This morning Dragonite announced that it has reached an agreement to sell its e-cigarette assets and asked the Hong Kong Stock Exchange to halt trading pending an announcement.

SUSPENSION OF TRADING

As announced by Dragonite International Limited (the “Company”, and together with its subsidiaries, the “Group”) on 1 August 2013, the Company has been engaged in discussions relating to the possible disposal of the Company’s electronic cigarette business in whole or in parts. On 14 August 2013, the Group and the buyer have entered into the Sale of Assets Agreement for the disposal of the Group’s certain assets relating to the electronic cigarette business (the “Disposal”).

The Disposal will constitute a very substantial disposal for the Company pursuant to Chapter 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. At the request of the Company, trading in the shares of the Company on The Stock Exchange of Hong Kong Limited will be suspended with effect from 9:00 a.m. on 15 August 2013 pending the release of an announcement in relation to the Disposal.

By order of the Board
Dragonite International Limited
Gary Drew Douglas
Managing Director

Announced six months of operations for the period ended 6.30.12. Awful operating results, stronger balance sheet as a result of diluting shareholders- something Dragonite excels at.

http://www.dragonite.com.hk/attachment/20120824223201001489071_en.pdf

DRAGONITE IN DISCUSSIONS

In the last two days Dragonite stock has increased in value by 30% on volume of nearly 30% of the O/S shares. The company halted trading today (overnight) in Hong Kong and made an announcement. Here's a link to the announcement:

http://www.dragonite.com.hk/attachment/20120720200201001467656_en.pdf

Significantly the announcement includes:

"As at the date of the announcement, the Managing Director of the Company, Mr. Gary Drew Douglas is in the United States to discuss with international tobacco companies for the possible disposal of or co-operation with or introduction of new capital into the Group's Ruyan electronic cigarettes business which owns the patents of electronic cigarette technology. No definitive agreements or contracts have been signed by the Group as at the date of this announcement and the aforesaid developments may or may not proceed. Shareholders of the Company and the investing public should exercise extreme caution when dealing in the shares of the Company."

So, it appears as if Dragonite is in serious talks to one of three things: 1) sell the business (and the patents) 2) find a international tobacco company to partner with 3) get an international tobacco partner or tobacco interests to invest in the business. Given the volume and price acceleration of the past two days this news has leaked in some fashion and this announcement was required.

Remember this would be the first announcement of this type ever initiated by the Company. An earlier release in 2011 about discussions with an international tobacco company in the past was made in response to rumors and the Company was directed to make the announcement by the Hong Kong Exchange. This release is proactive and neither defensive nor reactive.

Swisher's e-cigarettes are being produced by Freedom Smokeless- the same company that produces the private label Smoker Friendly brand.

Big option grant coming. Looks like management and directors are about to make large option grant at HK$0.07 per share. Thinking that the grant is most likely for their patent counsel.

http://www.dragonite.com.hk/attachment/20120709181701001461663_en.pdf

Here comes another reverse split- they're getting good at it:

http://www.dragonite.com.hk/attachment/20120629194701001455436_en.pdf

Note that the defendants include blu cig, who is being acquired by Lorillard, and Spark Industries LLC- the manufacturer of the e-cig exclusively marketed by Kretek. All I can surmise with respect to blu cig is that the settlement that was announced in April- just prior to the Lorillard announcement- was a settlement that was exclusive to the patents granted in November of 2010- but I cannot be sure of that. Also note that both Vapor Corp. and NJOY have been sued under the new patents- after having been sued under the earlier ones, as well.

1. Barjan LLC- markets Mistic E-cigarette
2. CB Distributors- markets 21st Century Smokes E-cigarette
3. Finiti Branding Group- markets FIN E-cigarette
4. LOEC, Inc.- does business as blu Cig!!!
5. Logic Technology Development Co.- markets Logic E-cigarette
6. Nicotek Development Co.- markets Metro E-cigarettes
7. The Safe Cig LLC- markets The Safe Cig E-cigarette
8. Sottera Inc.- markets NJOY E-cigarettes
9. Spark Industries LLC- markets CIG20 E-cigarettes- a private label brand exclusive through Kretek, a large, independent tobacco distributor
10. Vapor Corp.- markets Fifty-One, Krave, VaporX, EZ Smoker, Green Puffer, Americig, Fumare, Hookah Stix and Smoke Star- E-cigarettes

It looks like Dragonite's e-cigarette business is moving to the US and be based in Southern California, funded by yet another capital raise. As described, here are the use of proceeds:

The Group is mainly engaged in (i) production and sales of health care products, pharmaceutical products and RUYAN atomizing cigarettes, (ii) securities trading and investment, and (iii) property investment.

Electronic cigarettes are a core business of the Group. The Group is the leader in electronic cigarette technology with an extensive patent portfolio. In order to facilitate the enforcement and commercialization of the Group’s intellectual property rights in the United States, the Company plans to establish a wholly-owned
subsidiary in Southern California. Such new subsidiary will also facilitate sales, marketing, regulatory compliance, and public relations in regard to the Group’s electronic cigarette business in the United States.

Upon Completion, the gross proceeds to be raised from the Placing will be approximately HK$21.5 million. After taking into account the estimated expenses in relation to the Placing, the estimated net proceeds from the Placing will be approximately HK$20.4 million, representing a net price of HK$0.063 per Placing
Share. The entirety of the net proceeds raised from the Placing will be dedicated to the paid-up capital of the aforesaid new subsidiary in Southern California.

The Directors consider that the Placing represents a good opportunity to raise additional funds for establishing a new subsidiary in Southern California and the Placing will widen the Company’s shareholder base. The Directors also consider that
the terms of the Placing, including the rate of the placing commission, are fair and reasonable compared with current market practice. Accordingly, the Directors are of the view that the Placing is in the interests of the Company and the Shareholders as a whole.

This is not a threat to the business. Lorillard is jumping in with both feet. Two weeks ago NJOY secured a $20 million investment from a serious and prestigious private equity fund. These two events validate the business and the technology. But. the big tobacco companies will not touch a company that has patent litigation hanging over its head. This is critical- the Blu Cig settlement was a condition to this deal going down. This is good news for the industry and good news for Dragonite.

Lorillard not only purchased Blu Cig but, by extension and through the settlement, they purchased a license. They are now the only US tobacco company with a license for the e-cig technology that has been granted patents. Keep in mind, this is not a material transaction from Lorillard's perspective. $135 million represents less than 10% of the cash on their balance sheet at 3/31/12.

Blu settled its patent litigation with Dragonite last week for an undisclosed amount. I have to wonder how much of the $135 million that Lorillard is paying for Blu Cig will go to Dragonite. I suspect that settling the patent litigation was a condition to getting this deal between Blu Cig and Lorillard negotiated, signed and announced. At the very least this should help dragonite fund and continue its patent prosecution for some time.

Eugene pulling his old tricks again!! Alice has been in an out of this stock seven different times since Eugene and his Hong Kong cronies have gained control of the company.

The patent- originally filed in March of 2005 appears to encompass the characteristics of what was Ruyan's E-gar and then "morphed" into various "disposable" products manufactured and sold by them. It would appear to be the basis for just about every disposable e-cigarette currently on the market. Nothing groundbreaking here- but this could cause real problems for US importers across the board and could, potentially, have a serious negative impact on the retail supply chain.

Settlement implications related to Dragonite business model.

The fact that Dragonite is willing to discuss settlement with BLEC and NJOY signals the best and most effective path to monetizing its technology and its growing IP portfolio. BLEC and NJOY are serious players and, clearly, take the patent infringement claims seriously. BLEC and NJOY are serious players because the US distribution and retail supply chain see them as credible and reliable. The same cannot be said for 99% of US-based importers and distributors of e-cigs.

Unfortunately, Dragonite’s Ruyan subsidiary has a very spotty record in the US- due entirely to their inability to manufacture with any consistency when it comes to quality or quantity. The various Dragonite recaps have made some of us hopeful that Ruyan’s manufacturing and distribution issues would be addressed. To date, that has not been the case, as Dragonite always seems to get distracted with dubious investment activity whenever they have cash on their balance sheet.

Many of us would love to see the current court activities come down to a race between BLEC and NJOY as to who gets to stay in business without threat of lengthy, costly legal battles. One or the other accomplishes this through negotiation or settlement with Dragonite.

But, one also has to be concerned about the constant regulatory buzz that the US FDA seems intent on fermenting. Both BLEC and NJOY have the experience and expertise to manage US regulatory issues. After all, NJOY beat the FDA in court, something that many large US pharma companies have never done!

BEST CASE- long term licensing/partnership with one of the large US importers/distributors and a growing, sustainable source of revenue.

ALTERNATIVE- Dragonite gets out of the e-cig business through a strategic divestment of Ruyan and its IP through a sale or spin-off involving one of the large US importers/distributors.

REALITY- Dragonite will not be a major player in the e-cig business on its own. They do not have the resources, the expertise or the desire, irrespective of what they are saying in their filings.

Settlement Disclosures

The disclosures about the settlement discussions with BLEC and Magic Puffer are in the joint discovery filings on PACER- one filed 12/30/11 and the other 1/4/12. The NJOY disclosure was earlier when NJOY requested dismissal and then both parties asked for a delay in a hearing.

Settlement discussions disclosed in recent court filings.

Discovery schedules filed in the two patent infringement cases have disclosed that Dragonite is in settlement discussions with BLEC (Blu Cig) and Magic Puffer. Many observers believe that Dragonite's most effective way to tap into US market in near term is to align itself with large, successful US-based importer/marketer with established distribution and retail channels. Earlier filings also disclosed that there have been discussions with NJOY, but these appear to have been ended. NJOY and BLEC are among the largest and most successful US based e-cig importers/marketers.