
Office equipment and furniture 202,242 57,746 144,496
Leasehold improvements 952,364 119,234 833,130
Production and lab equipment 1,598,360 330,194 1,268,166
--------------- ------------------ ---------------
$2,853,275 $522,926 $2,330,349
=============== ================== ===============
For the year ended December 31, 2001, depreciation expenses totalled $344,614
(2000 - $269,125). The majority of fixed assets are located in China.
7. Investment in Hepatitis B Vaccine Project - Related Party
2001 2000
---------------- ----------------
Hepatitis B Vaccine Project $4,000,000 $4,000,000
Less: Valuation allowance (210,000) -
---------------- ----------------
$3,790,000 $4,000,000
================ ================
Pursuant to an agreement dated October 6, 2000, the Company paid $4,000,000 for
the acquisition of certain assets and technology relating to the production of
Hepatitis B vaccine. The vendor of the transaction is a company named Alphatech
Bioengineering Limited, incorporated in Hong Kong, and one of the two
shareholders of which is a director and senior officer of the Company.
F-15
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
7. Investment in Hepatitis B Vaccine Project - Related Party (continued)
(b) Pursuant to an amended agreement dated June 5, 2001, in the event that
the Company failed to find a joint venture partner, establish a
production facility for the vaccine project or sell the project to a
third party within nine months from the date of this amended
agreement, Dr. Longbin Liu, a senior officer and director of the
Company and one of the shareholders of Alphatech, demands to
repurchase the project from the Company. The repurchase price will be
$4.0 million payable as follows:
(i) $500,000 at the date of repurchase; and
(ii) the balance to be paid within eighteen (18) months of the date of
repurchase with interest at 6% per annum. The interest will be
accrued from six months after the date of repurchase.
8. Refundable Investment deposits - Related Party
2001 2000
-------- --------
Guanzhou Recomgen Biotech Co. Ltd.
- Tissue Plasminogen Activator ("TPA") Project $400,000 $400,000
Less: Valuation allowance (28,000) (28,000)
-------- --------
$372,000 $372,000
======== ========
During the year 2000, the Company paid $400,000 to Guanzhou Recomgen Biotech Co.
Ltd. ("Guanzhou Recomgen"), a company incorporated in China, for the funding of
its TPA research and development programs with the intention of acquiring the
technology. Guanzhou Recomgen is controlled by a senior officer and a director
of the Company. Subsequent to the year-end, due to financial market and economic
conditions, the Company decided not to proceed with the funding and the
acquisition. In accordance with the agreement, Guanzhou Recomgen and its
principals agreed to refund the $400,000 before September 30, 2001. The $400,000
was repaid subsequent to December 31, 2001.
F-16
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
9. Bank Loans
2001 2000
----------- ------------
RMB 3,000,000, bearing interest at 5.85% per annum and
due on July 31, 2001 $ - $ 362,354
RMB 2,000,000, bearing interest at 5.85% per annum and
due on August 15, 2001 - 241,570
RMB 7,800,000, bearing interest at 5.265% per annum and
due on January 31, 2002. (Renewed subsequent to year 942,312 942,120
end.) The loan is secured by the term deposit.
RMB 4,000,000, bearing interest at 5.265% per annum and
due on August 20, 2002. The loan is secured by the term 483,238 483,138
deposit.
RMB 1,400,000 bearing interest at 5.265% per annum and
due on July 26, 2002. The loan is secured by the term 169,133 169,098
deposit.
RMB 2,300,000 bearing interest at 5.265% per annum and
due on January 18, 2002. (Repaid subsequent to year end.) -
The loan is secured by the term deposit. 277,862
RMB 3,150,000 bearing interest at 5.265% per annum and
due on April 4, 2002. The loan is secured by the term 380,550 -
deposit.
RMB 3,700,000 bearing interest at 5.265% per annum and
due on June 19, 2002. The loan is secured by the term 446,995 -
deposit.
RMB 1,555,000 bearing interest at 5.022% per annum and
due on January 31, 2002. (Renewed subsequent to year
end.) The loan is secured by the term deposit. 187,255 -
----------- ------------
Total $ 2,887,345 $ 2,198,280
=========== ============
The weighted average interest rate was 5.249% and 5.79% for the years ended
December 31, 2001 and 2000.
F-17
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
10. 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, 2001, the parent company, Kailong and Huaxin have
estimated losses, for tax purposes, totalling approximately
$5,440,000, 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, 2001 and 2000. The
potential tax benefits arising from these losses have not been
recorded in the financial statements. The Company evaluates its
valuation allowance requirements on an annual basis based on projected
future operations. When circumstances change and this causes a change
in management's judgement about the realizability of deferred tax
assets, the impact of the change on the valuation allowance is
generally reflected in current income.
(b) The tax effect of temporary differences that give rise to the
Company's deferred tax asset (liability) is as follows:
2001 2000
------------ -----------
Tax losses carried forward $ 1,850,000 $ 776,560
Stock-based compensation 17,700 70,000
Less: valuation allowance (1,867,700) (846,560)
------------ -----------
$ - $ -
============ ===========
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate is as follows:
2001 2000
------ ------
Federal statutory income tax rate 34% 34%
Change in valuation allowance (34%) (34%)
------ ------
Effective income tax rate - -
F-18
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
11. Stock Options and Warrants
(a) Stock Options Plans
The Company charged $51,975 and $205,375, for the years ended
December 31, 2001 and 2000, respectively, to income due to the
exercise price of the vested options granted being below fair value of
the Company's stock on the date of the grant. During the year ended
December 31, 2001, there were options granted entitling the option
holders to acquire 20,000 shares at a price of $1.80 expiring November
30, 2001, 125,000 shares at a price of $1.80 per share expiring May
31, 2006 and 50,000share at a price of $1.75 per share expiring
December 18, 2006.
The following is a summary of the employee stock option information
for the period ended December 31, 2001:
Weighted Average
Shares Exercise Price
--------------- -------------------
Options outstanding at December 31, 1999 1,520,000 $ 0.58
Granted 1,737,500 $ 3.31
Forfeited (107,500) $ 7.00
Exercised (107,000) $ 0.50
--------------- -------------------
Options outstanding at December 31, 2000 $ 1.89
Granted 195,000 $ 1.79
Forfeited (137,500) $ 2.93
Exercised (131,000) $ 0.50
--------------- -------------------
Options outstanding at December 31, 2001 2,969,500 $ 1.92
=============== ===================
Options Outstanding Options Exercisable
- ------------------------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------------------------------------------------- ------------------------
$0.01 - $1.00 1,257,000 2.29 $ 0.50 1,243,000 $ 0.50
$1.01 - $2.00 175,000 4.57 $ 1.79 175,000 $ 1.79
$2.01 - $3.00 60,000 2.86 $ 2.50 60,000 $ 2.50
$3.01 - $4.00 1,477,500 3.85 $ 3.13 1,477,500 $ 3.13
--------- ---- ------- --------- -------
2,969,500 3.21 $ 1.92 2,955,500 $ 1.93
========= ==== ======= ========= =======
F-19
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
11. Stock Options and Warrants (continued)
The Company accounts for its stock-based compensation plan in
accordance with APB Opinion No. 25, under which no compensation is
recognized in connection with options granted to employees except if
options are granted with a strike price below fair value of the
underlying stock. The Company adopted the disclosure requirements SFAS
No. 123, Accounting for Stock-Based Compensation. Accordingly, the
Company is required to calculate and present the pro forma effect of
all awards granted. For disclosure purposes, the fair value of each
option granted to an employee has been estimated as of the date of
grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.5%, dividend yield 0%,
volatility of 89%, and expected lives of approximately 0 to 5 years.
Based on the computed option values and the number of the options
issued, had the Company recognized compensation expense, the following
would have been its effect on the Company's net loss:
2001 2000
----------- -----------
Net (loss) for the year:
- as reported $(3,735,305) $(2,745,794)
- pro-forma $(3,735,889) (2,746,378)
----------- -----------
Basic and diluted (loss) per share:
- as reported $(0.21) $(0.17)
- pro-forma $(0.21) $(0.17)
----------- -----------
(b) Warrants
Share purchase warrants outstanding as at December 31, 2001:
Number Underlying Exercise Price
of Warrants Shares Per Share Expiry Date
----------- ---------- -------------- -----------
400,000 400,000 $3.00 November 24, 2002
3,500,000 1,750,000 $2.00 September 13, 2003
50,000 50,000 $1.70 November 15, 2004
12. Related Party Transactions
(a) The Company incurred the following expenses to two directors of the
Company:
2001 2000
-------- --------
Management fees $336,000 $ 72,000
======== ========
(b) see Notes 7, 8 and 15.
F-20
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
13. Commitment
The Company has entered into operating lease agreements with respect to
Huaxin's production plant in Nanjing, China for an amount of RMB 2,700,000
(US$326,000) per annum until June 11, 2009, and the Company's
administrative offices in Vancouver for an amount escalating from
CDN$200,000 to CDN$230,000 (US$126,000 to US$145,000) per annum until March
31, 2007. Minimum payments required under the agreements are as follows:
2002 $430,913
2003 452,351
2004 467,062
2005 468,143
2006 471,384
2007 - 2009 833,671
-------------------------------------------
Total US$3,123,524
-------------------------------------------
14. Comparative Figures
Certain 2000 comparative figures have been reclassified to conform to the
financial statement presentation adopted for 2001.
15. Subsequent Events
Subsequent to December 31, 2001, the Company
a) entered into a Project Development Agreement with the President and
Chief Executive Officer of the Company (the "President") to continue
the research and development of G-CSF and Insulin for the Company. The
Company will make payment for the development of G-CSF as follows:
i. US$500,000 to be provided at the commencement of the research in
the G-CSF Project;
ii. US$500,000 to be provided when cell-line and related technology
is established and animal experimentation commences in the G-CSF
Project; and
iii. US$300,000 to be provided when a permit for clinical trials for
G-CSF has been issued by the State Drug Administration of China
("SDA"); and
iv. US$200,000 to be provided when a new drug license for G-CSF is
issued to Dragon by the SDA.
v. US$500,000 to be paid as a bonus if the SDA issues the new drug
license for G-CSF to Dragon before January 14, 2004.
F-21
DRAGON PHARMACEUTICALS INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(Expressed in U.S. Dollars)
The Company will make payment for the development of Insulin as follows:
i. US$750,000 to be provided by at the commencement of the research
in the Insulin Project;
ii. US$750,000 to be provided when cell-line and related technology
is established and animal experimentation commences in the
Insulin Project;
iii. US$300,000 to be provided when a permit for clinical trials for
Insulin has been issued by the SDA; and
iv. US$200,000 to be provided when a new drug license for Insulin is
issued to Dragon by the SDA.
v. US$500,000 to be paid as a bonus if the SDA issues the new drug
license for Insulin to Dragon before January 14, 2004.
For both the G-CSF and Insulin Projects:
i. If the Company elects to cease development of the project it will
forfeit any payments made and lose ownership of the Project, but
it will not be obligated to make any further payments toward the
Project;
ii. if an application for permit for clinical trials is not submitted
within three years with respect to the G-CSF Project by or four
years with respect to the Insulin Project or if the SDA rejects
the Project for technical or scientific reasons or if development
of the Project is terminated by the President, then the President
will refund to the Company all amounts paid, without interest or
deduction, with respect to the Project with in six months.
b) entered into a Patent Development Agreement with the President and a
company controlled by the President entitling the Company to acquire
one patent filed in the United States related to the discovery of a
new gene or protein. Consideration for the right to acquire the patent
is payment of US$500,000 and the issuance of warrants to acquire
1,000,000 common shares of the Company at a price of $2.50 per share
for a period of five years. The patent may be acquired prior to
January 14, 2005, at no additional cost other than the reasonable
legal costs of obtaining the patent.
c) acquired the balance of the outstanding shares of Huaxin for
$1,400,000.