20-F 1 sva-20f_20181231.htm 20-F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒
☐
☐
Date of event requiring this shell company report
For the transition period from to
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. 15 Zhi Tong Road,
Zhongguancun Science & Technology Park,
Changping District, Beijing 102200
People’s Republic of China
(Address of principal executive offices)
Nan Wang
Chief Financial Officer
No. 15 Zhi Tong Road,
Zhongguancun Science & Technology Park,
Changping District, Beijing 102200
People’s Republic of China
Tel: +86-10-5693-1800
Fax: +86-10-5693-1800
E-mail: ir@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, par value $0.001 per share
Preferred Share Purchase Rights
Name of each exchange on which registered
The NASDAQ Stock Market LLC
The NASDAQ Stock Market LLC
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
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.
71,139,402 common shares as of December 31, 2018
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ 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 ☒ 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
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth
company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant
to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its
Accounting Standards Codification after April 5, 2012.
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 ☐
Other ☐
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 ☐ Item 18
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 ☒ 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 ☐ No
CONTENTS
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures about Market Risk
Description of Securities other than Equity Securities
INTRODUCTION
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 4A.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
PART II
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
ITEM 16H.
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
Audit Committee Financial Expert
Code of Ethics
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committees
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Change in Registrant’s Certifying Accountant
Corporate Governance
Mine Safety Disclosure
PART III
ITEM 17.
ITEM 18.
ITEM 19.
Financial Statements
Financial Statements
Exhibits
1
1
1
1
1
28
42
42
54
62
63
67
67
78
78
78
78
78
79
80
80
80
80
81
81
81
82
82
82
82
82
INTRODUCTION
In this annual report on Form 20-F, unless otherwise indicated or unless the context otherwise requires,
•
•
•
•
•
•
“Sinovac,” “Sinovac Biotech,” “Company,” “we,” “us,” “our company,” and “our” refer to Sinovac Biotech Ltd., its predecessor entities
and its consolidated subsidiaries
“Sinovac Antigua” refers to Sinovac Biotech Ltd.;
“China,” “Chinese” or the “PRC” refers 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;
“RMB” or “renminbi” refers to the legal currency of China; and “$” or “U.S. dollars” refers to the legal currency of the United States;
“shares” or “common shares” refers to our common shares, par value $0.001 per share; and
“U.S. GAAP” refers to generally accepted accounting principles in the United States.
Discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.
This annual report contains translations of certain renminbi amounts into U.S. dollars at specified rates solely for the convenience of readers.
All translations from renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in renminbi per
U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate. Unless otherwise stated, the
translation of renminbi into U.S. dollars has been made at the noon buying rate in effect on December 31, 2018, which was RMB6.8755 to
$1.00. We make no representation that the renminbi or U.S. dollar amounts referred to in this annual report could have been or could be
converted into U.S. dollars or renminbi, as the case may be, at any particular rate or at all. On April 19, 2019, the noon buying rate was
RMB6.7032 to $1.00.
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 statements of comprehensive income (loss) data for the fiscal years ended December 31, 2018, 2017 and
2016, and consolidated balance sheet data as of December 31, 2018 and 2017 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 statements of comprehensive
income (loss) data for the fiscal years ended December 31, 2015 and 2014 and consolidated balance sheet data as of December 31, 2016,
2015 and 2014 have been derived from our audited consolidated financial statements that are not included in this annual report.
1
Our historical results do not necessarily indicate results expected for any future periods.
Consolidated statements of
Comprehensive income (loss) data
2018
Year ended December 31,
2016
(in thousands except share and per share data)
2015
2017
$
Sales
Cost of sales(1)
Gross profit
Operating expenses:
Selling, general and administrative expenses(1)
Provision (recovery) for doubtful accounts
Research and development expenses(1)
Loss on disposal and impairment of property, plant and
equipment
Government grants recognized in income
Total operating expenses
Operating income
Interest and financing expenses
Interest income
Other income (expenses)
Income (loss) before income taxes and non-controlling
interests
Income tax expenses
Income (loss) from continuing operations
Net income (loss) from discontinued operations, net of tax of
nil
Net income (loss)
Less: (income) loss attributable to non-controlling interests
Net income (loss) attributable to the shareholders of Sinovac
Comprehensive income (loss)
Less: comprehensive (income) loss attributable to non-
controlling
interests
Comprehensive income (loss) attributable to shareholders
of Sinovac
Weighted average number of common shares outstanding
- basic
- diluted
Earnings (loss) per share
229,650 $
24,723
204,927
174,346
$
20,240
154,106
72,431
$
22,393
50,038
67,414
$
18,408
49,006
137,003
820
21,910
75
(197)
159,611
45,316
(1,070)
2,016
321
46,583
(10,472)
36,111
—
36,111
(14,329)
21,782
25,115
87,365
934
20,489
42
(141)
108,689
45,417
(1,569)
1,183
13
45,044
(8,339)
36,705
—
36,705
(10,898)
25,807
44,803
41,980
1,412
12,648
478
(6,984)
49,534
504
(1,729)
731
100
(394)
(2,664)
(3,058)
2,338
(720)
124
(596)
(9,563)
37,481
(49)
9,490
26
(1,637)
45,311
3,695
(1,920)
1,155
(174)
2,756
(2,985)
(229)
(728)
(957)
(459)
(1,416)
(5,342)
2014
62,932
15,476
47,456
34,338
329
10,934
74
(104)
45,571
1,885
(3,407)
2,684
1,186
2,348
(2,069)
279
(1,524)
(1,245)
(270)
(1,515)
(3,648)
(12,507)
(12,089)
953
82
35
12,608
32,714
(8,610)
(5,260)
(3,613)
64,727,146 57,033,816 56,949,083 56,313,927 55,681,076
64,977,554 57,101,191 56,949,083 56,313,927 56,114,202
Basic
Continuing operations
Discontinued operations
Basic net income (loss) per share
Diluted
Continuing operations
Discontinued operations
Diluted net income (loss) per share
0.34
—
0.34
0.34
—
0.34
0.45
—
0.45
0.45
—
0.45
(0.05)
0.04
(0.01)
(0.02)
(0.01)
(0.03)
(0.05)
0.04
(0.01)
(0.02)
(0.01)
(0.03)
0.00
(0.03)
(0.03)
0.00
(0.03)
(0.03)
Weighted average number of common shares outstanding
- basic
- diluted
Supplemental information(2)
Non-GAAP adjusted EBITDA
Non-GAAP net income from continuing operations
Non-GAAP Diluted EPS from continuing operations
64,727,146 57,033,816 56,949,083 56,313,927 55,681,076
64,977,554 57,101,191 56,949,083 56,313,927 56,114,202
54,757
39,857
0.38 $
51,277
36,361
0.44 $
8,223
293
0.01 $
11,166
1,588
0.01 $
10,276
1,283
0.02
$
(1) Includes share-based compensation of $4.3 million, $1.0 million, $2.4 million, $1.0 million and $0.3 million in 2018, 2017, 2016, 2015
and 2014, respectively.
(2) See “Non-GAAP Measures” below.
2
Non-GAAP Measures
We use Non-GAAP adjusted EBITDA, non-GAAP net income from continuing operations and non-GAAP diluted EPS from continuing
operations, in evaluating our operating results and for financial and operational decision-making purposes.
We believe that Non-GAAP adjusted EBITDA, non-GAAP net income from continuing operations and non-GAAP diluted EPS from
continuing operations help identify underlying trends in our business that could otherwise be distorted by the effect of certain income or
expenses that we include in income from operations from continuing operations, net income from continuing operations and diluted EPS from
continuing operations. We believe that Non-GAAP adjusted EBITDA, non-GAAP net income from continuing operations and non-GAAP
diluted EPS from continuing operations provide useful information about our core operating results, enhance the overall understanding of our
past performance and future prospects and allow for greater visibility with respect to key metrics used by management in our financial and
operational decision-making.
Non-GAAP adjusted EBITDA, non-GAAP net income from continuing operations and non-GAAP diluted EPS from continuing operations
should not be considered in isolation or construed as an alternative to income from operations from continuing operations, net income from
continuing operations, diluted EPS from continuing operations, or any other measure of performance or as an indicator of our operating
performance. These non-GAAP financial measures presented here may not be comparable to similarly titled measures presented by other
companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to our
data.
Non-GAAP adjusted EBITDA represents income (loss) from continuing operations, excludes interest and financing expenses, interest
income, net other income (expenses) and income tax benefit (expenses), and certain non-cash expenses, consisting of share-based
compensation expenses, amortization and depreciation that we do not believe are reflective of our core operating performance during the
periods presented.
Non-GAAP net income from continuing operations represents net income (loss) from continuing operations before share-based
compensation expenses, and foreign exchange gain or loss.
Non-GAAP diluted EPS from continuing operations represents non-GAAP net income attributable to ordinary shareholders from
continuing operations divided by the weighted average number of shares outstanding during the periods on a diluted basis, including
accounting for the effect of the assumed conversion of options.
The table below sets forth a reconciliation of our income (loss) from continuing operations to Non-GAAP adjusted EBITDA for the periods
indicated:
Year ended December 31,
2018
2017
2016
2015
2014
Income (loss) from continuing operations
$
36,111 $
Adjustments
36,705 $
(in thousands)
(3,058) $
(229) $
279
Share-based compensation
Depreciation and amortization
Interest and financing expenses, net of interest income
Net other (income) expense
Income tax expense
Non-GAAP adjusted EBITDA
4,305
5,136
(946)
(321)
10,472
54,757 $
979
4,881
386
(13)
8,339
51,277 $
2,409
5,310
998
(100)
2,664
8,223 $
952
6,519
765
174
2,985
11,166 $
$
287
8,104
723
(1,186)
2,069
10,276
The following table sets forth a reconciliation of our net income from continuing operations to non-GAAP net income from continuing
operations for the periods indicated:
Net Income (loss) from continuing operations
Add: Foreign exchange (gain) loss
Add: Share-based compensation
Non-GAAP net income from continuing operations
Year ended December 31,
2018
2017
2016
2015
2014
$
$
36,111 $
(559)
4,305
39,857 $
36,705 $
(1,323)
979
36,361 $
(in thousands)
(3,058) $
942
2,409
293 $
(229) $
865
952
1,588 $
279
717
287
1,283
3
The following table sets forth a reconciliation of our diluted EPS from continuing operations to non-GAAP diluted EPS from continuing
operations for the periods indicated:
2018
Year ended December 31,
2016
2015
2017
2014
(in thousands except share and per share data)
Net income (loss) from continuing operations attributable
to
shareholders of Sinovac
Add: Non-GAAP adjustments to net income from continuing
operations(1)
Non-GAAP net income attributable to shareholders of
Sinovac from continuing operations for computing
non-GAAP diluted earnings per share
Weighted average number of shares on a diluted basis
Diluted earnings (loss) per share from continuing
operations(2)
Add: Non-GAAP adjustments to net income per share from
continuing operations(3)
Non-GAAP diluted earnings per share from continuing
operations(4)
$
21,782 $
25,807 $
(2,934) $
(688) $
9
2,764
(344)
3,351
1,817
1,004
24,546
25,463
417
1,129
1,013
64,977,554 57,101,191 56,949,083 56,313,927 56,114,202
0.34
0.45
(0.05)
(0.02)
0.04
(0.01)
0.06
0.03
0.00
0.02
$
0.38 $
0.44 $
0.01 $
0.01 $
0.02
(1) See the table above about the reconciliation of net income from continuing operations to non-GAAP net income from continuing
operations for more information on these non-GAAP adjustments.
(2) Diluted EPS from continuing operations is derived from net income attributable to ordinary shareholders from continuing operations for
computing diluted EPS divided by weighted average number of shares on a diluted basis.
(3) Non-GAAP adjustments to net income per share from continuing operations is derived from non-GAAP adjustments to net income from
continuing operations divided by weighted average number of shares on a diluted basis.
(4) Non-GAAP diluted EPS from continuing operations is derived from non-GAAP net income attributable to ordinary shareholders from
continuing operations for computing non-GAAP diluted EPS from continuing operations divided by weighted average number of shares
on a diluted basis.
Balance sheet data
2018
2017
2016
2015
2014
As of December 31,
Cash and cash equivalents
Total assets
Short-term bank loans and current portion of long-term debt
Total current liabilities
Long term debt (include due to related party)
Net assets
Non-controlling interests
Common stock
Total shareholders’ equity
B.
Capitalization and Indebtedness
Not applicable.
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
89,793
238,663
47,375
79,870
1,803
140,145
14,934
56
125,211
$ 158,170 $ 114,415 $
299,219
18,152
92,543
21,919
177,140
25,988
57
369,780
3,321
58,205
10,595
291,928
38,495
71
(in thousands)
62,434 $
211,355
31,279
66,264
9,448
129,666
13,899
57
63,834 $
202,927
21,775
58,138
756
136,505
14,852
57
$ 253,433 $ 151,152 $ 115,767 $
121,653 $
4
D.
Risk Factors
Risks Related to Our Company
Our business growth relies on our ability to react to infectious disease threats and to continually introduce new vaccine products into the
commercial market. Our failure to effectively develop and commercialize new products could materially and adversely affect our business,
financial condition, results of operations and prospects.
The biopharmaceutical market in general and the vaccine product market in particular are developing rapidly as a result of ongoing infectious
disease threats and new trends in the related research and technology developments. Consequently, our success depends on our ability to react
to disease and technology development trends and to identify, develop and commercialize in a timely and cost-effective manner effective
vaccine products that meet evolving market needs.
Whether we are successful in developing and commercializing new products is determined by, among other things, our ability to:
•
accurately assess disease and technology trends and market needs;
• maintain strong research and development capabilities;
•
optimize our manufacturing and procurement processes to predict and control costs;
• manufacture and deliver products with good quality in a timely manner and in sufficient quantities;
•
increase customer awareness and acceptance of our products;
• minimize the time and cost required to obtain required regulatory clearances and approvals;
•
•
•
•
anticipate and compete effectively with other vaccine product developers, manufacturers and marketers;
price our products competitively;
comply with the guidelines of Good Manufacturing Practice (“GMP”) and other related regulations; and
thoroughly understand the frequently developing regulatory guidelines and regulations on vaccine products and comply with the
regulations and guidelines accordingly.
Although we are profitable in 2018, we incurred a loss in 2016 as well as in past years, and may incur losses again in the future.
Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. Although we were
profitable in 2018, we incurred a loss in 2014, 2015 and 2016. In past years, the loss was caused primarily by research and development
expenses. None of the research and development expenses incurred were capitalized in our financial statements. We intend to continue to
invest in research and development to sustain our long-term growth. We expect our research and development expenses to fluctuate
depending on the progress we make on each project, with relatively more spending on clinical studies than preclinical studies. We expect that
our spending on research and development will have a negative impact on our future net earnings. As a result, we may incur losses in the
future, which will have an adverse impact on our working capital, total assets, shareholders’ equity and cash flow.
We sell vaccines in China through Centers for Disease Control (“CDCs”) which are PRC government agencies. This exposes us to risks
relating to doing business with the government.
We sell our vaccines to CDCs, which exposes us to various risks relating to doing business with the government. For example, demand and
ability to pay for our products may be affected by government budgetary cycles, shifting availability of public funds and changes in policy.
Funding reductions, delays in payment or unilateral demands for changes to the terms of our contracts by our government customers could
adversely impact our results of operations and financial condition, exacerbate the existing seasonality of our revenues and make it difficult for
us to allocate resources or anticipate demand for our products. More importantly, we have little or no control over government procurement
decisions, and government agencies that contract to purchase our products may reduce or cancel orders, or demand price adjustments or other
changes to their contracts with us without our consent. Changes in the personnel of the PRC government agencies that purchase our products
may result in changes or delays to or cancellations of purchase commitments due to, among others, differing policy and budgetary agendas of
the personnel involved. Similar changes could occur if CDC or other relevant government agency were to be consolidated with another
ministry. Any of the above mentioned actions taken by government agencies could have a material adverse effect on our results of operations
and expected earnings, or result in our failure to meet, or having to adjust downwards, our sales and gross margin guidance or estimates,
which could adversely affect our stock price and result in substantial losses to you. In addition, many of the remedies that are available to us
when dealing with private parties, such as making claims for breach of contract or taking other legal actions, may not be available or
practicable in our dealings with government agencies.
5
We currently have limited revenue sources. A reduction in revenues from sales of Inlive, Healive, Bilive, Anflu or Panflu would cause our
revenues to decline and could materially harm our business.
We generate all of our revenues from sales of our vaccine products. We derive a substantial percentage of our revenues from a small number
of vaccine products. Inlive enterovirus 71 (“EV71”) vaccine contributed 70.8%, 69.6% and 48.5% of our revenue in 2018, 2017 and 2016,
respectively. In 2018, 2017 and 2016, 22.8%, 15.7% and 27.7%, respectively, of our revenues were from sales of our hepatitis A vaccine,
Healive; 4.8%, 6.0% and 0.8%, respectively, of our revenues were from sales of our hepatitis A&B vaccine, Bilive; 0.9%, 7.8% and 13.6%,
respectively, of our revenues were from sales of our influenza vaccine, Anflu; and nil, nil and 8.8%, respectively, of our revenues were from
sales of our pandemic influenza virus vaccine, Panflu (H5N1). However, revenue recognition of Panflu (H5N1) is not recurring due to its
government stockpile nature, which may cause fluctuation of our revenue. As a result of this relative lack of product diversification, an
investment in our company would be riskier than investments in companies that offer a wide variety of products or services.
We expect our key products, which will likely shift over time, to account for a significant portion of our net revenues for the foreseeable
future. As a result, continued market acceptance and popularity of these products are critical to our success and a reduction in demand due to,
among other factors, the introduction of competing products by our competitors, the entry of new competitors, or end-users’ dissatisfaction
with the quality of our products, could materially and adversely affect our financial condition and results of operations..
We could be subject to costly and time-consuming product liability actions and, because our insurance coverage is limited, our exposure to
such claims could cause significant financial burden.
Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of biopharmaceutical
products. We manufacture vaccines that are injected into healthy people to protect against infectious illnesses. If our products do not function
as anticipated, whether as a result of flaws in our design, unanticipated health consequences or side effects, misuse or mishandling by third
parties, or faulty or contaminated supplies, they could harm the vaccines 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. Meritless and unsuccessful product liability claims can be time-consuming and expensive to
defend and could result in the diversion of management’s attention from managing our core business or result in associated negative publicity.
Successful assertion of product liability claims against us could require us to pay significant monetary damages. Although we currently carry
worldwide product liability insurance for Healive, Bilive, Anflu, Panflu and Inlive worldwide, we cannot assure you that such coverage will
be sufficient to cover any liabilities resulting from successful product liability claims. In such a case, we may be required to make substantial
payments to cover any losses, damages or liabilities arising from product liability claims. For any amounts covered by insurance, foreign
exchange or other regulatory restrictions may prevent the use of insurance proceeds to meet the liabilities. In addition, we do not have or plan
to procure clinical trial liability insurance for our clinical trials to mitigate any unsuccessful clinical trial expenses or product liability claims
arising therefrom. Any of these factors could have a material adverse effect on our business, financial condition and results of operations.
Any pandemic threat may abate, or alternative vaccines or technologies may be adopted, before our vaccines achieve significant sales.
We have devoted significant resources to research and develop various vaccines to address the pandemic threat of infectious diseases,
including SARS, avian flu and swine flu, and will continue to devote resources to the development of our vaccines to address any new needs.
However, the threat of a pandemic outbreak may subside before we realize any return on our investment in our research and development. For
example, although we believe we were the first company to complete a phase I clinical trial of an inactivated SARS vaccine in December
2004, we did not proceed with the phase II and phase III trials as the SARS epidemic subsequently subsided. Other organizations may obtain
licenses for their own pandemic vaccines, or government health organizations may acquire adequate stockpiles of pandemic vaccine or adopt
other technologies or strategies to prevent or limit outbreaks before our pandemic vaccines achieve significant sales. We may not achieve a
return on our investment before the threat of a pandemic outbreak subsides or a competing product is adopted.
Failure to comply with the U.S. Foreign Corrupt Practices Act (“FCPA”) and other applicable anti-corruption laws could subject us to
penalties and other adverse consequences and corrupt practices by our competitors may place us at a competitive disadvantage.
Our executive officers, employees and other agents may violate applicable laws in connection with the marketing or sale of our products,
including FCPA and applicable anti-corruption laws in China and other jurisdictions in which our products are sold or registered for sale.
FCPA generally prohibits United States issuers from engaging in bribery or other prohibited payments to foreign officials for the purpose of
obtaining or retaining business and requires issuers to maintain reasonable internal controls. The PRC also strictly prohibits bribery of
government officials. We have adopted a policy regarding compliance with FCPA and other applicable anti-corruption laws to prevent, detect
and correct such corrupt practice. However, corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time to
time in the PRC and the countries in which we seek to do business. While we have sought to enhance measures and controls to ensure
compliance with FCPA and other applicable anti-corruption laws by individuals involved with our company, our existing compliance policies
and procedures may be insufficient or may fail to prevent our employees or other agents from engaging in inappropriate conduct for which we
might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and
other consequences that may have a material
6
adverse effect on our business, financial condition and results of operations. In addition, our brand and reputation, our sales activities or the
price of our common shares could be adversely affected if we become the target of any negative publicity as a result of actions taken by our
employees or other agents. As discussed under “Item 8. Financial Information — A. Consolidated Statements and Other Financial
Information — Legal and Administrative Proceedings,” we have conducted an internal investigation regarding FCPA related matters and have
informed NASDAQ, the SEC and the U.S. Department of Justice (the “DOJ”) regarding these matters. On August 14, 2018, the SEC notified
us that the SEC had concluded its investigation and would not recommend an enforcement action against us at this time. On September 12,
2018, the DOJ notified us that it had closed its investigation, with no charges. With the closure of the DOJ’s investigation, we are not aware
of any pending U.S. government investigations of us related to these matters.
In addition, there may be corrupt practices in the healthcare industry in China and other countries in which we conduct business. For example,
in order to secure agreements with CDCs or hospitals in China, our competitors may engage in corrupt practices in order to influence
decision-makers in violation of the anti-corruption laws of China and FCPA. As competition persists and intensifies in our industry, we may
lose potential clients, client referrals and other opportunities to the extent that our competitors engage in such practices or other illegal
activities.
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 U.S. securities laws. Section 404 of the Sarbanes-Oxley Act of 2002 and related rules
require public companies to include a report of management on their internal control over financial reporting in their annual reports. This
report must contain an assessment by management of the effectiveness of a public company’s internal control over financial reporting. In
addition, an independent registered public accounting firm for a public company must attest to and report on the effectiveness of our internal
control over financial reporting.
Our management has concluded that our internal control over financial reporting is effective as of December 31, 2018. See “Item 15. Controls
and Procedures.” Our independent registered public accounting firm has issued an attestation report on our internal control over financial
report, which concludes that our internal control over financial reporting is effective in all material aspects. However, we cannot assure you
that any material weakness or deficiency in our internal control over financial reporting will not be identified in the future. We may not
always be able to maintain an effective internal control over financial reporting. If we fail to maintain effective internal control over financial
reporting in the future, we and our independent registered public accounting firm may not be able to conclude that we have effective internal
control over financial reporting at a reasonable assurance level. This could in turn result in the loss of investor confidence in the reliability of
our financial statements and negatively impact the trading price of our common shares, inhibiting our ability to raise sufficient capital on
favorable terms. Furthermore, we have incurred and anticipate that we will continue to incur considerable costs and use significant
management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
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 in the future. Our competitors include large
pharmaceutical and biotechnology companies, both domestic and international. Many of these competitors have greater resources than we do.
New competitors may also enter into the markets in which we 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:
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have launched its competing product first or the competing product may have, or be perceived as having, better efficacy, stronger brand
recognition, or other advantages;
have better access to certain raw materials;
have more efficient manufacturing processes and greater manufacturing capacity;
have greater marketing capabilities;
have greater pricing flexibility;
have more extensive research and development and technical capabilities;
have proprietary patent portfolios or other intellectual property rights that may present obstacles to our business;
have greater knowledge of local market conditions where we seek to increase our international sales;
have capability to maintain a competitive management team; or
have investment capability to acquire businesses when the opportunity is not available to us.
7
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 EV71 vaccine, 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 maintain market share in China with our commercialized vaccines, which could adversely affect our ability to
increase our revenues.
We used to estimate our market share in China based on the batch release number published by the National Institutes for Food and Drug
Control (“NIFDC”) which represents the market share estimated based on published supply quantity, but not the actual number of sales in the
market.
We started to market our EV71 vaccine in 2016. We supplied 41.8%, 18.8% and 52.5% of the EV71 vaccine market in China in 2018，2017
and 2016, respectively.
We supplied 24.3%, 18.0%, and 9.7% of the total hepatitis A vaccine market in China, or 67.8%, 75.8%, and 76.3% of the inactivated
hepatitis A vaccine market in China in 2018, 2017 and 2016, respectively, as measured by lot release number. We may not be able to compete
with other hepatitis A suppliers for either the private-pay market or public market, which could adversely affect our ability to increase our
revenues from hepatitis A vaccine.
We have been marketing and selling seasonal flu vaccines since 2006. We didn’t supply season flu vaccine in 2018 due to the production
disruption caused by Mr. Aihua Pan and unknown individuals in April 2018 during an attempt to take physical control of Sinovac’s facility in
Beijing. The product being produced at the time of disruption was destroyed due to quality concerns. We supplied 12.7%, 9.9% and 10.9% of
the seasonal flu vaccine market in China in 2017, 2016 and 2015, respectively. The flu vaccine market in China is highly competitive. Our
revenue could be adversely impacted if we are not able to maintain our market share in this highly competitive market.
We may not be able to maintain market share in the government-funded hepatitis A vaccine market, or other government-funded vaccine
markets, which could adversely affect our revenues, and if we do maintain or expand market share in these markets, we may need to sell
our vaccines at a lower price, which could adversely affect our gross margin.
Hepatitis A vaccines have been included in the Expanded Program on Immunization (“EPI”) in China since 2007. The PRC government
purchases hepatitis A vaccines for each 18-month-old child.
Although the hepatitis A vaccines have been included in the EPI, most provincial and municipal governments are not able to afford the two
shots of inactivated hepatitis A vaccines due to insufficient financial support, which constrains the purchase of inactivated hepatitis A
vaccines in government-funded markets. Most provincial and municipal governments prefer to purchase lower-priced live attenuated hepatitis
A vaccines; however, a few affluent provincial and municipal governments, such as Beijing, Tianjin, Shanghai and Jiangsu province, have
started to purchase inactivated hepatitis A vaccines. We are supplying vaccines in these markets at a lower price than we do in the private
market, which could adversely affect our gross margin. Our revenue could be adversely impacted if we are not able to maintain our market
share of the government-funded markets in these cities and provinces. As we are making efforts to breakthrough into additional provincial
and municipal public markets, we may be forced to lower our prices to win tenders, which will adversely affect our gross margin.
Since 2007, we have been selected as one of the suppliers by Beijing CDC to supply seasonal influenza vaccines to Beijing citizens. We
cannot assure you that we will continue to obtain orders in the future and maintain our market share. If the supply volume continues to
decrease, it would negatively impact our sales revenue in the future.
Since 2008, we have received three stockpiling orders for our H5N1 vaccine from China’s central government every two years in an amount
of three million doses per order, and four stockpiling orders from Beijing government in an amount of 20,000 doses per order. The latest
batch of stockpiled H5N1 vaccines for the central government expired in the first half of 2016 and we recognized the revenue upon the
government inspection. The most recent batch ordered by Beijing government is expected to expire in 2020. We cannot assure you that we
will receive additional stockpiling orders from governments in the future.
If CDCs, hospitals, physicians and patients do not accept our products, we may be unable to generate significant revenue.
Even if we have obtained regulatory approval for commercialization of our vaccines, they still may not gain market acceptance among CDCs,
hospitals, physicians, patients and the medical community, which would limit our ability to generate revenue and adversely affect our results
of operations. CDCs, hospitals and physicians may not recommend products developed by us or our collaborators until clinical data or other
factors demonstrate superior or comparable safety and efficacy of our products as compared to other available treatments. Even if the clinical
safety and efficacy of our products are established, CDCs, hospitals and physicians may elect not to recommend these products for a variety
of reasons. There are other vaccines and treatment options for the conditions that many of our products and product candidates target, such as
EV71, hepatitis A and B and influenza. In order to successfully launch a product, we must educate physicians and patients about the relative
benefits of our products. If our products are not perceived as easy and convenient to use, 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 patients 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.
8
The ongoing litigation regarding our shareholder rights agreement (the “Rights Agreement”) could have a material adverse effect on the
results of our operations and our financial condition.
On March 5, 2018, we filed a lawsuit in the Court of Chancery of the State of Delaware seeking a determination whether certain of our
shareholders, including 1Globe Capital LLC (“1Globe”), The Chiang Li Family, OrbiMed Advisors LLC and OrbiMed Capital LLC (together
“OrbiMed”), and certain additional shareholders (collectively, the “Shareholder Group”) had triggered our Rights Agreement, by forming a
group holding approximately 45% of outstanding shares, in excess of the Right Agreement’s threshold of 15%, and acting in concert prior to
our annual general meeting of shareholders held on February 6, 2018 (the “2017 AGM”). Our Rights Agreement is intended to promote the
fair and equal treatment of all Sinovac shareholders and ensure that no person or group can gain control of Sinovac through undisclosed
voting arrangements, open market accumulation or other tactics potentially disadvantaging the interest of all our shareholders.
On April 12, 2018, 1Globe filed an amended answer to our complaint, counterclaims, and a third-party complaint against Mr. Weidong Yin
alleging, among other allegations, that our Rights Agreement is not valid, that Mr. Weidong Yin and the Buyer Consortium (described below)
had previously triggered our Rights Agreement, and that 1Globe did not trigger our Rights Agreement. The Chiang Li Family and OrbiMed
filed similar responses. We, and our board of directors, believe that the actions taken by our board of directors were appropriate under the
circumstances and in the interests of our company and all our shareholders. We also believe that the allegations in the counterclaim and third-
party complaint are without merit. 1Globe asks for various measures of equitable relief and also includes a claim for its costs, including
attorneys’ fees.
On December 19, 2018, the High Court of Justice of Antigua and Barbuda held, following a trial, that Sinovac Antigua’s Rights Agreement is
valid under Antigua law, and found that “there was a secret plan to take control of the Company” at the 2017 AGM. On February 18, 2019,
after reviewing the Court’s judgment and considering all additional facts known to the Board, the Board determined that the Shareholder
Group, together with their affiliates and associates (collectively, the “Collaborating Shareholders”) became Acquiring Persons on or prior to
the 2017 AGM and that their conduct resulted in a “Trigger Event” under Sinovac Antigua’s Rights Agreement. Pursuant to the Rights
Agreement, our board of directors elected to exchange (the “Exchange”) each valid and outstanding preferred share purchase right held by
Sinovac Antigua’s shareholders (not including the Collaborating Shareholders) for a combination of 0.655 of Sinovac Antigua’s common
shares and 0.345 of Sinovac Antigua’s newly created Series B Convertible preferred shares (the “Series B Preferred Shares” and, together,
each an “Exchange Share”). On February 22, 2019, the Exchange Shares were issued into the Shareholder 2019 Rights Exchange Trust in the
name of Wilmington Trust, National Association, which holds the Exchange Shares for the benefit of Sinovac Antigua’s shareholders (not
including the Collaborating Shareholders). 1Globe filed notice to appeal the Antigua Court’s judgment on January 29, 2019. On April 4,
2019, the Eastern Caribbean Supreme Court, Court of Appeal issued an order that restrains Sinovac Antigua from taking further action under
its Rights Agreement, including the distribution of the previously issued Exchange Shares, until the conclusion of such appeal.
On March 6, 2019, the Delaware Court entered a status quo order preventing us from distributing Exchange Shares to any shareholders or
otherwise take any action pursuant to the Rights Agreement until the conclusion of the Delaware litigation or Court order. On April 4, 2019,
the Eastern Caribbean Supreme Court, Court of Appeal issued an order that restrains Sinovac Antigua from taking further action under its
Rights Agreement, including the distribution of the previously issued Exchange Shares to the holders of valid Rights, until the conclusion of
1Globe Capital, LLC’s appeal of the December 19, 2018 Judgment of the High Court of Justice of Antigua and Barbuda. On April 8, 2019,
the Delaware Chancery Court stayed the Delaware litigation pending the outcome of 1Globe’s appeal of the Antigua Judgment.
We cannot predict the outcome of the litigation. Preparing for this litigation, or any related litigation or related matters, has caused us to incur
significant costs and we expect these costs to continue until the litigation concludes. In addition, preparing for this litigation is time-
consuming and may disrupt our operations and divert the attention of management and our employees from executing our strategic plan.
Our ongoing litigation against 1Globe and The Chiang Li Family claiming violations of U.S. federal securities laws could have a material
adverse effect on the results of our operations and our financial condition.
On March 5, 2018, Sinovac Antigua filed a lawsuit in the United States District Court for Massachusetts alleging violations of Section 13(d)
and Section 13(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) by 1Globe and The Chiang Li Family. The lawsuit alleges,
among other things, that the defendant shareholders failed to make required disclosures on Schedule 13D regarding their intentions to attempt
to replace Sinovac Antigua’s board of directors.
The litigation is currently in the pre-trial phase and we cannot predict when or how the litigation will be resolved. There can be no assurance
that we will prevail in this litigation. Preparing for this litigation, or any related litigation or related matters may result in significant costs to
our company or otherwise adversely affect our business.
Our business could be negatively affected as a result of actions of shareholders or others.
On March 5, 2018, we announced the re-election of the members of our board of directors—Mr. Weidong Yin, Mr. Yuk Lam Lo, Mr. Simon
Anderson, Mr. Kenneth Lee, and Mr. Meng Mei—at the 2017 AGM. We also announced that we had determined, after consultation with our
Antigua legal counsel, that an alternative, pre-printed ballot not made available to all our shareholders and purportedly submitted at our 2017
AGM by the Shareholder Group was invalid. We refer to this ballot as the “Non-Public Submission.” On March 13, 2018, 1Globe filed a
complaint against Sinovac Antigua in the Eastern Caribbean Supreme Court in the High Court of Justice, Antigua and Barbuda (the “Antigua
9
Court”). The complaint sought a declaration that the five persons purportedly proposed by the Shareholder Group on the Non-Public
Submission at the 2017 AGM were elected as directors of our company at that meeting, together with an order of the Antigua Court that those
directors be installed as our company’s board of directors, and a declaration that any actions taken on behalf of our company at the direction
of the board of directors since the 2017 AGM are null and void. Following a trial in early December 2018, the Antigua Court issued a
judgment on December 19, 2018 that dismissed 1Globe’s claim and declared that Sinovac Antigua’s Rights Agreement was validly adopted
as a matter of Antigua law. 1Globe filed notice to appeal the Antigua Court’s judgment on January 29, 2019.
On October 8, 2018, Sinovac became aware that unauthorized documents in respect of Sinovac Hong Kong had been filed with the Hong
Kong Companies Registry and that unauthorized documents in respect of Sinovac Beijing had been filed with the Industry and Commerce
Bureau of Beijing. In a hearing before the High Court of the Hong Kong Special Administrative Region (“Hong Kong High Court”) on
October 19, 2018, the judge granted an interlocutory injunction restraining Mr. Pengfei Li and Mr. Jianzeng Cao from purporting to act or
holding themselves out as directors of Sinovac Hong Kong or its subsidiaries, purporting to take any actions as directors of Sinovac Antigua
or its subsidiaries, and relying on or using the forged documents in any way whatsoever. On November 28, 2018 at a further hearing in the
Hong Kong High Court, the Hong Kong High Court made orders (the “November 28 Order”) and held that it is beyond dispute that the
documents in respect of Sinovac Hong Kong had been forged and unlawfully filed with the Hong Kong Companies Registry, based on the
evidence filed by Mr. Cao, Mr. Li and the Lawful Directors. The Hong Kong High Court therefore declared that Mr. Yin and Ms. Wang were
and still are the lawful directors of Sinovac Hong Kong, and Mr. Li and Mr. Cao were not and are not the lawful directors of Sinovac Hong
Kong. The Hong Kong High Court also granted a permanent injunction restraining Mr. Li and Mr. Cao from purporting to act or holding
themselves out as directors of Sinovac Hong Kong or its subsidiaries (including but not limited to Sinovac Beijing), purporting to take any
actions as directors of Sinovac Hong Kong or its subsidiaries, and relying on or using the forged documents in any way whatsoever.
Furthermore, the Hong Kong High Court also ordered the Companies Registry to remove the forged documents in respect of Sinovac Hong
Kong that had been unlawfully filed. On November 28, 2018, Mr. Cao and Mr. Li filed a Notice of Appeal with the Hong Kong Court of
Appeal, indicating their intention to appeal the orders made by the Hong Kong High Court. No hearing date has yet been fixed to hear the
appeal.
We cannot predict the outcome of our ongoing litigation, including whether we will prevail. We also cannot predict how the litigation may
affect our stock price, which could be volatile during the pendency of each suit and following its conclusion. Preparing for the litigation, or
any related litigation or related matters, has caused us to incur significant costs and we expect these costs to continue until the litigation
concludes. In addition, preparing for litigation is time-consuming and may disrupt our operations and divert the attention of management and
our employees from executing our strategic plan. In addition, the uncertainties as to the composition of the board of directors of Sinovac
Antigua may materially and adversely affect business in unpredictable ways, which, in turn, could cause our revenue, earnings and operating
cash flows to be materially and adversely affected.
Disruptive actions taken by the minority shareholder of Sinovac Biotech Co., Ltd. (“Sinovac Beijing”) caused suspension of production,
destruction of products and disruption of our website, which may materially and adversely affect our business, financial condition and
results of operations.
Sinovac Beijing, our principal operating subsidiary, is a Sino-foreign equity joint venture in which we own a 73.09% interest and Sinobioway
Bio-medicine Co., Ltd., formerly named Xiamen Bioway Group Co., Ltd (“Sinobioway Medicine”), owns a 26.91% interest. Recent events
suggest that Sinobioway Medicine’s interests are not aligned with our interests. We cannot assure you that Sinobioway Medicine will be
cooperative with us in handling matters related to the operations of Sinovac Beijing.
As the minority shareholder of Sinovac Beijing, according to Sinovac Beijing’s articles of association, Sinobioway Medicine has the right to
assign a director to the five-director board of Sinovac Beijing, and the director assigned by Sinobioway Medicine is the legal representative of
Sinovac Beijing. Accordingly, the representative of Sinobioway Medicine has the ability to take actions that bind Sinovac Beijing or to block
any action that requires unanimous board approval. In addition, if we wish to transfer our equity interest in Sinovac Beijing, in whole or in
part, to a third party, Sinobioway Medicine has a right of first refusal to purchase our interest in accordance with relevant PRC regulations.
Sinobioway Medicine, the minority shareholder of Sinovac Beijing, has additional rights under the joint venture contract and 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 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.
In February 2018, Mr. Pan, the representative of Sinobioway Medicine, sent letters without the approval of the full board of Sinovac Beijing,
to Mr. Weidong Yin, Ms. Nan Wang, and other senior managers of Sinovac Beijing purporting to terminate their employment. The board of
directors of Sinovac Beijing subsequently determined, with the advice of PRC legal counsel, that this action did not conform with the joint
venture contract and articles of association and was unlawful. On March 5, 2018, Sinovac Biotech announced actions taken to enhance the
corporate governance and management of Sinovac Beijing, including the appointment of Mr. Dawei Mao, Chairman of Zhongke
Biopharmaceutical Co., Ltd., as a director of Sinovac Beijing. He replaced Ms. Xiaomin Yang, the current President of Sinobioway Group
Co., Ltd. In addition, in March 2018, Mr. Weidong Yin, Ms. Nan Wang, and other senior managers of Sinovac Beijing signed new
employment agreements with Sinovac Biotech Ltd. and Sinovac Beijing.
On April 17, 2018, Mr. Pan and dozens of unidentified individuals forcibly entered Sinovac Beijing’s corporate offices and limited the
physical movements of employees in Sinovac Beijing’s general manager’s office and finance department in an attempt to wrongfully take
control of
10
Sinovac Beijing’s official seal, legal documents, accounting seal, financial documents and financial information systems. In addition, these
individuals disrupted Sinovac Beijing’s hepatitis A vaccine production and seasonal flu vaccine production by cutting power, seriously
impacting Sinovac Beijing’s production and manufacturing processes and possibly damaging product quality. Due to the actions of the
representative of Sinobioway Medicine, Sinovac Beijing was forced to destroy the affected products. To maintain product safety, Sinovac
Beijing temporarily suspended production at the impacted facility, thought production has resumed at this facility. Sinovac Beijing was also
forced to destroy the bacterial seeds intended for use in the production of its 23-valent pneumococcal polysaccharide vaccine (“PPV”) and to
suspend all preparations for and ultimately postpone the National Medical Products Administration (“NMPA”), formerly known as the PRC
State Food and Drug Administration, inspection of the manufacturing site necessary for 23-valent PPV production approval.
These and other actions taken by the representative of Sinobioway Medicine may materially and adversely affect our business, financial
condition and results of operations. We also cannot assure you that the representative of Sinobioway Medicine will cease from interfering
with our business.
We do not currently intend to hold an annual general meeting of shareholders until after the final determination of the litigation
concerning our Rights Agreement, which will delay the ability of our shareholders to vote in an election of our directors.
Due to the ongoing litigation concerning the Exchange and our Rights Agreement, we have not held an annual meeting of our shareholders
since February 2018, and do not intend to hold an annual meeting of our shareholders until the final determination of such litigation.
Therefore, our shareholders will not have the opportunity to vote in an election of our directors for an indeterminate amount of time. If our
shareholders want us to hold an annual meeting prior to the final determination of the ongoing litigation referred to above, they may attempt
to force us to hold one under Antigua law.
We may not achieve the expected return on our investment in Sinovac (Dalian) Vaccine Technology Co., Ltd. (“Sinovac Dalian”).
In November 2009, we entered into an agreement with Dalian Jin Gang Group to establish Sinovac Dalian. In January 2010, we established
Sinovac Dalian to focus on the research, development, manufacturing and commercialization of vaccines, such as mumps and varicella for
human use. Pursuant to the joint venture agreement, we made an initial cash contribution of RMB60.0 million ($9.3 million) in exchange for
a 30% equity interest in Sinovac Dalian, and Dalian Jin Gang Group made an asset contribution of RMB140.0 million ($21.6 million),
including the manufacturing facilities, production lines and land use rights, in exchange for the remaining 70% interest in Sinovac Dalian. In
December 2010, we purchased an additional 25% equity interest in Sinovac Dalian from Dalian Jin Gang Group for consideration of
RMB50.0 million ($7.7 million). In October 2016, we increased our ownership in Sinovac Dalian to 67.86% by making an additional
RMB80.0 million ($12.8 million) capital contribution. In 2018, 2017 and 2016, we provided a loan of RMB30 million ($4.4 million), RMB20
million ($2.9 million) and RMB30 million ($4.4 million) to Sinovac Dalian, respectively. We cannot assure you that Sinovac Dalian’s
business, covering the research, development, manufacturing and commercialization of vaccines, such as mumps and varicella, will be
successful. As such, we could incur related impairment charges in the future. Any failure to achieve the expected return on our investment in
Sinovac Dalian may materially and adversely affect our business, financial condition and results of operations.
The interests of the minority shareholder of Sinovac Beijing and Sinovac Dalian may diverge from our own, which may adversely affect
our ability to manage these subsidiaries.
Under China’s joint venture regulations, the unanimous approval of members of a joint venture’s 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. If our
interests diverge from those of our minority shareholders, they may exercise their rights under PRC laws to protect their own interests, which
may be adverse to ours. As a result, our ability to manage these subsidiaries may be adversely affected, which in turn may materially and
adversely affect our business, financial condition and results of operations. Recent disruptive actions taken by Sinobioway Medicine suggest
that its interests are not aligned with our interests. We cannot assure you that Sinobioway Medicine will be cooperative with us in handling
matters related to the operations of Sinovac Beijing. To date, Dalian Jin Gang Group has been cooperative with us in handling matters with
respect to the business of Sinovac Dalian. We cannot assure you, however, that Dalian Jin Gang Group will continue to act in a cooperative
manner in the future.
Our growth may be adversely affected if market demand for our vaccine products and product candidates does not meet our expectations.
We may encounter problems of inadequate supply or oversupply, which would materially and adversely affect our financial condition and
results of operations and would also damage our reputation and brand.
The production of vaccine products is a lengthy and complex process. As a result, our inability to match our production to market demand
may result in a failure to meet market demand, which could materially and adversely affect our financial condition and results of operations
and could also damage our reputation and corporate brand. For example, many patients receive their seasonal 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. If we overestimate
demand, we may purchase more raw materials than required. If we underestimate demand, our third-party suppliers may have inadequate raw
material inventories, which could interrupt our manufacturing, delay shipments and result in lost sales.
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If we are unable to enroll sufficient patients and identify clinical investigators for our clinical trials, our development programs could be
delayed or terminated.
The rate of completion of our clinical trials significantly depends on the rate of enrollment of volunteers. Patients enrollment is a function of
many factors, including:
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efforts of the sponsor and clinical sites involved to facilitate timely enrollment;
patient 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 patient population;
availability of competing therapies;
availability of clinical trial sites; and
proximity of and access by patients to clinical sites.
We may have difficulty in obtaining sufficient volunteer subjects enrollment or finding qualified investigators to conduct our clinical trials as
planned and we may need to expend substantial funds to obtain access to resources or delay or modify our plans significantly. These
considerations may lead us to consider the termination of development of a product for a particular indication.
A setback in any of our clinical trials could adversely affect our share price.
Clinical trials are an important part of vaccine research before any vaccine is approved for commercial use in humans. Setbacks in any phase
of the clinical trials of our product candidates could have a material adverse effect on our business and our 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 significantly 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 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 clinical trials, who may not perform their duties satisfactorily.
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 patients and conduct clinical trials. Our reliance on these third parties for clinical development
activities reduces our control over the clinical 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 fulfill their contractual obligations, including failing to meet expected
deadlines, we may not succeed or may experience delays in our efforts to obtain regulatory approvals and commercialize our vaccine
candidates.
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 key material 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 third-party suppliers were to cease production or otherwise fail to supply us with quality raw materials,
and if 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.
In addition, if we fail to secure long-term supply sources for some of the raw materials we use, our business could be harmed. For example,
we do not have a long-term agreement for the supply of hepatitis B antigens used for Bilive production. We source hepatitis B antigens
entirely from Beijing Tiantan Biological Products Co., Ltd. (“Beijing Tiantan”). Although we are developing our own hepatitis B vaccine,
before it is approved to be commercialized, we have to rely on the supplier to receive hepatitis B antigen. We and Beijing Tiantan agreed to
enter into annual hepatitis
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B antigens supply agreements after our previous ten-year exclusive supply framework agreement expired in October 2012. Beijing Tiantan
supplied hepatitis B antigens to us from July 2013 to June 2015 based on the annual supply agreement. Thereafter, Beijing Tiantan ceased its
hepatitis B antigens production due to facilities renovation. We will work closely with Beijing Tiantan to resume production of Bilive.
However, we do not have expected timetable to this.
From time to time, concerns are raised with respect to potential contamination of biological materials supplied to us. These concerns can
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, material shortages could impact product development and production.
Our business is highly seasonal. This seasonality will contribute to our operating results fluctuating considerably throughout the year.
The seasonality in our business is expected to result in significant quarterly fluctuations in our ongoing operating results. 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.
We rely on a limited number of facilities for the manufacturing of our products in accordance with relevant regulatory requirements. Any
disruption to our existing manufacturing facilities or in the development of new facilities could reduce or restrict our sales and harm our
reputation.
According to the China GMP guidelines, each vaccine product can only be produced in a dedicated production facility. In Beijing, we conduct
the primary production of each vaccine in a dedicated production plant at our Shangdi site or Changping site, and secondary filling and
packaging at our Changping site. In Dalian, we manufacture mumps vaccine at one facility. We do not maintain back-up facilities for our
currently available products, so we are dependent on our existing facilities for the continued operation of our business.
As described more fully above, a representative of Sinobioway Medicine, who was the Chairman of the board of directors of Sinovac Beijing,
and dozens of unidentified individuals forcibly entered Sinovac Beijing’s corporate offices and disrupted Sinovac Beijing’s hepatitis A
vaccine production and seasonal flu vaccine production by cutting power to our Shangdi site, seriously impacting Sinovac Beijing’s
production and manufacturing processes and possibly damaging product quality. Due to the actions of the representative of Sinobioway
Medicine, Sinovac Beijing was forced to destroy the affected products. To maintain product safety, Sinovac Beijing temporarily decided to
stop production at the impacted facility, though production has resumed at this facility.
Natural disasters or other unanticipated catastrophic events, including power interruptions, water shortages, storms, fires, earthquakes and
terrorist attacks, could significantly impair our ability to manufacture our products and operate our business and could also delay our research
and development activities. Our facilities and certain equipment located in these facilities would be difficult to replace and could require
substantial replacement lead-time. Catastrophic events may also destroy any inventory located in our facilities.
We do not maintain any business interruption insurance to cover lost income as a result of any such events. The occurrence of such events
could materially and adversely affect our business. We may build additional manufacturing facilities in the future. There can be no assurance,
however, that we will be able to expand our manufacturing capabilities to or realize the anticipated benefits of our new facilities. Any of these
factors could reduce or restrict our sales, harm our reputation and have a material adverse effect on our business, financial condition, results
of operations and prospects.
We may need additional capital to upgrade or expand our production capabilities, 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.
In the future, we may need to raise additional funds to finance equipment expenditures, to acquire intellectual property, to expand the
production facility for our pipeline products, to continue the development and commercialization of our product candidates and to fund other
corporate purposes. As of December 31, 2018, we had approximately $158.2 million in cash and cash equivalents. We expect to undertake
significant future financings in order to:
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establish and expand manufacturing capabilities;
proceed with the research and development of other vaccine products, including clinical trials of new products;
commercialize our products, including the marketing and distribution of new and existing products;
seek and obtain regulatory approvals;
develop or acquire directly, or indirectly through acquisition of companies, other product candidates or technologies or companies;
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protect our intellectual property; and
finance general, 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, working capital, bank loans
and proceeds from private placements and public offerings of our common shares. We may raise additional funds in the future because our
current operating and capital resources may be insufficient to meet future requirements.
If we raise additional funds by issuing equity securities, it will result in further dilution to our existing shareholders because the shares may be
sold when the market price is low and shares issued in equity financing transactions will normally be sold at a discount to the current market
price. Any additional 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,
disease developments, product sales, new product rollouts, clinical trials, research and development programs, our strategic relationships, our
intellectual property, litigation, regulatory changes in our industry, the Chinese market generally or general economic conditions, could
interfere with our ability to raise additional funds or materially and 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 received different types of grants from the PRC
government to finance the research and development and facility investment of our vaccine products. We may not receive additional grants in
the future.
As described above, the actions of the Shareholder Group leading up to and at the 2017 AGM resulted in uncertainties as to the future
direction of our company and the composition of our board of directors. As a result of these uncertainties, 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 and competitors could develop products sooner than we do. As a result, our business, financial
condition and results of operations could be materially and adversely affected.
We issued approximately 27.8 million common shares and 14.6 million Series B Preferred Shares in connection with the Exchange, and
could issue additional common shares or Series B Preferred Shares, or one or more additional series of preferred shares with the effect of
diluting existing shareholders and impairing their voting and other rights
Our articles of incorporation authorize the issuance of up to 100,000,000 common shares and 50,000,000 preferred shares with designations,
rights, privileges, restrictions and conditions as may be determined from time to time by our board of directors. On February 22, 2019, in
connection with the Exchange, we issued approximately 27.8 million common shares and 14.6 million Series B Preferred Shares for the
benefit of the holders of valid and outstanding Rights as of that date. This issuance had the effect of significantly diluting the holdings of the
shareholders that are not entitled to participate in the Exchange.
The Series B Preferred Shares share equally in all dividends and distributions made on our common shares and vote together with the
common shares on all matters brought before the shareholders, in each case on an as-converted basis and subject to applicable law. The Series
B Preferred Shares are convertible into common shares at our option, or automatically upon a successful shareholder vote to increase the
authorized number of Sinovac Antigua’s common shares. Until the Series B Preferred Shares are converted into common shares (or until the
Series B Preferred Shares are listed on a nationally recognized securities exchange), they will earn a preferred dividend equal to $0.41 per
annum, payable quarterly in arrears. As a result of the ongoing litigation described elsewhere, there can be no assurance that this preferred
share dividend will be paid in a timely manner, if at all.
Our board is empowered, without shareholder approval, to issue one or more additional series of preferred shares with dividend, liquidation,
conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common shareholders. The issuance of
such additional series of preferred shares, or the issuance of additional common shares, could be used as a method of discouraging, delaying
or preventing a change in control. For example, it would be possible for our board of directors to issue preferred stock with voting or other
rights or preferences that could impede the success of any attempt to effect a change in control of our Company.
The PIPE Investors (as defined below) may exercise influence over us, including through their ability to influence matters requiring the
approval of holders of our Common Stock or Series A Preferred Stock.
On July 2, 2018, we completed a private placement of our common shares (the “PIPE”) with private investors Vivo Capital and Advantech
Capital (the “PIPE Investors”), whereby we received gross proceeds of $86.73 million. The proceeds of this offering will be used to increase
the our capabilities in research relating to quality control and to build additional production facilities to support the development and
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commercialization of sIPV-based combination vaccine and other new vaccine projects. These investments have not yet been made due in part
to the disruptive actions of certain of our shareholders and the related litigation, which remains ongoing.
The shares owned by the PIPE Investors currently represent approximately 16.6% of the voting rights in respect of our share capital (before
taking into account the shares issued in the Exchange under our Rights Agreement). Further, the PIPE Investors are entitled to appoint a
designee and observer to Sinovac Antigua’s board of directors. Accordingly, the PIPE Investors may have the ability to influence the direction
of Sinovac Antigua or the outcome of most matters submitted for the vote of our shareholders. In any of these matters, the interests of the
PIPE Investors may differ from or conflict with the interests of our other shareholders.
In connection with the PIPE, Sinovac Antigua entered into a shareholders agreement with the PIPE Investors, pursuant to which the PIPE
Investors agreed to vote their shares affirmatively in favor of all of the director designees nominated to serve on Sinovac Antigua’s board of
directors, and the PIPE Investors agreed to transfer restrictions with respect to their shares and a standstill provision, which, among other
things, bars each PIPE Investor and its affiliates from acquiring in excess of 10% of the share capital of Sinovac Antigua.
In addition, the PIPE Investors are in the business of making investments in companies and may, from time to time, acquire interests in
businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers.
If we are unable to attract, train, retain and motivate our direct sales force and third-party marketing agents, sales of our products may be
materially and adversely affected.
We rely on our direct sales force and third-party marketing agents, who are dispersed across China, to market our products to CDCs and other
healthcare institutions. We believe that our future success will depend on the dedication, efforts and performance of our direct sales force and
third-party marketing agents. There are only limited numbers of competent and qualified marketing agents in the China vaccine industry. Our
competitors may provide commissions or other economic incentives to third-party marketing agents significantly above the market standard,
which may cause such agents to cease marketing our products. If we are unable to attract, train, retain and motivate our direct sales force and
marketing agents, sales of our products may be materially and adversely affected.
Anti-corruption measures taken by the PRC government to correct corruptive practices in the vaccine industry could adversely affect our
sales and reputation.
The PRC government has taken anti-corruption measures to correct corrupt practices. In the vaccine industry, such practices include, among
others, acceptance of kickbacks, bribery or other illegal gains or benefits by the CDCs in connection with the prescription of a certain
vaccine. We do not control our third-party marketing agents, who may engage in corrupt practices to promote our products. While we
maintain strict anti-corruption policies applicable to our internal sales force and third-party marketing agents, these policies may not be
completely effective. If our sales staff or any of our third-party marketing agents engage in such practices and the PRC government takes
enforcement action, our products may be seized and our own practices, and involvement in the market agents’ practices may be investigated.
If this occurs, our sales and reputation may be materially and adversely affected.
Some of the predecessor shareholders of Sinovac Beijing were enterprises owning state-owned assets (“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.
Sinovac Beijing is currently owned 73.09% by us and 26.91% by Sinobioway Medicine. The technologies related to our hepatitis A vaccine,
hepatitis A and B vaccine and influenza vaccine that are vital to our business were directly or indirectly transferred to us by Tangshan Yian
Biological Engineering Co., Ltd. (“Tangshan Yian”). Some of the predecessor shareholders of Sinovac Beijing, including Shenzhen Kexing
Biological Engineering Ltd. (“Shenzhen Kexing”), Sinobioway Medicine, Tangshan Medicine Biotech Co., Ltd., Tangshan Yikang Biotech
Co., Ltd. and Tangshan Yian, 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. Since 2004, EOSAs have also been
required to make such assets or equity transfers at government-designated marketplaces. Certain of our acquisitions of intellectual property
rights and some equity interests were subject to these requirements.
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Tangshan Yian failed to file with the government authorities the appraisal of the hepatitis A vaccine technology that it transferred to Sinovac
Beijing in 2001 as its capital contribution to Sinovac Beijing. Under PRC laws, Tangshan Yian also failed to:
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obtain the appraisal of the hepatitis A and B vaccine technology that it transferred for no consideration to Beijing Keding Investment Co.,
Ltd. (“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 the 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 the
government authorities.
These failures subject us to the risk of losing ownership or control of these vaccine technologies.
In addition, before we acquired our 73.09% equity interest in Sinovac Beijing, it had undergone multiple changes in its shareholders and the
amounts held by the same. Some of the EOSA shareholders of Sinovac Beijing have sold, transferred or assigned their respective equity
interests in Sinovac Beijing 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 interest in Sinovac Beijing.
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. The government authorities could take such
legal actions and such legal actions, if commenced, could 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 constitutes core part of our operations, our loss of
these technologies or equity interest in Sinovac Beijing would materially and adversely affect our operations and financial condition.
Our Rights Agreement and certain provisions of our By-laws may discourage a change of control.
In March 2016, we adopted our Rights Agreement that provides for the issuance of one right (a “Right”), for each of our outstanding common
shares. We amended and restated our Rights Agreement for an additional 12-month period in February 2019. The Rights are designed to
assure that all of our shareholders receive fair and equal treatment in the event of any proposed takeover and to guard against partial tender
offers, open market accumulations, undisclosed voting arrangements and other abusive or coercive tactics to gain control of our company or
our board of directors without paying all shareholders a control premium. The Rights will cause substantial dilution to a person or group that
acquires 15% or more of the common shares on terms not approved by our board of directors.
As described above, 1Globe is appealing the judgment of the Antigua Court that our Rights Agreement is valid. If 1Globe is successful, our
shareholders will not benefit from the protections of our Rights Agreement and our company may be subject to abusive or coercive tactics by
certain shareholders to gain control of our company or our board of directors without paying all shareholders a control premium. On April 4,
2019, the Eastern Caribbean Supreme Court, Court of Appeal issued an order that restrains the Company from taking further action under its
Rights Agreement, including the distribution of the previously issued Exchange Shares, until the conclusion of such appeal.
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 preferred shares in one or more series and to designate
the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders.
These provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by
many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares.
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 735 full-time employees as of December 31, 2018 and we depend to a great extent on principal members of our
management and scientific teams. If we lose the services of any key personnel, in particular Mr. Weidong Yin, the loss could significantly
impede the key decision making on strategic choices and operational issues, which in turn will harm our business achievement. We do not
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.
As described above, a representative of Sinobioway Medicine, who was the Chairman of the board of directors of Sinovac Beijing, sent letters
without the approval of the full board of Sinovac Beijing, to Mr. Weidong Yin, Ms. Nan Wang, and other senior managers of Sinovac Beijing
purporting to terminate their employment. The board of directors of Sinovac Beijing subsequently determined, with the advice of PRC legal
counsel, that this action did not conform with the joint venture contract and articles of association and was unlawful. As also described above,
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the representative of Sinobioway Medicine and dozens of unidentified individuals forcibly entered Sinovac Beijing’s corporate offices and
limited the physical movements of employees in Sinovac Beijing’s general manager’s office and finance department in an attempt to
wrongfully take control of Sinovac Beijing’s official seal, legal documents, accounting seal, financial documents and financial information
systems. As a result of these actions, our ability to attract and retain the talent required for our business may be materially harmed.
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 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. In addition, we have a limited number of shares available for issuance under our share incentive award plan,
which may adversely affect our ability to retain and motivate our employees. 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 rapid and substantial growth and, if such growth continues, will place a strain on our administrative and operational
infrastructure. We also plan to introduce new products to market that, if successful, could 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.
International expansion may be costly, time-consuming and difficult. If we do not successfully expand internationally, our growth strategy
and prospects would be materially and adversely affected.
We have entered into selected international markets and intend to continue to expand the sales of our products into new international markets.
In expanding our business internationally, we have entered, and intend to continue to enter, markets in which we have limited or no
experience and in which our brand may be less recognized. To promote our brand and generate demand for our products to attract distributors
in international markets, we expect to spend significantly more on marketing and promotion than we do in our existing domestic markets
when appropriate. We may be unable to attract a sufficient number of distributors, and our selected distributors may not be suitable for selling
our products.
In new markets, we may fail to anticipate competitive conditions that are different from those in our existing markets. These competitive
conditions may make it difficult or impossible for us to effectively operate in these markets. If our expansion efforts in existing and new
internal markets are unsuccessful, our growth strategy and prospects would be materially and adversely affected.
We are exposed to other risks associated with international operations, including:
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political instability;
economic instability and recessions;
changes in tariffs;
difficulties of administering foreign operations generally;
limited protection for intellectual property rights;
obligations to comply with a wide variety of foreign laws and other regulatory approval requirements;
increased risk of exposure to terrorist activities;
financial condition, expertise and performance of our international distributors;
export license requirements;
unauthorized re-export of our products;
potentially adverse tax consequences;
inability to effectively enforce contractual or legal rights; and
exchange rate fluctuations or devaluation of foreign currencies.
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We may undertake acquisitions which may have a material adverse effect on our ability to manage our business and may end up being
unsuccessful.
Our growth strategy may involve the acquisition of new production lines, technologies, businesses, products or services or the creation of
strategic alliances in areas in which we do not currently operate. These acquisitions could require that our management develop expertise in
new areas or new geographies, manage new business relationships and attract new types of customers. Furthermore, acquisitions may require
significant attention from our management, and the diversion of our management’s attention and resources could have a material adverse
effect on our ability to manage our business. We may experience difficulties integrating acquisitions into our existing business and operations.
Future acquisitions may also expose us to potential risks, including risks associated with:
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the integration of new operations, services and personnel;
unforeseen or hidden liabilities;
the diversion of resources from our existing businesses and technologies;
our inability to generate sufficient revenue to offset the costs of acquisitions;
potential loss of, or harm to, relationships with employees or customers, any of which could significantly disrupt our ability to manage
our business and materially and adversely affect our business, financial condition and results of operations; and
impairment of intangible assets acquired.
We may be unable to ensure compliance with United States economic sanctions laws, especially when we sell our products to distributors
over which we have limited control.
The U.S. Department of the Treasury’s Office of Foreign Assets Control administers certain laws and regulations that impose penalties upon
U.S. persons and, in some instances, foreign entities owned or controlled by U.S. persons, for conducting activities or transacting business
with certain countries, governments, entities or individuals subject to U.S. economic sanctions (“U.S. Economic Sanctions Laws”). We will
not use any proceeds, directly or indirectly, from sales of our common shares, to fund any activities or business with any country, government,
entity or individual with respect to which U.S. persons or, as appropriate, foreign entities owned or controlled by U.S. persons, are prohibited
by U.S. Economic Sanctions Laws from conducting such activities or transacting such business.
However, we sell our products in international markets through independent non-U.S. distributors which are responsible for interacting with
the end-users of our products. We may not be able to ensure that such non-U.S. distributors comply with all applicable U.S. Economic
Sanctions Laws. Moreover, if a U.S. distributor conducts activities or transacts business with a country, government, entity or individual
subject to U.S. economic sanctions, such actions may violate U.S. Economic Sanctions Laws. As a result of the foregoing, actions could be
taken against us that could materially and adversely affect our reputation and have a material adverse effect on our business, financial
condition, results of operations and prospects.
We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S.
Holders of our common shares.
Based on the market price of our common shares, the value of our assets and the composition of our income and assets, we do not believe we
were a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our taxable year ended December 31, 2018.
However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you we will not be a PFIC for
any taxable year. A non-U.S. corporation will be a PFIC for any taxable year if either (i) at least 75% of its gross income for such year is
passive income or (ii) at least 50% of the value of its assets (based on a quarterly average) during such year is attributable to assets that
produce passive income or are held for the production of passive income. We must make a separate determination after the close of each year
as to whether we were a PFIC for that year. The composition of our income and assets will be affected by how, and how quickly, we use any
cash we generate from our operations or raise in any offering. Because the value of our assets for purposes of the PFIC test will generally be
determined by reference to the market price of our common shares, fluctuations in the market price of our common shares may cause us to
become a PFIC for any subsequent year. If we are a PFIC for any year during which a U.S. Holder (as defined in “Item 10. Additional
Information — E. Taxation — United States Federal Income Taxation”) holds our common shares, certain adverse U.S. federal income tax
consequences could apply to such U.S. Holder. Please see “Item 10. Additional Information — E. Taxation — United States Federal Income
Taxation — Passive Foreign Investment Company.”
Negative publicity regarding vaccinations in China may lead to lower demand for vaccination, which could in turn negatively affect our
business, financial condition and results of operations.
In December 2013, it was reported that several infants died shortly after receiving inoculations of hepatitis B vaccine produced by a domestic
company in China. NMPA and National Health and Family Planning Commission have determined that the inoculated hepatitis B vaccines
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comply with the applicable regulatory standards. In March 2016, media reported on improperly stored vaccines illegally sold in Shandong
province and all across China. The illegal distribution started in 2010 and two suspects were detained by police in 2015. Although experts
from the World Health Organization (“WHO”) has confidence in China’s vaccine industry and publicly clarified their position several times
since news of this scandal broke, public concerns remain. In July 2018, Changchun Changsheng Life Science Co., Ltd. was found by the
government to have falsified production records. Although the government determined to levy a $1.3 billion fine and started to initiate
drafting of new vaccine management laws of China, such negative publicity may lead to lower demand for vaccination in China, which could
in turn negatively affect the vaccine industry and our business, financial condition and results of operations.
As a foreign private issuer, we are subject to different U.S. securities laws and NASDAQ listing rules than domestic U.S. issuers.
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. In addition, as an Antigua and Barbuda company listed on the NASDAQ Global
Select Market, we are subject to NASDAQ’s corporate governance requirements. However, NASDAQ listing rules permit a foreign private
issuer like us to elect to follow home country corporate governance practices in lieu of certain NASDAQ corporate governance standards,
subject to certain conditions. Certain corporate governance practices in Antigua and Barbuda, which is our home country, may differ
significantly from the NASDAQ standards. As a result of our status as a foreign private issuer, you may not be afforded the same information
or protections that would be made available to you were you investing in a domestic U.S. issuer.
Trading of our common shares on NASDAQ has been halted since February 22, 2019.
In connection with the Exchange and the issuance of the Exchange Shares into the Shareholder 2019 Rights Exchange Trust, NASDAQ
implemented a halt in trading in Sinovac Antigua’s common shares in order to facilitate the orderly distribution of the Exchange Shares. In
light of the ongoing litigation concerning our Rights Agreement, there can be no assurance when or if this halt will be lifted. NASDAQ has
continued listing standards that we must maintain on an ongoing basis in order to continue the listing of our common shares. If NASDAQ
determines that we fail to meet these continued listing requirements, our common shares may be subject to delisting.
If our common shares are delisted and we are not able to list our common shares on another national securities exchange, we expect our
securities would be quoted on an over-the-counter market. If this were to occur, our shareholders could face significant material adverse
consequences, including limited availability of market quotations for our securities and reduced liquidity for the trading of our securities. In
addition, we could experience a decreased ability to issue additional securities and obtain additional financing in the future.
Risks Related to Government Regulation
We may not be able to comply with applicable GMP standards and other regulatory requirements, which could have a material adverse
effect on our business, financial condition and results of operations.
We are required to comply with applicable GMP regulations, which include, among other things, requirements relating to personnel, premises
and equipment, raw material and products, qualification and validation, document management, production management, quality control and
assurance and product distribution and recall. Manufacturing facilities must be approved by governmental authorities before they can be used
to commercially manufacture our products and are subject to inspection by regulatory agencies. We have been required to comply with the
new GMP standards implemented by NMPA since March 1, 2011. All vaccine manufacturers were required to meet the new GMP standards
and obtain certifications for their manufacturing facilities by December 31, 2013. Any manufacturer that failed to meet the deadline would be
forced to suspend production.
We have obtained the new GMP certificates for all of our commercial production facilities. However, we cannot assure you that we will be
able to continue to meet the applicable GMP standards and other regulatory requirements in the future. In addition, in light of the incident
where vaccines were illegally sold and distributed in Shandong province and other provinces around China in 2016, the government has
changed policies and regulations related to the vaccine sales and distribution in China. Before the policy was issued, human vaccine sales
were halted in China for months. Although the vaccine purchase and delivery was resumed in second half of 2016, we are not able to estimate
whether any other change of policies and regulations on our business will negatively impact on business in the future.
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:
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fines;
product recalls or seizures;
injunctions;
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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
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criminal prosecution.
We can only sell products that have received regulatory approvals. Many factors affect our ability to obtain such approvals.
Pre-clinical and clinical trials of our products, and the manufacturing and marketing of our products, are subject to extensive, costly and
rigorous regulation by governmental authorities in the PRC and in other countries. Even if we complete pre-clinical 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 NMPA and other regulatory authorities often takes many years 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 years and four and a half years to develop and obtain regulatory
approvals to commercialize Bilive and Anflu, respectively. EV71 vaccine, above all, took us eight years from 2008 to 2016 to develop and
obtain regulatory approvals.
There can be no assurance that all of the clinical trials pertaining to our vaccines in development will be completed within the timeframes
currently anticipated by us. We could encounter difficulties in enrolling patients for clinical trials or encounter setbacks while conducting
clinical trials that result in delays or cancellation. Data obtained from pre-clinical 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
regulation from future legislation, administrative action or changes in the NMPA policy or if unforeseen health risks become an issue with the
participants of clinical trials.
Clinical trials may also fail at any stage. 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. In addition, production permits for our products are valid for only five years and we need to apply for renewal six
months prior to their expiration. The process to approve our renewal applications could be lengthy and there is no assurance that we will be
granted renewal in a timely manner or at all.
Delays in obtaining NMPA 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, we may not maintain the approval and the approval may 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 some of our potential products is contingent upon receiving marketing authorizations from the
appropriate foreign regulatory authorities. For example, our hepatitis A vaccine, Healive, can be supplied to certain international
organizations and is eligible to participate into the tender process in some countries as it has passed the WHO prequalification assessment
(“WHO PQ”). However, there are still many other countries that require additional marketing authorization to sell in such countries despite
the WHO PQ status. These foreign regulatory approval processes include the risks associated with the NMPA approval process described
above and may include additional risks.
Because the medical conditions that 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 and additional regulations.
In response to a pandemic or the perceived risk of a pandemic, governments in the PRC 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 could subject our manufacturing locations to seizure by the PRC government. The
PRC government may also grant compulsory licenses to allow competitors to manufacture products that are protected by our patents or use
our technology developed using funds received from government agencies.
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 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.
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We are also subject to PRC laws and regulations governing the construction and operation of production facilities that may have an impact on
the environment and the use, manufacture, storage, handling or disposal of hazardous materials and waste products, such as the PRC
Environmental Impact Assessment Law, the PRC Prevention and Control of Water Pollution Law and the PRC Environmental Protection
Law, as well as waste-disposal standards set by 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 Municipal Environment Protection Bureau on our hepatitis A vaccine production line and passed the same
examination on our seasonal flu vaccine production line and filling and packaging line in 2005 and 2008, respectively, we cannot assure you
that we will continue to pass similar environmental examinations on any future production facilities that we may construct. In addition,
according to the PRC Environmental Impact Assessment Law, after the approval of previous environmental impact assessment report, if there
is any material change in the nature, scale, location, production technology used and measures adopted to prevent damages to ecology, new
environmental impact assessment reports need to be filed for approval.
We have already obtained the approval of the environmental impact assessment report from the Beijing Municipal Environment Protection
Bureau for the construction plan of our facilities in Changping District, Beijing. We produce Bilive vaccine at our production facility for
hepatitis A vaccine and produce Panflu and Panflu.1 vaccines at our production facility for seasonal flu or Anflu vaccine. We have canceled
the construction plan for our influenza vaccine production facility in Changping. A new environmental impact assessment report regarding
the change has been submitted to the relevant environment protection authorities and has passed the government inspection. We also added a
sIPV production facility to the Changping construction plan. The relevant environmental impact assessment report was submitted to the
relevant government authorities and passed the government evaluation. The approval on this report was already obtained. The construction of
sIPV has mostly been completed.
In addition, we have obtained approval for the environmental impact assessment report for PPV production facility at our Shangdi site. We
are required to pass the government inspection to launch the commercial production of PPV. If we fail to pass the inspection, we cannot
commence commercial production of the product. Moreover, we do not currently have a pollution and remediation insurance policy to
mitigate any risk related to environmental pollution or violation of environmental law.
Failure to commence development of land which we have been granted right to use within the required timeframe may cause us to lose
our land use rights.
Sinovac Dalian was granted land use rights to two parcels of land, with an aggregate area of 95,686 square meters (approximately 1,030,000
square feet) located in the Economic and Technical Development Zone of Dalian, Liaoning province by the local government. According to
the relevant PRC regulations, a parcel of land may be treated as idle land if development of the land has not been commenced within one year
after the commencement date stipulated in the land use rights grant contract or the issuance date of the construction land approval certificate.
Land users can extend the deadline for commencing the construction work for one year.
All of our current facilities of Sinovac Dalian are located at one of the two parcels of the land with an aggregated area of 55,606 square
meters (598,582 square feet). However, as of the date of this annual report, we have not commenced development of the other parcel of the
land with 40,080 square meters (431,418 square feet), which Sinovac Dalian was granted the right to use. The PRC government may treat the
land as idle land, in which case we may be required to pay idle land fees or penalties, change the intended use of the land, find another parcel
of land, or even be required to forfeit the land to PRC government, any of which would adversely affect our financial condition.
Negative publicity regarding China-based companies listed in the United States may affect the trading price of our common shares and
result in increased regulatory scrutiny of our business.
In the past, litigation and negative publicity surrounding companies with operations in China listed in the United States have resulted in
declining stock prices for such companies. Various equity research organizations have published reports on China-based companies after
examining their corporate governance practices, related party transactions, sales practices and financial statements that have led to special
investigations and stock suspensions on national exchanges. Any similar scrutiny of us, regardless of merit, could result in a diversion of our
management’s attention from managing our core business, negative publicity, potential costs to defend ourselves against rumors, volatility
and loss in the trading price of our common shares and increased directors’ and officers’ insurance premiums, any of which could materially
and adversely affect our business, financial condition and results of operations.
Risks Related to Our Intellectual Property
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 a total of 53 issued patents and a number of pending patent applications relating to our vaccines in China. 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
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may make in the future with respect to 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, third
parties could independently develop information and techniques substantially similar to ours or otherwise gain access to our trade secrets.
Our current or potential competitors, many of whom have substantial resources and have made substantial investments in competing
technologies, could 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.
We may be exposed to infringement or misappropriation claims by third parties which, if determined adversely to us, could cause substantial
liabilities to us, or we may be unable to sell some of our products. Please see “Item 4. Information on the Company — B. Business Overview
— Intellectual Property and Proprietary Technology.”
Third parties may bring intellectual property infringement claims against us in the future.
Our commercial success depends significantly on our ability to operate without infringing the patents and other proprietary rights of third
parties. Even after reasonable investigation, we may not know with certainty whether we have infringed upon a third party’s patent due to the
complexity of patent claims, the inadequacy of patent clearance search procedures in the PRC and the fact that a third party may have filed a
patent application without our knowledge while that product was under development by us.
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. There may also be technologies licensed to us or
acquired by us that are subject to infringement, misappropriation or other claims by others which could damage our ability to rely on such
technologies.
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;
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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;
• 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; and
• we may be subject to injunctions prohibiting the manufacture and sale of our products or the use of our technologies.
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 effectively
manage the resulting relationships. 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. 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.
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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 to be 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 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:
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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 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. Moreover, these third parties may pursue alternative technologies or product candidates either
on their own or in strategic relationships with others in direct competition with us.
Any cessation or suspension of our collaborations with scientific advisors and academic institutions may increase our costs in research
and development, 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 some of our research and development efforts. Some of our pre-
clinical and research programs rely heavily on 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, valuable proprietary knowledge may become publicly known which would compromise our competitive advantage.
We may lose the right to use “科兴” (Kexing) on our vaccine products and/or as part of our trade name.
We currently use “科兴” (Kexing) as part of Sinovac Beijing’s Chinese trade name in the PRC. We also use “科兴” (Kexing) as part of the
Chinese trade name of Sinovac Dalian in the PRC. Shenzhen Kexing currently owns the “科兴” trademark registered in China for Class 5
(Pharmaceuticals) under the International Classification of Goods and Services. To protect our interest in using “科兴” in our trade name, we
applied to register “科兴” in China for Class 42 (Scientific & Technological Services &Research) in 2006 and the PRC Trademark Office of
the State Administration for Industry and Commerce approved our application in 2010. The “科兴” trademark owned by Shenzhen Kexing
has not been identified as “Well-known Trademark” by the relevant PRC authorities since we first started using “科兴” in the trade name of
Sinovac Beijing in 2001. If the “科兴” trademark owned by Shenzhen Kexing is ever officially identified as a “Well-Known Trademark,”
however, we may be subject to trademark infringement claim for the use of “科兴” in our trade name. Although the trademark application
and the trade name approval systems are administered separately in China, it is possible that we may lose our ability to use the “ 科 兴 ”
trademark in our trade name due to a successful trademark infringement claim, which may adversely affect our ability to maintain and protect
our brands, cause us to incur litigation costs and divert resources and management attention.
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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.
We conduct all our operations in China, and generate approximately 94.7% of our sales 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:
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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
a lack of sufficient transparency in the regulatory process.
While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among
various sectors of the economy. The PRC government has implemented 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 PRC
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, the Chinese government still owns a
substantial portion of the productive assets in China. The continued control of these assets and other aspects of the national economy by the
PRC government could materially and adversely affect our business. The PRC government also exercises significant control over Chinese
economic growth by allocating of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and
providing preferential treatment to particular industries or companies. Efforts by the PRC 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.
The political relationship among foreign countries and China is subject to sudden fluctuations and periodic tensions. 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.
Although the Chinese economy has grown significantly in the past decade, that growth may not continue, as evidenced by the slowing of the
growth of the Chinese economy since 2012. 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 PRC 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, sometimes abruptly,
change their enforcement practices.
Prior enforcement activity, or lack of enforcement activity, is not necessarily predictive of future actions. Any enforcement actions against us
could have a material 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 costs and diversion of resources and
management attention, negative publicity, damage to our reputation and decline in the price of our common shares.
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We rely on dividends paid by our PRC 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 the dividends paid by our PRC subsidiaries, including majority-owned subsidiaries Sinovac
Beijing and Sinovac Dalian and our wholly owned subsidiaries Sinovac R&D (formerly known as Sinovac Biological) and Sinovac Biomed
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 the PRC 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, in accordance with the regulations in China, Sinovac Beijing, Sinovac Dalian, Sinovac R&D and
Sinovac Biomed are 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 each company.
Sinovac Beijing, Sinovac Dalian, Sinovac R&D and Sinovac Biomed are required to set aside, at the discretion of their respective board of
directors, a portion of their annual income after taxes to their employee welfare and bonus funds. These funds reduce the ability of the
subsidiaries to pay dividends in cash. In addition, if Sinovac Beijing, Sinovac Dalian, Sinovac R&D or Sinovac Biomed 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 over 95% 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, Sinovac Beijing, Sinovac R&D, Sinovac Dalian and Sinovac Biomed are
able to pay dividends in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”) by
complying with certain procedural requirements. However, the PRC government could 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 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 SAFE. Such loans must also be registered with 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 U.S. dollar, Euro and other currencies is affected by, among other things, changes in China’s political
and economic conditions and China’s foreign exchange policies. The PRC government allows the renminbi to fluctuate within a narrow and
managed band against a basket of certain foreign currencies. In recent years, the exchange rate between the renminbi and U.S. dollar has been
relatively stable and consequently the renminbi has sometimes fluctuated sharply against other freely traded currencies, in tandem with the
U.S. dollar.
Since June 2010, the Renminbi has fluctuated against the U.S. dollar. Since October 1, 2016, the RMB has joined the International Monetary
Fund’s basket of currencies that make up the Special Drawing Right, along with the U.S. dollar, the Euro, the Japanese yen and the British
pound. In the fourth quarter of 2016, the RMB depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital
outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi
internationalization, the PRC government may announce further changes to the exchange rate system and the RMB could appreciate or
depreciate significantly in value against the U.S. dollar.
It is difficult to predict how long such depreciation of the RMB against the U.S. dollar may last and when and how the relationship between
the renminbi and the U.S. dollar may change again. The PRC government indicated that it will make the foreign exchange rate of the
renminbi more flexible and widen the trading band of renminbi, which increases the possibility of sharp fluctuations in renminbi’s value in
the future as well as the unpredictability associated with renminbi’s exchange rate. There remains significant international pressure on the
PRC government to adopt an even more flexible currency policy, which could result in further and more significant fluctuations of the
renminbi against foreign currencies.
As the majority of our costs and expenses are denominated in renminbi, a resumption of the appreciation of the renminbi against the U.S.
dollar would further increase our costs in U.S. dollar terms. In addition, as our operating subsidiaries in China receive revenues in renminbi,
any significant depreciation of the renminbi against the U.S. dollar may have a material adverse effect on our revenues in U.S. dollar terms
and financial condition, and the value of, and any dividends payable on, our common shares. For example, to the extent that we need to
convert U.S. dollars into renminbi for our operations, appreciation of the renminbi against the U.S. dollar would have an adverse effect on the
renminbi amount we receive from the conversion. Conversely, if we decide to convert our renminbi into U.S. dollars for the purpose of
making payments for
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dividends on our common shares or for other business purposes, appreciation of the U.S. dollar against the renminbi would have a negative
effect on the U.S. dollar amount available to us.
Our business benefits from certain government tax incentives. Expiration, reduction or elimination of these incentives will increase our
tax expenses and in turn decrease our net income.
Pursuant to the PRC Enterprise Income Tax Law (the “EIT Law”) and its implementation rules, both domestic companies and the foreign
invested enterprises (the “FIEs”) are subject to a unified income tax rate of 25%. Tax exemption or reduction with fixed terms enjoyed by
enterprises including us will continue until the expiration of the prescribed period. Preferential tax treatments will continue to be granted to
high and new technology enterprises that conduct business in encouraged sectors, whether FIEs or domestic companies.
Sinovac Beijing reconfirmed its “High and New Technology Enterprises,” or HNTE, status and obtained the corresponding certificate in 2014
for a period of three years. As a result, subject to satisfaction of applicable criteria as confirmed by the competent authorities, Sinovac Beijing
was entitled to a reduced enterprise income tax (“EIT”) rate of 15% from 2014 to 2016. Sinovac Beijing reconfirmed its HNTE status in 2017
for another three-year period, which is from 2017 to 2019. Sinovac Dalian, being confirmed as a HNTE in 2017 for a period of 3 years, is
subject to the preferential EIT of 15% from 2017 to 2019. The PRC government could eliminate any of these preferential tax treatments
before their scheduled expiration. Expiration, reduction or elimination of such tax incentives will increase our tax expenses and in turn
decrease our net income.
Under the EIT Law, dividends payable by us and gains on the disposition of our shares may be subject to PRC taxation.
If we were considered a PRC resident enterprise under the EIT Law, our shareholders who are deemed non-resident enterprises may be
subject to the EIT at the rate of 10% upon the dividends payable by us or upon any gains realized from the transfer of our shares, if such
income is deemed derived from China, provided that (i) such foreign enterprise investor has no establishment or premises in China or (ii) it
has an establishment or premises in China but its income derived from China has no real connection with such establishment or premises. If
we were required under the EIT Law to withhold PRC income tax on our dividends payable to our non-PRC enterprise shareholders, or if any
gains realized from the transfer of our shares by our non-PRC enterprise shareholders were subject to the EIT, such shareholders’ investment
in our shares would be materially and adversely affected.
PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our
PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability
to increase their registered capital or distribute profits.
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and
Financing and Roundtrip Investment through Special Purpose Vehicles (“SAFE Circular 37”) on July 4, 2014, which replaced the former
circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to
register with the local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose
of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore
assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.”
SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose
vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division, or other material
events. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the
PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying
out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute
additional capital into its PRC subsidiary.
Failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of
foreign exchange controls. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration
of Direct Investment released on February 13, 2015 by SAFE, local banks will examine and handle foreign exchange registration for overseas
direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.
However, since this notice has not yet come into force, significant uncertainty exists with respect to its interpretation and implementation by
governmental authorities and banks.
Mr. Weidong Yin has made the required SAFE registration with respect to his investments in our company. However, we may not be aware of
the identities of all of our beneficial owners who are PRC residents. We do not control our beneficial owners and cannot assure you that all of
our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules. The failure of our beneficial
owners who are PRC residents to register or amend their foreign exchange registrations in a timely manner pursuant to SAFE Circular 37 and
subsequent implementation rules, or the failure of future beneficial owners of our company who are PRC residents to comply with the
registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our PRC
subsidiaries to fines and legal sanctions.
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Furthermore, since SAFE Circular 37 was recently promulgated and it is unclear how this regulation, and any future regulation concerning
offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant PRC government authorities, we cannot
predict how these regulations will affect our business operations or future strategy. Failure to register or comply with relevant requirements
may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute
dividends to our company. These risks may have a material adverse effect on our business, financial condition and results of operations.
Any failure to comply with PRC regulations regarding our employee equity incentive plans may subject the PRC plan participants or us to
fines and other legal or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies due to their
position as director, senior management or employees of the PRC subsidiaries of the overseas companies may submit applications to SAFE or
its local branches for the foreign exchange registration with respect to offshore special purpose companies. Our directors, executive officers
and other employees who are PRC residents and who have been granted options and restricted shares were able to follow SAFE Circular 37
to apply for the foreign exchange registration before our company became an overseas listed company.
Since our company has become an overseas listed company, we and our directors, executive officers and other employees who are PRC
residents and who have been granted options are subject to the Notice on Issues Concerning the Foreign Exchange Administration for
Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012,
according to which, employees, directors, supervisors and other management members participating in any stock incentive plan of an
overseas publicly listed company who are PRC residents are required to register with SAFE through a domestic qualified agent, which could
be a PRC subsidiary of such overseas listed company, and complete certain other procedures.
Failure to complete SAFE registrations may subject them to fines and legal sanctions and may also limit the ability to make payments under
our equity incentive plans or receive dividends or sales proceeds related thereto, or our ability to contribute additional capital into our wholly-
foreign owned enterprises in China and limit our wholly-foreign owned enterprises’ ability to distribute dividends to us. We also face
regulatory uncertainties that could restrict our ability to adopt additional equity incentive plans for our directors and employees under PRC
law.
In addition, the State Administration for Taxation has issued circulars concerning employee share options or restricted shares. Under these
circulars, employees working in the PRC who exercise share options, or whose restricted shares or restricted share units, or RSUs, vest, will
be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company have obligations to file documents related to
employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees related
to their share options, restricted shares or RSUs. If the employees fail to pay, or the PRC subsidiaries fail to withhold, their income taxes
according to relevant laws, rules and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities or other PRC
government authorities.
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 foreign-
investment companies’ “registered capital” and “total investment.” “Registered capital” refers to the capital contributed to or paid into a PRC
foreign-investment company in cash or in kind, and “total investment” refers to the amount of a PRC foreign-investment company’s
registered capital plus all external borrowings by such company. The amounts of a PRC foreign-investment 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 and Sinovac Dalian, must be approved by their minority shareholders, as well as Sinobioway Medicine
(formerly named Xiamen Bioway Group Co., Ltd) or Dalian Jin Gang Group, respectively, as well.
Loans by us or Sinovac Hong Kong to Sinovac Beijing, Sinovac R&D, Sinovac Dalian or Sinovac Biomed 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 the case of Sinovac Beijing or Sinovac Dalian, the approval of Sinobioway Medicine or Dalian Jin Gang Group, respectively, to increase
the amount of total investment. Further, such loans must be registered with 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 or Sinovac Dalian, by Sinobioway Medicine or Dalian Jin
Gang Group, respectively. We cannot assure you that we will be able to obtain these government registrations or approvals, or the approval of
Sinobioway Medicine or Dalian Jin Gang Group, 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 obtain 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 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 rights under U.S. law in a court in the United States.
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 Corporations Act and common law of Antigua and Barbuda. The rights of shareholders to take legal action against our
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directors, officers and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us are to a large extent
governed by the International Business Corporations 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 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, 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 U.S. 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
Our legal and commercial name is Sinovac Biotech Ltd. Our principal executive offices are located at No. 15, Zhi Tong Road, Zhongguancun
Science & Technology Park, Changping District, Beijing 102200, PRC. Our telephone number at this address is +86-10-5693-1800. Our
registered address is located at the office of APN Corporate and Management Services Limited, Unit #4 Bryson’s Complex, Friars Hill Road,
St. John’s, Antigua. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 801 2nd
Avenue, Suite 403, New York, NY 10017.
We are a holding company and conduct our business in China through our 73.09% majority-owned subsidiary Sinovac Beijing, our wholly
owned subsidiary Sinovac R&D, our 67.86% majority-owned subsidiary Sinovac Dalian, and our wholly owned subsidiaries Sinovac Biomed
and Sinovac Hong Kong. Sinovac Beijing was incorporated on April 28, 2001, Sinovac R&D was incorporated on May 7, 2009, Sinovac
Dalian was established on January 19, 2010, Sinovac Biomed was incorporated on April 16, 2015 and Sinovac Hong Kong was incorporated
on October 21, 2008.
We were incorporated in Antigua and Barbuda on March 1, 1999 as an Antiguan company with limited liability under the laws of Antigua
and Barbuda pursuant to the International Business Corporations Act. 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 ten million new shares to Lily Wang, one of our then principal shareholders to acquire a
51% equity interest in 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 those shareholders and was recorded under applicable PRC law transfer documents as a cash transaction. Lily Wang was responsible for
paying the cash to those 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 20.6% equity interest in Sinovac Beijing for
approximately $3.3 million in cash. In October 2011, we further acquired an additional 1.53% equity interest in Sinovac Beijing by
contributing the dividends declared to Sinovac Hong Kong but unpaid in amount of RMB18.6 million ($2.9 million). We currently own
73.09% of the equity interests in Sinovac Beijing and Sinobioway Medicine owns a 26.91% interest.
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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 those 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.
In the first quarter of 2008, we issued and sold an aggregate of 2.5 million common shares at $3.90 per share to Sansar Capital Management.
We received approximately $9.75 million in gross proceeds from this private placement of our common shares.
In October 2008, we established Sinovac Hong Kong, a wholly owned subsidiary focused primarily on registering and distributing current
and newly-developed vaccine products in Hong Kong and exporting our products abroad. In addition, Sinovac Hong Kong seeks research and
development collaboration opportunities with third parties in Hong Kong.
In May 2009, Sinovac R&D was incorporated with a registered capital of $5 million. In 2016, our board of directors approved an additional
capital contribution of $4.6 million by us, which has been fully provided.
In November 2009, we entered into an agreement with Dalian Jin Gang Group to establish Sinovac Dalian. In January 2010, we established
Sinovac Dalian which focuses on the research, development, manufacturing and commercialization of live attenuated vaccines, such as
varicella and mumps vaccines for human use. Pursuant to the joint venture agreement, we made an initial cash contribution of RMB60.0
million ($9.3 million) in exchange for a 30% equity interest in Sinovac Dalian and Dalian Jin Gang Group made an asset contribution of
RMB140.0 million ($21.6 million), including manufacturing facilities, production lines and land use rights, in exchange for the remaining
70% interest in Sinovac Dalian.
In December 2010, we purchased an additional 25% equity interest in Sinovac Dalian from Dalian Jin Gang Group for consideration of
RMB50.0 million ($7.7 million). In 2014, the board of directors passed a resolution to increase our capital contribution to Sinovac Dalian in
the amount of RMB80.0 million ($12.8 million), which aimed to increase Sinovac’s equity ownership from 55% to 67.86%. RMB50.0
million ($7.7 million) was initially provided through foreign debt with the expectation of a debt to equity swap of the total amount after the
remaining RMB30.0 million ($4.6 million) is provided to Sinovac Dalian. In 2016, an additional RMB30.0 million was made to Sinovac
Dalian through foreign debt and subsequently the debt to equity swap for a total of RMB80.0 million was completed. In October 2016, our
equity ownership in Sinovac Dalian increased to 67.86%.
In February 2010, we closed a public offering of our common shares. We issued and sold 11.5 million common shares at $5.75 per share. We
received net proceeds of approximately $61.8 million, after deducting underwriting discounts and commissions and offering expenses payable
by us.
In 2013, we increased the capital investment to Tangshan Yian with the total amount of $4 million, which we lent to Tangshan in 2010. In the
same year, we lent Tangshan Yian $1 million to be used for sales and marketing spending and other corporate purposes operational activities.
In December 2015, Sinovac entered into an equity interest transfer agreement with Beijing Kuai Le Xing Biotech Co., Ltd. to transfer
Sinovac’s 100% equity interest in Tangshan Yian to Beijing Kuai Le Xing Biotech Co., Ltd. for consideration of RMB13.0 million ($1.9
million). As of the date of this annual report, we have received RMB11.0 million ($1.7 million) and the remaining RMB2.0 million ($0.3
million) is receivable from Beijing Kuai Le Xing Biotech Co., Ltd. The disposal of Tangshan Yian was completed in February 2016.
In April 2015, Sinovac established Sinovac Biomed Co., Ltd., which is 100% owned by Sinovac Biotech (Hong Kong) Ltd. Sinovac Biomed
Co., Ltd. focuses on the distribution of vaccine products as well as providing consulting services in the vaccination industry.
In March 2016, we adopted our Rights Agreement. Pursuant to our Rights Agreement, subject to limited exceptions, upon (i) a person or
group obtaining ownership of 15% or more of our common shares or (ii) the commencement or announcement of an intention to make a
tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 15% or more of
our common shares, in each case, without the approval of our board of directors, each Right will entitle the holders, other than the Acquiring
Person, to buy, at an exercise price of $30.00, one one-thousandth of a share of our newly created series A junior participating preferred
shares (the “Series A Preferred Shares”). Holders are entitled to receive, in lieu of each one one-thousandths of a Series A Preferred Share,
common shares having a market value at that time of twice the Right’s exercise price. Our board of directors is entitled to redeem the Rights
at $0.001 per Right at any time before the Rights are exercisable. We refer to the person who acquired 15% or more of the outstanding
common shares of Sinovac Antigua as the “Acquiring Person.” In February 2019, we amended and restated our Rights Agreement to extend
its term until February 2020. As described above, on March 5, 2018, Sinovac Antigua filed a lawsuit in the Court of Chancery of the State of
Delaware seeking a determination whether the Shareholder Group had triggered our Rights Agreement by forming a group holding
approximately 45% of Sinovac Antigua’s outstanding shares, in excess of the plan’s threshold of 15%, and acting in concert prior to the 2017
AGM.
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On June 26, 2017, we entered into an Amalgamation Agreement with Sinovac (Cayman) Limited (“Parent”) and Sinovac Amalgamation Sub
Limited, a wholly owned subsidiary of Parent. Pursuant to the Amalgamation Agreement, Parent would acquire Sinovac Biotech Ltd. for cash
consideration equal to $7.00 per common share. On July 2, 2018, the Amalgamation Agreement was terminated.
On February 18, 2019, after reviewing the judgment of the High Court of Justice of Antigua and Barbuda of December 19, 2018 and
considering all additional facts known to the board of directors, our board of directors determined that the Collaborating Shareholders became
Acquiring Persons as defined under Sinovac Antigua’s Rights Agreement, and that their conduct resulted in a Trigger Event under the Rights
Agreement. As a result, the Rights held by the Collaborating Shareholders were deemed void.
Pursuant to the Rights Agreement, the board of directors elected to exchange each valid and outstanding Right held by Sinovac Antigua’s
shareholders (not including the Collaborating Shareholders) for an Exchange Share. The total Exchange Shares to be received by any holder
will be rounded up to the nearest whole common share and rounded down to the nearest whole Series B preferred share. On February 22,
2019, in order to facilitate the Exchange, approximately 27.8 million Common Shares and approximately 14.6 million Series B Preferred
Shares were issued into a trust for the benefit of the holders of the valid and outstanding Rights (not including the Collaborating
Shareholders). As of the close of trading in the United States on February 22, 2019, the Rights converted into the right to receive the
Exchange Shares and will no longer trade with the common shares, and will not otherwise trade on any securities market.
On March 6, 2019, the Delaware Chancery Court entered a status quo order providing that Sinovac Antigua not distribute any of the
Exchange Shares from the trust until the final disposition of the pending Delaware litigation or further order of the Court. On April 4, 2019,
the Eastern Caribbean Supreme Court, Court of Appeal issued an order that restrains Sinovac Antigua from taking further action under its
Rights Agreement, including the distribution of the previously issued Exchange Shares to the holders of valid Rights, until the conclusion of
1Globe Capital, LLC’s appeal of the December 19, 2018 Judgment of the High Court of Justice of Antigua and Barbuda. On April 8, 2019,
the Delaware Chancery Court stayed the Delaware litigation pending the outcome of 1Globe’s appeal of the Antigua Judgment. See “Legal
and Administrative Proceedings” for additional information.
For additional information regarding our principal capital expenditures, see “— D. Property, Plants and Equipment” and Item 5, Section B.
Liquidity and Capital Resources, “Capital Expenditures.”
Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website
is http://www.sinovac.com. The information contained on our website does not form part of this annual report.
B.
Business Overview
We are a fully integrated China-based biopharmaceutical company that focuses on the research, development, manufacturing and
commercialization of vaccines that protect against human infectious diseases including, without limitation, hepatitis A, hepatitis B, hand foot
and mouth disease caused by enterovirus 71, seasonal influenza, H5N1 and H1N1 pandemic influenza and mumps. In 2002, we launched our
first product, Healive, which was the first inactivated hepatitis A vaccine developed, produced and marketed by a China-based manufacturer.
In 2005, we received regulatory approvals for the production of Bilive in China, a combined hepatitis A and B vaccine, and Anflu, a split
viron influenza vaccine. In April 2008, we received regulatory approval for the production in China of our whole viron H5N1 pandemic
influenza (avian flu) vaccine, which is the only vaccine approved for sale to the Chinese national vaccine stockpiling program.
In September 2009, we were granted a production license for Panflu.1, which was the first approved vaccine in the world against the
influenza A H1N1 virus (swine flu). In December 2011, Sinovac Dalian obtained the production license from NMPA for its mumps vaccine
product and launched the mumps vaccine in late 2012. In December 2015, NMPA issued the new drug certificate and production license for
Inlive, our EV71 vaccine, and in January 2016, NMPA issued the GMP certificate and was commercially launched in China in June 2016.
Our pipeline consists of various vaccine candidates in the pre-clinical and clinical development phases in China. We obtained the approvals to
conduct clinical trials of PPV, pneumococcal conjugate vaccine, rubella vaccine, varicella vaccine, sIPV, and quadrivalent influenza vaccine
in May 2014, January 2015, December 2014, October 2015, November 2015 and in November 2016, respectively. And we have filed new
drug application for PPV, varicella vaccine, sIPV, quadrivalent influenza vaccine in June 2017, November 2017, December 2018, and
February 2019 respectively.
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Our Products
We specialize in the sales, marketing, manufacturing, and development of vaccines for infectious diseases with significant unmet medical
need. Set forth below is a chart that outlines our current marketed products and those that we have developed or are developing.
(1) Our Panflu whole viron pandemic influenza vaccine did not undergo phase III clinical trials because none were required by the relevant
authorities in order to receive regulatory approval.
(2) Our Panflu split viron pandemic influenza Vaccine did not undergo phase III clinical trials because none were required by the relevant
authorities in order to receive regulatory approval.
(3) Our mumps vaccine did not undergo clinical trials because none were required by the relevant authorities.
• Healive. In May 2002, we obtained final PRC regulatory approval for the production of Healive, 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, by consuming contaminated food or by drinking water that has been contaminated by hepatitis A. According to the WHO, as no
specific treatment exists for hepatitis A, prevention is the most effective approach against the disease. In February 2008, the PRC
government included hepatitis A vaccine into its national immunization program, and announced plans to expand vaccination to
newborns nationwide by the end of 2010. According to the NIFDC lot release records, approximately 21.6 million doses of hepatitis A
vaccines and 7.7 million doses of inactivated hepatitis A vaccine were approved and released in China for the year ended December 31,
2018. Administered intramuscularly, Healive is available in different doses for use by both adults (1.0 ml per dose) and children (0.5 ml
per dose). Our production line to manufacture our hepatitis vaccines, Healive and Bilive, interchangeably has an aggregate combined
production capacity of approximately 10 million doses annually. In 2018, 2017 and 2016, we sold approximately 8.1 million, 3.8 million,
and 3.5 million doses of Healive, which generated approximately $52.4 million, $27.4 million, and $20.0 million in revenues,
respectively. Since we launched Healive in 2002, we have sold a total of approximately 65.0 million doses as of December 31, 2018. We
are selling Healive in Asia and Latin America.
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•
•
•
•
Bilive. In June 2005, we obtained final PRC regulatory approval for the production of Bilive, the first 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.
Recipients under China’s vaccination program must privately pay for Bilive vaccinations. Bilive is designed for boost immunization or
for users in the private-pay market who prefer the convenience of one inoculation rather than two. Similar to hepatitis A, hepatitis B is
endemic in China, a major disease worldwide and a serious global public health issue. A substantial percentage of people infected with
the hepatitis B virus carry chronic or lifelong infections. The chronically infected are at a high risk of death from cirrhosis of the liver or
liver cancer. We are the only supplier in China that produces a combined inactivated hepatitis A and B vaccine, and our market share in
China, according to the NIFDC lot release records, was 100% in 2016. Bilive is available in different doses for use in both adults and
children. The 1.0 ml dose is for non-immune adults and adolescents 16 years of age and older. The 0.5 ml dose is for pediatric use in non-
immune infants, children and adolescents from one year up to and including 15 years of age. 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. Our production line to manufacture our
hepatitis vaccines, Healive and Bilive, interchangeably has an aggregate combined production capacity of approximately 10 million doses
annually. In 2018, 2017 and 2016, Bilive generated approximately $11.0 million, $10.4 million and $0.6 million in revenues, respectively.
Anflu. In October 2005, we received final approval from NMPA to produce our Anflu vaccine against influenza. We began marketing
Anflu in September 2006. The primary influenza vaccine used worldwide is the split viron vaccine, which contains virus particles
disrupted by detergent treatment. The market penetration of the seasonal flu vaccine in China is significantly below that in the developed
markets. We are the first Influenza Vaccine Supply (“IVS”) taskforce member from a developing country that collaborates with world-
class partners in influenza vaccine research. According to the NIFDC lot release records, 16.1 million doses of influenza vaccines were
approved and released in China for the year ended December 31, 2018. Our production line to manufacture our flu vaccines, Anflu,
Panflu and Panflu.1, interchangeably has an annual production capacity of approximately 8 million doses of Anflu. We sold 0.3 million,
2.7 million and 2.0 million doses of Anflu in 2018, 2017 and 2016, which generated approximately $2.0 million, $13.5 million and $9.8
million in revenues, respectively. We didn’t supply season flu vaccine in 2018 due to the production disruptions resulting from the actions
of the representative of Sinobioway Medicine. Further, Sinovac Beijing was forced to destroy the affected products. To maintain product
safety, Sinovac Beijing temporarily decided to stop production at the impacted facility; however, production has resumed at this facility.
Our Anflu products are sold to Asia and Latin America.
Panflu. In April 2008, we were granted a production license for Panflu by NMPA. Panflu is the first and only approved vaccine available
in China against the H5N1 influenza virus. The vaccine is approved for supply within China to the Chinese national vaccine stockpiling
program and may not be sold directly to the Chinese commercial market. Panflu is also registered for sale in Hong Kong. Our production
line to manufacture our flu vaccines, Anflu, Panflu and Panflu.1, interchangeably has an annual production capacity of approximately 20
million doses of Panflu or 20 million doses of Panflu.1 given the yield of virus strain received from the WHO. We produced Panflu for
government reservation since 2008, and we started recognizing revenue in 2010. Our revenue from the sale of Panflu amounted to $nil,
$nil and $6.4 million in 2018, 2017 and 2016, respectively.
Panflu.1. In September 2009, we were granted a production license for Panflu.1 by the NMPA. Panflu.1 is the first approved vaccine in
the world against the influenza A H1N1 virus. The outbreaks of influenza A H1N1 was caused by a new virus that had not been seen
previously in either human beings or animals. According to the NIFDC lot release records, we ranked number two in market share in
China in 2009 and number three in 2010. Our production line to manufacture our flu vaccines, Anflu, Panflu and Panflu.1,
interchangeably has an annual production capacity of approximately 20 million doses of Panflu or 20 million doses of Panflu.1. We
started to sell Panflu.1 in September 2009. Our revenue from Panflu.1 amounted to approximately $14 million in 2011, and Panflu.1 is
not likely to generate revenues in the foreseeable future. Panflu.1 is also registered for sale in Mexico.
• Mumps vaccine. Mumps is a viral disease of the human species caused by mumps virus, which poses a significant threat to human health
in the developing countries. According to the NIFDC release records, approximately 4.3 million doses of mumps vaccines were approved
and released for the year ended December 31, 2018. In September 2012, we were granted a production license for mumps vaccine. We
began to sell mumps vaccine in December of 2012 and no revenues were recognized in 2012. Mumps vaccine generated approximately
$1.7 million, $1.7 million, and $0.5 million in revenues in 2018, 2017, and 2016, respectively.
•
Split viron pandemic influenza vaccine. Our split viron pandemic influenza vaccine has been developed in conjunction with our whole
viron pandemic influenza vaccine. Split viron vaccines are considered to have a better safety profile than whole viron vaccines, both of
which are for the governmental stockpiling program. This product has been developed to address the needs of young children, who may
be more susceptible to adverse reactions to whole viron pandemic influenza vaccine than to a split viron vaccine. In November 2011, we
were granted the production license of split viron pandemic influenza vaccine that is to be used among the teenagers aged from 12 to 17.
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•
Inlive. EV71 causes HFMD among children under ten years old. HFMD is a common and usually mild childhood disease; however,
HFMD caused by EV71 has shown a higher incidence of neurologic involvement, and a higher acute fatal incidence. There have been a
number of outbreaks of HFMD caused by EV71 in the Asia-Pacific region since 1997 including in China, Malaysia, Singapore, Australia,
Vietnam and Taiwan. According to the National Health and Family Planning Commission of China, from 2008 to 2017, more than 18.3
million cases of HFMD were reported, resulting in around 3,650 reported fatalities in China. According to the guidelines for use of
inactivated enterovirus type 71 vaccine, EV71 infection caused majority of severe cases and fatalities from 2008 to 2015. There is no
identified treatment for enterovirus infections. We started our research and development of the EV71 vaccine in 2008. In December 2009,
NMPA accepted our application to commence human clinical trials and on December 23, 2010, we obtained approval from NMPA to
commence clinical trials. In 2013, we completed all three phases of clinical trials, which showed our EV71 vaccine candidate had a good
safety and immunogenicity profile, and had an efficacy rate of 94.6% against HFMD among infants and young children. In February
2014, the phase III clinical trial results of our EV71 vaccine were published online on NEJM, which showed the efficacy of the vaccine
against HFMD, or herpangina, was 94.8% among infants and young children. On December 30, 2015, NMPA issued the new drug
certificate and production license for our EV71 vaccine. On January 25, 2016, NMPA issued the GMP certificate for Inlive. We have
eight granted patents relating to the EV71 vaccine in China. Inlive primarily targets children from six months old to three years old, with
each child requiring a total of two doses one month apart from another. According to the NIFDC release records, approximately 27.9
million doses of EV71 vaccine were approved and released in China for the year ended December 31, 2018. Inlive generated $162.5
million, $121.3 million and $35.1 million revenue in 2018, 2017 and 2016, respectively.
Our pipeline consists of vaccine candidates in the clinical and pre-clinical development phases in China, as follows:
•
•
•
•
•
Pneumococcal polysaccharide vaccine. Pneumococcal polysaccharide vaccine (“PPV”), is a vaccine used to prevent streptococcus
pneumoniae (pneumococcus) infections, such as pneumonia and septicemia among adults aged 65 or older, adults with serious long-term
health problems, smokers, and children older than two years with serious long-term health problems. We filed an application for clinical
trials to NMPA in February 2011 and obtained the approval to commence clinical trials in May 2014. The phase III clinical trial has been
completed and we filed an application for a production license in June 2017. The research site inspection and clinical trial site inspection
have been completed and registration dossier is being reviewed by NMPA. The technical review on the registration dossier was
conducted in 2018 and supplementary documents were issued and responded to during the year.
Pneumococcal conjugate vaccine. Pneumococcal infection is a leading cause of serious illness in children and adults throughout the
world. The disease is caused by a common bacterium, the pneumococcus, which can attack different parts of the human body. According
to the WHO, pneumococcal disease is the leading vaccine-preventable killer of children under five years old in the world. At least one
million children die of pneumococcal disease every year, most of whom are young children in developing countries. Since the U.S.
commenced vaccination programs against this disease, the pneumococcal disease incidence has decreased by 94% in the U.S. Currently,
in China, there is only one imported vaccine product against the diseases. No domestic producer has been licensed to supply this vaccine.
Our pneumococcal conjugate vaccine will primarily target children two years old or under, who number approximately 32 million in
China. We obtained the clinical trials license in January 2015.
Rubella vaccine. Rubella is a disease caused by the rubella virus and an acute infection is usually associated with the symptoms of fever
and systemic rash. The clinical trial license was granted in December 2014. Development of this vaccine candidate depends on the
progress of developing a measles, mumps and rubella vaccine (“MMR vaccine”).
Varicella vaccine. Varicella is a highly contagious infectious disease caused by the varicella-zoster virus (herpesvirus 3, Human). It
usually affects children, is spread by direct contact or respiratory route via droplet nuclei and is characterized by the appearance on the
skin and mucous membranes of successive crops of lesions that are easily broken and become scabbed. Varicella is relatively benign in
children, but may be complicated by pneumonia and encephalitis in adults. According to the NIFDC lot release records, 13.4 million
doses of varicella vaccines were approved and released in China for the year ended December 31, 2016. We had completed the pre-
clinical studies of a human vaccine against varicella. The clinical trial application was filed with NMPA in January 2013. We obtained the
clinical trial license in October 2015. A phase I clinical trial was conducted and completed in 2016 and a phase III trial was completed in
2017. The production license application was filed with NMPA in November 2017. The clinical site inspection was completed in 2018.
The technical review on the registration dossier was also conducted in 2018 and supplementary documents were issued and responded to
during the year.
Sabin Inactivated Polio vaccine. Poliomyelitis (polio) is a highly infectious viral disease, which mainly affects young children. The virus
is transmitted by person-to-person spread mainly through the fecal-oral route or, less frequently, by a common vehicle (e.g., contaminated
water or food) and multiplies in the intestine, from where it can invade the nervous system and can cause paralysis. One in 200 infections
leads to irreversible paralysis (usually in the legs). Among those paralyzed, 5-10% die when their breathing muscles become
immobilized. In developing countries around the globe including China, oral polio vaccine (“OPV”), is widely utilized to eradicate polio.
Although OPV is considered safe and effective, in rare instances, the live attenuated vaccine virus in OPV can cause paralysis, resulting
in cases of vaccine-associated paralytic polio or circulating vaccine-derived poliovirus. Therefore, to eliminate the risk of such cases,
OPV will be phased out from routine immunization programs around the world. According to the Polio Eradication & Endgame Strategic
Plan 2013-2018 by WHO, governments should complete, inactivated polio vaccine (“IPV”) introduction and OPV withdrawal by 2016,
and include IPV and OPV in routine immunization by 2018. OPV will be phased out from routine immunization programs around the
world by 2020. Sabin IPV is safer
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to manufacturers and potentially more affordable as compared to the currently available Salk IPV. The global demand for IPV is
increasing as the Global Polio Eradication Initiative has called for IPV to be introduced globally. On April 3, 2014, we entered into a non-
exclusive license agreement with The Institute for Translational Vaccinology (“INTRAVACC”) a governmental institute working under
the Dutch Ministry of Public Health, Welfare and Sports, to develop and commercialize sIPV for distribution in China and other
countries. In collaboration with INTRAVACC, we have completed the pre-clinical study and submitted the application for clinical trials
to NMPA in October 2014. In November 2015, we obtained a clinical trial license. Phase I/II clinical trials were completed in April 2017,
followed by the commencement of a phase III trial, which was completed in 2018. In January 2019, the NDA was submitted to the
NMPA. The consistency study on three consecutive lots is expected to start in 2019.
• Quadrivalent influenza vaccine. Different from the trivalent influenza vaccine, which includes an influenza A H1N1 virus, an influenza A
H3N2 virus and one B virus, the quadrivalent influenza vaccine (“QIV”), is designed to protect against four different flu viruses; two
influenza A viruses and two influenza B viruses, because two very different lineages of B viruses circulate during most seasons. Adding
another B virus to the vaccine aims to give broader protection against circulating flu viruses. We initiated the development of a QIV in
May 2013. Following the completion of preclinical studies, we applied for the clinical license from the NMPA. The approval to conduct
human clinical trial was issued by NMPA in November 2016. Phase III trial has been completed. The preliminary results of the trial show
that the vaccine is safe and immunogenic. The NDA has been filed, and the application is under review by the NMPA.
Research and Development
We have established a leadership position in the research and development of vaccines in China. Since our inception, we have successfully
developed and marketed Healive, Bilive, Anflu, Panflu, Panflu.1, mumps vaccine, Inlive and have made significant advances in the
prevention of SARS. Please see “— Our Products.” We believe our R&D capabilities provide us with a key competitive advantage. We intend
to focus our research and development efforts on developing vaccines for infectious diseases with significant unmet medical needs, as well as
the vaccine products with extensive market demand in China and other countries.
In 2008, we restructured our R&D team in Beijing to better utilize our scientific and personnel resources. In 2009, we built an R&D center of
approximately 13,300 square feet in the campus of our Beijing headquarters to meet our R&D demand. In 2011, we built a lab of 6,778
square feet, which is focused on maintaining quality control of our pipeline products.
In order to achieve our R&D goal, part of our R&D strategy is to focus on in-house development and to establish collaborations with
domestic and international partners on technology and virus strains licensing. 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,
we will own the commercial rights to the products that result from our existing R&D strategic collaborations.
The investment in R&D is one of our strategies, which, we believe, will ensure our future growth. Our research and development expenses
were $21.9 million, $20.5 million, and $12.6 million in 2018, 2017, and 2016, respectively. We have obtained financial support from the PRC
government to conduct preclinical and clinical research of vaccines for government-sponsored programs.
Sales and Marketing
Our sales strategy is to increase our market share and enhance our competitive advantage in the private vaccine sales market in China while
building on this strength to push government to expand market size in the government-paid market.
Though the serious impact of the Changchun vaccine scandal, the overall vaccine market in China was increased in 2018. And although we
suspended the production of hepatitis A vaccine and seasonal flu vaccine during the year, total sales of our regular products increased by 32%
year over year.
In 2018, our sales model has been totally transformed to a collaborative model between our sales team and third party promoting companies.
We have formed a new marketing management team, strengthened the compliance management to third-party promotion companies, and
expanded market coverage, improved market competition, and improved the quality of customer service through professional and academic
promotion model. As of December 31, 2018, our internal sales and marketing team consisted of 61 employees, covering 1759 district CDC
customers in 28 provinces in China. Our sales team is mainly responsible for the maintenance of customer relationship at or above the
provincial level, bidding access at the provincial level, the development of the public market, as well as product after-sales service and the
support and management of third-party promotion companies. We cooperate with 43 third-party promotion companies, with more than 600
promotional staff. The third-party promotional team carries out business with district CDC customers with our academic support. In addition,
we have taken the lead in commercial insurance compensation mechanism for abnormal response to vaccination nationwide for the private
vaccine to provide more professional services for CDC customers and consumers. We believe these efforts contributed to our reputation for
quality and brand awareness in the Chinese vaccine market.
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We intend to establish our presence, increase our sales to international markets and enhance awareness of our products outside of China. As
of December 31, 2018, we had already exported some of our products to 11 countries. And our products are being registered in another 17
countries. In order to speed up the globalization progress, as well as strengthening our reputation for quality, we obtained WHO
prequalification in December 2017 for our hepatitis A vaccine, Healive. We will explore the globalization of our portfolio and develop
products targeting other potential international markets where we believe we can be successful.
Seasonality
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. We expect this seasonality in our business to contribute to significant quarterly
fluctuations in our operating results. In the first quarter, our strong winter-season sales are usually offset by the slow-down of business during
the Chinese New Year holiday season that effectively lasts more than half a month. During this holiday season, many businesses in China,
including CDCs and most departments in hospitals, are either closed or substantially reduce the level of their activities. Please see “Item 3.
Key Information — D. Risk Factors — Risks Related to Our Company — Our business is highly seasonal. This seasonality will contribute to
our operating results fluctuating considerably throughout the year.”
Suppliers
We obtain the raw materials from local and overseas suppliers. We generally maintain at least two suppliers for each key raw material, with
the exception of hepatitis B antigens we use for Bilive production. We source hepatitis B antigens entirely from Beijing Tiantan. Please see
“Item 3. Key Information — D. Risk Factors — Risks Related to Our Company — If any of our third-party suppliers or manufacturers cannot
adequately meet our needs, our business could be harmed.” Raw materials generally are 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.
Manufacturing, Safety and Quality Assurance
We have three manufacturing bases located in the Haidian and Changping Districts of Beijing and Dalian City of Liaoning province.
We have two upstream production facilities in Haidian District, Beijing for commercialized products. Our Healive and Bilive share the same
production line, which has an aggregate annual capacity of 10 million doses. Our Anflu production line has an annual capacity of 8 million
doses, which can also be used to produce 20 million doses of Panflu or Panflu.1 annually.
Our Healive, Bilive and Anflu production facilities received their GMP certificates initially in March 2002, June 2005 and October 2005,
respectively, and renewed their GMP certificates for another five years in 2008, 2010 and 2010, respectively. The upstream production plants
for our hepatitis vaccines and flu vaccines in Haidian District have passed the new GMP certification and obtained the new GMP certificate
on April 17, 2013, which was renewed on April 13, 2018. Our upstream production line for PPV, with annual production capacity of 5 million
doses, was built in Haidian site in 2014. As described above, a representative of Sinobioway Medicine and dozens of unidentified individuals
forcibly entered Sinovac Beijing’s corporate offices and cut power to our Shangdi site. Due to the actions of the representative of Sinobioway
Medicine, Sinovac Beijing was forced to destroy the affected products of hepatitis A vaccine and influenza vaccine and temporarily
suspended production at the impacted facility in order to maintain product safety. Since the influenza vaccine is a seasonal product, there was
no supply of Anflu for the flu season of 2018-2019. However, production of the hepatitis A vaccine resumed in fourth quarter of 2018 and
production of the influenza vaccine resumed in March 2019.
We have built a new production site in Changping District, Beijing, which consists of a new filling and packaging line that complies with the
new PRC GMP standards, EV71 production facilities and a warehouse. The EV71 vaccine production line has a designed annual capacity of
20 million doses and was granted the GMP certificate in January 2016. Our upstream production facilities of Sabin IPV were built in
Changping in 2017 with expected annual production capacity of 20 million doses.
Our production site in Sinovac Dalian focuses on the research, development, manufacturing and commercialization of live-attenuated
vaccines, such as varicella, mumps and combination vaccines containing measles, mumps, rubella, and/or varicella. Sinovac Dalian has
received its GMP certificate (2010 version) from NMPA for its mumps vaccine in September 2012 and launched mumps vaccine, its first
commercial product, in late 2012. The renewed GMP certificate issued by Food and Drug Administration of Liaoning Province was obtained
on February 13, 2018, which will remain valid until February 12, 2023. The construction of a production line for the varicella vaccine is
being completed.
Each of our subsidiaries has its own quality assurance departments. The quality assurance department of each subsidiary plays a role to
supervise the R&D, manufacturing, procurement, quality control, sales and marketing, logistics and plant construction of its own subsidiary
under the guidance of relating regulations and guidelines. Regular training or seminars are organized among quality assurance departments of
each subsidiary to share and exchange knowledge and experiences.
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Sinovac has built a pharmacovigilance system. Pharmacovigilance system includes organization structure, documentation, working
procedures and SOPs. The organization structure indicates staff and relevant responsibilities. According to requirements of authorities, we
report the severe Adverse Event Following Immunization (“AEFI”) in time and regularly. We summarize and analyze safety information
coming from post-marketing surveillance, phase IV clinical trials, safety studies and literatures, and to submit the Periodic Safety Update
Reports to authorities regularly. Meanwhile, we are also required to assist authorities to investigate on the AEFIs and provide information as
required.
Collaborations
In September 2015, Sinovac Dalian entered into a technology transfer and supply agreement with GlaxoSmithKline Biologicals SA (“GSK”),
to use GSK’s measles seeds to develop combination vaccines containing measles for the China market. Under this agreement, GSK agreed to
transfer its measles seeds, and provide reasonable assistance and relevant technical materials to Sinovac Dalian for developing and producing
combination vaccines containing measles. We made a payment of $87,000 for purchasing measles seeds from GSK during the year ended
December 31, 2017.
On April 3, 2014, we entered into a non-exclusive license agreement with INTRAVACC, a governmental institute working under the Dutch
Ministry of Public Health, Welfare and Sports, to develop and commercialize sIPV for distribution in China and other countries. We expect to
develop and commercialize the vaccine in China, as well as seeking regulatory approval in other countries. The agreement has a term of 50
years. Please see “— Our Products.”
We agreed to pay INTRAVACC license fee of up to $2,406 million (€1.5 million) net of PRC withholding tax, including an entrance fee and
milestone payments upon achieving specific milestones. We also agreed to pay royalty payments in a single digit percentage of net sales
generated worldwide from the product or products developed under the license agreement. We recorded an entrance fee of $0.7 million (€0.5
million) excluding PRC withholding tax for the year ended December 31, 2014 as research and development expense. We also recorded $0.1
million (€0.1 million) for payment made to INTRAVACC for use of sIPV viral seeds in research and development expense for the year ended
December 31, 2014. We recorded a milestone fee of $0.6 million (€0.5 million) and $0.6 million (€0.5 million) for the years ended December
31, 2018 and 2016 as research and development expense, respectively. There was no expense incurred or paid to INTRAVACC for the year
ended December 31, 2017.
We licensed from MedImmune, LLC (“MedImmune”) certain rights to use patented reverse genetics technology pertaining to a virus strain
used for the production of Panflu (H5N1). We have agreed to pay an upfront license fee and to pay milestone payments of up to an aggregate
of $9.9 million upon the achievement of certain amount of cumulative net sales of licensed products in China (including Hong Kong and
Macau), as well as royalty payments in single digits of net sales of the licensed products in China (including Hong Kong and Macau). On
August 15, 2012, we entered into amendment agreements with MedImmune in respect of four of our patent license agreements with
MedImmune to, among other things, extend the effectiveness of each agreement to reflect revised termination dates between December 2015
and May 2021. We accrued license fee and royalties of $3.4 million at the end of 2011 which were paid in 2012. We did not make any royalty
payment in 2013 but made a $1.0 million royalty payment in May 2014. We accrued a royalty payment of $9,000 and $8,000 as of December
31, 2018 and 2016, which was paid in 2019 and 2017, respectively.
In March 2009, we entered into a technology transfer agreement (with an amendment agreement entered into on December 14, 2011) with
Tianjin CanSino Biotechnology Inc. (“Tianjin Cansino”). According to the agreement, Tianjing Cansino will transfer the technology related to
pneumococcal vaccine to us and jointly develop the technology with us. The collaboration term under the technology transfer agreement is
from March 12, 2009 to eight years after the first sale of the vaccine developed under the technology transfer agreement in the Chinese
market.
Under the terms of the technology transfer agreement, we will make milestone payments of up to $3 million and royalty payments ranging
from 6% to 10% of net sales in China. Both parties will work together to develop international markets for the products. On November 17,
2009 and December 14, 2011, two amendment agreements were signed for the payment of $0.3 million for the transfer of an additional six
serotypes and related technology. As of December 31, 2016, we made total milestone payments of $1.2 million ($1 million under the March
12, 2009 agreement and $0.2 million under the December 14, 2011 amendment). The remaining milestone payments will be paid when we
achieve each specific milestone, which includes obtaining clinical trials approval, completing clinical trials and achievement of desired
results, and achievement of commercial sales.
In January 2015, we entered into a third amendment to the technology transfer agreement dated March 12, 2009 and the two amendment
agreements dated November 17, 2009 and December 24, 2011. By entering into this third amendment, the technology transfer agreement was
revised to be a licensing agreement. The remaining milestone and royalty payments under the technology transfer agreement have been
reduced. Both we and Tianjin Cansino are free to develop pneumococcal vaccines or to collaborate with one other company for the same
purpose. We made a payment and recorded $nil, $nil and $0.3 million in research and development expenses for the years ended December
31, 2018, 2017 and 2016, respectively.
In August 2009, we entered into a patent license agreement with the National Institutes of Health (“NIH”), an agency of the United States
Public Health Services within the Department of Health and Human Services. NIH has granted us a non-exclusive license to make and use
certain of its products. NIH has also granted us the right to use certain associated information for development of its licensed products. The
collaboration term under the patent license agreement is from August 18, 2009 to the later of (a) the expiration of all royalty obligations under
the licensed rights where such rights exist and (b) eight years after the first commercial sale by us, unless the agreement is terminated earlier
per the provisions included therein.
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We agreed to pay NIH a license issue royalty of $80,000 upon execution of the agreement and a non-refundable minimum annual royalty of
$8,000, and royalty payments on net sales ranging from 1.5% to 4% depending on the sales territory and the customers. We also agreed to pay
NIH benchmark royalties of $0.3 million upon achieving each benchmark as specified in the patent license agreement, including completion
of clinical trials, obtaining regulatory approval for marketing, and achievement of commercial sales. We recorded a license issue royalty of
$16,000 for the year ended December 31, 2018 as research and development expenses (2017 - $nil, 2016 - $nil).
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. In 2010, NMPA
increased the quality standard of some vaccine products by issuing a new version of Pharmacopeia. As a result, some vaccine products
manufactured by multinational companies could no longer be sold in China. According to NMPA, there are approximately 40 vaccine
companies in China, of which we believe approximately ten are our direct competitors.
Even with the advent of private medical and healthcare insurance programs in China and the government vaccine purchase program’s
expanded vaccine list, most Chinese citizens must pay for their own vaccines because these insurance programs do not typically cover
vaccines and the government vaccine purchase program covers only infants and young children. We believe the consumer market for
conventional products is health conscious yet price sensitive and accordingly would favor our products over both cheaper but not enough high
quality vaccines provided by local manufacturers and comparable quality but more expensive vaccines manufactured by international
competitors. Our competitors, both domestic and international, include large integrated multinational pharmaceutical, domestic state-owned
entities and domestic private companies 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, although these advantages are not comprehensive.
Multiple vaccine products have been 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, influenza and EV71. Specifically, with respect to the inactivated hepatitis A vaccine, we
consider Tibet AIM Biovaccine Technology Group Co., Ltd. (the hepatitis A manufacturer spun off from Kunming Institute of Biological
Products) and Merck Sharp & Dohne Corp. as key competitors in the China market, and GlaxoSmithKline Biologicals and Merck Sharp &
Dohme Corp. for the markets outside of China.
In China, according to the batch release numbers published by NIFDC, over 55% of hepatitis A vaccines released in China are live attenuated
vaccine, another type of hepatitis A vaccine compared to inactivated version, which is the biggest competitor for inactivated hepatitis A
vaccine. The live attenuated hepatitis A vaccine manufacturers include Kunming Institute of Biological Product, Pukang Biological Co., Ltd.,
and Changchun Institute of Biological Products. With respect to the hepatitis A and B vaccines, we are the only company to supply hepatitis
A and B vaccine in China.
With respect to the influenza vaccines, in China, we consider Hualan Biological Engineering Inc., Changchun Institute of Biological
Products, Sanofi Pasteur S.A., Aleph Biological Co., Ltd. (Dalian Yalifeng) and Sanofi Pasteur S.A. as our major competitors for the market
outside of China. With respect to the EV71 vaccines, we considered Kunming Institute of Biological Product and China National Biotec
Group Co., Ltd. as our key competitors in China as well as outside of China.
We believe we enjoy a number of advantages over our PRC domestic and multinational competitors. Generally, we believe that the principal
competitive factors in the markets for our products and product candidates include:
•
•
•
•
safety and efficacy profile;
brand reputation;
product supply; and
after-sales service.
Intellectual Property and Proprietary Technology
Protection of our intellectual property and proprietary technology is 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 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.
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We have a total of 53 issued patents and a number of pending patent applications relating to our vaccines in China. Our hepatitis A vaccine
and seasonal influenza vaccine and EV71 vaccine have five, three and eight issued patents for protection, respectively.
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 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 conceived by the individual during the
course of employment is our exclusive property 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.
We have relied on administrative protection afforded new drugs through the monitoring period provided by NMPA in the past. During the
monitoring period, third party applications for manufacturing or importing the same drug are not accepted by NMPA. The administrative
protection for Healive expired in December 2007 and Bilive expired in January 2008. The administrative protection was no longer
implemented in China. Instead, NMPA implements a new drug monitoring period starting from the issuance of production license, aiming to
collect safety data for further evaluation on new products of this kind commercialized in China. Our EV71 vaccine was granted a five-year
new drug monitoring period, during which no other company is able to be approved to enter into a human clinical study of this kind of
vaccine except the three products from Kunming, CNBG and Sinovac approved in China. This monitoring period of our EV71 vaccine will
expire in December 2020.
We maintain 20 registered trademarks in China, including (i) Sinovac, (ii) Sinovac’s Chinese name and its logo, (iii) Healive, its Chinese
name and its logo, (iv) Bilive and its Chinese name, (v) Anflu and its Chinese name, (vi) Panflu, its Chinese name and its logo, (vii)
PANFLU.1 and its Chinese name, (viii) Chinese name of Inlive and (ix) EV71Vac and EntV71. We have registered “Sinovac” trademark in
Canada, Malaysia and Philippines and the United States. We have registered “Sinovac” as trademarks under the “Madrid international
trademark registration system,” which can be used in the member countries of Madrid Union, including France, United Kingdom and
Germany. Since the “Sinovac” trademark certificates of Columbia, India, Thailand and United States have already expired, we now deal with
their renewal procedures.
We currently use “科兴” (Kexing) as part of Sinovac Beijing’s Chinese trade name in the PRC. We also use “科兴” (Kexing) as part of the
Chinese trade name of Sinovac Dalian in the PRC. Shenzhen Kexing currently owns the “科兴” trademark registered in China for Class 5
(Pharmaceuticals) under the International Classification of Goods and Services. To protect our interest in using “科兴” in our trade name, we
applied to register “科兴” in China for Class 42 (Scientific & Technological Services & Research) in 2006 and the PRC Trademark Office of
the State Administration for Industry and Commerce approved our application in 2010. The “科兴” trademark owned by Shenzhen Kexing
has not been identified as “Well-known Trademark” by the relevant PRC authorities since we first started using “科兴” in the trade name of
Sinovac Beijing in 2001. If the “科兴” trademark owned by Shenzhen Kexing is ever officially identified as a “Well-Known trademark,”
however, we may be subject to trademark infringement claim for the use of “科兴” in our trade name.
Although the trademark application and the trade name approval systems are administered separately in China, that we may lose our ability to
use the “科兴” trademark in our trade name due to a successful trademark infringement claim, which may adversely affect our ability to
maintain and protect our brands, cause us to incur litigation costs and divert resources and management attention. 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.
We have registered our domain names, including www.sinovac.com.cn and www.sinovac.com, with the China Internet Network Information
Center.
Insurance
We maintain property insurance coverage with an annual aggregate insured amount of approximately RMB744.9 million ($108.3 million) to
cover our property and facilities from claims arising from fire, earthquake, flood and a wide range of other natural disasters. We are carrying
worldwide product liability insurance for Healive, Bilive, Anflu, Panflu and Inlive (excluding the United States and Europe) from April 2019
to April 2020. We do not carry liability insurance to cover liability claims that may arise from the incidents relating to the clinical trials of our
vaccine products. Our insurance coverage may not be sufficient to cover any claim for product liability or damage to our fixed assets. We do
not maintain any business interruption insurance. We are negotiating with the insurance providers for a renewal of our product liabilities
insurance policies. 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, because our insurance coverage is limited, our exposure to such claims could cause significant
financial burden.”
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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 NMPA 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 trial, declaration, approval and transfer of new medicine registrations, applicable industry standards of
manufacturing, distribution, packaging, advertising and pricing.
Pre-clinical Studies. Pre-clinical studies 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. Pre-clinical studies must be conducted in compliance with Good Laboratory
Practice for Non-clinical Studies of Pharmaceuticals. With respect to vaccines, the pre-clinical studies should also comply with Technical
Guidance for Pre-clinical Studies on Preventive Vaccines. We must submit a file package for investigational new drug application (“IND”), to
the Centers for Drug Evaluation. The files should include pharmaceutical research, pharmacology and toxicology research, together with the
records of manufacturing and testing and the sample of product candidate. We cannot commence clinical trials until we obtain the approval of
IND notification. We cannot assure that submission of an IND will result in the Centers for Drug Evaluation allowing clinical trials to begin,
after these trials commence, issues could arise that result in the suspension or termination of such clinical trials.
Clinical trials. Clinical trials involve the administration of the product candidate to healthy volunteers or patients 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 patient population to evaluate preliminarily the efficacy of the drug for specific, targeted conditions and 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 patient population. Clinical trials have to be conducted in compliance
with the Good Clinical Trial Practice of Pharmaceuticals.
With respect to vaccines, we also have to comply with the NMPA’s Requirements on Application for Clinical Trial of New Preventive
Biological Products. The sample vaccine products must be tested by the NIFDC before they may be used in the clinical trials. We or the
NMPA 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 clinical trials, we apply for New Drug Application (“NDA”). We submit to the Centers for Drug Evaluation the NDA
file package, which includes a clinical trial research report, pharmaceutical research data, and records of manufacturing and testing of three
batches of products, to apply for a new drug certificate and/ or production license. For vaccines, we have to comply with the NMPA’s
Guidelines for Clinical Trial Report on Vaccines.
Communication Meeting. In order to improve review process of regulatory approval, NMPA has set up a communication channel between
the applicant and reviewing agencies. Applicant can discuss the material safety issue during human clinical study or significant technical
issue arise during the development process with regulatory agencies. This kind of meeting can also be held at critical stages in the entire
process of drug development, including before IND application, before phase II or phase III human clinical studies, before NDA application,
etc.
New Drug Certificate. The Centers for Drug Evaluation 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 Centers for Drug Evaluation will begin technical
review, and give their technical opinion to NMPA. At the meantime, according to the requirement of technical review, the Centers for Drug
Evaluation can ask for an on-site examination on the circumstances of our clinical trials and pharmaceutical research. NMPA will decide
whether or not to issue a new drug certificate to us. We consider obtaining the new drug certificate for our product candidates a significant
milestone in our business.
Production Permit. Simultaneously with the application of new drug certificate, we also apply to NMPA for a production license to
manufacture the new drug to be approved by NMPA. The production license application will be examined with similar stage procedure as for
the new drug certificate, first by the Center for Drug Evaluation, and NMPA the last. After the Center for Drug Evaluation accepts the
application, the Center for Drug Evaluation will review the application files and give technical opinion. If the Center for Drug Evaluation is
satisfied with our application materials, it will notify us to apply for the on-site production inspection within six months after being so
notified.
39
The Center for Food and Drug Inspection will conduct an on-site inspection on our production procedures within 30 days after receipt of our
application and take samples from three batches of our products, and the NIFDC will test the selected samples and later submit its testing
reports to the Centers for Drug Evaluation. The Center for Food and Drug Inspection must submit the on-site production inspection report to
Center for Drug Evaluation. The Centers for Drug Evaluation will form a comprehensive opinion based upon the technical review and
evaluation opinion, the on-site production inspection report and the testing results of the samples, and submit its opinion and relevant
materials to NMPA. NMPA will decide whether or not to issue the production permit to us. If the product approval and production approval
both meet the criteria, NMPA will issue the production permit together with the new drug certificate at the same time. The production permit
is valid for a term of five years and must be renewed before its expiration. During the renewal process, our production facilities will be re-
evaluated by the appropriate governmental authorities and must comply with effective standards and regulations.
Under certain circumstances, for instance, where drugs are developed to cure a disease without effective therapeutic methods, NMPA
provides a special proceeding for its review of the new drug certificate application and production permit application relating to such drugs.
In addition, in order to encourage innovation and shorten the time of commercialization of pharmaceutical products that are urgently needed,
CDE has developed a prioritized review and approval mechanism. If a product is granted prioritized status, the review will be expedited.
NMPA 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 of NMPA. During the same period, NMPA 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 manufacturing of pharmaceutical products for which there are
published state pharmaceutical standards.
GMP Certificate. After receiving the production permit, we should submit the GMP inspection application to the provincial level of NMPA,
the provincial level of NMPA will arrange for the inspection on our facilities for purposes of GMP inspection. If we pass the GMP inspection,
the provincial level of NMPA will issue the GMP Certificate. A GMP Certificate is used to approve the quality system, including quality
assurance and quality control management, production management, materials and products, qualification and validation, facility and
equipment. NMPA has issued GMP standards for pharmaceutical manufacturers to minimize the risks arising out of the production process of
drugs that are not identified or eliminated through testing the final products. Otherwise, the application and on-site inspection of GMP can
also be merged into the on-site inspection of production procedures in the NDA process.
A GMP Certificate is valid for five years and we 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 receiving batch approval. After we obtain the GMP
certificate, we will start commercial production, after which we need to apply for batch release approval by the NIFDC for the commercial
lots. For each batch of products, we will provide samples taken from cold rooms by inspectors, together with manufacturing records, self-
testing records and other quality control documents. The NIFDC will review the documents and test the samples and issue a batch approval
within approximately two months if our manufacture procedures and the quality of our products meet the NMPA standards. With the batch
approval, we may distribute the approved batch of vaccines to the market.
40
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 as of the date of this report.
*
**
Dalian Jin Gang Group Co., Ltd. owns the remaining 32.14% equity interest in Sinovac Dalian.
Sinobioway Bio-medicine Co., Ltd., formerly named Xiamen Bioway Group Co., Ltd, owns the remaining 26.91% equity interest in
Sinovac Beijing.
***
The former name is Beijing Sinovac Biological Technology Co., Ltd.
****
The former name is Sinovac Zhong Yi Bio-pharmaceutical Co., Ltd.
D.
Property, Plants and Equipment
We are headquartered in the Peking University Biological Industry Park (Haidian) 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 vaccines is located. We own the above-described 48,900-square-foot facility in
Beijing.
In August 2004, we signed two 20-year leases with SinoBioway Biotech Group Co. Ltd. (“SinoBioway”), pursuant to which we leased two
buildings of approximately 28,000 and 13,300 square feet, respectively, located at the Peking University Biological Park in Beijing. We house
our Anflu manufacturing and R&D center in these two buildings. One of the lease agreements was amended on August 12, 2010 to reflect an
increase in the lease payment. In June 2007, we signed another 20-year lease with SinoBioway, in order to expand Sinovac Beijing’s
production facilities in Beijing, pursuant to which we leased one building of approximately 37,000 square feet, located at Peking University
Biological Park. Part of our administrative offices and filling facilities are located in this building until 2013. The filling facilities were moved
to Changping site in 2013, where we are setting up the commercial production facility for our pneumococcal vaccines.
In September 2010, we entered into an agreement with SinoBioway, under which we lease a space of 6,778 square feet. The lease term is five
years and we used it for our research and development function. On April 8, 2013, we entered into three supplemental agreements with
SinoBioway, under which the expiration date of each of the four operating lease agreements was extended to April 7, 2033.
We have three production lines located in the Peking University Biological Park (Haidian). Our production line to manufacture our hepatitis
vaccines, Healive and Bilive, interchangeably has an aggregate combined production capacity of approximately 10 million doses annually.
Our production line to manufacture our flu vaccines, Anflu, Panflu and Panflu.1, interchangeably has an annual production capacity of
approximately eight million doses of Anflu (northern hemisphere), or the equivalent of 20 million doses of Panflu or 20 million doses of
Panflu.1.
We have also built PPV production line at the Haidian site with designed annual capacity of five million doses per year. In May 2013, our
filling and packaging line in Changping site was granted the GMP certificate for the first time, after which we moved the filling and
packaging activities to our Changping site. In July 2016, we started to build our sIPV plant for bulk production on our Changping site. The
expected capacity is approximately 20 million doses. The five-year GMP renewal on Changping site was successfully completed in April 13,
2018.
In February 2010, we acquired a right to use approximately 312,400 square feet of land located in Changping District, Beijing (“Changping
Site”) with five buildings with a total built-out area of 32,322 square meters (approximately 347,900 square feet) on 29,021 square meters (for
a total consideration of approximately RMB123.6 million ($19.1 million)). We have made all required payments by December 31, 2012. We
have built a new filling and packaging line, EV71 production facilities and a warehouse on the Changping site. The new filling and packaging
line and warehouse commenced operation in May 2013 and December 2010, respectively. The EV71 vaccine production line has a designed
annual capacity of 20 million doses and was granted the new GMP certificate in January 2016. As described above, a representative of
Sinobioway Medicine and dozens of unidentified individuals forcibly entered Sinovac Beijing’s corporate offices and cut power to our
Shangdi site. Due to the actions of the representative of Sinobioway Medicine, Sinovac Beijing was forced to destroy the affected products
and temporarily decided to stop production at the impacted facility in order to maintain product safety, though production has resumed at this
facility.
41
In November 2009, we entered into an agreement with Dalian Jin Gang Group to establish Sinovac Dalian. In January 2010, we established
Sinovac Dalian which focuses on the research, development, manufacturing and commercialization of live-attenuated vaccines, such as
varicella, mumps and rubella vaccines for human use. Sinovac Dalian has seven existing buildings with a total built-out area of 20,000 square
meters (approximately 215,280 square feet) on 95,685 square meters (approximately 1,030,000 square feet) of land, located at DD Port,
Economic and Technical Development Zone, Dalian City, Liaoning province. The construction of a varicella vaccine production plant within
the existing building in Sinovac Dalian with total area of 4,458 square meters is underway. The expected annual capacity is five million
doses. Sinovac Dalian received its GMP certificate (2010 version) from the NMPA for its mumps vaccine in September 2012.
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 fully integrated, China-based biopharmaceutical company that focuses on the research, development, manufacturing and
commercialization of vaccines against infectious diseases. We have successfully developed a portfolio of products, consisting of vaccines
against hepatitis A, hepatitis B, enterovirus type 71, influenza viruses and mumps. The following table sets forth certain information on our
commercialized products.
Products
Healive
Bilive
Anflu
Inlive
Panflu(1)
Panflu.1(1)
Mumps
Date of Approval
May 2002
June 2005
October 2005
January 2016
April 2008
September 2009
September 2012
Number of Doses Sold
2017
3.8 million
0.6 million
2.7 million
4.7 million
nil
nil
0.3 million
2018
8.1 million
0.6 million
0.3 million
6.1 million
nil
nil
0.2 million
2016
3.5 million
0.4 million
2.0 million
1.5 million
1.9 million
nil
0.3 million
(1) We sold all of our Panflu and Panflu.1 products to the PRC government. Our sales of Panflu and Panflu.1 depend on the completion of
government audit on our fulfillment to the stockpiling order. In 2016, 1.9 million doses of Panflu products manufactured for the
government stockpiling order were not used and expired, allowing us to recognize sales revenue. Sales of Panflu generated revenues of
$6.4 million in 2016.
Our pipeline consists of various vaccine candidates in the clinical trial development phases and production application phase in China. We
obtained the approvals to conduct clinical trials of PPV, pneumococcal conjugate vaccine, sIPV, varicella vaccine and quadrivalent flu vaccine
in May 2014, January 2015 and November 2015, October 2015 and November 2016, respectively. And we have filed application of
production license for PPV, varicella vaccine, sIPV, quadrivalent influenza vaccine in June 2017, November 2017, December 2018, and
February 2019 respectively.
Our Proprietary Rights
Healive was co-developed by Tangshan Yian and the NIFDC. In April 2001, Tangshan Yian contributed its proprietary rights to Healive to
Sinovac Beijing as its capital contribution to Sinovac Beijing. In 2002, the NIFDC, Tangshan Yian and Sinovac Beijing agreed that Sinovac
Beijing owned the right to market and sell Healive, and that Sinovac Beijing was required to pay the NIFDC approximately $1 million for the
Healive technology consulting fee that Tangshan had not paid by that time. We obtained Healive’s new drug certificate from the NMPA in
December 1999, the production license in May 2002, and final PRC regulatory approval for production of Healive in May 2002. Production
of Healive commenced in July 2002.
42
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 10.7% equity interest in Sinovac Beijing and a cash payment of
$18,000. Beijing Keding is owned by Mr. Weidong Yin and three other senior officers of Sinovac Beijing. We received the production license
for Bilive from the NMPA in January 2005. In June 2005, we obtained the final PRC regulatory approval for production of Bilive. 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.
Sinovac Beijing started to research and develop the H5N1 vaccine in 2004. In 2004, Sinovac Beijing entered into an agreement with the
National Institute for Biological Standards and Controls (“NIBSC”), an England based laboratory under the WHO, on transferring the H5N1
virus strain. According to the agreement, Sinovac Beijing as the recipient would receive the materials and information from NIBSC. The
agreement indicated that Sinovac Beijing can only use received materials and information for academic in-house research purposes and
Sinovac Beijing shall negotiate with the owner of reverse genetics technology pertaining to virus strain for any commercial purpose. In April
2008, Sinovac Beijing received a production license for H5N1 from the PRC government and started to produce H5N1 vaccines for the
government-stockpiling program in June 2008.
In 2011, we licensed from MedImmune certain rights to use patented reverse genetics technology pertaining to virus strain production for
H5N1 influenza vaccine. We have agreed to pay an upfront license fee, milestone payments up to an aggregate of $9.9 million based upon the
achievement of cumulative net sales of licensed products in China (including Hong Kong and Macau), as well as royalty payments in single
digit of net sales of the licensed products in China (including Hong Kong and Macau). On August 15, 2012, we entered into amended
agreements with MedImmune to, among other things, extend the effectiveness of each agreement to reflect revised termination dates between
December 2015 and May 2021. License fee and royalties of $3.4 million accrued at the end of 2011 was paid in 2012. No payments were
made in 2013 and 2015. We made a $0.9 million royalty payment to MedImmune in 2014.
No amortization expenses were recorded in 2018, 2017, and 2016 for proprietary rights as they were fully amortized.
Research and Development Programs
The research and development strategy is developed by management and reviewed and approved by the board of our company. Utilizing the
resources and platform of each subsidiary, the R&D team of each subsidiary selects a R&D project and develops a feasibility analysis for
review and approval. Once the project is approved, we will track the R&D progress as well as the spending of each project. Each year all the
ongoing R&D projects will be reviewed along with the budgeting for the following year.
We also use our research and development resources, including employees and our technology, across multiple product development
programs.
The process of developing, obtaining and maintaining regulatory approvals for new products is lengthy, expensive and uncertain. While the
development may take years to complete, the market environment may change from the time when the project is selected, which will have an
impact to the expected return of the investment. We anticipate that we will frequently monitor the progress of each key project and 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.
We have obtained the new drug certification, production license and GMP certification for our new core product, the EV71 vaccine. We
started the commercial production and sales activities of EV71 vaccine in 2016. We have completed phase III clinical trials for the
pneumococcal polysaccharides vaccine and filed an application of production license in 2017. We completed Phase III clinical trials on our
varicella in 2017. We also completed Phase III clinical trials of Sabin-IPV vaccine in 2018. In addition, we have obtained clinical trial license
for the pneumococcal conjugate vaccine.
Government Grants
Deferred government grants represent funding received from the government for research and development, or investment in building or
improving production facilities. The amount of deferred government grants as of year-end is net of research and development expenditures or
depreciation incurred or those recognized as government grants income. We received government grant that were deferred in the amount of
RMB23.4 million ($3.5 million), RMB15.6 million ($2.3 million) and RMB5.0 million ($0.7 million) in 2018, 2017 and 2016, respectively.
In addition, we received RMB1.7 million ($0.3 million) in other government grants and subsidies that were recognized in the statements of
comprehensive income (loss) in 2018.
43
Deferred government grants included RMB1.9 million ($0.3 million) being the unamortized portion of a grant we received in 2007 for
construction of a pandemic influenza vaccine plant and buildings (RMB3.7 million ($0.6 million) as of December 31, 2017), which will be
amortized in 2019 and was included in the current portion of deferred government grants. We have fulfilled the conditions attached to the
government grant. The production facility grant requires us to have the entire facility available to manufacture pandemic influenza vaccines
at any given moment upon request by the Chinese government. Government grants relating to these production facilities of $0.3 million, $0.3
million and $0.3 million for the years ended December 31, 2018, 2017 and 2016, respectively, were recorded as a reduction to depreciation
expense for those respective years.
Deferred government grants included RMB0.4 million ($0.1 million) being the unamortized portion of a grant we received in 2009 for
purchasing equipment for H1N1 vaccine production, which will be amortized in 2019 and was included in the current portion of deferred
government grants (RMB1.3 million ($0.2 million) as of December 31, 2017). We have fulfilled the conditions attached to the government
grant. Government grant relating to this production facility of $0.1 million, $0.1 million and $0.1 million for the years ended December 31,
2018, 2017 and 2016, respectively, were recorded as a reduction to the related depreciation expense.
Deferred government grants included RMB0.1 million ($15,000) being the unamortized portion of a grant we received in 2013 for purchasing
equipment for H5N1 vaccine production, which will be amortized in 2019 and was included in the current portion of deferred government
grants. We have fulfilled the conditions attached to the government grant. Government grant relating to this production facility of $15,000,
$15,000 and $15,000 for the year ended December 31, 2018, 2017 and 2016, respectively, were recorded as a reduction to the related
depreciation expense.
Deferred government grants included RMB11.3 million ($1.6 million) being the unamortized portion of a grant we received in 2015 for
equipment purchase and construction of the enterovirus 71 (“EV71”) vaccine production facility. We have fulfilled the conditions attached to
the government grant in 2016 (RMB14.5 million ($2.2 million) as of December 31, 2017). RMB3.3 million ($0.5 million) which will be
amortized in 2019 was included in the current portion of deferred government grants and RMB8.0 million ($1.1 million) which will be
amortized after 2019 was included in the non-current portion of deferred government grants. RMB2.7 million ($0.4 million) of government
grant relating to these production facilities was recorded as a reduction to depreciation expense for the year ended December 31, 2018, and
RMB0.6 million ($82,000) was recorded as government recognized in income for the year ended December 31, 2018.
Deferred government grants included RMB6.7 million ($1.0 million) being the unamortized portion of a grant we received in 2017 and 2018
for phase IV clinical research for EV71 vaccine. As of December 31, 2018, we have not fulfilled the conditions attached to the government
grant. As we do not expect to fulfill the conditions within one year, the grant is recorded as a non-current deferred government grant.
Deferred government grants also included RMB10.0 million ($1.5 million) being the unamortized portion of a grant we received in 2017 for
purchasing equipment for sIPV vaccine production. As of December 31, 2018, we have not fulfilled the conditions attached to the
government grant. As we do not expect to fulfill the conditions within one year, the grant is recorded as a non-current deferred government
grant.
Deferred government grants included RMB4.2 million ($0.6 million) being the unamortized portion of a grant we received in 2018 for
international registration for EV71 vaccine. As of December 31, 2018, we have not fulfilled the conditions attached to the government grant.
As we do not expect to fulfill the conditions within one year, the grant is recorded as a non-current deferred government grant.
Deferred government grants included RMB4.8 million ($0.7 million) being the unamortized portion of a grant we received in 2018 for
research for Qudravalent & Pentavalent vaccine. As of December 31, 2018, we have not fulfilled the conditions attached to a government
grant. As we do not expect to fulfill the conditions within one year, the grant is recorded as a non-current deferred government grant.
As of December 31, 2018, conditions attached to a government grant received in 2017 for certain production facilities were fulfilled in 2017,
of which RMB0.1 million ($18,000) will be amortized in 2019 and RMB0.2 million ($34,000) will be amortized after 2019, and RMB0.1
million ($19,000) of government grant relating to these production facilities was recorded as a reduction to depreciation expense for the year
ended December 31, 2018. As of December 31, 2018, conditions of seven government grants totaling RMB15.0 million ($2.2 million) have
not been fulfilled by us, of which conditions attached to four grants totaling RMB7.9 million ($1.1 million) were expected to be fulfilled
within one year, and were included in the current portion of the deferred government grants.
Critical Accounting Policies and Estimates
Our consolidated financial information has been prepared in accordance with U.S. 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.
44
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.
Revenue from Contracts with Customers
We adopted ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”), on January 1, 2018, using the modified retrospective
method. Revenues for the year ended December 31, 2018 were presented under ASC 606, and revenues for the years ended December 31,
2017 and 2016 were not adjusted and continue to be presented under ASC Topic 605, Revenue Recognition. The cumulative effect of
adopting ASC 606 resulted in $nil to the opening balance of retained earnings at January 1, 2018.
Revenue is recognized when control of promised goods is transferred to our customers in an amount of consideration of which we expect to
be entitled to in exchange for the goods, and we can reasonably estimates return provision for the goods.
The product return provisions are estimated based on historical return and exchange data as well as the inventory levels and the remaining
shelf lives of the products in the distribution channels.
As of December 31, 2018, sales return provision for inactivated hepatitis A vaccine, combined inactivated hepatitis A&B vaccine and
enterovirus 71 vaccine was $2.9 million, compared with $4.7 million as of December 31, 2017. Private pay sales return provision of
inactivated hepatitis A vaccine, combined inactivated hepatitis A&B vaccine and enterovirus 71 vaccine as a percentage of sales was 1.4%
and 3.1% in 2018 and 2017, respectively. As of December 31, 2018, sales return provision for seasonal influenza vaccine returns was $nil,
compared with $0.3 million as of December 31, 2017.
Deferred revenue is generally related to government stockpiling programs and advances received from customers. For government
stockpiling programs of H5N1 vaccines, we generally obtains purchase authorizations from the government for a specified amount of
products at a specified price and no rights of return are provided. Revenue is recognized when the government takes delivery of the products.
If the products expire prior to delivery, these expired products are recognized as revenue once cash is received and the products have expired
and passed government inspection.
For the year ended December 31, 2018, the Company did not have any significant incremental costs of obtaining contracts with customers
incurred or costs incurred in fulfilling contracts with customers within the scope of ASC Topic 606, that shall be recognized as an asset and
amortized to expenses in a pattern that matches the timing of the revenue recognition of the related contract.
The Company does not have amounts of contract assets since revenue is recognized as control of goods is transferred. The contract liabilities
consist of advance payments from customers. The contract liabilities are reported in a net position on a customer-by-customer basis at the end
of each reporting period. All contract liabilities are included in deferred revenue in the Consolidated Balance Sheets.
For the year ended December 31, 2018, the Company recognized sales of $3.9 million related to contract liabilities at January 1, 2018.
Allowance for Doubtful Accounts
We extend unsecured credit to our customers in the ordinary course of business but mitigate 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.
We also maintain an allowance for doubtful accounts for estimated losses based on our assessment of the collectability of specific customer
accounts and the aging of the accounts receivable. We analyze accounts receivable and historical bad debts, customer concentrations,
customer solvency, current economic and geographic trends, and changes in customer payment terms and practices when evaluating the
adequacy of our current and future allowance. In circumstances where we are aware of a specific customer’s inability to meet its financial
obligations to us, a specific allowance for bad debt is estimated and recorded, which reduces the recognized receivable to the estimated
amount we believe will ultimately be collected. We monitor and analyze the accuracy of the allowance for doubtful accounts estimate by
reviewing past collectability and adjust it for future expectations to determine the adequacy of our current and future allowance. Our reserve
levels have generally been sufficient to cover credit losses. As of December 31, 2018, we provided 100% (December 31, 2017 - 100%)
allowance for accounts receivable aged more than four years, approximately 96.9% (December 31, 2017 - 94.6%) allowance for accounts
receivable aged between three years and four years, approximately 90.6% (December 31, 2017 - 68.5%) allowance for accounts receivable
aged between two years and three years, approximately 42.1% (December 31, 2017 - 15.3%) allowance for accounts receivable aged between
one year and two years, and approximately 1.4% (December 31, 2017 - 1.2%) allowance for accounts receivable aged less than one year.
Our allowance for doubtful accounts as of December 31, 2018 was $4.6 million, compared to $4.8 million as of December 31, 2017. If the
financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances
may be required. Bad debt provision was $0.8 million for the year ended December 31, 2018 as compared with a provision of $0.9 million for
the year ended December 31, 2017.
45
Inventory Provision
We write off all the unsold seasonal influenza vaccines before the end of the flu season at the end of the fiscal year, except for those
distributed after the end of the fiscal year. In addition, we estimate an inventory provision for existing Healive, Bilive, Inlive and Mumps
products in inventory after considering the sales forecasts, the conditions of the raw material inventory, as well as the expiration dates of these
products. The inventory provision in 2018, 2017 and 2016 was $2.5 million, $1.2 million and $6.4 million, respectively.
Impairment of Long-Lived Assets
Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset group may not be recoverable from the future undiscounted net cash flows expected
to be generated by the asset group. An asset group is identified as assets at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets.
If the asset group is not fully recoverable, an impairment loss would be recognized for the difference between the carrying value of the asset
group and its estimated fair value, based on the discounted net future cash flows or other appropriate methods, such as comparable market
values. We use estimates and judgments in the impairment tests and the timing and amount of impairment charges could be materially
different if different estimates or judgments are utilized. We did not record any impairment charges on long-lived assets in 2018, 2017 and
2016.
Income Tax Valuation Allowance
In 2018, we recorded $5.8 million of deferred income tax assets based on the difference in timing of certain deductions for income tax and
accounting purposes. We evaluate our valuation allowance requirements at each reporting period 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 a change in
circumstances causes a change in management’s judgment about the reliability of deferred tax assets, the impact of the change on the
valuation allowance is generally reflected in income from operations. 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 carry forward
period available under applicable tax law.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 specifies the accounting for leases. For
operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value
of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of
the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public business entities for annual
reporting periods and interim periods within those years beginning after December 15, 2018. We will adopt ASU 2016-02 on January 1, 2019
using the modified retrospective method and will not restate comparable periods. We will elect the package of practical expedients permitted
under the transition guidance, which allow us to carry forward the historical lease classification, the assessment whether a contract is or
contains a lease and initial direct costs for any leases that exist prior to adoption of the new standard. We will also elect the practical
expedient not to separate lease and non-lease components for certain classes of underlying assets and the short-term lease exemption for
contracts with lease terms of 12 months or less. We currently believes the most significant change will be related to the recognition of right-
of-use assets and lease liabilities on our balance sheet for certain in-scope operating leases. We do not expect any material impact on net
assets and the consolidated statement of comprehensive income as a result of adopting the new standard.
46
RESULTS OF OPERATIONS
Consolidated statements of comprehensive income (loss) data
Sales
Cost of sales(1)
Gross profit
Operating expenses:
Selling, general and administrative expenses(1)
Provision for doubtful accounts
Research and development expenses(1)
Loss on disposal and impairment of property, plant and equipment
Government grants recognized in income
Total operating expenses
Operating income
Interest and financing expenses
Interest income
Other income
Income (loss) before income taxes and non-controlling interests
Income tax expenses
Income (loss) from continuing operations
Income from discontinued operations, net of tax of nil
Net income (loss)
Less: (income) loss attributable to non-controlling interests
Net income (loss) attributable to the shareholders of Sinovac
Comprehensive income (loss)
Less: comprehensive (income) loss attributable to non-controlling interests
Comprehensive income (loss) attributable to shareholders of Sinovac
2018
Year ended December 31,
2017
(in thousands except share and per share data)
72,431
22,393
50,038
229,650 $
24,723
204,927
174,346
20,240
154,106
2016
$
$
137,003
820
21,910
75
(197)
159,611
45,316
(1,070)
2,016
321
46,583
(10,472)
36,111
—
36,111
(14,329)
21,782
25,115
(12,507)
12,608 $
87,365
934
20,489
42
(141)
108,689
45,417
(1,569)
1,183
13
45,044
(8,339)
36,705
—
36,705
(10,898)
25,807
44,803
(12,089)
32,714 $
41,980
1,412
12,648
478
(6,984)
49,534
504
(1,729)
731
100
(394)
(2,664)
(3,058)
2,338
(720)
124
(596)
(9,563)
953
(8,610)
$
(1) Includes share-based compensation of $4.3 million, $1.0 million and $2.4 million in 2018, 2017 and 2016, respectively.
Sales
Revenues from sales represent: (1) the invoiced value of goods, net of value added taxes, and sales returns. See “Item 5. Operating and
Financial Review and Prospects — A. Operating Results — Taxes and incentives.” We recognize revenues when control of promised goods is
transferred to our customers in an amount of consideration of which we expect to be entitled to in exchange for the goods, and we can
reasonably estimates return provision for the goods.; and (2) the value of goods produced for government stockpiling program. We recognize
revenues from the sales of products to the government stockpiling program when cash has been received and the products have expired and
passed government inspection or are delivered per government instruction.
Our revenues, growth and results of operations depend on several factors, including the level of acceptance of our products among doctors,
hospitals and patients, and our ability to maintain or increase prices for our products at levels that provide favorable margins. The level of
acceptance among doctors, hospitals and patients is influenced by the performance, promotion and academic research, and pricing of our
products.
We market and sell our vaccine products primarily through 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. Since hepatitis A vaccines were included into government sponsored expended
immunization program in 2007, we have actively participated in the tender and bidding organized by various provincial CDCs. We enter into
sales agreements with CDCs when we win a bid.
Pricing
In the private market, we set our price based on our production cost, the price of competitive products and acceptance level of CDC and
vaccines. We also adjust our product price according to changes in the external environment to balance sales volume and gross profit, and
ultimately to maximize sales profit margins.
47
In the public market, the government purchases vaccines for EPI market by issuing government tenders. During the evaluation process, price
is a key factor which impacts the result of the tender. Therefore, we need to price our products competitively to win the tenders. We believe
that our emphasis on product quality is an advantage and increases our competitiveness.
Cost of sales
Our cost of sales primarily consists of material, direct labor and production overheads. Depreciation of property, plant and equipment
attributable to manufacturing activities and license amortization are capitalized as part of inventory, and expensed as cost of sales when
product is sold. Cost of goods sold in 2018, 2017 and 2016 amounted to $24.7 million, $20.2 million and $22.4 million, respectively, of
which idle capacity amounted to $2.7 million, $2.8 million and $3.2 million, respectively. We produce our products and conduct the final
product packaging in-house.
Our production capacity has not been fully utilized. If we successfully commercialized new products and increase sales of existing products,
we expect the unit production cost to decrease.
Selling, general and administrative expense
Selling and marketing expenses consist primarily of salaries and related expenses for personnel engaged in sales, marketing and customer
support functions and costs associated with marketing activities and shipping. Selling expense in 2018 was $95.2 million, representing 41.4%
of total sales revenue of 2018, which is a 1.7% increase compared to 2017.
General and administrative expense consists primarily of compensation for employees in executive and operational functions, including
finance and accounting, business development and human resources. Other significant costs include facilities costs, share-based compensation
and professional fees for accounting and legal services.
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 of 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;
depreciation of facilities and equipment used to develop our products; and
technology license fees and milestone payments paid to third parties before a product receives regulatory approval.
We expense both internal and external research and development costs as incurred, other than capital expenditures that have alternative future
uses, such as the build-out of our plant, or license fees and milestone payments made to third parties after regulatory approval is received. 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 pre-clinical and clinical trials.
Taxes and incentives
Sinovac Beijing, Sinovac R&D, Sinovac Dalian and Sinovac Biomed are subject to income taxes in China on their taxable income calculated
at a tax rate in accordance with the relevant income tax laws and regulations. Income tax returns filed by our PRC subsidiaries for tax years
beginning in 2006 have been subject to examination by tax authorities.
Effective from January 1, 2008, the PRC’s statutory income tax rate is 25%. Our PRC subsidiaries, except for Sinovac Beijing and Sinovac
Dalian, are subject to income tax at the statutory rate of 25%. Sinovac Beijing, being reconfirmed as a “High and New Technology
Enterprise,” or HNTE in 2017 for a period of three years, Sinovac Dalian, being confirmed as a HNTE in 2017 for a period of 3 years, and
accordingly each is subject to a preferential income tax rate of 15% from 2017 to 2019. We determine deferred taxes for each tax-paying
entity in each tax jurisdiction. The potential tax benefits arising from the losses incurred by the subsidiaries have been recorded in our
financial statements.
We evaluate our valuation allowances requirements at each reporting period 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 a change in circumstances causes a
change in management’s judgment about the ability to realize deferred tax assets, the impact of the change on the valuation allowance is
generally reflected in income from operations. 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 carry forward period available under
applicable tax law.
48
The valuation allowances relating to the deductible temporary differences and the unused tax losses of Sinovac R&D, Sinovac Dalian and
Sinovac Biomed are still required as realization of these elements of the potential tax benefits is still uncertain. Taking the valuation
allowances into account, the potential tax benefits arising from the deductible temporary differences and the unused tax losses of Sinovac
R&D, Sinovac Dalian and Sinovac Biomed effectively have not been recorded in the financial statements. Tax losses of our PRC subsidiaries
in the amount of $27.5 million (RMB189 million) as of December 31, 2018 will expire from 2019 to 2023, if not utilized.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Sales. Total sales from continuing operations in 2018 increased by 31.7% to $229.7 million from $174.3 million in 2017. Revenue
recognition of Panflu under the government stockpiling program in 2018 and 2017 were nil. The growth was mainly contributed by sales of
Inlive.
The table below sets forth a breakdown of our sales by product:
Sales
Hepatitis A vaccines
Hepatitis A&B vaccines
Influenza vaccines
EV71 vaccines
Mumps vaccines
Regular sales subtotal
H5N1 vaccines
Total sales
Year ended December 31,
2017
2018
$
(in thousands)
52,420 $
11,006
2,028
162,537
1,659
229,650
—
$
229,650 $
27,421
10,430
13,544
121,284
1,667
174,346
—
174,346
Gross Profit. Gross profit from continuing operations in 2018 increased by 33.0% to $204.9 million from $154.1 million in 2017. Gross
margin percentage increased to 89.2% in 2018 from 88.4% in 2017. The increase of gross margin was mainly due to higher gross profit on
Inlive in 2018.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses in 2018 increased by 56.8% to $137.0 million from $87.4 million in 2017. The increase was
mainly due to higher selling expenses incurred on increased sales and higher professional and consulting fees associated with ongoing
litigations.
We recorded total share-based compensation of $4.3 million in 2018, compared to $1.0 million in 2017. As of December 31, 2018, we had
unrecognized compensation costs of $12.6 million. This unearned component will be recognized over a period of 50 months.
Research and Development Expenses. Research and development expenses in 2018, primarily represented expenditures on the advancement
of pipeline vaccines, including pneumococcal vaccines, sIPV and varicella vaccine, increased to $21.9 million in 2018 from $20.5 million in
2017.
Interest and Financing Expenses. Interest and financing expense decreased by 31.8% to $1.1 million in 2018 from $1.6 million in 2017.
There were $nil and $0.3 million of interest subsidies received in 2018 and 2017, respectively.
Income Tax Expenses. Income tax expense was $10.5 million in 2018, compared to an income tax expense of $8.3 million in 2017.
Income from Continuing Operations. Income from continuing operations was $36.1 million in 2018, compared to $36.7 million in 2017.
Net Income. Net income attributable to shareholders of Sinovac was $21.8 million in 2018, compared to $25.8 million in 2017.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Sales. Total sales from continuing operations in 2017 increased by 140.7% to $174.3 million from $72.4 million in 2016. Excluding revenue
recognition of Panflu under the government stockpiling program in 2016 and 2015, regular sales of Healive, Bilive, Anflu, Inlive and mumps
vaccine increased by 163.9% to $174.3 million in 2017 from $66.0 million in 2016. The growth was mainly contributed by sales of Inlive.
49
The table below sets forth a breakdown of our sales by product:
Sales
Hepatitis A vaccines
Hepatitis A&B vaccines
Influenza vaccines
EV71 vaccines
Mumps vaccines
Regular sales subtotal
H5N1 vaccines
Total sales
$
Year ended December 31,
2016
2017
(in thousands)
27,421 $
10,430
13,544
121,284
1,667
174,346
—
$
174,346 $
20,044
552
9,829
35,140
477
66,042
6,389
72,431
Gross Profit. Gross profit from continuing operations in 2017 increased by 208.0% to $154.1 million from $50.0 million in 2016. Gross
margin percentage increased to 88.4% in 2017 from 69.1% in 2016. Excluding the impact of Panflu sales under the government-stockpiling
program in 2017 and 2016, gross margin increased to 88.4% in 2017 from 70.0% in 2016. The increase of gross margin was mainly due to
higher gross profit on Inlive and lower inventory provision charged to Bilive vaccines in 2017.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses in 2017 increased by 108.1% to $87.4 million from $42.0 million in 2016. The increase was
mainly due to higher selling expenses incurred on promotion of Inlive and higher professional and consulting fees related to the proposed
privatization.
We recorded total share-based compensation of $1.0 million in 2017, compared to $2.4 million in 2016. As of December 31, 2017, we had
unrecognized compensation costs of $2.3 million. This unearned component will be recognized over a period of 28 months.
Research and Development Expenses. Research and development expenses in 2017, primarily represented expenditures on the advancement
of pipeline vaccines, including pneumococcal vaccines, sIPV and varicella vaccine, increased to $20.5 million in 2017 from $12.6 million in
2016.
Interest and Financing Expenses. Interest and financing expense decreased by 9.3% to $1.6 million in 2017 from $1.7 million in 2016.
There were $0.3 million and $37,000 of interest subsidies received in 2017 and 2016, respectively.
Income Tax Expenses. Income tax expense was $8.3 million in 2017, compared to an income tax expense of $2.7 million in 2016.
Income (loss) from Continuing Operations. Income from continuing operations was $36.7 million in 2017, compared to a loss of $3.1
million in 2016.
Income (loss) from Discontinued Operations. Income from discontinued operations was nil in 2017, compared to an income of $2.3 million
in 2016. The income from discontinued operations in 2016 was a result of completion of the disposal transaction of Tangshan Yian.
Net Income (loss). Net income attributable to shareholders of Sinovac was $25.8 million in 2017, compared to a net loss of $0.6 million in
2016.
We finance our operations primarily through short-term and long-term borrowings, proceeds from public offerings, capital raised in private
placements, cash generated from operations and, to a lesser extent, cash from government research grants. 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 due to changing business conditions or
other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our
requirements, we may seek to sell additional equity securities, debt securities or borrow from banks.
50
Cash Flows and Working Capital
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 (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents and restricted cash
Increase (decrease) in cash and cash equivalents and restricted cash
Less: Net decrease in cash from discontinued operation
Increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents and restricted cash at end of period
$
$
2018
Year ended December 31,
2017
(in thousands)
2016
7,943 $
(25,261)
64,180
(4,656)
42,206
—
42,206
115,964
158,170 $
59,756 $
(11,896)
(1,342)
4,005
50,523
—
50,523
65,441
115,964 $
(13,902)
(11,776)
27,784
(2,268)
(162)
(143)
(19)
65,460
65,441
Operating Activities
Net cash provided by operating activities was $7.9 million in 2018, compared to net cash provided by operating activities of $59.8 million in
2017. Net cash used in our operating activities in 2018 resulted primarily from (1) our net income from continuing operations of $36.1
million, (2) an increase of short-term investment of $19.7 million, (3) an increase of accounts receivable of $13.1 million and a decrease in
income tax payable of $11.8 million.
Net cash provided by operating activities was $59.8 million in 2017, compared to net cash used in operating activities of $13.9 million in
2016. Net cash provided by our operating activities in 2017 resulted primarily from (1) our net income from continuing operations of $36.7
million, (2) deferred income taxes of $4.9 million, (3) depreciation of property, plant and equipment and amortization of prepaid land lease
payments of $4.9 million, (4) a decrease of accounts receivable of $13.5 million and an increase in accounts payables and accrued liabilities
of $33.4 million.
Investing Activities
Net cash used in investing activities was $25.3 million in 2018, compared to $11.9 million in 2017. We invested primarily in the construction
of our sIPV production facilities in 2018.
Net cash used in investing activities was $11.9 million in 2017, compared to $11.8 million in 2016. We invested primarily in the construction
of our sIPV production facilities in 2017.
Financing Activities
Net cash provided by financing activities was $64.2 million in 2018 compared to net cash used in financing activities was $1.3 million in
2017. In 2018, net cash provided by our financing activities mainly included net proceeds of $85.3 million from issuance of common shares.
We also received loan proceeds of $18.9 million and made loan repayments of $43.9 million in 2018.
Net cash used in financing activities was $1.3 million in 2017 compared to net cash provided by financing activities was $27.8 million in
2016. In 2017, net cash provided by our financing activities included net proceeds of $1.3 million from issuance of common shares and
government funding of $2.6 million. We also received loan proceeds of $28.6 million and made loan repayments of $38.7 million in 2017.
Accounts Receivable
Our total accounts receivable, including other receivables, increased by $8.3 million from $66.2 million as of December 31, 2017 to $74.5
million as of December 31, 2018. Our average accounts receivable turnover time in 2018 was 117 days, as compared to 127 days in 2017.
Our maximum exposure to credit risk at the balance sheet dates relating to accounts receivables is summarized as follows:
Aging within one year, net of allowance for doubtful accounts
Aging greater than one year, net of allowance for doubtful accounts
Total trade receivable
51
Year ended December 31,
2017
2018
(in thousands)
71,728 $
1,239
72,967 $
58,157
6,512
64,669
$
$
Borrowings
As of December 31, 2018, we had $3.3 million in short-term bank loans, offset by $158.2 million in cash and cash equivalents, resulting in a
liquid assets balance of $154.9 million, compared with $96.3 million at the end of December 31, 2017. The following tables summarize our
short-term and long-term bank borrowings as of December 31, 2018:
Type
Bank loan from Bank of Beijing
Bank loan from Bank of Beijing
Amount
RMB4.9 million
($0.7 million)
RMB39.7 million
($5.8 million)
Annual
Interest
Rate
Interest
Payment
Maturity Date
5.25%
quarterly
May 20, 2020
4.75%
quarterly
May 20, 2020
Purpose
construction of the
PPV facilities
construction of the
PPV facilities
On May 20, 2015, Sinovac Beijing entered into a bank loan with Bank of Beijing in the aggregate principal amount of RMB 48 million ($7.0
million) with a term from July 2015 to May 2020 for construction of the PPV facilities. The loan’s interest rate is based on the prime rate of a
five-year term loan published by the People’s Bank of China at the time withdraws are made. Interest is payable quarterly and the loan is
repayable based on the payment schedule and shall be fully repaid before May 20, 2020. RMB 4.9 million ($0.7 million) was drawn in 2015
with an annual interest rate of 5.25%, and RMB 39.7 million（$5.8 million) was drawn in 2016 with an annual interest rate of 4.75%. Prepaid
land lease payments and buildings of Sinovac Beijing with a net book value of RMB 13.9 million ($2.0 million) were pledged as collateral as
of December 31, 2018.
Type
Bank loan from Bank of China
Amount
RMB5 million
($0.7 million)
Annual
Interest
Rate
Interest
Payment
Maturity Date
Purpose
5.88%
Monthly
August 16, 2019 Operation
On August 14, 2018, Sinovac Dalian entered into a bank loan with Bank of China in the aggregate principal amount of RMB 5 million ($0.7
million) to finance its working capital requirements. The loan bears interest at 157 basis points above the prime rate of a one-year term loan
published by the People’s Bank of China, at 5.88%. Interest is payable monthly and the loan is payable on August 16, 2019. Buildings of
Sinovac Dalian with a net book value of RMB 3.5 million ($0.5 million) were pledged as collateral.
Our weighted average effective interest rate on outstanding borrowings was 4.91%, 4.61% and 4.73% for the years ended December 31,
2018, 2017 and 2016, respectively. 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.
Restrictions on Cash Dividends
We are a holding company, and we rely in part on dividends paid by our subsidiaries, Sinovac Beijing, Sinovac Dalian, Sinovac R&D and
Sinovac Biomed 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 the statutory surplus reserves.
The 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 their after-tax profits based on PRC accounting standards to the employee welfare and bonus funds, which shall be
utilized for collective staff benefits. In addition, if Sinovac Beijing, Sinovac Dalian, Sinovac R&D or Sinovac Biomed incurs debt on its own
behalf in the future, the instruments governing the debt may restrict the ability of one or more of our PRC subsidiaries, as the case may be, to
pay dividends or make other distributions to us.
52
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 SAFE. See “Item 10. Additional Information — D.
Exchange Controls.”
Capital Expenditures
We made capital expenditures of $5.6 million, $11.9 million and $12.7 million in 2018, 2017 and 2016, respectively. In 2018, we made $5.4
million of payments towards property, plant and equipment for construction of sIPV and varicella production facilities, in each case located in
China. As of December 31, 2018, our commitments related to capital expenditures of approximately $0.6 million were primarily for the
construction of our storage facilities. We will finance such commitments through long-term borrowings, proceeds from our public offerings
and cash generated from operations.
C.
Research and Development, Patents and Licenses, Etc.
See discussions under “Item 5. Operating and Financial Review and Prospects — A. Operating Results — 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, 2018 to December 31, 2018 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 estimated contractual obligations and commitments as of December 31, 2018 for the periods indicated:
Debt obligations including amount owing to related
party (including interest)
R&D expenses, liabilities and commitment
Operating lease obligations
Purchase of facilities commitments
Accounts payable and accrued liabilities
Total
G.
Safe Harbor
Less
than
1 year
Total
4-5
years
More
than
5 years
2-3 years
(in thousands)
$
$
15,790 $
2,053
10,795
581
49,991
79,210 $
4,232 $
2,053
1,037
581
49,991
57,894 $
11,558 $
—
2,780
—
—
14,338 $
— $
—
1,620
—
—
1,620 $
—
—
5,358
—
—
5,358
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;
53
•
•
•
•
•
•
•
our ability to expand our manufacturing facilities to meet the needs 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;
our ability to compete successfully against our competitors;
risks associated with our corporate structure and the regulatory environment in China;
ongoing litigation between our Company and certain of our shareholders; and
other risks outlined in our filings with the Securities and Exchange Commission 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 the date of this annual report:
Directors and Executive Officers
Age
Position/Title
Weidong Yin
Simon Anderson(1) (2) (3)
Yuk Lam Lo(1) (2) (3)
Kenneth Lee(2) (3)
Meng Mei(1) (2) (3)
Shan Fu
Nan Wang
Xiaomei Yin
Qiang Gao
Jing Li
55
58
69
50
63
51
53
55
42
45
Chairman, President, Chief Executive Officer
Independent Director
Independent Director
Independent Director
Independent Director
Independent Director
Chief Financial Officer, Vice President
Vice President, Sales and Marketing
Vice President, Research and Development
Vice President, Quality and Production
(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 our chairman, president, chief executive officer and secretary since September 2003. He previously 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 Healive. 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 is also the
president of Zhongguancun Listed Companies Association. He obtained his MBA from the National University of Singapore.
Mr. Simon Anderson has served as an independent director of our company since July 2004. He is a member of our audit, compensation, and
corporate governance and nominating committees. Mr. Anderson advises companies listed on North American stock exchanges and private
businesses in the areas of regulatory compliance, exchange listings and financial operations. He is a member of the Chartered Professional
Accountants of British Columbia, having qualified as a Chartered Accountant in 1986. Mr. Anderson serves as a director of IBC Advanced
Alloys Corp., which manufactures and processes alloys at its U.S. plants.
54
Mr. Yuk Lam Lo has served as an independent director of our company since March 2006. Mr. Lo is a member of the audit, compensation and
corporate governance and nominating committees. Currently Mr. Lo is serving as the Chairman of the Advisory Council for Food Safety of
the Food and Health Bureau HKSAR, an Executive Committee Member of the Chinese Manufacturers’ Association of Hong Kong (CMA)
and Chairman of the Education Committee of CMA. Mr. Lo is also the Honorary Founding Chairman of Hong Kong Bio-Organization. In the
educational area, Mr. Lo has been elected an Honorary Fellow of the Hong Kong University of Science and Technology. He is an Honorary
Chairman of Hong Kong Food Safety Association, Adjunct Professor of the Chinese University of Hong Kong and Honorary Professor of
several universities in China. Mr. Lo was heavily involved in several committees of the HKSAR Government. He had been appointed as
Director of the Hong Kong Applied R&D Fund Co. Ltd., Chairman of the Biotechnology Committee of the Hong Kong Industry &
Technology Development Council, and Chairman of Biotechnology Projects Vetting Committee of the Innovation and Technology Fund,
HKSAR. In China, Mr. Lo is a Member of Chinese People’s Political Consultative Conference in Jilin province, and a Consultant of the
Centre for Disease Control and Prevention of China. In the business sector, he is an Independent Director of Luye Pharma Group Limited
(2186.HK) and CSPC Pharmaceutical Group Limited (1093.HK).
Mr. Kenneth Lee is an independent director of Sinovac. He has served on our board of directors since May 2011. In July 2012, the board
appointed him as a member of the compensation committee and corporate governance and nominating committee. Mr. Lee is a partner at
SAIF Partners. SAIF Partners IV L.P. is currently the largest shareholder of Sinovac. Mr. Lee has more than 20 years of experience across
private equity investments, corporate finance, and business development in China. He is a non-executive director on the boards of three
Chinese portfolio companies publicly listed on the stock exchanges in the United States and Hong Kong and a board director for four other
private Chinese companies backed by SAIF Partners. Mr. Lee is a graduate of Amherst College.
Mr. Meng Mei has served as an independent director of our company since March 2012. Mr. Mei is the chairman of compensation committee,
and member of the audit and corporate governance and nominating committees. Mr. Mei founded TusPark, a science park established by
Tsinghua University in 1994, to incubate high growth companies. He has been the director of TusPark’s development center since its
inception. Mr. Mei is also the Chairman of TusHoldings Co., Ltd., which is engaged in the development, construction, and management of
TusPark and is providing services to enterprises based in TusPark. TusHoldings Co., Ltd. is also involved in venture capital investments in
China. Mr. Mei sits on the judging expert panel of China’s National Science & Technology Award. He has developed courses on
entrepreneurship and new venture formation as a Tsinghua University professor and an entrepreneur. Mr. Mei holds a bachelor’s degree in
automation from Tsinghua University, PRC.
Mr. Shan Fu has served as an independent director since July 2018, when he was appointed as a director by the PIPE Investors in connection
with the PIPE transaction described above. Mr. Fu is a Managing Partner at Vivo Capital. Vivo Capital is a healthcare focused investment
firm formed in 1996 with over $3 billion under management. Prior to joining Vivo in 2013, Mr. Fu was Senior Managing Director in the
Private Equity group and the Chief Representative of Blackstone’s Beijing Office. Additionally, Mr. Fu’s qualifications include experience in
the Department of Foreign Investment in China’s National Development and Reform Commission, the State Economic and Trade
Commission, the Office of Economic and Trade in State Council, and the Office of Production in State Council. Mr. Fu is currently a director
on the boards of 4 biopharma companies, 1 medical consumable company, and 1 healthcare service company.
Ms. Nan Wang has served as our chief financial officer since June 2013. Ms. Wang served as the vice president of Sinovac Beijing from 2001
to 2013 where she oversaw business development, investment 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 SinoBioway. Ms. Wang
received her bachelor’s degree in biology from Peking University and her master’s 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.
Ms. Xiaomei Yin has served as our vice president since December 29, 2017. She is responsible for our oversee sales and marketing. Ms. Yin
joined business development department of Sinovac Beijing in May 2006. She was appointed as director of government relations in February
2010. Before joined us, Ms. Yin worked with Industrial and Commercial Bank of China, one of the major commercial banks in China. She
received a bachelor degree in finance from Central University of Finance and Economics, PRC.
Mr. Qiang Gao has served as our vice president since April 2016. Mr. Gao joined Sinovac Beijing in 2002 and has served as quality control
manager, quality assurance manager, R&D manager and R&D director at Sinovac Beijing in the past years, and the general manager of
Sinovac R&D since 2010. He is responsible for developing our new vaccine products, including EV71 vaccine. Mr. Gao received a master’s
degree and a bachelor’s degree in microbiology from the University of Agriculture, PRC.
Ms. Jing Li has served as our vice president since April 2016. Ms. Li was named as quality person of Sinovac Beijing in March 2015. Since
she joined Sinovac Beijing in 2003, she has worked in different roles in production and quality function, including quality assurance vice
manager, department manager of hepatitis A vaccine production and director of vaccine production at Sinovac Beijing. Ms. Li is also in
charge of the production of our EV71 vaccine. Ms. Li received a master’s degree in physiology from the University of Agriculture, PRC.
55
B.
Compensation
In 2018, the aggregate cash compensation paid to our directors and executive officers was approximately $4.20 million.
Our company may terminate the employment of any director and officers for cause, at any time, without notice or remuneration, for certain acts of
such director and officer, such as conviction of or plea of guilty to a felony or to an act of fraud, misappropriation or embezzlement, gross negligence
or dishonest acts to our detriment, gross misconduct or a failure to perform agreed duties, death or disability (physical or mental impairment). Our
company may also terminate his or her employment without cause, at any time, upon a one month’s written notice. Our directors and officers may
terminate their employment, at any time, with a one-month prior written notice to our company for good reason, including material diminution in
their authority, duties, responsibilities or cash compensation as detailed in their employment agreements, or in event of any action or inaction that
constitutes a material breach by our company under the employment agreement, in the manner set forth in their employment agreements. Upon
termination of his or her employment with our company by our company without cause or by him or her for good reason, such director and executive
officer is entitled to receive severance benefits including cash payment equal to the amount set forth in his or her employment agreement. In addition,
all the share options and restricted share award granted to him or her under our stock/share incentive plans will become fully vested on the
employment termination date and such share options will remain exercisable for eighteen months following the employment termination date.
The bonus plan of the executive officers is made based on our annual performance in different functions and the respective key result areas of
these functional teams. Each vice president’s bonus is determined based on the key corporate development objectives and key performance
index set by the compensation committee and approved by the board at the beginning of the year. The bonus payoff plan is approved by the
board.
Our shareholders have authorized the board of directors to administer two share incentive plans which in aggregate provide for the issuance
of up to 9,000,000 shares of common stock, including 5,000,000 shares reserved under the 2003 Stock Option Plan and 4,000,000 shares
reserved under 2012 Share Incentive Plan. The following tables summarize, as of December 31, 2018, the outstanding options and regular
shares that we granted to several of our directors, executive officers, principal shareholders and to other individuals as a group, all of which
were made under our 2012 Share Incentive Plan.
Name
Weidong Yin
Simon Anderson
Yuk Lam Lo
Meng Mei
Kenneth Lee
Nan Wang
Xiaomei Yin
Qiang Gao
Jing Li
Others as a group
Subtotal
Weidong Yin
Nan Wang
Xiaomei Yin
Qiang Gao
Jing Li
Others as a group
Subtotal
Number of
Options
150,000
40,000
40,000
40,000
40,000
90,000
10,000
40,000
52,000
302,000
804,000
Exercise
Price($/Share) Grant Date Expiration Date
April 30, 2023
April 30, 2023
April 30, 2023
April 30, 2023
April 30, 2023
April 30, 2023
April 30, 2023
April 30, 2023
April 30, 2023
April 30, 2023
April 30, 2023
May 1, 2015
May 1, 2015
May 1, 2015
May 1, 2015
May 1, 2015
May 1, 2015
May 1, 2015
May 1, 2015
May 1, 2015
May 1, 2015
May 1, 2015
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
4.98
Name
Restricted
Shares
Grant Date
160,000
160,000
120,000
120,000
120,000
1,320,000
2,000,000
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
We have not set aside or accrued any amount of cash to provide pension, retirement or other similar benefits to our officers and directors. Our
PRC subsidiaries and consolidated affiliated entities as well as their subsidiaries are required by law to make contributions equal to certain
percentages of each employee’s salary for his or her retirement benefits, medical insurance benefits, housing funds, unemployment and other
statutory benefits.
56
2003 STOCK OPTION PLAN
Our board of directors adopted the 2003 Stock Option Plan (the “2003 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 depends on 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 the 2003 Plan.
•
Size of plan. We have reserved an aggregate of 5,000,000 of our common shares for issuance under the 2003 Plan. As of December 31,
2018 an aggregate of 4,699,700 common shares have been issued pursuant to options issued under the 2003 Plan.
• Administration. The 2003 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 the 2003 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 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 options are 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 Plan will expire in 2023. Our board of directors has the authority to terminate the
2003 Plan prior to the expiry of the plan provided that such early termination shall not affect the options then outstanding under the plan.
2012 SHARE INCENTIVE PLAN
In August 2012, our shareholders adopted a 2012 Share Incentive Plan, or the 2012 Plan. The maximum aggregate number of common shares
which may be issued pursuant to all awards under the 2012 Plan is 4,000,000 shares. As of December 31, 2018, 3,073,700 common shares
were issued under the 2012 Plan. The following paragraphs describe the principal terms of the 2012 Plan.
Types of Awards
The types of awards we may grant under the plan include the options to purchase our common shares at a specified price and in a specified
period determined by our board. Under the 2012 Plan, we may also grant awards of our (1) restricted shares, (2) restricted share units, (3)
dividend equivalents, (4) deferred shares, (5) share payments and (6) share appreciation rights under the terms and conditions determined by
our board of directors.
Eligibility
We may grant awards to the directors, officers, advisors and employees of us and our wholly owned subsidiaries and any entity which may
thereafter be established.
Plan Administration
Our board of directors will administer the 2012 Plan. The board will determine the terms and conditions of each grant, including but not
limited to, the exercise, grant or purchase prices, any reload provision, any restrictions or limitations on the awards, vesting schedules,
restrictions on the exercisability of the awards, any accelerations or waivers, and any provision related to non-competition and recapture of
gain on the awards.
57
Award Agreement
Awards granted under the plan will be evidenced by an award agreement that will set forth the terms, conditions and limitations for each
award. The award agreement should be signed by the employee and a director or an officer of us. Share awards may be evidenced by way of
an issuance of certificates or book entries with appropriate legends. The certificates and book entry procedures may be subject to counsels’
advice, stop-transfer orders or other conditions or restrictions where the plan administrator deems necessary to comply with the required laws
and regulations.
Vesting
The 2012 Plan provides that the administrator may set the period during which an option or a share appreciation right can be exercised and
may determine that an option or a share appreciation right may not be exercised for a specified period after it is granted. Such vesting can be
based on criteria selected by the administrator. At any time after the grant of an option or a share appreciation right, the administrator may, in
its sole discretion and subject to the terms and conditions it determines, accelerate the period during which an option or a share appreciation
right vests. No portion of an option or a share appreciation right exercisable at the termination of service of an option or a share appreciation
right holder with our company or subsidiaries can become exercisable afterwards, unless otherwise provided by the administrator.
Exercise Price and Term of Awards
The exercise price per share of options granted under the 2012 Plan is determined by the plan administrator in the award agreement. The price
may be fixed or variable related to the fair market value of our ordinary shares. The term of any option granted should not exceed ten years.
However, in the case where our incentive option is granted to an individual who, at the date of grant, owns more than ten percent of the total
voting power of all classes of our shares, the price granted shall not be less than 110% of the fair market value on the date of grant and the
option is exercisable for no more than five years from the date of grant.
For common share awards granted under the 2012 Plan, namely (1) restricted shares, (2) restricted share units, (3) dividend equivalents, (4)
deferred shares, and (5) share payments, the consideration shall not be less than the par value of the shares purchased. The terms of the share
awards are set by the plan administrator in its sole discretion.
The exercise price of share appreciation right under the 2012 Plan is determined by the plan administrator and set forth in the award
agreement which may be a fixed or variable price related to the fair market value of the shares. The term of the share appreciation right will
not exceed ten years.
The approval of shareholders is required for downward adjustment of the exercise prices of options or share appreciation rights. A downward
adjustment of the exercise prices of options or share appreciation rights means (i) lowering the exercise price of outstanding options or share
appreciation rights, or (ii) cancelling outstanding options or share appreciation rights in exchange for cash, other awards, or options or share
appreciation rights with an exercise price that is less than the exercise price of the original options or share appreciation rights.
Transfer Restrictions
The awards granted under the 2012 Plan may not be sold, pledged, assigned or transferred other than by will or the laws of descent and
distribution or, subject to the consent of the plan administrator, as required under the applicable laws.
Amendments or Termination
The 2012 Plan provides that in the event of any changes affecting our common shares or our share price, the plan administrator can make
proportional and equitable adjustments to reflect such changes. Upon or in anticipation of a corporate transaction, including acquisition,
disposal of substantially all or all assets, reverse takeover, dissolution, the plan administrator should in its discretion provide for replacement
or assumption of such award. In the event of other changes, the board of directors should in its discretion make adjustments in the number and
class of shares subject to awards outstanding on the date of such change to prevent dilution or enlargement of rights. The 2012 Plan will
expire and no further awards may be granted after the tenth anniversary of the date the plan was adopted.
C.
Board Practices
Board of Directors
Our Articles of Incorporation prescribe that we should have a minimum of one and a maximum of 15 directors. Currently, our board of
directors comprises six board members, five of whom are independent. A director is not required to hold any shares in the company by way of
qualification. A director may vote with respect to any contract, proposed contract or arrangement in which he is materially interested provided
that such director must disclose his interest in the contract or arrangement. There is no age limit requirement for directors. 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 Articles of Incorporation 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.
58
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.
As described above, on March 5, 2018, we announced the re-election of the members of our board of directors—Mr. Weidong Yin, Mr. Yuk
Lam Lo, Mr. Simon Anderson, Mr. Kenneth Lee, and Mr. Meng Mei—at the 2017 AGM. We also announced that we had determined, after
consultation with our Antigua legal counsel, that an alternative, pre-printed ballot not made available to all our shareholders and purportedly
submitted at our 2017 AGM by the Shareholder Group was invalid. On March 13, 2018, 1Globe filed a complaint against our company in the
Eastern Caribbean Supreme Court in the High Court of Justice, Antigua and Barbuda, to dispute the results of the election. See “Item 8.
Financial Information — A. Consolidated Statements and Other Financial Information — Legal and Administrative Proceedings” for
additional information. In July 2018, Mr. Shan Fu was appointed to our board of directors in connection with the PIPE transaction. In 2018,
our board of directors held meetings or passed resolutions by unanimous written consent 26 times.
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 a successor is elected at the next annual shareholders’ meeting. 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 Messrs. Simon Anderson, Yuk Lam Lo and Meng Mei, and is chaired by Simon Anderson, all of whom
satisfy the “independence” requirements of Rule 5605 of the NASDAQ Listing Rules and Rule 10A-3 under the Securities Exchange Act of
1934. 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.
In 2018, our audit committee held meetings or passed resolutions by unanimous written consent four times.
59
Compensation Committee
Our compensation committee consists of Messrs. Meng Mei, Simon Anderson, Yuk Lam Lo, and Kenneth Lee, and is chaired by Mr. Meng
Mei, all of whom satisfy the “independence” requirements of Rule 5605 of the NASDAQ Listing Rules and Rule 10C-1 under the Securities
Exchange Act of 1934. 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.
In 2018, our compensation committee held meetings or passed resolutions by unanimous written consent three times.
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Messrs. Yuk Lam Lo, Simon Anderson, Kenneth Lee and Meng Mei, and is
chaired by Mr. Yuk Lam Lo, all of whom satisfy the “independence” requirements of Rule 5605 of the NASDAQ Listing Rules. 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.
In 2018, our corporate governance and nominating committee did not hold meetings or passed resolutions, instead, the matters for discussion
were combined to the meetings or resolutions by the board of directors.
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 all our powers 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.
60
D.
Employees
As of December 31, 2018, 2017 and 2016, we had 735, 644, and 724 full-time employees, respectively. Of our workforce as of December 31,
2018, about 108 employees are primarily engaged in research and development, 71 employees are engaged in sales and marketing, 463
employees in production related, and 93 employees in administration. As of December 31, 2018, we have a total of 135 temporary employees.
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 April 19, 2019, by:
•
•
each of our directors and executive officers; and
each person/organization known to us to own beneficially more than 5% of our common shares.
The calculations in the table below are based on 71,135,902 common shares outstanding as of April 19, 2019 (before taking into account the
issuance of the Exchange Shares in the Exchange). 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.
Additionally, for purposes of this item, share counts and calculations in the table below do not reflect the issuance of the Exchange Shares
into the Shareholder 2019 Rights Exchange Trust in connection with the Exchange.
Directors and Executive Officers:
Weidong Yin
Simon Anderson
Yuk Lam Lo
Meng Mei
Kenneth Lee
Shan Fu
Nan Wang
Ming Xia
Xiaomei Yin
Qiang Gao
Jing Li
All directors and executive officers as a group
Principal Shareholders
SAIF Partners IV(1)
1Globe Capital LLC(2)
Prime Success, L.P.(3)
Vivo Capital(4)
Shares Beneficially Owned
Number
%
6,359,500
*
*
*
*
—
*
*
*
*
*
7,536,847
10,780,820
9,353,092
5,900,000
5,900,000
8.94%
*
*
*
*
—
*
*
*
*
*
10.59%
15.16%
13.15%
8.29%
8.29%
Less than 1% of our common shares.
*
(1) According to the Amendment No. 6 to Schedule 13D filed with the SEC on June 27, 2017 by SAIF Partners IV L.P., SAIF IV GP, L.P.
and SAIF IV GP Capital Ltd.
(2) According to the Schedule 13D filed with the SEC on July 7, 2017, the Amendment No. 1 to the Schedule 13D filed with the SEC on
March 23, 2018 and the Amendment No. 2 filed with the SEC on March 19, 2019 by 1Globe Capital LLC.
(3) According to the Schedule 13G filed with the SEC on July 10, 2018 by Prime Success, L.P., Green Vision Partners Limited and
Advantech Capital Partners Ltd.
(4) According to the Amendment No. 2 to Schedule 13D filed with the SEC on August 24, 2018 by Vivo Capital, LLC, Vivo Capital VIII,
LLC and Vivo Capital IX, LLC.
61
None of our existing shareholders has different voting rights from other shareholders. Holders of our Series B Preferred Shares vote together
with the common shares on an as-converted basis on all matters presented to the shareholders for a vote, subject to applicable law. Except for
the complaint against filed by 1Globe against Sinovac Antigua in the Antigua Court, as disclosed in “Item 8. Financial Information — A.
Consolidated Statements and Other Financial Information — Legal and Administrative Proceedings” or elsewhere in this annual report, we
are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
As of December 31, 2018, 71,139,402 of our common shares were issued and outstanding. Approximately 80% of the issued and outstanding
shares were held by the record shareholders in the United States. On February 22, 2019, 27,777,341 of Sinovac Antigua’s common shares and
14,630,813 of Sinovac Antigua’s Series B preferred shares were issued into the Shareholder 2019 Rights Exchange Trust in connection with
the Exchange. As described below under “Item 8. Financial Information — A. Consolidated Statements and Other Financial Information —
Legal and Administrative Proceedings”, courts in Antigua and Delaware have enjoined the Company from issuing Exchange Shares from the
Trust until final resolution of such matters. Taking into account issuance of the Exchange Shares, immediately following such issuance,
Sinovac Antigua had 98,918,243 common shares and 14,630,813 Series B Preferred Shares outstanding.
For the options granted to our directors, officers and employees, please refer to “— B. Compensation.”
ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees — E. Share Ownership.”
B.
Related Party Transactions
Terminated Privatization Transaction
On June 26, 2017, we entered into the Amalgamation Agreement with Parent and Sinovac Amalgamation Sub Limited, a wholly owned
subsidiary of Parent. Pursuant to the Amalgamation Agreement, Parent would acquire Sinovac Biotech Ltd. for cash consideration equal to
$7.00 per common share. On July 2, 2018, the Amalgamation Agreement was terminated.
Transaction with Yuk Lam Lo
Sinovac Hong Kong is using part of the office of Mr. Yuk Lam Lo, one of our independent directors, as its office. We do not pay any rent to
Mr.Lo and only pay our share of the utilities and property management fees, which totaled $7,000, nil and nil in 2016, 2017 and 2018
respectively.
Transactions with Certain Directors and Affiliates
We entered into two operating lease agreements with SinoBioway, the non-controlling shareholder of Sinovac Beijing, with respect to
Sinovac Beijing’s production plant and laboratory in Beijing, China with annual lease payments totaling RMB 1.4 million ($0.2 million). The
leases commenced on August 12, 2004 and have a term of 20 years. One of the lease agreements was amended on August 12, 2010 with the
rent increasing from RMB 0.5 million ($75,000) to RMB 1.4 million ($0.2 million) per year.
In June 2007, we entered into another operating lease agreement with SinoBioway, with respect to the expansion of Sinovac Beijing’s
production plant in Beijing, China, for an annual lease payment of RMB2.0 million ($0.3 million). The lease commenced in June 2007 and
has a term of 20 years.
In September 2010, we entered into another operating lease agreement with SinoBioway with respect to expansion of Sinovac R&D’s
business in research and development activities for an annual lease payment of RMB 1.0 million ($0.1 million). The lease commenced on
September 30, 2010 and has an inital term of five years.
On April 8, 2013, we entered into three supplemental agreements with SinoBioway, under which the expiration date of three of the four
operating lease agreements was extended to April 7, 2033.
Loan from a non-controlling shareholder
In 2011, Sinovac Dalian entered into an agreement to borrow RMB20.0 million ($2.9 million) loan from its non-controlling shareholder,
Dalian Jin Gang Group. The loan was unsecured, bearing interest at 7.2% per year. RMB4.0 million ($0.6 million) was repaid on September
25, 2014. No repayments were made in 2018 and 2017, respectively. In 2017, Sinovac Dalian entered into an agreement to borrow RMB30.0
million ($4.4 million) loan from its non-controlling shareholder, Dalian Jin Gang Group. The loan was unsecured, bearing interest at 6.0% per
year. No repayments were made in 2018 and 2017.
62
Share Options
See “Item 6. Directors, Senior Management and Employees — B. Compensation — 2003 Stock Option Plan” and “Item 6. Directors, Senior
Management and Employees — B. Compensation — 2012 Share Incentive Plan.”
C.
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.
Legal and Administrative Proceedings
We may be subject to legal proceedings, investigations and claims relating to the conduct of our business from time to time.
DOJ and SEC Investigations and NASDAQ Inquiry
The Beijing People’s Court issued five judgments in 2016 and 2017. These judgments were related to corrupt conduct allegedly engaged in by
a former official of the Center for Drug Evaluation in NMPA, his wife and his son. These judgments found that the official and his wife had
engaged in a practice of improperly soliciting and accepting payments from various individuals involved in the vaccine products industry.
According to the judgments, one of the individuals solicited by the official was Mr. Weidong Yin, our chairman, president and chief executive
officer. It was asserted in the judgments that Mr. Weidong Yin made three payments, and arranged for a loan, to the official and his wife, in
the total amount of RMB550,000 ($77,000) between 2002 and 2011. Mr. Weidong Yin was not charged with any offense or improper conduct
and he cooperated as a witness with the procuratorate. To our knowledge, the Chinese authorities have not commenced any legal proceedings
or government inquiries against Mr. Yin. In December 2016, our audit committee authorized the commencement of an internal investigation
into the allegations made in the judgments. The audit committee engaged Latham & Watkins LLP as independent counsel to assist with the
investigation.
In 2017 and 2018, we became aware of certain judgments based on bribery charges issued by Chinese courts in four provinces against various
officials of the CDC. While these judgments appear to reflect an industry-wide investigation focused on CDC officials, they also referenced
nine of our former salespersons, together with sales personnel from several other Chinese vaccine companies and distributors. These
judgments did not name, and no charges were brought against, our company or any of our directors or officers as defendants. To the best of
our knowledge, the nine referenced employees cooperated with the procuratorate. The procuratorate did not contact us for cooperation. Upon
becoming aware of these judgments, our Audit Committee expanded its internal investigation to review matters related to these judgments
and our sales practices and policies, and further engaged Latham & Watkins LLP to continue the independent investigation with the expanded
scope. One of the nine former sales employees has been convicted for giving bribes. The judgment states that this former sales employee took
these actions without knowledge of our company. His criminal penalty was waived by the court.
After we publicly announced the internal investigation arising from the allegations in a research report in December 2016, we were notified
by the SEC in February 2017 of an enforcement inquiry related to the matters discussed in the report, and in April 2017 we received a
subpoena from the SEC requesting documents. In September 2017, we received an inquiry from the DOJ and we have been cooperating with
the DOJ. The SEC and DOJ requested information regarding the judgments discussed above, and we cooperated with these requests.
Also in February 2017, we received an inquiry from NASDAQ related to the same matter. Further, in May 2018, we received an inquiry from
NASDAQ requesting information related to the actions by Sinobioway Medicine and their impact on our operations and financial reporting.
We cooperated with both of these NASDAQ inquiries.
On August 14, 2018, the SEC notified us that the SEC had concluded its investigation and would not recommend an enforcement action
against us at this time. On September 12, 2018, the DOJ notified us that it had closed its investigation, with no charges. With the closure of
the DOJ’s investigation, we are not aware of any pending U.S. government investigations of us related to these matters.
Class Actions
On July 3, 2017, a securities class action complaint was filed in the U.S. District Court for the District of New Jersey against Sinovac Biotech
Ltd. and three of its current and former officers: Mr. Weidong Yin, our chief executive officer, Ms. Nan Wang, our chief financial officer, and
Mr. Danny Chung, our former chief financial officer. The complaint asserts that statements in our annual filings for fiscal years 2012 through
2015 were false and misleading because they failed to disclose matters relating to the alleged bribery incidents, among other allegations. On
September 6, 2017, the plaintiff has filed the notice of voluntary dismissal. The Court granted the dismissal without prejudice.
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On July 12, 2017, an alleged shareholder of Sinovac Biotech Ltd. filed a putative class action complaint in the Supreme Court of the State of
New York against Sinovac Biotech Ltd., our directors, and certain entities related to the Amalgamation Agreement, in a matter captioned Wu
v. Yin, et al. The complaint alleges that our directors breached their fiduciary duties by, among other things, entering into a self-dealing
transaction at a price below fair value and failing to take steps to maximize our value. The complaint also alleges that our company aided and
abetted those alleged breaches of fiduciary duty. The complaint sought, among other things, an injunction preventing completion of the
transactions contemplated by the Amalgamation Agreement, rescission of the Amalgamation Agreement to the extent it is implemented,
damages, and attorneys’ fees. None of the defendants, including our company and certain directors, were served with the complaint, and the
time for doing so now has expired. On July 3, 2018, the Amalgamation Agreement was terminated.
US Litigation
Delaware Chancery Court Action
On March 5, 2018, we filed a lawsuit in the Court of Chancery of the State of Delaware seeking a determination whether 1Globe, The Chiang
Li Family, OrbiMed and other shareholders of Sinovac Biotech Ltd. had triggered our Rights Agreement by forming a group holding
approximately 45% of outstanding shares of Sinovac Biotech Ltd., in excess of the plan’s threshold of 15%, and acting in concert prior to the
2017 AGM. Our Rights Agreement is intended to promote the fair and equal treatment of all Sinovac shareholders and ensure that no person
or group can gain control of Sinovac through undisclosed voting arrangements, open market accumulation or other tactics potentially
disadvantaging the interest of all shareholders.
On April 12, 2018, 1Globe filed an amended answer to Sinovac Antigua’s complaint, counterclaims, and a third-party complaint against Mr.
Weidong Yin alleging, among other allegations, that our Rights Agreement is not valid, that Mr. Weidong Yin and the Buyer Consortium had
previously triggered our Rights Agreement, and that 1Globe did not trigger our Rights Agreement. Sinovac Antigua and its board of directors
believes that the actions taken by the board of directors were appropriate under the circumstances and that the allegations of the counterclaim
and third-party complaint are without merit. 1Globe asks for various measures of equitable relief and also includes a claim for its costs,
including attorneys’ fees.
On July 31, 2018, following Sinovac Antigua motions for partial summary judgment and an expedited trial date, the Delaware Chancery
Court effectively stayed the action pending receipt of a post-trial decision from the Antigua Court in the matter captioned 1Globe Capital,
LLC and Sinovac Biotech Ltd., Claim No. ANUHCV 2018/0120. On December 19, 2018, the Antigua Court issued a judgment affirming the
validity of Sinovac Antigua’s Rights Agreement under Antigua law, and finding that “there was a secret plan to take control” of Sinovac
Antigua at the 2017 AGM.
Based upon the Antigua Court’s judgment and other facts known to the board of directors, our board of directors determined that the
Collaborating Shareholders became Acquiring Persons on or prior to the 2017 AGM and their conduct resulted in a Trigger Event under
Sinovac Antigua’s Rights Agreement. As a result of becoming Acquiring Persons, the approximately 28.7 million Rights held by the
Collaborating Shareholders automatically became void under the terms of the Rights Agreement. Pursuant to the Rights Agreement, our
board of directors elected to exchange the approximately 42.4 million valid and outstanding Rights held by Sinovac Antigua’s shareholders
(not including the Collaborating Shareholders) for a combination of approximately 27.8 million common shares and approximately 14.6
million Series B preferred shares, all of which Sinovac Antigua issued into a trust on February 22, 2019 for the benefit of the holders of the
valid and outstanding Rights. See “History and Development of the Company” for additional information.
On March 6, 2019, the Delaware Chancery Court entered a status quo order providing that Sinovac Antigua not distribute any of the
Exchange Shares to rights holders until the final disposition of the pending Delaware litigation or further order of the Court. On April 4, 2019,
the Eastern Caribbean Supreme Court, Court of Appeal issued an order that restrains Sinovac Antigua from taking further action under its
Rights Agreement, including the distribution of the previously issued Exchange Shares to the holders of valid Rights, until the conclusion of
1Globe Capital, LLC’s appeal of the December 19, 2018 Judgment of the High Court of Justice of Antigua and Barbuda. On April 8, 2019,
the Delaware Chancery Court stayed the Delaware litigation pending the outcome of 1Globe’s appeal of the Antigua Judgment. We cannot
predict whether an ultimate outcome will be favorable or unfavorable, nor estimate the amount or range of potential loss (if any) at this time.
Massachusetts District Court Action
On March 5, 2018, Sinovac Antigua also filed a lawsuit in the United States District Court for Massachusetts alleging violations of Section
13(d) of the Securities Exchange Act of 1934 by 1Globe and The Chiang Li Family. The lawsuit alleges, among other things, that the
defendant shareholders failed to make required disclosures on Schedule 13D regarding their intentions to attempt to replace Sinovac
Antigua’s board of directors.
On April 9, 2018, we received a document request from SEC requesting all of our documents concerning 1Globe, the Chiang Li Family,
OrbiMed, certain other shareholders, and their affiliates. We have been cooperating with the SEC. We understand the SEC is investigating
whether 1Globe, and possibly other shareholders, violated the U.S. securities laws. We do not have any information to suggest the SEC is
investigating the actions of Sinovac Antigua or its officers and directors.
64
On May 21, 2018, 1Globe answered and filed counterclaims against Sinovac Antigua and certain of its executives, alleging violations of
Section 10(b) of the Exchange Act and various state law claims. In response to Sinovac Antigua motion to dismiss 1Globe’s counterclaims,
on August 1, 2018, 1Globe filed amended counterclaims against Sinovac Antigua and certain of its executives, alleging violations of Section
10(b) of the Exchange Act and Rule 10b-5, as well as state law claims of abuse of process, fraudulent misrepresentation, negligent
misrepresentation, and aiding and abetting such violations, primarily arising out of allegedly false and/or misleading statements made by us
regarding our business, operational, and financial results.
On August 17, 2018, the Massachusetts Court granted a consent motion to extend the deadline for Sinovac Antigua’s response to 1Globe’s
counterclaims (and for any subsequent opposition by 1Globe) until after the Antigua Court issued a ruling in the matter captioned 1Globe
Capital, LLC and Sinovac Biotech Ltd., Claim No. ANUHCV 2018/0120. On December 19, 2018, the Antigua Court issued a judgment,
which 1Globe appealed on January 29, 2019. Per the Massachusetts Court’s order, the parties have filed periodic status reports regarding the
pending court proceedings in Antigua. No date for Sinovac Antigua’s response to 1Globe’s counterclaims has been set. We are vigorously
pursuing this lawsuit; however, we cannot predict whether an ultimate outcome will be favorable or unfavorable, nor estimate the amount or
range of potential loss (if any) at this time.
Also on August 1, 2018, 1Globe filed a motion for preliminary injunction seeking to enjoin Sinovac Antigua from, inter alia, altering its
capital structure. On October 15, 2018, the Massachusetts Court denied 1Globe’s motion. On November 14, 2018, 1Globe filed an appeal of
the denial of its motion for preliminary injunction to the United States Court of Appeals for the First Circuit. On January 10, 2019, 1Globe
filed a motion to hold its appeal in abeyance pending the outcome of its separate appeal of the Antigua Court’s judgment, which Sinovac
Antigua opposed.
Antigua Litigation
On March 13, 2018, 1Globe filed a complaint against Sinovac Antigua in the Antigua Court. The complaint seeks a declaration that the five
persons purportedly proposed on the Non-Public Submission at the 2017 AGM were elected as directors of Sinovac Antigua at that meeting,
an order of the Antigua Court that those directors be installed as Sinovac Antigua’s board of directors, and a declaration that any actions taken
on behalf of Sinovac Antigua at the direction of the board of directors since the 2017 AGM are null and void. On April 10, 2018, 1Globe filed
a notice of application in the Antigua Court seeking an order declaring the result of the disputed election, an urgent order restraining Sinovac
Antigua’s board of directors from acting, pending determination of the dispute, including acting to initiate or continue litigation against the
Shareholder Group, and other related relief. We attended the first hearing on May 9, 2018. In July 2018, the Antigua court heard an
application by 1Globe for interim injunctive relief preventing Sinovac Antigua from exercising its rights under the Rights Agreement. This
application was unsuccessful, but the judge set an expedited timetable to trial. The trial of the matter took place from December 3 to 5, 2018.
On December 19, 2018, the judge handed down his judgment, finding in Sinovac Antigua’s favor in full, dismissing 1Globe’s claim and
declaring that the Rights Agreement was validly adopted as a matter of Antigua law. On January 29, 2019, 1Globe filed a Notice of Appeal.
On March 4, 2019, 1Globe filed an application for urgent interim relief, seeking an injunction to prevent Sinovac Antigua from continuing to
implement its Rights Agreement until the resolution of the appeal. This urgent interim relief application was heard on April 4, 2019, at which
the Court of Appeal made an order restraining Sinovac Antigua in similar terms to the Delaware Court order of March 6, 2019, together with
restraint from operating the Rights Agreement in any way that affects 1Globe’s rights or shareholding until determination of the appeal. There
will be further hearings and an appeal at which we will continue to vigorously defend the litigation; however, we cannot predict or estimate
an outcome or economic burden for this case at this time.
Hong Kong Litigation
On October 8, 2018, Sinovac became aware that unauthorized documents in respect of Sinovac Hong Kong had been unlawfully filed with
the Hong Kong Companies Registry and that unauthorized documents in respect of Sinovac Beijing had been unlawfully filed with the
Industry and Commerce Bureau of Beijing. On October 15, 2018, Mr. Yin and Ms. Nan Wang commenced proceedings HCMP 1731/2018
before the Hong Kong High Court.
In a hearing before the Hong Kong High Court on October 19 2018, the lawful directors of Sinovac Hong Kong (“Lawful Directors”) asked
the court to grant an urgent interim injunction order to restrain Mr. Li and Mr. Cao from taking further unlawful actions against Sinovac HK
and its subsidiaries. At the hearing, the judge granted an interlocutory injunction in the same terms sought by the Lawful Directors restraining
Mr. Pengfei Li and Mr. Jianzeng Cao from purporting to act or holding themselves out as directors of Sinovac Hong Kong or its subsidiaries,
purporting to take any actions as directors of Sinovac Hong Kong or its subsidiaries, and relying on or using the forged documents in any way
whatsoever.
On November 28, 2018 at a further hearing in the Hong Kong High Court, the Hong Kong High Court made the November 28 Order and held
that it is beyond dispute that the documents in respect of Sinovac Hong Kong had been forged and unlawfully filed with the Hong Kong
Companies Registry, based on the evidence filed by Mr. Cao, Mr. Li and the Lawful Directors. The Hong Kong High Court therefore declared
that Mr. Yin and Ms. Wang were and still are the lawful directors of Sinovac Hong Kong, and Mr. Li and Mr. Cao were not and are not the
lawful directors of Sinovac Hong Kong. The Hong Kong High Court also granted a permanent injunction restraining Mr. Li and Mr. Cao from
purporting to act or holding themselves out as directors of Sinovac Hong Kong or its subsidiaries (including but not limited to Sinovac
Beijing), purporting to take any actions as directors of Sinovac Hong Kong or its subsidiaries, and relying on or using the forged documents
in any way whatsoever. Furthermore, the Hong Kong High Court also ordered the Companies Registry to remove the forged documents in
respect of Sinovac Hong Kong that had been unlawfully filed.
65
On November 28, 2018, Mr. Cao and Mr. Li filed a Notice of Appeal with the Hong Kong Court of Appeal, indicating their intention to
appeal the orders made by the Hong Kong High Court. No hearing date has yet been fixed to hear the appeal. Mr. Yin and Ms. Wang intends
to vigorously contest the appeal filed by Mr. Cao and Mr. Li. Pending the determination of the appeal, the November 28 Order remains
effective and enforceable. Pursuant to the November 28 Order, the Hong Kong Companies Registry has removed the purported Sinovac Hong
Kong documents from the Companies Register and updated Sinovac Hong Kong’s register of director such that the directors on record are Mr.
Yin, Ms. Wang and Mr. Yuk Lam Lo.
PRC Litigation
On April 4, 2018, Sinovac Hong Kong filed a complaint against Sinovac Beijing in the Haidian District Court of Beijing. The complaint
seeks a declaration that the board resolutions dated February 6, 2018 purporting to appoint Mr. Aihua Pan as the general manager of Sinovac
Beijing are invalid. On August 24, 2018, the court made a judgment in favor of Sinovac Hong Kong, which ruled that the board resolutions
dated February 6, 2018 are invalid. No appeal was filed and the judgment has already become effective and enforceable.
On May 9, 2018, Sinobioway Medicine filed a complaint against Sinovac Beijing in the Haidian District Court of Beijing. The complaint
seeks a declaration that the board resolutions passed on February 28, 2018 to appoint Mr. Weidong Yin and other senior management
members are invalid. Sinobioway Medicine withdrew the lawsuit after two hearings.
On May 16, 2018, Sinovac Hong Kong filed a complaint against Sinobioway Medicine, Mr. Aihua Pan, and Shandong Sinobioway
Biomedicine Co., Ltd. in the Fourth Intermediate People’s Court of Beijing. The complaint sought to hold the defendants jointly and severally
liable for the torts they committed. As of the date of this annual report, this lawsuit is pending and no hearing has been held.
On September 13, 2018, Sinovac Beijing filed a complaint against Mr. Aihua Pan in the Haidian District People’s Court of Beijing. The
complaint sought to request Aihua Pan return a business license of Sinovac Beijing which was reissued by the Haidian Branch of Beijing
Administration for Industry and Commerce on May 10, 2018 and the seals of Sinovac Beijing which are forged by Mr. Aihua Pan. Sinovac
Beijing filed a preservation application to the court. The court supported Sinovac Beijing’s preservation application and prohibited Mr. Aihua
Pan from using or authorizing others to use the above-mentioned license and seals during the case hearing. As of the date of this annual
report, this lawsuit is pending and no hearing has been held.
On December 24, 2018, Sinobioway Medicine filed a complaint against Sinovac Beijing in the Haidian District Court of Beijing. The
complaint sought a declaration that all the board resolutions dated September 5, 2018, including the composition of the board, the
appointment of the senior managers and the management of the corporate seals, are invalid. Sinovac Hong Kong has filed an application for
adding itself as the third party in this lawsuit. As of the date of this annual report, the court has not decided whether to accept its application
and the lawsuit is pending.
We cannot predict whether an ultimate outcome of the pending lawsuits will be favorable or unfavorable, nor estimate the amount or range of
potential loss (if any) at this time.
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. 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 U.S. dollars.
We are a holding company, and we rely on the dividends paid by our majority-owned subsidiaries, Sinovac Beijing and Sinovac Dalian,
wholly owned subsidiaries Sinovac R&D and Sinovac Biomed through Sinovac Hong Kong, 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. In
accordance with the regulations in China, Sinovac Beijing, Sinovac Dalian, Sinovac R&D and Sinovac Biomed are 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 each company. Sinovac Beijing, Sinovac Dalian, Sinovac R&D and Sinovac Biomed are required to set aside, at the
discretion of their respective board of directors, a portion of its after-tax profits to their employee welfare and bonus funds.
66
Furthermore, pursuant to the double tax arrangement between Hong Kong and PRC, dividends paid by a foreign-invested enterprise in China
to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns
directly at least 25% of the shares of the foreign-invested enterprise for a period greater than 12 months), or otherwise 10%. Whether the
favorable rate will be applicable to dividends received by Sinovac Hong Kong from our PRC subsidiaries is subject to the approval of the
PRC tax authorities because it is unclear whether Sinovac Hong Kong is considered as the beneficial owner of the dividends in substance.
The PRC tax authorities have discretion to assess whether a recipient of the PRC-sourced income is only an agent or a conduit, or lacks the
requisite amount of business substance, in which case the application of the tax arrangement may be denied. This withholding tax imposed on
dividends paid to us by our PRC subsidiaries would reduce our net income attributable to the shareholders. In May 2012, Sinovac Hong Kong
was granted by the local tax bureau the preferential dividend withholding tax rate of 5% on dividends declared by Sinovac Beijing for three
years from 2012 to 2014. The State Administration of Taxation has the authority to re-assess the approval of the preferential dividend
withholding tax rate granted by the local tax bureau. The preferential dividend withholding tax rate expired in 2014. The dividends received
by Sinovac Hong Kong from its PRC subsidiaries are subject to a withholding tax rate of 10%.
B.
Significant Changes
Except with respect to the Exchange and the related issuance of common shares and Series B Preferred Shares pursuant to Sinovac Antigua’s
Rights Agreement, as well as the related ongoing litigation, in each case disclosed elsewhere in this annual report, we have not experienced
any significant changes since the date of our audited consolidated financial statements included in this annual report.
ITEM 9.
THE OFFER AND LISTING
A.
Offer and Listing Details
Not Applicable.
B.
Plan of Distribution
Not applicable.
C.
Markets
Our common shares have been listed on the NASDAQ Global Select Market since January 3, 2011 under the symbol “SVA.” In connection
with the Exchange and the issuance of the Exchange Shares into the Shareholder 2019 Rights Exchange Trust, trading of our common shares
on Nasdaq has been halted since February 22, 2019.
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
ITEM 10.ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
We are an Antiguan company (Company No.11949) with limited liability and our affairs are governed by our Articles of Incorporation, By-
laws and the International Business Corporation Act. The following are summaries of material provisions of our Articles of Incorporation,
By-laws and the International Business Corporations Act.
67
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.
Corporate Purpose
The objects for which the Company is established are set forth in the Company’s Articles of Incorporation, as follows:
1. To conduct any and all business activities permitted by the laws of the State of Antigua and Barbuda as an International Business
Corporation.
2. To acquire and deal with any property, real or personal, to erect any buildings, and generally to do all acts and things which, in the
opinion of Sinovac Antigua or the Directors, may be conveniently, or profitably, or usefully, acquired and dealt with, carried on,
erected or done by Sinovac Antigua in connection with said property.
3. To generally have and exercise all powers, rights and privileges necessary and incident to carrying out properly the objects herein
mentioned.
Sinovac Antigua shall not engage in International banking, Trust, Insurance, Betting and Bookmaking or any other activity which requires a
License under the International Business Corporation Act.
Sinovac Antigua shall be primarily engaged in research, development and commercialization of human vaccines for infectious diseases.
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, completing a share transfer form 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. They may, however, access such corporate information as is publicly available in the Companies Registry in St. John’s,
Antigua. We will also 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:
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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;
designate and issue any number of new series of preferred shares; and
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.
Series B Preferred Shares
Ranking. The Series B Preferred Shares rank senior to Sinovac Antigua’s common shares, Series A Junior Participating Preferred Shares, par
value $0.001 per share, and Series C Junior Participating Preferred Shares, par value $0.001 per share, and junior to all series or any other
class of Sinovac Antigua’s Preferred Shares, except to the extent that any such other series or class specifically provides that it will rank on a
parity with or junior to the Series B Preferred Shares.
Dividends. Holders of Series B Preferred Shares are entitled to receive (i) the same aggregate amount per share (on an as-converted basis) of
all dividends (cash or in-kind) declared on the common shares and (ii) cumulative preferential dividends, payable quarterly in arrears, at an
annual rate of $0.41 per annum in cash until the earlier of (a) the conversion of the Series B Preferred Shares into the common shares or (b)
the listing of the Series B Preferred Shares on a nationally recognized securities exchange.
Voting Rights. Holders of Series B Preferred Shares are entitled to vote with the holders of common shares, voting together as a single class,
on all matters submitted for a vote of the shareholders of Sinovac Antigua, subject to applicable law. Each Series B Preferred Share entitles
the holder to a number of votes equal to the number of common shares issuable upon the conversion of such Series B Preferred Share to
which such share is entitled as of the applicable record date.
Conversion. Either (i) at our option or (ii) within 90 days of approval by the shareholders of Sinovac Antigua of an increase in the number of
Sinovac Antigua’s authorized but unissued common shares to such number as would be sufficient to effect the conversion of all or any
portion of the outstanding Series B Preferred Shares (a “Common Share Increase”), all or such portion of the Series B Preferred Shares will
be convertible into common shares on a one-for-one basis, subject to customary anti-dilution adjustments.
Listing. In the event the shareholders of Sinovac Antigua do not vote to approve a Common Share Increase at the next annual general meeting
following the initial issuance of any Series B Preferred Shares, Sinovac Antigua will use its best efforts to list the Series B Preferred Shares
for trading on a nationally recognized securities exchange within 180 days of such annual general meeting.
Consolidation, Merger, etc. In case Sinovac Antigua shall enter into any consolidation, amalgamation, merger, combination or other
transaction in which the common shares are exchanged for or changed into other shares or securities, cash and/or any other property, then in
any such case each Series B Preferred Share shall at the same time be similarly exchanged or changed into an amount per share (on an as-
converted basis) equal to the aggregate amount of shares, securities, cash and/or any other property (payable in kind), as the case may be, into
which or for which each common share is changed or exchanged.
Liquidation. Upon any liquidation, dissolution or winding up of Sinovac Antigua, voluntary or otherwise, the holders of Series B Preferred
Shares shall be entitled to receive a preferential payment of $0.01 per share, plus an aggregate amount per share (on an as-converted basis)
equal to the aggregate amount to be distributed per share to holders of common shares.
Differences in Corporate Law
The International Business Corporations Act is modeled after English law but does not follow many recent English law statutory enactments.
In addition, the International Business Corporations Act 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 Corporations Law applicable to
us and the laws applicable to companies incorporated in the State of Delaware and their stockholders.
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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 two-thirds
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. 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:
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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 Corporations
Act.
When a take-over offer is made and accepted (within four months) by holders of 90% of the shares affected, the offeror 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.
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 claimant in actions against directors, and derivative actions may not generally be brought by a
minority shareholder. However, English authorities provide exceptions to the foregoing principle, including when:
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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.
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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.
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 and the International Business Corporations Act to call shareholders’
annual general meetings. See “Risk Factors — We do not currently intend to hold an annual general meeting of shareholders until after the
final determination of the litigation concerning our Rights Agreement, which will delay the ability of our shareholders to vote in an election
of our directors.”
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 a 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 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.
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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. By-laws can be amended by a vote or unanimous written resolution of the directors.
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 preferred shares in one or more series and to designate
the price, rights, preferences, privileges and restrictions of such preferred 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.
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.
Rights Agreement
In March 2016, we adopted our Rights Agreement that provides for the issuance of one right (a “Right”), for each of our outstanding common
shares. We amended and restated our Rights Agreement for an additional 12-month period in February 2019. The Rights are designed to
assure that all of our shareholders receive fair and equal treatment in the event of any proposed takeover and to guard against partial tender
offers, open market accumulations, undisclosed voting arrangements and other abusive or coercive tactics to gain control of our company or
our board of directors without paying all shareholders a control premium. The Rights will cause substantial dilution to a person or group that
acquires 15% or more of the common shares on terms not approved by our board of directors.
Rights agreements are allowable under Delaware law. Additionally, on December 19, 2018, the High Court of Justice of Antigua and Barbuda
held, following a trial, that Sinovac Antigua’s Rights Agreement is valid under Antigua law. 1Globe filed notice to appeal the Antigua Court’s
judgment on January 29, 2019. The results of that appeal are currently pending.
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 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 renminbi into a foreign currency, such as U.S.
dollars, and remittance of the foreign currency outside the PRC.
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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 U.S. federal income tax consequences to U.S. Holders (as defined below) under current law
of an investment in our common shares. The effects of any applicable state or local laws and other U.S. federal tax laws such as estate and gift
tax laws, and the impact of the alternative minimum tax and the Medicare contribution tax on net investment income, are not discussed. This
discussion applies only to U.S. Holders that hold our common shares as capital assets (generally, property held for investment) and have the
U.S. 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 annual
report and on U.S. Treasury regulations in effect or, in some cases, proposed as of the date of this annual report, 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 address all U.S. federal
income tax consequences relevant to a U.S. Holder’s particular circumstances or to holders subject to particular rules, including:
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banks and other financial institutions;
insurance companies;
regulated investment companies;
real estate investment trusts;
broker-dealers;
traders that elect to use a mark-to-market method of accounting;
• U.S. expatriates;
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tax-exempt entities;
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 stock by vote or value;
persons subject to special tax accounting rules as a result of any item of gross income with respect to our common shares being taken into
account in an “applicable financial statement” (as defined in the U.S. Internal Revenue Code of 1986, as amended);
partnerships or other pass-through entities, or persons holding our common shares through such entities; or
persons who acquired our common shares pursuant to the exercise of any employee share option or otherwise as compensation.
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL
INCOME TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE ESTATE AND GIFT, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON SHARES.
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The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of our
common shares and you are, for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States;
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the laws of the
United States, any state thereof or the District of Columbia;
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all
substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
If a partnership (or other entity taxable as a partnership for U.S. federal income tax purposes) 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. If you are
a partner in such partnership, you should consult your tax advisor.
Taxation of Dividends and Other Distributions on Our Common Shares
Subject to the PFIC rules discussed below, the gross amount of any distributions we make to you with respect to our common shares generally
will be includible in your gross income in the year received as dividend income to the extent the distribution is paid out of our current or
accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent the amount of the distribution
exceeds our current and accumulated earnings and profits, such excess amount will be treated first as a tax-free return of your tax basis in
your common shares, and then, to the extent such excess amount exceeds your tax basis, as capital gain. We currently do not, and we do not
intend to, calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a
distribution will generally be reported as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as
capital gain under the rules described above. Any dividends we pay will not be eligible for the dividends-received deduction allowed to
corporations in respect of dividends received from U.S. corporations.
With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, dividends may constitute “qualified dividend income”
eligible to be taxed at the preferential rate applicable to capital gains, provided that (1) our common shares are readily tradable on an
established securities market in the United States, or we are eligible for the benefits of a qualifying income tax treaty with the United States
that includes an exchange of information program, (2) we are neither a PFIC nor treated as such with respect to you (as discussed below) for
the taxable year in which the dividend is paid or the preceding taxable year and (3) certain holding period requirements are met. Under U.S.
Internal Revenue Service authority, common 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 NASDAQ Global Select Market, as are our common shares. There can be no
assurance our common shares will continue to be readily tradable on an established securities market in later years. Consequently, there can
be no assurance dividends paid on our common shares will continue to qualify for the reduced tax rates. If we are treated as a “resident
enterprise” for PRC tax purposes under the EIT Law (see “Item 10. Additional Information — E. Taxation — PRC Taxation”), we may be
eligible for the benefits of the income tax treaty between the United States and the PRC. You should consult your tax advisors regarding the
availability of the lower capital gains rate applicable to qualified dividend income 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 taxed as qualified
dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the U.S. foreign tax credit
limitation generally will be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to qualified dividend
income and divided by the highest tax rate that would be applicable to dividends if not for the reduced tax rate applicable to qualified
dividend income. 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.”
If PRC withholding taxes apply to dividends paid to you with respect to the common shares (see “Item 10. Additional Information — E.
Taxation — PRC Taxation”), subject to certain conditions and limitations, such PRC withholding taxes may be treated as foreign taxes
eligible for credit against your U.S. federal income tax liability. The rules relating to the determination of the foreign tax credit are complex,
and you should consult your tax advisors regarding the availability of a foreign tax credit in your particular 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 U.S. Holder, including an individual U.S. 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.
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Any gain or loss you recognize on a disposition of our common shares generally will be treated as U.S. source income or loss for foreign tax
credit limitation purposes. However, if we are treated as a resident enterprise for PRC tax purposes and PRC tax may be imposed on any gain
from the disposition of the common shares in accordance with the income tax treaty between the United States and the PRC (see “Item 10.
Additional Information — E. Taxation — PRC Taxation”), a U.S. Holder that is eligible for the benefits of the income tax treaty between the
United States and the PRC may elect to treat the gain as PRC source income. You should consult your tax advisors regarding the proper
treatment of gain or loss in your particular circumstances.
Passive Foreign Investment Company
Based on the market price of our common shares, the value of our assets, and the composition of our income and assets, we do not believe we
were a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2018. However, the application of the PFIC rules
is subject to uncertainty in several respects, and we cannot assure you we will not be a PFIC for any taxable year.
A non-U.S. corporation will be a PFIC for any taxable year if either:
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at least 75% of its gross income for such year is passive income, or
at least 50% of the value of its assets (based on a quarterly average) during such year is attributable to assets that produce passive income
or are held for the production of passive income.
For purposes of the PFIC rules, passive income includes, among other things, dividends, interest, royalties, rents, annuities, and net gains
from certain commodity and foreign currency transactions, subject to certain exceptions. Passive income generally does not include rents and
royalties derived from the active conduct of a trade or business (other than from a related person). 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 after the close of each year as to whether we were a PFIC for that year. The composition of our
income and assets will be affected by how, and how quickly, we use any cash we generate from our operations or raise in any offering.
Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our common
shares, fluctuations in the market price of our common shares may cause us to become a PFIC for any subsequent year. 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 with respect to you for that year and
for all succeeding years during which you hold our common shares, unless we cease to be a PFIC and you make a “deemed sale” election
with respect to our common shares. If such election is made, you will be deemed to have sold common shares you hold at their fair market
value on the last day of the last taxable year in which we qualified as a PFIC, and any gain from such deemed sale would be subject to the
rules described in the following two paragraphs. After the deemed sale election, your common shares with respect to which such election was
made will not be treated as shares in a PFIC unless we subsequently become a PFIC. You are urged to consult your tax advisor about this
election.
For each taxable year we are treated as a PFIC with respect to you, you will be subject to special tax rules with respect to any “excess
distribution” you receive and any gain you recognize from a sale or other disposition (including a pledge) of the common shares, unless you
make a “mark-to-market” election as discussed below. 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 before
the current year will be treated as an excess distribution. Under these special tax rules:
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the excess distribution or recognized gain will be allocated ratably over your holding period for the common shares;
the amount allocated to the current taxable year, and any taxable years in your holding period 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 tax at the highest income tax rate in effect for individuals or corporations, as
applicable, for each such year, and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax
attributable to each such year.
Gains (but not losses) from a sale or other disposition of the common shares are not taxed at reduced tax rates, even if you hold the common
shares as capital assets.
If we are treated as a PFIC with respect to you for any taxable year, to the extent any of our subsidiaries are also PFICs or we make direct or
indirect equity investments in other entities that are PFICs, you will be deemed to own shares in such lower-tier PFICs directly or indirectly
owned by us in the proportion that the value of the common shares you own bears to the value of all of our common shares, and you may be
subject to the rules described in the preceding two paragraphs with respect to the shares of such lower-tier PFICs that you would be deemed
to own. You should consult your tax advisors regarding the application of the PFIC rules to any of our subsidiaries.
75
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the
PFIC rules described above regarding excess distributions and recognized gains. If you make a mark-to-market election for the common
shares, you will include in income for each year that we are a PFIC 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 will be 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
will be 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 from the actual sale or other disposition of the common
shares will be treated as ordinary income. Ordinary loss treatment will apply to the deductible portion of any mark-to-market loss on the
common shares, as well as to any loss from the actual sale or other 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. Your basis in the common shares will be
adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, any distributions we make would generally
be subject to the tax rules discussed above under “— Taxation of Dividends and Other Distributions on Our Common Shares,” and the lower
capital gains rate applicable 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 greater than de
minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a “qualified exchange or other market,” as defined
in applicable U.S. Treasury regulations. Any trades that have as their principal purpose satisfying this requirement will be disregarded. Our
common shares are listed on the NASDAQ Global Select Market, which is a qualified exchange or other market for these purposes.
Consequently, if the common shares remain listed on the NASDAQ Global Select Market and are regularly traded, and you are a holder of
common shares, we expect the mark-to-market election would be available to you if we become a PFIC. There can be no assurance the
common shares will be “regularly traded” for purposes of the mark-to-market election. Once made, the election cannot be revoked without
the consent of the U.S. Internal Revenue Service unless the common shares cease to be marketable stock. Because a mark-to-market election
cannot be made for equity interests in any lower-tier PFICs that we own, a U.S. Holder may continue to be subject to the PFIC rules described
above regarding excess distributions and recognized gains with respect to its indirect interest in any investments held by us that are treated as
an equity interest in a PFIC for U.S. federal income tax purposes. You should consult your tax advisors as to the availability and desirability
of a mark-to-market election, as well as the impact of such election on interests in any lower-tier PFICs.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such corporation to elect out of
the PFIC rules described above regarding excess distributions and recognized gains. A U.S. Holder that makes a qualified electing fund
election with respect to a PFIC will generally include in income such holder’s pro rata share of the corporation’s income on a current basis.
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 currently do not intend to prepare or provide such information.
Each U.S. shareholder of a PFIC is required to file an annual report containing such information as the U.S. Treasury requires. If we become a
PFIC, you should consult your tax advisors regarding any reporting requirements that may apply to you.
You are urged to consult your tax advisors 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 U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 24%. Backup
withholding will not apply, however, to a U.S. Holder that furnishes a correct taxpayer identification number and makes any other required
certification on U.S. Internal Revenue Service Form W-9 or that is otherwise exempt from backup withholding. U.S. Holders that are required
to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders should
consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. 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 U.S. Internal Revenue Service and furnishing any required information in a timely manner.
Additional Reporting Requirements
Certain U.S. Holders who are individuals are required to report information relating to an interest in our common shares, subject to certain
exceptions (including an exception for common shares held in accounts maintained by certain financial institutions). U.S. Holders should
consult their tax advisors regarding the effect, if any, of these rules on their ownership and disposition of our common shares.
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PRC Taxation
Under the EIT Law, enterprises established under the laws of non-PRC jurisdictions but whose “de facto management body” is located in
China are considered “resident enterprises” for PRC tax purposes. Under the implementation regulations issued by the State Council relating
to the EIT Law, “de facto management bodies” are defined as the bodies that have material and overall management control over the business,
personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation issued a circular, known as Circular 82,
which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled offshore incorporated
enterprise is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise
groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of
Taxation’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all
offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group
will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China only if all of the following conditions are
met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and
human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets,
accounting books and records, company seals, and board and shareholders minutes, are located or maintained in the PRC; and (iv) at least
50% of voting board members or senior executives habitually reside in the PRC. Substantially all of our management are currently based in
China, and may remain in China in the future. If we were treated as a “resident enterprise” for PRC tax purposes, we would be subject to PRC
income tax on our worldwide income at a uniform tax rate of 25%. Dividends received by us from our PRC subsidiaries may be exempt from
PRC withholding tax.
Under the EIT Law and its implementation regulations, dividends paid to a non-PRC investor are generally subject to a 10% PRC
withholding tax, if such dividends are derived from sources within China and the non-PRC investor is considered to be a non-resident
enterprise without any establishment or place of business within China or if the dividends paid have no connection with the non-PRC
investor’s establishment or place of business within China, unless such tax is eliminated or reduced under an applicable tax treaty. Similarly,
any gain realized on the transfer of common shares by such investor is also subject to a 10% PRC withholding tax if such gain is regarded as
income derived from sources within China, unless such tax is eliminated or reduced under an applicable tax treaty.
If we were considered a PRC “resident enterprise,” it is possible that the dividends we pay with respect to our common shares, or the gain you
may realize from the transfer of our common shares, would be treated as income derived from sources within China and be subject to income
tax at 10%.
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 within four months after the end
of each fiscal year. You can access the reports that we file with the SEC at the SEC’s web site at www.sec.gov, which 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.
We will furnish the transfer agent of our common shares, with our annual reports, which will include a review of operations and annual
audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports
and communications that are made generally available to our shareholders. The transfer agent will make such notices, reports and
communications available to holders of our common shares and, upon our request, will mail to all record holders of our common shares the
information contained in any notice of a shareholders’ meeting received by the transfer agent from us.
In accordance with the NASDAQ Rules, we will post this annual report on Form 20-F on our website www.sinovac.com. In addition, we will
provide hardcopies of our annual report free of charge to shareholders upon request.
I.
Subsidiary Information
For a listing of our subsidiaries, see “Item 4. Information on the Company — C. Organizational Structure.”
77
ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
Substantially all of our revenues and most of our costs and our expenses are denominated in renminbi. Our exposure to foreign exchange risk
primarily relates to cash and cash equivalents denominated in U.S. dollars as a result of our past issuances of common shares through a
private placement and proceeds from our public offering of common shares. Furthermore, the renminbi prices of some of the materials and
supplies for reagent kits that are imported from companies in the United States, Sweden and United Kingdom may be affected by fluctuations
in the value of renminbi against the currencies of those countries. We also incur professional, investor relations, director compensation and
miscellaneous fees related to our operations as a public company that are denominated in U.S. dollars.
The value of the renminbi against the U.S. 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 U.S. dollars, has been based on rates
set by the People’s Bank of China. In July 2005, the PRC government changed its decades-old policy of pegging the value of renminbi to U.S.
dollars, and renminbi appreciated more than 20% against U.S. dollars over the following three years. Between July 2008 and June 2010, this
appreciation subsided and the exchange rate between renminbi and U.S. dollars remained within a narrow band. Since June 2010, renminbi
has fluctuated against U.S. dollars, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S.
government policy may impact the exchange rate between renminbi and U.S. dollar in the future. The PRC government has indicated that it
will make effort to widen the trading band of the renminbi exchange rate, which increases the possibility of sharp fluctuations in renminbi’s
value in the future as well as the unpredictability associated with renminbi’s exchange rate. By way of example, assuming we had converted a
U.S. dollar denominated cash balance of $1.0 million as of December 31, 2018 into renminbi at the exchange rate of $1.00 for RMB6.8755 as
of December 31, 2018, such a cash balance would have been RMB6.88 million. Assuming a 1% appreciation/depreciation of the renminbi
against the U.S. dollar, such a cash balance would have decreased/increased by RMB68,755 as of December 31, 2018.
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 statements of comprehensive income 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 expense 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 4.91%, 4.61% and 4.73% for the years ended December 31,
2018, 2017 and 2016. A hypothetical increase or decrease in interest rates of 1% would increase or decrease our annual interest and financing
expenses by $72,000 based on our outstanding indebtedness as of December 31, 2018.
ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
A. — D. Material Modifications to the Rights of Security Holders
In March 2016, we adopted our Rights Agreement. Pursuant to our Rights Agreement, subject to limited exceptions, upon (i) a person or
group obtaining ownership of 15% or more of our common shares or (ii) the commencement or announcement of an intention to make a
tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 15% or more of
our common shares, in each case, without the approval of our board of directors, each Right will entitle the holders, other than the Acquiring
Person, to buy, at an exercise price of $30.00, one one-thousandth of a Series A Preferred Share. Holders are entitled to receive, in lieu of
each one one-thousandths of a Series A Preferred Share, common shares having a market value at that time of twice the Right’s exercise
price. Our board of directors is entitled to redeem the Rights at $0.001 per Right at any time before the Rights are exercisable. In February
2019, we amended our Rights Agreement to extend its term until February 2020.
78
On February 18, 2019, after reviewing the judgment of the High Court of Justice of Antigua and Barbuda of December 19, 2018 and
considering all additional facts known to the board of directors, our board of directors determined that the Collaborating Shareholders became
Acquiring Persons as defined under Sinovac Antigua’s Rights Agreement, and that their conduct resulted in a Trigger Event under the Rights
Agreement. As a result, the Rights held by the Collaborating Shareholders were deemed void. Pursuant to the Rights Agreement, the board of
directors elected to exchange each valid and outstanding Right held by Sinovac Antigua’s shareholders (not including the Collaborating
Shareholders) for an Exchange Share. On March 6, 2019, the Delaware Chancery Court entered a status quo order providing that Sinovac
Antigua not distribute any of the Exchange Shares from the trust until the final disposition of the pending Delaware litigation or further order
of the Court. On April 4, 2019, the Eastern Caribbean Supreme Court, Court of Appeal issued an order that restrains Sinovac Antigua from
taking further action under its Rights Agreement, including the distribution of the previously issued Exchange Shares to the holders of valid
Rights, until the conclusion of 1Globe Capital, LLC’s appeal of the December 19, 2018 Judgment of the High Court of Justice of Antigua and
Barbuda. On April 8, 2019, the Delaware Chancery Court stayed the Delaware litigation pending the outcome of 1Globe’s appeal of the
Antigua Judgment.
On February 22, 2019, in connection with the Exchange, we issued approximately 27.8 million common shares and 14.6 million Series B
Preferred Shares for the benefit of the holders of valid and outstanding Rights as of that date. This issuance had the effect of significantly
diluting the holdings of the shareholders that are not entitled to participate in the Exchange. The Series B Preferred Shares share equally in all
dividends and distributions made on our common shares and vote together with the common shares on all matters brought before the
shareholders, in each case on an as-converted basis and subject to applicable law. The Series B Preferred Shares are convertible into common
shares at our option, or automatically upon a successful shareholder vote to increase the authorized number of common shares of Sinovac
Antigua. Until the Series B Preferred Shares are converted into common shares (or until the Series B Preferred Shares are listed on a
nationally recognized securities exchange), they will earn a preferred dividend equal to $0.41 per annum, payable quarterly in arrears.
E. Use of Proceeds
Not applicable.
ITEM 15.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
In connection with the preparation of this annual report on Form 20-F, we carried out an evaluation of the effectiveness of our disclosure
controls and procedures, which is defined in Rules 13a-15(e) of the Exchange Act, as of the period covered by this annual report.
Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2018, our disclosure
controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file or submit
under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms,
and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding
required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, which is defined in Rules
13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation and fair presentation of the consolidated financial statements for external purposes in
accordance with accounting principles generally accepted in the United States and includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in
accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are made only in accordance with
authorization of a company’s management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on the consolidated financial statements.
Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2018. In
making this assessment, we used the criteria established within the Internal Control —Integrated Framework (2013 Framework) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included a review of the documentation of
controls, an evaluation of the design effectiveness of controls, the testing of the operating effectiveness of controls and a conclusion on this
evaluation. All internal control systems, no matter how well designed, have inherent limitations. 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. A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement to our annual or interim financial statements will not be prevented or detected on a timely basis.
79
Based on our evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31,
2018.
Marcum Bernstein & Pinchuk LLP, an independent registered public accounting firm that audited the financial statements included in this
annual report, has issued an attestation report on the effectiveness of our internal control over financial reporting.
Attestation Report of the Registered Public Accounting Firm
The attestation report issued by Marcum Bernstein & Pinchuk LLP, our independent registered public accounting firm, on the effectiveness of
internal control over financial reporting can be found on page F-4 of this annual report.
Changes in Internal Control over Financial Reporting
As required by Rule 13a-15(d), under the Exchange Act, our management, including our chief executive officer and chief financial officer,
has conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the period
covered since last report have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Based on this evaluation, it has been determined that there has been no change during the period covered by 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, satisfies the
“independence” requirements of the NASDAQ Marketplace rule and Rule 10A-3 under the Exchange Act.
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 our annual report on Form 20-F (file no. 001-32371)
filed with the SEC on July 14, 2006, 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
Ernst & Young Hua Ming LLP audited our financial statements for the year ended December 31, 2017. We changed our independent auditor
for the year ended December 31, 2018 from Ernst & Young Hua Ming LLP to Marcum Bernstein & Pinchuk LLP. The following table sets
forth the aggregate fees by categories specified below in connection with certain professional services rendered by Ernst & Young Hua Ming
LLP, for the periods indicated below.
Audit fees(1)
Audited-related fees(2)
Tax fees(3)
All other fees(4)
2018
$0.6 million
—
—
—
2017
$1.3 million
—
—
—
(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 included in our annual reports on Form 20-F 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 rendered by our
principal auditors that are reasonably related to the performance of the audit of our financial statements and are not reported under “Audit
fees.”
(3) “Tax fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for
tax compliance, tax advice, and tax planning.
(4) “All other fees” means the aggregate fees billed in each of the fiscal years listed for products and services provided by our principal
accountant, other than the services reported in the other categories.
Before our independent auditors are engaged to render any services, the terms and fees of the engagement are reviewed by the audit
committee before our audit committee grants approval. All services as described above have been approved by our audit committee.
ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
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ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
On December 10, 2018, Ernst & Young Hua Ming LLP (“EYHM”) notified us that they would not stand for reappointment as our
independent registered public accounting firm.
On February 2, 2019, we appointed Marcum Bernstein & Pinchuk LLP (“Marcum”) to perform an integrated audit of our consolidated
balance sheet as of December 31, 2018 and the related consolidated statement of comprehensive income (loss), shareholders’ equity and cash
flow for the year then ended, which includes an audit of effectiveness of our internal control over financial report as of December 31, 2018.
The decision to appoint a new auditor was unanimously approved by our audit committee.
The change was not made due to any disagreements with EYHM. EYHM’s audit reports on our consolidated financial statements for the
fiscal years ended December 31, 2016 and 2017 did not contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified
or modified as to uncertainty, audit scope, or accounting principles.
During the fiscal years ended December 31, 2016 and 2017 and the subsequent interim period through December 10, 2018, there have been
no (i) disagreements between us and EYHM on any matter of accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of EYHM would have caused them to make reference thereto in
their reports on the consolidated financial statements for such years, or (ii) reportable events pursuant to Item 16F(a)(1)(v) of the instructions
to Form 20-F other than the material weaknesses reported in our 2016 annual report on Form 20-F filed with the U.S. Securities and
Exchange of Commission on November 22, 2017. Specifically, the material weaknesses identified as of December 31, 2016 were as follows:
(i) Lack of design of effective controls to identify, assess and review provision of non-routine benefits for employees and the related
individual income tax withholding obligations.
(ii) Ineffective design of controls over the expense authorization and reimbursement process to obtain adequate supporting
documentation to facilitate review and approval of expenses and to evaluate the nature of such expenses in order to (i) assess
corresponding corporate income tax impacts, if any, and (ii) prevent or detect possible non-compliance with anti-bribery and
bookkeeping provisions of the Foreign Corrupt Practices Act.
The Audit Committee of the Board of Directors discussed the material weaknesses with EYHM and authorized EYHM to fully respond to the
inquiries of Marcum on the material weaknesses.
We provided a copy of the above statements to EYHM and requested that EYHM furnish a letter addressed to the SEC stating whether it
agrees with the above statements, and if not, stating the respects in which it does not agree. A copy of the letter from EYHM addressed to the
SEC, dated April 29, 2019, is filed as Exhibit 15.3.
During each of the fiscal years ended December 31, 2016 and 2017 and the subsequent period prior to our engagement of Marcum, neither we
nor anyone on our behalf consulted Marcum regarding either (i) the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on our financial statements, or (ii) any matter that was either the
subject of a disagreement with Marcum or a reportable event.
During each of the fiscal years ended December 31, 2016 and 2017 and the subsequent period prior to our engagement of Marcum, we have
not obtained any written report or oral advice that Marcum concluded was an important factor considered by us in reaching a decision as to
the accounting, auditing or financial reporting issue.
ITEM 16G.CORPORATE GOVERNANCE
NASDAQ Stock Market Rule 5620 requires each issuer to hold an annual meeting of shareholders no later than one year after the end of the
issuer’s fiscal year-end. However, NASDAQ Stock Market Rule 5615(a)(3) permits foreign private issuers like us to follow “home country
practice” in certain corporate governance matters. We did not have an annual meeting of shareholders in 2017 and held an annual meeting of
shareholders on February 6, 2018. Delany Law, our Antigua and Barbuda counsel, has provided a letter to the NASDAQ Stock Market
certifying that our current practice relating to the annual meeting of shareholders will not breach our Articles of Incorporation and By-laws
nor any applicable law in Antigua and Barbuda.
Other than the annual meeting practice described above, there are no significant differences between our corporate governance practices and
those followed by U.S. domestic companies under NASDAQ Stock Market Rules.
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ITEM 16H.MINE SAFETY DISCLOSURE
Not applicable.
PART III
ITEM 17.FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18.FINANCIAL STATEMENTS
The consolidated financial statements of our company are included at the end of this annual report.
ITEM 19.EXHIBITS
Exhibit Number
Description of Document
1.1
1.2
1.3
1.4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11*
Articles of Incorporation and By-laws, as amended on March 21, 2006 and July 14, 2011 (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 April 12, 2012)
Certificate of Designations of Series A Junior Participating Preferred Shares (incorporated by reference to Exhibit A to
Exhibit 4.1 from our Current Report on Form 6-K (file no. 001-32371) filed with the Securities and Exchange
Commission on March 29, 2016)
Certificate of Designations of Series B Convertible Preferred Shares (incorporated by reference to Exhibit 3.2 from our
Registration Statement on Form 8-A (file no. 000-29031) filed with the Securities and Exchange Commission on February
22, 2019)
Certificate of Designations of Series C Junior Participating Preferred Shares (incorporated by reference to Exhibit 99.7
from our Current Report on Form 6-K (file no. 001-32371) filed with the Securities and Exchange Commission on
February 22, 2019)
Translation of a Lease between Sinovac Beijing and SinoBioway 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 SinoBioway 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 SinoBioway (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)
Translation of a Supplemental Agreement, dated August 12, 2010, to a Lease Contract between Sinovac Beijing and
SinoBioway, dated August 12, 2004 (incorporated by reference to Exhibit 4.18 from our annual report on Form 20-F (file
no. 001-32371) filed with the Securities and Exchange Commission on April 30, 2013)
Translation of a Supplemental Agreement, dated April 8, 2013, to a Lease Contract between Sinovac Beijing and
SinoBioway, dated August 12, 2004 (incorporated by reference to Exhibit 4.16 from our annual report on Form 20-F (file
no. 001-32371) filed with the Securities and Exchange Commission on April 30, 2013)
Translation of a Lease between Sinovac Beijing and SinoBioway related to buildings of approximately 37,000 square feet,
dated June 4, 2007 (incorporated by reference to Exhibit 4.8 from our annual report on Form 20-F (file no. 001-32371)
filed with the Securities and Exchange Commission on March 31, 2008)
Translation of a Supplemental Agreement, dated April 8, 2013, to a Lease Contract between Sinovac Beijing and
SinoBioway, dated June 4, 2007 (incorporated by reference to Exhibit 4.17 from our annual report on Form 20-F (file no.
001-32371) filed with the Securities and Exchange Commission on April 30, 2013)
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)
2012 Share Incentive Plan adopted on August 22, 2012 (incorporated by reference to Exhibit 4.15 from our annual report
on Form 20-F (file no. 001-32371) filed with the Securities and Exchange Commission on April 30, 2013)
Form of Employment Agreement between the Registrant and Officers (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 May 11, 2018)
Translation of Form of Employment Agreement between the Registrant or its subsidiary and any other senior executive
officers of the Registrant or its subsidiary
82
4.12
4.13*
4.14
4.15
4.16
4.17
4.18
4.19
8.1*
11.1
12.1*
12.2*
13.1**
13.2**
15.1*
15.2*
15.3*
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
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)
Form of Director Indemnification Agreements
Securities Purchase Agreement dated as of July 2, 2018, between Sinovac Biotech Ltd., Vivo Capital, LLC and Prime
Success, L.P. (incorporated by reference to Exhibit 99.3 from our current report on Form 6-K (file no. 001-32371) filed
with the Securities and Exchange Commission on July 3, 2018)
Registration Rights Agreement dated as of July 2, 2018, between Sinovac Biotech Ltd., and Vivo Capital, LLC and Prime
Success, L.P. (incorporated by reference to Exhibit 99.3 from our current report on Form 6-K (file no. 001-32371) filed
with the Securities and Exchange Commission on July 3, 2018)
Shareholders Agreement dated as of July 2, 2018, between Sinovac Biotech Ltd., and Vivo Capital, LLC and Prime
Success, L.P. (incorporated by reference to Exhibit 99.4 from our current report on Form 6-K (file no. 001-32371) filed
with the Securities and Exchange Commission on July 3, 2018)
Form of Director Confidentiality Agreement (incorporated by reference to Exhibit 99.9 from our current report on Form
6-K (file no. 001-32371) filed with the Securities and Exchange Commission on July 3, 2018)
Trust Agreement dated as of February 20, 2019 between Sinovac Biotech Ltd. and Wilmington Trust, National
Association (incorporated by reference to Exhibit 99.2 from our current report on Form 6-K (file no. 001-32371) filed
with the Securities and Exchange Commission on February 22, 2019)
Amended and Restated Rights Agreement, dated as of February 22, 2019, between Sinovac Biotech Ltd. and Pacific Stock
Transfer Company, as Rights Agent (incorporated by reference to Exhibit 99.6 from our current report on Form 6-K (file
no. 001-32371) filed with the Securities and Exchange Commission on February 22, 2019)
List of Subsidiaries
Code of Business Conduct and Ethics (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
Consent of Marcum Bernstein & Pinchuk LLP
Consent of Ernst & Young Hua Ming LLP
Letter dated as of April 29, 2019 from Ernst & Young Hua Ming LLP
XBRL Instance Document
XBRL Taxonomy Extension Scheme Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
*
**
Filed with this annual report on Form 20-F
Furnished with this annual report on Form 20-F
83
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.
SIGNATURES
Date: April 29, 2019
Sinovac Biotech Ltd.
By:
/s/ Weidong Yin
Name: Weidong Yin
Title: Chairman and Chief Executive Officer
84
SINOVAC BIOTECH LTD.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of U.S. dollars, unless otherwise stated)
December 31, 2018 and 2017
F-1
Index
Reports of Independent Registered Public Accounting Firm –Marcum Bernstein & Pinchuk LLP
Reports of Independent Registered Public Accounting Firm – Ernst & Young Hua Ming LLP
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-2
F-3
F-5
F-6
F-7
F-8
F-11
F-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Sinovac Biotech Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Sinovac Biotech Ltd. (the “Company”) as of December 31, 2018, the
related consolidated statements of comprehensive income (loss), shareholders’ equity and cash flows for the year ended December 31, 2018,
and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the
year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the
Company's internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated April
29, 2019, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit
included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis
for our opinion.
/s/ Marcum Bernstein & Pinchuk LLP
We have served as the Company’s auditor since 2019.
Beijing, China
April 29, 2019
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
To the Shareholders and Board of Directors of Sinovac Biotech Ltd.
Opinion on Internal Control over Financial Reporting
We have audited Sinovac Biotech Ltd.’s (the “Company”) internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the
consolidated balance sheet as of December 31, 2018 and the related consolidated statements of comprehensive income (loss), shareholders’
equity, and cash flows and the related notes for the year ended December 31, 2018 of the Company, and our report dated April 29, 2019
expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company'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 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of
internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
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 the 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 degree of compliance with the policies or procedures may deteriorate.
/s/ Marcum Bernstein & Pinchuk LLP
Beijing, China
April 29, 2019
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Sinovac Biotech Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sinovac Biotech Ltd. (the “Company”) as of December 31, 2017, the
related consolidated statements of comprehensive income (loss), shareholders' equity and cash flows for each of the two years in the period
ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017, and the
results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with U.S. generally
accepted accounting principles.
Adoption of New Accounting Standards
As discussed in Note 2(c) to the consolidated financial statements, the accompanying consolidated statements of cash flows for each of the
two years in the period ended December 31, 2017 have been adjusted for the retrospective application of the authoritative guidance on the
presentation and classification of restricted cash which was adopted by the Company on January 1, 2018.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable
basis for our opinion.
/s/ Ernst & Young Hua Ming LLP
We served as the Company’s auditor from 2013 to 2018.
Beijing, the People’s Republic of China
May 11, 2018
except for Note 2(c), as to which the date is April 29, 2019, as to the effect of the retrospective application of the authoritative guidance on
the presentation and classification of restricted cash in the consolidated statements of cash flows.
F-5
SINOVAC BIOTECH LTD.
Consolidated Balance Sheets
As of December 31, 2018 and 2017
(Expressed in thousands of U.S. dollars, except for number of shares and per share data)
December 31,
2018
December 31,
2017
ASSETS
Current assets
Cash and cash equivalents
Short-term investment (note 4)
Restricted cash
Accounts receivable – net (note 5)
Income tax receivable
Inventories (note 6)
Prepaid expenses and deposits (including prepaid expenses to a related
party of 2018 - $354, 2017 - $366) (note 11 (b))
Total current assets
Property, plant and equipment – net (note 8)
Prepaid land lease payments (note 9)
Long–term inventories (note 7)
Long–term prepaid expenses to a related party (note 11(b))
Prepayments for acquisition of equipment
Deferred tax assets (note 13)
Total assets
LIABILITIES AND EQUITY
Current liabilities
Short-term bank loans (note 10)
Accounts payable and accrued liabilities (note 12)
Income tax payable
Deferred revenue (note 14)
Deferred government grants (note 15)
Total current liabilities
Deferred government grants (note 15)
Long-term bank loans (note 10)
Deferred revenue (note 14)
Loan from a non-controlling shareholder (note 11 (a))
Other non-current liabilities (note 13)
Total long-term liabilities
Total liabilities
Commitments and contingencies (notes 16 and 22)
EQUITY
Preferred stock
Authorized 50,000,000 shares at par value of $0.001 each
Issued and outstanding: nil
Common stock (note 17)
Authorized: 100,000,000 shares at par value of $0.001 each
Issued and outstanding: 71,139,402 (2017 –57,281,861)
Additional paid-in capital
Accumulated other comprehensive income (loss)
Statutory surplus reserves (note 19)
Accumulated earnings
Total shareholders' equity
Non-controlling interests
Total equity
Total liabilities and equity
The accompanying notes are an integral part of these consolidated financial statements.
F-6
$
$
$
$
158,170 $
18,908
—
74,464
2,999
25,091
4,543
284,175
70,920
8,304
90
23
470
5,798
369,780 $
3,321 $
49,991
—
2,907
1,986
58,205
5,961
3,890
90
6,705
3,001
19,647
77,852
—
71
204,998
(2,099)
26,643
23,820
253,433
38,495
291,928
369,780 $
114,415
—
1,549
66,205
—
19,618
2,101
203,888
76,430
9,028
—
25
528
9,320
299,219
18,152
59,418
8,862
4,073
2,038
92,543
4,474
14,849
—
7,070
3,143
29,536
122,079
—
57
115,339
7,075
19,549
9,132
151,152
25,988
177,140
299,219
SINOVAC BIOTECH LTD.
Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, 2018, 2017 and 2016
(Expressed in thousands of U.S. Dollars, except for number of shares and per share data)
Sales (note 21)
Cost of sales
Gross profit
Selling, general and administrative expenses (including rent expenses incurred
to a related party of 2018 - $810, 2017 - $793, 2016 - $807) (note 11(b))
Provision for doubtful accounts
Research and development expenses
Loss on disposal of property, plant and equipment (note 8)
Government grants recognized in income
Total operating expenses
Operating income
Interest and financing expenses – (including interest expenses incurred
to a related party, 2018 - $453, 2017 - $262, 2016 - $176) (note 11(a))
Interest income
Other income, net
Income (loss) from continuing operations before income taxes
Income tax expense (note 13)
Income (loss) from continuing operations
Income from discontinued operations, net of tax of nil (note 3)
Net income (loss)
Less: (Income) loss attributable to non-controlling interests
Net income (loss) attributable to shareholders of Sinovac
Income (loss) from continuing operations
Other comprehensive income (loss) from continuing operations, net of tax of nil
Foreign currency translation adjustments
Comprehensive income (loss) from continuing operations
Income from discontinued operations
Other comprehensive loss from discontinued operations, net of tax of nil
Foreign currency translation adjustments
Comprehensive income from discontinued operations
Comprehensive income (loss)
Less: comprehensive (income) loss attributable to non-controlling interests
Comprehensive income (loss) attributable to shareholders of Sinovac
Earnings (loss) per share (note 20)
Basic net income (loss) per share:
Continuing operations
Discontinued operations
Basic net income (loss) per share
Diluted net income (loss) per share:
Continuing operations
Discontinued operations
Diluted net income (loss) per share
Weighted average number of shares of common stock outstanding
– Basic
– Diluted
For the year ended December 31
2017
2016
2018
$
229,650 $
24,723
204,927
174,346 $
20,240
154,106
137,003
820
21,910
75
(197)
159,611
45,316
(1,070)
2,016
321
46,583
(10,472)
36,111
—
36,111
(14,329)
21,782 $
36,111
(10,996)
25,115
—
—
— $
25,115
(12,507)
12,608
0.34
—
0.34
0.34
—
0.34
87,365
934
20,489
42
(141)
108,689
45,417
(1,569)
1,183
13
45,044
(8,339)
36,705
—
36,705
(10,898)
25,807 $
36,705
8,098
44,803
—
—
— $
44,803
(12,089)
32,714
0.45
—
0.45
0.45
—
0.45
$
$
72,431
22,393
50,038
41,980
1,412
12,648
478
(6,984)
49,534
504
(1,729)
731
100
(394)
(2,664)
(3,058)
2,338
(720)
124
(596)
(3,058)
(8,843)
(11,901)
2,338
—
2,338
(9,563)
953
(8,610)
(0.05)
0.04
(0.01)
(0.05)
0.04
(0.01)
64,727,146
64,977,554
57,033,816
57,101,191
56,949,083
56,949,083
The accompanying notes are an integral part of these consolidated financial statements.
F-7
SINOVAC BIOTECH LTD.
Consolidated Statements of Shareholders’ Equity
For the years ended December 31, 2018, 2017 and 2016
(Expressed in thousands of U.S. dollars, expect number of shares data)
Accumulated
other
comprehensive
income
(foreign
currency
translation surplus Accumulated shareholders’ controlling Total
Statutory
Non-
Total
Common stock
Additional
paid-in
capital
Shares
Amount
adjustment)
reserves
deficit
equity
interests equity
56,906,561 $
57 $ 109,944 $
8,182 $ 13,450 $
(9,980) $
121,653 $
14,852 $136,505
Balance, December 31,
2015
Share-based compensation
(note 18)
Exercise of stock options
(note 17)
Cancellation of
outstanding shares (note
17)
Other comprehensive loss
- Other comprehensive loss
attributable to
non-controlling interests
- Other comprehensive loss
attributable
to shareholders of
Sinovac
Net loss for the year
-Net loss attributable to
non-controlling interests
- Net loss attributable to
shareholders of Sinovac
- Transfer to statutory
surplus reserves (note 19)
Balance, December 31,
2016
—
—
2,409
—
—
—
2,409
—
2,409
120,000
—
315
—
—
—
315
—
315
(14,800)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(829)
(829)
—
—
—
(8,014)
—
—
(8,014)
—
(8,014)
—
—
—
—
—
—
—
(124)
(124)
—
—
—
—
—
(596)
(596)
—
(596)
—
—
—
—
1,338
(1,338)
—
—
—
57,011,761 $
57 $ 112,668 $
168 $ 14,788 $
(11,914) $
115,767 $
13,899 $129,666
The accompanying notes are an integral part of these consolidated financial statements
F-8
SINOVAC BIOTECH LTD.
Consolidated Statements of Shareholders’ Equity
For the years ended December 31, 2018, 2017 and 2016
(Expressed in thousands of U.S. dollars, expect number of shares data)
Accumulated
other
comprehensive
income
(foreign
currency
translation
Additional
Common stock
Shares
Amount
paid-in
capital
adjustment)
Statutory
surplus
reserves
Accumulated
deficit)
earnings
Total
shareholders’
equity
Non-
controlling Total
interests equity
57,011,761 $
57 $ 112,668 $
168 $ 14,788 $
(11,914) $
115,767 $
13,899 $129,666
Balance, December 31,
2016
Share-based compensation
(note 18)
Exercise of stock options
(note 17)
Subscriptions received
(note 17)
Other comprehensive
income
- Other comprehensive
income attributable to
non-controlling interests
- Other comprehensive
income attributable
to shareholders of
Sinovac
Net income for the year
-Net income attributable to
non-controlling interests
- Net income attributable
to shareholders of Sinovac
- Transfer to statutory
surplus reserves (note 19)
Balance, December 31,
2017
—
—
979
—
—
—
979
—
979
270,100
—
1,264
—
—
—
1,264
—
1,264
—
—
428
—
—
—
428
—
428
—
—
—
—
—
—
—
1,191
1,191
—
—
—
6,907
—
—
6,907
—
6,907
—
—
—
—
—
—
—
10,898 10,898
—
—
—
—
—
25,807
25,807
— 25,807
—
—
—
—
4,761
(4,761)
—
—
—
57,281,861 $
57 $ 115,339 $
7,075 $ 19,549 $
9,132 $
151,152 $
25,988 $177,140
The accompanying notes are an integral part of these consolidated financial statements
F-9
SINOVAC BIOTECH LTD.
Consolidated Statements of Shareholders’ Equity
For the years ended December 31, 2018, 2017 and 2016
(Expressed in thousands of U.S. dollars, expect number of shares data)
Accumulated
other
comprehensive
income (loss)
(foreign
currency
translation
Additional
Common stock
Shares
Amount
paid-in
capital
adjustment)
Statutory
surplus
reserves
Accumulated
deficit)
earnings
Total
shareholders’
equity
Non-
controlling Total
interests equity
Balance, December 31,
2017
Share-based compensation
(note 18)
Exercise of stock options
(note 17)
Subscriptions received
(note 17)
Cancellation of
outstanding shares (note
17)
Issuance of new and
restricted shares (note 17
and 18)
Other comprehensive
income
- Other comprehensive loss
attributable to
non-controlling interests
- Other comprehensive loss
attributable
to shareholders of
Sinovac
Net income for the year
-Net income attributable to
non-controlling interests
- Net income attributable
to shareholders of Sinovac
- Transfer to statutory
surplus reserves (note 19)
Balance, December 31,
2018
57,281,861 $
57 $ 115,339 $
7,075 $ 19,549 $
9,132 $
151,152 $
25,988 $177,140
—
—
4,305
—
—
—
4,305
—
4,305
109,041
—
3
—
—
—
—
64
—
—
—
—
3
—
3
64
—
64
(51,500)
—
—
—
—
—
—
—
—
13,800,000
14
85,287
—
—
—
85,301
— 85,301
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,822)
(1,822)
—
—
—
—
—
—
(9,174)
—
—
—
—
—
—
—
—
—
—
—
(9,174)
—
—
—
(9,174)
—
—
14,329 14,329
—
—
—
—
—
21,782
21,782
— 21,782
—
—
—
—
7,094
(7,094)
—
—
—
71,139,402
71
204,998
(2,099)
26,643
23,820
253,433
38,495 291,928
The accompanying notes are an integral part of these consolidated financial statements.
F-10
SINOVAC BIOTECH LTD.
Consolidated Statements of Cash Flows
For the years ended December 31, 2018, 2017 and 2016
(Expressed in thousands of U.S. dollars)
Cash flows provided by (used in) operating activities
Income (loss) from continuing operations
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
- Deferred income taxes (note 13)
- Share-based compensation (note 18)
- Inventory provision (note 6)
- Provision (recovery) for doubtful accounts
- Loss on disposal of property, plant and equipment (note 8)
- Depreciation of property, plant and equipment and amortization of licenses (note 8)
- Amortization of prepaid land lease payments (note 9)
- Government grants recognized in income
Changes in:
- Accounts receivable
- Inventories
- Income tax payable
- Prepaid expenses and deposits
- Deferred revenue
- Accounts payable and accrued liabilities
- Other non-current liabilities
Net cash provided by (used in) operating activities from continuing operations
Net cash used in operating activities from discontinued operations
Net cash provided by (used in) operating activities
Cash flows provided by (used in) financing activities
- Proceeds from bank loans
- Repayments of bank loans
- Proceeds from issuance of common stock, net of share issuance costs
- Proceeds from shares subscribed
- Government grants received (note 15)
- Loan from a non-controlling shareholder (note 11(a))
Net cash provided by (used in) financing activities
Cash flows used in investing activities
- Purchase of short-term investments
- Proceeds from disposal of equipment
- Acquisition of property, plant and equipment
- Net proceeds from disposal of subsidiary
Net cash used in investing activities from continuing operations
Net cash used in investing activities from discontinued operations
Net cash used in investing activities
Effect of exchange rate changes on cash and cash equivalents and restricted cash
Increase (decrease) in cash and cash equivalents and restricted cash, including
cash from discontinued operation
Less: Net decrease in cash from discontinued operation
Increase (decrease) in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash, beginning of year
Cash and cash equivalents and restricted cash, end of year
$
For the year ended December 31
2017
2016
2018
36,111 $
36,705 $
(3,058)
$
3,146
4,305
2,529
820
75
4,887
249
(197)
(13,082)
(9,412)
(11,844)
(2,613)
(892)
(6,167)
28
7,943
—
7,943
18,898
(43,886)
85,304
64
3,800
—
64,180
(19,670)
22
(5,613)
—
(25,261)
—
(25,261)
(4,656)
(4,921)
979
1,231
934
42
4,638
243
(141)
(13,482)
(5,531)
4,948
(622)
987
33,416
330
59,756
—
59,756
28,636
(38,708)
1,264
428
2,598
4,440
(1,342)
—
19
(11,915)
—
(11,896)
—
(11,896)
4,005
42,206
—
42,206
115,964
158,170 $
50,523
—
50,523
65,441
115,964 $
(1,007)
2,409
6,377
1,412
478
5,063
247
(6,984)
(15,122)
(3,025)
1,720
(436)
(4,959)
2,739
339
(13,807)
(95)
(13,902)
45,462
(24,850)
315
—
6,857
—
27,784
—
26
(12,654)
861
(11,767)
(9)
(11,776)
(2,268)
(162)
(143)
(19)
65,460
65,441
1,662
1,885
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
$
$
1,494 $
19,151 $
1,325 $
7,909 $
The accompanying notes are an integral part of these consolidated financial statements
F-11
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
1.
Basis of Presentation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States (“US GAAP”). They include the accounts of Sinovac Biotech Ltd., which is incorporated under the laws of Antigua
and Barbuda, and its wholly owned or controlled subsidiaries (collectively, the “Company”). All significant intercompany
transactions have been eliminated. Details of the Company’s subsidiaries are as follows:
Name
Sinovac Biotech (Hong
Kong) Ltd.
(“Sinovac Hong Kong”)
Sinovac Biotech Co., Ltd.
(“Sinovac
Beijing”)
Date of
incorporation or
establishment
Place of
incorporation
(or establishment)
/operation
Percentage of
ownership
as of
December
31, 2018
Percentage of
ownership
as of
December
31, 2017
October 2008
Hong Kong
100%
100%
April 2001
People’s
Republic of
China (“PRC”)
73.09%
73.09%
Sinovac Research &
Development
Co., Ltd. (“Sinovac R&D”)
Sinovac (Dalian) Vaccine
Technology
Co., Ltd.(“Sinovac
Dalian”)
Sinovac Biomed Co., Ltd.
May 2009
PRC
100%
100%
January 2010
April 2015
PRC
PRC
67.86%
67.86%
100%
100%
Principal activities
Investment holding
company
Research and
development,
production and sales
of vaccine products
Research and
development of
vaccine products
Research and
development,
production and sales
of vaccine products
Distribution of vaccine
products
2.
Significant Accounting Policies
(a)
Use of Estimates
In preparation of the Company’s consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant
estimates made by management include: provision for product returns, allowance for doubtful accounts, inventory
provisions, impairment of long-lived assets, fair value of options granted and related forfeiture rates, and realizability of
deferred tax assets. On an ongoing basis, management reviews its estimates to ensure that these estimates appropriately
reflect changes in the Company’s business and new information as it becomes available. If historical experience and other
factors used by management to make these estimates do not reasonably reflect future activity, the Company’s consolidated
financial statements could be materially impacted.
(b)
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments that are readily convertible to cash generally with maturities of three
months or less when purchased.
F-12
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
(c)
Restricted Cash
Restricted cash is cash held as collateral for transactions and a loan the Company has entered into.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230):
Restricted Cash, which requires companies to include amounts generally described as restricted cash and restricted cash
equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts presented in
the statement of cash flows. The Company adopted the new standard effective January 1, 2018, using the retrospective
transition method.
The ending balance of cash and cash equivalents and restricted cash presented on the face of the consolidated statements of
cash flows in 2018 is $158,170 (2017 - $115,964, 2016 - $65,441). It includes $ 158,170 cash and cash equivalents (2017 -
$114,415,
2016
-
-$3,007) as presented in consolidated balance sheets.
restricted
$62,434)
$1,549,
(2017
2016
cash
$nil
and
-
(d)
Short-term investments
All highly liquid investments with original maturities greater than three months, but less than twelve months, are classified
as short-term investments. Investments that are expected to be realized in cash during the next twelve months are also
included in short-term investments.
The Company accounts for short-term debt investments in accordance with ASC Topic 320, Investments—Debt Securities
(“ASC 320”). The Company classifies the short-term investments in debt as “held-to-maturity,” “trading” or “available-for-
sale,” whose classification determines the respective accounting methods stipulated by ASC 320. Dividend and interest
income, including amortization of the premium and discount arising at acquisition, for all categories of investments in
securities are included in earnings. Any realized gains or losses on the sale of the short-term investments are determined on
a specific identification method, and such gains and losses are reflected in earnings during the period in which gains or
losses are realized.
(e)
Accounts Receivable
The Company extends unsecured credit to its customers in the ordinary course of business and actively pursues past due
accounts. The Company estimates an allowance for doubtful accounts based on historical experience, the age of the
accounts receivable balances, credit quality of the Company’s customers, current economic conditions and other factors that
may affect its customers’ ability to pay.
(f)
Inventories
Inventories are stated at the lower of cost or net realizable value. The cost of work in progress and finished goods is
determined on a weighted-average cost basis and includes direct material, direct labor and overhead costs. Net realizable
value represents the anticipated selling price, net of distribution cost, less estimated costs to completion for work in
progress.
(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 and development projects
with no alternative uses are expensed. Assets under construction are not depreciated until construction is completed and the
assets are ready for their intended use. Gains and losses from the disposal of property, plant and equipment are recorded in
gain or loss on disposal and impairment of property, plant and equipment included in the consolidated statements of
comprehensive income (loss).
Depreciation of property, plant and equipment is computed using the straight-line method based on the estimated useful
lives of the assets as follows:
Plant and buildings
Machinery and equipment
Motor vehicles
Office equipment and furniture
Leasehold improvements
10 to 24 years
8 to 10 years
4 to 5 years
3 to 5 years
Lesser of useful lives and term of lease
F-13
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
(h)
Prepaid Land Lease Payments
Prepaid land lease payments represent amounts paid for the rights to use land in the PRC and is recorded at purchased cost
less accumulated amortization. Amortization is provided on a straight-line basis over the term of the lease agreement, which
ranges from 28 to 49 years.
(i)
Licenses
The Company capitalizes the patent payment and the purchased cost of vaccines if the vaccine has received a new drug
certificate from the China Food and Drug Administration (“CFDA”) of China. If the vaccine has not received a new drug
certificate, the purchase cost is expensed as in-process research and development.
Licenses in relation to the production and sales of pharmaceutical products are amortized on a straight-line basis over their
respective useful lives. Costs incurred to renew or extend the term of licenses are capitalized and amortized over the
license’s useful life on a straight-line basis.
(j)
Impairment of Long-Lived Assets
Long-lived assets including intangible assets subject to amortization are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset group may not be recoverable from the future
undiscounted net cash flows expected to be generated by the asset group. An asset group is identified as assets at the lowest
level for which identifiable cash flows are largely independent of the cash flows of other assets. If the asset group is not
fully recoverable, an impairment loss would be recognized for the difference between the carrying value of the asset group
and its estimated fair value, based on the discounted net future cash flows or other appropriate methods, such as comparable
market values. The Company uses estimates and judgments in its impairment tests and if different estimates or judgment
had been utilized, the timing or the amount of any impairment charges could be materially different.
(k)
Income Taxes
The Company follows the liability method of accounting for income taxes. Under this method, deferred tax liabilities and
assets are determined based on the temporary differences between the carrying values and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is
provided if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates and laws.
The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be
sustained upon examination by the appropriate taxing authority, based on the technical merits of the position. The tax
benefits recognized from such a position are measured based on the amount that is greater than 50% likely of being realized
upon settlement. The Company recognizes a change in available facts after the reporting date but before issuance of the
financial statements in the period when the change in facts occur, even if that new information provides a better estimate of
the ultimate outcome of an uncertainty. Liabilities associated with uncertain tax positions are classified as long−term unless
expected to be settled within one year. Interest and penalties related to uncertain tax positions, if any, are recorded in the
provision for income taxes and classified with the related liability on the consolidated balance sheets.
(l)
Value-added Taxes
Value-added taxes (“VAT”) collected from customers relating to product sales and remitted to governmental authorities are
presented on a net basis. VAT collected from customers is excluded from revenue.
(m)
Revenue from Contracts with Customers
The Company adopted ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”), on January 1, 2018, using
the modified retrospective method. Revenues for the year ended December 31, 2018 were presented under ASC 606, and
revenues for the years ended December 31, 2017 and 2016 were not adjusted and continue to be presented under ASC Topic
605, Revenue Recognition. The cumulative effect of adopting ASC 606 resulted in $nil to the opening balance of retained
earnings at January 1, 2018.
F-14
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
Revenue is recognized when control of promised goods is transferred to the Company’s customers in an amount of
consideration of which the Company expect to be entitled to in exchange for the goods, and the Company can reasonably
estimates return provision for the goods.
The product return provisions are estimated based on historical return and exchange data as well as the inventory levels and
the remaining shelf lives of the products in the distribution channels.
As of December 31, 2018, sales return provision for inactivated hepatitis A vaccine, combined inactivated hepatitis A&B
vaccine and enterovirus 71 vaccine was $2,880 (December 31, 2017 - $4,672). Private pay sales return provision of
inactivated hepatitis A vaccine, combined inactivated hepatitis A&B vaccine and enterovirus 71 vaccine as a percentage of
sales was 1.4% and 3.1% in 2018 and 2017, respectively. As of December 31, 2018, sales return provision for seasonal
influenza vaccine returns was $nil (December 31, 2017 - $263).
Deferred revenue is generally related to government stockpiling programs and advances received from customers. For
government stockpiling programs of H5N1 vaccines, the Company generally obtains purchase authorizations from the
government for a specified amount of products at a specified price and no rights of return are provided. Revenue is
recognized when the government takes delivery of the products. If the products expire prior to delivery, these expired
products are recognized as revenue once cash is received and the products have expired and passed government inspection.
For the year ended December 31, 2018, the Company did not have any significant incremental costs of obtaining contracts
with customers incurred or costs incurred in fulfilling contracts with customers within the scope of ASC Topic 606, that
shall be recognized as an asset and amortized to expenses in a pattern that matches the timing of the revenue recognition of
the related contract.
The Company does not have amounts of contract assets since revenue is recognized as control of goods is transferred. The
contract liabilities consist of advance payments from customers. The contract liabilities are reported in a net position on a
customer-by-customer basis at the end of each reporting period. All contract liabilities are included in deferred revenue in
the Consolidated Balance Sheets.
For the year ended December 31, 2018, the Company recognized sales of $3,888 related to contract liabilities at January 1,
2018.
(n)
Shipping and Handling
Shipping and handling fees billed to customers are included in sales. Costs related to shipping and handling are recognized
in selling, general and administrative expenses in the consolidated statements of comprehensive income (loss). For the year
ended December 31, 2018, $6,261 of shipping and handling costs was included in selling, general and administrative
expenses (2017 - $5,759, 2016 - $1,654).
(o)
Advertising Expenses
Advertising costs are expensed as incurred and included in selling, general and administrative expenses. Advertising costs
were $3,901 for the year ended December 31, 2018 (2017 - $4,007, 2016 - $3,336).
(p)
Research and Development
Research and development ("R&D") costs are expensed as incurred and are disclosed as a separate line item in the
Company’s consolidated statements of comprehensive income (loss). R&D costs consist primarily of the remuneration of
R&D staff, depreciation, material, clinical trial costs as well as amortization of acquired technology and know-how used in
R&D with alternative future uses. R&D costs also include costs associated with collaborative R&D and in-licensing
arrangements, including upfront fees paid to collaboration partners in connection with technologies which have not reached
technological feasibility and did not have an alternative future use. Reimbursement of R&D costs for arrangements with
collaboration partners is recognized when the obligations are incurred.
Under certain R&D arrangements with third parties, the Company may be required to make payments that are contingent on
the achievement of specific development, regulatory and/or commercial milestones. Before a product receives regulatory
approval, license fees and milestone payments made to third parties are expensed as incurred. License fees and milestone
payments made to third parties after regulatory approval is received are capitalized and amortized over the remaining life of
the agreement with third parties.
F-15
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
(q)
Government Grants
Government grants received from the PRC government by the PRC operating subsidiaries of the Company are recognized
when there is reasonable assurance that the amount is receivable and all the conditions specified in the grant have been met.
Government grants for R&D are recognized as a reduction to R&D expenses when the expenses are incurred in the same
period when the conditions attached to the grants are met, or recognized as government grants recognized in income in the
period when the conditions are met after the expenses are incurred. Government grants for property, plant and equipment
are deferred and recognized as a reduction to the related depreciation and amortization expenses in the same manner as the
property, plant and equipment are depreciated. Interest subsidies are recorded as a reduction to interest and financing
expenses in the consolidated statements of comprehensive income (loss), or recorded as a reduction to interest capitalized if
the subsidies granted are related to a specific borrowing associated with building a qualifying asset. For government loans
received at below market interest rate, the difference between the face value of the loan and fair value using the effective
interest rate method is recorded as deferred government grants.
(r)
Retirement and Other Post-retirement Benefits
Full-time employees of the Company in the PRC participate in a government mandated defined contribution plan pursuant
to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare
benefits are provided to employees. Chinese labor regulations require that the Company makes contributions to the
government for these benefits based on certain percentages of the employees’ salaries. The Company has no legal obligation
for the benefits beyond the contributions. Total amounts for such employee benefits incurred was $7,438 for the year ended
December 31, 2018 (2017 - $6,197, 2016 - $5,473).
(s)
Foreign Currency Translation and Transactions
The Company maintains their accounting records in their functional currencies, U.S. dollars (“US$”) for the Company and
Sinovac Hong Kong and Renminbi Yuan (“RMB”) for the PRC subsidiaries. The Company uses the US$ as its reporting
currency.
At the transaction date, each asset, liability, revenue and expense is re-measured into the functional currency by the use of
the exchange rate in effect at that date. At each period end, foreign currency monetary assets, and liabilities are re-measured
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 selling, general and administrative expenses. The Company recognized foreign exchange
gain of $559 for the year ended December 31, 2018 (2017 - $1,323, 2016 - $942).
Assets and liabilities of the PRC subsidiaries, Sinovac Beijing, Sinovac R&D, Sinovac Dalian and Sinovac Biomed are
translated into US$ at the exchange rates in effect at the balance sheet date. Revenue and expenses are translated at average
exchange rates. Gains and losses from such translations are recorded in accumulated other comprehensive income, a
component of shareholders’ equity.
Gain on intra-entity foreign currency transactions that are of a long-term-investment nature was $268 for the year ended
December 31, 2018 (2017 - $336 in gain, 2016 - $335 in losses) which was recorded in accumulated other comprehensive
income, a component of shareholders’ equity.
(t)
Share-based Compensation
Compensation expense for costs related to all share-based payments, including grants of stock options, is recognized
through a fair-value based method. The Company uses the Black-Scholes option-pricing model to determine the grant date
fair value for stock options. The Company uses the grant date stock price to determine the grant date fair value of restricted
shares. The Company has elected to recognize share-based compensation costs using the straight-line method over the
requisite service period with a graded vesting schedule, provided that the amount of compensation costs recognized at any
date is at least equal to the portion of the grant date value of the awards that are vested at that date. Forfeitures are estimated
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Share
based compensation costs are recorded net of estimated forfeitures such that expense is recorded only for those awards that
are expected to vest.
(u)
Comprehensive Income (loss)
The Company’s comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments.
F-16
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
(v)
Earnings (loss) Per Share
Earnings (loss) per share is calculated in accordance with Accounting Standards Codification (“ASC”) 260 Earnings per
Share. Basic earnings (loss) per share is computed by dividing the net income (loss) attributable to shareholders of Sinovac
by the weighted average number of common shares outstanding during the year. 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. Dilutive common share equivalents are excluded from the computation of diluted earnings per
share if their effects would be anti-dilutive.
(w)
Operating Leases
Leases are classified as capital and operating depending on the terms and conditions of the lease agreement. Leases that
transfer substantially all the benefits and risks incidental to ownership of assets are accounted for as if there was an
acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases are accounted for as
operating leases where rental payments are expensed as incurred. There are no capital leases for the periods presented.
(x)
Fair Value Measurements
Assets and liabilities subject to fair value measurements are required to be disclosed within a specified fair value hierarchy.
The fair value hierarchy ranks the quality and reliability of inputs, or assumptions, used in the determination of fair value
and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following categories based
on the lowest level input used that is significant to a particular fair value measurement:
•
•
•
Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either
directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, or quoted
prices for identical or similar assets and liabilities in markets that are not active.
Level 3 — Unobservable inputs for the asset or liability.
As of December 31, 2018 and 2017, the Company did not have any financial assets or liabilities measured at fair value on a
recurring basis.
The carrying values of cash equivalents, restricted cash, short-term investment, accounts receivable, accounts payable and
accrued liabilities and short-term bank loans and the current portion of long-term debt approximate their fair value because
of their short-term nature. Fair value of the long-term bank loans are determined based on level 2 inputs, and the carrying
amounts of long-term bank loans approximate fair value as the related interest rates approximate rates currently offered by
financial institution for similar debt instruments.
The Company measures property, plant and equipment at fair value on a non-recurring basis only if an impairment charge
were to be recognized. There were no non-recurring fair value measurements for the years ended December 31, 2018 and
2017.
(y)
Concentration of Risks
Exchange Rate Risks
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 the US$ and the RMB. In 2018, foreign exchange gain of $559 is included in
selling, general and administrative expenses (2017 - $1,323, 2016 - $942). As of December 31, 2018, cash and cash
equivalents of $70,448 (RMB 484 million) is denominated in RMB and are held in PRC and Hong Kong (December 31,
2017 - $103,370 (RMB 673 million)).
Currency Convertibility Risks
Substantially all of the Company’s operating activities are transacted in RMB, which is not freely convertible into foreign
currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks
authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China. Approval of
foreign currency
F-17
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form
together with other information such as suppliers’ invoices, shipping documents and signed contracts.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentration of credit risks consist primarily of cash and
cash equivalents, restricted cash, short-term investment and accounts receivable, the balances of which are stated on the
consolidated balance sheets which represent the Company’s maximum exposure. The Company places its cash and cash
equivalents, restricted cash, and short-term investment in good credit quality financial institutions in Hong Kong and China.
Concentration of credit risks with respect to accounts receivables is linked to the concentration of revenue. The Company’s
customers are mainly various government agencies in China. For the year ended December 31, 2018, 2017 and 2016, no
single customer of the Company accounted for more than 10% of total sales. To manage credit risk, the Company performs
ongoing credit evaluations of customers’ financial condition.
Interest Rate Risks
The Company is subject to interest rate risk. Other than loans from a non-controlling shareholder of $6,705 with fixed
interest rates as of December 31, 2018 (note 11(a)), interests of other interest-bearing loans are charged at variable rates
based on the People’s Bank of China (note 10).
(z)
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 specifies the accounting for
leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially
measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a
single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis.
ASU 2016-02 is effective for public business entities for annual reporting periods and interim periods within those years
beginning after December 15, 2018. The Company will adopt ASU 2016-02 on January 1, 2019 using modified
retrospective method and will not restate comparable periods. The Company will elect the package of practical expedients
permitted under the transition guidance, which allow the Company to carry forward the historical lease classification, the
assessment whether a contract is or contains a lease and initial direct costs for any leases that exist prior to adoption of the
new standard. The Company will also elect the practical expedient not to separate lease and non-lease components for
certain classes of underlying assets and the short-term lease exemption for contracts with lease terms of 12 months or less.
The Company currently believes the most significant change will be related to the recognition of right-of-use assets and
lease liabilities on the Company’s balance sheet for certain in-scope operating leases. The Company does not expect any
material impact on net assets and the consolidated statement of comprehensive income as a result of adopting the new
standard.
3.
Discontinued Operations
In December 2015, the Company committed to a plan to sell 100% of its equity stake in Tangshan Yian to an unrelated third-party
biological technology company, for a total consideration of $1,872 (RMB 13 million). The transaction represents a strategic shift that
the Company was exiting the animal vaccine market and will focus on the human use vaccine market, which will have a major effect
on the Company’s operations and financial results going forward. As such, the financial results of Tangshan Yian and the gain on
disposition are reported within discontinued operations in the consolidated financial statements. The consolidated financial
statements and amounts previously reported have been reclassified, as necessary, to conform to this presentation in accordance with
ASC 205, Presentation of Financial Statements to allow for meaningful comparison of continuing operations. The Company received
$926 (RMB 5.97 million) in January 2016 and the disposition transaction was completed in February 2016 as all other conditions
have been fulfilled. The Company recognized gain on the disposition of $2,461 (net of tax of nil), which represents the excess of (a)
the sum of (i) $2,016 (RMB 13 million) in consideration, consisting of $1,706 (RMB 11 million) in cash received and $310 (RMB 2
million) of cash receivable, and (ii) Tangshan Yian’s $1,880 cumulative translation gain, which was reclassified to earnings, over (b)
$1,435 net book value of Tangshan Yian upon the closing of the transaction.
F-18
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
Results of the discontinued operations are summarized as follows:
For the year ended December 31,
2017
2016
2018
Sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Research and development expenses
Total operating expenses
Operating loss
Other income
Loss from discontinued operations before gain on disposition and
provision for income taxes
Gain on disposal of Tangshan Yian
Provision for income taxes
Income from discontinued operations, net of income tax
$
$
— $
—
—
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
129
—
129
(129)
6
(123)
2,461
—
2,338
Income from discontinued operations, net of income tax, for the year ended December 31, 2016 included the results of Tangshan
Yian through the disposition date of February 28, 2016.
4.
Short-term investments
As of December 31, 2018, the Company’s short-term investments comprised of only debt securities. All of the short-term held-to-
maturity investments were deposits in commercial banks with maturities of less than one year and the Company has the positive
intent and ability to hold those securities to maturity.
During the years ended December 31, 2018, 2017 and 2016, the Company recorded interest income from its short-term investments
of $ 47, $nil and $nil in the consolidated statements of comprehensive income, respectively.
Short-term Investments
5.
Accounts Receivable – net
Trade receivables
Allowance for doubtful accounts
Other receivables
Total accounts receivable
F-19
December 31,
2018
2017
$
18,908 $
—
December 31,
2018
2017
77,537 $
(4,570)
72,967
1,497
74,464 $
69,448
(4,779)
64,669
1,536
66,205
$
$
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable
balance. The Company estimates the allowance based on historical experience, the age of the accounts receivable balances, credit
quality of the Company’s customers, current economic conditions, and other factors that may affect customers’ ability to pay. As of
December 31, 2018, the Company provided 100% (December 31, 2017 - 100%) allowance for accounts receivable aged more than
four years, approximately 96.9% (December 31, 2017 - 94.6%) allowance for accounts receivable aged between three years and four
years, approximately 90.6% (December 31, 2017 - 68.5%) allowance for accounts receivable aged between two years and three
years, approximately 42.1% (December 31, 2017 - 15.3%) allowance for accounts receivable aged between one year and two years,
and approximately 1.4% (December 31, 2017 - 1.2%) allowance for accounts receivable aged less than one year.
The Company’s maximum exposure to credit risk at the balance sheets date relating to trade receivables is summarized as follows:
Aging within one year, net of allowance for doubtful accounts
Aging greater than one year, net of allowance for doubtful accounts
Total trade receivables
6.
Inventories
Raw materials
Work in progress
Finished goods
Total inventories
December 31,
2018
2017
71,728 $
1,239
72,967 $
58,157
6,512
64,669
December 31,
2018
2017
4,835 $
3,930
16,326
25,091 $
3,298
3,275
13,045
19,618
$
$
$
$
For the year ended December 31, 2018, the Company charged $2,735 of excessive fixed production overhead to cost of sales (2017 -
$2,757, 2016 - $3,232).
For the year ended December 31, 2018, cost of sales includes $2,529 of inventory provision for products that are changed or are
likely to expire before being sold (2017 - $1,231, 2016 - $6,377).
7.
Long-term Inventories
Finished goods
December 31,
2018
2017
$
90
—
Long-term inventories represent H5N1 vaccines with remaining shelf lives over one year and not expected to be sold within one
year. These vaccines are for government stockpiling purposes.
F-20
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
8.
Property, Plant and Equipment - net
Cost
Construction in progress
Plant and buildings
Machinery and equipment
Motor vehicles
Office equipment and furniture
Leasehold improvements
Total cost
Less: Accumulated depreciation
Construction in progress
Plant and buildings
Machinery and equipment
Motor vehicles
Office equipment and furniture
Leasehold improvements
Total accumulated depreciation
Property, plant and equipment, net
December 31,
2018
2017
34,217 $
29,195
39,345
1,449
2,942
12,336
119,484 $
— $
11,021
26,338
1,009
2,064
8,132
48,564 $
70,920 $
34,566
30,851
39,678
1,710
2,736
12,972
122,513
—
10,380
24,808
1,333
2,000
7,562
46,083
76,430
$
$
$
$
$
The buildings of Sinovac Beijing with a net book value of $1,738 (RMB 11.9 million) were pledged as collateral for a bank loan
from Bank of Beijing (note 10 (c)).
The buildings of the Changping facilities of Sinovac Beijing with a net book value of $10,620 (RMB 73.0 million) were pledged as
collateral for bank loans from China Construction Bank (note 10(f), 10 (i)).
The buildings of Sinovac Dalian with a net book value of $514 (RMB 3.5 million) were pledged as collateral for a bank loan from
Bank of China (note 10 (d)).
Net depreciation expense for the year ended December 31, 2018 was $4,887 (2017 - $4,638, 2016 - $5,063), after deduction of
amortized government grant specifically related to qualified property, plant and equipment.
Loss on disposal of equipment for the year ended December 31, 2018 was $75 (2017 - $42, 2016 - $478).
9.
Prepaid Land Lease Payments
Prepaid land lease payments
Less: accumulated amortization
Net carrying value
December 31,
2018
2017
$
$
10,502 $
2,198
8,304 $
11,098
2,070
9,028
Prepaid land lease payments of the Shangdi facilities of Sinovac Beijing with a net book value of $281 (RMB 1.9 million) were
pledged as collateral (note 10 (c)) for a bank loan from Bank of Beijing.
Prepaid land lease payments of the Changping facilities of Sinovac Beijing with a net book value of $2,359 (RMB 16.2 million)
were pledged as collateral (note 10 (f), 10(i)) for a bank loan from China Construction Bank.
Amortization expense for prepaid land lease payments for the year ended December 31, 2018 was $249 (2017 - $243, 2016 - $247).
F-21
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
10.
Bank Loans
Summarized below are bank loans as of December 31, 2018 and 2017:
Industrial and Commercial Bank of China (a)
Bank of Beijing (b)
Bank of Beijing (c)
Bank of China (d)
China Merchants Bank (e)
China Construction Bank (f)
China Construction Bank (g)
Citi Bank (h)
Bank loans due within one year
Bank of Beijing (c)
China Construction Bank (i)
Long-term bank loans
Total bank loans
December 31,
2018
2017
— $
—
2,594
727
—
—
—
—
3,321
3,890
—
3,890
7,211 $
3,074
3,689
—
—
3,074
2,982
722
4,611
18,152
6,851
7,998
14,849
33,001
$
$
(a) On February 27, 2017, Sinovac Beijing entered into a bank loan with Industrial and Commercial Bank of China in the aggregate
principal amount of $3,074 (RMB 20 million) to finance its working capital requirements. The loan bears interest at the prime rate of
a one year term loan published by the People’s Bank of China, at 4.35%. Interest is payable quarterly and the loan was repaid on
February 27, 2018.
(b) On September 18, 2015, Sinovac Beijing entered into a maximum credit facility of $7,202 (RMB 50 million) with Bank of
Beijing to finance its working capital requirements. $753 (RMB 4.9 million) was drawn on August 29, 2017 and was repaid on
August 29, 2018. $784 (RMB 5.1 million) was drawn on September 6, 2017 and was repaid on August 29, 2018. These two tranches
bore interest at 4.57% and was payable quarterly. $1,537 (RMB 10 million) was drawn on October 13, 2017, and was repaid on
October 12, 2018. $615 (RMB 4 million) was drawn on November 9, 2017 and was repaid on October 12, 2018. These two tranches
bear interest at 5.00% and was payable quarterly.
(c) On May 20, 2015, Sinovac Beijing entered into a bank loan with Bank of Beijing in the aggregate principal amount of $6,981
(RMB 48 million) with a term from July 2015 to May 2020 for construction of the pneumococcal polysaccharide vaccine facilities.
The loan’s interest rate is based on the prime rate of a five-year term loan published by the People’s Bank of China at the time
withdraws are made. Interest is payable quarterly and the loan is repayable based on the payment schedule and shall be fully repaid
before May 20, 2020. $713 (RMB 4.9 million) was drawn in 2015 with an annual interest rate of 5.25%, and $5,771 (RMB 39.7
million) was drawn in 2016 with an annual interest rate of 4.75%. Prepaid land lease payments and buildings of Sinovac Beijing with
a net book value of $2,019 (RMB 13.9 million) were pledged as collateral as of December 31, 2018.
(d) On August 14, 2018, Sinovac Dalian entered into a bank loan with Bank of China in the aggregate principal amount of $727
(RMB 5 million) to finance its working capital requirements. The loan bears interest at 157 basis points above the prime rate of a
one-year term loan published by the People’s Bank of China, at 5.88%. Interest is payable monthly and the loan is payable on August
16, 2019. Buildings of Sinovac Dalian with a net book value of $514 (RMB 3.5 million) were pledged as collateral.
(e) On February 23, 2017, Sinovac Beijing entered into a one-year term bank loan with China Merchants Bank in the aggregate
principal amount of $3,074 (RMB 20 million) to finance its working capital requirements, bearing interest at 4.57% per year. Interest
was payable quarterly and the loan was repaid on February 22, 2018.
(f) On May 6, 2015, Sinovac Beijing entered into a maximum credit facility of $17,284 (RMB 120 million), which was increased to
$30,739 (RMB 200 million) in 2017, with China Construction Bank to finance its working capital requirements.
F-22
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
On September 5, 2017, Sinovac Beijing entered into a bank loan with China Construction Bank in the aggregate principal amount of
$2,982 (RMB 19.4 million) to finance its working capital requirements, bearing interest at 4.57%. Interest was payable monthly and
the loan was repaid on May 23, 2018.
Prepaid land lease payment and buildings of the Changping facilities of Sinovac Beijing with a net book value of $12,978 (RMB
89.2 million) were pledged as collateral against the loan as of December 31, 2018.
(g) On March 27, 2017, Sinovac R&D entered into a bank loan with China Construction Bank in the aggregate principal amount of
$722 (RMB 4.7 million) to finance its working capital requirements, bearing an interest at 4.43%. Interest was payable monthly and
the loan was repaid on March 26, 2018.
(h) On May 9, 2016, Sinovac Beijing entered into a revolving bank loan with Citi Bank with the aggregate principal limit of $4,611
(RMB 30 million), which was increased to $5,090 (RMB 35 million) in 2018, to finance its working capital requirements. The
revolving loan bears interest at the prime rate of a one-year term loan published by the People’s Bank of China, with a weighted
average rate at 4.64% and interest is payable quarterly. Each withdraw from the revolving loan has a maximum term of 12 months.
The outstanding balance of $4,611 (RMB 30.0 million) as of December 31, 2017 was fully repaid in 2018.
(i) On May 6, 2015, Sinovac Beijing entered into a maximum credit facility of $10,758 (RMB 70 million) with China Construction
Bank to finance construction of the Sabin inactivated polio vaccine facilities. On October 14, 2016, Sinovac Beijing entered into a
bank loan with China Construction Bank in the aggregate principal amount of $7,684 (RMB 50 million) with a term from October
2016 to October 2021. The loan bore interest at 5% below the prime rate of a five-year term loan published by the People’s Bank of
China, adjusted every 12 months, currently at 4.51%. Interest was payable quarterly and the loan was repayable based on the
payment schedule and shall be fully repaid before October 13, 2021. $3,230 (RMB 21.0 million) was drawn in 2016 and $4,454
(RMB 29.0 million) was drawn in 2017. On August 17, 2017, Sinovac Beijing entered into a bank loan with China Construction
Bank in the aggregate principal amount of $3,074 (RMB 20 million) with a term from August 2017 to October 2021. The loan bore
interest at prime rate of a five-year term loan published by the People’s Bank of China, adjusted every 12 months, currently at
4.75%. Interest is payable quarterly and the loan was repayable based on the payment schedule and shall be fully repaid before
October 21, 2021. $314 (RMB 2.0 million) was drawn in 2017. On April 27, 2018 and November 9, 2018, Sinovac Beijing repaid
$297 (RMB 2.0 million) and $7,272 (RMB 50 million), respectively, where all outstanding balance as of December 31, 2017 was
fully repaid by then. Prepaid land lease payment and buildings of the Changping facilities of Sinovac Beijing with a net book value
of $12,978 (RMB 89.2 million) were pledged as collateral against the loan as of December 31, 2018.
Aggregate maturities of loans for each of the next 5 years following December 31, 2018 are as follows:
Within 1 year
In 2020
In 2021
In 2022
In 2023
Total
$
$
3,321
3,890
—
—
—
7,211
The weighted average interest rate for all short-term and long-term bank loans was 4.91% in 2018 (2017 - 4.61%, 2016 – 4.73%).
The weighted average interest rate for short-term loans was 5.04% in 2018 (2017 – 4.51%, 2016 – 4.73%). The Company incurred
$1,470 in interest and financing expenses for the year ended December 31, 2018 (2017 - $2,171, 2016 - $1,841), of which $400 was
capitalized in property, plant and equipment for the year ended December 31, 2018 (2017 - $302, 2016 - $75).
11.
Related Party Transactions and Balances
(a)
Loan from a non-controlling shareholder
Loan - non - current
December 31,
2018
2017
$
$
6,705 $
6,705 $
7,070
7,070
F-23
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
The Company has two loans due to Dalian Jin Gang Group, the non-controlling shareholder of Sinovac Dalian, with a total amount
of $6,705, of which $4,378 (RMB 30 million) was borrowed on August 23, 2017 and is repayable on August 22, 2020. $2,327 (RMB
16 million) was borrowed in 2012 and amended from current to long term loan, which is repayable on November 9, 2020. These two
loans are unsecured, bearing interest at 6.0% and 7.2% per year, respectively. Interest expense was $453 in 2018 (2017 - $262, 2016
- $176). Interest is payable monthly. As of December 31, 2018, $15 interest is owed on the loan from the non-controlling shareholder
(December 31, 2017 - $nil). Interests of $438, $262 and $176 were paid to the non-controlling shareholder for the years ended
December 31, 2018, 2017 and 2016, respectively.
(b)
The Company entered into the following transactions in the normal course of operations at the exchange amount with
related parties:
For the year ended December 31,
2017
2016
2018
Rent expenses to SinoBioway Biotech Group Co. Ltd. (“SinoBioway”).
$
810
$
793
$
807
In 2004, the Company entered into two operating lease agreements with SinoBioway, the non-controlling shareholder of Sinovac
Beijing, with respect to Sinovac Beijing’s production plant and laboratory in Beijing, China with annual lease payments totaling
$197 (RMB 1.4 million). The leases commenced on August 12, 2004 and have a term of 20 years. One of the lease agreements was
amended on August 12, 2010 with the rent increasing from $75 (RMB 0.5 million) to $197 (RMB 1.4 million) per year.
In June 2007, the Company entered into another operating lease agreement with SinoBioway, with respect to the expansion of
Sinovac Beijing’s production plant in Beijing, China, for an annual lease payment of $297 (RMB 2.0 million). The lease commenced
in June 2007 and has a term of 20 years.
In September 2010, the Company entered into another operating lease agreement with SinoBioway with respect to expansion of
Sinovac R&D’s business in research and development activities for an annual lease payment of $147 (RMB 1.0 million). The lease
commenced on September 30, 2010 and has a term of five years.
On April 8, 2013, the Company entered into three supplemental agreements with SinoBioway, under which the expiration date of
three of the four operating lease agreements was extended to April 7, 2033.
As of December 31, 2018, $370 (December 31, 2017 - $391) in prepaid lease payments made to SinoBioway is included in current
and long-term prepaid expenses and deposits.
12.
Accounts Payable and Accrued Liabilities
Trade payables
Machinery and equipment payables
Accrued expenses
Value added tax payable
Other tax payable
Withholding tax payable
Bonus and benefit payables
Other payables
Total accounts payable and accrued liabilities
13.
Income Taxes
Antigua and Barbuda
December 31,
2018
2017
5,530
861
26,810
420
1,361
71
6,219
8,719
49,991
$
$
6,780
2,191
32,620
239
619
75
8,213
8,681
59,418
$
$
Under the current laws of Antigua and Barbuda, the Company is not subject to tax on income or capital gains. Additionally, upon
payments of dividends by the Company to its shareholders, no Antigua and Barbuda withholding tax will be imposed.
F-24
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
Hong Kong
Under the Hong Kong tax laws, Sinovac Hong Kong is exempted from income tax on its foreign-derived income and there are no
withholding taxes in Hong Kong on remittance of dividends.
China
Effective from January 1, 2008, the PRC’s statutory income tax rate is 25%. The Company’s PRC subsidiaries are subject to income
tax at the statutory rate of 25% except for Sinovac Beijing and Sinovac Dalian. Sinovac Beijing, being reconfirmed as a “High and
New Technology Enterprise” (“HNTE”) in 2017 for a period of 3 years, is subject to a preferential income tax rate of 15% from 2017
to 2019. Sinovac Dalian, being confirmed as a “High and New Technology Enterprise” (“HNTE”) in 2017 for a period of 3 years, is
subject to a preferential income tax rate of 15% from 2017 to 2019.
The Company’s income (loss) before income tax from continuing operations consists of:
Non-PRC
PRC
Total
$
$
(16,308) $
62,891
46,583
$
(3,123) $
48,167
45,044
$
(5,323)
4,929
(394)
The Company’s income (loss) before income tax from discontinued operations consists of:
For the year ended December 31,
2017
2016
2018
For the year ended December 31,
2017
2016
2018
Non-PRC
PRC
Total
$
$
—
—
—
$
$
—
—
—
$
$
—
2,338
2,338
Income taxes that are attributed to discontinued operations in China were $nil for all the periods presented.
Income taxes attributed to the continuing operations in China consist of:
Current income tax expenses
Deferred tax benefits
Total income tax expense
$
$
(7,326) $
(3,146)
(10,472) $
(13,260) $
4,921
(8,339) $
(3,671)
1,007
(2,664)
F-25
For the year ended December 31,
2017
2016
2018
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
The following is a reconciliation of the Company’s total income tax expenses to the amount computed by applying the PRC statutory
income tax rate of 25% to its income from continuing operations before income taxes for the years ended December 31, 2018, 2017
and 2016:
For the year ended December 31,
2017
2016
2018
Income (loss) from continuing operations before income taxes
Income tax benefit (expense) at the PRC statutory rate
International tax rate differential
Super deduction for research and development expenses
Non-deductible expenses
Other adjustments
Effect of preferential tax rate
Change in valuation allowance
Effect of PRC withholding tax
Effect of prior year adjustment and restatement
Income tax expense
$
$
46,583 $
(11,646)
(3,929)
1,835
(1,865)
14
6,562
(1,429)
(14)
—
(10,472) $
45,044 $
(11,261)
(781)
1,257
(577)
(5)
5,406
(2,309)
(69)
—
(8,339) $
(394)
99
(1,331)
461
(1,141)
89
1,635
(2,430)
(59)
13
(2,664)
The tax effects of temporary differences from continuing operations that give rise to the Company’s deferred tax assets are as
follows:
Inventories
Accrued expenses
Deferred government grants
Fixed assets
Tax losses carried forward
Less: valuation allowance
Deferred tax assets
December 31,
2018
2017
355
3,761
1,066
3,115
5,212
(7,711)
5,798
$
275
8,483
684
3,484
6,375
(9,981)
9,320
$
In assessing the realizbility of deferred tax assets, management considers whether it is more likely than not that some portion of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which the temporary differences become deductible or utilized. The Company considers
projected future taxable income and tax planning strategies in making this assessment. Based upon an assessment of the level of
historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible or
can be utilized, the Company provided valuation allowance of $7,711 as of December 31, 2018 ( December 31, 2017 - $9,981).
The Company evaluates its valuation allowance requirements at end of each reporting period 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 cause a change in management’s judgement about the realizability of deferred tax assets, the impact of the change on
the valuation allowance is generally reflected in income from operations. 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 carry forward period available under applicable tax law. The Company’s valuation allowance decreased by $2,270 from $9,981
as of December 31, 2017 to $7,711 as of December 31, 2018.
F-26
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
Tax losses of the Company’s PRC subsidiaries in the amount of $27,517 (RMB 189 million) as of December 31, 2018 will expire
from 2019 to 2023, if not utilized.
As of December 31, 2018, the Company has not recognized any deferred tax liability on Sinovac Beijing’s undistributed earnings of
approximately $99,601, in view of the Company's permanent reinvestment plan. The Company would be subject to PRC withholding
income taxes at 5% or 10%, depending on the availability of treaty benefit between China and Hong Kong, upon the distribution of
such profits outside of China. As of December 31, 2018, the Company’s portion on the amount of unrecognized deferred tax liability
was ranging from $4,980 to $9,960.
The changes in unrecognized tax benefits are as follows:
For the year ended December 31,
2017
2016
2018
Balance at January 1
Additions for tax positions of the current year
Additions for tax positions of the prior years
Settlement with the taxing authority
Lapse of statute of limitations
Balance at December 31
1,873
7
—
—
(199)
$
1,681
1,842
271
—
—
(240)
$
1,873
2,027
183
—
—
(368)
1,842
$
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as part of its income tax expenses. For
the year ended December 31, 2018, the Company recognized $203 in interest (December 31, 2017 - $291) and nil in penalties
(December 31, 2017 - nil). The Company had $859 accrued interest as of December 31, 2018 (December 31, 2017 - $667). The PRC
tax law provides statute of limitations ranging from 3 to 5 years and for transfer pricing related matters, it could be extended to 10
years. The PRC tax returns for the Company’s PRC subsidiaries are open to examination by tax authorities for the tax years
beginning in 2008.
As of December 31, 2018, the Company had unrecognized tax benefits of approximately $1,681 (December 31, 2017 - $1,873,
December 31, 2016 - $1,842) and such balance was included in “other non-current liabilities”. As of December 31, 2018,
unrecognized tax benefits amounting to $1,681 would affect the effective tax rate if recognized (December 31, 2017 - $1,873,
December 31, 2016 - $1,842). The Company does not expect the amount of unrecognized tax benefits would change significantly in
the next 12 months.
14.
Deferred Revenue
Current deferred revenue included $ 2,791 of advances from customers (December 31, 2017 - $3,950) and $116 from Chinese
government for stockpiling of H5N1 and hepatitis A vaccines (December 31, 2017 - $123).
Long-term deferred revenue included $90 received from the Chinese government for stockpiling of H5N1 vaccines (December 31,
2017 - $nil).
F-27
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
15.
Deferred Government Grants
Deferred government grants represent funding received from the government for research and development (“R&D”) or investment
in building or improving production facility. The amount of deferred government grants as of year end is net of research and
development expenditures, deduction of depreciation expenses, and the amount recognized as government grant income. The
Company received $3,546 of government grant in 2018 (2017 - $2,306, 2016 - $753) that were deferred. In addition, the Company
received $254 in other government grants and subsidies for the year ended December 31, 2018 and recognized as income in the
statements of comprehensive income (loss) (2017 - $292, 2016 - $6,104).
Summarized below are deferred government grants as of December 31, 2018 and 2017:
Construction of a pandemic influenza vaccine plant and buildings (a)
Purchasing equipment for H1N1 vaccine production (b)
Purchasing equipment for H5N1 vaccine production (c)
EV71 commercialization project (d)
Others (i)
Current deferred government grants
Construction of a pandemic influenza vaccine plant and buildings (a)
Purchasing equipment for H1N1 vaccine production (b)
Purchasing equipment for H5N1 vaccine production (c)
EV71 commercialization project (d)
EV71 phase IV clinical research (e)
Purchasing equipment for sIPV vaccine production (f)
EV71 international registration (g)
Quadra & Pentavalent research (h)
Others (i)
Non-current deferred government grants
Total deferred government grants
December 31,
2018
2017
276
54
15
474
1,167
1,986
—
—
—
1,168
977
1,454
607
693
1,062
5,961
7,947
$
$
277
136
15
502
1,108
2,038
291
57
15
1,735
784
1,537
—
—
55
4,474
6,512
$
$
(a) Deferred government grants included $276 being the unamortized portion of a grant the Company received in 2007 for
construction of a pandemic influenza vaccine plant and buildings (December 31, 2017 - $568), which will be fully amortized in 2019
and was included in the current portion of deferred government grants. The Company has fulfilled the conditions attached to the
government grant. The production facility grant requires the Company to have the entire facility available to manufacture pandemic
influenza vaccines at any given moment upon request by the Chinese government. $272 of government grant relating to these
production facilities was recorded as a reduction to depreciation expense for the year ended December 31, 2018 (2017 - $266, 2016 -
$271).
(b) Deferred government grants included $54 being the unamortized portion of a grant the Company received in 2009 for purchasing
equipment for H1N1 vaccine production, which will be fully amortized in 2019 and was included in the current portion of deferred
government grants. The Company has fulfilled the conditions attached to the government grant. $134 of government grant relating to
these production facilities was recorded as a reduction to depreciation expense for the year ended December 31, 2018 (2017 - $131,
2016 - $133).
(c) Deferred government grants included $15 being the unamortized portion of a grant the Company received in 2013 for purchasing
equipment for H5N1 vaccine production, which will be fully amortized in 2019 and was included in the current portion of deferred
government grants. The Company has fulfilled the conditions attached to the government grant. $15 of government grant relating to
these production facilities was recorded as a reduction to depreciation expense for the year ended December 31, 2018 (2017 - $15,
2016 - $15).
F-28
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
(d) Deferred government grants included $1,642 being the unamortized portion of a grant the Company received in 2015 for
equipment purchase and construction of the enterovirus 71 (“EV71”) vaccine production facility. The Company has fulfilled the
conditions attached to the government grant in 2016. $474 which will be amortized in 2019 was included in the current portion of
deferred government grants and $1,168 which will be amortized after 2019 was included in the non-current portion of deferred
government grants. $412 of government grant relating to these production facilities was recorded as a reduction to depreciation
expense for the year ended December 31, 2018 (2017 - $403, 2016 - $274), and $82 was recorded as government recognized in
income for the year ended December 31, 2018 (2017 - $80, 2016 - $55).
(e) Deferred government grants included $977 being the unamortized portion of a grant the Company received in 2017 and 2018 for
phase IV clinical research for EV71 vaccine. As of December 31, 2018, the Company has not fulfilled the conditions attached to the
government grant. As the Company does not expect to fulfill the conditions within one year, the grant is recorded as a non-current
deferred government grant.
(f) Deferred government grants included $1,454 being the unamortized portion of a grant the Company received in 2017 for
purchasing equipment for sIPV vaccine production. As of December 31, 2018, the Company has not fulfilled the conditions attached
to the government grant. As the Company does not expect to fulfill the conditions within one year, the grant is recorded as a non-
current deferred government grant.
(g) Deferred government grants included $607 being the unamortized portion of a grant the Company received in 2018 for
international registration for EV71 vaccine. As of December 31, 2018, the Company has not fulfilled the conditions attached to the
government grant. As the Company does not expect to fulfill the conditions within one year, the grant is recorded as a non-current
deferred government grant.
(h) Deferred government grants included $693 being the unamortized portion of a grant the Company received in 2018 for research
for Qudravalent & Pentavalent vaccine. As of December 31, 2018, the Company has not fulfilled the conditions attached to a
government grant. As the Company does not expect to fulfill the conditions within one year, the grant is recorded as a non-current
deferred government grant.
(i) As of December 31, 2018, conditions attached to a government grant received in 2017 for certain production facilities were
fulfilled in 2017, of which $18 will be amortized in 2019 and $34 will be amortized after 2019, and $19 of government grant relating
to these production facilities was recorded as a reduction to depreciation expense for the year ended December 31, 2018. As of
December 31, 2018, conditions of seven government grants totaling $2,176 have not been fulfilled by the Company, of which
conditions attached to four grants totaling $1,149 were expected to be fulfilled within one year, and were included in the current
portion of the deferred government grants.
16.
Commitments and Contingencies
(a)
Operating Lease Commitments
The Company leases production plant and laboratory under operating leases from its related parties (note 11(b)). Rental expense
amounted to $948 for the year ended December 31, 2018 (2017 - $793, 2016 - $807).
Minimum future rental payments under operating leases for the years ending December 31 are as follows:
2019
2020
2021
2022
2023
Thereafter
Total minimum future payments
(b)
Other Commitments
F-29
$
$
1,037
1,457
1,323
810
810
5,358
10,795
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
In addition to commitments disclosed in note 22, commitments related to R&D expenditures are $2,053 as of December 31, 2018.
Commitments related to capital expenditures for the Company are approximately $581 as of December 31, 2018.
(c)
Foreign Corrupt Practice Act Matters
The Company may be subject to legal proceedings, investigations and claims relating to the conduct of the Company’s business from
time to time.
The Beijing People’s Court issued five judgments in 2016 and 2017. These judgments were related to corrupt conduct allegedly
engaged in by a former official of the Center for Drug Evaluation in NMPA, his wife and his son. These judgments found that the
official and his wife had engaged in a practice of improperly soliciting and accepting payments from various individuals involved in
the vaccine products industry. According to the judgments, one of the individuals solicited by the official was Mr. Weidong Yin, the
Company’s chairman, president and chief executive officer. It was asserted in the judgments that Mr. Weidong Yin made three
payments, and arranged for a loan, to the official and his wife, in the total amount of $77 (RMB 0.6 million) between 2002 and 2011.
Mr. Weidong Yin was not charged with any offense or improper conduct and he cooperated as a witness with the procuratorate. To
the Company’s knowledge, the Chinese authorities have not commenced any legal proceedings or government inquiries against Mr.
Yin. In December 2016, the Company’s audit committee authorized the commencement of an internal investigation into the
allegations made in the judgments. The audit committee engaged Latham & Watkins as independent counsel to assist with the
investigation.
In addition, the Company became aware of certain judgments based on bribery charges issued by Chinese courts in four provinces
against various officials of the Chinese Center for Disease Control (the “CDC”). While these judgments appear to reflect an industry-
wide investigation focused on CDC officials, they also referenced nine of the Company’s former sales persons, together with sales
personnel from several other Chinese vaccine companies and distributors. These judgments did not name, and no charges were
brought against, the Company or any of its directors or officers as defendants. To the best of the Company’s knowledge, the nine
referenced employees cooperated with the procuratorate. The procuratorate did not contact the Company for cooperation. Upon
becoming aware of these judgments, the audit committee expanded its internal investigation to review matters related to these
judgments and the Company’s sales practices and policies, and further engaged Latham & Watkins to continue the independent
investigation with the expanded scope. One of the nine former sales employees has been convicted for giving bribes. The judgment
states that this former sales employee took these actions without knowledge of the Company. His criminal penalty was waived by the
court.
After the Company publicly announced the internal investigation arising from the allegations in a research report in December 2016,
the Company was notified by the SEC in February 2017 of an enforcement inquiry related to the matters discussed in the report, and
in April 2017 the Company received a subpoena from the SEC requesting documents. In September 2017, the Company received an
inquiry from the Department of Justice (the “DOJ”) and the Company has been cooperating with the DOJ. The SEC and DOJ have
requested information regarding the judgments discussed above, and the Company is cooperating with these requests.
Also in February 2017, the Company received an inquiry from NASDAQ related to the same matter. Further, in May 2018, the
Company received an inquiry from NASDAQ requesting information related to the actions by Sinobioway and their impact on the
Company’s operations and financial reporting. The Company has cooperated with both of these NASDAQ inquiries.
On August 14, 2018, the SEC notified the Company that the SEC had concluded its investigation and would not recommend an
enforcement action against the Company at this time. On September 12, 2018, the DOJ notified the Company that it had closed its
investigation, with no charges.
With the closure of the DOJ’s investigation, the Company is not aware of any pending U.S. government investigations of the
Company related to these matters.
On July 3, 2017, a securities class action complaint was filed in the U.S. District Court for the District of New Jersey against the
Company and three of its current and former officers: Mr. Weidong Yin, the Company’s current chief executive officer, Ms. Nan
Wang, the Company’s current chief financial officer, and Mr. Danny Chung, the Company’s former chief financial officer. The
complaint asserts that statements in the Company’s annual filings for fiscal years 2012 through 2015 were false and misleading
because they failed to disclose matters relating to the alleged bribery incidents, among other allegations. On September 6, 2017, the
plaintiff has filed the notice of voluntary dismissal. The Court granted the dismissal without prejudice.
F-30
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
(d)
Other Litigation Matters
On July 12, 2017, an alleged shareholder of the Company filed a putative class action complaint in the Supreme Court of the State of
New York against the Company, its directors, and certain entities related to the Amalgamation Agreement, in a matter captioned Wu
v. Yin, et al. The complaint alleges that the Company’s directors breached their fiduciary duties by, among other things, entering into
a self-dealing transaction at a price below fair value and failing to take steps to maximize the value of the Company. The complaint
also alleges that the Company aided and abetted those alleged breaches of fiduciary duty. The complaint sought, among other things,
an injunction preventing completion of the transactions contemplated by the Amalgamation Agreement, rescission of the
Amalgamation Agreement to the extent it is implemented, damages, and attorneys’ fees. None of the defendants, including the
Company and certain directors, were served with the complaint, and the time for doing so now has expired. On July 2, 2018, the
Amalgamation Agreement was terminated.
On March 5, 2018, the Company filed a lawsuit in the Court of Chancery of the State of Delaware seeking a determination whether
1Globe, The Chiang Li Family, OrbiMed and other shareholders of Sinovac Biotech Ltd. had triggered the Rights Agreement by
forming a group holding approximately 45% of outstanding shares of Sinovac Biotech Ltd., in excess of the plan’s threshold of 15%,
and acting in concert prior to the 2017 AGM. The Company’s Rights Agreement is intended to promote the fair and equal treatment
of all the Company’s shareholders and ensure that no person or group can gain control of the Company through undisclosed voting
arrangements, open market accumulation or other tactics potentially disadvantaging the interest of all shareholders.
On April 12, 2018, 1Globe filed an amended answer to the Company’s complaint, counterclaims, and a third-party complaint against
Mr. Weidong Yin alleging, among other allegations, that the Company’s Rights Agreement is not valid, that Mr. Weidong Yin and
the Buyer Consortium had previously triggered the Company’s Rights Agreement, and that 1Globe did not trigger the Company’s
Rights Agreement. The Company and its board of directors believes that the actions taken by the board of directors were appropriate
under the circumstances and that the allegations of the counterclaim and third-party complaint are without merit. 1Globe asks for
various measures of equitable relief and also includes a claim for its costs, including attorneys’ fees.
On July 31, 2018, following the Company’s motions for partial summary judgment and an expedited trial date, the Delaware
Chancery Court effectively stayed the action pending receipt of a post-trial decision from the High Court of Justice, Antigua and
Barbuda (“Antigua Court”) in the matter captioned 1Globe Capital, LLC and Sinovac Biotech Ltd., Claim No. ANUHCV
2018/0120. On December 19, 2018, the Antigua Court issued a judgment affirming the validity of the Company’s Rights Agreement
under Antigua law, and finding that “there was a secret plan to take control of the Company” at the 2017 AGM.
Based upon the Antigua Court’s judgment and other facts known to the board of directors, the Company’s board of directors
determined that the Collaborating Shareholders became Acquiring Persons on or prior to the 2017 AGM and their conduct resulted
in a Trigger Event under the Company’s Rights Agreement. As a result of becoming Acquiring Persons, the approximately 28.7
million Rights held by the Collaborating Shareholders automatically became void under the terms of the Rights Agreement. Pursuant
to the Rights Agreement, the board of directors elected to exchange the approximately 42.4 million valid and outstanding Rights held
by the Company’s shareholders (not including the Collaborating Shareholders) for a combination of approximately 27.8 million
Common Shares and approximately 14.6 million Series B Preferred Shares, all of which the Company issued into a trust on February
22, 2019 for the benefit of the holders of the valid and outstanding Rights.
On March 6, 2019, the Delaware Chancery Court entered a status quo order providing that the Company not distribute any of the
Exchange Shares to rights holders until the final disposition of the pending Delaware litigation or further order of the Court. On
April 4, 2019, the Eastern Caribbean Supreme Court, Court of Appeal issued an order that restrains the Company from taking further
action under its Rights Agreement, including the distribution of the previously issued Exchange Shares to the holders of valid Rights,
until the conclusion of 1Globe Capital, LLC’s appeal of the December 19, 2018 Judgment of the High Court of Justice of Antigua
and Barbuda. On April 8, 2019, the Delaware Chancery Court stayed the Delaware litigation pending the outcome of 1Globe’s
appeal of the Antigua Judgment. The Company cannot predict whether an ultimate outcome will be favorable or unfavorable, nor
estimate the amount or range of potential loss (if any) at this time.
On March 5, 2018, the Company also filed a lawsuit in the United States District Court for Massachusetts alleging violations of
Section 13(d) of the Securities Exchange Act of 1934 by 1Globe and The Chiang Li Family. The lawsuit alleges, among other things,
that the defendant shareholders failed to make required disclosures on Schedule 13D regarding their intentions to attempt to replace
the Company's board of directors.
On April 9, 2018, the Company received a document request from SEC requesting all of the Company’s documents concerning
1Globe, the Chiang Li Family, OrbiMed, certain other shareholders, and their affiliates. The Company has been cooperating with the
SEC. The Company understands the SEC is investigating whether 1Globe, and possibly other shareholders, violated the U.S.
securities laws. The Company does not have any information to suggest the SEC is investigating the actions of the Company or its
officers and directors.
F-31
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
On May 21, 2018, 1Globe answered and filed counterclaims against the Company and certain of its executives, alleging violations of
Section 10(b) of the Exchange Act and various state law claims. In response to the Company’s motion to dismiss 1Globe’s
counterclaims, on August 1, 2018, 1Globe filed amended counterclaims against the Company and certain of its executives, alleging
violations of Section 10(b) of the Exchange Act and Rule 10b-5, as well as state law claims of abuse of process, fraudulent
misrepresentation, negligent misrepresentation, and aiding and abetting such violations, primarily arising out of allegedly false
and/or misleading statements made by the Company regarding its business, operational, and financial results.
On August 17, 2018, the Massachusetts Court granted a consent motion to extend the deadline for the Company’s response to
1Globe’s counterclaims (and for any subsequent opposition by 1Globe) until after the Antigua Court issued a ruling in the matter
captioned 1Globe Capital, LLC and Sinovac Biotech Ltd., Claim No. ANUHCV 2018/0120. On December 19, 2018, the Antigua
Court issued a judgment, which 1Globe appealed on January 29, 2019. Per the Massachusetts Court’s order, the parties have filed
periodic status reports regarding the pending court proceedings in Antigua. No date for the Company’s response to 1Globe’s
counterclaims has been set. The Company is vigorously pursuing this lawsuit; however, the Company cannot predict whether an
ultimate outcome will be favorable or unfavorable, nor estimate the amount or range of potential loss (if any) at this time.
Also on August 1, 2018, 1Globe filed a motion for preliminary injunction seeking to enjoin the Company from, inter alia, altering
the capital structure of the Company. On October 15, 2018, the Massachusetts Court denied 1Globe’s motion. On November 14,
2018, 1Globe filed an appeal of the denial of its motion for preliminary injunction to the United States Court of Appeals for the First
Circuit. On January 10, 2019, 1Globe filed a motion to hold its appeal in abeyance pending the outcome of its separate appeal of the
Antigua Court’s judgment, which the Company opposed.
On March 13, 2018, 1Globe filed a complaint against the Company in the Antigua Court. The complaint seeks a declaration that the
five persons purportedly proposed on the Non-Public Submission at the 2017 AGM were elected as directors of the Company at that
meeting, an order of the Antigua Court that those directors be installed as the Company’s board of directors, and a declaration that
any actions taken on behalf of the Company at the direction of the board of directors since the 2017 AGM are null and void. On
April 10, 2018, 1Globe filed a notice of application in the Antigua Court seeking an order declaring the result of the disputed
election, an urgent order restraining the Company’s board of directors from acting, pending determination of the dispute, including
acting to initiate or continue litigation against the Shareholder Group, and other related relief. The Company attended the first
hearing on May 9, 2018. In July 2018, the Antigua court heard an application by 1Globe for interim injunctive relief preventing the
Company from exercising its rights under the Rights Agreement. This application was unsuccessful, but the judge set an expedited
timetable to trial. The trial of the matter took place from December 3 to 5, 2018. On December 19, 2018, the judge handed down his
judgment, finding in Sinovac’s favor in full, dismissing 1Globe’s claim and declaring that the Rights Agreement was validly adopted
as a matter of Antigua law. On January 29, 2019, 1Globe filed a Notice of Appeal. On March 4, 2019, 1Globe filed an application for
urgent interim relief, seeking an injunction to prevent Sinovac from continuing to implement its Rights Agreement until the
resolution of the appeal. This urgent interim relief application was heard on April 4, 2019, at which the Court of Appeal made an
order restraining the Company in similar terms to the Delaware Court order of March 6, 2019, together with restraint from operating
the Rights Agreement in any way that affects 1Globe’s rights or shareholding until determination of the appeal. There will be further
hearings and an appeal at which the Company will continue to vigorously defend the litigation; however, the Company cannot
predict or estimate an outcome or economic burden for this case at this time.
17.
Common Stock
Share Capital
Each share of common stock is entitled to one vote per share and is entitled to dividends when declared by the Company’s board of
directors. As of December 31, 2018 and 2017, there were 71,139,402 and 57,281,861shares of common stock outstanding,
respectively. As of December 31, 2018 and 2017, there was no preferred stock issued and outstanding.
In 2016, the Company issued 101,600 shares of common stock on the exercise of employee stock options with exercise price of
$2.37 per share and 18,400 shares of common stock on the exercise of employee stock options with exercise price of $4.98 per share,
for total proceeds of $315. In 2016, the Company cancelled 14,800 restricted shares previously issued to employees of the Company
due to employee termination.
In 2017, the Company issued 31,000 shares of common stock on the exercise of employee stock options with exercise price of $2.37
per share and 239,100 shares of common stock on the exercise of employee stock options with exercise price of $4.98 per share, for
total proceeds of $1,264. The Company received further cash proceeds of $428 on the exercise of stock option in 2017 with the
shares issued subsequent to December 31, 2017.
F-32
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
In 2018, the Company issued 1,219 shares of common stock on the exercise of employee stock options with exercise price of $2.37
per share and 107,822 shares of common stock on the exercise of employee stock options with exercise price of $4.98 per share, for
156,300 shares of stock options exercised under cashless excise with total proceeds of $3. In 2018, the Company cancelled 51,500
restricted shares previously issued to employees of the Company due to employee termination. On July 2, 2018, in connection with a
private placement transaction, the Company issued 11,800,000 shares of common stock at $7.35 per share with a nine months
restricted period. The Company received net proceeds of $85,299 after deducting offering expenses of approximately $1,431.
18.
Stock Options
(a)
Stock Option Plan
The board of directors approved a stock option plan (the “2003 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
2003 Plan expires on November 1, 2023. Up to 10% of the Company’s then outstanding common stocks were reserved for issuance
under the 2003 Plan. As of December 31, 2016, 42,800 shares of common stock under the 2003 Plan remain available for issuance.
Each stock option entitles its holder to purchase one share of common stock of the Company. Options may be granted for a term not
exceeding 10 years from the date of grant. The 2003 Plan is administered by the board of directors.
In December 2011, the Company granted 767,000 options to employees with an exercise price of $2.37, being the quoted market
price of the Company’s shares at the time of grant. 10% of the options vest every three months from December 26, 2012 to March
26, 2015 and expired on December 25, 2017. This grant was fully vested on March 26, 2015.
On August 22, 2012, the board of directors approved a new stock option plan (the “2012 Plan”), which allowed the Company to
issue up to 4,000,000 options for common shares and restricted shares of the Company to directors, officers, employees and
consultants of the Company. Each stock option entitles its holder to purchase one share of common stock of the Company. Options
and restricted shares may be granted for a term not exceeding 10 years from the date of grant. The 2012 Plan is administered by the
board of directors. The 2012 Plan will expire on August 22, 2022. Any awards that are outstanding on August 22, 2022 will remain
in force according to the terms of the 2012 Plan and the applicable award agreement.
On May 1, 2015, the Company granted 729,000 restricted shares (the “Restricted Shares”) at par value of $0.001 and 1,341,000
options (the “Options”) under the 2012 Plan with an exercise price of $4.98, being the quoted market price of the Company’s shares
at the time of grant. The options will expire on April 30, 2023. One-fifth of the Restricted Shares and Options shall vest on the first,
second, third, fourth and fifth anniversaries of date of grant, respectively. The Restricted Shares are not subject to any restriction on
transfer and repurchase after they are vested. 20% of the Options and Restricted Shares were vested on May 1, 2016. On December
16, 2016, the board of directors approved that an additional 30% of the Options to be vested on December 16, 2016, and restrictions
of an additional 30% of the Restricted Shares were removed on December 16, 2016. On April 25, 2018, the board of directors
approved that all remaining unvested Options and Restricted Shares that were granted on May 1, 2015 were fully vested on April 25,
2018.
On January 30, 2018, the Company granted 2,800 options to employees with an exercise price of $2.37, vesting immediately. The
grant expired on December 31, 2018.
On March 7, 2018, the Company granted 2,000,000 restricted shares (the “2018 Restricted Shares”) at par value of $0.001 under the
2012 Plan, to certain officers and employees of the Company. 60% of the 2018 Restricted Shares will vest on the third anniversary of
the date of grant, the remaining 40% 2018 Restricted Shares will vest on the fourth and the fifth anniversary evenly.
F-33
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
(b)
Share-based Payment Award Activity
A summary of the Company’s stock options activity for the 2003 and 2012 Plan is presented below:
Outstanding as of January 1, 2018
Granted
Exercised
Forfeited / Expired
Outstanding as of December 31, 2018
Vested and expected to vest at December 31, 2018
Exercisable as of December 31, 2018
Weighted
Average
Exercise Price
($/option)
Aggregate
Intrinsic
Value ($)
Number
of Options
1,028,500 $
2,800
(156,300)
(71,000)
804,000 $
804,000 $
804,000 $
4.98 $
2.37
4.93
4.98
4.98 $
4.98
2,982,650
—
—
—
1,575,840
1,575,840
4.98 $
1,575,840
A summary of the Company’s non-vested restricted share activity for the 2012 plan is presented below:
Non-vested as of January 1, 2018
Granted
Vested
Forfeited
Non-vested as of December 31, 2018
As at December 31, 2018
Number
of Non-Vested
Restricted
Shares
Weighted
Average
Grant Date
Fair Value ($)
272,000 $
2,000,000
(220,500)
(51,500)
2,000,000 $
4.98
8.25
4.98
4.98
8.25
Exercise
Prices
($/option)
$
4.98
Number of
Options
Outstanding
804,000
804,000
Remaining
Average
Contractual
Life (years)
Average
Exercise Price
($/option)
Number
of Options
Exercisable
Remaining
Contractual
Life (years)
Average
Exercise Price
($/option)
4.33
4.33
4.98
4.98
804,000 $
804,000
4.33 $
4.33
4.98
4.98
Share-based compensation expense, included in cost of sales, selling, general and administrative expenses and R&D expenses is
charged to operations over the vesting period of the options using the straight-line amortization method. The share-based
compensation expense was $4,305 in 2018 (2017 - $979, 2016 - $2,409). As of December 31, 2018, there was $nil and $12,561 of
unrecognized compensation cost related to non-vested stock options and non-vested restricted shares, respectively, granted under the
2012 Plan, which will be recognized over a weighted average period of 50 months, respectively.
The 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 2003 Plan and the 2012 Plan was $13 and $413 for year ended December 31, 2018, respectively, determined as
of the date of option exercise (2017 - $861, 2016 - $386).
The estimated fair value of stock options vested during the year ended December 31, 2018 was $1,135 (2017 – 384, 2016 - $1,567).
F-34
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
19.
Statutory surplus reserves
Pursuant to Chinese company law applicable to foreign investment companies, the Company’s PRC subsidiaries are required to
maintain statutory surplus reserves. The statutory surplus reserves are to be appropriated from net income after taxes, and should be
at least 10% of the after tax net income determined in accordance with accounting principles and relevant financial regulations
applicable to PRC enterprises (“PRC GAAP”). The Company has an option of not appropriating the statutory surplus reserve after
the statutory surplus reserve is equal to 50% of the subsidiary’s registered capital. Statutory surplus reserves are recorded as a
component of shareholders’ equity. The statutory surplus reserve as of December 31, 2018 is $26,643 (2017 - $19,549).
Sinovac R&D, Sinovac Dalian and Sinovac Biomed have not made any profit since inception. No appropriation to the statutory
surplus reserves and staff welfare and bonus were made.
Dividends declared by the Company’s PRC subsidiaries are based on the distributable profits as reported in their statutory financial
statements reported in accordance with PRC GAAP, which differ from the results of operations reflected in the consolidated financial
statements prepared in accordance with US GAAP. The Company’s ability to pay dividends is primarily dependent on the Company
receiving distributions of funds from its PRC subsidiaries. The Company has not declared any dividends to the shareholder of
Sinovac Beijing in 2018, 2017 and 2016. As of December 31, 2018, the Company has $nil dividend payable (December 31, 2017 -
$nil).
Under PRC laws and regulations, statutory surplus reserves are restricted to set-off against losses, expansion of production and
operation and increasing registered capital of the respective company, and are not distributable other than upon liquidation. Staff
welfare and bonus funds are restricted to expenditures for the collective welfare of employees. The reserves are not allowed to be
transferred to the Company in terms of cash dividends, loans or advances, nor are they allowed for distribution except under
liquidation. Amounts restricted include the PRC subsidiaries’ paid-in capital, additional paid-in capital and statutory surplus reserves
of the Company’s PRC subsidiaries totaling $75,447 (RMB 519 million) as of December 31, 2018 (December 31, 2017, $68,353
(RMB 473 million)). Further, foreign exchange and other regulations in the PRC further restrict the Company’s PRC subsidiaries
from transferring funds to the Company in the form of loans, advances or cash dividends. As of December 31, 2018, amounts
restricted include the net assets of the Company’s PRC subsidiaries, which amounted to $154,437 (December 31, 2017 - $116,365).
20.
Earnings (loss) per Share
The following table sets forth the computation of basic and diluted income (loss) attributable to shareholders of Sinovac per share (in
thousands, except for number of shares and per share data):
For the year ended December 31
2017
2018
2016
Numerator
Income (loss) from continuing operations
Less: Income (loss) attributable to non-controlling interests
Income (loss) attributable to shareholders of Sinovac from continuing
operations
Income (loss) attributable to shareholders of Sinovac from discontinued
operations
Net income (loss) attributable to shareholders of Sinovac
Denominator
Basic weighted average number of common shares outstanding
Dilutive effect of stock options
Diluted weighted average number of common shares outstanding
Basic net income (loss) per share
Continuing operations
Discontinued operations
Basic net income (loss) per share
Diluted net income (loss) per share
Continuing operations
Discontinued operations
Diluted net income (loss) per share
$
36,111 $
14,329
36,705 $
10,898
(3,058)
(124)
21,782
25,807
(2,934)
—
21,782
—
25,807
2,338
(596)
64,727,146
250,408
64,977,554
57,033,816
67,375
57,101,191
56,949,083
—
56,949,083
0.34
—
0.34
0.34
—
0.34
0.45
—
0.45
0.45
—
0.45
(0.05)
0.04
(0.01)
(0.05)
0.04
(0.01)
F-35
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
Anti-dilutive options and non-vested restricted shares were not included in the diluted EPS calculation for the year ended December
31, 2016.
21.
Segment Information
The Company operates exclusively in the biotechnology sector. The Company’s business is considered as operating in one segment.
The Company’s Chief Executive Officer is the chief operating decision maker and reviews the consolidated results of operations
when making decisions about resources allocation and assessing performance of the Company as a whole. All revenues are
generated from the subsidiaries located in China. Total long-lived assets of $79,224 including prepaid land lease payments, property,
plant and equipment are all located in mainland China (December 31, 2017 - $85,458). The Company’s total assets by geographic
location are as follows:
Assets
Mainland China
Hong Kong
Total Assets
The Company’s revenues by product are as follows:
Sales
Inactivated hepatitis vaccines
Influenza vaccines
Enterovirus 71 vaccines
H5N1 vaccines
Mumps vaccines
Total Sales
December 31,
2018
2017
$
$
272,852 $
96,928
369,780 $
289,560
9,659
299,219
For the year ended December 31,
2017
2016
2018
$
$
63,426 $
2,028
162,537
—
1,659
229,650 $
37,851 $
13,544
121,284
—
1,667
174,346 $
20,596
9,829
35,140
6,389
477
72,431
The H5N1 vaccines were all sold to the Chinese government. The Company’s sales of H5N1 vaccines are dependent on government
stockpiling purchases.
The Company’s revenues are attributed to geographic locations as follows:
For the year ended December 31,
2017
2016
2018
Sales
Mainland China
Foreign countries
Total Sales
22.
Collaboration Agreements
$
$
215,121 $
14,529
229,650 $
172,897 $
1,449
174,346 $
71,184
1,247
72,431
(a)
On March 12, 2009, the Company entered into a technology transfer agreement (with an amendment agreement entered into
on December 14, 2011) with Tianjin CanSino Biotechnology Inc. (“Tianjin Cansino”). According to the agreement, Tianjing
Cansino will transfer the technology related to pneumococcal vaccine to the Company and jointly develop the technology
with the Company. The collaboration term under the technology transfer agreement is from March 12, 2009 to eight years
after the first sale of the vaccine developed under the technology transfer agreement in the Chinese market.
F-36
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
(b)
(c)
(d)
Under the terms of the technology transfer agreement, the Company will make milestone payments of up to $3,000 and
royalty payments ranging from 6% to 10% of net sales in China. Both parties will work together to develop international
markets for the products. On November 17, 2009 and December 14, 2011, two amendment agreements were signed for the
payment of $300 for the transfer of an additional six serotypes and related technology. As of December 31, 2016, the
Company made total milestone payments of $1,200 ($1,000 under the March 12, 2009 agreement and $200 under the
December 14, 2011 amendment). The remaining milestone payments will be paid when the Company achieves each specific
milestone, which includes obtaining clinical trials approval, completing clinical trials and achievement of desired results,
and achievement of commercial sales.
On January 29, 2015, the Company entered into a third amendment to the technology transfer agreement dated March 12,
2009 and the two amendment agreements dated November 17, 2009 and December 24, 2011. By entering into this third
amendment, the technology transfer agreement was revised to be a licensing agreement. The remaining milestone and
royalty payments under the technology transfer agreement have been reduced. Both the Company and Tianjin Cansino are
free to develop pneumococcal vaccines or to collaborate with one other company for the same purpose. The Company made
a payment and recorded $nil, $nil and $300 in research and development expenses for the years ended December 31, 2018,
2017 and 2016, respectively.
On August 18, 2009, the Company entered into a patent license agreement with the National Institutes of Health (“NIH”),
an agency of the United States Public Health Services within the Department of Health and Human Services. NIH has
granted the Company a non-exclusive license to make and use certain of its products. NIH has also granted the Company
the right to use certain associated information for development of its licensed products. The collaboration term under the
patent license agreement is from August 18, 2009 to the later of (a) the expiration of all royalty obligations under the
licensed rights where such rights exist and (b) eight years after the first commercial sale by the Company, unless the
agreement is terminated earlier per the provisions included therein.
The Company has agreed to pay NIH a license issue royalty of $80 upon execution of the agreement and a non-refundable
minimum annual royalty of $8, and royalty payments on net sales ranging from 1.5% to 4% depending on the sales territory
and the customers. The Company has also agreed to pay NIH benchmark royalties of $330 upon achieving each benchmark
as specified in the patent license agreement, including completion of clinical trials, obtaining regulatory approval for
marketing, and achievement of commercial sales. The Company recorded a license issue royalty of $16 for the year ended
December 31, 2018 as R&D expenses (2017 - $nil, 2016 - $nil).
On August 15, 2011, the Company licensed from Medimmune, LLC, a US based pharmaceutical company, certain non-
exclusive rights to use patented reverse genetics technology pertaining to H5N1 influenza virus strain production for
vaccines. The Company has agreed to pay an upfront license fee and milestone payments of up to an aggregate of $9.9
million based upon achievement of cumulative net sales of licensed products in China (including Hong Kong and Macau),
as well as royalty payments in single digit of net sales of the licensed products in China (including Hong Kong and Macau).
License fee and royalties of $3,400 accrued at the end of 2011 were paid in 2012. In 2013, the Company obtained a new
stockpile order of 3 million doses of H5N1 vaccines from the Chinese government. For the year ended December 31, 2013,
royalties of $1,036 was capitalized as inventory costs and included in accounts payable and accrued liabilities, which was
paid in May 2014. The Company accrued a royal payment of $9 as of December 31, 2018, which is payable in 2019. The
Company accrued a royal payment of $8 as of December 31, 2016, which was paid in 2017. No royalties were incurred for
the years ended December 31 2017.
On April 3, 2014, the Company entered into a non-exclusive license agreement (the “Agreement”) with The Institute for
Translational Vaccinology (“INTRAVACC”), a governmental institute working under the Dutch Ministry of Public Health,
Welfare and Sports, to develop and commercialize the Sabin Inactivated Polio Vaccine (“sIPV”) for distribution in China
and other countries. The Company expects to develop and commercialize the vaccine in China, as well as seeking regulatory
approval in other countries. The agreement has a term of 50 years.
The Company has agreed to pay INTRAVACC up to $2,406 (€1.5 million), net of PRC tax, including an entrance fee and
milestone payments upon achieving specific milestones. The Company has also agreed to pay royalty payments in a single
digit percentage of net sales generated worldwide from the product or products developed under the Agreement. The
Company recorded an entrance fee of $665 (€0.5 million) for the year ended December 31, 2014 as research and
development expense. The Company also recorded $125 (€94) for payment made to INTRAVACC for use of sIPV viral
seeds in R&D expenses for the year ended December 31, 2014. The Company recorded a milestone fee of $611 (€0.5
million) and $568 (€0.5 million) for the year ended December 31, 2018 and 2016 as research and development expense.
There was no expense incurred or paid to INTRAVACC for the year ended December 31, 2017.
F-37
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
(e)
In September 2015, Sinovac Dalian entered into a technology transfer and supply agreement with GlaxoSmithKline
Biologicals SA, or GSK, to use GSK’s measles seeds to develop combination vaccines containing measles for the China
market. Under this agreement, GSK agreed to transfer its measles seeds, provide reasonable assistance and relevant
technical materials to Sinovac Dalian for the purpose of developing and producing combination vaccines containing
measles. The Company made a payment of $nil for purchasing measles seeds to GSK for the year ended December 31, 2018
(2017 - $87, 2016 - $84).
23.
Subsequent Events
On December 19, 2018, the High Court of Justice of Antigua and Barbuda held that the Company’s Rights Agreement is valid under
Antigua law, and found that “there was a secret plan to take control of the Company” at the AGM. On February 18, 2019, after
reviewing the Court’s judgment and considering all additional facts known to the Board, the Board determined that the Collaborating
Shareholders became Acquiring Persons on or prior to the AGM and that their conduct resulted in a Trigger Event. Pursuant to the
Rights Agreement, the board of directors elected to exchange each valid and outstanding preferred share purchase right held by the
Company’s shareholders (other than the Collaborating Shareholders) for a combination of 0.655 of the Company’s Common Shares
and 0.345 of the Company’s newly created Series B Convertible Preferred Shares (the “Series B Preferred Shares” and, together,
each an “Exchange Share”). On February 22, 2019, the Exchange Shares were issued into the Shareholder 2019 Rights Exchange
Trust in the name of Wilmington Trust, National Association, which holds the Exchange Shares for the benefit of the Company’s
shareholders.
On March 6, 2019, the Delaware Court entered a Status Quo order preventing the Company from distributing Exchange Shares to
any shareholders or otherwise take any action pursuant to the Rights Agreement until the conclusion of the litigation or Court order.
The litigation is currently stayed pending the outcome of litigation in Antigua.
On April 4, 2019, the Antigua Appellate Court granted 1Globe’s application for injunctive relief to stay the operation of the
Company’s Rights Agreement pending a ruling by the Antigua Appellate Court on 1Globe’s appeal as to the validity of the Rights
Agreement. Based on this ruling of the Antigua Appellate Court, defendants 1Globe and OrbiMed in the Delaware Action requested
that the Delaware Court stay the Delaware Action pending final resolution of the Antigua Action. On April 8, 2019, the Delaware
Court stayed further proceedings in the Delaware Action pending the resolution of 1Globe’s appeal before the Antigua Appellate
Court
.
F-38
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
24.
Condensed Financial Information of the Parent Company
Balance Sheets
ASSETS
Current assets
Cash and cash equivalents
Prepaid expenses and other receivables
Amount due from subsidiaries
Dividend receivables
Total current assets
Investment in subsidiaries
Total assets
LIABILITIES AND EQUITY
Current liabilities
Accrued expenses and other payables
Amount due to subsidiaries
Total current liabilities
Total liabilities
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: 71,139,402 (2017 –57,281,861)
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total shareholders' equity
Total liabilities and equity
December 31,
2018
2017
85,049 $
1,338
82,581
3,195
172,163
99,485
271,648 $
1,667 $
16,548
18,215
18,215 $
—
71
204,998
(2,099)
50,463
253,433
271,648 $
2,140
478
71,097
21,280
94,995
72,046
167,041
1,943
13,946
15,889
15,889
—
57
115,339
7,075
28,681
151,152
167,041
$
$
$
$
$
Selling, general and administrative expenses
Total operating expenses
Loss from operations
Other expenses
Interest income
Equity earnings of subsidiaries, net of tax
Gain on disposal of subsidiary
Net income (loss)
Foreign currency translation adjustments
Total comprehensive income (loss)
Statements of Comprehensive Income (Loss)
For the year ended December 31
2017
2016
2018
15,615
15,615
(15,615)
(13)
798
36,612
—
21,782
(9,174)
12,608 $
4,267
4,267
(4,267)
—
145
29,929
—
25,807
6,907
32,714 $
5,434
5,434
(5,434)
—
382
2,118
2,338
(596)
(8,014)
(8,610)
$
F-39
SINOVAC BIOTECH LTD.
Notes to Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, unless otherwise stated)
Statements of Cash Flows
Cash flows provided by (used in) operating activities
Net income (loss)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
- Gain on disposal of subsidiary
- Share-based compensation
- Equity in earnings of subsidiaries
Changes in:
- Amount due from subsidiaries
- Prepaid expenses and other receivables
- Dividend receivables
- Amount due to subsidiaries
- Accrued expenses and other payables
Net cash provided by (used in) operating activities
Cash flows provided by financing activities
- Proceeds from issuance of common stock, net of share issuance costs
- Proceeds from shares subscribed
Net cash provided by financing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
(a) Basis of presentation
For the year ended December 31
2017
2016
2018
$
21,782 $
25,807 $
(596)
—
445
(36,612)
(7,624)
(861)
18,085
2,602
(276)
(2,459)
85,304
64
85,368
82,909
2,140
85,049 $
—
119
(29,929)
(602)
(73)
—
3,426
887
(365)
1,264
428
1,692
1,327
813
2,140 $
(2,338)
293
(2,118)
(171)
(335)
—
5,042
390
167
315
—
315
482
331
813
$
The condensed financial information has been prepared using the same accounting policies as set out in the accompanying consolidated
financial statements except that the Company used the equity method to account for investment in its subsidiaries.
The Company records its investment in its subsidiaries under the equity method of accounting. Such investment is presented on the balance
sheets as “Investment in subsidiaries” and share of their income (loss) as “Equity earnings (losses) of subsidiaries” in the statements of
comprehensive income (loss).
Each of the Company’s PRC subsidiaries has restrictions on its ability to pay dividends to the Company under PRC laws and regulations
(Note 19). The subsidiaries did not pay any dividends to the Company for the years presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been
condensed or omitted by reference to the consolidated financial statements.
(b) Commitments
The Company does not have any significant commitments or long-term obligations as of any of the periods presented, except for those
disclosed in the consolidated financial statements (notes 16 and 22).
F-40