Form 20-F
Page 1 of 111
20-F 1 d20f.htm FORM 20-F
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
(cid:133) Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
or
FORM 20-F
⌧ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2007.
(cid:133) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
or
or
(cid:133) Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of event requiring this shell company report
Commission file number: 001-32371
SINOVAC BIOTECH LTD.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Antigua, West Indies
(Jurisdiction of incorporation or organization)
No.39 Shangdi Xi Road,
Haidian District, Beijing 100085
People’s Republic of China
(Address of principal executive offices)
Helen G. Yang
Manager of International Business Development
No.39 Shangdi Xi Road,
Haidian District, Beijing 100085
People’s Republic of China
Tel: +86-10-6296-3661
Fax: +86-10-6296-6910
E-mail: yangg@sinovac.com
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, per value $0.001 per share
Name of each exchange on which registered
American Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
40,305,028 ordinary shares as of December 31, 2007.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No ⌧
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. Yes (cid:133) No ⌧
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ⌧ No (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:133) Accelerated filer (cid:133) Non-accelerated filer ⌧
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ⌧ International Financial Reporting Standards as issued by the International Accounting Standards Board (cid:133) Other (cid:133)
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to
follow. Item 17 (cid:133) Item 18 (cid:133)
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No ⌧
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court. Yes (cid:133) No (cid:133)
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Table of Contents
INTRODUCTION
FORWARD-LOOKING INFORMATION
TABLE OF CONTENTS
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3.
KEY INFORMATION
ITEM 4.
INFORMATION ON THE COMPANY
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10. ADDITIONAL INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
1
1
2
2
2
24
41
41
55
62
63
65
66
76
76
77
77
77
78
78
78
78
78
79
79
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Unless otherwise indicated, references in this annual report on Form 20-F to:
• “$” and “U.S. dollars” are to the legal currency of the United States;
INTRODUCTION
• “China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report on Form 20-
F only, Taiwan and the special administrative regions of Hong Kong and Macau;
• “common shares” are to our common shares, par value $0.001 per share;
• “GAAP” refers to general accepted accounting principles in the United States;
• “RMB” and “Renminbi” are to the legal currency of China;
• “Sinovac,” “we,” “us,” “our company” and “our” are to Sinovac Biotech Ltd., its predecessor entities and its consolidated
subsidiaries;
• “Sinovac Beijing” are to Sinovac Biotech Co., Ltd., our majority-owned subsidiary incorporated in China; and
• “Tangshan Yian” are to Tangshan Yian Biological Engineering Co., Ltd., our wholly owned subsidiary in China.
FORWARD-LOOKING INFORMATION
This annual report on Form 20-F contains forward-looking statements that relate to future events, including our future operating
results and conditions, our prospects and our future financial performance and condition, all of which are largely based on our current
expectations and projections. The forward-looking statements are contained principally in the sections entitled “Item 3. Key
Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.”
These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can
identify these forward-looking statements by terminology such as “may,” “will,” “expect,” “anticipate,” “aim,” “future,” “intend,”
“plan,” “believe,” “estimate,” “is/are likely to” or other and similar expressions. Forward-looking statements involve inherent risks and
uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement,
including but not limited to the following:
• our future financial performance and projected expenditures;
• our ability to enter into future collaborations with pharmaceutical, biopharmaceutical and biotechnology companies and
academic institutions or to obtain funding from government agencies;
• our product research and development activities, including the timing and progress of our clinical trials and projected
expenditures;
• our ability to receive regulatory approvals to develop and commercialize our products;
• our ability to increase our manufacturing capabilities for our products;
• our projected markets and growth in markets;
• our staffing needs; and
• our plans for sales and marketing.
The forward-looking statements made in this annual report on Form 20-F relate only to events or information as of the date on
which the statements are made in this annual report on Form 20-F. Except as required by law, we undertake no obligation to update or
revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on
which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report on Form 20-F
completely and with the understanding that our actual future results may be materially different from what we expect.
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PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following selected consolidated statement of operations data for the fiscal years ended December 31, 2005, 2006 and 2007
and consolidated balance sheet data as of December 31, 2006 and 2007 have been derived from our audited consolidated financial
statements that are included in this annual report beginning on page F-1. The following selected consolidated statement of operations
data for the fiscal years ended December 31, 2003 and 2004 and consolidated balance sheet data as of December 31, 2003, 2004, 2005
have been derived from our audited consolidated financial statements that are not included in this annual report.
Our historical results do not necessarily indicate results expected for any future periods. The selected consolidated financial data
should be read in conjunction with our audited consolidated financial statements and related notes and Item 5 “Operating and Financial
Review and Prospects” below. Our audited consolidated financial statements are prepared and presented in accordance with US GAAP.
Statement of operations data
Sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and
administrative expenses
Research and development
expenses
Purchased in process research
and development
Depreciation of property, plant
and equipment and
amortization of licenses and
permits
Total operating expenses
Operating income (loss)
Interest and financing expenses
Interest and other income
Income (loss) before income taxes
and minority interest
Income taxes (recovery)
Minority interest share of (earnings)
Net earnings (loss) for the year
Earnings (loss) per share—basic and
loss
diluted
Weighted average number of
common shares outstanding —
basic
—diluted
2003
2004
Year ended December 31,
2005
(in thousands, except share and per share data)
2006
2007
$
$
2,839
1,086
1,753
$
6,454
1,938
4,516
8,608
2,346
6,262
$
15,354
4,231
11,123
$
33,541
6,502
27,039
1,749
8,843
10,278
9,753
11,958
262
381
271
2,663
(910)
(269)
41
(1,138)
—
266
(872)
(0.04)
286
—
334
9,463
(4,946)
(369)
321
(4,994)
(767)
(440)
(4,667)
(0.14)
234
233
555
11,299
(5,037)
(229)
235
(5,031)
212
132
(5,111)
(0.14)
325
—
605
10,683
440
(319)
285
406
101
1,001
(696)
(0.02)
965
—
641
13,564
13,475
(478)
190
13,187
1,974
(3,563)
7,650
0.19
20,081,796
20,081,796
32,742,837
32,742,837
36,353,149
36,353,149
38,229,944
38,229,944
40,254,192
40,637,876
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Balance sheet data
Cash and cash equivalents
Restricted cash
Total assets
Short-term loans
Total current liabilities
Long-term debts
Minority interest
Total stockholders’ equity
Exchange Rate Information
2003
2004
As of December 31,
2005
(in thousands)
2006
2007
$ 1,420 $ 2,605 $ 7,354 $ 9,249 $17,071
1
57,448
6,836
24,445
1,367
2,898
$ 5,568 $12,437 $18,023 $19,245 $30,004
149
31,299
2,418
8,844
2,664
1,769
24
37,009
2,661
11,864
3,838
2,062
—
13,784
752
3,407
604
4,205
391
22,420
2,605
6,656
202
3,125
We publish our financial statements in U.S. dollars. Our business is primarily conducted in China and all of our revenues are
denominated in RMB. However, periodic reports made to shareholders will include current period amounts translated into U.S. dollars
in the following manner.
The assets and liabilities of our PRC subsidiaries, Sinovac Beijing and Tangshan Yian, are translated into U.S. dollars at the
exchange rate in effect at the balance sheet date of RMB7.3141 to $1.00. Revenue and expenses are translated at an average exchange
rate of RMB7.6172 to $1.00. Gains and losses from such translations are included in stockholders’ equity as a component of other
comprehensive income.
We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or
RMB, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in
part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Related to Our Company
We have a history of net losses and although we recently became profitable, we may be in loss position again in the future.
Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We have
incurred substantial losses since our inception, and although we first became profitable for the six months ended June 30, 2007 and
stayed profitable for the year ended December 31, 2007, we cannot assure you that we will remain profitable. We incurred net losses of
$5.0 million and $0.7 million in 2005 and 2006 and we recorded a profit of $7.7 million in 2007. As of December 31, 2007, we had an
accumulated deficit of $7.1 million. Our losses have resulted principally from our selling, general and administrative expenses,
including our share-based compensation. We expect to incur additional losses in the future if our sales do not increase or if our expenses
grow. Our losses have had, and are expected to continue to have, an adverse impact on our working capital, total assets, shareholders’
equity and cash flow. We cannot assure you that we will ever become profitable, or, even if we become profitable, that we would be
able to sustain or increase our profitability.
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We will need additional capital to expand the production capacity for our existing products, to continue development of our product
pipeline and to market existing and future products on a large scale. We cannot guarantee that we will find adequate sources of
capital in the future.
We will need to raise additional funds from the capital markets to finance expenditures for equipment, to acquire intellectual
property asset acquisitions, to expand the production capacity for our existing products, to continue the development and
commercialization of our product candidates and for other corporate purposes. As of December 31, 2007, we had approximately
$17,071,497 in cash and cash equivalents. Although we believe we have adequate near-term cash resources, we will need to undertake
significant future financings in order to:
• proceed with the research and development of other vaccine products, including clinical trials of new products;
• develop or acquire other product candidates or technologies;
• establish and expand manufacturing capabilities;
• commercialize our products, including the marketing and distribution of new and existing products;
• protect our intellectual property;
• seek and obtain regulatory approvals; and
• finance general and administrative and research activities that are not related to specific products under development.
In the past, we funded most of our research and development and other expenditures through government grants and working
capital. We intend to raise additional funds in the near future because our current operating and capital resources may be insufficient to
meet future requirements.
If we continue to raise additional funds by issuing equity securities, it will result in further dilution to our existing shareholders,
because the shares may be sold at a time when the market price is low, and because shares issued in equity financing transactions will
normally be sold at a discount to the current market price. Any equity securities issued also may provide for rights, preferences or
privileges senior or otherwise preferential to those of holders of our existing common shares. Unforeseen problems, including materially
negative developments relating to, among other things, product sales, new product rollouts, clinical trials, research and development
programs, our strategic relationships, our intellectual property, litigation, regulatory issues in our industry, the Chinese market generally
or general economic conditions, could interfere with our ability to raise additional funds or materially adversely affect the terms upon
which such funding is available.
If we raise additional funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to
those of holders of our common shares, and the terms of the debt securities issued could impose significant restrictions on our
operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish
significant rights to certain of our technologies, marketing territories, product candidates or products that we would otherwise seek to
develop or commercialize ourselves, or be required to grant licenses on terms that are not favorable to us. In the past, we have also
received research grants from the PRC government to finance the development of our vaccine products. We may not receive additional
grants in the future.
We do not know whether additional financing will be available to us on commercially acceptable terms when needed. If adequate
funds are not available or are not available on commercially acceptable terms, we may be unable to continue developing our products.
In any such event, our ability to bring a product to market and obtain revenues could be delayed, competitors could develop products
sooner than we do, and we could be forced to relinquish rights to technologies, products or potential products.
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We currently have limited revenue sources. A reduction in revenues of Healive would cause our revenues to decline and could
materially harm our business.
We generate all of our revenues from sales of our vaccine products. 96% of our sales in 2005, 97% of our sales in 2006 and 85%
of our sales in 2007 were attributable to Healive. Revenue from sales of Healive was $8.3 million, $14.8 million and $28.6 million in
2005, 2006 and 2007, respectively. We only began marketing and selling our new product Bilive in 2005, but, to date, sales of this new
product have been limited and we do not expect such sales to accelerate for some time, if at all. In addition, because Bilive is a
combination hepatitis A and B vaccine, and Healive is a hepatitis A vaccine, an increase in Bilive sales may result in a decrease in
Healive sales as customers substitute Bilive for Healive. We expect sales of Healive to continue to comprise a substantial portion of our
revenues in the near future. Since Healive and Bilive compete with each other to a certain degree, this could reduce our revenues and
margins, and increase pricing pressure on these products could also adversely affect our financial results. Because of this relative lack of
product diversification, an investment in our company would be more risky than investments in companies that offer a wider variety of
products or services.
Our legal counsel has advised us that we may have violated Section 402 of the Sarbanes-Oxley Act of 2002, which prohibits an
issuer from extending or maintaining personal loans to its directors or executive officers. As a result, we could become subject to
criminal, civil or administrative sanctions or penalties and we may also face potential private securities litigation.
We had extended and maintained some credit to two of our former directors, one of whom was also a former officer. Lily Wang,
our former director and CFO until March 22, 2006, was indebted to us in the amount of approximately $1.8 million as of October 2004.
This indebtedness arose from Ms. Wang’s agreement in September 2003 to acquire Tangshan Yian’s equity interest in Sinovac Beijing.
This loan was fully repaid as of November 2006. Another former director, Heping Wang, became indebted to us in early 2004 in the
amount of $2.6 million as a result of an unpaid capital contribution owed by Mr. Wang to Tangshan Yian. The debt was partly off set by
a US2.2 million payment from us for the transfer of ownership of Tangshan Yian. Mr. Wang ended up with a loan of $400,000, which
was paid in full in November 2004. In addition, in connection with his agreement to transfer a 100% equity interest in Tangshan Yian to
us in 2004, Mr. Wang agreed to assume and indemnify Tangshan Yian’s loan obligations in an aggregate amount of RMB10.8 million
comprising the RMB9 million principal amount of the loan and a RMB1.8 million funding fee. In July 2007, we received full repayment
of Mr. Wang’s outstanding obligations to us and released from escrow 1.5 million shares in our company pledged by Mr. Wang as
collateral for his obligations.
We took remedial steps to address the potential violation of the Sarbanes-Oxley Act by issuing a letter on June 22, 2006 to each of
Lily Wang and Heping Wang demanding immediate full repayment of all outstanding loan balances including accrued interests. We
have since received full repayment of the amounts owed by Lily Wang and Heping Wang. Section 402 of the U.S. Sarbanes-Oxley Act
of 2002 prohibits public U.S. companies, including us, from extending or maintaining personal loans to its directors or executive
officers. The arrangements with Ms. Wang and Mr. Wang may have violated this prohibition. The potential violation of the Section 402
may cause governmental authorities, such as the U.S. Securities and Exchange Commission, or SEC, or other U.S. authorities, to
impose certain criminal, civil, and administrative sanctions or penalties upon us. Similarly, private parties may also bring civil
litigations against us for such violations.
Failure to achieve and maintain effective internal controls could have a material adverse effect on our business, results of
operations and the trading price of our common shares.
We are subject to the reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-
Oxley Act of 2002, has adopted rules requiring public companies to include a report of management on such companies’ internal
control over financial reporting in their annual reports. This report must contain an assessment by management of the effectiveness of
the company’s internal control over financial reporting. In addition, an independent registered public accounting firm for a public
company must attest to and
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report on management’s assessment of the effectiveness of the company’s internal control over financial reporting. The management
assessment requirement will first apply to our annual report on Form 20-F for the fiscal year ending December 31, 2007, and the auditor
attestation requirement will first apply to our annual report on Form 20-F for the fiscal year ending December 31, 2009. In an effort to
comply with the requirements by the effective date for compliance, we are evaluating our internal control system and documentation
and will, if necessary, remediate any shortcomings we identify. We have hired a professional consultant to assist us in such efforts. Our
efforts to implement standardized internal control procedures and develop the internal tests necessary to verify the proper application of
the internal control procedures and their effectiveness will be a key area of focus for our board of directors, our audit committee and
senior management.
We found a significant deficiency in computing deferred income tax assets and liabilities, and income tax recovery as of
December 31, 2007. We have taken actions to remediate this deficiency by adding a review process by tax consultants on complicated
tax issues. Although management concludes that the internal control is effective for the period ended December 31, 2007, we cannot be
certain that the effectiveness of internal control can be maintained in the future. If we cannot implement the requirements of Section 404
of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by
regulatory authorities, such as the SEC. Our failure to achieve and maintain effective internal control over financial reporting could
result in loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively
impact the trading price of our common shares. Furthermore, we anticipate that we will incur considerable costs and use significant
management and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
If we fail to comply with our listing obligations, we risk being de-listed from the American Stock Exchange, which could have a
material adverse effect on the trading market for our common shares, reduce our ability to raise funds and otherwise have
significant negative consequences to us.
We have previously failed to comply with the continued listing requirements of the American Stock Exchange and we cannot
assure you that we will comply with those requirements in the future. For example, until April 2006, we were not in full compliance
with the American Stock Exchange corporate governance deadlines requiring maintenance of an independent board of directors with a
majority of independent directors, establishment of a compensation committee, corporate governance and nominating committee and
adoption of a code of ethics. In addition, the American Stock Exchange requires we hold shareholder meetings annually. We convened a
meeting of our shareholders in August 2007 but had to cancel the meeting because we could not form the necessary quorum. We have
applied to the American Stock Exchange to extend to April 30, 2008 the deadline for holding our 2007 shareholders’ meeting, but we
cannot assure you that we can form the quorum for any reconvened meeting by the extended deadline. If we are unable to comply with
these or other exchange requirements at some time in the future, the American Stock Exchange could de-list our shares from trading on
that exchange. If our common shares were to be de-listed by the American Stock Exchange, we might be unable to list our common
shares with another stock exchange. In that event, trading of our common shares might be limited to the over-the-counter market.
De-listing of our common shares could have a material adverse effect on the liquidity and price of our common shares and make it
more difficult for us to raise additional capital on favorable terms, if at all. In addition, de-listing by the American Stock Exchange
might negatively impact our reputation and, as a consequence, our business.
If we are unable to successfully compete in the highly competitive biopharmaceutical industry, our business could be harmed.
We operate in a highly competitive environment, and we expect the competition to increase further in the future. Our competitors
include large pharmaceutical and biotechnology companies and academic research institutions, both within and outside China. Many of
these competitors have greater resources than us. New
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competitors may also enter into the markets in which we currently compete. Accordingly, even if we are successful in launching a
product, we may not be able to outperform a competing product for any number of reasons, including:
• the possibility that the competitor may have launched its product first;
• the competitor may have greater access to certain raw materials;
• the competitor may have more efficient manufacturing processes;
• the competitor may have greater marketing capabilities; or
• the competitive product may have therapeutic or other advantages.
The technologies applied by our competitors and us are rapidly evolving, and new developments frequently result in price
competition and product obsolescence. In addition, we may be impacted by competition from generic forms of our products, substitute
products or imports of products from lower-priced markets. For a detailed description of our competitors in hepatitis A vaccines,
hepatitis A and B vaccines and influenza vaccines, please see “Item 4. Information on the Company—B. Business overview—
Competition.”
We may not be able to capture market share in China’s growing “inactive” vaccine market, which could adversely affect our ability
to increase our revenues.
Effective January 1, 2006, liquid formulations of attenuated hepatitis A vaccines were removed from the vaccines batch approval
list that was issued on December 23, 2005 by the NICPBP. As a result, the use of inactive vaccines in China was increased considerably
and the increase is expected to continue over the next several years. We believe that Western pharmaceutical companies should benefit
from this growing market for inactive vaccines since they manufacture the majority of inactive vaccines worldwide. Western
pharmaceutical companies should also benefit because inactive vaccines are more expensive to manufacture and they typically have
more financial resources than Chinese pharmaceutical companies. Even though our market share increased to 33% in 2007, going
forward, we may not be able to compete with Western pharmaceutical companies to further penetrate the inactive vaccine market,
which could adversely affect our ability to grow our revenues.
We may not be able to capture market share in the government-funded hepatitis A vaccine market, which could adversely affect our
revenues, and if we do capture market share in this market, we may need to sell our hepatitis A vaccine at low cost, which could
adversely affect our gross margin.
In a government working report presented in March 2007 at the Fifth Session of the Tenth National People’s Congress, Wen
Jiebao, China’s Premier, indicated that the PRC government will expand its immunization program and purchase vaccines to prevent 15
different infectious diseases, including hepatitis A. We expect the program to increase the overall size of the hepatitis A vaccine market
in China. However, we may not be able to capture market share in the government-funded hepatitis A vaccine market because domestic
suppliers of non-liquid, live attenuated hepatitis A vaccine may be able to supply this market at a lower cost and with higher quantities
of vaccine than we can. If we are unable to capture market share in the government-funded hepatitis A vaccine market, our sales volume
may decrease and our revenues could be adversely affected. Moreover, if we do successfully capture market share in the government-
funded hepatitis A vaccine market, we may need to sell our vaccines at a lower price than we do in the private market. Any reduction in
the average selling price of our hepatitis A vaccines could adversely affect our gross margin.
If end-users, such as hospitals, physicians and vaccinees, do not accept our products, we may be unable to generate significant
revenue.
Even where our vaccines obtain regulatory approval for commercialization, they still may not gain market acceptance among
centers for disease control, or CDCs, hospitals, physicians, vaccinees and the medical community, which would limit our ability to
generate revenue and would adversely affect our results of
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operations. CDCs, hospitals and physicians may not recommend products developed by us or our collaborators until clinical data or
other factors demonstrate the safety and efficacy of our products as compared to other available treatments. Even if the clinical safety
and efficacy of our products is established, hospitals and physicians may elect not to recommend these products for a variety of reasons,
including the reimbursement policies of government and third-party payors. There are other vaccines and treatment options for the
conditions that many of our products and product candidates target, such as hepatitis A and B and influenza. In order to successfully
launch a product, we must educate physicians and vaccinees about the relative benefits of our products. If our products are not
perceived as easy and convenient to use, are perceived to present a greater risk of side effects or are not perceived to be as effective as
other available treatments, CDCs, hospitals, physicians and vaccinees might not adopt our products. A failure of our products to gain
commercial acceptance would have a material adverse effect on our business, financial condition and results of operations.
Our growth may be adversely affected if market demand for our Anflu vaccine product does not meet our expectations.
Many vaccinees receive their flu vaccinations in the three-month period from September to November in anticipation of an
upcoming flu season, and we expect this period to be one of the most significant sales periods for this product each year. In anticipation
of the flu season, we intend to build up inventory of our Anflu product in line with what we believe will be the anticipated demand for
the product. If actual demand does not meet our expectations, we may be required to write off significant inventory and may otherwise
experience adverse consequences in our financial condition.
Even if our pandemic influenza product candidate obtains regulatory approval, by the time we complete development, the pandemic
influenza threat may have abated or alternative vaccines or technologies may have been adopted.
We are devoting significant resources to research and develop a new vaccine for pandemic influenza. Our pandemic influenza
vaccine candidate has completed phase II clinical trials.
Even if our vaccine for pandemic influenza obtains regulatory approval, by that time the threat of a pandemic influenza outbreak
may be reduced, or government health organizations may have adequate stockpiles of pandemic influenza vaccine or have adopted other
technologies or strategies to prevent or limit outbreaks. For example, we invested substantial resources to develop a SARS vaccine, but
the SARS epidemic subsided before we could complete clinical or regulatory development.
Our business is highly seasonal. This seasonality will contribute to our operating results fluctuating considerably throughout the
year.
Our business is highly seasonal. For example, the influenza season generally runs from November through March of the next year,
and the largest percentage of influenza vaccinations is administered between September and November of each year. As a result, we
expect to realize most of our annual revenues from Anflu during this period. You should expect this seasonality in our business to
contribute to significant quarterly fluctuations in our operating results.
If any of our third-party suppliers or manufacturers cannot adequately meet our needs, our business could be harmed.
While we use raw materials and other supplies that are generally available from multiple commercial sources, certain raw
materials that we use to cultivate our influenza vaccines, such as embryonated eggs, are in short supply or difficult for suppliers to
produce in accordance with our specifications. If the third-party suppliers were to cease production or otherwise fail to supply us with
quality raw materials, and we were unable to contract on acceptable terms for these materials with alternative suppliers, our ability to
deliver our products to the market would be adversely affected.
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In addition, if we fail to secure long-term supply relationship for some of the raw materials we use, our business could be harmed.
For example, we do not have a long-term supply agreement for hepatitis B vaccine we use for Bilive production. We source the hepatitis
B vaccine we use for Bilive production entirely from Beijing Temple of Heaven Biological Products Co., Ltd. In an agreement dated
October 15, 2002, we agreed to purchase all hepatitis B vaccine to be used in our Bilive production exclusively from Beijing Temple of
Heaven for 10 years and to enter into a separate supply agreement in the future to specify the pricing, quantity, delivery and payment
terms of the hepatitis B vaccine supply relationship. However, this agreement is silent on whether Beijing Temple of Heaven is
obligated to furnish us with hepatitis B vaccine for 10 years.
From time to time, concerns are raised with respect to potential contamination of biological materials that are supplied to us. These
concerns can further tighten market conditions for materials that may be in short supply or available from limited sources. Moreover,
regulatory approvals to market our products may be conditioned upon obtaining certain materials from specified sources. Any efforts to
substitute material from an alternate source may be delayed by pending regulatory approval of such alternate source. Although we work
to mitigate the risks associated with relying on sole suppliers, there is a possibility that material shortages could impact product
development and production.
We are controlled by a small number of existing shareholders and their affiliated entities and their interests may not be aligned with
the interests of our other shareholders.
Our directors and executive officers and their affiliates collectively control approximately 26.45 % of our outstanding common
shares as of January 28, 2008. These shareholders, if they act together, will be able to influence our management and affairs and all
matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. The
concentration of ownership of these shareholders may act to entrench our board of directors and management and may discourage, delay
or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their
shares as part of a sale of our company and might reduce the price of our common shares. These actions may be taken even if they are
opposed by our other shareholders. In cases where the interests of our significant shareholders are aligned and they vote together, these
shareholders may also have the power to prevent or cause a change in control. In addition, these shareholders could divert business
opportunities from us to themselves or others.
The interests of the existing minority shareholder in our Sinovac Beijing subsidiary may diverge from our own and this may
adversely affect our ability to manage Sinovac Beijing.
Sinovac Beijing, our principal operating subsidiary, is a Sino-foreign equity joint venture in which we directly own a 71.56%
interest and China Bioway Biotech Group Co., Ltd., or China Bioway, an affiliate of Peking University, owns a 28.44% interest. China
Bioway’s interests may not be aligned with our interests at all times. If our interests diverge, China Bioway may exercise its right under
PRC laws to protect its own interest, which may be adverse to us. For example, under China’s joint venture regulations, unanimous
approval of members of a joint venture’s (such as Sinovac Beijing) board of directors who are present at a board meeting is required for
any amendment to the joint venture’s articles of association, the termination or dissolution of the joint venture company, an increase or
decrease in the registered capital of the joint venture company or a merger or de-merger of the joint venture. China Bioway appoints one
of the five directors of Sinovac Beijing’s board. Accordingly, China Bioway has the ability to block any action that requires unanimous
board approval. Further, should we wish to transfer our equity interest in Sinovac Beijing, in whole or in part, to a third-party, China
Bioway has a right of first refusal to purchase our interest under China’s joint venture regulations.
In addition to its statutory rights as a minority shareholder, China Bioway has additional rights under the joint venture contract and
under the articles of association of Sinovac Beijing. The joint venture contract and articles of association require the consent of each of
Sinovac Beijing’s shareholders and/or unanimous board approval on matters such as a major change in the business line of the
company, expansion or amendment of the
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business scope of the company, transfer of the registered capital by a shareholder, creation of a mortgage or pledge upon the company’s
assets, a change in the organizational form of the company and designation or removal of the general manager.
To date, China Bioway has been cooperative with us in handling matters with respect to the business of Sinovac Beijing. We
cannot assure you, however, that China Bioway will continue to act in a cooperative manner in the future.
Some of the predecessor shareholders of Sinovac Beijing and Tangshan Yian were enterprises owning state-owned assets, or
EOSAs. Their failures to comply with PRC legal requirements in asset or share transfers could, under certain circumstances, result
in such transfers being invalidated by government authorities. If this occurs, we could lose our ownership of intellectual property
rights that are vital to our business as well as our equity ownership in Sinovac Beijing and Tangshan Yian.
Sinovac Beijing is currently owned 71.56% by us and 28.44% by China Bioway. Tangshan Yian is wholly owned by us. Some of
the predecessor shareholders of Sinovac Beijing and Tangshan Yian, including Shenzhen Kexing Biological Engineering Ltd., China
Bioway, Tangshan Medicine Biotech Co., Ltd., Tangshan Yikang Biotech Co., Ltd. and Tangshan Yian itself (as Sinovac Beijing’s
former shareholder) were EOSAs. Under applicable PRC laws, when EOSAs sell, transfer or assign assets or equity investments in their
possession or under their control to third parties, they are required to obtain an independent appraisal of the transferred assets or shares
and file such appraisal with or obtain approval of such appraisal from PRC government authorities. Beginning after 2004, EOSAs have
also been required to make such assets or equity transfers at government-designated marketplaces. Our acquisitions of intellectual
property rights and some equity interests were subject to these requirements. The technologies related to hepatitis A vaccine, hepatitis A
and B vaccine and influenza vaccine that are vital to our business were directly or indirectly transferred by Tangshan Yian to us.
Tangshan Yian failed to file with government authorities the appraisal of the hepatitis A vaccine technology that it transferred in
2001 to Sinovac Beijing as Tangshan Yian’s capital contribution to Sinovac Beijing. Under PRC laws, Tangshan Yian also failed to:
• obtain the appraisal of the hepatitis A and B vaccine technology that it transferred for no consideration to Beijing Keding
Investment Co., Ltd., or Beijing Keding, in 2002 (Beijing Keding subsequently transferred the technology to Sinovac Beijing
as Beijing Keding’s capital contribution to Sinovac Beijing) and to file such appraisal with government authorities; and
• obtain the appraisal of the influenza vaccine technology that it transferred to Sinovac Beijing in 2004 and to file such
appraisal with government authorities.
These failures subject us to the risk of losing ownership or control of these vaccine technologies.
In addition, before we acquired our 71.56% equity interest in Sinovac Beijing and 100% equity interest in Tangshan Yian, both
companies had undergone multiple changes in their shareholders and these shareholders’ shareholdings. Some of the EOSA
shareholders of Sinovac Beijing and Tangshan Yian, including China Bioway and Tangshan Medicine Biotech Co., Ltd., have sold,
transferred or assigned their respective equity interests in Sinovac Beijing and Tangshan Yian without fully complying with laws to
appraise the equity interests, to file such appraisals with or obtain regulatory approval of such appraisals from PRC government
authorities or to make equity interest transfers at the government-designated marketplaces as required for transactions completed after
2004. Similar to the asset transfers, such failures subject us to the risk of losing the ownership or control of our equity interests in
Sinovac Beijing and Tangshan Yian.
PRC government authorities may take court actions to invalidate the transfers of the assets or equity investments discussed above
for non-compliance with applicable appraisal, filing, approval and designated marketplace requirements. We cannot guarantee that
government authorities will not take such legal actions or
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that such legal actions, if commenced, will not be successful. If these transfers are invalidated, we would lose title to these assets and
investments. Because we depend on these technologies and because Sinovac Beijing and Tangshan Yian constitute all of our operations,
our loss of these technologies or equity interests in Sinovac Beijing and/or Tangshan Yian would materially and adversely affect our
business operations and financial condition.
The landlord that leases us our three buildings in Beijing has not yet obtained ownership certificates for the buildings. If PRC
government authorities or third-parties challenge or invalidate the landlord’s ownership of the buildings, our Anflu and filling and
packaging operations would be materially and adversely affected.
In August 2004, we signed two 20-year leases in Beijing with China Bioway Biotech Group Co., Ltd., pursuant to which we
leased two buildings of approximately 28,000 and 13,300 square feet, respectively, located at the Peking University Biological
Park. We house our Anflu manufacturing and research and development center in these buildings. In June 2007, we signed another 20-
year lease in Beijing with China Bioway Biotech Group., Ltd., in order to expand Sinovac Beijing’s production plant in Beijing,
pursuant to which we leased one building of approximately 37,000 square feet, located at Peking University Biological Park. China
Bioway has yet to obtain building ownership certificates for the three buildings. Under the three leases, China Bioway agreed to hold us
harmless and indemnify us for any damages or losses we may suffer as a result of its failure to obtain building ownership certificates.
China Bioway also pledged its land use certificate relating to these three leases to a commercial lender in October 2002 for 5
years. China Bioway has guaranteed to us in writing that we have all the legal rights and privileges to use the three buildings as agreed
to in the three leases and that it will indemnify us for any losses or damages that could be incurred if our rights and privileges to use
such buildings are impeded or hampered by the commercial lender. We cannot guarantee that China Bioway will ever be able to obtain
the necessary building ownership certificates or that PRC government authorities or third-parties will not challenge or invalidate China
Bioway’s ownership even if it does obtain such ownership certificates. If that happens, we may need to vacate our existing facilities and
build alternative facilities, causing material and adverse disruptions to our business operations. China Bioway obtained the approval
certificate for the design of the leased buildings. It will take several months or longer for the ownership certificate to be issued
according to related process within China regulatory agency.
We became a public company through our acquisition of a public shell company, where we were the accounting acquirer and
assumed all known and unknown potential liabilities of our predecessor entity.
In September 2003, we engaged in a share exchange with Net-Force Systems Inc., or Net-Force. This transaction was accounted
for as a reverse merger in which Sinovac Biotech Co., Ltd. was deemed the accounting acquirer and Net-Force, which was originally
incorporated in 1999, was the legal acquirer. Although we disposed of all the assets and liabilities of Net-Force to a company controlled
by its then president and CEO, we cannot guarantee that we will not be liable for any liabilities related to the conduct by Net-Force of
its business prior to its acquisition by us.
We could be subject to costly and time-consuming product liability actions. We carry limited insurance coverage.
We manufacture vaccines that are injected into vaccinees to protect against infectious illnesses. If our products do not function as
anticipated, whether as a result of the design of these products, unanticipated health consequences or side effects, or misuse or
mishandling by third parties, of such products, or because of faulty or contaminated supplies, they could injure the vaccinees and as a
result subject us to product liability lawsuits. Claims against us also could be based on failure to immunize as anticipated. Any product
liability claim brought against us, with or without merit, could have a material adverse effect on us. Even a meritless or unsuccessful
product liability claim could be time consuming, expensive to defend and could result in the diversion of management’s attention from
managing our core business or result in associated negative publicity.
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Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of
biopharmaceutical products. We currently do not carry product liability insurance for Bilive or Anflu. Although we carry regular
product liability insurance for Healive, we cannot be certain that we will be able to maintain adequate product liability insurance at a
reasonable cost. In addition, we have no clinical trial liability insurance for our clinical trials because such coverage is not available in
mainland China. Any insurance coverage we do have may not be sufficient to satisfy liability resulting from product liability claims. A
successful product liability claim or series of claims could have a material adverse impact on our business, financial condition and
results of operations.
We depend on our key personnel, the loss of whom would adversely affect our operations. If we fail to attract and retain the talent
required for our business, our business will be materially harmed.
We are a small company with 305 full-time employees as of December 31, 2007, and we depend to a great extent on principal
members of our management and scientific staff. If we lose the services of any key personnel, in particular Mr. Weidong Yin, our
President and Chief Executive Officer, the loss could significantly impede the achievement of our research and development objectives
and delay our product development programs and the approval and commercialization of our product candidates. We do not currently
have any key man life insurance policies. We have entered into employment agreements with our executive officers under which they
have agreed to restrictive covenants relating to non-competition and non-solicitation. These employment agreements do not, however,
guarantee that we will be able to retain the services of our executive officers in the future. In addition, recruiting and retaining additional
qualified scientific, technical and managerial personnel and research partners will be critical to our success. Competition among
biopharmaceutical and biotechnology companies for qualified employees in China is intense and turnover rates are high. There is
currently a shortage of employees in China with expertise in our areas of research and clinical and regulatory affairs, and this shortage is
likely to continue. We may not be able to retain existing personnel or attract and retain qualified staff in the future. If we fail to hire and
retain personnel in key positions, we may be unable to develop or commercialize our product candidates in a timely manner.
We may encounter difficulties in managing our growth, which could adversely affect our results of operations.
We have experienced a period of rapid and substantial growth that has placed and, if such growth continues, will continue to place
a strain on our administrative and operational infrastructure. If we are unable to manage this growth effectively, our business, results of
operations or financial condition may be materially and adversely affected. Our ability to manage our operations and growth effectively
requires us to continue to improve our operational, financial and management controls, reporting systems and procedures and hiring
programs. We may not be able to successfully implement these required improvements.
We may be classified as a passive foreign investment company, which could result in adverse United States federal income tax
consequences to US holders of our common shares.
Based in part on our estimates of the value of our assets, as determined based on the price of our common shares and the expected
price of our common shares, we do not expect to be a “passive foreign investment company,” or PFIC, for U.S. federal income tax
purposes for our current taxable year ending December 31, 2008 or in the foreseeable future. However, the application of the PFIC rules
is subject to ambiguity in several respects, and PFIC status is tested each taxable year and will depend on the composition of our assets
and income and the value of our assets including, among others, goodwill and equity investments in less than 25%-owned entities,
which may change from time to time. Because we currently hold, and expect to continue to hold, a substantial amount of cash or cash
equivalents and other passive assets, and, because the value of our assets is likely to be determined in large part by reference to the
market prices of our common shares, which is likely to fluctuate, we may be a PFIC for any taxable year. If we are treated as a PFIC for
any taxable year during which a U.S. person held our common shares, certain adverse U.S. federal income tax consequences would
apply to such U.S. person.
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For more information on the tax consequences to you if we were treated as a PFIC, see “Item 10. Additional Information—E.
Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”
Risks Related to Government Regulation
We can only sell products that have received regulatory approval. Many factors affect our ability to obtain such approvals.
Pre-clinical and clinical trials of our products, and the manufacturing and marketing of our technologies, are subject to extensive,
costly and rigorous regulation by governmental authorities in the PRC and in other countries. Even if we complete preclinical and
clinical trials successfully, we may not be able to obtain applicable regulatory approvals. We cannot market any product candidate until
we have both completed our clinical trials and obtained the necessary regulatory approvals for that product candidate.
Conducting clinical trials and obtaining regulatory approvals are uncertain, time consuming and expensive processes. The process
of obtaining required regulatory approvals from the China State Food and Drug Administration, or China SFDA, and other regulatory
authorities often takes many years to complete and can vary significantly based on the type, complexity and novelty of the product
candidates. For example, it took us approximately ten years to develop and obtain regulatory approval to commercialize Healive, and it
took us five and a half and four and a half years, respectively, to develop and obtain regulatory approval to commercialize Bilive and
Anflu.
There can be no assurance that all of the clinical trials pertaining to our vaccines in development will be completed within the time
frames currently anticipated by us. We could encounter difficulties in enrolling vaccinees for trials or encounter setbacks during the
conduct of trials that result in delays or trial cancellation. Data obtained from preclinical and clinical studies are subject to varying
interpretations that could delay, limit or prevent regulatory approval, and failure to observe regulatory requirements or inadequate
manufacturing processes are examples of other problems that could prevent approval. In addition, we may encounter delays or
rejections in the event of additional government regulation from future legislation, administrative action or changes in China SFDA
policy or if unforeseen health risks become an issue with the participants of clinical trials. Clinical trials may also fail at any stage of
testing. Results of early trials frequently do not predict results of later trials, and acceptable results in early trials may not be repeated.
For these reasons, we do not know whether regulatory authorities will grant approval for any of our product candidates in the future.
The process of obtaining regulatory approvals is also lengthy, expensive and uncertain for products that have been developed by
others but which we market and sell in China. For example, LG Life Sciences Ltd. granted us a five-year exclusive license to market
and distribute its hepatitis B vaccine in mainland China, subject to our ability to obtain the required regulatory approvals for this product
by February 2009. Under the agreement with LG Life Sciences, we have a limited period of time to obtain the required approvals before
LG Life Sciences may terminate the agreement. It is likely to take several years or more to obtain the regulatory approvals necessary for
us to be able to market and distribute LG Life Sciences’ hepatitis B vaccine in mainland China, if we are able to obtain such regulatory
approvals at all.
Delays in obtaining China SFDA or foreign approvals of our products could result in substantial additional costs and adversely
affect our ability to compete with other companies. Even if regulatory approval is ultimately granted, there can be no assurance that we
can maintain the approval or that the approval will not be withdrawn. Any approval received may also restrict the intended use and
marketing of the product we want to commercialize.
Outside the PRC, our ability to market any of our potential products is contingent upon receiving marketing authorizations from
the appropriate foreign regulatory authorities. These foreign regulatory approval processes include all of the risks associated with the
China SFDA approval process described above and may include additional risks.
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If we are unable to enroll sufficient vaccinees and identify clinical investigators to complete our clinical trials, our development
programs such as pandemic influenza vaccine could be delayed or terminated.
The rate of completion of our clinical trials, and those of our collaborators, is significantly dependent upon the rate of enrollment
of vaccinees and clinical investigators. Vaccinee enrollment is a function of many factors, including:
• efforts of the sponsor and clinical sites involved to facilitate timely enrollment;
• vaccinee referral practices of physicians;
• design of the protocol;
• eligibility criteria for the study in question;
• perceived risks and benefits of the drug under study;
• the size of the vaccinee population;
• availability of competing therapies;
• availability of clinical trial sites; and
• proximity of and access by vaccinees to clinical sites.
We may have difficulty obtaining sufficient vaccinee enrollment or clinician participation to conduct our clinical trials as planned,
and we may need to expend substantial additional funds to obtain access to resources or delay or modify our plans significantly. These
considerations may lead us to consider the termination of ongoing clinical trials or development of a product for a particular indication.
A setback in any of our clinical trials could adversely affect our stock price.
In January 2008, we completed phase II clinical trials of a vaccine against the H5N1 strain of pandemic influenza in collaboration
with the China Center for Disease Control and Prevention, or China CDC. The preliminary results of the phase II clinical trial reached
the EMEA evaluation standards for seasonal flu vaccines, which is an indication of good immunogenicity of the vaccine. We have filed
the phase II clinical trial report with the China SFDA. We are also developing a vaccine to protect against Japanese encephalitis.
Setbacks in any phase of the clinical development of our product candidates could have a material adverse effect on our business and
our future prospects and financial results and would likely cause a decline in the price of our common shares.
We may not achieve our projected development goals in the time frames we announce and expect. If we fail to achieve one or more
milestones as contemplated, the market price of our common shares could decline.
We set goals for and make public statements regarding our anticipated timing of the accomplishment of objectives material to our
success, such as the commencement and completion of clinical trials and other milestones. The actual timing of these events can vary
dramatically due to factors such as delays or failures in our clinical trials, the uncertainties inherent in the regulatory approval process
and delays in achieving manufacturing or marketing arrangements sufficient to commercialize our products. We may not complete our
clinical trials or make regulatory submissions or receive regulatory approvals as planned. Also, we may not be able to adhere to our
currently anticipated schedule for the launch of any of our products. If we fail to achieve one or more milestones as contemplated, the
market price of our shares could decline.
We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to
meet established deadlines for the completion of such trials.
After we obtain approval to conduct clinical trials for our product candidates, we rely on qualified research organizations, medical
institutions and clinical investigators to enroll qualified vaccinees and conduct our clinical trials. Our reliance on these third parties for
clinical development activities reduces our control over the clinical
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trial process. Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If
these third parties do not successfully carry out their contractual duties, including meeting expected deadlines, our efforts to obtain
regulatory approvals for and commercialize our vaccine candidates may be delayed or prevented.
Because the medical conditions our vaccines are intended to prevent represent significant public health threats, we are at risk of
governmental actions detrimental to our business, such as product seizure, compulsory licensing, resumed price controls and
additional regulations.
In response to a pandemic or the perceived risk of a pandemic, governments in China and other countries may take actions to
protect their citizens that could affect our ability to control the production and export of pandemic vaccines or otherwise impose
burdensome regulations on our business. For example, an outbreak of influenza or SARS may subject our manufacturing locations to
seizure by the PRC government. The PRC government may also require that we grant compulsory licenses to allow competitors to
manufacture products that are protected by our patents or may resume its price control over vaccines although such control has recently
been lifted in China.
We may not be able to comply with applicable good manufacturing practice requirements and other regulatory requirements, which
could have a material adverse affect on our business, financial condition and results of operations.
We are required to comply with applicable good manufacturing practice regulations, which include requirements relating to
quality control and quality assurance as well as corresponding maintenance, record-keeping and documentation standards.
Manufacturing facilities must be approved by governmental authorities before we can use them to commercially manufacture our
products and are subject to inspection by regulatory agencies.
If we fail to comply with applicable regulatory requirements at any stage during the regulatory process, including following any
product approval, we may be subject to sanctions, including:
• fines;
• product recalls or seizure;
• injunctions;
• refusal of regulatory agencies to review pending market approval applications or supplements to approval applications;
• total or partial suspension of production;
• civil penalties;
• withdrawals of previously approved marketing applications; and
• criminal prosecution.
We deal with hazardous materials that may cause injury to others. These materials are regulated by environmental laws that may
impose significant costs and restrictions on our business.
Our research and development programs and manufacturing operations involve the controlled use of potentially harmful biological
materials and other hazardous materials. We cannot completely eliminate the risk of accidental contamination or injury to our
employees or others from the use, manufacture, storage, handling or disposal of hazardous materials and certain waste products. In the
event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any
applicable insurance coverage we may have. We are also subject to PRC laws and regulations governing the use, manufacture, storage,
handling or disposal of hazardous materials and waste products, such as the PRC Prevention and Control
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of Water Pollution Law and PRC Environmental Protection Law, as well as waste-disposal standards set by the relevant governmental
agencies. It is likely that China will adopt stricter pollution controls as the country is experiencing increasingly serious environmental
pollution. Although we passed an environmental examination of our facilities conducted in 2004 by the Beijing Environment Protection
Bureau on our hepatitis A vaccine production line, we can not assure you that we will continue to pass similar environmental
examinations in the future. If we fail to comply with applicable environmental laws and regulations or with the environmental
conditions attached to our operating licenses, our operating licenses could be revoked and we could be subject to civil, criminal and
administrative penalties. We may also have to incur significant costs to comply with future environmental laws and regulations.
Moreover, we do not currently have a pollution and remediation insurance policy to mitigate against any risk related to environmental
pollution or violation of environmental law.
Risks Related to Our Intellectual Property
Our hepatitis and influenza vaccine technology is not patented. If we are unable to protect our technologies from competitors with
patents or other forms of intellectual property protection, our business may be harmed.
Our success depends, in part, on our ability to protect our proprietary technologies. We try to protect the technology that we
consider important to our business by filing PRC patent applications and relying on trade secret and pharmaceutical regulatory
protection.
We have no patent protection for our hepatitis or influenza vaccines. We have one issued patent and three patent applications
pending in the PRC relating to our SARS vaccine technology. The process of seeking patent protection in China can be lengthy and
expensive, and we cannot assure you that our pending patent applications, or any patent applications we may make in the future in
respect of other products, will result in issued patents, or that any patents issued in the future will be able to provide us with meaningful
protection or commercial advantage. Our patent applications may be challenged, invalidated or circumvented in the future.
In addition to patents, we rely on trade secrets and proprietary know-how to protect our intellectual property. We have entered into
confidentiality agreements (which include, in the case of employees, non-competition provisions) with many of our employees,
consultants, outside scientific collaborators, sponsored researchers and other advisors. These agreements provide that all confidential
information developed or made known to the individual during the course of the individual’s relationship with us is to be kept
confidential and not disclosed to third parties except in specific circumstances. In the case of our employees, the agreements provide
that all of the technology which is conceived by the individual during the course of employment is our exclusive property. These
agreements may not provide meaningful protection or adequate remedies in the event of unauthorized use or disclosure of our
proprietary information. In addition, it is possible that third parties could independently develop information and techniques
substantially similar to ours or otherwise gain access to our trade secrets.
We cannot assure you that our current or potential competitors, many of whom have substantial resources and have made
substantial investments in competing technologies, do not have and will not develop, products that compete directly with our products
despite our intellectual property rights.
Intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other
countries. Policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to
enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others.
The experience and capabilities of PRC courts in handling intellectual property litigation varies, and outcomes are unpredictable.
Further, such litigation may require significant expenditures of cash and management efforts and could harm our business, financial
condition and results of operations. An adverse determination in any such litigation could materially impair our intellectual property
rights and may harm our business, prospects and reputation.
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The market exclusivity period upon which we depended for certain of our products has expired.
We have traditionally relied on market exclusivity under Chinese law for our vaccines products such as Healive and Bilive.
However, the market exclusivity period for Healive and Bilive expired on December 7, 2007 and January 6, 2008, respectively.
Assuming regulatory approvals are obtained, our ability to successfully commercialize certain drugs may depend on the
availability of market exclusivity under PRC law, which provides protections for certain new products. Under the PRC’s former
Regulation on the Protection of New Pharmaceuticals and Technology Transfer, new drugs were afforded exclusivity protection of six,
eight or twelve years, depending on the category of the drug in question. During the protection period, the China SFDA will not accept
third parties’ applications for manufacturing the drug under protection.
After China joined the WTO in 2001, the PRC government amended and implemented many laws and regulations in the area of
pharmaceuticals. Currently, the Pharmaceutical Administration Law, the Implementing Regulations on Pharmaceutical Administration
Law and the Administration of Registration of Pharmaceutical Procedures are the primary laws and regulations governing the exclusive
protection regime for new drugs.
The Implementing Regulations on Pharmaceutical Administration Law provide that the China SFDA may establish a monitoring
period for up to five years for certain new drugs to monitor the safety of these products. During the monitoring period, the China SFDA
will not accept third parties’ applications for manufacturing or importing the same drug. The China SFDA’s regulations provide that the
monitoring period shall be three, four or five years. According to the Administration of Registration of Pharmaceutical Procedures
promulgated by the China SFDA in 2007, in case there is more than one application for the same new drug pending, after the issuance
of the first production license afforded with a monitoring period, the other co-pending applications should be rejected unless a clinical
trial application has been approved.
The period of market exclusivity under these Chinese pharmaceutical regulations is considerably shorter than the exclusivity
period afforded by patent protection, which, in the case of invention patents, may last up to 20 years from the national filing date of the
patent directed to the product, its use or method of manufacture.
If our products infringe the intellectual property rights of third parties, we may incur substantial liabilities, and we may be unable to
sell these products.
Our commercial success also depends significantly on our ability to operate without infringing the patents and other proprietary
rights of third parties. Patent applications are maintained in secrecy until their publication 18 months after the filing date. The
publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying
discoveries were made and patent applications were filed. China, similar to many other countries, adopts the first-to-file system under
which the first party to file a patent application (instead of the first to invent the subject invention) may be awarded a patent. Even after
reasonable investigation we may not know with certainty whether we have infringed upon a third party’s patent because such third party
may have filed a patent application without our knowledge while we are still developing that product. If a third party claims that we
infringe upon its proprietary rights, any of the following may occur:
• we may become involved in time-consuming and expensive litigation, even if the claim is without merit;
• we may become liable for substantial damages for past infringement if a court decides that our technology infringes upon a
competitor’s patent;
• a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be
available on commercially reasonable terms, if at all, or which may require us to pay substantial royalties or grant cross
licenses to our patents; and
• we may have to reformulate our product so that it does not infringe upon others’ patent rights, which may not be possible or
could be very expensive and time-consuming.
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If any of these events occurs, our business will suffer and the market price of our common shares could decline.
The success of our business may depend on licensing vaccine components from, and entering into collaboration arrangements with,
third parties. We cannot be certain that our licensing or collaboration efforts will succeed or that we will realize any revenue from
them.
The success of our business strategy depends, in part, on our ability to enter into licensing and collaboration arrangements and to
manage effectively the resulting relationships. For example, we believe our exclusive right to distribute the hepatitis B vaccine for LG
Life Sciences, or LGLS, in the PRC is important to our success. We cannot assure you that LGLS will not terminate its relationship with
us, or enter into relationships with third-party competitor of ours in the future. We also consider important to our business the
continuous and stable supply of hepatitis B vaccines from Beijing Temple of Heaven Biological Products Co., Ltd. for our production of
Bilive, our contemplated collaboration with LGLS in marketing and distributing our vaccine products in Korea and other countries, our
cooperation with China CDC in pandemic influenza research and market exploration in Mexico with Glovax C.V.
Our ability to enter into agreements with commercial partners depends in part on our ability to convince them of the value of our
technology and know-how. This may require substantial time and effort on our part. While we anticipate expending substantial funds
and management effort, we cannot assure you that strategic relationships will result or that we will be able to negotiate additional
strategic agreements in the future on acceptable terms, if at all. Furthermore, we may incur significant financial commitments to
collaborators in connection with potential licenses and sponsored research agreements. In addition, we may not be able to control the
areas of responsibility undertaken by our strategic partners and may be adversely affected should these partners prove unable to carry a
product candidate forward to full commercialization or should they lose interest in dedicating the necessary resources toward
developing any such product quickly.
Third parties may terminate our licensing and other strategic arrangements if we do not perform as required under these
arrangements. Generally, we expect that agreements for rights to develop technologies will require us to exercise diligence in bringing
product candidates to market and may require us to make milestone and royalty payments that, in some instances, could be substantial.
Our failure to exercise the required diligence or make any required milestone or royalty payments could result in the termination of the
relevant license agreement, which could have a material adverse effect on us and our operations. In addition, these third parties may also
breach or terminate their agreements with us or otherwise fail to conduct their activities in connection with our relationships in a timely
manner. If we or our partners terminate or breach any of our licenses or relationships, we may:
• lose our rights to develop and market our product candidates;
• lose patent and/or trade secret protection for our product candidates;
• experience significant delays in the development or commercialization of our product candidates;
• not be able to obtain any other licenses on acceptable terms, if at all; and
• incur liability for damages.
Licensing arrangements and strategic relationships in our industry can be very complex, particularly with respect to intellectual
property rights. Disputes may arise in the future regarding ownership rights to technology developed by or with other parties. These and
other possible disagreements between us and third parties with respect to our licenses or our strategic relationships could lead to delays
in the research, development, manufacture and commercialization of our product candidates. These disputes could also result in
litigation or arbitration, both of which are time-consuming and expensive. These third parties also may pursue alternative technologies
or product candidates either on their own or in strategic relationships with others in direct competition with us.
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Any cessation or suspension of our collaborations with scientific advisors and academic institutions may increase our costs in
research and development and lengthen our new vaccines development process and lower our efficiency in new products
development.
We work with scientific advisors and academic collaborators who assist us in our research and development efforts. Almost all of
our preclinical and research programs are heavily reliant upon such collaborators, and we generally benefit considerably from the
resources, technology and experience these collaborations can provide. These scientists are not, however, our employees and may have
other commitments that limit their availability to us. If a conflict of interest arises between their work for us and their work for another
entity, we may lose the services of these scientists and institutions. Any cessation or suspension of our collaborations with scientific
advisors and academic institutions may increase our research and development costs, lengthen our new vaccines development process
and lower our efficiency in new products development. In addition, although our scientific advisors and academic collaborators
generally sign agreements not to disclose our confidential information, it is possible that valuable proprietary knowledge may become
publicly known which would compromise our competitive advantage.
Risks Related to Doing Business in China
Adverse changes in political, economic and other policies of the PRC government could have a material adverse effect on the overall
economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive
position.
All of our business operations are conducted in China, and all of our sales are currently made in China. Accordingly, our business,
financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in
China. The Chinese economy differs from the economies of most developed countries in many respects, including:
• the extent of government involvement;
• the level of development;
• the growth rate;
• the control of foreign exchange;
• the allocation of resources;
• an evolving regulatory system; and
• lack of sufficient transparency in the regulatory process.
While the Chinese economy has experienced significant growth in the past 20 years, growth has been uneven, both geographically
and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth
and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect
on us. For example, our financial condition and results of operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us.
The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent
years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the
reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a
substantial portion of the productive assets in China is still owned by the Chinese government. The continued control of these assets and
other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese
government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or
companies. Efforts by the Chinese government to slow the pace of growth of the Chinese economy could result in hospitals spending
less, which in turn could reduce demand for our products.
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Moreover, the political relationship among foreign countries and China is subject to sudden fluctuation and periodic tension.
Changes in political conditions in China and changes in the state of foreign relations are difficult to predict and could adversely affect
our product export and international collaborations. This could lead to a decline in our profitability in the future.
Any adverse change in the economic conditions or government policies in China could have a material adverse effect on overall
economic growth and the level of healthcare investments and expenditures in China, which in turn could lead to a reduction in demand
for our products and consequently have a material adverse effect on our businesses.
Future changes in laws, regulations or enforcement policies in China could adversely affect our business.
Laws, regulations and enforcement policies in China, including those regulating our business, are evolving and subject to future
change. Future changes in laws, regulations or administrative interpretations, or stricter enforcement policies by the Chinese
government, could impose more stringent requirements on us, including fines or other penalties. Changes in applicable laws and
regulations may also increase our operating costs. Compliance with such requirements could impose substantial additional costs or
otherwise have a material adverse effect on our business, financial condition and results of operations. These changes may relax some
requirements, which could be beneficial to our competitors or could lower market entry barriers and increase competition. Further,
regulatory agencies in China may periodically, and sometimes abruptly, change their enforcement practices. Therefore, prior
enforcement activity, or lack of enforcement activity, is not necessarily predictive of future actions. Any enforcement actions against us
could have a material and adverse effect on us and the market price of our common shares. In addition, any litigation or governmental
investigation or enforcement proceedings in China may be protracted and may result in substantial cost and diversion of resources and
management attention, negative publicity, damage to our reputation and decline in the price of our common shares.
We rely on dividends paid by our subsidiaries for our cash needs. If they are unable to pay us sufficient dividends due to statutory or
contractual restrictions on their abilities to distribute dividends to us, our various cash needs may not be met.
We are a holding company, and we rely on dividends paid by our majority-owned subsidiary, Sinovac Beijing, and wholly owned
subsidiary, Tangshan Yian, for our cash needs, including the funds necessary to pay any dividends and other cash distributions to our
shareholders, service any debt we may incur and pay our operating expenses. The payment of dividends in China is subject to
limitations. Regulations in the PRC currently permit payment of dividends by our PRC subsidiaries only out of accumulated profits as
determined in accordance with accounting standards and regulations in China. For instance, Tangshan Yian is required to set aside at
least 10% of its after-tax profits each year to contribute to its reserve fund until the accumulated balance of such reserve fund reaches
50% of the registered capital of Tangshan Yian. Tangshan Yian is also required to reserve a portion of its after-tax profits to its
employee welfare and bonus fund, the amount of which is subject to its board of directors. Sinovac Beijing is required to set aside, at
the discretion of its board of directors, a portion of its after-tax profits to its reserve fund, enterprise development fund and employee
welfare and bonus funds. These funds are not distributable in cash dividends. In addition, if Sinovac Beijing or Tangshan Yian incurs
debt on its own behalf in the future, the instruments governing the debt may restrict either company’s ability to pay dividends or make
other distributions to us.
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
We receive all of our revenues in Renminbi, which currently is not a freely convertible currency. A portion of our revenues may be
converted into other currencies to meet our foreign currency obligations, including, among others, payment of dividends declared by our
subsidiaries. Under China’s existing foreign exchange regulations, both Sinovac Beijing and Tangshan Yian are able to pay dividends in
foreign currencies without
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prior approval from the State Administration of Foreign Exchange, or the SAFE, by complying with certain procedural requirements.
However, we cannot assure you that the PRC government will not take future measures to restrict access to foreign currencies for
current account transactions.
Our PRC subsidiaries’ ability to obtain foreign exchange is subject to significant foreign exchange controls and, in the case of
amounts under the capital account, requires the approval of and/or registration with PRC government authorities, including the SAFE.
In particular, if we finance our PRC subsidiaries by means of foreign currency from us or other foreign lenders, the amount is not
allowed to exceed the difference between the amount of total investment and the amount of the registered capital as approved by the
Ministry of Commerce and registered with the SAFE. Further, such loans must be registered with the SAFE. If we finance our PRC
subsidiaries by means of additional capital contributions, the amount of these capital contributions must first be approved by the
relevant government approval authority. These limitations could affect the ability of our PRC subsidiaries to obtain foreign exchange
through debt or equity financing.
Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.
The value of the Renminbi against the US dollar and other currencies may fluctuate and is affected by, among other things,
changes in China’s political and economic conditions. The conversion of Renminbi into foreign currencies, including US dollars, has
historically been set by the People’s Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of
the Renminbi to the US dollar. Under the new policy, the Renminbi is permitted to fluctuate within a band against a basket of certain
foreign currencies. This change in policy resulted initially in an approximately 2.0% appreciation in the value of the Renminbi against
the US dollar. Since the adoption of this new policy, the value of Renminbi against the US dollar has fluctuated on a daily basis within
narrow ranges, but overall has continued to strengthen against the US dollar. There remains significant international pressure on the
PRC government to further liberalize its currency policy, which could result in a further and more significant appreciation in the value
of the Renminbi against the US dollar. As we import certain production equipment from Europe and the United States, fluctuations in
the value of the Renminbi against the Euro and the dollar may increase our cost of production. In addition, as we rely entirely on
dividends paid to us by our subsidiaries Sinovac Beijing and Tangshan Yian, any significant revaluation of the Renminbi may have a
material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on, our common shares in
foreign currency terms. For example, to the extent that we need to convert US dollars into Renminbi for our operations, appreciation of
the Renminbi against the US dollar would reduce the Renminbi amount we receive from the conversion. Conversely, if we decide to
convert our Renminbi into US dollars for the purpose of making dividend payments on our common shares or for other business
purposes, appreciation of the US dollar against the Renminbi would reduce the US dollar amount available to us.
Our business benefits from certain government incentives. Expiration of, or changes to, these incentives could have a material
adverse effect on our operating results by significantly increasing our tax expenses.
The PRC government provides various incentives to foreign-invested companies, including Sinovac Beijing and Tangshan Yian,
in order to encourage development of investment by foreigners. Such incentives include reduced tax rates and other measures. Under
the PRC tax laws effective prior to January 1, 2008, domestically-owned companies typically were subject to an enterprise income tax
rate of 33%. Currently, Sinovac Beijing is subject to a 15% enterprise income tax rate. Tangshan Yian is subject to a reduced enterprise
income tax rate of 24%. Any change in the preferential tax rates or tax holidays currently enjoyed by our subsidiaries will reduce our
after-tax profit. On March 16, 2007, the National People’s Congress of China enacted a new enterprise income tax law, and the
implementation rules of such new enterprise income tax law were promulgated by the State Council of China on December 6, 2007.
Under the new enterprise income tax law and its implementation rules, foreign invested enterprises, or FIEs, such as our subsidiaries,
and domestic companies would be subject to EIT at a uniform rate of 25%. Preferential tax treatments will continue to be granted to
entities that conduct business in encouraged sectors, whether FIEs or domestic companies. The new tax law and its implementation
rules became effective on January 1, 2008. Under the new tax law, enterprises that were established and already
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enjoyed preferential tax rates or tax holidays before March 16, 2007 will (i) in the case of preferential tax rates, gradually increase to the
25% rate for a period of 5 years, or (ii) in the case of tax holidays continue to enjoy them until the expiration of such term. There can be
no assurance that any of our subsidiaries will continue to be entitled to any preferential tax rates or tax holidays after the transition
period expires.
The newly enacted PRC Enterprise Income Tax Law could affect tax exemptions on dividends received by us and increase our
enterprise income tax rate.
We are incorporated under the laws of Antigua and Barbuda. As a foreign legal person, dividends derived from our business
operations in the PRC are currently not subject to income tax under PRC law. However, we cannot assure you that such dividends will
continue to be exempt from PRC enterprise income tax. Under the newly enacted PRC Enterprise Income Tax Law promulgated by the
Fifth Meeting of the Tenth National People’s Congress on March 16, 2007 and its implementation rules promulgated by the State
Council of China on December 6, 2007, if we are deemed as a non-PRC tax resident enterprise without an office or premises in the
PRC, withholding tax at the rate of 10% will be applicable to dividends received by us from our subsidiaries, unless the tax is entitled to
reduction or elimination in accordance with any future PRC laws or regulations or an applicable tax treaty between the PRC and
Antigua and Barbuda. As of the date of this prospectus, Antigua and Barbuda has not entered into any such tax treaties with the PRC.
In addition, the newly enacted PRC Enterprise Income Tax Law provides that, if an enterprise incorporated outside the PRC has its
“de facto management organization” located within the PRC, such enterprise may be recognized as a PRC tax resident enterprise and
thus may be subject to enterprise income tax at the rate of 25% on their worldwide income. Under the newly enacted Implementation
Rules of the PRC Enterprises Income Tax Law, “de facto management organization” means the organization which is essentially in
charge of overall management and control with respect to the operation, personnel, books and accounts, and assets of the enterprise in
question. Substantially all members of our management are located in the PRC. As substantially all members of our management
continue to be located in the PRC after January 1, 2008, the effective date of the newly enacted PRC Enterprise Income Tax Law and its
implementation rules, we may be deemed a PRC tax resident enterprise and therefore subject to an enterprise income tax rate of 25% on
our worldwide income, although the dividends that we receive from our PRC subsidiaries may be exempt from PRC withholding tax if
we are recognized as a PRC tax resident.
Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC
resident shareholders to personal liability and limit our ability to acquire PRC companies or to inject capital into our PRC
subsidiary, limit our PRC subsidiary’s ability to distribute profits to us, or otherwise adversely affect our financial position.
SAFE issued a public notice in October 2005, or the SAFE Notice 75, requiring PRC residents to register with the local SAFE
branch before establishing or controlling any company outside of China, or an offshore special purpose company, for the purposes of
overseas capital raising with assets or equities of PRC companies. In addition, the PRC resident who is the shareholder of an offshore
special purpose company is required to amend its SAFE registration with the local SAFE branch, with respect to that offshore special
purpose company, in the event of any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation
of any security interest over the assets located in China or other material changes in share capital. If any PRC shareholder fails to make
the required SAFE registration and amendment, the PRC subsidiaries of that offshore special purpose company may be prohibited from
distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation, to the offshore special purpose
company. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability
to our PRC beneficial owners or our PRC subsidiaries under PRC laws for evasion of applicable foreign exchange restrictions.
SAFE Notice 75 applies retroactively to PRC residents who have established or controlled an offshore special purpose company
that made onshore investments in the PRC prior to the issuance of the SAFE Notice 75.
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In May 2007, SAFE issued relevant guidance to its local branches with respect to the operational procedures for SAFE registration
under SAFE Notice No. 75. This guidance standardized more specific and stringent supervision on registrations relating to SAFE Notice
No. 75. Mr. Weidong Yin, our chairman of the board of directors, chief executive officer and president, out of our current beneficial
owners who are PRC residents has made the required SAFE registration with respect to his investments in our company and Mr. Heping
Wang has made the SAFE registration only in Beijing. The failure of Mr. Heping Wang to make the registration in the city of Tangshan
and the failure of our other beneficial owners who are PRC residents to make their SAFE registrations or timely amend their SAFE
registrations pursuant to the SAFE Notice 75 or the failure of future beneficial owners of our company who are PRC residents to
comply with the registration procedures set forth in the SAFE Notice 75 may subject such beneficial owners or our PRC subsidiaries to
fines and legal sanctions and may also result in a restriction on our PRC subsidiaries’ ability to distribute profits to us or otherwise
adversely affect our business.
As it is uncertain how the SAFE Notice 75 will be interpreted or implemented, we cannot predict how and to what extent it will
affect our business operations or future strategy. For example, we may be subject to a more stringent review and approval process with
respect to our foreign exchange activities, such as remittance of dividends, re-investments of profits and foreign currency-denominated
borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to acquire a PRC
company with equity interests or assets, we or the owners of such company, as the case may be, may not be able to complete the
necessary approvals, filings and registrations for the acquisition. This may restrict our ability to implement our acquisition strategy and
adversely affect our business and prospects.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making
loans or additional capital contributions to our PRC operating subsidiaries and affiliated entities.
In funding our PRC subsidiaries, we must comply with PRC legal requirements relating to foreign debt registration and to PRC
companies’ “registered capital” and “total investment.” “Registered capital” refers to the capital contributed to or paid into a PRC
company in cash or in kind, and “total investment” refers to the amount of a company’s registered capital plus all external borrowings
by such company. The amounts of a PRC company’s registered capital and total investment are set forth in the company’s constitutional
documents and approved by the competent government authority in advance and, in the case of Sinovac Beijing, must be approved by
its minority shareholder, China Bioway, as well.
Loans by us to Sinovac Beijing or Tangshan Yian cannot exceed the difference between such company’s registered capital and
total investment, unless the company has obtained the approval of the approval authority and, in Sinovac Beijing’s case, the approval of
China Bioway, to increase the amount of total investment. Further, such loans must be registered with the SAFE or its local counterpart.
We may also decide to finance our PRC subsidiaries by making additional capital contributions. These additional contributions
must be approved by the government approval authority and, in the case of Sinovac Beijing, by China Bioway. We cannot assure you
that we will be able to obtain these government registrations or approvals, or the approval of China Bioway, on a timely basis, if at all,
with respect to future loans or additional capital contributions by us to our subsidiaries or affiliates. If we fail to receive such
registrations or approvals, our ability to capitalize our PRC operations would be negatively affected, which could adversely and
materially affect the liquidity of our subsidiaries and our ability to expand our business.
Because we are incorporated under Antigua and Barbuda law, substantially all of our operations, property and assets are located in
China and a majority of our directors and officers and substantially all of their assets are located outside of the United States, you
may be unable to protect your shareholder rights.
We are incorporated in Antigua and Barbuda. Our corporate affairs are governed by our articles of incorporation and by-laws and
by the International Business Corporation Act and common law of Antigua and Barbuda. The rights of shareholders to take legal action
against our directors, officers and us, actions by minority
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shareholders and the fiduciary responsibilities of our directors to us are to a large extent governed by the International Business
Corporation Act and common law of Antigua and Barbuda. The common law of Antigua and Barbuda is derived in part from
comparatively limited judicial precedent in Antigua and Barbuda as well as from English common law, which has persuasive, but not
binding, authority on a court in Antigua and Barbuda. The rights of our shareholders and the fiduciary responsibilities of our directors
under Antigua and Barbuda law are not as clearly established as they would be under statutes or judicial precedents in the United States.
Among other things, Antigua and Barbuda has a less developed body of securities laws as compared to the United States, and provides
significantly less protection to investors. Further, Antigua and Barbuda’s body of securities law, and the experience of its courts in
addressing corporate and securities law issues of a type often experienced by public companies, is likely less developed than that of
some of the other jurisdictions where publicly traded China-based companies are incorporated, such as the Cayman Islands.
It may be difficult or impossible for you to bring an action against us or our directors or officers in Antigua and Barbuda or to
enforce or protect your rights under U.S. securities laws or otherwise. Even if you are successful in bringing an action of this kind, you
may be unable to enforce a judgment against our assets or the assets of our directors and officers under the laws of Antigua and
Barbuda. There is doubt as to whether Antigua and Barbuda courts would enforce judgments of United States courts obtained in actions
against us or our directors or officers that are predicated upon the civil liability provisions of the Securities Act, or in original actions
brought against us or such persons predicated upon the Securities Act. There is no treaty in effect between the United States and
Antigua and Barbuda providing for such enforcement, and there are grounds upon which Antigua and Barbuda courts may not enforce
judgments of United States courts. In addition, Antigua and Barbuda corporations may not have standing to initiate a shareholder
derivative action before the federal courts of the United States.
PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law
based either on treaties between the PRC and the country where the judgment is made or on reciprocity between jurisdictions. If there
are no treaties or reciprocity arrangements between the PRC and a foreign jurisdiction where a judgment is rendered, according to PRC
Civil Procedures Law, matters relating to the recognition and enforcement of the foreign judgment in the PRC may be resolved through
diplomatic channels. The PRC does not have any treaties or other arrangements with the United States or Antigua and Barbuda that
provide for the reciprocal recognition and enforcement of foreign judgments. As a result, it is generally difficult to enforce in the PRC a
judgment rendered by a US or Antigua and Barbuda court.
As a result of all of the above, as well as the fact that substantially all of our property, assets and operations are located in China
and all of our directors and officers and substantially all of their assets are located outside of the United States, you may be unable to
protect your shareholder interests through actions against us or our management, directors or major shareholders.
ITEM 4.
INFORMATION ON THE COMPANY
A. History and Development of the Company
We are a limited liability corporation incorporated in Antigua, West Indies, and operate under the International Business
Corporations Act. Our principle office is at No. 39, Shangdi Xi Rd, Haidian District, Beijing, PRC 100085 and our telephone number is
+86-10-6296-3661.
We are a holding company and conduct our business in China through our 71.56% majority-owned subsidiary, Sinovac Beijing,
and our wholly owned subsidiary, Tangshan Yian. Sinovac Beijing was incorporated on April 28, 2001 and Tangshan Yian was
incorporated on February 9, 1993.
We were incorporated in Antigua and Barbuda on March 1, 1999. Before we adopted our current name on October 21, 2003, we
were called Net-Force System Inc. and were primarily engaged in the online gaming business. We were quoted on the OTC Bulletin
Board on February 21, 2003. In September 2003, we issued 10 million new shares to Lily Wang, one of our current principal
shareholders, to acquire a 51% equity interest in
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Sinovac Beijing. Ms. Wang had contracted to purchase these shares from certain of Sinovac Beijing’s then shareholders for cash
immediately before the above 51% share transfer. However, this 51% equity interest in Sinovac Beijing was transferred to us directly
from these shareholders and was recorded under applicable PRC law transfer documents as a cash transaction. Lily Wang was
responsible for paying the cash to these shareholders. The transfer of the Sinovac Beijing equity interest to us was registered and
approved by PRC government authorities in August 2004. In September 2004, we acquired an additional 20.56% equity interest in
Sinovac Beijing for approximately $3.3 million in cash. We currently own 71.56% of the equity interest in Sinovac Beijing.
In January 2004, we entered into a share purchase agreement with Heping Wang and issued him 3.5 million of our common shares
and a promissory note in the amount of $2.2 million to acquire from him a 100% equity interest in Tangshan Yian. Mr. Wang had
contracted to purchase these shares from Tangshan Yian’s then two shareholders immediately before the above 100% share transfer.
However, this 100% equity interest in Tangshan Yian was transferred to us directly from these shareholders and was recorded under
applicable PRC law transfer documents as a cash transaction. Heping Wang was responsible for paying the cash to the two shareholders.
The transfer of the Tangshan Yian equity interest by Mr. Wang to us was registered and approved by PRC government authorities in
November 2004.
For additional information regarding our principal capital expenditures, see Item 4.D of this annual report, “Property, Plants and
Equipment.”
We file annual reports and other information with the Securities and Exchange Commission (“SEC”). These materials can be
inspected and copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of these materials
may also be obtained by mail at prescribed rates from the SEC’s Public Reference Room at the above address. Information about the
Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that
contains reports and other information about issuers that file electronically with the SEC. The address of the SEC’s Internet website is
www.sec.gov.
Our Internet website is www.sinovac.com. We make available free of charge on our website our annual reports on Form 20-F, our
semi-annual reports on Form 6-K and any amendments to such reports as soon as reasonably practicable following the electronic filing
of such report with the SEC. In addition, we provide electronic or paper copies of our filings free of charge upon request. The
information found on our website is not part of this or any other report filed with or furnished to the SEC.
B. Business Overview
We are a fully integrated, profitable China-based biopharmaceutical company that focuses on the research, development,
manufacturing and commercialization of vaccines that protect against human infectious diseases. Our portfolio of regulatory-approved
products consists of vaccines against the hepatitis A, hepatitis B and influenza viruses. In 2002, we launched our first product, Healive,
which was the first inactivated hepatitis A vaccine developed, produced and marketed in China. In 2005, we received regulatory
approvals in China for the production of Bilive, a combination hepatitis A and B vaccine, and Anflu, a split virus influenza vaccine.
• Healive. In May 2002, we obtained final PRC regulatory approval for the production of Healive. Healive is the first
inactivated hepatitis A vaccine developed in China. The hepatitis A virus, which is endemic in China and other developing
countries, primarily impacts the liver by causing it to swell and preventing it from functioning properly. The disease is highly
contagious and can be spread by close personal contact with someone carrying the virus, by consuming contaminated food
prepared by someone with the disease or by drinking water that has been contaminated by hepatitis A. According to WHO,
as no specific treatment exists for Hepatitis A, prevention is most effective approach against the disease and Hepatitis A
vaccination provides preexposure protection from HAV infection, which is
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highly recommended by WHO. Administered intramuscularly, Healive is available in different doses for use by both adults
(1.0 ml dose) and children (0.5 ml dose). Our current manufacturing capacity for Healive is 10 million doses per year.
• Bilive. In June 2005, we obtained final PRC regulatory approval for the production of Bilive. Bilive is the first and currently
the only combined inactivated hepatitis A and B vaccine developed and marketed in China. Bilive is a combination vaccine
formulated with purified inactivated hepatitis A virus antigen, which we manufacture, and recombinant (yeast) hepatitis B
surface antigen, which we source from a third-party supplier. We began selling this vaccine in July 2005. Similar to hepatitis
A, hepatitis B is endemic in China, a major disease worldwide and a serious global public health issue. It is preventable with
safe and effective vaccines that have been available since 1982. A substantial percentage of people infected with the hepatitis
B virus carry chronic or lifelong infections. The chronically infected are at high risk of death from cirrhosis of the liver or
liver cancer.
• Anflu. In October 2005, we received final PRC regulatory approval to produce our Anflu vaccine against influenza. We
began marketing Anflu in January 2006. The primary influenza vaccine used worldwide is the split virus vaccine, which
contains virus particles disrupted by detergent treatment. Our Anflu vaccine is an inactivated split influenza vaccine
formulated from three split inactivated virus solutions. Anflu is produced with the virus strains recommended by the WHO
each year.
We sold approximately 1.3 million, 2.6 million and 5.1 million doses of Healive, respectively, in 2005, 2006 and 2007. We sold
approximately 40,000, 55,000 and 12,000 doses of Bilive, respectively, in 2005, 2006 and 2007. We sold approximately 77,000 and
1.59 million doses of Anflu, respectively, in 2006 and 2007.
Our pipeline consists of vaccine candidates in the pre-clinical and clinical development phases in China, including vaccines for the
H5N1 strain of pandemic influenza virus that are in Phase I and Phase II clinical trials, a vaccine for the Japanese encephalitis virus
currently in pre-clinical development and a vaccine for the SARS virus that has completed a Phase I clinical trial.
• Pandemic Influenza. The H5N1 virus, is an influenza virus that is highly contagious and deadly to birds, and can and has
infected humans with deadly results. Since 2003, a growing number of human infections have been reported in various parts
of Asia, including China. While there is no confirmed evidence of human-to-human transmission, suspected cases were
identified in Indonesia in May 2005. It is feared that if the H5N1 influenza virus undergoes either a genetic alteration or
recombination with a human influenza virus, a new subtype could emerge which could be both highly contagious and highly
lethal in humans. Such a subtype could potentially cause a global influenza pandemic. WHO has led global efforts to develop
a viable vaccine against the H5N1 virus and has been providing the H5N1 bird influenza virus strain at no cost to vaccine
manufacturers around the world, including us. We began a Phase 1 clinical trial for the pandemic influenza vaccine in
December 2005. We completed this trial of a H5N1 vaccine in June 2006 after we took blood samples from volunteers to test
for antibody growth and analyze the immunogenicity of the vaccine. The results of the trial showed good immunogenicity,
with a sero-positive rate exceeding the criteria for assessment of vaccines established by the Committee for Proprietary
Medicinal Products of the European Union. In November 2007, we announced the completion of a Phase II clinical trial of
Panflu, which is a whole viron inactivated human-use vaccine against the H5N1 strain of influenza virus that we jointly
developed with the China CDC. In addition to Panflu, we also announced the completion of Phase I and Phase II clinical
trials for a split viron vaccine against the H5N1 strain of influenza virus. No serious adverse events occurred in our clinical
trials of Panflu or the split viron vaccine.
• Japanese Encephalitis. The JE virus is a mosquito-borne virus that can infect the central nervous system in human beings
and animals. We are in the pre-clinical stages of development for a new and potentially safer inactivated JE vaccine. We
believe our production technology can increase manufacturing yield, simplify operations and stabilize cultivation conditions,
all of which facilitate large-scale automated production.
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• SARS. The SARS epidemic claimed 774 lives worldwide in 2003. We believe we were the first company to complete a Phase
I clinical trial of an inactivated SARS vaccine, which demonstrated no serious adverse reactions. We completed our Phase I
clinical trial in December 2004. Phase II and Phase III trials will need to be carried out before the vaccine can be sold
commercially. As the SARS epidemic has subsided, we currently are not proceeding with further clinical trials. However,
should another outbreak occur in the future, we believe we can rapidly initiate Phase II and III trials.
Our Products
We specialize in the sales, marketing, manufacturing, and development of vaccines for infectious disease with significant unmet
medical need. Set forth below is a table that outlines our current marketed products and those that we have developed or are developing.
Product
Healive
Bilive
Anflu
Pandemic Influenza Vaccine
Japanese Encephalitis Vaccine
Healive
Indication
Hepatitis A
Hepatitis A & B
Influenza
Pandemic Influenza Virus
Japanese Encephalitis
Pre-
clinical
Phase I
Phase II
Phase III
Stage
On sale
(cid:121)
(cid:121)
(cid:121)
(cid:121)
(cid:121)
Healive is the first inactivated hepatitis A vaccine developed, produced and marketed in China. It is administered intramuscularly
and is available in a 1.0 ml dose for adults and a 0.5 ml dose for children. Healive took approximately 10 years to develop and was
granted a New Drug Certificate by the China SFDA in 1999. We began marketing and sales of Healive in May 2002. Our current
manufacturing capacity for hepatitis A vaccines is 10 million doses per year. In 2005, 2006 and 2007, we sold approximately
1.3 million, 2.6 million and 5.1 million doses of Healive that amounted to approximately $8.3 million, $14.8 million and $28.56 million
in revenues, respectively. In 2007, there were approximately 23.9 million doses of hepatitis A vaccine released by the China SFDA,
among which 7.7 million doses were Healive, representing approximately 33% of the total released. Approximately 85% of the hepatitis
A vaccines sold in China until December 2005 were attenuated vaccines, with only 15% of hepatitis A vaccines sold in China of the
inactivated type. Effective on January 1, 2006, liquid formulations of attenuated hepatitis A vaccines were removed from the vaccines
batch approval list that was issued on December 23, 2005 by the NICPBP. We have experienced a significant increase in demand for
Healive since 2006 partly due to this change in the law.
In a government working report presented in March 2007 at the Fifth Session of the Tenth National People’s Congress, Wen
Jiebao, China’s Premier, indicated that the PRC government will expand its immunization program and purchase vaccines to prevent 15
different infectious diseases, including hepatitis A. The PRC government also announced plans to increase funding for its vaccination
program to RMB 2.8 billion. These policies provide us with significant opportunities to increase our sales and market share.
Since the launch of Healive, we estimate over 10 million doses have been sold.
Bilive
Bilive is a combined vaccine formulated by purified inactivated hepatitis A virus antigen, available from Healive, and the
recombinant yeast-derived hepatitis B surface antigen. Bilive is used to prevent infection from hepatitis A and hepatitis B. Bilive is
available in different doses for use in both adults and children. 1.0ml dose is for non-immune adults and adolescents 16 years of age and
older. 0.5ml dose is for pediatric use in non-immune
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infants, children and adolescents from one year up to and including 15 years of age. We produce the hepatitis A antigens used to
produce Bilive internally while we source the hepatitis B antigens from Beijing Temple of Heaven Biological Products Co., Ltd.
Bilive is the first, and currently the only combined inactivated hepatitis A and B vaccine developed and marketed in China. Bilive
took approximately 5 years to develop and was granted a New Drug Certificate by the China SFDA in January 2005. In June 2005, the
China SFDA granted us its approval for the production of Bilive. We began marketing and sales of Bilive in July 2005. The standard
Bilive vaccination schedule consists of three doses. The second dose is administered one month after the first dose and the third dose is
administered six months after the first dose. Booster vaccinations are recommended five years after the initial immunization. In
addition, Bilive vaccinations must be privately paid by the recipients under China’s current vaccination program. Accordingly, we do
not expect to generate more sales from Bilive than Healive. We sold approximately 12,000 doses of Bilive in 2007.
Anflu
The split virus vaccine, containing virus particles disrupted by detergent treatment, is the primary type of influenza vaccine used
worldwide. Our Anflu vaccine is an inactivated split influenza vaccine formulated from three split inactivated virus solutions. Anflu is
standardized annually according to the virus strains recommended by WHO for the current year. In October 2005, we received final
PRC regulatory approval for the production of our Anflu vaccine against influenza. In 2007, we sold approximately 1.59 million doses
of Anflu, compared to 77,000 doses in 2006.
Our development of the influenza vaccine is closely related to our development of a vaccine against pandemic influenza
(separately discussed below). Many governments in the world encourage and incentivize vaccine manufacturers to develop influenza
vaccines and build influenza vaccine production lines, because these manufacturing facilities can be easily converted for the production
of pandemic influenza vaccines should an outbreak of pandemic influenza occur. In 2006, the Chinese government approved a RMB20
million grant for the expansion of our flu vaccine production capacity. We received the grant in 2007.
We filed our new drug application with the China SFDA in June 2004. We received the New Drug Certificate for Anflu from the
China SFDA on February 25, 2005. Our Anflu production line is located in Beijing. We received Anflu GMP certificate in October
2005, which enables us to manufacture Anflu for the 2006-2007 influenza season.
Our Product Pipeline
Pandemic influenza vaccine
The H5N1 virus is an influenza virus that is highly contagious and deadly to birds and may cause a human influenza pandemic in
the future. H5N1 virus does not usually infect people, but infections in humans with these viruses can and have occurred. Most of these
cases have resulted from people having direct or close contact with H5N1-infected poultry or H5N1-contaminated surfaces. Since 2003,
a growing number of human H5N1 cases have been reported in many countries including China. More than half of the people infected
with the H5N1 virus have died. There is a significant concern that H5N1 will evolve into a virus capable of human-to-human
transmission because there have been suspected cases identified in Indonesia in May 2006.
There is little or no immune protection against the H5N1 virus in the human population. If the H5N1 virus were to gain the ability
to spread easily from person to person, it is feared that a worldwide outbreak of disease could begin. However, experts from around the
world are watching the H5N1 situation very closely and are preparing for the possibility that the virus may begin to spread more easily
and widely from person to person.
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The WHO has been the key driver in gathering global resources to develop a viable vaccine that may prevent pandemic influenza.
Since early 2004, the WHO has been providing the reverse genetic bird influenza virus strain at no cost to vaccine manufacturers around
the world to assist in their pandemic influenza R&D efforts. In March 2004, we were provided by the WHO such reverse genetic bird
influenza virus strain and began to develop our own vaccine. As part of our efforts, in December 2004, we signed a pandemic influenza
vaccine co-development agreement with the China CDC to jointly develop a pandemic influenza vaccine. Pursuant to this co-
development agreement, we agreed, among other things, to conduct pandemic influenza vaccine R&D based on our established vaccine
R&D technical platform and to apply for a New Drug Certificate, production license and patents for a pandemic influenza vaccine, and
the China CDC agreed, among other things, to strategize development of the pandemic influenza vaccine, provide us with scientific
guidance to vaccine specifications and conduct certain pandemic related research and vaccine development-related analysis and testing.
Both parties agreed to be responsible for certain specified expenditures associated with the vaccine development and to jointly apply for
government R&D funds. However, the co-development agreement expressly provides that we will be the applicant for and owner of the
future New Drug Certificate, production license and any patent or know-how in connection with the pandemic influenza vaccine. In
return, we have agreed to fund and support the China CDC’s influenza-related investigation and other pandemic control efforts after we
gain profits from the sale of pandemic influenza vaccines. We applied for grants from the PRC and local governments to further help
fund our pandemic influenza vaccine development initiatives. In 2006, the Chinese government approved a grant of RMB20 million for
the expansion of flu vaccine production capability. The funds were received in 2007.
We began human clinical trials for the pandemic influenza vaccine in December 2005. In April 2006, we announced the
completion of the immunization schedule of a Phase I clinical trial of H5N1 in which 120 volunteers aged from 18 to 60 completed the
two shot regimen of either the vaccine or a placebo. We completed a Phase I clinical trial of a pandemic influenza vaccine in June 2006.
Blood samples taken from volunteers were tested for antibody growth and immunogenicity. The results of the Phase I clinical trial
showed good immunogenicity, with a sero-positive rate exceeding the criteria for assessment of vaccines established by the Committee
for Proprietary Medicinal Products of the European Union. In November 2007, we announced the completion of a Phase II clinical trial
of Panflu, which is a whole viron inactivated human-use vaccine against the H5N1 strain of influenza virus that we jointly developed
with the China CDC. In addition to Panflu, we also announced the completion of Phase I and Phase II clinical trials for a split viron
vaccine against the H5N1 strain of influenza virus. No serious adverse events occurred in our clinical trials of Panflu or the split viron
vaccine.
We received approval from the China State Food and Drug Administration (SFDA) in April 2007 to conduct Phase Ib and II trials
of the H5N1 whole viron vaccine and Phase I and Phase II trials of the H5N1 split viron vaccine. In December 2007, we announed top-
line preliminary phase II results of pandemic influenza (H5N1) whole viron vaccine. The Phase II trial of the H5N1 whole viron
inactivated vaccine was conducted by Beijing Centers for Disease Control and Prevention. It included 402 volunteers, between the ages
of 18 and 60, who were each vaccinated with two doses of 5 ug, 10 ug or 15 ug. The preliminary results of the trials suggested that each
of the three dosages can induce varying degrees of immune response. In particular, the preliminary results of the phase II clinical trial
reached the EMEA evaluation standards for seasonal flu vaccines, which is an indication of good immunogenicity of the vaccine. The
trial result did not show any serious adverse reaction among volunteers, suggesting the vaccine has a good safety profile. The phase II
clinical trial report has been filed with China SFDA.
Japanese Encephalitis Vaccine
Japanese encephalitis is an acute infection of the central nervous system in human beings and animals spread by mosquitoes. JE is
a significant public health problem in Southeast Asia and the western Pacific. In China, the transmission of JE is usually seasonal,
occurring in summer and autumn-mainly July to September. At present, there is no JE-specific therapy once a person becomes infected,
other than supportive care to control the symptoms of the disease in hospital. Humans, especially children, are susceptible to JE virus.
The course of disease is about two weeks and it can result in a mortality rate of about 30%. In the endemic areas, 85% of cases are in
children under 15 years old, and those under 10 years old are susceptible to serious neurological and
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psychiatric complications such as an inability to speak, paralysis, imbecility, dementia, malformation of limbs and convulsion. We are
in pre clinical development for a new, potentially safer and more effective inactivated JE vaccine using our micro-carrier technology for
the cultivation of viruses. This technology can increase the manufacturing yield, simplify the operations, and stabilize the cultivation
conditions, all of which facilitate large scale automated production.
Our microcarrier technology is a multilayer porous beaded material for large-scale cell cultivation and propagation and supports
the growth of anchorage-dependent animal cells for the purposes of producing vaccines. During this process, cells grow as either
monolayer on the surface of small spheres or as multilayer in the pores of macroporous structures. The conventional monolayer
cultivation method often employed in producing vaccines requires the use of thousands of rolling bottles or stacking flat plates and is
labor-intensive. Our microcarrier technology provides a multilayer surface whereby a significantly greater number of cells are attached
to a large surface area. This is a better method of cultivating anchorage-dependent animal cells because it can cultivate more anchorage-
dependent cells while saving virus antigens.
SARS vaccine
On January 19, 2004, the China SFDA authorized us to conduct a Phase I clinical test of a potential SARS vaccine. We were the
first institution approved by the China SFDA to conduct human clinical trials of a SARS vaccine. Thirty-six healthy volunteers between
21 years of age to 40 years of age were selected and divided into four groups for clinical testing. Twenty-four subjects (two groups of
12 each) received the vaccine in two doses, while 12 others (two groups of six) received a placebo. The first group of volunteers
received their injection on May 22, 2004. By September 1, 2004, all 36 subjects who participated in the clinical trial had been
vaccinated with two doses of either the SARS vaccine or the placebo. On December 5, 2004, the PRC Ministry of Science and
Technology, the Ministry of Health and the China SFDA jointly announced that the Phase I clinical trial of a SARS vaccine,
independently developed by Chinese scientists, proved to be safe and immunogenic in preliminary tests. We have suspended our
subsequent clinical trials of our SARS vaccine as there are currently no new reported cases of SARS. If the disease reemerges, we
intend to resume the remaining process required to obtain an approval to market and sell the SARS vaccine.
Research and Development
We believe we have established a leadership position in the research and development of vaccines in China. Our research and
development personnel leverage their significant years of combined experience with what we believe are low operating costs, strong
relationships with relevant governmental authorities and research institutes and leading technologies to develop and commercialize our
vaccines. We believe our R&D capabilities provide us with a key competitive advantage and we intend to continue to focus our research
and development efforts on developing vaccines for infectious diseases with significant unmet medical needs, such as pandemic
influenza and SARS and improving on traditional vaccines such as those for Japanese encephalitis.
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In order to achieve our R&D goal, part of our R&D strategy is to establish collaborations with domestic and international partners.
We have entered into collaborations with a group of leading universities, colleges and research institutes that have strong vaccine
research capabilities and proven track records in China. In most cases, in our existing R&D strategic collaborations we will own the
commercial rights to the products that result from the collaboration. Set forth below are examples of projects on which we have
collaborated:
R&D Collaborations
Partner
Institute of Laboratory Animal Science, Chinese
Academy of Medical Science
National Institute For the Control of Pharmaceutical
and Biological Products
Projects
SARS
JE, Hepatitis A & B
National Institute for Viral Disease Control and
Prevention, China Center for Disease Control and
Prevention
Hepatitis A, SARS, Pandemic
Influenza
National Institute for Epidemic Disease, China Center
for Disease Control and Prevention
SARS
Department of Microbiology, University of Hong
Kong
Pandemic Influenza
National Institute for Viral Disease Control and
Universal Pandemic Influenza
Prevention, Chinese Center for Disease Control
and Prevention, China CDC
Vaccine (National High-Tech
Research and Development
Plan)
Scope of Collaborations
Animal trial
Hepatities A vaccine development;
Obtaining JE virus strain; Hepatitis
A&B R&D
Epidemic surveillance; virus strain
analysis
Blood serum analysis
Virus Sequencing
Vaccine development
We regularly obtain financial support from the PRC government to research government-sponsored vaccine programs, including
SARS and pandemic influenza. We received government funding in the amount of $1,222,000, $739,000 and $906,000 for 2005, 2006
and 2007, respectively. These grants were to fund research in the areas of pre-clinical and clinical trials. The government approved a
grant in the amount of $2.6 million for the expansion of our production capacity, which was received in 2007.
Sales and Marketing
We market and sell our vaccine products primarily through various provincial and municipal CDCs. We enter into sales
agreements with CDCs each time a CDC places a purchase order. Pursuant to these sales agreements, CDCs typically agree not to re-
sell our products to regions outside the territory the pertinent CDC covers administratively. CDCs usually place a large number of
orders at the end of the year when they begin to stockpile vaccine products for the next year. We usually generate a significant portion
of our sales around this time of the year.
We expect the recent initiation of a national-level, government-funded program for hepatitis A vaccine in China to increase our
sales of Healive by increasing overall market demand for hepatitis A vaccine in China. We expect that sales under the program will be
seasonal and will mirrors the seasonality of the epidemic features of this disease, which usually reaches a peak in the second quarter and
third quarters.
In July 2007, we entered into an Exclusive Promotion Service Agreement with GlaxoSmithKline (China) Investment Co., Ltd., or
GSK, to promote the Anflu adult dosage formulation. Under the agreement, GSK agreed to sell our Anflu adult dosage formulation to
non-tender customers in mainland China.
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Our sales strategy is to maintain our market share and comparative advantage in the private vaccine sales market while leveraging
this strength to established a presence in the government-paid market. We also will continue to maintain and develop stable, solid and
long-term relationships with the various provincial and municipal CDCs that constitute our key customer base. To this end, we engage
in various marketing activities to promote our products and services. For instance, we regularly hold academic symposia for our CDC
customers during which a group of experts and scholars invited by us give lectures to the CDC personnel and update them on the latest
research progress in diseases and vaccines. We also assist our CDC customers in “grass roots” disease prevention efforts. In addition,
we collaborate with provincial and municipal CDCs to produce education programs related to disease control and prevention with a
view to enhancing the public’s awareness and knowledge about epidemic prevention and control. We also employ traditional marketing
tools to promote our products such as exhibiting posters at scientific conferences and publishing academic papers in academic journals,
such as the Chinese Journal of Vaccines and Immunization and Chinese Journal of Epidemiology.
As of December 31, 2007, we have a sales and marketing team comprising approximately 75 professionals who are assigned to 9
sales districts designated geographically within China that include 29 provinces and municipalities. Our sales department and marketing
department are supported by other departments within our company, such as our logistics department, clinical research department,
quality assurance department and information center.
Suppliers
We obtain the raw materials we require from local suppliers and, with the exception of the hepatitis B antigens we use for Bilive
production, we maintain at least two suppliers for each raw material we use. We source the hepatitis B antigens we use for Bilive
production entirely from Beijing Temple of Heaven Biological Products Co., Ltd., pursuant to a contract under which we agreed to
purchase hepatitis B antigens exclusively from them. We use embryonated eggs in our production of Anflu, our seasonal influenza
vaccine. Although embryonated eggs remain in good supply, we expect to pay approximately 10% more for embryonated eggs in 2008
than we did in 2007. Our other raw materials generally have been in good supply and the prices we pay for them have remained stable.
We target to maintain our gross margin in the event of rising raw materials costs by improving our production processes and technical
methods.
Safety and Quality Assurance
All our facilities are designed and maintained with a view towards conforming with European cGMP standards. Our Healive,
Bilive and Anflu received their GMP certificates in March 2002, June 2005 and October 2005, respectively. To comply with GMP
operational requirements, we have implemented a quality assurance plan setting forth our quality assurance procedures, and a complete
documentation system.
Our facilities are designed to the international standards in bio-pharmaceutical manufacturing. Our production plant for Healive
vaccine was designed by a European company in accordance with the European and Chinese GMP guidelines, with major equipment
and facilities imported from Europe and North America.
We closely manage our staff, plant environment, support facilities, raw materials, hygiene, validation, documentation,
manufacturing process, quality control, product selling and sales follow-up resolution. Our personnel are trained with respect to these
procedures and documentations are routinely undertaken in an effort to ensure comprehensive quality assurance system and the quality
of finished product. Our products are required to comply with national standards for products and each batch of our products is required
to obtain a certificate of approval issued by the China National Institute for the Control of Pharmaceutical and Biological Products.
Each vaccine sold by us is identifiable by a serial number which allows us to trace products and identify fake products.
We have established an emergency response system under which a team of experts, professors and doctors responds to
emergencies within 24 hours to handle any emergency reported from users of our vaccine products. We also ensure that we have an
effective internal reporting system to report any serious accidents related to drug use to the China SFDA promptly as mandated by the
China SFDA and PRC Ministry of Public Health.
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Manufacturing
The production process of our Healive, Bilive and Anflu vaccines can be broadly divided into five stages: cultivation and harvest,
purification, inactivation, formulation and filling and packaging. The diagram below illustrates the major steps in each stage of
production.
The production processes performed on our production line, from bulk production and formulation to filling and packaging, are
performed in accordance with SFDA requirements for human vaccine manufacturing. As of December 31, 2007, our hepatitis A vaccine
production capacity was 10 million doses per year while our influenza vaccine production capacity was two million doses of adult
formulation per year. In order to further expand our production capacity, we are currently expanding our Healive production line to a
capacity of 20 million doses per year. We are also expanding our filling and packaging facility to a capacity of 20 million doses per
year. When improvements to our facilities in Beijing are complete we expect to have an annual production capacity of influenza vaccine
of 5 million doses of adult formulation per year.
Collaborations
In February 2006, we entered into an exclusive distribution agreement with LG Life Sciences, Ltd. under which LG Life Sciences
granted us an exclusive right to market and distribute its hepatitis B vaccine, Euvax B, in mainland China for five years from the date
we obtain regulatory approval for the sale of the product in China. This is the first strategic alliance that we have made with a major
vaccine supplier to capitalize upon our local knowledge and technology expertise in the vaccine industry. We have filed the application
for regulatory approval for sale of Euvax B in China.
In August 2005, we entered into a distribution agreement with Glovax C.V., a Dutch biopharmaceutical company with operations
in Mexico, pursuant to which we appointed Glovax to be the exclusive distributor of our vaccine products in the Mexican market.
Glovax is currently preparing the documentation for the registration, which may take as long as several years to complete.
In December 2004, we signed a pandemic influenza vaccine co-development agreement with the China CDC to jointly develop a
pandemic influenza vaccine. Pursuant to this co-development agreement, we agreed, among other things, to conduct pandemic influenza
vaccine R&D based on our established vaccine R&D technical platform and to apply for the new drug certificate, production license
and patents for the pandemic influenza vaccine. The China CDC agreed, among other things, to strategize development of the pandemic
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influenza vaccine, provide us with scientific guidance to vaccine technicalities and conduct certain pandemic related research and
vaccine development-related analysis and testing. Both parties agreed to be responsible for certain specified expenditures associated
with the vaccine development and to jointly apply for government R&D funds. However, the co-development agreement expressly
provides that we will be the applicant for and owner of the future new drug certificate, production license and any patent or know-how
in connection with the pandemic influenza vaccine. In return, we have agreed to fund and support the China CDC’s influenza-related
investigation and other pandemic control efforts after we gain profits from the sale of pandemic influenza vaccines.
In July 2007, we entered into an Exclusive Promotion Service Agreement with GSK to promote the Anflu adult dosage
formulation. Under the agreement, GSK agreed to sell our Anflu adult dosage formulation to non-tender customers in mainland China.
We will continue to leverage our own sales force to market and sell the pediatric dosage formulation where we have market expertise.
In October 2007, we prepared a non-binding term sheet with an unrelated corporation to contemplate the formation a joint
venture company for the development, licensing, manufacturing and commercialization of influenza vaccines. The term sheet
contemplates that we would own a minority stake in the joint venture and would contribute cash, plant and equipment,
and the influenza vaccine production license. The other party would contribute cash and provide technical support to the joint venture.
Competition
The pharmaceutical, biopharmaceutical and biotechnology industries both within China and globally are intensely competitive and
are characterized by rapid and significant technological progress, and our operating environment is increasingly competitive. According
to the China SFDA, there are approximately 30 vaccine companies in China, of which we believe approximately 8 to 10 are our direct
competitors.
Even with the advent of private medical and healthcare insurance programs in China, most Chinese citizens must pay for their own
vaccines, because these insurance programs do not typically cover vaccines. We believe the consumer market is health conscious yet
price sensitive and accordingly would favor our products over cheaper but less safe vaccines provided by local manufacturers and over
comparable quality but more expensive vaccines manufactured by some of our international competitors. Our competitors, both
domestic and international, include large integrated pharmaceutical and biotechnology companies, universities, and public and private
research institutions that currently engage in, have engaged in, or may engage in efforts related to the discovery and development of
new biopharmaceuticals and vaccines. Many of these entities have substantially greater research and development capabilities and
financial, scientific, manufacturing, marketing and sales resources than we do, as well as more experience in research and development,
clinical trials, regulatory matters, manufacturing, marketing and sales.
There are multiple vaccines products approved for sale worldwide. Many of these vaccine products are marketed by our major
competitors and are in the areas of hepatitis A, hepatitis B and influenza. Specifically, with respect to hepatitis A vaccine, we consider
GlaxoSmithKline Biologicals S.A., Berna Biotech AG, Pukang Biological Co., Ltd., Changhun Institute of Biological Products, and
Kunming Institute of Biological Products our major competitors. With respect to hepatitis A and B vaccines, we consider
GlaxoSmithKline Biologicals S.A. our significant competitor. Finally, with respect to influenza vaccines, we consider Sanofi Pasteur
S.A. our major international competitor and Hangzhou Tianyuan Biological Products Co., Ltd., Shanghai Institute of Biological
Products and Jiangsu Changzhou Yanshen our major domestic competitors.
We believe we enjoy a number of advantages over our PRC domestic competitors. Generally, we believe that the principal
competitive factors in the markets for our product candidates will include:
• safety and efficacy profile;
• product price;
• ease of application;
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• length of time to receive regulatory approval;
• product supply;
• enforceability of patent and other proprietary rights; and
• marketing and sales capability.
Intellectual Property and Proprietary Technology
Protection of our intellectual property and proprietary technology is very important for our business. We rely primarily on a
combination of trademark, patent and trade secret protection laws in China and other jurisdictions, as well as employee and third-party
confidentiality agreements to safeguard our intellectual property, know-how and our brand. Our ability to protect and use our
intellectual property rights in the continued development and commercialization of our technologies and products, operate without
infringing the proprietary rights of others, and prevent others from infringing our proprietary rights, is crucial to our continued success.
We will be able to protect our products and technologies from unauthorized use by third parties only to the extent that they are covered
by valid and enforceable patents, trademarks or copyrights, or are effectively maintained as trade secrets, know-how or other proprietary
information.
We have one registered patent and three patent applications pending in the PRC relating to our SARS vaccine technology. We do
not have any other issued patent or pending patent application with respect to our existing vaccine products or our pandemic influenza
or JE product candidates. The process of seeking patent protection can be lengthy and expensive, and we cannot assure you that these
patent applications, or any patent applications we may make in the future in respect of other products, will result in patents being issued,
or that any patents issued in the future will be able to provide us with meaningful protection or commercial advantage. Our patent
applications may be challenged, invalidated or circumvented in the future.
We maintain seven registered trademarks in China, including Sinovac, Healive and its Chinese name, Bilive and its Chinese name,
Anflu and our logo. We also use a trademark under a nonexclusive, royalty-free license from Shenzhen Kexing Biological Engineering
Limited, a company controlled by Weidong Yin, our chairman and chief executive officer, that will expire on August 20, 2011. This
license terminates automatically if Weidong Yin were to cease his managerial control of Sinovac Beijing. We have applied for the
registration of PAnflu and associated logos with the Trademark Office of the State Administration for Industry and Commerce in China.
We have registered the “Sinovac” trademark in Thailand, Korea and Canada. We are in the process of registering “Sinovac” and our
logos as trademarks in such other major countries as the United States, the United Kingdom, Germany and France. We have registered
our domain names, including www.sinovac.com.cn, with the CNNIC. As our brand name is becoming more recognized in the vaccine
market, we are working to maintain, increase and enforce our rights in our trademark portfolio, the protection of which is important to
our reputation and branding.
With respect to, among other things, proprietary know-how that is not patentable and processes for which patents are difficult to
enforce, we rely on trade secret protection and confidentiality agreements to safeguard our interests. We believe that many elements of
our vaccine products, clinical trial data and manufacturing processes involve proprietary know-how, technology or data that are not
covered by patents or patent applications. We have taken appropriate security measures to protect these elements. We have entered into
confidentiality, non-compete and invention assignment agreements with our executive officers and research and development personnel.
These agreements address intellectual property protection issues and require our employees to assign to us all of their inventions,
designs and technologies they develop during their terms of employment with us and cooperate with us to secure patent protection for
these inventions if we wish to pursue such protection. Any of these parties may breach the agreements and disclose our confidential
information or our competitors might learn of the information in some other way. If any of our trade secrets, know-how or other
proprietary information that is not protected by a patent were to be disclosed to or independently developed by a competitor, our
business, results of operations and financial condition could be materially and adversely affected.
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We also rely on administrative protection afforded new drugs through the protection period or monitoring period provided by the
China SFDA. During the protection period or monitoring period, third parties’ applications for manufacturing or importing the same
drug are not accepted by the China SFDA. Our vaccines, Healive and Bilive, were granted protection periods that recently expired in
December 2007 and January 2008, respectively.
Despite any measures we take to protect our intellectual property, no assurance can be made that unauthorized parties will not
attempt to copy aspects of our products or manufacturing processes or otherwise our proprietary technology or to obtain and use
information that we regard as proprietary.
Insurance
We maintain property insurance coverage from Ping An Property & Casualty Insurance Company of China, Ltd., with an annual
aggregate insured amount of approximately $8.17 million to cover our property and facilities from claims arising from fire, earthquake,
flood and a wide range of other natural disasters. We also maintain product liability insurance from PICC Property and Casualty
Company Limited on Healive for an aggregate limit of indemnification for approximately $10,500. We do not currently carry product
liability insurance for Bilive or Anflu because of their low sales volume. Moreover, we do not carry liability insurance to cover liability
claims that may arise from the incidents relating to the clinical trails of our vaccine products because such insurance program has not
become available in mainland China. Our insurance coverage may not be sufficient to cover any claim for product liability or damage to
our fixed assets. In 2007, we maintained directors’ & officers’ liability insurance from a British insurance company. We do not maintain
any business interruption insurance. See “Item 3. Key Information—D. Risk factors—Risks related to our company—We could be
subject to costly and time-consuming product liability actions and carry limited insurance coverage.”
Regulatory Framework of the Pharmaceutical Industry in the PRC
The testing, approval, manufacturing, labeling, advertising and marketing, post-approval safety reporting, and export of our
vaccine products or product candidates are extensively regulated by governmental authorities in the PRC and other countries.
In the PRC, the China SFDA regulates and supervises biopharmaceutical products under the Pharmaceutical Administration Law,
the Implementing Regulations on Pharmaceutical Administration Law, the Administration of Registration of Pharmaceuticals
Procedures, and other relevant rules and regulations which are applicable to manufacturers in general. Every step of our
biopharmaceutical production is subject to the requirements on the manufacture and sale of pharmaceutical products as provided by
these laws and regulations, including but not limited to, the standards of clinical testing, declaration, approval and transfer of new
medicine registrations, applicable industry standards of manufacturing, distribution, packaging, advertising and pricing.
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Under the relevant laws and regulations, our vaccine products are not officially approved for sale in the market until the following
procedures have been followed:
Preclinical Laboratory Tests and Animal Tests. Preclinical tests include in-vitro laboratory evaluation of the product candidate,
as well as in-vivo animal studies to assess the potential safety and efficacy of the product candidate. Preclinical tests must be conducted
in compliance with Good Laboratory Practice for Non-clinical Tests of Pharmaceuticals, or GLP. With respect to vaccines, the
preclinical tests should also comply with Technical Guidance for Preclinical Tests on Prophylactic Vaccines and, in the case of SARS,
the Technical Requirements on Preclinical Tests of Inactivated Vaccines against SARS promulgated by the China SFDA that strictly
control the registration, procurement, manipulation and tests of SARS strains. We must submit the results of the preclinical tests,
together with manufacturing information, analytical data and the sample of product candidate to the provincial SFDA as part of an
investigational new drug application, or IND, which must be approved before we may commence human clinical trials. We cannot
assure that submission of an IND will result in the China SFDA allowing human clinical trials to begin, or that, once begin, issues will
not arise that result in the suspension or termination of such human clinical trials.
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Human Clinical Trials. Clinical trials involve the administration of the product candidate to healthy volunteers or vaccinees under
the supervision of principal investigators, who are generally physicians or an independent third party not employed by us or under our
control. Clinical trials typically are conducted in three sequential phases, but the phases may overlap or be combined. In Phase I, the
initial introduction of the drug into human subjects, the drug is usually tested for safety (adverse effects), dosage tolerance, and
pharmacologic action. Phase II usually involves studies in a limited vaccinee population to evaluate preliminarily the efficacy of the
drug for specific, targeted conditions; to determine dosage tolerance and appropriate dosage and to identify possible adverse effects and
safety risks. Phase III trials generally further evaluate clinical efficacy and test further for safety within an expanded vaccinee
population. Clinical trials have to be conducted in compliance with the Good Clinical Trial Practice of Pharmaceuticals, or GCP. With
respect to vaccines, we also have to comply with the China SFDA’s Requirements on Application for Clinical Trial of New
Prophylactic Biological Products. The sample vaccine products must be inspected by the China Medicine and Biological Products
Examination Institute before they may be used in the clinical trials. We or the China SFDA may suspend clinical trials at any time on
various grounds, including a finding that subjects are being exposed to an unacceptable health risk.
After three phases of human clinical trials, we will submit to the provincial level SFDA a report containing the results of the
preclinical and clinical studies, together with other detailed information, including information on the manufacture and composition of
the product candidate, to apply for a new drug certificate. For vaccines, we have to comply with the China SFDA’s Guidelines for
Clinical Trial Report on Vaccines. In the meantime, we will submit raw materials of the product candidate to the China Medicine and
Biological Products Examination Institute.
New Drug Certificate. The provincial level SFDA will conduct a preliminary examination of our application for a new drug
certificate. Once it decides to accept our application based upon such preliminary examination, the provincial level SFDA will, within 5
days, conduct an on-site examination on the circumstances of our clinical trials and relevant source materials. Then the provincial level
SFDA will submit its opinion and examination report, together with our application materials, to the Center for Drug Examination and
Evaluation of the China SFDA. If the Center for Drug Examination and Evaluation of the China SFDA is satisfied with our application
materials, it will notify us to apply for the on-site production examination, and we should apply to the Center for Drug Certification
Administration of the China SFDA for the on-site production examination within six months after being so notified. The Center for
Drug Certification Administration of the China SFDA will conduct an on-site examination on our production procedures within thirty
days after receipt of our application, and draw samples from three batches of our products, and a medicine inspection institute will
inspect the selected samples and later submit its inspection reports to the Center for Drug Examination and Evaluation of the China
SFDA. The Center for Drug Certification Administration of the China SFDA shall submit the on-site production examination report to
the Center for Drug Examination and Evaluation within ten days after completion of the on-site examination. The Center for Drug
Examination and Evaluation will form a comprehensive opinion based upon the technical examination and evaluation opinion, the on-
site production examination report and the inspection results of the samples, and submit its opinion and relevant materials to the China
SFDA, and the China SFDA will decide whether to issue a new drug certificate to us or not. We consider obtaining the new drug
certificate for our product candidates as a significant milestone in our business.
Production Permit. Simultaneously with the application of new drug certificate, we also apply to the provincial level SFDA for a
production license to manufacture the new drug to be approved by the China SFDA. The production license application will be
examined with similar two-stage procedure as for the new drug certificate, first by the provincial level SFDA followed by the China
SFDA. After the provincial level SFDA accepts the application, conducts the on-site examination and forms its opinion, the provincial
level SFDA will transfer the file to the China SFDA. When the China SFDA decides to issue the new drug certificate, it will further
examine whether the applicant holds a License for Pharmaceutical Production and whether the applicant has proper production
facilities. With the criteria met, the China SFDA will issue the production permit together with the new drug certificate. The production
permit is valid for a term of five years and must be renewed before
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its expiration. During the renewal process, our production facilities will be re-evaluated by the appropriate governmental authorities and
must comply with the then effective standards and regulations.
Under certain circumstances, for instance, where drugs are developed to cure a disease without effective therapeutic methods, the
China SFDA provides for a special proceeding for its review of the new drug certificate application and production permit application
relating to such drugs.
The China SFDA will specify a monitoring period ranging from three to five years when approving the first production permit for
most new drugs. During this monitoring period, the manufacturers holding the new drug certificates must regularly report, among other
things, the production process, efficacy, stability and side effects of the new drugs involved to the provincial level SFDA. During the
same period, the China SFDA will not accept any new application for approval of the same drug involved. However, if a third party has
filed an application for the same drug and obtained the clinical trial permit before the monitoring period commences, the third party may
still obtain a new drug certificate and production permit for the same drug.
We may also be required to conduct clinical trials prior to commencing the manufacture of pharmaceutical products for which
there are published state pharmaceutical standards.
GMP Certificate. After receiving a new drug certificate and production permit, we will further need to submit to the China SFDA
an application for a Good Manufacturing Practice Certificate, or GMP Certificate. A GMP Certificate is used to approve the
manufacturing equipment, process and workshop used in producing a particular drug. The China SFDA has issued GMP standards for
pharmaceutical manufacturers to minimize the risks arising out of the production process of drugs that will not be identified or
eliminated through testing the final products. The application for a GMP Certificate should be approved or rejected within six months
from the application date.
A GMP Certificate is valid for five years. However, prior to October 2005, a GMP certificate for a drug produced by a newly-
established pharmaceuticals manufacturer is valid for only one year. The manufacturers should apply for a reassessment of their one-
year term GMP Certificate no later than three month prior to the expiration of such GMP Certificates and, if approved, would receive a
five-year GMP Certificate subject to reassessment by the relevant authority. According to the current practice, we receive a five-year
GMP Certificate directly and should apply for a renewal of our GMP Certificate no later than six months prior to the expiration of our
GMP Certificate.
We cannot commence the manufacture of a new drug unless and until we have obtained a valid new drug certificate, production
permit and GMP certificate.
Batch Approval. Our vaccine products cannot be distributed in the market before they are approved for sale by relevant medicine
inspection institute. We have to apply for examination and/or inspection of each batch of our products by the relevant inspection
institute. For each batch of products, we will provide the inspection institute with samples together with manufacturing records, internal
inspection records and other quality control documents. The inspection institute will review the documents and inspect the samples and
issue a batch approval within approximately two months, if our manufacture procedures and quality of the products are ascertained to
meet the standards as approved by the China SFDA. With the batch approval, we may distribute the approved batch of vaccines to the
market.
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C. Organizational Structure
The following diagram illustrates our company’s organizational structure, and the place of incorporation, ownership interest and
affiliation of each of our subsidiaries.
* China Bioway Biotech Group Co., Ltd., an affiliate of Peking University, owns the remaining 28.44% equity interest in Sinovac
Beijing.
D. Property, Plants and Equipment
We are headquartered in the Peking University Biological Industry Park in Beijing in a 48,900 square-foot facility, of which
approximately 16,700 square feet are used as office space and approximately 32,200 square feet are used for the production plant for
Healive and Bilive where the production equipment for hepatitis vaccine is located These facilities were designed by a European
pharmaceutical engineering company in accordance with China GMP and international safety guidelines. We own the above-described
48,900 square-foot facility in Beijing. Our production capacity of Hepatitis A vaccine products was six million and ten million doses per
year as of December 31, 2006 and 2007, respectively. We produced 7.27 million doses of Hepatitis A vaccine products in 2007.
In August 2004, we signed two 20-year leases in Beijing with China Bioway, pursuant to which we leased two buildings of
approximately 28,000 and 13,300 square feet, respectively, located at the Peking University Biological Industry Park. We house our
Anflu manufacturing and R&D center in these buildings. Our production capacity of Anflu was two million doses of adult formulation
per year as of December 31, 2007. We produced 1.87 million does of Anflu in 2007. China Bioway has yet to obtain building ownership
certificates for the two buildings. Under the two leases, China Bioway agreed to hold us harmless and indemnify us for any damages or
losses we may suffer as a result of its failure to obtain building ownership certificates. China Bioway also pledged its land use
certificate relating to these two leases to a commercial lender in October 2002 for five years. In June 2006, China Bioway guaranteed to
us in writing that we have all the legal rights and privileges to use the two buildings as agreed to in the two leases and that it will
indemnify us against any losses or damages that could be incurred if our rights and privileges to use such buildings are impeded or
hampered by the commercial lender.
In June 2007, we entered into another 20-year lease with China Bioway, pursuant to which we leased one building of
approximately 37,000 square feet located at the Peking University Biological Industry Park in Beijing. Part of our administrative offices
and filling and packaging facilities are located in this building. Our filling and packaging facilities had a capacity of 10 million doses
per year as of December 31, 2007. We filled and packaged approximately 9.58 million doses of products in 2007. China Bioway has yet
to obtain the building ownership certificate for this building, but has agreed to hold us harmless and indemnify us for any damages or
losses we may suffer as a result of its failure to obtain the building ownership certificate.
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Our approximately 40,000 square-foot Tangshan Yian facility in Tangshan, Hebei Province, where research and pilot production
for vaccine candidates are carried out, houses a cell culturing workshop, a pilot trial production workshop and a reagents manufacture
workshop. In Tangshan, we obtained a state-owned land use certificate of a granted land with area of approximately 214,200 square
feet, 21,700 square feet of which are occupied by cottages of others. Tangshan Yian entered into an agreement with the Tangshan local
government, pursuant to which Tangshan Yian will not pay for or use the above approximately 21,700 square feet of the occupied land
until the cottages are removed by the government. This situation has no impact on Tangshan Yian’s use of the other part of the land.
Tangshan Yian owns the facilities built thereon.
Certain of our bank loans are collateralized by the land use rights and plant of Sinovac Beijing. We have invested approximately
$8.3 million in our production facilities, packaging and filling facilities, research and development centers, administrative offices, and
other property, plants and equipment since January 1, 2005. We are expanding and improving our facilities in Beijing in order to
increase our annual production capacity of influenza vaccine to 5 million doses of adult formulation per year, which capacity would
permit us to produce 20 million doses of pandemic influenza vaccine per year due to the smaller dosage our clinical trials indicate is
required for inoculation against pandemic influenza. We estimate that we will invest $5.4 million in this expansion, of which $3.5
million already has been paid. We are financing our expansion with retained earnings and government grants.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may
contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under
“Item 3. Key Information—D. Risk Factors” or in other parts of this annual report on Form 20-F.
A. Operating Results
Overview
We are a China-based biopharmaceutical company that focuses on the research, development, manufacturing and
commercialization of vaccines that protect against human infectious diseases. Our portfolio of regulatory-approved products consists of
vaccines against the hepatitis A, hepatitis B and influenza viruses. In 2002, we successfully launched our first product, Healive, which is
the first inactivated hepatitis A vaccine developed, produced and marketed in China. In 2005, we received regulatory approvals in China
for the sale of Bilive, a combination hepatitis A and B vaccine, and Anflu, a split virus influenza vaccine. Our pipeline consists of three
vaccine product candidates in the pre-clinical and clinical development phases in China, including a vaccine for the H5N1 strain of
pandemic influenza virus which has completed phase II clinical trial, a vaccine for the Japanese encephalitis (JE) virus currently in pre-
clinical development, and a vaccine for the SARS virus which has completed phase I clinical trial.
In May 2002, we obtained final PRC regularly approval for the production of Healive. We sold approximately 1.3 million,
2.6 million and 5.1 million doses of Healive in 2005, 2006 and 2007, respectively. In June 2005, We obtained final PRC regulatory
approval for the production of Bilive, and began selling this product in July 2005. We sold approximately 12,000 doses of Bilive in
2007, compared to 55,000 doses in 2006 and 40,000 doses in 2005 respectively. In October 2005, we received final PRC regulatory
approval of the production of our Anflu vaccine against influenza. We sold approximately 1.59 million doses of Anflu in 2007,
compared to 77,000 doses in 2006.
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Our proprietary rights
Healive was co-developed by Tangshan Yian and the National Institute for the Control of Pharmaceutical and Biological Products,
or the NICPBP. Tangshan Yian and NICPBP agreed in 2000 that Tangshan Yian will own nearly all proprietary rights to Healive, and
that Tangshan Yian, in return, should pay NICPBP a Healive technology consulting fee in the amount of approximately $1 million. In
April 2001, Tangshan Yian contributed its proprietary rights to Healive to Sinovac Beijing as its capital contribution to Sinovac Beijing.
In 2002, NICPBP, Tangshan Yian and Sinovac Beijing agreed that Sinovac Beijing owns the right to market and sell Healive, and that
Sinovac Beijing was required to pay NICPBP approximately $1 million for the Healive technology consulting fee that Tangshan had not
paid by that time. We obtained final PRC regulatory approval for production of Healive in May 2002, by which time we already
received Healive’s new drug certificate from the China SFDA in December 1999 and the production license in May 2002. Production of
Healive commenced in July 2002.
Bilive was initially developed by Tangshan Yian. In March 2002, Tangshan Yian and Beijing Keding entered into an agreement
under which Tangshan Yian transferred to Beijing Keding its proprietary rights to Bilive at no cost. In August 2002, Sinovac Beijing
acquired the proprietary rights to Bilive from Beijing Keding in consideration of a 10.71% equity interest in Sinovac Beijing and a cash
payment of $18,116. Beijing Keding is owned by Weidong Yin and three other senior officers of Sinovac Beijing. In June 2005, we
obtained final PRC regulatory approval for production of Bilive. We received the production license for Bilive from the China SFDA in
January 2005. The cost of the proprietary rights to Bilive was expensed as purchased in-process research and development. Production
of Bilive commenced in June 2005.
In March 2003, Sinovac Beijing acquired the proprietary rights to Anflu from Tangshan Yian at the vendor’s cost. In November
2004, we completed the acquisition of 100% of the shares of Tangshan Yian. We received final PRC regulatory approval for the
production of Anflu in October 2005. The cost of the proprietary rights to Anflu was expensed as purchased in-process research and
development.
Amortization expense for these proprietary rights was $317,518, $341,008 and $357,334 for 2005, 2006 and 2007, respectively.
Research and Development Programs
Due to the risks inherent in the clinical trial process and the early stage of development of our products, we did not track our
internal research and development costs for each of our research and development programs. We use our research and development
resources, including employees and our technology, across multiple product development programs. As a result, we cannot state
precisely the costs incurred for each of our research and development programs or our clinical and preclinical product candidates.
However, the table below presents our best estimate of our total research and development costs allocable to our leading research and
development programs for the periods indicated. We have allocated direct and indirect costs to each program based on certain
assumptions and our review of the status of each program, payroll related expenses and other overhead costs based on estimated usage
by each program.
Research and development programs
Healive
Bilive
Anflu
Pandemic influenza vaccine
Japanese encephalitis vaccine
SARS vaccine
Others
Total
42
Years ended December 31,
2005
2006
(in thousands)
2007
$ —
$ —
$
75
$1,168
$ 159
$ —
$ —
$1,402
$ —
$ —
$ —
$ 837
88
$
$
57
$ 189
$1,171
$ —
$ —
$ —
$1,403
$ 213
$
86
$ 107
$1,809
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Significant additional expenditures are generally required to complete clinical trials, start new trials, apply for regulatory
approvals, continue development of our technologies, expand our operations and bring product candidates to market. The eventual total
cost of each clinical trial is dependent on a number of uncertain variables such as trial design, the length of trials, the number of clinical
sites and the number of subjects. The process of obtaining and maintaining regulatory approvals for new therapeutic products is lengthy,
expensive and uncertain. We anticipate that we will determine which of our early stage product candidates is best suited for further
development, as well as how much funding to direct to each program, on an on-going basis in response to the scientific and clinical
success and commercial potential of each product candidate. Because of these and other uncertainties, we cannot reliably estimate
completion dates, completion costs and capital requirements for our lead programs, and, therefore, we cannot reliably estimate when we
might receive material net cash inflows from our research and development projects.
SARS and Pandemic Influenza
We commenced the study and research of a SARS vaccine after the SARS outbreak in 2003. In 2004, we became the first
company in the world approved to commence a human clinical trial of a SARS vaccine. On May 22, 2004, the commencement of the
phase I clinical trial was announced when the first clinical trial volunteer received his first inoculation. A research grant from the PRC
Ministry of Science and Technology and other PRC government agencies on behalf of the PRC have provided sufficient funding for the
phase I clinical trial and demonstrates the support for our SARS vaccine research.
The PRC government provided grants to us which are taken into income in the period in which the research and development
expenses are recorded and the conditions imposed by government authorities are fulfilled. We received government funding in the
amount of $1,222,000, $739,000 and $905,648 for 2005, 2006 and 2007, respectively. In 2007, we also received $2,625,637 from the
government to expand our Pandemic influenza production capacity. We recognized government research grant income of $1,167,814,
$845,122 and $843,910 in 2005, 2006 and 2007, respectively.
Critical Accounting Policies and Estimates
Our consolidated financial information has been prepared in accordance with GAAP, which requires us to make judgments,
estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets
and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We
continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other
conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our
basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral
component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies
require a higher degree of judgment than others in their application.
When reviewing our financial statements, you should consider (1) our selection of critical accounting policies, (2) the judgment
and other uncertainties affecting the application of those policies, and (3) the sensitivity of reported results to changes in conditions and
assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation
of our financial statements.
The Company adopted FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes” (“Fin 48”) on January 1,
2007. FIN 48 clarifies the accounting for uncertainty in come taxes recognized in enterprises’s financial statements in accordance with
FASB Statement NO.109, “Accounting for Income Taxes.” FIN 48 prescribes a two-step process to determine the amount of tax benefit
to recognize. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon examination by a tax
authority. If the tax position is deemed “more-likely- than-not” to be sustained, the tax position is then assessed to determine the
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amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that
has a greater than 50 percent likelihood of being realized upon ultimate settlement. If the tax position deos not meet the “more-likely-
than-not” threshold then it is not recognized in the financial statements.
The Company has reviewed the tax positions taken, or to be takin, in its tax return for all tax years currently open to examination
by a taxing authority in accordance with the recognition and measurement standards of FIN 48. The Company’s adoption of FIN 48 as
of January 1, 2007 did not have a material impact on the Company’s financial position or results of operations. The adoption of FIN 48
did not result in a cumulative adjustment to equity and there were no unrecognized tax benefits, penalties or interest at the time of or
subsequent to adoption. The Company is currently not under examination by any authority for income tax purposes and no statutes for
income tax filings have been extended.
The Company is not subject to taxation in the U.S. Sinovac Biotech Ltd.’s (Parent company) taxing jurisdiction is Antigua and
Barbuda, Sinovac Biotech (Canada) Ltd. (Subsidiary incorporated in Canada) has no transactions/activities since inception. The
Company’s two subsidiaries Sinovac Beijing and Tangshan Yian’s taxing jurisdiction are China. Examinations of income tax returns
filed by the Company and its active subsidiaries that are still subject to examination are Sinovac Beijing for December 31, 2003 and
subsequent years, and Tangshan Yian for December 31, 2003 and subsequent years.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS No. 157”). SFAS No. 157 defines fair
value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other
accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007, the year beginning January 1, 2008 for the Company. The
Company has not yet determined the impact adoption will have on the Company.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS
No. 159 on its consolidated financial position and results of operations.
In December 2007, the FASB issued SFAS No.160, “Non–controlling interest in consolidated financial statements.” SFAS No.160
clarifies that a non-controlling in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. It requires consolidated net income to be reported at amounts that include the amounts attributable to
both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the non-controlling interest. This statements amends FASB No.128,
Earning per share, the calculation of the EPS amounts in consolidated financial statement will continue to be based on amounts
attributable to the parent. SFAS No.160 is effective for fiscal year beginning after December 31, 2008. The company is currently
evaluating the impact of SFAS No.160 on its consolidated financial position and results of operations.
In December 2007, FASB issued SFAS No. 141 “Business combinations” (“SFAS No. 141”) (revised 2007) to improve the
relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports
about a business combination and its effects. The Statement establishes principles and requirements for the acquirer to (1) recognizes
and measure in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest.
(2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. (3) determines what
information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination.
The effective date of SFAS No. 141 is December 15, 2008. The Company is currently evaluating the impact of SFAS No. 141 on its
consolidated financial statements.
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Stock-based Compensation
Stock-based compensation was a significant expense for us, but is based on estimates that have a subjective element. We employ
the Black-Scholes option pricing model, which in turn is based upon, among other things, assumptions regarding interest rates, expected
life and share volatility. To estimate the risk-free interest rate, we use the U.S. Treasury bill rate for instruments with a similar term to
the expected life of the option being granted. The expected volatility related to options granted in 2006 is based on our historical share
prices. Prior to 2006, computation of expected volatility was based on the historical share prices of comparable companies.
Computation of expected life was estimated after considering the contractual terms of the stock-based award, vesting schedules and
expectations of future employee behavior. We granted no stock options in 2007.
The following table shows the assumptions used in determining stock-based compensation costs under the Black-Scholes option
pricing model:
Expected volatility
Risk-free interest rate
Expected life (years)
Dividend yield
Weighted average fair value of options granted
2006
76%
4.74%
3.0
Nil
$1.39
2005
60%
4.51%
5.0
Nil
$2.93
Given the nature of the estimated volatility of a stock, it is not practical to provide a meaningful assessment of historical accuracy
of the estimated volatility used. It is very likely that the expected volatility will change in future periods and the changes could be
material. However, the changes in volatility will only impact future or modified grants.
Amortization of intangible assets
We have amortized the value of intangible assets, being licenses and permits, over an estimated 10-year useful life. The estimated
life of intangible assets is inevitably subjective, however at least once per year, we reevaluate the market opportunities for its products
and determines whether the remaining useful life estimate is still reasonable.
The following table shows the effect of a change in the estimated useful life of licenses and permits of 10% for 2007:
Useful life
Amortization expense
Income for the year
Earning per share
Changes from reported
amount based on
hypothetical
10% Decrease
in Useful Life
$
$
$
9 years
39,704
(39,704)
—
Changes from reported
amount based on
hypothetical
10% Increase
in Useful Life
$
$
$
11 years
32,485
32,485
—
As Reported
10 years
$ 357,334
$7,650,406
0.19
$
Given the nature of estimating the useful life of long-term assets, it is not yet possible to provide a meaningful assessment of
historical accuracy of the useful life estimates employed. It is very likely that the useful life of the licenses and permits will be different
from the estimate employed, and the changes could be material. Changes in the estimated life of the licenses and permits will not have a
bearing on the total amount charged to operations over the life of the assets, but could change the results of operations and financial
position in any given period.
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Allocation of intangible assets
When we acquired our additional 20.56% interest in Sinovac Beijing in February 2005, we had to allocate the purchase price over
the fair value of the net assets acquired. We based such allocation upon a third party’s appraisal reports as well as the projected cash
flows to be earned from each product.
Given the nature of estimating the relative value of long-term assets, it is not possible to provide a meaningful assessment of
historical accuracy of the valuation allocation estimates employed. It is very likely that the actual values of the licenses and permits will
be different from the estimates employed and the changes could be material. Changes in the relative value of each of the licenses and
permits will not have a bearing on the total amount charged to operations over the life of the assets, but could change the results of
operations and financial position in any given period.
The following table summarizes the amortization expense for each component of licenses and permits, allowing investors to draw
inferences regarding the sensitivity of earnings to different allocation models.
Asset
Inactive hepatitis A
Recombinant hepatitis A and B
Total
Cost
$2,888,483
$ 415,356
$3,303,839
Amortization Expense in the Year
Ended December 31, 2007
$
$
$
317,116
40,218
357,334
The cost of the influenza virus vaccine was written off as in-process research and development expenses at the date of acquisition.
Income tax valuation allowance
In 2007, we recorded a $1,272,756 deferred income tax asset based on the difference in timing of certain deductions for income
tax and accounting purposes. The ability of us to ultimately derive a benefit from the deferred tax asset depends on the existence of
sufficient taxable income of the appropriate character within the carry forward period available under the tax law. We have reviewed
available information, both positive and negative, and have concluded that realization is more likely than not. If our evaluation of the
circumstances is not correct, we will have to record a charge to operations in respect of any over-accrual of the benefit.
RESULTS OF OPERATIONS
Statement of operations data
Sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative expenses
Research and development expenses
Purchased in process research and development
Depreciation of property, plant and equipment and
amortization of licenses and permits
Total operating expenses
Operating income (loss)
Interest and financing expenses
Interest and other income
Income (loss) before income taxes and minority interest
Income taxes (recovery)
Minority interest share of (earnings) loss
Net (loss) for the year
2005
2006
2007
$
% of net
revenues
$
% of net
revenues
$
% of net
revenues
8,608
2,346
6,262
100.0
27.3
72.7
15,354
4,231
11,123
100.0
27.6
72.4
33,541
6,502
27,039
10,278
234
233
555
11,299
(5,037)
(229)
235
(5,031)
212
132
(5,111)
46
119.4
2.7
2.7
6.4
131.3
(58.5)
(2.7)
2.7
(58.4)
2.5
1.5
(59.4)
9,753
325
—
605
10,683
440
(319)
285
406
101
(1,001)
(696)
63.5
2.1
—
3.9
69.6
2.9
(2.1)
1.9
2.6
0.7
(6.5)
(4.5)
11,958
965
—
641
13,564
13,475
(478)
190
13,187
1,974
(3,563)
7,650
100.0
19.4
80.6
35.7
2.9
—
1.9
40.4
40.2
(1.4)
0.6
39.3
5.9
(10.6)
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Sales
Revenues from sales represent the invoiced value of goods, net of value added taxes, or VAT, sales returns, trade discounts and
allowances. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Taxes and Incentives.” We recognize
revenues at the time when our products are delivered, persuasive evidence of an arrangement exists, the price is fixed and final and there
is reasonable assurance of collection of the sales proceeds.
Our revenues, growth and results of operations depend on several factors, including the level of acceptance of our products among
doctors, hospitals and vaccinees and our ability to maintain prices for our products at levels that provide favorable margins. The level of
acceptance among doctors, hospitals and vaccinees is influenced by the performance and pricing of our products.
We market and sell our vaccine products primarily through various provincial and municipal CDCs. We enter into sales
agreements with CDCs each time a CDC places a purchase order. Pursuant to these sales agreements, CDCs typically agree not to re-
sell our products to regions outside the territory the pertinent CDC covers administratively.
Pricing
To gain market penetration, we price our Healive at levels that we believe offer attractive economic returns to CDCs and their end
customers, such as hospitals, taking into account the prices of competing products in the market. We believe that our Healive and Bilive
are competitively priced compared to hepatitis vaccines available in China. We priced Anflu competitively to offer attractive economic
returns to our distributors. The prices of our products are significantly lower than those of foreign imports.
The provincial governments in China may adjust the fee rates from time to time. If they reduce the fee rates, some hospitals and
distributors may be discouraged from purchasing our products, which would reduce our sales. In that event, we may need to decrease
the price of our products to provide our customers acceptable returns on their purchases. We cannot assure you that our business,
financial condition and results of operations will not be adversely affected by any reduction in fees for the vaccines in the future.
Cost of sales
Our cost of sales primarily consists of material and component costs. Depreciation of property, plant and equipment attributable to
manufacturing activities is capitalized as part of inventory, and expensed as cost of sales when product is sold. Cost of goods sold in
2005, 2006 and 2007 amounted to $2,346,000, $4,232,000 and $6,502,000, respectively. We produce our own products and conduct the
final product packaging in-house.
As we source a significant portion of our components and raw materials in China, we currently have a relatively low cost base
compared to vaccines manufacturers in more developed countries. We expect the costs of components and raw materials in China will
increase in the future as a result of further economic development in China. In addition, our focus on new generations and applications
of our products may require higher cost components and raw materials. We plan to offset increases in our cost of raw materials and
components through more efficient product designs and product assembly enhancements as well as through savings due to economies of
scale.
Sales, general and administrative expense
Sales and marketing expenses consist primarily of salaries and related expenses for personnel engaged in sales, marketing and
customer support functions and costs associated with advertising and other marketing activities. Going forward, we expect to increase
our expenditures on sales and marketing, both on an absolute basis and as a percentage of revenue, to promote our products, especially
Bilive and Anflu.
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General and administrative expense consists primarily of compensation for employees in executive and operational functions,
including finance and accounting, business development and corporate development. Other significant costs include facilities costs,
stock-based compensation, professional fees for accounting and legal services and the income taxes we assumed for our employees as a
result of their exercising the stock options.
We expect our general and administrative expenses to increase due to increased costs for insurance, professional fees, public
company reporting requirements, Sarbanes-Oxley Act compliance and investor relations costs associated with operating as a publicly-
traded company. These increases will also likely include the hiring of additional personnel.
Research and development expenses
Our research and development expenses consist primarily of:
• salaries and related expenses for personnel;
• fees paid to consultants and clinical research organizations in conjunction with their independent monitoring our clinical
trials and acquiring and evaluating data in conjunction with our clinical trials;
• consulting fees paid to third parties in connection with other aspects of our product development efforts;
• costs of materials used in research and development; and
• depreciation of facilities and equipment used to develop our products.
We expense both internal and external research and development costs as incurred, other than those capital expenditures that have
alternative future uses, such as the build-out of our plant. We expect our research and development costs will continue to be substantial
and that they will increase as we advance our current portfolio of product candidates through clinical trials and move other product
candidates into preclinical and clinical trials.
Taxes and incentives
Under the current laws of Antigua, we are not subject to tax on our income or capital gains. In addition, no Antigua withholding
tax will be imposed on payments of dividends by us to our shareholders.
Substantially all of our sales are conducted in the PRC. Under PRC law, Sinovac Beijing and Tangshan Yian are both subject to
enterprise income tax, or EIT, and VAT. Sinovac Beijing is classified as a “New Technology Enterprise” and operates as a Sino-foreign
joint venture. As such, it was subject to a reduced EIT rate of 15% in 2007, compared to a statutory rate of 33% for most domestically-
owned companies in China. On March 16, 2007, The National People’s Congress of China passed “The Enterprise Income Tax Law.”
Under the new law, effective on January 1, 2008, China will adopt a uniform tax rate of 25.0% for all enterprises (including foreign-
invested enterprises) and revoke the current tax exemption, reduction and preferential treatments applicable to foreign-invested
enterprises. However, a preferential tax rate of 15.0% for high and new technology enterprises and current preferential tax treatments
for foreign-invested enterprises would be grandfathered for a period of five years following the effective date of the new law. The
implantation rules for the new law were announced in December 2007 but do not clearly explain the treatment of “New Technology
Enterprises.” It is likely that Sinovac Beijing will be able to preserve its tax holiday under the grandfathering provisions in the
Enterprise Income Tax Law. We will continue to monitor the implementation rules with regard to the grandfathering provisions of the
new law. For the three fiscal years ended December 31, 2005, 2006 and 2007, Sinovac Beijing incurred income tax expenses of
$220,111, $491,914 and $2,203,173 respectively. VAT is charged based on the selling price of our products at a rate of 6%. Tangshan
Yian was subject to a reduced EIT rate of 24% in 2007, according to the new enterprises income tax law, Tangshan Yian would subject
to 25% starting from 2008.
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Year ended December 31, 2007 Compared to Year Ended December 31, 2006
Sales. Sales increased 118.4% to $33,541,000 in 2007 from $15,355,000 in 2006. Our sales in 2007 comprised sales of Healive,
Bilive and Anflu. We generated $ 28,612,000 and $ 14,878,000 in sales of Healive in 2007 and 2006, respectively. We generated
$133,000 and $231,000 in sales of Bilive in 2007 and 2006 respectively. We also generated $4,796,000 and $246,000 in sales of Anflu
in 2007 and 2006 respectively. The total number of doses sold increased from 2.7 million in 2006 to 6.7 million in 2007. Revenue
growth in 2007 was mainly attributed to 1) more individuals acknowledging the importance of Hepatitis A vaccination after its
inclusion in the government vaccine plan; 2) local CDC’s reevaluation of the Hepatitis A vaccination rate and providing the vaccination
to population groups who will not be covered by the government vaccination plan; 3) our gaining further market share after the phasing
out of liquid formulation of live attenuated hepatitis A vaccine as mandated by the Chinese government at the end of 2006, which
previously accounted for 80% of China’s hepatitis A vaccine market; and 4) co-promotion strategy with another pharmaceutical
company with regard to Anflu vaccines that significantly increased our Anflu sales.
Cost of Sales. Cost of sales increased 53.7% to $ 6,502,000 in 2007 from $4,232,000 in 2006. For Healive, the cost of sales
increased 38.5% compared to 92.3% increase in sales, primarily because of the achievement of economic scale of production. For
Anflu, the cost of sales increased 85.5% compared to a sales increase of 1852.8%. In 2007, we have normalized our influenza
production process and experienced no charge in excessive fixed production overhead and abnormal wasted material to the cost of
goods sold compared to and $902,000 in 2006.
Gross Profit. Gross profit increased 143% to $27,039,000 in 2007 from $11,123,000 in 2006. Gross profit margin, including
depreciation of land use rights and amortization of licenses and permits, was 80.6 % and 72.4% for 2007 and 2006, respectively. The
increase in gross profit margin was due to the achievement of economic scale of Healive and Anflu production.
Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A expenses, include non-
production related wages and salaries, stock-based compensation, consulting fees, travel, occupancy, advertising, public company costs
and professional fees. Our SG&A expenses increased 22.6% to $11,958,000 from $ 9,753,000 in 2006. Our selling expenses increased
107.8% in 2007 to $7,502,000 from 3,610,000 in 2006, in line with increased sales. Our general and administrative expenses decreased
by 27.5 % to $4,456,000 in 2007 from $6,143,000 in 2006 due to decreased stock based compensation, and consulting fees. We incurred
professional fees, financing fees and Sarbanes-Oxley 404 consulting fees of $1,001,000 in 2007 compared to $2,494,000 in 2006.
Stock-Based Compensation. We recorded stock-based compensation of $180,000 in 2007 compared to $707,000 in 2006. We did
not grant any stock options in 2007. In 2006, 100,000 stock options were granted to the directors at an exercise price of $2.64 per share
and 15,000 stock options to the employees at an exercise price of $2.69 per share. The stock options granted to our directors and
employees in 2006 had a weighted average estimated fair value of $1.39 and $1.51 per share, respectively. We granted options with
different vesting schedules. As a result, as at December 31, 2007, we had unrecognized compensation costs of $80,000. This unearned
component will be recognized over a period of 27 months.
Research and Development Expenses. Research and development expenses increased by 197% to $965,000 in 2007 from
$325,000 in 2006, primarily representing amounts spent on Pandemic influenza vaccines, SARS vaccines, and Japanese Encephalitis
vaccines, net of government grants to fund these activities. The PRC government provided grants to us that are brought into income in
the period in which the research and development expenses are recorded and the conditions imposed by government authorities are
fulfilled. In 2007, we received SARS and pandemic influenza research grants of $0 and $906,000, respectively. In 2007, we recognized
government research grant income of $844,000 compared to $845,000 in the prior year.
Interest and Financing Expenses. Interest and financing expenses increased by 49.9% to $478,000 in 2007 from $320,000 in
2006, mainly resulting from a higher loan payable balance.
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Income Taxes. We incurred an income tax expense of $1,974,000 in 2007 compared to $101,000 in 2006. In 2007, we incurred
$2,203,000 liability for income taxes on profits in Sinovac Beijing and recorded a $229,000 deferred tax recovery that offset this
expense. Our taxable income in China is subject to Chinese income tax regulations for its reported statutory income declaration at a tax
rate in accordance with the relevant income tax laws and regulations applicable to Sino-foreign joint ventures. In 2007 and 2006
Tangshan Yian had a net loss.
Net Income (Loss). Net income increased to $ 7,650,000 in 2007 from a net loss of $696,000 in 2006.
Year ended December 31, 2006 Compared to Year Ended December 31, 2005
Sales. Sales increased 78.4% to $15,355,000 in 2006 from $8,608,000 in 2005. Our sales in 2006 comprised sales of Healive,
Bilive and Anflu. Our sales in 2005 comprised sales of Healive and Bilive. We generated $14,878,000 and $8,228,000 in sales of
Healive in 2006 and 2005, respectively. We generated $231,000 and $380,000 in sales of Bilive in 2006 and 2005, respectively. We
also generated $246,000 in sales of Anflu in 2006. The total number of vaccine doses sold increased from 1.3 million in 2005 to
2.7 million in 2006.
Cost of Sales. Cost of sales increased 80.4% to $4,232,000 in 2006 from $2,346,000 in 2005. For Healive, the cost of sales
increased 13%, compared to an 80.8% increase in sales, primarily because of the achievement of economic scale of production.
However, as Anflu was in a preliminary production stage, we incurred a total $1,299,000 cost of sales that included significant
production costs.
Gross Profit. Gross profit increased 77.6% to $11,123,000 in 2006 from $6,262,000 in 2005. Gross profit margin, including
depreciation of land use rights and amortization of licenses and permits, was 70% and 69% for 2006 and 2005, respectively. The
increase in gross profit margin was due to the achievement of economic scale of Healive production, offset by significant production
costs relating to Anflu.
Selling, General and Administrative Expenses. SG&A expenses decreased 5.1% to 9,753,000 from $10,278,000 in 2005. Our
selling expenses increased 37% in 2006 to $3,610,000 from $2,629,000 in 2005 in line with increased sales. Our general and
administrative expenses decreased by 20% to $6,143,000 in 2006 from $7,649,000 in 2005. We incurred significantly lower
withholding tax expenses relating to our employees’ exercise of their stock options in the amount of $272,000 in 2006 compared to
$1,455,000 in 2005. We also incurred professional fees, financing fees and Sarbanes-Oxley 404 consulting fees of $2,494,000 in 2006
compared to $1,012,000 in 2005.
Stock-Based Compensation. We recorded stock-based compensation of $707,000 in 2006 compared to $3,356,000 in 2005. In
2006, 100,000 stock options were granted to our directors at an exercise price of $2.64 per share and 15,000 stock options to our
employees at an exercise price of $2.69 per share. The stock options granted in 2006 had a weighted average estimated fair value of
$1.39 per share. We granted options with different vesting schedules. As a result, as of December 31, 2006, we had unrecognized
compensation costs of $260,000. This unearned component will be recognized over a period of 39 months.
Research and Development Expenses. Research and development expenses increased by 38.8% to $325,000 in 2006 from
$234,000 in 2005, primarily representing amounts spent on Pandemic influenza vaccines, SARS vaccines, and Japanese Encephalitis
vaccines, net of government grants to fund these activities. Grants provided by the PRC government are recognized as income in the
period in which the research and development expenses are recorded and the conditions imposed by government authorities are
fulfilled. In 2006, we received SARS and pandemic influenza research grants of $0 and $739,000, respectively. In 2006, we recognized
government research grant income of $845,000, compared to $1,168,000 in the prior year.
Interest and Financing Expenses. Interest and financing expenses increased by 39.7% to $320,000 in 2006 from $229,000 in
2005, mainly resulting from a higher loan payable balance.
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Income Taxes. We incurred an income tax expense of $101,000 in 2006 compared to $212,000 in 2005. In 2006, we incurred
$492,000 liability for income taxes on profits in Sinovac Beijing and recorded a $391,401 deferred tax recovery that offset this expense.
Our taxable income in China is subject to Chinese income tax regulations for its reported statutory income declaration at a tax rate in
accordance with the relevant income tax laws and regulations applicable to Sino-foreign joint ventures. In 2006 and 2005, Tangshan
Yian had a net loss.
Net Loss. Net loss decreased by 86.4% to $696,000 in 2006 from $5,111,000 in 2005.
B. Liquidity and Capital Resources
As of December 31, 2007, we had an accumulated deficit of $7.1 million. We do not expect to maintain the same high growth rate
we had achieved in 2007 over the next few years as we continue our clinical trials, apply for regulatory approvals, continue
development of our technologies, and expand our operations. Since our inception, we have financed our operations primarily through
sales revenue, sale of equity securities, and interest income earned on cash and cash equivalents. We have also generated funds from
debt financing and from government research grants.
We made capital expenditures of $2.4 million, $1.1 million and $2.4 million in 2005, 2006 and 2007, respectively. We believe that
our current cash and cash equivalents, and anticipated cash flow will be sufficient to meet our anticipated cash needs, including our cash
needs for working capital and capital expenditure, for the next 12 months. We may, however, require additional cash because of
changing business conditions or other future developments. If our existing cash is insufficient to meet our requirements, we may need to
raise additional money and may seek to do so by: (1) out-licensing technologies or products, (2) securing debt financing or (3) selling
additional equity securities. Our ability to successfully enter into any such arrangements is uncertain and if funds are not available, or
not available on terms acceptable to us, we may be required to revise our planned clinical trials, other development activities, capital
expenditure requirements and the scale of our operations. We expect to attempt to raise additional funds in advance of depleting funds;
however, we may not be able to raise funds or raise amounts sufficient to meet the long-term needs of the business. Satisfying long-term
needs will require the successful commercialization of our product candidates and, at this time, we cannot reliably estimate if or when
that will occur, and the process may require additional capital as discussed above.
The following table sets forth a summary of our net cash flows for the periods indicated:
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
2007
2005
Year ended December 31,
2006
(in thousands)
$(1,635)
(569)
3,984
1,894
7,354
$ 9,249
$ (1,570)
(4,883)
11,144
4,749
2,605
$ 7,354
$ 4,316
(2,442)
5,565
7,822
9,249
$17,071
Operating activities
Net cash provide by operating activities was $4,316,000 in 2007, compared to cash used of $1,635,000 in 2006. Net cash provided
by operating activities in 2007 was a result of a net income of $7,650,000, decreased by $844,000 by cash paid for research and
development expenditures qualified for government grants, and adjusted by certain non-cash charges including stock-based
compensation ($180,000), a provision for doubtful debts ($456,000), a provision for inventory ($373,000) and depreciation of property,
plant and equipment and amortization of licenses and permits ($1,411,000).
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Net cash used in operating activities was $1,635,000 in 2006, compared to net cash used in operating activities of $1,570,000 in
2005. Net cash used in operating activities in 2006 was a result of a net loss of $696,000, increased by $845,000 cash paid for research
and development expenditures qualified for government grants, and adjusted by certain non-cash charges including stock-based
compensation ($707,000), a provision for doubtful debts ($581,000), a provision for inventory (1,320,000) and depreciation of property,
plant and equipment and amortization of licenses and permits ($1,268,000).
Net cash used in operating activities was $1,570,000 in 2005, compared to $1,537,000 in 2004. Net cash used in operating
activities in 2005 was a result of a net loss of $5,111,000, increased by $1,232,000 cash paid for research and development expenditures
qualified for government grants, and adjusted by certain non-cash charges including stock-based compensation ($3,356,000), a
provision for doubtful debts ($447,000) and depreciation of property, plant and equipment and amortization of licenses and permits
($1,102,000).
Investing activities
Net cash used in investing activities was $2,442,000 in 2007. In 2007, cash used in investing activities included $2,466,000 used
to acquire property, plant and equipment partially offset by $24,000 released from restricted cash. We have committed to spend at least
RMB40 million ($5,469,000) including a government grant of RMB20 million ($2,734,000) to expand our seasonal flu vaccine
production line to a capacity of five million doses of adult formulation (equivalent to 20 million doses of pandemic flu vaccine) per year
as a precondition to our receipt of the grant. As of December 31, 2007 we have spent RMB25.7 million ($3.52 million) that may be
applied to this amount leaving us with a further RMB14.3 million ($ 1.94 million) commitment for expansion of our flu vaccine
production line.
Net cash used in investing activities was $569,000 in 2006, compared to $4,883,000 in 2005. In 2006 cash used in investing
activities included $1,140,000 used to acquire property, plant and equipment. The cash used in investing activities was partially offset
by $127,000 released from restricted cash and $438,000 repayment of deposit in relation to land use right.
Net cash used in investing activities was $4,883,000 in 2005, compared to $3,050,000 in 2004. In 2005, cash used in investing
activities included $2,444,000 used to acquire property, plant and equipment, $2,260,000 used in relation to the purchase of a further
20.56% interest in Sinovac Beijing (another $1,050,000 was used in 2004 for this same purchase) and $428,000 used as deposit in
relation to land use rights. The cash used in investing activities was partially offset by $249,000 released from restricted cash.
Financing activities
Net cash provided by financing activities was $5,565,000 in 2007. In 2007, net cash provided by our financing activities included
proceeds of $214,000 from issuance of common shares, proceeds of $9,000 from shares subscribed, and proceeds of $3,531,000 from
government funding. We received $1,394,000 from a related party on releasing escrowed shares. We also received loan proceeds of
$3,938,000 and made loan payments of $2,731,000. We paid dividends of $839,000 to minority shareholders in Sinovac Beijing in
2007. In February 2008, we completed a private placement with Sansar Capital Management LLC in which we issued 2,500,000
common shares at $3.9 per share, with total proceeds of $9,750,000.
Net cash provided by financing activities was $3,984,000 in 2006 compared to $11,144,000 in 2005. In 2006, net cash provided by
our financing activities included proceeds of $882,000 from issuance of common shares, $26,000 proceeds from shares subscribed,
$1,765,000 of advances from related parties and $739,000 proceeds from government funding. We paid $570,000 as dividend to
minority shareholders in Sinovac Beijing. We also received loan proceeds of $3,758,000 and made loan payments of $2,560,000 in
2006.
Net cash provided by financing activities was $11,144,000 in 2005 compared to $5,775,000 in 2004. In 2005, net cash provided by
our financing activities included proceeds of $5,529,000 from issuance of common
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shares, $1,424,000 proceeds from shares subscribed, $1,605,000 of advances from related parties and $1,222,000 proceeds from
government funding. We paid $379,000 as dividend to minority shareholders in Sinovac Beijing and $401,000 to related parties. We
also received loan proceeds of $3,667,000 and made loan payments of $1,523,000 in 2005.
At December 31, 2007, we had $1.37 million in long-term interest bearing loans and $6.84 million in short-term borrowings,
offset by $17.1 million in cash, resulting in a liquid assets balance of $8.89 million, compared with $2.75 million at the end of 2006. We
hold our cash and cash equivalents in interest-bearing dollar and RMB denominated accounts at registered banks. The following table
summarizes our borrowings as of December 31, 2007:
Type
Bank loan
Bank loan
Bank loan
Bank loan
Bank loan
Amount
Interest Rate
6.84% fixed rate
Maturity Date
July 24, 2008
RMB10,000,000
($1,367,000
)
RMB10,000,000
($1,367,000
)
RMB15,000,000
($2,051,000
)
RMB15,000,000
($2,051,000
)
RMB10,000,000
($1,367,000
)
8.02% fixed rate
December 19, 2008
floating rate (6.03% to
7.56% for 2007)
floating rate (6.03% to
7.56% for 2007)
floating rate (6.03% to
7.56% for 2007)
July 25, 2008
August 15, 2008
December 12, 2009
Our weighted average effective interest rate was 6.37%, 5.97% and 5.79% for the years ended December 31, 2007, 2006 and 2005,
respectively. We believe that we will continue to be able to obtain loans and access the capital markets on terms and in amounts that
will be satisfactory to us.
We are a holding company, and we rely on dividends paid by our subsidiaries, Sinovac Beijing and Tangshan Yian, for our cash
needs, mainly our operating expenses. The payment of dividends in China is subject to limitations. Regulations in the PRC currently
permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in
China. Our subsidiary is also required to set aside at least a portion of its after-tax profit based on PRC accounting standards each year
to fund certain reserve funds. These reserves can be used to recoup previous years’ losses, if any, and, subject to the approval of the
relevant PRC government authority, may be converted into share capital in proportion to their existing shareholdings, or by increasing
the par value of the shares currently held by them. Such reserves, however, are not distributable as cash dividends. In addition, at
discretion of their board of directors, our subsidiaries may allocate a portion of its after-tax profits based on PRC accounting standards
to its enterprise development funds and employee welfare and bonus funds. These funds also are not distributable as cash dividends. In
addition, if Sinovac Beijing or Tangshan Yian incurs debt on its own behalf in the future, the instruments governing the debt may
restrict Sinovac Beijing’s or Tangshan Yian’s ability, as the case may be, to pay dividends or make other distributions to us.
The ability of our subsidiary to convert Renminbi into U.S. dollars and make payments to us is subject to PRC foreign exchange
regulations. Under these regulations, the Renminbi is convertible for current account items, including the distribution of dividends,
interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as
direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the SAFE. See
“Item 10D. Exchange Controls.”
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C. Research and Development
See discussions under “—Item 5.A. Research and Development Programs.”
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or
events for the period from January 1, 2007 to December 31, 2007 that are reasonably likely to have a material adverse effect on our net
revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily
indicative of future operating results or financial conditions.
E. Off-Balance Sheet Arrangements
We do not, and did not, have any interest in variable interest entities or any other off-balance sheet arrangements that require
disclosure.
F. Tabular Disclosure of Contractual Obligations
The following table summarizes our contractual obligations and commitments as of December 31, 2007 for the periods indicated:
Contractual obligations
Long-Term Debt
Operating Lease Obligations
Total
G. Safe Harbor
Payments due by period
Total
Less than
1 year
1-3 years
(in thousands)
3-5 years
More than
5 years
$1,367
$8,467
$9,834
—
452
452
$
$
$ 1,367
1,356
$ 2,723
—
$ 904
$ 904
—
$ 5,755
$ 5,755
This annual report on Form 20-F contains forward-looking statements that relate to future events, including our future operating
results and conditions, our prospects and our future financial performance and condition, all of which are largely based on our current
expectations and projections. The forward-looking statements are contained principally in the sections entitled “Item 3. Key
Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.”
These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can
identify these forward-looking statements by terminology such as “may,” “will,” “expect,” “anticipate,” “future,” “intend,” “plan,”
“believe,” “estimate,” “is/are likely to” or other and similar expressions. Forward-looking statements involve inherent risks and
uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement,
including but not limited to the following:
• our ability to maximize sales of our existing products within the Chinese market;
• our ability to develop new vaccines;
• our ability to improve our existing vaccines and lower our production costs;
• our ability to expand our manufacturing facilities to meet need of the growing Chinese market and other geographic markets;
• our ability to acquire new technologies and products;
• uncertainties in and the timeliness of obtaining necessary governmental approvals and licenses for marketing and sale of our
vaccines in certain overseas markets;
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• our ability to compete successfully against our competitors;
• risks associated with our corporate structure and the regulatory environment in China; and
• other risks outlined in our filings with the Securities and Exchange Commission, or the SEC, including this annual report on
Form 20-F.
The forward-looking statements made in this annual report on Form 20-F relate only to events or information as of the date on
which the statements are made in this annual report on Form 20-F. Except as required by law, we undertake no obligation to update or
revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on
which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report on Form 20-F
completely and with the understanding that our actual future results may be materially different from what we expect.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of December 31, 2007.
Directors and Executive Officers
Weidong Yin
Xianping Wang
Simon Anderson(1)(2)(3)
Yuk Lam Lo(1)(2)(3)
Chup Hung Mok(1)(2)(3)
Jinling Qin
Jiansan Zhang
Nan Wang
Changjun Fu
Age
43
Chairman, President, Chief Executive Officer, Secretary
and Director
Position/Title
53 Director
46 Director
59 Director
50 Director
62 Acting Chief Financial Officer
52 Vice General Manager
41 Vice General Manager
48 Vice General Manager
(1) Member of the audit committee.
(2) Member of the corporate governance and nominating committee.
(3) Member of the compensation committee.
Mr. Weidong Yin has served as the president, CEO, secretary and a director of our company since September 2003. Mr. Yin is also
the general manager of our subsidiary, Sinovac Biotech. He is the former general manager of Tangshan Yian Bioengineering Co., Ltd.,
and previously he worked as a medical doctor in infectious disease at the China Center for Disease Control and Prevention, Tangshan
City, Hebei Province. Mr. Yin has been dedicated to hepatitis research for over 20 years and was instrumental in the development of our
Healive vaccine. In addition, Mr. Yin has been appointed as the principal investigator by the Chinese Ministry of Science and
Technology for many key governmental R&D programs such as “Inactivated Hepatitis A vaccine R&D,” “Inactivated SARS vaccine
R&D” and “New Human Influenza Vaccine (H5N1) R&D.” He obtained his MBA from the National University of Singapore.
Mr. Xianping Wang has served as a director of our company since March 2006. He has also been the president and CEO of Xinhua
China Ltd. since September 2004, which is a company listed on the FINRA Over-the-Counter Bulletin Board under the symbol
“XHUA.” He has also served as the president of Asia-Durable (Beijing) Investments Co., Ltd. since 2002, and from 1992-1997 he
served as the president of Beijing New Fortune Investment Co., Ltd. as well as general manager of Beijing Fuhua Constructions and
Development Co., Ltd. Mr. Wang has worked in a diverse range of industries, such as medicine, the health care industry, construction
projects, investment consultation and real estate development. Since 1993, he has participated in
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various real estate investment projects in China, managing the development of Fuhua Mansion, Meihui Mansion, Jinhua Garden and
others. Mr. Wang is the brother of Lily Wang, a former director and CFO of our company, and Heping Wang, a former director of our
company. Mr. Wang has a bachelor’s degree in engineering from the Navy Engineering Institute and a master’s degree in economics
from Tsinghua University, China.
Mr. Simon Anderson has served as our director since July 2004. Mr. Anderson is a member of our audit, compensation and
corporate governance and nominating committees. Since 1996, Mr. Anderson has been a partner and Vice President of MCSI
Consulting Services Inc., a company that provides consulting expertise in the areas of regulatory compliance, exchange listings and
financial operations. Mr. Anderson was admitted as a member of the Institute of Chartered Accountants in British Columbia in 1986.
Through MCSI Consulting Services Inc., Mr. Anderson serves as chief financial officer of companies listed on the TSX and TSX
Venture exchanges in Canada, including Buffalo Gold Ltd., which is also traded on the Over the Counter market. Buffalo Gold Ltd.
acquires and explores mineral properties with the primary aim of development them for profit. Mr. Anderson also serves as a director of
TSX-listed Wex Pharmaceuticals Inc., which is dedicated to the discovery, development, manufacture and commercialization of
innovative drug products to treat pain and TSX Venture Exchange-listed International Beryllium Corporation, which owns beryllium
resource properties.
Mr. Yuk Lam Lo has served as a director of our company since March 2006. Mr. Lo is a member of the audit, compensation and
corporate governance and nominating committees. He is currently serving as the vice president of PerkinElmer Life and Analytical
Sciences, Pacific Rim, the chairman of the Industry Technology Committee of the Chinese Manufacturers’ Association of Hong Kong
and the director of the Chinese Manufacturers’ Association of Hong Kong. Mr. Lo also served as the chairman of the Innovation and
Technology Fund (Biotechnology Projects) Vetting Committee, HKSAR, and as chairman of the Biotechnology Committee, Industry &
Technology Development Council, HKSAR. He also served the director of the Hong Kong Applied R&D Fund Co., Ltd.,
HKSAR. Mr. Lo was also heavily involved in several committees of the Industry Department of the HKSAR Government. Professor Lo
has been named an Honorary Fellow by the Hong Kong University of Science and Technology as well as the Honorary Chairman of the
City University Committee of Co-operative Education Centre. Mr. Lo is currently a member of the Advisory Committee of the World
Trade Centre Association (Hong Kong), an adjunct professor of the Chinese University of Hong Kong, the special advisor of the Hong
Kong University of Science & Technology (HKUST), a committee member of the Biotechnology Research Institute (BRI) of HKUST,
and a member of the Advisory Committee of the City University of Hong Kong and the Hong Kong Polytechnic University. In China,
Mr. Lo is a consultant to the Economic Bureau, Changchun, a member of the advisory committee of the Shenzhen Municipal Science
and Technology Bureau, an honorary consultant of the Beijing Medical University, an honorary professor of Chengdu University of
TCM and a visiting professor at Xiamen University, China and at Shanghai Jiao Tong University, China.
Ms. Chup Hung Mok has served as a director of our company since March 2006. Ms. Mok joined the Development Office of the
National University of Singapore in September 2007 as manager of its gift processing unit. Ms. Mok was previously the Financial
Controller of Zero Spot Laundry Service Private Limited where she was responsible for the financial affairs of the company and had
oversight responsibilities in human resource management. Prior to joining Zero Spot in 2005, Ms. Mok had more than 28 years of
banking experience. During the period Ms. Mok worked at the Bank of China, Singapore Branch, where she led the Internal Audit and
Treasury Settlements departments. She was also a member of the bank’s Assets and Liabilities Management Committee, Prevention of
Money Laundering Committee and Business Continuity Management Committee. Prior to joining the Bank of China, Ms. Mok began
her career with The Kwangtung Provincial Bank Singapore Branch. She worked in the Retail Banking Department and was tasked with
setting up the Bank’s Treasury Department. From 1992 to 2001, being the senior management member of the bank, she had oversight
responsibilities in accounting, treasury settlements, human resource management and credit management functions. She was a member
of the Credit Committee and Prevention of Money Laundering Committee. Ms. Mok holds a Master of Business Administration from
the National University of Singapore.
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Ms. Jinling Qin has served as our acting CFO since March 22, 2006. Prior to that date, she had been the Manager of the Finance
Department of Sinovac Beijing since January 2001. During 1993 and 2000, Ms. Qin was the Director of the Finance Department of
Tangshan Yian. She served as the Director of the Audit Department of the Economics Commission of Tangshan City, Hebei Province
during 1988 and 1993. Ms. Qin holds an associate degree in accounting from Hebei Provincial Academy of Machinery and Electronics.
Mr. Jiansan Zhang has served as the vice general manager of Sinovac Beijing since April 2001 and the deputy general manager of
Tangshan Yian since 1998. At Sinovac Beijing, he oversees the production, engineering, research and development and quality
assurance departments. At Tangshan Yian, he oversees the P3 Lab. From 1995-1997, Mr. Zhang served as the production manager and
the assistant to the general manager of Shenzhen Kangtai Biological Product Co., Ltd. From 1988-1995, he served as the vice general
manager of Shenzhen Guangxin Biological Product Co., Ltd. and from 1992-1995, he served as a consultant to Tangshan Yian.
Mr. Zhang received his bachelor’s degree in medical treatment from Sun Yat-sen University of Medical Sciences, PRC and an EMBA
degree from Tsinghua University, PRC. In 1980, Mr. Zhang completed advanced training courses in management and quality control of
biological products in Holland.
Ms. Nan Wang has served as the vice general manager of Sinovac Beijing since 2001 where she oversees business development
and clinical research. From 1988 to 1993, Ms. Wang was a researcher in biology at the Life Science College of Peking University, PRC.
From 1993 to 2001, she worked as a manager at China Bioway Biotech Group Co., Ltd. Ms. Wang received her bachelor’s degree in
biology from Peking University and her master degree from University of International Business and Economics, PRC. Ms. Wang also
received a diploma in financial management from Beijing College for Entrepreneurs, PRC in 2003.
Mr. Changjun Fu has served as Sinovac Beijing’s vice general manager since March 2002. Mr. Fu currently oversees the sales and
marketing department and business development of Sinovac Beijing. Prior to joining Sinovac Beijing, Mr. Fu was the sales director at
Changchun Changsheng Biological Product Co., Ltd. from 1986 to 1997 where he oversaw the marketing of vaccine products,
particularly hepatitis vaccines. From 1997 to 2002, Mr. Fu served as the Vice President of Shenzhen Shukang Biological Products Co.
Ltd. where he was responsible for the marketing and sales of vaccines and blood products. Mr. Fu received a bachelor’s degree in 1984
from Norman Bethune University of Medical Sciences, PRC.
B. Compensation of Directors and Executive Officers
In 2007, the aggregate cash compensation paid to our directors and executive officers was approximately $214,959. No executive
officer is entitled to any severance benefits upon termination of his or her employment with our company. For options granted to
officers and directors, see “2003 Stock Option Plan.”
Our board of directors and shareholders approved the issuance of up to 5,000,000 common shares upon exercise of options granted
under our 2003 stock option plan. As of December 31, 2007, options to purchase 184,000 common shares were outstanding. The
following table summarizes, as of December 31, 2007, the outstanding options that we granted to several of our directors, executive
officers, principal shareholders and to other individuals as a group under our 2003 stock option plan.
Name
Weidong Yin
Simon Anderson
Yuk Lam Lo
Chuphung Mok
Other individuals as a group
Ordinary Shares Underlying
Outstanding Options
Exercise Price
($/Share)
321,000
150,000
50,000
50,000
1.31
3.20
2.64
2.64
Grant Date
November 13, 2003
November 4, 2005
September 14, 2006
September 14, 2006
Expiration Date
November 12, 2008
November 3, 2010
September 13, 2011
September 13, 2011
229,800
From 1.31 to 3.36
November 13, 2003
earliest
November 3, 2010
latest
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2003 STOCK OPTION PLAN
Our board of directors adopted a stock option plan on November 1, 2003. The purpose of the plan is to attract and retain the best
available personnel for positions of substantial responsibility, provide additional incentive to employees, directors and consultants and
promote the success of our business. Our board of directors believes that our company’s long-term success is dependent upon our ability
to attract and retain superior individuals who, by virtue of their ability, experience and qualifications, make important contributions to
our business.
Set forth below is a summary of the principal terms of our stock option plan.
• Size of plan. We have reserved an aggregate of 5,000,000 of our common shares for issuance under our 2003 stock option
plan. As of December 31, 2007, options to purchase an aggregate of 184,000 of our common shares were issued and
outstanding and an aggregate 2,179,700 common shares have been issued pursuant to options issued under the plan.
• Administration. Our stock option plan is administered by our board of directors. The board will determine the provisions,
terms and conditions of each option grant, including without limitation the option vesting schedule or exercise installment,
the option exercise price, payment contingencies and satisfaction of any performance criteria.
• Vesting schedule. The vesting schedules of options granted will be specified in the applicable option agreements.
• Option agreement. Options granted under our stock option plan are evidenced by option agreements that contain, among
other things, provisions concerning exercisability and forfeiture upon termination of employment or consulting arrangements
by reason of death or otherwise, as determined by our board. In addition, the option agreement also provides no option shares
will be issued under the plan unless the Securities Act has been fully complied with.
• Option term. The term of options granted under the 2003 stock option plan may not exceed ten years from the date of grant.
• Termination of options. Where the option agreement permits the exercise of the options granted for a certain period of time
following the recipient’s termination of services with us, the options will terminate to the extent any is not exercised or
purchased on the last day of the specified period or the last day of the original term of the options, whichever occurs first.
• Change of control. If a third-party acquires us through the purchase of all or substantially all of our assets, a merger or other
business combination, all outstanding stock options will become fully vested and exercisable immediately prior to such
transaction.
• Termination of plans. Unless terminated earlier, the 2003 stock option plan will expire in 2023. Our board of directors has
the authority to terminate our stock option plan prior to the expiry of the plan provided that such early termination shall not
affect the options then outstanding under the plan.
C. Board Practices
Board Of Directors
Our articles of association prescribes that we should have a minimum of 1 and a maximum of 15 directors. Currently, our board of
directors comprises 5 board members, three of them are independent. Under Antigua law, our directors have a duty of loyalty to act
honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and
such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to
us, our directors must ensure compliance with our memorandum and by-laws, as amended and re-stated from time to time. A
shareholder has the right to seek damages if a duty owed by our directors is breached.
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The functions and powers of our board of directors include, among others:
• convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;
• declaring dividends and distributions;
• appointing officers and determining the term of office of officers;
• exercising the borrowing powers of our company and mortgaging the property of our company; and
• approving the transfer of shares of our company, including the registering of such shares in our share register.
Terms of directors and Executive Officers
Our officers are elected by and serve at the discretion of the board of directors. Our directors are not subject to a term of office and
hold office until such time as they are removed from office by special resolution or the unanimous written resolution of all shareholders.
A director will be removed from office automatically if, among other things, the director (i) becomes bankrupt or makes any
arrangement or composition with his creditors; or (ii) dies or is found by our company to be or becomes of unsound mind. None of our
directors has a service contract with us or any of our subsidiaries providing for benefits upon termination of employment.
Committees of the Board of Directors
Our board of directors has established an audit committee, a compensation committee and a corporate governance and nominating
committee.
Audit Committee
Our audit committee consists of our independent directors Messrs. Simon Anderson, Yuk Lam Lo and Ms. Chup Hung Mok, and
is chaired by Simon Anderson. The audit committee oversees our accounting and financial reporting processes and the audits of the
financial statements of our company. The audit committee is responsible for, among other things:
• selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our
independent auditors;
• reviewing with our independent auditors any audit problems or difficulties and management’s response;
• reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K under the
Securities Act;
• discussing the annual audited financial statements with management and our independent auditors;
• reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material
control deficiencies;
• annually reviewing and reassessing the adequacy of our audit committee charter;
• such other matters that are specifically delegated to our audit committee by our board of directors from time to time;
• meeting separately and periodically with management and our internal and independent auditors; and
• reporting regularly to the full board of directors.
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Compensation Committee
Our compensation committee consists of our independent directors Messrs. Simon Anderson, Yuk Lam Lo and Ms. Chup Hung
Mok, and is chaired by Yuk Lam Lo. Our compensation committee assists the board in reviewing and approving the compensation
structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive
officers. Members of the compensation committee are not prohibited from direct involvement in determining their own compensation.
Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The
compensation committee is responsible for, among other things:
• approving and overseeing the compensation package for our executive officers;
• reviewing and making recommendations to the board with respect to the compensation of our directors;
• reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer,
evaluating the performance of our chief executive officer in light of those goals and objectives, and setting the compensation
level of our chief executive officer based on this evaluation; and
• reviewing periodically and making recommendations to the board regarding any long-term incentive compensation or equity
plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of our independent directors Messrs. Simon Anderson, Yuk Lam Lo
and Ms. Chup Hung Mok, and is chaired by Ms. Chup Hung Mok. The corporate governance and nominating committee assists the
board of directors in identifying individuals qualified to become our directors and in determining the composition of the board and its
committees. The corporate governance and nominating committee is responsible for, among other things:
• identifying and recommending to the board nominees for election or re-election to the board, or for appointment to fill any
vacancy;
• reviewing annually with the board the current composition of the board in light of the characteristics of independence, age,
skills, experience and availability of service to us;
• identifying and recommending to the board the directors to serve as members of the board’s committees;
• advising the board periodically with respect to significant developments in the law and practice of corporate governance as
well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of
corporate governance and on any corrective action to be taken; and
• monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of
our procedures to ensure proper compliance.
Interested Transactions
A director may vote in respect of any contract or transaction in which he or she is interested, provided that the nature of the
interest of any directors in such contract or transaction is disclosed by him or her at or prior to its consideration and any vote in that
matter.
Remuneration and Borrowing
The directors may determine remuneration to be paid to the directors. The compensation committee assists the directors in
reviewing and approving the compensation structure for the directors. The directors may exercise
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all the powers of the company to borrow money and to mortgage or charge its undertaking, property and uncalled capital, and to issue
debentures or other securities whether outright or as security for any debt obligations of our company or of any third party.
D. Employees
As of December 31, 2005, 2006 and 2007, we had 193, 252 and 305 full-time employees. Of our workforce as of December 31,
2007, 60 employees are engaged in research and development and 75 employees are engaged in sales and marketing. None of our
employees is represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our
employees to be good.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our common shares, as of the date of
February 15, 2008, the most recent practicable date, by:
• each of our directors and executive officers; and
• each person known to us to own beneficially more than 5% of our common shares.
The calculations in the table below are based on 40,305,028 common shares outstanding as of December 31, 2007. Beneficial
ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within
60 days, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares,
however, are not included in the computation of the percentage ownership of any other person.
Directors and Executive Officers:
Weidong Yin
Simon Anderson
Yuk Lam Lo
Chup Hung Mok
Jinling Qin
Jiansan Zhang
Nan Wang
Changjun Fu
Principal Shareholders:
Sansar Capital Management, LLC(1)
Morgan Stanley(2)
Heping Wang
Shares Beneficially
Owned
Number
%
6,331,100 15.71
*
150,000
*
15,000
*
15,000
*
25,400
*
50,000
*
57,000
*
38,400
3,528,803 8.76
3,298,800 8.18
2,445,000 6.07
Less than 1%.
*
(1) Based on a Schedule 13G/A filed on February 14, 2008 with the SEC. According to the filing, Sansar Capital Management, LLC’s
managing member is Sansar Family II, LLC, which is managed by Sanjay Motwani. All of the shares of common stock that were
beneficially owned by the reporting persons were held by a fund to which Sansar Capital Management, LLC acts as an investment
advisor.
(2) Based on a Schedule 13G filed on February 14, 2008 with the SEC. According to the filing, the shares are owned, or may be
deemed to be beneficially owned, by Morgan Stanley Capital Services Inc., a wholly-owned subsidiary of Morgan Stanley.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—Share Ownership.”
B. Related Party Transactions
Transactions with Lily Wang
Lily Wang, a principal shareholder of our company, was also our former director and chief financial officer from September 2003
to March 2006.
In September 2003, we issued 10 million new common shares to Lily Wang in exchange for a 51% equity interest in Sinovac
Beijing that Ms. Wang had contracted to buy from certain of Sinovac Beijing’s then four shareholders for cash immediately before the
above 51% share transfer. This 51% equity interest in Sinovac Beijing was transferred to us directly from these shareholders and was
recorded in the applicable transfer instrument as a cash transaction. The cash due to these shareholders was payable by Ms. Wang. The
transfer of the 51% equity interest to us was registered and approved by relevant PRC government authorities in August 2004. The
common shares we issued to Ms. Wang were issued at a price of $0.60 per share, representing approximately 37% of our outstanding
common shares immediately after the issuance.
Tangshan Yian was one of the shareholders from whom Ms. Wang contracted to buy the Sinovac Beijing equity interest described
above. Ms. Wang agreed to buy from Tangshan Yian a 15.72% equity interest in Sinovac Beijing for a cash consideration of
approximately $1.8 million. This 15.72% equity interest was transferred to us directly in our partial acquisition of Sinovac Beijing
described above. When we acquired Tangshan Yian as a wholly owned subsidiary in November 2004, its assets included a promissory
note from Ms. Wang for the approximately $1.8 million purchase consideration. In October 2004, we and Ms. Wang entered into a
pledge and escrow agreement under which Ms. Wang pledged 3 million of her shares in our company to us as collateral for this $1.8
million unpaid purchase consideration. Under the agreement, Ms. Wang was to pay by November 15, 2006, the unpaid purchase
consideration together with interest thereon at 5% per annum in quarterly installments of $200,000 each. We have received full
repayment from Lily Wang.
Transactions with Heping Wang
Heping Wang was our director from September 2003 to April 2006. Mr. Wang is also the brother of Lily Wang.
In January 2004, we entered into a share purchase agreement with Heping Wang to acquire from Mr. Wang a 100% equity interest
in Tangshan Yian that he had contracted to purchase from Tangshan Yian’s then existing two shareholders immediately before the
above 100% share transfer. This 100% equity interest in Tangshan Yian was transferred to us directly from these shareholders and was
recorded in the applicable transfer instrument as a cash transaction. The purchase consideration we paid Mr. Wang was (1) 3.5 million
of our new common shares, issued at a price of $0.76 per share and (2) a promissory note from us in the amount of $2.2 million. The
foregoing purchase consideration took into account the value of Tangshan Yian with an increased registered capital by $2.6 million that
Mr. Wang had agreed to subscribe for but had not yet paid. In connection with this acquisition, Mr. Wang issued us a promissory note in
the amount of $2.6 million in respect of such unpaid capital contribution.
The transfer of the 100% equity interest to us was approved by relevant PRC government authorities on October 25, 2004. In
October 2004, our $2.2 million promissory note to Mr. Wang was canceled and Mr. Wang’s $2.6 million promissory note was reduced
by $2.2 million. Mr. Wang paid the $400,000 balance of the promissory note in November 2004.
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At the time of the above equity interest transfer from Mr. Wang to us, Tangshan Yian owed to China High Tech Investment Co.,
Ltd. a loan in the principal amount of RMB9 million that occurred in 2001 and 2002. In 2004, Tangshan Yian agreed to pay China High
Tech Investment an aggregate amount of RMB10.8 million comprising the RMB9 million principal amount of the loan and a
RMB1.8 million funding fee, in two equal installments by September 30, 2005 and December 31, 2005, respectively. Tangshan Yian
further agreed, if it failed to make either of these two loan installment payments, to pay China High Tech Investment a default penalty at
0.1% of the aggregate outstanding loan balance per day. As of December 31, 2006, the balance was RMB4 million principal and
RMB1.8 million accrued interest. We fully repaid these amounts in 2007.
In connection with the above equity interest transfer, Mr. Wang agreed to assume and indemnify Tangshan Yian’s loan obligations
owed to China High Tech Investment. In October 2004, we and Mr. Wang entered into a pledge and escrow agreement, under which
Mr. Wang pledged 1.5 million of his shares in our company to us as collateral to secure his indemnification obligation owed to us in
respect of the loan. We received a $1,394,333 cash payment representing the balance of the $1.0 million in debt and related interest
assumed in connection with the acquisition of Tangshan Yian in 2007. The loan has been fully repaid.
Transactions with Certain Other Directors and Affiliates
We entered into two operating leases with China Bioway Biotech Group Co., Ltd., the current minority shareholder of Sinovac
Beijing, in 2004, with respect to Sinovac Beijing’s production plant and laboratory in Beijing for total annual lease payment of
$183,621. The leases commenced on August 12, 2004 and have a term of 20 years. We made payments of $118,836 and $119,954
pursuant to these leases on the plant and the laboratory as of December 31, 2007, respectively.
We entered into another operating lease agreement with China Bioway in June 2007 with respect to Sinovac Beijing’s production
plant in Beijing, China for an annual lease payment of $268,224. The lease commenced in June 2007 and has a term of 20 years. As of
December 31, 2007, we had prepaid a total of $525,112 to this related party.
In 2006 and 2007, the Company paid $13,977 and $7,505, respectively, to its directors for consulting services.
In 2006 and 2007, the Company paid director fees of $25,944 and $18,408, respectively, to a management services company that
is 50% owned by a director of the Company.
The Company entered into a license agreement with a corporation related with China Bioway (a non-controlling interest of
Sionvac Beijing) in respect to the trademark used on the Company’s products for zero consideration. This license agreement is non-
exclusive and has been extended to August 20, 2011.
Share Options
See Item 6.B. “Directors, Senior Management and Employees—2003 Stock Option Plan.”
B. Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
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Legal and Administrative Proceedings
We may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time. We
are not currently a party to any litigation or other legal proceedings brought against us. We are also not aware of any legal proceedings,
investigation or claim, or other legal exposure that has a more than remote possibility of having a material adverse effect on our
business, financial condition or results of operations.
Dividend Policy
We have never declared or paid any dividends, nor do we have any present plan to pay any cash dividends on our common shares
in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and
expand our business.
Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our shareholders. Even if
our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings,
capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may
deem relevant. Cash dividends on our common shares, if any, will be paid in US dollars.
We are a holding company, and we rely on dividends paid by our majority-owned subsidiary, Sinovac Beijing, and wholly owned
subsidiary, Tangshan Yian, for our cash needs, including the funds necessary to pay dividends and other cash distributions to our
shareholders, service any debt we may incur and pay our operating expenses. The payment of dividends in China is subject to
limitations. Regulations in the PRC currently permit payment of dividends by our PRC subsidiaries only out of accumulated profits as
determined in accordance with accounting standards and regulations in China. Tangshan Yian is required to set aside at least 10% of its
after-tax profits each year to contribute to its reserve fund until the accumulated balance of such reserve fund reaches 50% of the
registered capital of Tangshan Yian. Tangshan Yian is also required to reserve a portion of its after-tax profits to its employee welfare
and bonus fund, the amount of which is subject to its board of directors. Sinovac Beijing is required to set aside, at the discretion of its
board of directors, a portion of its after-tax profits to its reserve fund, enterprise development fund and employee welfare and bonus
funds. These funds are not distributable in cash dividends.
B. Significant Changes
We have not experienced any significant changes since the date of our audited consolidated financial statements included in this
annual report.
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ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
The table below sets forth, for the periods indicated, the high and low closing prices on the OTC Bulletin Board or the American
Stock Exchange for our common shares. Our common shares commenced trading on the OTC Bulletin Board on February 21, 2003 and
then became listed on the American Stock Exchange under the symbol “SVA” on December 8, 2004.
2003 (from November 3)
2004
2005
2006
2007
First quarter
Second quarter
Third quarter
Fourth quarter
First quarter
Second quarter
Third quarter
Fourth quarter
September
October
November
December
2008
January
February
March (through March 28)
Sales Price
High Low
1.80 0.80
6.95 1.71
7.92 1.65
5.28 1.81
5.28 3.24
4.97 2.30
3.12 1.81
3.85 2.30
8.33 2.50
3.55 2.25
3.83 2.55
8.33 2.50
6.98 3.32
8.33 3.12
6.48 5.20
6.98 3.50
5.50 3.32
5.22 3.58
4.27 3.81
4.20 3.08
B. Plan of Distribution
Not applicable.
C. Markets
Our common shares traded on the OTC Bulletin Board from February 21, 2003 to December 7, 2004. Since December 8, 2004,
our common shares have been listed on the American Stock Exchange under the symbol “SVA.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
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ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We are an Antigua company with limited liability, and our affairs are governed by our articles of incorporation, by-laws and the
International Business Corporations Act. The following are summaries of material provisions of our articles of incorporation, by-laws
and the International Business Corporations Act.
General
All of our outstanding common shares are fully paid and non-assessable. The common shares are issued in registered form.
Holders of common shares are entitled to receive share certificates. Our shareholders who are non-residents of Antigua may freely hold
and vote their common shares.
Dividends
The holders of our common shares are entitled to such dividends as may be declared by our board of directors subject to the
International Business Corporations Act.
Voting rights
Each common share is entitled to one vote on all matters upon which the common shares are entitled to vote.
A quorum required for a meeting of shareholders consists of shareholders who hold at least a majority of our shares at the meeting
present in person or by proxy. Shareholders’ meetings are held annually and may be convened by our board of directors on its own
initiative or upon a request to the directors by shareholders holding in aggregate at least five percent of our issued share capital.
Advance notice of at least 21 days is required for the convening of our annual general meeting and other shareholders meetings.
Unless the International Business Corporations Act otherwise requires, resolutions to be passed by the shareholders requires a
simple majority vote. Important matters such as changes to our by-laws require a resolution passed by a vote of shareholders holding a
majority of all the outstanding and issued shares.
Transfer of Common Shares
Our shareholders may transfer common shares by endorsing the relevant share certificates or by other proper evidence of
succession, assignment or authority to transfer.
Liquidation
On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of common shares), assets
available for distribution among the holders of common shares shall be distributed among the holders of the common shares on a pro
rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that
the losses are borne by our shareholders proportionately.
Inspection of Books and Records
Holders of our common shares will have no general right under Antigua law to inspect or obtain copies of our list of shareholders
or our corporate records. However, we will provide our shareholders with annual audited consolidated financial statements.
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Changes in Capital
We may from time to time by a resolution passed by a majority of the shares entitled to vote:
• increase the share capital by such sum, to be divided into shares of such classes and amount, as the resolution may prescribe;
• consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;
• sub-divide our existing shares, or any of them into shares of a smaller amount provided that in the subdivision the proportion
between the amount paid and the amount, if any unpaid on each reduced share shall be the same as it was in case of the share
from which the reduced share is derived;
• cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person
and diminish the amount of our share capital by the amount of the shares so cancelled.
We may by special resolution reduce our share capital and any capital redemption reserve in any manner authorized by law.
Differences In Corporate Law
The International Business Corporation Law is modeled after English law but does not follow many recent English law statutory
enactments. In addition, the International Business Corporation Law differs from laws applicable to United States corporations and their
shareholders. Set forth below is a summary of the significant differences between the provisions of the International Business
Corporation Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.
Mergers and Similar Arrangements
Antigua and Barbuda law does not provide for mergers as that expression is understood under United States corporate law.
However, there are statutory provisions for amalgamation that facilitate the consolidation of companies, provided that the arrangement
is approved by a majority number of each class of shareholders and creditors with whom the arrangement is to be made, and who must
in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and
voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and
subsequently the arrangement may be, but is not required to be, sanctioned by the High Court of Antigua and Barbuda. In some
instances, the Court of Appeal of Antigua and Barbuda, a tier higher than the High Court, may be called upon to approve a proposed
arrangement. While a dissenting shareholder has the right to express to the court his view that the transaction ought not to be approved,
the court can be expected to approve the arrangement if it determines that:
• the statutory provisions as to the dual majority vote have been met;
• the shareholders have been fairly represented at the meeting in question;
• the arrangement is such that a businessman would reasonably approve; and
• the arrangement is not one that would more properly be sanctioned under some other provision of the International Business
Corporation Law.
When a take-over offer is made and accepted (within four months) by holders of 90% of the shares affected, the offerer may,
within a two month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can
be made to the High Court of Antigua and Barbuda but this is unlikely to succeed unless there is evidence of fraud, bad faith or
collusion.
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If the arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal
rights, which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to
receive payment in cash for the judicially determined value of the shares.
Shareholders’ Suits
We are not aware of any reported class action or derivative action having been brought in a court in Antigua and Barbuda. In
principle, the company itself will normally be the proper plaintiff in actions against directors, and derivative actions may not generally
be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority
in Antigua and Barbuda, there are exceptions to the foregoing principle, including when:
• a company acts or proposes to act illegally or ultra vires;
• the act complained of, although not ultra vires, required a special resolution, which was not obtained; and
• those who control the company are perpetrating a “fraud on the minority.”
Directors’ Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders.
This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with
the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself
of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty
requires that a director act in a manner he reasonably believes to be in the best interests of the corporation. He must not use his
corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the
corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not
shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good
faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be
rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a
director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation. As
a matter of Antigua and Barbuda law, a director of an Antigua and Barbuda company is in the position of a fiduciary with respect to the
company and therefore it is considered that he owes the following duties to the company—a duty to act bona fide in the best interests of
the company, a duty not to make a profit out of his position as director (unless the company permits him to do so) and a duty not to put
himself in a position where the interests of the company conflict with his personal interest or his duty to a third-party. A director of an
Antigua and Barbuda company owes to the company a duty to act with skill and care. It was previously considered that a director need
not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge
and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required
skill and care and these authorities are likely to be followed in Antigua and Barbuda.
Shareholder Action by Written Consent
Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by
amendment to its certificate of incorporation. Antigua and Barbuda law and our by-laws provide that shareholders may approve
corporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to
vote on such matter at a general meeting without a meeting being held.
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Shareholder Proposals
Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of
shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board
of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special
meetings. Antigua and Barbuda law and our by-laws allow our shareholders holding not less than five per cent of the paid up voting
share capital of the Company to requisition a shareholder’s meeting. We are obligated under our by-laws to call shareholders’ annual
general meetings.
Cumulative Voting
Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the
corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of
minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is
entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. As permitted under
Antigua and Barbuda law, our by-laws will not provide for cumulative voting. As a result, our shareholders are not afforded any less
protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors
Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause
with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise.
Under our by-laws, directors can be removed by a majority vote of the shareholders.
Transactions with Interested Shareholders
The Delaware General Corporation Law contains a business combination statute applicable to Delaware public corporations
whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of
incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following
the date that such person becomes an interested shareholder. An interested shareholder generally is a person or group who or which
owns or owned 15% or more of the target’s outstanding voting stock within the past three years. This has the effect of limiting the
ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute
does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of
directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder.
This encourages any potential acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the
target’s board of directors.
Antigua and Barbuda law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by
the Delaware business combination statute. However, although Antigua and Barbuda law does not regulate transactions between a
company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the
company and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up
Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be
approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of
directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation
to include in its certificate
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of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under the International
Business Corporations Law, our company may be dissolved, liquidated or wound up only by the vote of holders of two-thirds of our
shares voting at a meeting or the unanimous written resolution of all shareholders.
Variation of Rights of Shares
Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a
majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Antigua and Barbuda
law and our by-laws, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class only
with the vote at a class meeting of holders of two-thirds of the shares of such class or unanimous written resolution.
Amendment of Governing Documents
Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a
majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by Antigua
and Barbuda law, our by-laws may only be amended with the vote of holders representing a majority of all our shares voting issued and
outstanding or the unanimous written resolution of all shareholders.
Indemnification of Directors and Executive Officers and Limitation of Liability
Antigua and Barbuda law does not limit the extent to which a company’s by-laws may provide for indemnification of officers and
directors, except to the extent any such provision may be held by the Antigua and Barbuda courts to be contrary to public policy, such
as to provide indemnification against civil fraud or the consequences of committing a crime. Our by-laws permit indemnification of
officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages arise
from negligence or illegal action of such directors or officers. This standard of conduct is generally the same as permitted under the
Delaware General Corporation Law to a Delaware corporation. In addition, we have entered into indemnification agreements with our
directors and senior executive officers that provide such persons with additional indemnification beyond that provided in our by-laws.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons
controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law.
We have obtained directors and officers insurance providing indemnification for our directors for certain liabilities.
Anti-takeover Provisions in the By-laws
Some provisions of our by-laws may discourage, delay or prevent a change in control of our company or management that
shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more
series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or
action by our shareholders.
However, under Antigua and Barbuda law, our directors may only exercise the rights and powers granted to them under our by-
laws for what they believe in good faith to be in the best interests of our company.
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Rights of Non-resident or Foreign Shareholders
There are no limitations imposed by our by-laws on the rights of non-resident or foreign shareholders to hold or exercise voting
rights on our shares. In addition, there are no provisions in our by-laws governing the ownership threshold above which shareholder
ownership must be disclosed.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in
Item 4, “Information on the Company” or elsewhere in this annual report on Form 20-F.
D. Exchange Controls
Foreign Currency Exchange
Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 1997 and various regulations issued
by State Administration of Foreign Exchange, or SAFE, and other relevant PRC government authorities, Renminbi is freely convertible
only to the extent of current account items, such as trade related receipts and payments, interest and dividends. Capital account items,
such as direct equity investments, loans and repatriation of investment, require the prior approval from SAFE or its local counterpart for
conversion of RMB into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC.
Payments for transactions that take place within PRC must be made in Renminbi. Unless otherwise approved, PRC companies
must repatriate foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts
with designated foreign exchange banks subject to a cap set by SAFE or its local counterpart. Unless otherwise approved, domestic
enterprises must convert all of their foreign currency receipts into Renminbi.
E. Taxation
Antigua and Barbuda Taxation
We and our securities holders, other than those resident in Antigua and Barbuda, are exempt from Antigua and Barbuda income,
corporation or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax. We are not subject to
stamp or other similar duty on the issuance, transfer or redemption of our common shares. Under Section 276 of the International
Business Corporations Act of Antigua and Barbuda, the tax exemption we and our securities holders currently enjoy will continue in
effect for a period of 50 years from our date of incorporation, which is March 1, 1999. No reciprocal income tax treaty affecting us
exists between Antigua and Barbuda and the United States.
United States Federal Income Taxation
The following discussion describes the material US federal income tax consequences to US Holders (defined below) under present
law of an investment in our common shares. This summary applies only to investors that hold our common shares as capital assets and
that have the US dollar as their functional currency. This discussion is based on the tax laws of the United States as in effect on the date
of this prospectus and on US Treasury regulations in effect or, in some cases, proposed, as of the date of this prospectus, as well as
judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change,
which change could apply retroactively and could affect the tax consequences described below.
The following discussion does not deal with the tax consequences to any particular investor or to persons in special tax situations
such as:
• banks;
• certain financial institutions;
• insurance companies;
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• broker dealers;
• US expatriates;
• traders that elect to mark to market;
• tax-exempt entities;
• persons liable for alternative minimum tax;
• persons holding a common share as part of a straddle, hedging, conversion or integrated transaction;
• persons that actually or constructively own 10% or more of our voting stock;
• partnerships or other pass-through entities; or
• persons holding our common shares through partnerships or other pass-through entities.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF
THE US FEDERAL INCOME TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE ESTATE AND
GIFT AND STATES LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF OUR COMMON SHARES.
The discussion below of the US federal income tax consequences to “US Holders” will apply if you are a beneficial owner of our
common shares and you are, for US federal income tax purposes:
• a citizen or resident of the United States;
• a corporation (or other entity taxable as a corporation for US federal income tax purposes) created or organized under the
laws of the United States, any State or the District of Columbia;
• an estate whose income is subject to US federal income taxation regardless of its source; or
• a trust that (1) is subject to the supervision of a court within the United States and the control of one or more US persons or
(2) has a valid election in effect under applicable US Treasury regulations to be treated as a US person.
If a partnership is a beneficial owner of our common shares, the tax treatment of a partner in the partnership generally will depend
upon the status of the partner and the activities of the partnership.
Taxation of Dividends and Other Distributions on Our Common Shares
Subject to the PFIC rules discussed below, the gross amount of all our distributions to you with respect to our common shares
generally will be included in your gross income in the year received as dividend income to the extent that the distribution is paid out of
our current or accumulated earnings and profits (as determined under US federal income tax principles). To the extent that the amount
of the distribution exceeds our current and accumulated earnings and profits, it will be treated first as a tax-free return of your tax basis
in your common shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain.
The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from
other US corporations.
With respect to non-corporate US Holders, including individual US Holders, for taxable years beginning before January 1, 2011,
dividends may constitute “qualified dividend income” eligible to be taxed at the preferential rate applicable to capital gains (currently a
maximum rate of 15 percent), provided that (1) our common shares are readily tradable on an established securities market in the United
States, (2) we are not a PFIC (as discussed below) for either our taxable year in which the dividend was paid or the preceding taxable
year, and (3) certain holding period requirements are met. Under Internal Revenue Service authority, common
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shares are considered for the purpose of clause (1) above to be readily tradable on an established securities market in the United States if
they are listed on the American Stock Exchange, as our common shares are. You should consult your tax advisors regarding the
availability of the lower rate for dividends paid with respect to our common shares.
Dividends generally will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are qualified
dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the US foreign tax
credit limitation generally will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate
of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by us with respect to our common shares generally will constitute
“passive category income” but could, in the case of certain US Holders, constitute “general category income.” The rules and
limitations with respect to foreign tax credits are complicated, and you should consult your tax advisors regarding the availability of
foreign tax credits to you in your circumstances.
Taxation of Disposition of Our Common Shares
Subject to the PFIC rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable
disposition of a common share equal to the difference between the amount realized for the common share and your tax basis in the
common share. Your tax basis in our common shares will generally equal the cost of such shares. The gain or loss generally will be
capital gain or loss. If you are a non-corporate US Holder, including an individual US Holder, who has held the common share for more
than one year, you will be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any such gain or
loss that you recognize generally will be treated as US source income or loss for foreign tax credit limitation purposes.
Passive Foreign Investment Company
We believe we were not a PFIC for our taxable year ending December 31, 2007. In addition, we do not expect to be a PFIC for
United States federal income tax purposes for our current taxable year ending on December 31, 2008. Our expectation for our current
taxable year ending December 31, 2008, is based in part on our estimates of the value of our assets as determined based on the
historical, current and expected prices of our common shares. However, our actual PFIC status for the current taxable year ending
December 31, 2008 will not be determinable until the close of the current taxable year ending December 31, 2008, and, accordingly,
there is no guarantee that we will not be a PFIC for the current taxable year. A non-US corporation is considered to be a PFIC for any
taxable year if either:
• at least 75% of its gross income is passive income, or
• at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is
attributable to assets that produce or are held for the production of passive income (and/or cash).
We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.
We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In
particular, our PFIC status may be determined in large part based on the market price of our common shares, which is subject to
fluctuation (and potentially considerable fluctuation given that market prices of biotechnology companies have been especially volatile).
Accordingly, fluctuations in the market price of our common shares may result in our being a PFIC for any year. In addition, the
composition of our income and assets will be affected by how, and how quickly, we spend any cash we raise. If we are a PFIC for any
year during which you hold our common shares, we generally will continue to be treated as a PFIC for all succeeding years during
which you hold our common shares.
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If we are a PFIC for any taxable year during which you hold our common shares, you will be subject to special tax rules with
respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the
common shares, unless you make either a “mark-to-market” or a “qualified electing fund” election as discussed below. In addition, a
step-up in the tax basis of stock in a PFIC may not be available upon the death of an individual US Holder.
Under the “excess distribution” rules, distributions you receive in a taxable year that are greater than 125% of the average annual
distributions you received during the shorter of the three preceding taxable years or your holding period for the common shares will be
treated as an excess distribution. Under these special tax rules:
• the excess distribution or gain will be allocated ratably over your holding period for the common shares,
• the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we became a
PFIC, will be treated as ordinary income, and
• the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge
generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net
operating losses for such years, and gains (but not losses) realized on the sale of the common shares cannot be treated as capital, even if
you hold the common shares as capital assets.
Alternatively, a US Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock
of a PFIC to elect out of the tax treatment discussed above. If you make a mark-to-market election for the common shares, you will
include in income each year an amount equal to the excess, if any, of the fair market value of the common shares as of the close of your
taxable year over your adjusted basis in such common shares. You are allowed a deduction for the excess, if any, of the adjusted basis
of the common shares over their fair market value as of the close of the taxable year. However, deductions are allowable only to the
extent of any net mark-to-market gains on the common shares included in your income for prior taxable years. Amounts included in
your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the common shares, are treated as
ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the common shares, as
well as to any loss realized on the actual sale or disposition of the common shares, to the extent that the amount of such loss does not
exceed the net mark-to-market gains previously included for such common shares. If you make a valid mark-to-market election, your
basis in the common shares will be adjusted to reflect any such income or loss amounts. The tax rules that apply to distributions by
corporations that are not PFICs would apply to distributions by us except that the preferential rates with respect to “qualified dividend
income” would not apply.
The mark-to-market election is available only for “marketable stock,” which generally is defined as stock that is traded in other
than de minimis quantities on at least 15 days during each calendar quarter on a qualified exchange, including the American Stock
Exchange, or other market, as defined in applicable US Treasury regulations. Our common shares are listed on the American Stock
Exchange and, consequently, if you are a holder of common shares the mark-to-market election would be available to you were we to be
or become a PFIC, provided that our common shares are traded in sufficient quantities.
In general, if a non-US corporation is a PFIC, as an alternative to the mark-to-market election, a holder of shares in that
corporation may avoid taxation under the PFIC rules described above by making a “qualified electing fund” election to include in
income its share of the corporation’s income on a current basis, or a “deemed sale” election once the corporation no longer qualifies as a
PFIC. However, you may make a qualified electing fund election with respect to your common shares only if we furnish you annually
with certain tax information, and we do not currently intend to prepare or provide such information.
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If you hold common shares in any year in which we are a PFIC, you will be required to file Internal Revenue Service Form 8621
regarding distributions received on the common shares and any gain realized on the disposition of the common shares.
You are urged to consult your tax advisor regarding the application of the PFIC rules to your investment in our common shares.
Information Reporting and Backup Withholding
Dividend payments with respect to our common shares and proceeds from the sale, exchange or redemption of our common shares
may be subject to information reporting to the Internal Revenue Service and possible US backup withholding at a current rate of 28%.
Backup withholding will not apply, however, to a US Holder who furnishes a correct taxpayer identification number and makes any
other required certification or who is otherwise exempt from backup withholding. US Holders who are required to establish their
exempt status generally must provide such certification on Internal Revenue Service Form W-9. US Holders should consult their tax
advisors regarding the application of the US information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your US federal
income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the Internal Revenue Service and furnishing any required information.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we
are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than
six months after the close of each fiscal year, which is December 31. Copies of reports and other information, when so filed, may be
inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and
Exchange Commission at Judiciary Plaza, 100 F Street, N.E., Washington, D.C. 20549, and at the regional office of the Securities and
Exchange Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The public may
obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC
also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding
registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules
under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act.
Our financial statements have been prepared in accordance with GAAP.
We will furnish our shareholders with annual reports, which will include a review of operations and annual audited consolidated
financial statements prepared in conformity with GAAP.
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I. Subsidiary Information
For a listing of our subsidiaries, see Item 4. C. of this annual report, “Information on the Company—Organizational Structure.”
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
Our revenues and costs and our expenses (other than U.S. dollar denominated professional, investor relations and miscellaneous
fees related to our operations as a public company) are currently denominated entirely in Renminbi, but the Renminbi prices of some of
the materials and supplies for reagent kits that are imported from companies in the United States, Finland and Sweden may be affected
by fluctuations in the value of Renminbi against the currencies of those countries. We do not believe that we currently have any
significant direct foreign currency exchange rate risk and have not hedged exposures denominated in foreign currencies or any other
derivative financial instruments. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the
U.S. dollar. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign
currencies. This change in policy resulted initially in an approximately 2.0% appreciation in the value of the Renminbi against the U.S.
dollar. Since the adoption of this new policy, the value of Renminbi against the U.S. dollar has fluctuated on a daily basis within narrow
ranges but overall has further strengthened against the U.S. dollar. There remains significant international pressure on the PRC
government to further liberalize its currency policy, which could result in a further and more significant appreciation or depreciation in
the value of the Renminbi against the U.S. dollar. Furthermore, a decline in the value of Renminbi against the U.S. dollar could reduce
the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay
in the future, if any, all of which may have a material adverse effect on the prices of our shares.
Our financial statements are expressed in U.S. dollars but our subsidiaries’ functional currency is Renminbi. The value of our
shares will be affected by the foreign exchange rate between U.S. dollars and Renminbi. To the extent we hold assets denominated in
U.S. dollars, any appreciation of the Renminbi against the U.S. dollar could result in a change to our statement of operations and a
reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of Renminbi against the U.S.
dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the
dividends we may pay in the future, if any, all of which may have a material adverse effect on the prices of our shares.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to the interest expenses associated with our short-term and/or long-term bank
borrowings as well as interest income provided by excess cash invested in demand and term deposits. Such borrowing and interest-
earning instruments carry a degree of interest rate risk. We have not historically used, and do not expect to use in the future, any
derivative financial instruments to manage our exposure to interest risk. We have not been exposed nor do we anticipate being exposed
to material risks due to changes in interest rates. The weighted effective interest rate on our outstanding loans was 6.37% and 5.97% for
the years ended December 31, 2007 and 2006. A hypothetical increase in interest rates of 1% would increase our annual interest and
financing expenses by $108,900 based on our outstanding indebtedness as of December 31, 2007.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
PART II
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this annual report, our management, with the participation of our chief executive officer and
acting chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures within the
meaning of Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon this evaluation, our management has concluded that, as of
the end of the period covered by this annual report, our existing disclosure controls and procedures were effective to provide reasonable
assurance that material information required to be disclosed by us in the reports that we file with, or submit to, the SEC under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in by the SEC’s rules and regulations.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal
control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair
presentation of its published consolidated financial statements. All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only
reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31,
2007. In making this assessment, it used the criteria established within the Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). As part of this assessment we identified a significant
deficiency, as defined under Auditing Standard No.5: An Audit of Internal Control Over Financial Reporting, in our internal controls
over financial reporting as of December 31, 2007. This significant deficiency is in calculation of deferred income tax assets and
liabilities and income tax recovery. We compute our deferred income tax assets and liabilities and income tax recovery based on
US GAAP and PRC income tax rules. This computation process is heavily reliant on our tax reporting staff’s manual review and
adjustment. Our control over the deferred income tax assets and liabilities and income tax recovery process primarily consists of
corporate review procedures. The design and operation of this control process may not prevent or detect misstatements on a timely
basis. We have taken actions to remediate this deficiency by adding a review process by tax consultants on complicated tax issues. This
significant deficiency does not, in our judgment, rise to the level of a material weakness in internal controls over financial reporting
because we believe that the controls in place would prevent or detect a material misstatement. Based on this assessment, our
management has concluded that, as of December 31, 2007, our internal control over financial reporting was effective.
There was no change in 2007 to our internal control over financial reporting that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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Our management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2007 has been
audited by Ernst & Young LLP, an independent registered public accounting firm that audited the financial statements included in the
annual report. The attestation report issued by Ernst &Young LLP on management assessment of internal control over financial
reporting is also included in this Annual Report.
ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that we have at least one audit committee financial expert serving on our Audit Committee.
Our audit committee financial expert is Mr. Simon Anderson. Each member of our Audit Committee, including Mr. Anderson, is
“independent” as that term is defined by the American Stock Exchange.
ITEM 16B.CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and agents, including certain
provisions that specifically apply to our chief executive officer, chief financial officer, vice presidents and any other persons who
perform similar functions for us. We have filed our code of business conduct and ethics as an exhibit to this annual report on Form 20-F,
and posted the code on our website at www.sinovac.com. We hereby undertake to provide to any person without charge, a copy of our
code of business conduct and ethics within ten working days after we receive such person’s written request.
ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services
rendered by Ernst & Young, our principal external auditor for 2006 and 2007. We did not pay any tax related or other fees to our
auditors during these periods.
Audit Fees(1)
Audit-Related Fees(2)
2006
2007
344,152 459,942
0 48,800
(1) “Audit Fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal
auditors for the audit of our annual financial statements and review of financial statements included in the Company’s Form 20-Fs
or services that are normally provided by accountants in connection with statutory and regulatory engagements for those fiscal
years.
(2) “Audit-Related Fees” means the aggregate fees billed in each of the fiscal years listed for assurance and related services by our
principal auditors that are reasonably related to the performance of the audit or review of our financial statements and are not
reported under “Audit Fees.” The services comprising the fees under this category include the issue of comfort letters, rendering of
listing advice, and other audit-related services for the years ended, December 31, 2006, and December 31, 2007.
Before our independent auditors are engaged to render any services, the engagement is approved by our audit committee.
ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
None.
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PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The following consolidated financial statements of Sinovac and its subsidiaries are included at the end of this annual report
together with the report of the independent auditors.
• Consolidated Balance Sheets as of December 31, 2007 and 2006
• Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2007, 2006 and 2005
• Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2007, 2006 and
2005
• Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
• Notes to the Consolidated Financial Statements
ITEM 19. EXHIBITS
Exhibit
Number
1.1*
4.1*
4.2*
4.3*
4.4*
4.5*
4.6*
Description of Document
Articles of Incorporation and By-laws of the Registrant, as last amended on March 21, 2006 (incorporated by
reference to Exhibit 1.1 from our annual report on Form 20-F (file no. 001-32371) filed with the Securities and
Exchange Commission on July 14, 2006)
Translation of a Lease between Sinovac Beijing and China Bioway Biotech Group Co., Ltd. related to a building of
approximately 28,000 square feet , dated August 12, 2004 (incorporated by reference to Exhibit 4.1 from our annual
report on Form 20-F (file no. 001-32371) filed with the Securities and Exchange Commission on July 14, 2006)
Translation of a Lease between Sinovac Beijing and China Bioway Biotech Group Co., Ltd. related to a building of
approximately 13,300 square feet , dated August 12, 2004 (incorporated by reference to Exhibit 4.2 from our annual
report on Form 20-F (file no. 001-32371) filed with the Securities and Exchange Commission on July 14, 2006)
Translation of a Supplement Agreement to the Leases between Sinovac Beijing and China Bioway Biotech Group Co.,
Ltd. (incorporated by reference to Exhibit 4.3 from our annual report on Form 20-F (file no. 001-32371) filed with the
Securities and Exchange Commission on July 14, 2006)
Stock Option Plan adopted on November 1, 2003 (incorporated by reference to Exhibit 4.4 from our annual report on
Form 20-F (file no. 001-32371) filed with the Securities and Exchange Commission on July 14, 2006)
Form of Employment Agreement between the Registrant and Weidong Yin, dated July 7, 2006 (incorporated by
reference to Exhibit 4.5 from our annual report on Form 20-F (file no. 001-32371) filed with the Securities and
Exchange Commission on July 14, 2006)
Translation of Form of Employment Agreement between the Registrant or its subsidiary and any other senior
executive officers of the Registrant or its subsidiary (incorporated by reference to Exhibit 4.6 from our annual report
on Form 20-F (file no. 001-32371) filed with the Securities and Exchange Commission on July 14, 2006)
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Exhibit
Number
4.7*
4.8
4.9
4.10
8.1
11.1*
12.1
12.2
13.1
13.2
Description of Document
Form of Non-disclosure, Non-competition and Proprietary Information Agreement between the Registrant or its
subsidiary and any other senior executive officers of the Registrant or its subsidiary (incorporated by reference to
Exhibit 4.7 from our annual report on Form 20-F (file no. 001-32371) filed with the Securities and Exchange
Commission on July 14, 2006)
Translation of a Lease between Sinovac Beijing and China Bioway Biotech Group Co., Ltd. related to buildings of
approximately 37,000 square feet, dated June 4, 2007
Share Purchase Agreement between Sinovac Biotech Ltd. and Sansar Capital Management LLC dated January 22, 2008
Exclusive Promotion Service Agreement between Sinovac Beijing and GlaxoSmithKline (China) Investment Co., Ltd.,
dated July 30, 2007
List of Subsidiaries
Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 11.1 from our annual report
on Form 20-F (file no. 001-32371) filed with the Securities and Exchange Commission on July 14, 2006)
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed by incorporation by reference
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
SINOVAC BIOTECH LTD.
By:
Name:
Title:
/s/ WEIDONG YIN
Weidong Yin
Chairman and Chief Executive Officer
Date: March 31, 2008
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SINOVAC BIOTECH LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Index
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
F-1
F-3
F-5
F-4
F-7
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Sinovac Biotech Ltd.
We have audited the accompanying consolidated balance sheets of Sinovac Biotech Ltd. (the “Company”) as of December 31,
2007 and 2006, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of the Company at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 28, 2008 expressed an unqualified opinion thereon.
Vancouver, Canada
February 28, 2008
F-1
/s/ ERNST & YOUNG LLP
Chartered Accountants
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Sinovac Biotech Ltd.
We have audited Sinovac Biotech Ltd.’s internal control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Sinovac Biotech Ltd’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Sinovac Biotech Ltd. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Sinovac Biotech Ltd. as of December 31, 2007 and 2006, and the related consolidated statements of and
operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2007 and our report dated February 28, 2008 expressed an unqualified opinion thereon.
Vancouver, Canada
February 28, 2008
F-2
/s/ ERNST & YOUNG LLP
Chartered Accountants
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SINOVAC BIOTECH LTD.
Consolidated Balance Sheets
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
ASSETS (Note 8)
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivable—net (note 3)
Inventories (note 4)
Prepaid expenses and deposits (note 11c)
Deferred tax assets (note 9)
Total current assets
Property, plant and equipment (note 5)
Long term prepaid expenses and deposits (note 11c)
Deferred tax asset (note 9)
Licenses and permits (note 7)
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loans payable (note 8)
Accounts payable and accrued liabilities (note 10)
Dividends payable to minority interest of Sinovac Beijing
Deferred government grants (note 15)
Due to related party (note 11a)
Total current liabilities
Deferred government grants (note 15)
Loans Payable (note 8)
Long-term debt (note 8)
Total liabilities
Minority interest
Commitments and contingencies (notes 9 , 11c& 15)
STOCKHOLDERS' EQUITY
Preferred stock
Authorized 50,000,000 shares at par value of $0.001 each Issued and
outstanding: nil
Common stock
Authorized: 100,000,000 shares at par value of $0.001 each Issued and outstanding:
40,305,028 (2006—40,121,028)
Subscriptions received
Additional paid in capital
Accumulated other comprehensive income
Dedicated reserves
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders’ equity
2007
2006
$17,071,497
846
16,983,892
3,745,957
800,840
579,703
39,182,735
15,879,391
298,731
693,053
1,394,052
$57,447,962
$ 6,836,110
9,522,818
3,000,459
1,038,396
46,971
20,444,754
2,734,444
1,367,222
4,101,666
24,546,420
2,897,687
$ 9,248,832
24,386
9,733,721
2,083,396
195,591
454,274
21,740,200
13,027,095
—
589,427
1,652,462
$ 37,009,184
$ 2,660,697
7,372,824
919,382
911,374
—
11,864,277
—
3,837,544
3,837,544
15,701,821
2,062,586
40,305
40,121
9,170
32,109,997
1,956,456
2,999,396
(7,111,469)
30,003,855
$57,447,962
25,938
30,295,726
645,471
1,168,529
(12,931,008)
19,244,777
$ 37,009,184
The accompanying notes are an integral part of these financial statements.
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SINOVAC BIOTECH LTD.
Consolidated Statements of Operations and Comprehensive Income (Loss)
Years ended December 31, 2007, 2006 and 2005
(Expressed in U.S. Dollars)
Sales
Cost of sales—exclusive of depreciation of land use rights and amortization of
licenses and permits of $376,184 (2006—$359,437; 2005—$333,770)
Gross profit
Selling, general and administrative expenses (notes 11 and 12)
Research and development expenses—net of $843,910 in government research
grants (2006—845,122; 2005—$1,167,814) (note 2m)
Purchased in-process research and development (note 6)
Depreciation and amortization
Total operating expenses
Operating income (loss)
Interest and financing expenses (note 8)
Interest and other income (note 11b)
Income (loss) before income taxes and minority interest
Income taxes (note 9)
Income (loss) before minority interest
Minority interest share of (income) loss
Net Income (loss) for the year
Foreign currency translation adjustment
Comprehensive income (loss)
Earnings (Loss) per share
—Basic
—Diluted
Weighted average number of shares of common stock outstanding
—Basic
—Diluted
2007
$33,541,187
2006
$15,354,608
2005
$ 8,607,948
6,502,328
27,038,859
11,958,498
4,231,785
11,122,823
9,752,783
2,346,204
6,261,744
10,277,620
965,000
—
640,568
13,564,066
13,474,793
(478,436)
190,668
13,187,025
1,974,118
11,212,907
(3,562,501)
$ 7,650,406
1,310,985
$ 8,961,391
324,970
—
605,262
10,683,015
439,808
(319,197)
285,148
405,759
100,513
305,246
(1,001,279)
$ (696,033)
302,490
$ (393,543)
233,994
232,531
554,600
11,298,745
(5,037,001)
(228,693)
234,864
(5,030,830)
212,111
(5,242,941)
132,314
$ (5,110,627)
344,594
$ (4,766,033)
$
$
0.19
0.19
$
$
(0.02)
(0.02)
$
$
(0.14)
(0.14)
40,254,192
40,637,876
38,229,944
38,229,944
36,353,149
36,353,149
The accompanying notes are an integral part of these financial statements.
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Common stock
Balance,
Shares
Amount
SINOVAC BIOTECH LTD.
Consolidated Statements of Stockholders’ Equity
(Expressed in U.S. Dollars)
Shares to
be issued for
services
Subscriptions
received
Additional
paid in
capital
Accumulated
other
comprehensive
income
Dedicated
reserves
Accumulated
earnings
(deficit)
Total
stockholders’
equity
December 31,
2005
Stock-based
compensation
Exercise of stock
options
Exercise of warrants
Shares issued for
services
Subscriptions
received (note
13a)
Other
comprehensive
income (loss)
—Foreign currency
translation
Net loss for the year
Transfer to
39,055,528 $39,056 $ 42,750 $ 1,423,710 $27,240,563 $
342,981 $ 484,482 $(11,550,928) $18,022,614
— —
—
—
707,204
609,500
441,000
609
441
—
— (1,423,710)
828,355
1,476,869
15,000
15
(42,750)
—
42,735
—
—
—
—
—
—
—
—
—
—
—
—
707,204
828,964
53,600
—
— —
—
25,938
—
—
—
—
25,938
— —
— —
—
—
—
—
—
—
302,490
—
—
—
—
(696,033)
302,490
(696,033)
dedicated
reserves
(note 14)
Balance,
December 31,
2006
— —
—
—
—
—
684,047
(684,047)
—
40,121,028 $40,121 $
— $
25,938 $30,295,726 $
645,471 $1,168,529 $(12,931,008) $19,244,777
The accompanying notes are an integral part of these financial statements.
F-5
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SINOVAC BIOTECH LTD.
Consolidated Statements of Stockholders’ Equity
(Expressed in U.S. Dollars)
Balance, December 31, 2006
Stock-based compensation
Payment to release shares in
escrow
Exercise of stock options
Subscriptions received (note 13a)
Other comprehensive income
—Foreign currency translation
Net income for the year
Transfer to dedicated reserves
(note 14)
Balance, December 31, 2007
Common stock
Shares
Amount
Subscriptions
Received
Additional
paid in
capital
40,121,028 $40,121 $
— —
25,938 $30,295,726 $
—
179,742
Accumulated
Other
comprehensive
income
645,471 $1,168,529 $(12,931,008) $ 19,244,777
179,742
Accumulated
earnings
(deficit)
Total
stockholders’
equity
Dedicated
reserves
—
—
—
184,000
— —
184
— —
—
(25,938)
9,170
1,394,333
240,196
—
—
—
—
— —
— —
—
—
— 1,310,985
—
—
—
—
—
—
—
—
—
—
1,394,333
214,442
9,170
—
7,650,406
1,310,985
7,650,406
— —
40,305,028 $40,305 $
—
—
— 1,830,867
9,170 $32,109,997 $ 1,956,456 $2,999,396 $ (7,111,469) $30,003,,855
(1,830,867)
—
The accompanying notes are an integral part of these financial statements.
F-6
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SINOVAC BIOTECH LTD.
Consolidated Statements of Cash Flows
Years ended December 31, 2007, 2006 and 2005
(Expressed in U.S. Dollars)
Cash flows from (used in) operating activities
Net Income (loss) for the year
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
—deferred income taxes
—stock-based compensation
—common stock issued or to be issued for services
—inventory provision
—In process research and development with acquisition of 20.56% Sinovac
Beijing interest
grants
—research and development expenditures qualified for government
—provision for doubtful accounts
—imputed interest on advances from related parties
—written-off equipment and loss on disposal
—depreciation of property, plant and equipment and amortization of
licenses and permits
—minority interest
Change in other assets and liabilities (net effect of acquisition of subsidiary)
—accounts receivable
—inventories
—prepaid expenses and deposits
—accounts payable and accrued liabilities
Net cash provided (used) in operating activities
Cash flows from (used in) financing activities
Loans proceeds
Loans repayment
Proceeds from issuance of common stock
Proceeds from shares subscribed
Payment to release shares in escrow
Dividends paid to minority shareholders of Sinovac Beijing
Government grant received
Advances from related parties
Advances to related parties
Due to related parties
Net cash provided by financing activities
Cash flows from (used in) investing activities
Restricted cash
Deposit relating to land use rights
Proceed from disposal of equipment
Acquisition of 20.56% interest in Sinovac Beijing from minority interest
Acquisition of property, plant and equipment
Net cash used in investing activities
Exchange gain on cash and equivalents
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information:
Cash paid for interest, net of interest capitalized
Cash paid for income taxes
2007
2006
2005
$ 7,650,406
$ (696,033)
$ (5,110,627)
(229,055)
179,742
—
373,473
(391,401)
707,204
—
1,319,704
(8,000)
3,355,708
42,750
—
—
—
232,531
(843,910)
455,674
—
4,016
(845,122)
580,900
—
41,511
(1,231,652)
447,431
(62,300)
—
1,401,892
3,562,501
1,268,145
1,001,279
1,101,526
(132,314)
(6,774,082)
(1,832,193)
(859,411)
1,227,128
4,316,181
(4,595,598)
(2,513,257)
99,832
2,387,546
(1,635,290)
3,938,455
(2,730,662)
214,442
9,170
1,394,333
(839,469)
3,531,285
—
—
46,971
5,564,525
24,215
—
—
—
(2,466,469)
(2,442,254)
384,213
7,822,665
9,248,832
$17,071,497
3,758,504
(2,560,564)
882,565
25,938
—
(570,124)
739,172
1,765,097
(56,591)
—
3,983,997
127,159
438,492
5,011
—
(1,139,980)
(569,318)
114,992
1,894,381
7,354,451
$ 9,248,832
(3,361,922)
(333,223)
159,639
3,330,340
(1,570,113)
3,667,482
(1,523,227)
5,529,268
1,423,710
—
(379,123)
1,222,494
1,605,160
(401,322)
—
11,144,442
248,881
(427,873)
—
(2,260,000)
(2,443,700)
(4,882,692)
57,763
4,749,400
2,605,051
$ 7,354,451
$
453,174
$ 1,968,393
$
$
258,226
416,771
$
$
141,163
124,326
The accompanying notes are an integral part of these financial statements.
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
1. Nature of Business and Basis of Presentation
These consolidated financial statements are those of Sinovac Biotech Ltd., formerly Net-Force Systems Inc., (“parent company”),
its 71.56% (see note 6) owned subsidiary Sinovac Biotech Co., Ltd. (“Sinovac Beijing”) and its 100% owned subsidiaries Tangshan
Yian Bioengineering Co., Ltd. (“Tangshan Yian”) and Sinovac Biotech (Canada) Ltd. (“Sinovac Canada”). Collectively, they are
referred to as “the Company.”
The Company, through its subsidiaries, Sinovac Beijing and Tangshan Yian, primarily operates in China and it is in the business
of research and development, production and sales of pharmaceutical products. Sinovac Beijing was incorporated under the laws of
China on April 28, 2001. In January 2004, the Company acquired a 100% interest in Tangshan Yian. Tangshan Yian was incorporated
under the laws of China on February 9, 1993.
On September 24, 2003, Net-Force Systems Inc. (“Net-Force”), a company incorporated on March 1, 1999 under the International
Business Corporations Act No. 28 of 1982 of the laws of Antigua and Barbuda, entered into a share exchange agreement (“Agreement”)
with Sinovac Beijing, whereby Net-Force issued 10,000,000 shares of its common stock in exchange for a 51% interest in Sinovac
Beijing. As part of the agreement, Net-Force disposed of its wholly owned subsidiary, Net Force Entertainment, Inc. and all of its assets
and liabilities to a company controlled by its president and chief executive officer for $100 and then become a non-operating shell
company. Immediately prior to the Agreement, Net-Force had 17,091,033 shares of common stock issued and outstanding. The
acquisition was accounted for as recapitalization of Sinovac Beijing because the management and shareholders (or their nominees) of
Sinovac Beijing controlled Net-Force after the acquisition. Sinovac Beijing was treated as the acquiring entity for accounting purposes
and Net-Force was the surviving entity for legal purposes. The combined company is considered to be a continuation of the operations
of Sinovac Beijing. Outside the Agreement, a member of Sinovac management purchased 6,544,830 shares of the 17,091,032 Net-Force
shares of common stock outstanding before the acquisition, resulting in shareholders (or their nominees) and management of Sinovac
Beijing having control of the combined entity. The issued and outstanding common stock of Sinovac Beijing prior to the completion of
acquisition was restated to reflect the 10,000,000 common stock issued by Net-Force. Effective on October 21, 2003, Net-Force
changed its name to Sinovac Biotech Ltd. Until December 2005, the Company maintained an office in Vancouver, Canada.
The Company incorporated a 100% owned subsidiary called Sinovac Biotech (Canada) Ltd., under the Canadian Business
Corporations Act, on May 12, 2004. Sinovac Canada had no operations since the incorporation.
Ownership in Chinese subsidiaries as well as the licenses and permits involves certain inherent risks due to the complexity of the
rules in China. Such ownership could be challenged by China government authorities. Each of these matters is subject to uncertainties,
and it is possible that some of these matters may be resolved unfavorably to the Company.
2. Significant Accounting Policies
(a) Basis of Presentation
These consolidated financial statements include the accounts of the parent company, its 71.56% owned subsidiary, Sinovac
Beijing and its 100% owned subsidiaries, Tangshan Yian and Sinovac Canada. All significant intercompany transactions have been
eliminated.
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(b) Use of Estimates
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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.
(c) Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments that are readily convertible to cash with maturities of three months or less
when purchased.
(d) Restricted Cash
Restricted cash is cash held as collateral for letters of credit issued and is classified based on the expected expiration of such
facilities.
(e) Accounts Receivable
The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by
performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and recorded based
on management’s assessment of the credit history with the customer and current relationships with them.
(f) Inventories
Inventories are stated at the lower of cost or replacement cost with respect to raw materials and the lower of cost and net realizable
value with respect to finished goods and work in progress. Cost of work in progress and finished goods is generally determined on a
first-in, first-out basis and includes direct material, direct labour and overheads. Net realizable value represents the anticipated selling
price less estimated costs of completion and distribution.
Effective January 1, 2006, the Company prospectively adopted Statement of Financial Accounting Standards No.151, “Inventory
Costs—an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 requires idle facility costs, abnormal freight, handling costs, and
amounts of wasted materials (spoilage) be treated as current-period costs. Under this concept, if the costs associated with the actual
level of spoilage or production defects are greater than the costs associated with the range of normal spoilage or defects, the difference
would be charged to current-period expenses, not included in inventory costs.
For the year ended December 31, 2007, the Company charged nil (2006- $902,000) in excessive fixed production overhead and
abnormal wasted materials to cost of sales. There is no effect of the adoption of SFAS 151 on the Company’s consolidated financial
statements for the year ended December 31, 2007. The effect for 2006 was an increase in net loss of $902,000 and a decrease in
earnings per share of $0.02. The adoption of SFAS 151 had no effect on the Company’s statement of cash flows.
(g) Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Significant additions and improvements are capitalized, while repairs and
maintenance are charged to expenses as incurred. Equipment purchased for specific research
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
and development projects with no alternative uses are expensed. Depreciation of property, plant and equipment generally is computed
using the straight-line method based on the estimated useful lives of the assets as follows:
Plant and building
Land-use rights
Machinery and equipment
Motor vehicles
Office equipment and furniture
Leasehold improvement
(h) Licenses and Permits
30 years
term of leases, ranging from 28 to 49 years
8 to 10 years
5 years
5 years
20 years (term of lease)
The Company capitalizes the purchase cost of vaccines if the vaccine has received a new drug certificate from the Chinese Food
and Drug Administration (“SFDA”). If the vaccine has not received a new drug certificate, the purchase cost is expensed as in-process
research and development.
Licenses and permits, in relation to the production and sales of pharmaceutical products in China, are amortized on a straight-line
basis over their useful lives which are estimated to be 10 years. Carrying values of such assets are reviewed whenever events or changes
in circumstances indicate that the carrying value may not be recoverable from future undiscounted net cash flows expected to be
generated by the asset. If the asset is not fully recoverable, an impairment loss would be recognized for the difference between the
carrying value of the asset and its estimated fair value based on discounted net future cash flows or quoted market prices. There were no
impairment adjustments to the carrying value of the licenses and permits for the years ended December 31, 2007, 2006 and 2005.
(i) Impairment of Long-Lived Assets
Long-lived assets and intangible assets subject to amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be recoverable from the future undiscounted net cash flows expected
to be generated by the asset. If the asset were not fully recoverable, an impairment loss would be recognized for the difference between
the carrying value of the asset and its estimated fair value based on discounted net future cash flows or quoted market prices. There have
been no impairment losses recognized to date.
(j) Income Taxes
The Company recognizes 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.
(k) Revenue Recognition
Sales revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed and final, delivery has occurred
and there is a reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its
customers for a specified amount of products at a specified price and considers delivery to have occurred when the customer takes
possession of the products. The Company
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
provides its customers with a limited right of return. Revenue is recognized upon delivery and a reserve for sales returns is recorded.
The Company has demonstrated the ability to make reasonable and reliable estimates of products returns in accordance with SFAS
No. 48, Revenue Recognition When Right of Return Exists.
Shipping and handling fees billed to customers are included in sales. Costs related to shipping and handling are part of selling
expenses in the consolidated statements operations. In 2007, $367,394 (2006—$198,283; 2005—$118,810) related to shipping and
handling costs was included in selling expenses in the accompanying consolidated statements of operations.
(l) Advertising Expenses
Advertising costs are expensed as incurred and included in selling expenses. Advertising costs were $37,388 for the year ended
December 31, 2007 (2006—$87,288; 2005—$12,543).
(m) Research and Development
Research and development costs are charged to operations as incurred and are listed as a separate line item on the Company’s
statements of operations.
Government grants for reimbursement of research and development expenses are taken into income in the period in which the
expenses are incurred and the conditions imposed by the government authorities are fulfilled. Government grants recognized are offset
against research and development expenses in the Company’s statement of operations.
(n) Government Grant for Capital Expenditure
Government grants for building production facilities are deferred and amortized in the same manner as the production facilities are
amortized.
(o) Foreign Currency Transactions
The parent company and its subsidiaries maintain their accounting records in their functional currencies, i.e. U.S. dollars and
Renminbi Yuan (“RMB”) respectively. The Company translates foreign currency transactions into its 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, foreign currency monetary assets, and liabilities are re-evaluated into the
functional currency by using the exchange rate in effect at the balance sheet date. The resulting foreign exchange gains and losses are
included in operations.
The assets and liabilities of the foreign subsidiaries, Sinovac Beijing and Tangshan Yian, 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.
(p) Stock-based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), or SFAS
123(R), Share Based Payment, which supersedes the previous accounting under
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
Statement No. 123, or SFAS 123, Accounting for Stock-Based Compensation. SFAS 123(R) requires the recognition of compensation
expense, using a fair-value based method, for costs related to all share-based payments to employees, including grants of stock options.
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing
model. The Company uses the Black-Scholes option-pricing model to determine the fair value for the awards. The value of the portion
of the award that is ultimately expected to vest is recognized as expense over the service period in the statement of operations. The
Company adopted SFAS 123(R) using the modified prospective transition method which recognizes the grant-date fair value of
compensation for new and unvested awards beginning in the fiscal period in which the recognition provisions are first applied. The
modified prospective transition method does not require the restatement of prior periods to reflect the impact of SFAS 123(R). Since the
Company previously accounted for stock-based compensation under the fair value provision of SFAS 123, adoption of SFAS123(R) did
not have a significant impact on the financial position or consolidated statement of operations.
(q) Comprehensive Income (Loss)
The Company’s comprehensive income (loss) consists of net earnings (loss) and foreign currency translation adjustments.
(r) Earnings (Loss) Per Share
Basic earning (loss) per share is computed using the weighted average number of shares outstanding during the period. The
Company has adopted SFAS No. 128, “Earnings per Share.” Diluted earnings per share is computed in accordance with the treasury
stock method and based on the weighted average number of common shares and dilutive common share equivalents.
(s) Financial Instruments and Concentration of Credit Risks
The fair values of financial instruments are estimated 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
judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, other receivables, short-term loans payable,
accounts payable and accrued liabilities, dividend payable and due to related parties approximates their fair value. The fair value of
long-term debt is based on the discounted value of contractual cash flows and at December 31, 2007, approximates its carrying value.
The discount rate is estimated using the rates currently offered for debt with similar remaining maturities.
The Company operates in China, which may give rise to significant foreign currency risks from fluctuations and the degree of
volatility of foreign exchange rates between US dollars and the Chinese currency RMB. Financial instruments that potentially subject
the Company to concentration of credit risks consist principally of cash and cash equivalents and accounts receivables, the balances of
which are stated on the consolidated balance sheets. The Company places its cash in high credit quality financial institutions.
Concentration of credit risks with respect to accounts receivables is linked to the concentration of revenue. The Company’s customers
are primarily government agencies. No single customer accounted for more than 10% of total sales for the year ended December 31,
2007. One customer accounted for 11% of total sales for year ended December 31, 2006. Two customers accounted for 21% of total
sales for the year ended December 31, 2005. As at December 31, 2007—$13,461,221 (RMB98,456,715) (2006—$4,742,547
(RMB37,074,865), (2005—$4,213,075
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
(RMB34,000,358)), of cash is denominated in Chinese RMB and is held in China. To manage credit risk, the Company performs
ongoing credit evaluations of customers’ financial condition. The Company does not require collateral or other security to support
financial instruments subject to credit risks. The Company is subject to significant interest risk. The interest-bearing loans are short-term
or at variable rate based on the bank’s floating lending rate.
(t) Accounting for Derivative Instruments and Hedging Activities
The Company has adopted the Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities, which requires companies to recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in
the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.
The Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes.
(u) Recently Adopted Accounting Pronouncement
The Company adopted FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes” (“Fin 48”) on January 1,
2007. FIN 48 clarifies the accounting for uncertainty in come taxes recognized in enterprises’s financial statements in accordance with
FASB Statement NO.109, “Accounting for Income Taxes.” FIN 48 prescribes a two-step process to determine the amount of tax benefit
to recognize. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon examination by a tax
authority. If the tax position is deemed “more-likely- than-not” to be sustained, the tax position is then assessed to determine the amount
of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a
greater than 50 percent likelihood of being realized upon ultimate settlement. If the tax position deos not meet the “more-likely-than-
not” threshold then it is not recognized in the financial statements.
The Company has reviewed the tax positions taken, or to be taken, in its tax return for all tax years currently open to examination
by a taxing authority in accordance with the recognition and measurement standards of FIN 48. The Company’s adoption of FIN 48 as
of January 1, 2007 did not have a material impact on the Company’s financial position or results of operations. The adoption of FIN 48
did not result in a cumulative adjustment to equity and there were no unrecognized tax benefits, penalties or interest at the time of or
subsequent to adoption. The Company is currently not under examination by any authority for income tax purposes and no statutes for
income tax filings have been extended.
The Company is not subject to taxation in the U.S. Sinovac Biotech Ltd.’s (Parent company) taxing jurisdiction is Antigua and
Barbuda, Sinovac Biotech (Canada) Ltd. (Subsidiary incorporated in Canada) has no transactions/activities since inception. The
Company’s two subsidiaries Sinovac Beijing and Tangshan Yian’s taxing jurisdiction are China. Examinations of income tax returns
filed by the Company and its active subsidiaries that are still subject to examination are Sinovac Beijing for December 31, 2003 and
subsequent years, and Tangshan Yian for December 31, 2003 and subsequent years.
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
(v) Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R
establishes principles and requirements for how an acquirer recognizes and measures the identifiable assets acquired, the liabilities
assumed, any non-controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business combination. FAS 141(R) is to be applied prospectively to
business combinations for which the acquisition date is on or after an entity's fiscal year that begins after December 15, 2008. The
Company will assess the impact of SFAS 141R if and when a future acquisition occurs.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (SFAS 157), which defines fair value, establishes
a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value
measurements. This Statement applies to other accounting pronouncements that require or permit fair value measurements, the FASB
having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years. In February 2008, the FASB released FSP No. FAS 157-2. FSP No. FAS 157-2 defers the effective date of FASB 157 for one
year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. It does not defer recognition and disclosure requirements for financial assets and financial liabilities, or for
nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. We do not expect the adoption of SFAS 157 to
have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS No. 159”). SFAS No. 159 permits entities to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 159 on its
consolidated financial position and results of operations.
In December 2007, the FASB issued SFAS No.160, “Non–controlling interest in consolidated financial statements.” SFAS No.160
clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. It requires consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated statement of
income, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest.
This statements amends FASB No.128, Earning per share, the calculation of the EPS amounts in consolidated financial statement
will continue to be based on amounts attributable to the parent. SFAS No.160 is effective for fiscal years beginning after December 31,
2008. The Company is currently evaluating the impact of SFAS No.160 on its consolidated financial position and results of operations.
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
3. Accounts Receivable
Trade receivables (note 8)
Allowance for doubtful accounts
Other receivables
Total
4. Inventories
Raw materials
Finished goods
Work in progress
Total
5. Property, Plant and Equipment
Construction in progress
Plant and building
Land-use rights
Machinery and equipment
Motor vehicles
Office equipment and furniture
Leasehold improvement
Total
Construction in progress
Plant and building
Land-use rights
Machinery and equipment
Motor vehicles
Office equipment and furniture
Leasehold improvement
Total
F-15
2007
$18,960,033
(1,993,224)
16,966,809
17,083
$16,983,892
2006
$11,164,547
(1,445,617)
9,718,930
14,791
$ 9,733,721
2007
$ 752,964
2,443,304
549,689
$3,745,957
2006
$ 387,565
1,209,091
486,740
$2,083,396
2007
Accumulated
Depreciation
Net book
Value
Cost
$ 2,486,866 $
— $ 2,486,866
5,820,778
1,026,475
4,792,218
324,426
171,736
1,256,892
$20,533,495 $4,654,104 $15,879,391
1,130,178
149,995
2,676,807
251,308
256,387
189,429
6,950,956
1,176,470
7,469,025
575,734
428,123
1,446,321
2006
Accumulated
Depreciation
$
— $
Cost
120,176 $
Net book
Value
120,176
5,537,258
987,313
4,771,975
210,531
152,994
1,246,848
$16,391,716 $3,364,621 $13,027,095
851,618
113,399
1,870,545
211,325
211,395
106,339
6,388,876
1,100,712
6,642,520
421,856
364,389
1,353,187
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
As at December 31, 2007, land-use rights and plant and building with a net book value of $4,843,000 were pledged as collateral
for the outstanding bank loans (note 8). Depreciation expense for the year ended December 31, 2007 was $1,044,558 (2006 -$923,137;
2005—$784,008).
6. Acquisition of Non-controlling Interest in Sinovac Beijing
On February 4, 2005, the Company acquired a further 20.56% interest in Sinovac Beijing for total cash consideration of
$3,310,000, of which $1,050,000 was paid in 2004. Following this acquisition, the Company owns 71.56% of Sinovac Beijing.
The acquisition has been accounted for by the purchase method. The following table summarizes the fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Cash and cash equivalents
Restricted cash
Accounts receivable, prepayment and deposits
Inventory
Property, plant and equipment
Licenses and permits
Deferred income tax assets
In-process research and development
Liabilities
Net assets acquired
$
164,747
80,489
1,001,063
132,024
2,219,801
1,221,910
(39,129)
232,531
(1,703,436)
$ 3,310,000
The amount assigned to in-process research and development relating to influenza virus HA vaccine, totalling $232,531, was
written off at the date of acquisition in accordance with FASB Interpretation No. 4 “Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method.”
7. Licenses and Permits
Inactive hepatitis A
Recombined hepatitis A&B
Less: accumulated amortization
Total
2007
$ 2,888,483
415,356
3,303,839
(1,909,787)
$ 1,394,052
2006
$ 2,702,481
388,610
3,091,091
(1,438,629)
$ 1,652,462
(a) Amortization expense for the licenses and permits was $357,334 for the year ended December 31, 2007 (2006—$341,008;
2005—$317,518).
(b) The estimated amortization expenses for each of the five succeeding fiscal years ended December 31 are as follows:
2008
2009
2010
2011
2012
$357,000
$357,000
$357,000
$146,000
$ 40,000
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
The above amortization expense forecast is an estimate. Actual amounts of amortization expense may differ from estimated
amounts due to additional intangible asset acquisitions, changes in foreign currency exchange rates, impairment of intangible
assets, accelerated amortization of licenses and permits, and other events.
(c) Also see note 1.
8. Loans Payable
Bank loan: RMB10,000,000, bearing interest at 6.12% per year, interest is payable quarterly and the
principal is repayable on December 28, 2007, The loan was collateralized by certain equipment and a
floating charge to certain accounts receivable with a carrying value of $2.31 million at the time when
loan was granted. The loan was repaid in 2007.
Bank loan: RMB10,000,000, bearing interest at 6.84% per year, interest is payable monthly and the
principal is repayable on July 24, 2008. The loan is collateralized by a floating charge to certain
accounts receivable with a carrying value of $6.50 million at the time when loan was granted. As at
December 31, 2007, these accounts receivable have an approximate carrying value of $5.76 million.
Loan from China High Tech Investment Co., Ltd.: $nil (2006-RMB5,800,000) unsecured. The loan was
repaid in 2007.
Bank loan: RMB10,000,000, bearing interest at 8.02% per year, interest is payable quarterly and the
principal is repayable on December 19, 2008, The loan is collateralized by certain accounts receivable
with a carrying value of $2.94 million at the time when loan was granted. As at December 31, 2007,
these accounts receivable have an approximate carrying value of $3.36 million.
Bank loan: RMB15,000,000 bearing interest at the bank’s floating lending rate, which ranged from 6.03%
to 7.56% in 2007, interest is payable monthly, the principal is due on July 25, 2008. The loan is
collateralized by the land-use rights and plant of Sinovac Beijing, 71.56% subsidiary of the Company,
with a net book value of $4,843,000.
2007
2006
—
1,279,181
1,367,222
—
—
741,925
1,367,222
—
2,050,833
—
Bank loan: RMB15,000,000, (2006—RMB5,000,000) (current portion of long-term bank loan of
RMB20,000,000) bearing interest at the bank’s floating lending rate, which ranged from 6.03% to
7.56% in 2007 and from 5% to 6.50% in 2006; interest is payable quarterly and the principal is due on
August 15, 2008. (RMB5,000,000 of RMB20,000,000 was repaid in August 2007) The loan is
collateralized by the land-use rights and plant of Sinovac Beijing, 71.56% subsidiary of the Company,
with a net book value of $4,834,000.
Total loans payable—current
2,050,833
639,591
$6,836,110 $2,660,697
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
Bank loan: RMB15,000,000 (long-term portion of RMB20,000,000 million) bearing interest at the bank’s
floating lending rate, which ranged from 5% to 6.5% in 2006 and 2005; interest is payable quarterly,
and the principal is due on August 15, 2008. (Reclassified to current liability in 2007)
Bank loan: RMB15,000,000 bearing interest at the bank’s floating lending rate, which ranged from 5%—
6.5% in 2006, interest is payable monthly, the principal is due on July 15, 2008. (Reclassified to
current liability in 2007)
2007
2006
—
1,918,772
—
1,918,772
Bank loan: RMB10,000,000 bearing interest at the bank’s floating lending rate, which ranged from 6.03%
to 7.56% in 2007; interest is payable quarterly and the principal is due on December 12, 2009. The
loan is collateralized by the land-use rights and plant of Sinovac Beijing, 71.56% subsidiary of the
Company, with a net book value of $4,843,000.
Total loans payable—long-term
1,367,222
—
$1,367,222 $3,837,544
The weighted average effective interest rate was 6.37%, 5.97%, and 5.79% for the years ended December 31, 2007, 2006 and
2005, respectively.
9. Income Taxes
Sinovac Beijing and Tangshan Yian are subject to income taxes in China on their taxable income as reported in their statutory
accounts at a tax rate in accordance with the relevant income tax laws applicable to foreign investment enterprises. Tangshan Yian is
eligible for a full exemption from income taxes for two years and a 50% reduction in income taxes for the three years following its first
profit making year. The tax holiday had no impact on Tangshan Yian’s operating results as Tangshan Yian was in a tax loss position.
Sinovac Beijing is granted a “New Technology Enterprise” certificate by Chinese government, under which Sinovac Beijing is entitled
to a tax holiday. It was exempt from income taxes for three years until 2003, is subject to a 7.5% corporation income tax rate until 2006
and 15% thereafter until it no longer qualifies as a “New Technology Enterprise.” The parent company is not subject to income taxes.
If the tax holiday of Sinovac Beijing described above had not existed, the income tax expenses (net of minority interest) would
have been increased by approximately $1,879,972 (RMB14,430,102), $1,196,847 (RMB9,553,113), $535,541 (RMB4,380,725) for the
years ended December 31, 2007, 2006, and 2005 respectively. Basic and diluted earning (loss) per common share would have been
approximately $0.14, $(0.05) and $(0.15) for the years ended December 31, 2007, 2006 and 2005, respectively.
The Company has structured its business and operations on an international basis. The Company's history is that it has also been
involved in a number of business combinations and significant financing. As a result the Company could be involved in various
investigations, claims and tax reviews that arise in the ordinary course of business activities. The Company has adopted FIN 48 on
January 1, 2007 as fully disclosed in note 2(u).
On March 16, 2007, The National People’s Congress of China passed “The Law of the People's Republic of China on Enterprise
Income Tax” (the “Enterprise Income Tax Law”). The Enterprise Income Tax Law will become effective on January 1, 2008. This new
law eliminated the existing preferential tax treatment that is available to the foreign invested enterprises (“FIE”s) but provides
grandfathering of the preferential tax treatment currently enjoyed by the FIEs. Under the new law, both domestic companies and FIEs
are subject to a unified
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
income tax rate of 25%. Sinovac Beijing is currently enjoying a tax holiday under a “New Technology Enterprise” certificate. It is likely
that Sinovac Beijing would be able to preserve its tax holiday under the grandfathering provisions in the Enterprise Income Tax Law.
The implementation rules for the new law were announced in December 2007. However, the implementation rules do not clearly define
“New Technology Enterprise.” The Company will continue to monitor the detailed implementation rules of the grandfathering
provisions of the new law.
Income taxes are attributed to the operations in China and consist of:
Current
Deferred
Total income tax expense
2007
$2,203,173
(229,055)
$1,974,118
2006
$ 491,914
(391,401)
$ 100,513
2005
$220,111
(8,000)
$212,111
The reconciliation of income taxes at the statutory income tax rate in Antigua and Barbuda to income tax rate based on income
before income taxes stated in the consolidated statements of operations is as follows:
Income taxes at the statutory income tax rate
Loss of the subsidiary (Tangshan Yian) at higher rate in China
Income of the subsidiary (Sinovac Beijing) at higher rate in China
Loss of the Company not subject to tax
Non-deductible expenses
Valuation allowance on deferred income tax assets (Sinovac Beijing)
Future tax rate difference on current timing differences
Others
Income taxes
2007
$
—
(93,279)
1,907,430
93,279
88,667
67,791
(11,972)
(77,798)
$1,974,118
2006
$
—
(79,521)
269,360
79,521
61,056
86,650
(161,545)
(155,008)
$ 100,513
2005
$
—
(270,502)
(43,023)
270,502
281,105
—
(17,924)
(8,047)
$ 212,111
The tax effects of temporary differences that give rise to the Company’s deferred tax assets (liabilities) are as follow:
Tax losses carried forward
Excess of tax cost over net book value of certain long-lived assets
Less: valuation allowance
Total deferred tax asset
Less: current portion
Total deferred tax asset-long term
2007
$ 637,383
1,434,648
(799,275)
1,272,756
579,703
$ 693,053
2006
$ 544,104
1,130,351
(630,754)
$1,043,701
454,274
$ 589,427
The Company determines deferred taxes for each tax-paying entity in each tax jurisdiction. The potential tax benefits arising from
the losses incurred by Tangshan Yian have not been recorded in the financial statements; however, the potential benefits arising from
tax losses incurred by Sinovac Beijing have been recognized.
The Company evaluates its valuation allowance requirements on an annual basis by reviewing all available evidence, both positive
and negative, and considering whether, based on the weight of that evidence, a valuation allowance is needed. When circumstances
change and this causes a change in management’s judgement about the
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
realizability of deferred tax assets, the impact of the change on the valuation allowance is generally reflected in current income. The
future realization of the tax benefit of an existing deductible temporary difference ultimately depends on the existence of sufficient
taxable income of the appropriate character within the carryforward period available under applicable tax law.
With the history of four years taxable income in Sinovac Beijing, the expectation of future earnings and the availability of certain
tax planning strategies, the Company concluded that the valuation allowance relating to temporary differences in respect of long lived
assets should be reversed. Management expects that taxable income from operations in the future will be sufficient to utilize the
deductions resulting from the reversal of temporary differences. If taxable income from operations is not sufficient, the Company will
employ tax planning strategies that relate to the realization of gains on land use rights at the time that those assets are no longer
required.
Based on these factors, the Company concluded that a valuation allowance in respect of temporary differences was not required at
December 31, 2007. The valuation allowance relating to losses carried forward of Tangshan Yian is still required as realization of this
element of the potential tax benefit is still uncertain.
10. Accounts payable and accrued liabilities
Accounts payable and accrued liabilities at December 31, 2007 and 2006 consisted of the following:
Trade payable
Machinery and equipment payable
Accrued expenses
Value added tax payable
Income tax payable
Other tax payable
Withholding personal income tax
Bonus and benefit payables
Other payables
Total
11. Related Party Transactions
2007
2006
$ 775,921 $ 655,387
102,560
2,124,308
232,304
271,705
55,127
2,008,131
1,182,192
741,110
$9,522,818 $7,372,824
588,979
4,234,790
155,396
532,075
62,921
998,897
1,852,719
321,120
Related party transactions not disclosed elsewhere in the consolidated financial statements are as follows:
(a) Amounts due to related parties are unsecured, do not bear interest, are due on demand, and consist of the following:
Due to a principal shareholder
Total
F-20
2007
$46,971
$46,971
2006
—
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
(b) The Company entered into the following transactions in the normal course of operations at the exchange amount with related
parties:
Interest income earned on the advances to related parties
Rent paid to China Bioway Biotech Group Holding Ltd., a non-controlling shareholder of Sinovac
Beijing (see (c) below)
2007
7,823 $ 70,174 $ 95,763
2005
2006
$
$317,743 $161,056 $170,988
(c)
In 2004, the Company entered into two operating lease agreements with China Bioway Biotech Group Holding Ltd., a non-
controlling shareholder of Sinovac Beijing, with respect to Sinovac Beijing’s production plant and laboratory in Beijing,
China for annual lease payments totaling $183,621 (RMB1,398,680). The leases commenced on August 12, 2004 and have a
term of 20 years. Included in prepaid expenses and deposits and long term prepaid expenses and deposits as at December 31,
2007, are $114,175 (December 31, 2006—$78,134) representing the lease deposit made to this related party.
In June 2007, the Company entered into another operating lease agreement with Bioway Biotech Group Holding Ltd., with
respect to expansion Sinovac Beijing’s production plant in Beijing, China for an annual lease payment of $268,244. The
lease commenced in June 2007 and has a term of 20 years. Included in prepaid expenses and deposit and long term prepaid
expenses and deposits as at December 31, 2007, are $525,112 representing the lease deposit made to this related party.
(d)
(e)
(f)
In 2004, a promissory note owed by a former director of the Company to Tangshan Yian approximating $2.6 million was
settled by $400,000 cash and offsetting $2.2 million promissory note owed to him. The Company set up 100% provision in
2005 with respect to the related interest owing by this individual. As of December 31, 2007, total $164,291 representing the
interest owing on the $2.6 million promissory was received from this individual.
In 2007, the Company paid $7,505 to its directors for management consulting services (2006-13,977, and 2005—$72,000).
In 2005, the Company made a deposit of $433,694 to a company controlled by a director of Sinovac Beijing in respect of
land-use rights. As at December 31, 2005, the Company decided not to pursue the acquisition, and the deposit was refunded
to the Company.
(g)
In 2007, the Company paid director fees of $18,408 (2006-23,055, and 2005- $25,944) to a management services company
that is 50% owned by a director of the Company.
(h) The Company entered into a license agreement with a corporation related with China Bioway (a non-controlling interest of
Sinovac Beijing) in respect to the trademark used on the Company’s products for nil consideration. This license agreement is
non-exclusive and expires on August 20, 2011.
(i)
In 2007, the Company received $1,394,333 of cash payments representing the $1 million debts and its related interest
assumed by a former director in connection with the acquisition of Tangshan Yian which completed in 2004. The Company
previously issued 1,500,000 common shares to this individual which were placed in escrow. These shares were released in
2007.
12. Stock Options
(a) Stock Option Plan
The board of directors approved a stock option plan (the “Plan”) effective on November 1, 2003, pursuant to which directors,
officers, employees and consultants of the Company are eligible to receive grants of options for the Company’s common stock. The
Plan expires on November 1, 2023. A maximum of 5,000,000 common
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
stocks have been reserved under the plan. Each stock option entitles its holder to purchase one common share of the Company. Options
may be granted for a term not exceeding 10 years from the date of grant. The Plan is administered by the board of directors.
In April 2005, the Company granted 60,000 stock options to employees with an exercise price of $2.40 per share, being the market
price at the time of the grant. These options vest from April 20, 2005 to July 20, 2007 and expire on April 20, 2010.
In May 2005, the Company granted 28,000 stock options to a consultant in connection with investor relation services to be
rendered, with an exercise price of $2.40 per share, being the market price at the time of the grant. These options vested on August 1,
2005 and expire on July 31, 2010.
In November 2005, the Company granted 280,000 stock options to certain directors with an exercise price of $3.20 per share,
lower than the market price at the time of the grant. These options vest from November 4, 2005 to March 4, 2007 and expire on
November 4, 2010.
In September 2006, the Company granted 100,000 options to certain directors with an exercise price of $2.64, being the market
price at the time of grant. These options vest in installments from September 14, 2007 to January 14, 2009 and expire on September 14,
2011.
In December 2006, the Company granted 15,000 options to certain employees with an exercise price of $2.69, being the market
price the time of grant. These options vest in installments from December 19, 2007 to March 19, 2010 and expire on December 19,
2011.
(b) Valuation Assumptions
The following assumptions were used in determining stock based compensation costs under the Black-Scholes option pricing
model:
Expected volatility
Risk-free interest rate
Expected life (years)
Dividend yield
Weighted average fair value of options granted
2007
—
—
—
—
—
2006
75.97%
4.74%
3.0
Nil
$ 1.39
2005
59.9%
4.51%
5.0
Nil
$2.93
The expected volatility related to 2006 grants is based on the Company’s historical stock prices. Prior to 2006, computation of
expected volatility was based on comparable companies’ historical stock prices. Computation of expected life was estimated after
considering the contractual terms of the stock-based award, vesting schedules and expectations of future employee behaviour. The
interest rate for period within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.
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(c) Stock Options Activity
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
Options outstanding at December 31, 2004
Granted
Forfeited
Canceled
Exercised
Options outstanding at December 31, 2005
Granted
Forfeited and cancelled
Exercised
Options outstanding at December 31, 2006
Granted
Forfeited and cancelled
Exercised
Options outstanding and vested or expected to vest at December 31, 2007
Exercisable at December 31, 2007
Number
4,959,000
368,000
(110,000)
(2,000,000)
(1,345,700)
1,871,300
115,000
(391,000)
(609,500)
985,800
—
(1,000)
(184,000)
800,800
717,300
Weighted
Average
Exercise Price
2.62
3.01
(1.31)
(4.55)
(1.31)
1.64
2.64
(1.80)
(1.36)
1.87
—
(1.31)
(1.33)
1.99
1.92
$
$
Aggregate
Intrinsic
Value
$2,504,408
$2,298,003
Range of Exercise Prices
$1.01—$2.00
$2.00—$3.00
$3.01—$4.00
Options Outstanding
Number
Outstanding
459,000
160,000
181,800
800,800
Weighted
Average
Remaining
Contractual
Life
0.92
3.37
2.81
Weighted
Average
Exercise
Price
$ 1.31
$ 2.58
$ 3.20
$ 1.99
Number
Exercisable
459,000
76,500
181,800
717,300
Options Exercisable
Weighted
Average
Remaining
Contractual
Life
0.92
2.90
2.81
Weighted
Average
Exercise
Price
$ 1.31
$ 2.50
$ 3.20
$ 1.92
The Company charged $179,742, $707,204, and $3,355,708 of stock-based compensation relating to selling, general and
administrative expenses in 2007, 2006 and 2005, respectively. The stock compensation expenses are charged to the consolidated
statement of operations over vesting period of the options using the straight-line amortization method.
Aggregate intrinsic value of the Company’s stock options is calculated as the difference between the exercise price of the options
and the quoted price of the common shares that were in-the-money. The aggregate intrinsic value of the Company’s stock options
exercised under the Plan was $328,547, $1,226,550, and $3,311,572, for 2007, 2006 and 2005, respectively, determined as of the date of
option exercise.
As at December 31, 2007, there was approximately $80,215 of total unrecognized compensation cost related to non-vested share-
based compensation arrangements granted under the Plan. This cost is expected to be recognized over a period of 27 months. The
estimated fair value of stock options vested during 2007, 2006 and 2005 was $191,565, $810,031, and $1,081,045 respectively.
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13. Common Stock
(a) Share Capital
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
In January 2005, the Company completed two private placements by issuing 491,667 and 70,000 units, respectively, at $3.00 per
unit for total gross proceeds of $1,685,000. Of this amount, $206,950 had been received by December 31, 2004. Each unit consisted of
one share of common stock of the Company and one share purchase warrant. The Company issued 39,333 warrants and 1,970 warrants
as finders' fees for the two private placements respectively. The Company also paid finders' fees in cash totalling $168,200. Each
warrant entitles its holder to purchase one additional share of common stock of the Company at $3.35 per share until the one year
anniversary date from the date of issuance, and:
(i)
For the first private placement warrants, at a price of $4.00 thereafter until the two year anniversary date after the issuance.
The warrants are subject to call provisions in favour of the Company, which may accelerate the expiry date.
(ii) For the second private placement warrants, at a price of $4.00 thereafter until October 15, 2006. The warrants are subject to
call provisions in favour of the Company, which may accelerate the expiry date.
In 2005, the Company issued 1,333,146 shares of common stock on the exercise of share purchase warrants with exercise prices
ranging from $1.50 to $3.00 per share for the total proceeds of $2,437,374.
In 2005, the Company issued 1,345,700 shares of common stock on the exercise of employee stock options with exercise prices
ranging from $1.31 to $3.36, yielding total proceeds of $1,781,482.
In 2006, the Company issued 441,000 shares of common stock on the exercise of share purchase warrants with exercise prices of
$3.35 per share for the total proceeds of $1,477,310, of which $1,423,710 had been received by December 31, 2005.
In 2006, the Company issued 609,500 shares of common stock on the exercise of employee stock options with exercise prices
ranging from $1.31 to $2.40 per share for the total proceeds of $828,965. In 2006, the Company received cash proceeds of $25,938 on
the exercise of stock options. The shares were issued in 2007.
In 2007, the Company issued 184,000 shares of common stock on the exercise of employee stock options with exercise prices
ranging from $1.31 to $2.40 per share for the total proceeds of $214,442. In 2007, the Company received further cash proceeds of
$9,170 on the exercise of stock options for which the shares were issued subsequent to the year-end.
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(b) Share Purchase Warrants
Outstanding at December 31, 2004
Granted
Expired
Exercised
Outstanding at December 31, 2005
Granted
Expired
Exercised
Outstanding at December 31, 2006
Granted
Expired
Exercised
Outstanding at December 31, 2007
(c) Stock issued for services
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
Number
—
602,970
—
(64,737)
538,233
—
—
(437,000)
101,233
—
(101,233)
—
—
Weighted
Average
Exercise Price
—
$
$
$
3.35
—
(3.35)
3.35
—
—
(3.35)
4.00
—
4.00
—
—
In 2005, the Company agreed to issue 15,000 shares of common stock to a consulting firm for investor relation services rendered
at a value of $42,750. The shares were issued in 2006.
14. Distribution of Profit
Pursuant to Chinese company law applicable to foreign investment companies, the Company’s subsidiaries, Sinovac Beijing and
Tangshan Yian, are required to maintain dedicated reserves from its after-tax net income determined in accordance with the Chinese
GAAP, which include a general reserve and an enterprise expansion reserve. Tangshan Yian is required to set aside at least 10% of its
after-tax net income each year to contribute to its reserve fund until the accumulated balance of such reserve fund reaches 50% of the
registered capital of Tangshan Yian. Sinovac Beijing is required to set aside, at the discretion of its board of directors, a portion of its
after-tax net income to its general reserve fund and enterprise development fund.
For the year ended December 31, 2007, Sinovac Beijing appropriated 10% (2006 -10%) and 5% (2006—5%) of its after-tax profit,
determined under the relevant Chinese accounting regulations, to the general reserve and the enterprise expansion reserve, respectively.
For the year ended December 31, 2007, the general reserve and the enterprise expansion reserve are $1,220,578 (RMB9,297,385)
(2006-$456,032 (RMB3,565,026)) and $610,289 (RMB4,648,692) (2006—$228,015 (RMB1,782,513)) respectively.
Pursuant to the same Chinese company law, the Company’s subsidiaries are required to transfer, at the discretion of their boards of
directors, a certain amount of its annual net income after taxes as determined under the relevant Chinese accounting regulations to a
staff welfare and bonus fund. For the year ended December 31, 2007, the board of directors of Sinovac Beijing approved $610,289
(RMB4,648,692) (2006- $228,016 (RMB1,782,513)) for contribution to such fund which shall be utilized for collective staff benefits
such as
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
building of staff quarters or housing. The amounts appropriated to staff welfare and bonus fund were charged against income and the
related provisions were reflected as accrued liabilities in the consolidated balance sheets.
Tangshan Yian recorded a net loss for each of the three years in the period ended December 31, 2007, so no appropriation to the
dedicated reserves and staff welfare and bonus fund was made.
Dividends declared by the Company’s subsidiaries are based on the distributable profits as reported in their statutory financial
statements. As of December 31, 2007, dividends payable of $ 3,000,459 (2006- $919,382), represent the minority interest in the share of
dividends declared by Sinovac Beijing.
In addition to the above reserves accrual, transferring the profit from the Chinese subsidiaries to the countries outside of China
also requires the Company and certain shareholders to comply with the certain administrative rules governed by the relevant Chinese
government authorities.
15. Deferred Government Grants
Deferred government grants (current) represents research and development grants received, net of research and development
expenditure incurred. In 2007, the Company received $ 943,178 (RMB6,898,500) (December 31, 2006—$754,717 (RMB5,900,000)) in
government grants for research and development expenses.
Deferred government grants (non-current) of $2,734,444 (RMB20 million) (December 31, 2006—$nil) represents the amount that
the Company received in 2007 for construction of an influenza vaccine production facility. The condition of receiving the production
facility grant requires the Company to spend an equal amount of the grant received on the influenza production facility and the entire
facility, is required to manufacture pandemic influenza vaccines at any given moment by the Chinese government. As of December 31,
2007, the Company has incurred $3,500,000 on the influenza production facility, of which $2,050,000 in the construction in progress on
the consolidated balance sheets.
16. Exclusive Promotion Service Agreement
In June 2007, the Company entered an Exclusive Promotion Service Agreement (the “Agreement”) with an unrelated enterprise
(the “Agent”) to grant the Agent an exclusive right in promotion of the Company’s adult influenza vaccines (“Anflu”) to non-tender
customers in mainland China. Pursuant to the Agreement, the Company is responsible for producing, packing, pricing and selling
pediatric formulation of the influenza vaccines. The Agent provides promotion services.
17. Letter of Intent with An Unrelated Corporation
In October, 2007, the Company entered a non-binding letter of intent (the “LOI”) with an unrelated corporation to contemplate the
incorporation of a joint venture company (the “JV”) for the development, licensing and manufacturing of flu vaccines.
Pursuant to the LOI, the Company will own a minority stake in the JV and will contribute cash, plant and equipments, and
influenza production license. The other party will contribute cash, equipment and know-how, and provide technical support to the JV.
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SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements—(Continued)
December 31, 2007 and 2006
(Expressed in U.S. Dollars)
18. Segmented Information
The Company operates exclusively in the biotech sector. The Company’s business is considered as operating in one segment based
upon the Company’s organizational structure, the way in which the operation is managed and evaluated, the availability of separate
financial results and materiality considerations. All the revenues are generated in China. The Company’s assets by geographical location
are as follows:
Assets
North America
China
Total
The Company’s revenues by products are as follows:
Sales
Inactive hepatitis A vaccines
Recombined hepatitis A&B vaccines
Influenza vaccines
Total
19. Non Cash Transactions
2007
2006
$ 3,719,135 $ 4,542,454
53,728,827 32,466,730
$57,447,962 $37,009,184
2007
2006
2005
$28,612,446 $14,878,194 $6,454,043
380,063
—
$33,541,187 $15,354,608 $8,607,948
132,569
4,796,172
230,810
245,604
In 2005, the Company agreed to issue 15,000 restricted shares of common stocks to a consulting firm for investor relation services
at a value of $42,750 (note 13c). The shares were issued in 2006.
20. Collaboration Agreement
The Company has entered into a Development Collaboration Agreement (the “Agreement”) with the China Center for Disease
Control and Prevention (the “China CDC”) to co-develop Pandemic Influenza vaccine (the “Vaccine”). Pursuant to the Agreement, both
parties agreed to be responsible for certain specified expenditures associated with the Vaccine development and to jointly apply for
government research and development grants. Pursuant to the same Agreement, the Company will be the applicant for and the owner of
the future New Drug Certificate, production license and any patent or know-how in connection with the Vaccine. In return, the
Company agreed to fund and support the China CDC’s influenza-related investigation and other pandemic control efforts after the
Company gains profits from the sale of the Vaccine. As at December 31, 2007, the research and development of the Vaccine is still in
process.
21. Minority Interest
Minority interest represents the interest of minority shareholders in Sinovac Beijing based on their proportionate interest in the
equity of that company adjusted for their proportionate share of income or losses from operations. The minority interest was 49% for the
period January 1, 2005 through February 3, 2005 and 28.44% for the period February 4, 2005 through December 31, 2005 and fiscal
year 2006 and 2007.
22. Subsequent Events
Subsequent to the year end, the Company completed a private placement by issuing 2,500,000 common shares of the Company at
$ 3.90 per share, with total proceeds of $9,750,000.
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