----------
Securities and Exchange Commission
----------------------------------
FORM 20-F/A-3
-------------
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES
EXCHANGE ACT OF 1934.
OR
[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 2004
............................................................................
OR
[_] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period
............................................................................
Commission File Number: 0-29031
-------------------------------
SINOVAC BIOTECH LTD.
--------------------
(Exact name of registrant as specified in its charter)
Not Applicable
--------------
(Translation of registrant's name into English)
Antigua, West Indies
--------------------
(Jurisdiction of incorporation or organization)
No. 39 Shangdi Xi Road, Haidian District, Beijing, P.R.C. 100085
----------------------------------------------------------------
(Address of principal executive offices)
----------
II
Securities to be registered pursuant to Section 12(b) of the Act.
None.
-----
Securities to be registered pursuant to Section 12(g) of the Act.
Common shares with par value $0.001
-----------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None.
-----
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.
35,815,015 common shares (as at the financial year ended December 31, 2004)
---------------------------------------------------------------------------
37,573,211 common shares (as at May 15, 2005)
---------------------------------------------
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: Not applicable. No: Not applicable.
-------------- --------------
Indicate by checkmark which financial statement item the registrant has elected
to follow:
Item 17: |X|. Item 18: .
--- ---
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i
FORM 20-F INDEX
---------------
Item Page No.
- ---- --------
FORWARD LOOKING STATEMENTS...................................................1
PART I.......................................................................1
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS..................................................................1
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE.............................1
A. Offer Statistics.............................................1
B. Method and Expected Timetable................................1
ITEM 3 - KEY INFORMATION.....................................................1
A. Selected Financial Information...............................1
Exchange Rates...............................................2
B. Capitalization and Indebtedness..............................3
C. Reasons for the Offer and Use of Proceeds....................3
D. Risk Factors.................................................3
ITEM 4 - INFORMATION ON THE COMPANY..........................................9
A. History and Development of the Company.......................9
B. Business Overview...........................................10
Cash Resources and Liquidity...........................11
Stated Business Objectives.............................11
Description of Business................................12
Principal Products.....................................18
Regulatory Environment.................................20
Research and Development...............................22
Safety and Quality Assurance...........................23
The Market.............................................24
Customer Types.........................................25
Marketing Strategy.....................................25
Seasonality of Sales...................................27
Other Developments.....................................27
Competition............................................28
C. Organizational Structure....................................30
D. Property, Plants and Equipment..............................30
ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS.......................31
A. The Company.................................................31
F. Tabular Disclosure of Contractual Obligations...............40
ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.........................41
A. Directors and Senior Management.............................41
Aggregate Ownership of Securities......................43
Other Reporting Issuers................................44
Individual Bankruptcies................................44
Conflicts of Interest..................................44
Other Information......................................45
ii
Item Page No.
- ---- --------
B. Compensation................................................45
The Company's Executive Compensation...................45
Compensation of the Company's Directors................50
C. Board Practices.............................................51
D. Employees...................................................51
E. Share Ownership.............................................51
Directors and Officers.................................51
Public and Insider Ownership...........................52
ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..................52
A. Major Shareholders..........................................52
B. Related Party Transactions..................................53
C. Interests of Experts and Counsel............................54
ITEM 8 - FINANCIAL INFORMATION..............................................55
A. Financial Statements and other Financial Information........55
B. Significant Changes.........................................55
ITEM 9 - THE OFFERING AND LISTING...........................................55
A. Offer and Listing Details...................................55
B. Plan of Distribution........................................55
C. Markets.....................................................56
D. Selling Shareholders........................................56
E. Dilution....................................................56
F. Expenses of the Issue.......................................56
ITEM 10 - ADDITIONAL INFORMATION............................................56
A. Share Capital...............................................56
B. Memorandum and Articles of Association......................56
C. Material Contracts..........................................60
D. Exchange Controls...........................................62
E. Taxation....................................................62
F. Dividends and Paying Agents.................................63
G. Statement by Experts........................................64
H. Documents on Display........................................64
I. Subsidiary Information......................................64
iii
Item Page No.
- ---- --------
ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK..............................................................64
ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES...............................................................65
A. Debt Securities.............................................65
B. Warrants and Rights.........................................65
C. Other Securities............................................65
D. American Depositary Shares..................................65
PART II.....................................................................65
ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...................65
ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS..............................................66
ITEM 15 - CONTROLS AND PROCEDURES...........................................66
ITEM 16A - AUDIT COMMITTEE FINANCIAL EXPERT.................................66
ITEM 16B - CODE OF ETHICS...................................................66
ITEM 16C - PRINCIPAL ACCOUNTANT FEES AND SERVICES...........................66
ITEM 17 - FINANCIAL STATEMENTS..............................................67
ITEM 18 - FINANCIAL STATEMENTS..............................................67
ITEM 19 - EXHIBITS..........................................................68
(A) Financial Statements...........................................68
(B) Exhibits.......................................................69
SIGNATURE..................................................................103
EXHIBIT INDEX..............................................................104
----------
1
FORWARD LOOKING STATEMENTS
--------------------------
Sinovac Biotech Ltd. (hereinafter referred to as the "Company", "Sinovac", "we",
"us", or "our") cautions readers that certain important factors (including,
without limitation, those set forth in this Form 20-F) may affect the Company's
actual results and could cause such results to differ materially from any
forward-looking statements that may be deemed to have been made in this Form
20-F annual report (the "Annual Report"), or that are otherwise made by or on
behalf of the Company. For this purpose any statements contained in this Annual
Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "except," believe," anticipate," "intend," "could,"
estimate" or "continue," or the negative or other variations of comparable
terminology, are intended to identify forward-looking statements.
PART 1
------
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
- --------------------------------------------------------------
Not Applicable
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE
- ------------------------------------------------
Not Applicable
A. Offer Statistics
----------------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
B. Method and Expected Timetable
-----------------------------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
ITEM 3 - KEY INFORMATION
- ------------------------
A. Selected Financial Information
------------------------------
The following table summarizes certain selected financial information with
respect to the Company on a consolidated basis as of December 31, 2004, and is
qualified in its entirety by reference to the financial statements of the
Company and the Notes thereto; a copy of which is attached to this Annual
Report:
2
Year Ended Year Ended Year Ended
Dec. 31/04 De. 31/03 Dec. 31/02
------------ ------------ ------------
Net Sales $ 6,454,043 $ 2,838,933 $ 649,319
Net Loss from Continuing Operations
US GAAP $(4,666,711) $ (872,307) $(1,166,052)
Net Loss from Continuing Operations per Share
US GAAP $ (0.14) $ (0.04) $ (0.07)
Total Assets
US GAAP $22,420,230 $13,784,104 $12,345,165
Long Term Obligations
Bank Loan $ 1,207,730 $ 1,207,730 $ 603,865
Weighted Average Common Shares Outstanding
US GAAP 32,742,837 20,081,796 15,891,700
Exchange Rates
- --------------
In this Annual Report, unless otherwise specified, all dollar amounts are
expressed in United States dollars. The high and low exchange rates, the average
rates (average of the exchange rates on the last day of each month during the
period) and the end of the period rates for Chinese Renminbi (RMB), expressed in
U.S. dollars, from April 28, 2001 to December 31, 2004, based on the noon buying
rate in New York City for cable transfers payable in Chinese Renminbi (RMB) as
certified for customs purposes by the Federal Reserve Bank of New York, were as
follows:
U.S. Dollars per 1.00 Yuan RMB
------------------------------
Year ended December 31
----------------------
2004 2003 2002 2001
---- ---- ---- ----
High 0.1208 0.1208 0.1210 0.1209
Low 0.1208 0.1208 0.1208 0.1208
Average 0.1208 0.1208 0.1208 0.1208
End of Period 0.1208 0.1208 0.1208 0.1208
May 20, April March February January Dec.
2005 2005 2005 2005 2005 2004
---------- ---------- ---------- ---------- ---------- ----------
High 0.1208 0.1208 0.1208 0.1208 0.1208
Low 0.1208 0.1208 0.1208 0.1208 0.1208 0.1208
3
Conversion Table
----------------
For ease of reference the following conversion factors are provided:
1 mile = 1.6093 kilometres 1 metric ton = 2,205 pounds
1 foot = 0.305 metres 1 troy ounce = 31.103 grams
1 acre = 0.4047 hectare 1 imperial gallon = 4.546 litres
1 long ton = 2,240 pounds 1 imperial gallon = 1.2010 U.S. gallons
B. Capitalization and Indebtedness
-------------------------------
This is an Annual Report, and therefore, this information is not applicable.
C. Reasons for the Offer and Use of Proceeds
-----------------------------------------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
D. Risk Factors
------------
RISKS RELATED TO SINOVAC'S FINANCIAL CONDITION
- ----------------------------------------------
The Company has a history of losses and may never achieve profitability.
- ------------------------------------------------------------------------
Sinovac incurred net losses of $4,667,000 for the fiscal year ended December 31,
2004, and $872,000 in 2003. At December 31, 2004, the Company had an accumulated
deficit of $6,155,425. To become profitable the Company must increase its sales
and continue to limit operating expenses growth. If sales do not grow, or if
expenses grow excessively, the Company may not be able to achieve or maintain
profitability in the future.
Sinovac will need additional capital to continue development of its new vaccine
- --------------------------------------------------------------------------------
products and to market existing vaccine products on a large scale.
- ------------------------------------------------------------------
The Company will need to raise further funds from the capital markets to
continue the development and commercialization of its products. This may delay
progress in product development or market. Although the Company has adequate
near-term cash requirements, it may need to undertake significant future
financings to complete clinical trials for new vaccines, as well as to
facilitate large-scale commercial rollout of new products. In the future, the
Company may require funds in excess of its existing cash resources for the
following reasons: to proceed with the development of other vaccine products,
including clinical testing relating to new products; to develop or acquire other
technologies or other lines of business; to establish and expand manufacturing
capabilities; and to finance general and administrative and research activities
that are not related to specific products under development. In the past,
Sinovac funded most of its development and other costs through equity financing.
The Company anticipates the need for additional funding, and because operating
and capital resources are insufficient to meet future requirements, will have to
raise additional funds in the near future to continue the development and
4
commercialization of its products. Unforeseen problems, including materially
negative developments in clinical trials or in general economic conditions,
could interfere with the Company's ability to raise additional equity capital or
materially adversely affect the terms upon which such funding is available. It
is possible that the Company will be unable to obtain sufficient additional
funding when needed. If the Company were unable to obtain additional funding as
and when needed, it could be forced to delay the progress of certain development
efforts. Such a scenario poses risks. For example, the Company's ability to
bring a product to market and obtain revenues could be delayed, competitors
could develop products sooner, and/or Sinovac could be forced to relinquish
rights to technologies, products or potential products.
The Company may have to rely on new equity financing to raise additional capital
- --------------------------------------------------------------------------------
and this would dilute stockholders' holdings
- --------------------------------------------
If Sinovac raises funds through equity financing to meet the needs discussed
above, it will have a dilutive effect on existing holders of Company shares by
reducing their percentage of ownership. The shares may be sold at a time when
the market price is low because the Company needs the funds. This will dilute
existing holders more than if the stock price was higher. In addition, equity
financings normally involve shares sold at a discount to the current market
price.
RISKS RELATED TO SINOVAC'S TECHNOLOGIES
- ---------------------------------------
Sinovac will only receive revenues from its products that have received
- --------------------------------------------------------------------------------
regulatory approval to sell. Many factors impact the Company's ability to obtain
- --------------------------------------------------------------------------------
approvals for its products.
- ---------------------------
There can be no assurance that all of the clinical trials pertaining to the
Company's in-development vaccines will be completed within the anticipated time
frame. Furthermore, such trials may be delayed or suspended at any time by
regulatory authorities if unforeseen health risks become an issue with the
participants of clinical trials. In addition, pre-clinical and clinical trials
of the Company's products, and the manufacturing and marketing of its
technologies, are subject to extensive, costly and rigorous regulation by
governmental authorities. The process of obtaining required regulatory approvals
from the China State Food and Drug Administration ("SFDA") and other regulatory
authorities often takes many years, is expensive and can vary significantly
based on the type, complexity and novelty of the product candidates. For these
reasons, it is possible the Company will never receive approval for one or more
product candidates in the future.
Delays in obtaining SFDA or foreign approvals for the Company's products could
result in substantial additional costs and adversely affect its ability to
compete with other companies. If regulatory approval is ultimately granted, the
approval may place limitations on the intended use of the product the Company
wants to commercialize, and may place restrictions on product marketing.
5
Due to legal and factual uncertainties regarding the scope and protection
- --------------------------------------------------------------------------------
afforded by patents and other proprietary rights, Sinovac may not have
- --------------------------------------------------------------------------------
meaningful protection from competition.
- ---------------------------------------
Sinovac's long-term success will substantially depend upon its ability to
protect proprietary technologies from infringement, misappropriation, discovery,
and duplication, and avoid infringing the proprietary rights of others. The
Company relies on trademarks, trade secrets, confidentiality procedures and
contractual provisions and government intellectual property protection
assurances to protect its intellectual property. The Company's intellectual
property rights, and the intellectual property rights of biotechnology and
pharmaceutical companies in general, are highly uncertain and include complex
legal and factual issues. Because of this, any future intellectual property
rights applications Sinovac undertakes with respect to its SARS vaccine,
combination hepatitis A and B vaccine, influenza vaccine, or potential avian flu
vaccine may not be granted. These uncertainties also mean that any patents or
intellectual property rights that The Company owns or will obtain in the future
could be subject to challenge, and even if not challenged, may not provide The
Company with meaningful protection from competition. Due to Sinovac's financial
uncertainties, it may not possess the financial resources necessary to enforce
its patents and/or intellectual property rights. Intellectual property rights
already provided to the Company or pending applications may become subject to
dispute, and any dispute could be resolved against the Company. .
Because a substantial number of patents and/or intellectual property rights have
been issued in the field of biopharmaceuticals and because such positions can be
highly uncertain and frequently involve complex legal and factual questions, the
breadth of claims obtained in any application or the enforceability of the
Company's patents and/or intellectual property rights cannot be predicted.
Consequently, the Company does not know whether its intellectual property rights
or future patent applications will result in the issuance of patents or, whether
these patents will be subject to further proceedings limiting their scope, or
provide significant proprietary protection or competitive advantage, or become
circumvented or invalidated.
Also, because of these legal and factual uncertainties, and because pending
patent and/or intellectual property right applications are held in secrecy for
varying periods depending on the particular country, even after reasonable
investigation the Company may not know with certainty whether any products that
it (or a licensee) may develop will infringe upon any patent or other
intellectual property right of a third party.
The Company could be subject to costly and time-consuming product liability
- --------------------------------------------------------------------------------
actions.
- --------
Sinovac manufactures vaccines that are injected into patients to protect against
infectious illnesses and, as a result, the Company may in the future be subject
to product liability lawsuits. Any product liability claim brought against the
Company, with or without merit, could have a material adverse effect on Sinovac.
Even a meritless or unsuccessful product liability claim could be time
consuming, expensive to defend, and could result in the diversion of
management's attention from managing the Company's core business or result in
associated negative publicity.
6
RISKS RELATED TO MARKETING OF SINOVAC'S POTENTIAL PRODUCTS
- ----------------------------------------------------------
Because the Company faces significant international competition from companies
- --------------------------------------------------------------------------------
with greater resources, Sinovac may be unable to compete effectively.
- ---------------------------------------------------------------------
Competition from other biomedical companies in the global vaccine marketplace is
a risk that Sinovac faces. In a rapidly changing field, this competition is most
likely to come from well-established biopharmaceuticals with deep pockets and a
proven track record for successful product development and commercialization.
Therefore, there can be no assurance that such potential rivals will not develop
more proficient and more affordable vaccine products. Also, the prospect of
another immunology company in North America or elsewhere commercializing the
world's first SARS or avian flu vaccines is a distinct possibility.
Changes in the policies of the Communist Government of China or political
- --------------------------------------------------------------------------------
instability could delay the further liberalization of the Chinese economy and
- --------------------------------------------------------------------------------
adversely affect economic conditions in China generally, which could impact the
- --------------------------------------------------------------------------------
Company's business and prospects.
- ---------------------------------
Sinovac is currently targeting its products for distribution and sale in China,
which represents the domestic market, and in Southeast Asia and other developing
countries. Because of the Company's concentration in China, its assets and
business ventures are susceptible to any reversals of China's longstanding
policies on economic reform or changes in its health policies. Sinovac's sales
may be adversely impacted by any changes in government, such as changes in
leadership or social disruption which may result in restrictions being placed on
import and export of foreign goods, acceptance into the local market of foreign
health products, advertising of foreign goods and public attitude towards the
Company's vaccines.
The economic environment, pricing pressure and rising wages in China could
- --------------------------------------------------------------------------------
negatively impact Sinovac's revenues and operating results.
- -----------------------------------------------------------
The Company's ability to maintain or increase pricing is restricted as clients
often expect they will receive volume discounts or special pricing incentives.
Existing and new customers are also increasingly using third-party consultants
with broad market knowledge to assist them in negotiating contractual terms.
Large U.S. multinational companies are establishing larger offshore operations
in China, resulting in wage pressures for Chinese companies. Pricing pressures
from the Company's clients, wage pressures in China and an increase in sales and
marketing expenditures may have a negative impact on operating results.
Sinovac is investing substantial cash assets in new facilities and physical
- --------------------------------------------------------------------------------
infrastructure, and profitability could be reduced if business does not grow
- --------------------------------------------------------------------------------
proportionately.
- ----------------
Sinovac intends to invest substantial cash assets in new facilities and physical
infrastructure in 2005. The Company may encounter cost overruns or project
delays in connection with new facilities and physical infrastructure. These
expansions may increase The Company's fixed costs. If Sinovac is unable to grow
its business and revenues proportionately, profitability will be reduced.
7
RISKS RELATED TO MANAGEMENT
- ---------------------------
There are limitations on the enforcement of U.S. laws against Sinovac Biotech
- --------------------------------------------------------------------------------
Ltd., its management, and others.
- ---------------------------------
Sinovac was incorporated on March 1, 1999, under the laws of Antigua. The
majority of the Board of Directors members are not residents of the United
States. All Company assets are located outside of the United States and
substantially all of the directors' assets are located outside of the United
States. As a result, it may not be possible for investors to effect service of
process within the United States upon a majority of the Company's directors or
upon the Company, or enforce judgments obtained in U.S. courts based on civil
liability provisions of the U.S. securities laws against the Company in Antigua.
Awards of punitive damages in actions brought in the United States or elsewhere
may not be enforceable in Antigua. In addition, actions brought in a court in
Antigua against the Company or members of its Board of Directors to enforce
liabilities based on U.S. federal securities laws may be subject to certain
restrictions; in particular, a court in Antigua may not award punitive damages.
The United States and Antigua do not currently have a treaty providing for
recognition and enforcement of judgments in civil and commercial matters.
Therefore, a final judgment for the payment of money rendered by any federal or
state court in the United States based on civil liability, whether or not
predicated solely upon United States federal securities laws, would not be
automatically enforceable in Antigua.
Sinovac relies heavily on key management personnel and the degree of success of
- --------------------------------------------------------------------------------
the Company's business may be dependant on the fulfillment of their employment
- --------------------------------------------------------------------------------
obligations.
- ------------
Sinovac's success is very dependant on the talents, capabilities, efforts and
commitment of certain key members of its management team, such as President, Dr.
Yin, Professor Pan, Chairman of the Company's majority owned subsidiary, Sinovac
Beijing, of which Sinovac owns 71.56%. The loss of the service of these members
of management could have a material adverse effect on the Company.
RISKS RELATED TO THE MARKET FOR SINOVAC'S COMMON STOCK
- ------------------------------------------------------
The price of the Company's common stock may be volatile.
- --------------------------------------------------------
There may be wide fluctuation in the price of Sinovac's common stock. These
fluctuations may be caused by several factors including: announcements of
research activities and technology innovations or new products by the Company or
its competitors; changes in market valuation of companies in the industry
generally; variations in operating results; changes in governmental regulations;
developments in patent and other proprietary rights; public concern as to the
safety of drugs or treatments developed by the Company or others; results of
clinical trials of Sinovac's products or competitors' products; and regulatory
action or inaction on the Company's products or competitors' products. From time
to time, the Company may hire companies to assist in pursuing investor
relations' strategies to generate increased volumes of investment in the
Company's common stock. Such activities may result, among other things, in
causing the price of Sinovac's common stock to increase on a short-term basis.
Furthermore, the stock market generally and the market for stocks of companies
with lower market capitalizations and small biopharmaceutical companies, like
8
Sinovac, have from time to time experienced, and likely will again experience,
significant price and volume fluctuations that are unrelated to the operating
performance of a particular company.
Sinovac may acquire technologies or companies in the future, which could result
- --------------------------------------------------------------------------------
in the dilution of the Company's stockholders and disruption of its business,
- --------------------------------------------------------------------------------
and reduced revenues.
- ---------------------
Sinovac is continually evaluating business alliances and external investments in
technologies related to its business. Acquisitions of companies, divisions of
companies, businesses, or products entail numerous risks, any of which could
materially harm the Company's business in several ways, including: diversion of
management's attention from their core business objectives and other business
concerns; failure to integrate efficiently businesses or technologies acquired
in the future with pre-existing business or technologies; potential loss of key
employees from either pre-existing business or the acquired business; dilution
of existing stockholders as a result of issuing equity securities; and
assumption of liabilities of the acquired company. Some or all of these problems
may result from future acquisitions or investments. Furthermore, the Company may
not realize any value from such acquisitions or investments.
Sinovac's stock may be deemed to be "Penny Stock"
- -------------------------------------------------
The Company's common shares may be deemed to be "penny stock" as that term is
defined in Regulation Section "240.3a51-1" of the Securities and Exchange
Commission (the "SEC"). Penny stocks are stocks: (a) with a price of less than
$5.00 per share; (b) that are not traded on a "recognized" national exchange;
(c) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ
- - where listed stocks must still meet requirement (a) above); or (d) in issuers
with net tangible assets of less than $2,000,000 (if the issuer has been in
continuous operation for at least three years) or $5,000,000 (if in continuous
operation for less than three years), or with average revenues of less than
$6,000,000 for the last three years.
Section "15(g)" of the United States Securities Exchange Act of 1934, as
amended, and Regulation Section "240.15g(c)2" of the SEC require broker dealers
dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain a manually signed and dated
written receipt of the document before effecting any transaction in a penny
stock for the investor's account. Potential investors in the Company's common
shares are urged to obtain and read such disclosure carefully before purchasing
any common shares that are deemed to be "penny stock."
Moreover, Regulation Section "240.15g-9" of the SEC requires broker dealers in
penny stocks to approve the account of any investor for transactions in such
stocks before selling any penny stock to that investor. This procedure requires
the broker dealer to: (a) obtain from the investor information concerning his or
her financial situation, investment experience and investment objectives; (b)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (c) provide the investor with a written statement
setting forth the basis on which the broker dealer made the determination in
(ii) above; and (d) receive a signed and dated copy of such statement from the
investor confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
9
these requirements may make it more difficult for investors in the Company's
common shares to resell their common shares to third parties or to otherwise
dispose of them.
ITEM 4 - INFORMATION ON THE COMPANY
- -----------------------------------
A. History and Development of the Company
--------------------------------------
Incorporation
- -------------
Sinovac Biotech Ltd. (the "Company") was incorporated on March 1, 1999, under
the laws of Antigua under the name "Net Force Systems Inc." By special
resolution of the Company dated October 8, 2003, the Company changed its name to
"Sinovac Biotech Ltd."
Corporate Information
- ---------------------
The Company's business address and executive offices are located at No. 39
Shangdi Xi Road, Haidian District, Beijing, P.R. China 100085. The Company's
telephone number is 86-10-82890088 and the Company's fax number is
86-10-62966910. The Company's agent for service in Canada is Devlin Jensen,
Barristers & Solicitors, who are located at Suite 2550, 555 West Hastings
Street, Vancouver, British Columbia, V6B 4N5, and who can be contacted at (604)
684-2550 or via facsimile at (604) 684-0916.
On September 24, 2003, the Company and Ms. Lily Wang, a natural person of the
United States, entered into a share purchase agreement whereby the Company
acquired a 51% ownership interest in Sinovac Biotech Co., Ltd., a company
organized under the laws of the People's Republic of China, from Ms. Wang in
exchange for the issuance of 10,000,000 newly issued shares of common stock of
the Company at a state value of $0.60 per share for a total of $6,000,000
constituting approximately 37% of the Company's outstanding capital stock on a
fully-diluted basis at that time.
On January 26, 2004, the Company entered into a formal share purchase agreement
(the "Share Purchase Agreement") to acquire 100% of the issued and outstanding
shares of Tangshan Yian Biological Engineering Co., Ltd. ("Tangshan Yian"), a
corporation organized under the laws of the People's Republic of China, through
the issuance of 3,500,000 shares of common stock of the Company plus $2,200,000
in cash, which will be payable by the Company within 12 months from the date of
entering into the Share Purchase Agreement, to Mr. He Ping Wang, the sole
shareholder of Tangshan Yian and also a director of the Company. At the time of
completion of the Share Purchase Agreement, Mr. He Ping Wang held approximately
11.45% of the Company's outstanding shares of common stock. On January 30, 2004,
all of the terms and conditions of the Share Purchase Agreement had been
satisfied and the acquisition of Tangshan Yian by the Company was completed.
Reserves
- --------
Pursuant to Chinese company law applicable to foreign investment companies, the
Company's subsidiaries, Sinovac Beijing and Tangshan Yian, are required to
10
maintain dedicated reserves, which include a general reserve and an enterprise
expansion reserve. The dedicated reserves are to be appropriated from net
income after taxes, determined under the relevant Chinese accounting regulations
at a rate determined by the board of directors of the respective subsidiaries,
and recorded as a component of shareholders' equity. Except for the reduction
for losses incurred, any other usage should not result in this reserve balance
falling below 25% of the registered capital. The dedicated reserves are not
distributable other than upon liquidation.
For the year ended December 31, 2004, Sinovac Beijing appropriated 10% of its
after-tax profit, determined under the relevant Chinese accounting regulations,
to each of the general reserve and the enterprise expansion reserve. As Sinovac
Beijing recorded a loss for the year ended December 31, 2003 and 2002, no
appropriation to the dedicated reserves was made.
Pursuant to the same Chinese company law, the Company's subsidiaries are
required to transfer, at the discretion of its board of directors, a certain
amount of its annual net income after taxes as determined under the relevant
Chinese accounting regulations to a staff welfare and bonus fund. For the year
ended December 31, 2004, the board of directors of Sinovac Beijing approved
$49,901 (RMB 413,183) for contribution to such fund which shall be utilized for
collective staff benefits such as building of staff quarters or housing. As
Sinovac Beijing recorded a net loss for the years end December 31, 2003 and
2002, no appropriation to the staff welfare and bonus fund was made. The
amounts appropriated to staff welfare and bonus fund were charged against
income and the related provisions were reflected as accrued liabilities in the
consolidated balance sheets.
Tangshan Yian recorded a net loss for each of the three years in the period
ended December 31, 2004, so no appropriation to the dedicated reserves and staff
welfare and bonus fund was made.
Dividends declared by the Company's subsidiaries are based on the distributable
profits as reported in their statutory financial statements. As of December 31,
2004, dividends payable of $470,301 represent a minority interest in the share
of dividends declared by Sinovac Beijing.
Legal Proceedings
- -----------------
There are currently no legal proceedings involving Sinovac Biotech Ltd. The
Company is not aware of any proceedings being contemplated by any governmental
authority.
B. Business Overview
-----------------
Sinovac specializes in the research, development and commercialization of
vaccines for infectious diseases such as hepatitis A, hepatitis B, influenza,
Avian Flu Influenza and Severe Acute Respiratory Syndrome ("SARS"). The Company
aspires to become a leader in China's biotech industry. Working closely with
Chinese public health agencies, the Company focuses on manufacturing and
marketing human-use vaccines and related products, as well as providing
technical and consulting services. Sinovac is the first company in the world to
have been granted permission to conduct human clinical trials for a SARS
vaccine.
11
Cash Resources and Liquidity
- ----------------------------
As of December 31, 2004, the Company had $2,605,051 in cash and cash equivalents
and a positive working capital position of $1,814,611.
Stated Business Objectives
- --------------------------
The overall strategic mission of the Company is to become a world leader in the
research and development, manufacturing and commercialization of vaccines for
epidemic viruses such as hepatitis and influenza, and for fast-emerging viruses
such as SARS and avian influenza (a.k.a. "bird flu").
The Company believes that it is possible and financially viable to provide safe,
efficient vaccines to all countries regardless of wealth. Through careful
financial management, low production costs and modern, innovative techniques,
the Company intends to continue to produce high quality vaccines and
successfully service market sectors that many pharmaceutical giants are unable
to service.
The following represents the Company's objectives for 2005:
o Increase hepatitis A vaccine (Healive(TM)) sales and revenues; initiate
sales of it's combined hepatitis A / B vaccine (Bilive(TM)); and sales of
its influenza flu vaccine (Anflu(TM)). To accomplish this objective,
Sinovac will:
> Expand the size of its sales force and conduct sales training
> Enhance brand awareness through Chinese media (news, professional
publications, and advertising)
> Conduct and participate in promotional activities (conferences,
seminars, VIP visits to Company facilities)
o Commence sales of Bilive(TM) in China (the SFDA approved Bilive(TM) January
7, 2005)
o Gain SFDA approval for Anflu(TM) production facility and commence sales in
China
o Complete the Summary Report on Phase I clinical trial on SARS vaccine;
entering Phase II clinical trials will depend on the SFDA's approval and
requirements statement
o Continue new vaccine products development, including an avian flu vaccine
with the China Centre of Disease Control and Prevention ("China CDC")
o Register and license Healive(TM), Bilive(TM) and Anflu(TM) for sale in
other developing countries
o Forge international strategic partnerships to open overseas markets
o Explore and develop domestic and international R&D and marketing agreements
12
o Explore acquisition opportunities
Marketing Objectives
--------------------
The Company's marketing strategy is based on two capabilities, organic growth,
augmented as necessary, and strategically beneficial acquisitions. The Company
will combine and organize these capabilities into a bifurcated marketing plan
(regional and global). Each branch of this plan is intended to focus on public
and private sectors in order to achieve sales and growth objectives. The public
sector consists of government and non-government organization ("NGO") programs,
and the private sector consists of independent/ private health insurance
companies and private citizens.
First the Company intends to target progressive geographic expansion with its
family of vaccines that target historically devastating viruses. The Company is
building and training a sales organization for the Chinese domestic market.
Concurrently with its domestic marketing plan, the Company is establishing a
marketing and sales presence in South East Asia and other developing countries
through local distributors. These distributors have over 10 years experience in
commercialization and registration of vaccines and other pharmaceuticals through
established governmental relationships and local sales networks.
The second prong of the Company's marketing strategy contains a contingency plan
that goes into effect once the Company creates a blockbuster vaccine for
defeating emerging viruses such as SARS or the Avian Flu. The Company believes a
"first to market" advantage opens doors to international markets. In such a
scenario, the Company intends to enter the international market with a worldwide
network of professional sales teams and sales networks, a reliable
customer-credit management system, and an efficient logistics system.
Description of the Business
- ---------------------------
General
-------
The Company specializes in the research, development, commercialization, and
sales of vaccines for infectious diseases such as hepatitis A, hepatitis B,
influenza, Avian Flu and SARS. The Company aspires to become a leader in China's
biotech industry. Working closely with Chinese public health agencies, the
Company focuses on manufacturing and marketing human-use vaccines and related
products, as well as providing technical and consulting services. The Company is
the first company in the world to have been granted permission to conduct
clinical trials for a SARS vaccine.
The Company's hepatitis A vaccine, Healive(TM), is currently experiencing strong
sales growth in China. The Company sold 1,002,000 doses of Healive(TM) in 2004,
while in 2003 the Company sold 433,000 doses. Sales revenues in 2004 totalled
approximately $6.5 million, an increase of more than 127% over 2003 sales
revenues of $2.8 million.
13
The Global Viral Environment
----------------------------
Global Viral Background
-----------------------
Although `virus' and `vaccine' are common terms that most people are familiar
with, several variations of these terms exist. To ensure a clear understanding
of the Company's business and market, some definitions and explanations are
provided.
Viruses:
- --------
A virus is best described as an infectious agent characterized by its inability
to reproduce outside of a living host cell. Viruses may subvert the host cells'
normal functions, causing the cell to behave in a manner determined by the
virus.
When a virus attacks the body for the first time, the immune system attempts to
identify and produce antibodies to fight the virus. The immune system's success
depends on whether it has encountered the virus before and on the aggressiveness
of the virus.
Some viruses will mutate or change vital characteristics as they migrate to a
new host cell. This mutation can make it difficult to create new, safe vaccines
or treatments that keep pace with the spread of the virus.
Vaccine:
- --------
Vaccines contain antigenic components. These components (live or dead parts of a
virus) antagonize or stimulate the immune system to produce antibodies. By
stimulating an immune response (but not the disease), vaccination leads to
immunity for a certain micro-organism and protects against subsequent infection
by that organism.
If a virus mutates, it is likely that a new vaccine will have to be created to
match the characteristics of that virus.
There are two types of vaccine, activated and inactivated. The key difference is
that inactivated vaccines (such as those produced by Sinovac) use inactive
(dead) components of the actual virus. Inactive vaccines provide enough genetic
material for the body to recognize and successfully create antibodies but do not
carry the obvious risk of using live or active components.
A virus often requires certain basic nutrients and conditions in order to
survive and replicate. The most basic of those is water, which is why viruses
are most commonly transmitted through fluid, e.g., water or bodily fluids.
To give some idea of how fast and effectively a virus can spread, hepatitis A
infects between 1.5 and 10 million people every year and more than 2 billion
people have been infected by hepatitis B which is one hundred times more
infectious than AIDS.
14
Human Suffering:
- ----------------
The consequences for humans are physical, emotional and of course financial.
Influenza, hepatitis and, more recently, SARS have all had a significant affect
on humans.
Hepatitis B causes liver diseases that kill more than 500,000 people every year.
Adding to these historical viruses are new types such as avian flu and SARS that
are increasing the stresses, costs and losses across industry and health care
sectors.
Pervasive Pan-Viral Transmission Patterns:
- ------------------------------------------
Because viruses like influenza, hepatitis and SARS spread so rapidly and
effectively, international health authorities and countries acknowledge that
prevention by mass vaccination is more cost effective than a cure.
With increasing national and international travel, combined with carriers that
never show symptoms as well as lengthy incubation periods, prevention is
becoming increasingly important. Governments, medical associations and health
authorities are pushing for increased vaccination policies to prevent the
problem before it occurs.
Recurring Epidemic Viruses
--------------------------
Hepatitis A
-----------
Hepatitis A is endemic in developing nations like China. Hepatitis A is a liver
disease that makes the liver swell and prevents it from functioning properly. It
is caused by the hepatitis A virus (HAV). Often, a person with hepatitis A shows
no signs or symptoms. If symptoms are present, these may include jaundice
(yellowing of eyes and skin) and fever. Hepatitis A will leave a person
incapacitated or weakened for a long time, as much as several weeks or months.
The hepatitis A virus is shed in the stool of an infected person during the
incubation period of 15-45 days before symptoms occur and during the first week
of the illness. Blood and other bodily secretions may also be infectious.
Hepatitis A is contagious and can be spread by close personal contact with
someone carrying the virus. Hepatitis A can also be contracted by consuming food
that has been prepared by someone with the disease or by drinking water that has
been contaminated by hepatitis A (in parts of the world with poor hygiene and
sanitary conditions). The virus does not remain in the body after the infection
has resolved, and there is no carrier state (i.e. a person who spreads the
disease to others but does not become ill).
Hepatitis A can be passed to anyone but those who are more likely to contract
the virus are persons who live with someone who has hepatitis A, children who
attend daycare, daycare personnel, homosexual men, people who travel to foreign
countries where hepatitis A is common and intravenous drug users.
Good personal hygiene and proper sanitation, such as washing hands before
eating, can help prevent hepatitis A. The safest and most effective form of
protection is vaccination.
15
Hepatitis B
-----------
Hepatitis B is one of the major diseases for humans and continues to be a
serious global public health issue. It is preventable with safe and effective
vaccines that have been available since 1982; yet information, education and
cost have often prevented the necessary vaccination programs that would help
defeat the virus.
Of the estimated 2 billion people who have been infected with the hepatitis B
virus (HBV), more than 350 million have chronic (lifelong) infections. These
chronically infected persons are at high risk of death from cirrhosis of the
liver and liver cancer, diseases that kill about one million people each year.
Although the vaccine will not cure chronic hepatitis, it is 95% effective in
preventing chronic infections from developing, and is the first vaccine against
a major human cancer.
Unfortunately, however, the children in the poorest countries, who need the
vaccine the most, have not been receiving it because their governments cannot
afford it. Fortunately, a hepatitis B vaccine will soon be available in these
countries with the assistance of the Global Alliance for Vaccines and
Immunization (GAVI) and the Global Fund for Children's Vaccines.
Sinovac's safe and effective BiliveTM product can be priced to support such
international programs and still provide significant net profit.
Influenza
---------
Influenza (commonly called "flu") is a contagious respiratory illness caused by
influenza viruses. Infection with influenza viruses can result in illness
ranging from mild to severe and life-threatening complications.
There are three types of the virus:
- - Influenza A viruses that infect mammals (humans, pigs, ferrets, horses) and
birds
- - Influenza B viruses that infect only humans
- - Influenza C viruses that infect only humans
All type A influenza viruses, including those that regularly cause seasonal
epidemics of influenza in humans, are genetically labile and well adapted to
elude host defenses. Influenza viruses lack mechanisms for the "proofreading"
and repair of errors that occur during replication. As a result of these
uncorrected errors, the genetic composition of the viruses changes as they
replicate in humans and animals, and the existing strain is replaced with a new
antigenic variant. These constant, permanent and usually small changes in the
antigenic composition of influenza A viruses are known as antigenic "drift".
The tendency of influenza viruses to undergo frequent and permanent antigenic
changes necessitates constant monitoring of the global influenza situation and
annual adjustments in the composition of influenza vaccines.
16
Influenza viruses have a second characteristic of great public health concern -
influenza A viruses, including subtypes from different species, can swap or
"re-assort" genetic materials and merge. This re-assortment process, known as
antigenic "shift", results in a novel subtype different from both parent
viruses. As populations will have no immunity to the new subtype, and as no
existing vaccines can confer protection, antigenic shift has historically
resulted in highly lethal pandemics. For this to happen, the novel subtype needs
to have genes from human influenza viruses that make it readily transmissible
from person to person for a sustainable period.
Research has shown that antiviral drugs are effective for both the prevention
(chemoprophylaxis) and early treatment of influenza, if administered within 48
hours following the onset of illness. During normal seasonal epidemics,
antivirals are considered an important adjunct to vaccination as a strategy for
reducing the medical and economic burden of influenza. Their use can reduce the
duration of uncomplicated disease and the likelihood of complications requiring
anti-microbial treatment and possibly hospitalization.
Sinovac intends to launch its split flu influenza (AnfluTM) vaccine in time to
begin sales during the 2005-2006 flu season.
New Viruses
-----------
SARS
----
The SARS epidemic has intensified interest for various vaccine shots. Demand for
different vaccine shots in Beijing, for instance, went up by 10 times since the
outbreak of SARS, government statistics indicate.
The continuing appearance of new infectious diseases, especially the SARS
outbreak in 2002, has resulted in a heightened worldwide demand for vaccines.
At a convention of leading SARS researchers from 15 nations in late 2003, the
greatest concern was that no country is adequately prepared to face the grave
health threats posed to their urban populations by such viruses. Nor are their
regional and national economies prepared for the seriously negative financial
impact that SARS has caused in many places. For instance, it is estimated that
SARS cost Southeast Asian nations approximately US$60 billion in economic losses
in 2003. Scientists at the convention concluded that a recurrence of SARS (which
spread to over 35 countries in a matter of months in 2003) could develop into a
full-blown global pandemic.
17
Avian Flu
---------
Avian influenza (also known as the "bird flu") is a type of influenza virulent
in birds. It was first identified in Italy in the early 1900s and is now known
to exist worldwide.
The causative agent is the avian influenza (AI) virus. AI viruses all belong to
the influenza virus A genus of the Orthomyxoviridae family and are
negative-stranded, segmented RNA viruses. Avian influenza spreads in the air and
in manure. Wild fowl often act as resistant carriers, spreading it to more
susceptible domestic stocks. It can also be transmitted by contaminated feed,
water, equipment and clothing; however, there is no evidence that the virus can
survive in well-cooked meat.
The incubation period is 3 to 5 days. Symptoms in animals vary, but virulent
strains can cause death within several days.
Avian Influenza in Humans
-------------------------
While avian influenza spreads rapidly among birds, it does not infect humans
easily, and there is no confirmed evidence of human-to-human transmission. Of
the 15 subtypes known, only subtypes H5 and H7 are known to be capable of
crossing the species barrier.
Conditions favorable for the emergence of antigenic shift have long been thought
to involve humans living in close proximity to domestic poultry and pigs.
Because pigs are susceptible to infection with both avian and mammalian viruses,
including human strains, they can serve as a "mixing vessel" for the scrambling
of genetic material from human and avian viruses, resulting in the emergence of
a novel subtype. Recent events, however, have identified a second possible
mechanism. Evidence is mounting that, for at least some of the 15 avian
influenza virus subtypes circulating in bird populations, humans themselves can
serve as the "mixing vessel".
The symptoms of avian influenza in humans are akin to those of human influenza,
ie. fever, sore throat, cough and in severe cases pneumonia. Human deaths from
avian influenza were unknown until 1997, when six people in Hong Kong died from
the particularly virulent H5N1 strain.
In January 2004, a major new outbreak of H5N1 avian influenza occurred in
Vietnam and Thailand's poultry industries, and within weeks spread to ten
countries and regions in Asia, including Indonesia, South Korea, Japan and
China. Intensive efforts were undertaken to slaughter chickens, ducks and geese,
and the outbreak was contained by March, but the total human death toll in
Vietnam and Thailand was 23 persons.
It is feared that if the avian influenza virus undergoes antigenic shift with a
human influenza virus, the new subtype created could be both highly contagious
and highly lethal in humans. In February 2004, avian influenza virus was
detected in pigs in Vietnam, increasing fears of the emergence of new variant
strains.
In North America, the presence of avian influenza was confirmed at several
poultry farms in British Columbia, Canada in February 2004.
18
Avian influenza in humans can be detected reliably with standard influenza
tests. Antiviral drugs are clinically effective in both preventing and treating
the disease. Vaccines, however, take at least four months to produce and must be
prepared for each subtype.
Principal Products
- ------------------
HealiveTM
---------
Healive(TM) is the first, and to date, only inactivated hepatitis A vaccine
developed in China. In 1984, Sinovac's President and CEO, Mr. Weidong Yin,
successfully isolated the TZ84 virus strain. Healive(TM) took nearly 10 years to
develop and gained the New Drug Certificate from the SFDA in 1999. The
manufacturing facility was designed by and equipped by reputable, European
companies and certified by the China State Food and Drug Administration
("SFDA"). Sales began in 2002.
Product testing research demonstrated the effects of Healive(TM) vaccinations on
children have excellent immunogenicity, slight reaction to the inoculation and
the same safety profile as inactivated vaccines manufactured by international
companies.
Healive is produced by the Company's 71.56% owned subsidiary, Sinovac Biotech
Co., Ltd. ("Sinovac Beijing"), a company organized pursuant to the laws of the
People's Republic of China.
BiliveTM
--------
Bilive(TM) is the first, and currently only, combined inactivated hepatitis A
and B vaccine developed by Chinese scientists. The R&D and clinical trial period
for Bilive(TM) was impressive; beginning at the end of 1999 and completed in
2003. The SFDA gave its final approval for marketing and sales of Bilive(TM) on
January 7, 2005.
The SFDA also issued a production license for Bilive(TM) and sales of the
vaccine in China will begin in 2005. Bilive(TM) vaccine has only one directly
competing product in the world, GlaxoSmithKline's Twinrix(TM), however only its
adult dosage vaccine is registered with the Chinese government. Furthermore, it
is very expensive with only a few thousand sales recorded after its launch into
the market.
Sinovac used its proprietary hepatitis A vaccine in combination with a
genetically engineered hepatitis B vaccine to develop the combined vaccine.
Bilive(TM) is a combined vaccine formulated by purified inactivated hepatitis A
virus antigen and recombinant (yeast) hepatitis B surface (HBsAg), absorbed into
aluminum hydroxide. Bilive(TM) induces the body's immune system to generate
antibodies as a reaction against hepatitis A and hepatitis B viruses. Hepatitis
B is a powerful disease that continues to be a serious global health concern.
The standard, primary Bilive(TM) vaccination schedule consists of three doses.
The second dose is administered one month after the first, and the third dose
six months after the first. Booster vaccinations are recommended five years
after the initial immunization.
19
Bilive(TM) junior is suitable for use in non-immune infants, children and
adolescents from one year up to and including 15 years, who are at risk of
hepatitis A and hepatitis B infection.
Bilive(TM) adult is suitable for use in non-immune adults and adolescents 16
years of age and older, who are at risk of hepatitis A and hepatitis B
infection.
Bilive(TM) can be recommended for persons who remain in the vicinity of HAV
and/or HBV, users of illicit intravenous drugs, homosexuals and bisexuals,
hemophiliacs who receive therapeutic blood products, persons with nephropathy
who receive dialysis treatment, and those persons who receive long term blood
dialysis.
Bilive(TM) side effects are rare and of low intensity. The most common reactions
were those at the site of injection, which included transient pain, redness and
swelling. Systemic adverse events seen were fever, headache, fatigue, nausea and
vomiting. These events were transient, only rarely reported and were considered
by the subjects as mild.
AnfluTM
-------
Sinovac began split flu vaccine research and development in 2001, completed
clinical trials in early 2004, and filed its New Drug Application with the SFDA
in June 2004. Quite significantly, the total time to market for Sinovac's
products have been consistently reduced, from ten years for HealiveTM, to just
over four years for BiliveTM, to just under four years for AnfluTM.
The Company received a New Drug Certificate from the SFDA for its split flu
vaccine (AnfluTM) on February 25, 2005. The AnfluTM production line is located
in Beijing and nearing completion. The Company believes it will receive GMP
certification for the production line in time to begin sales during the
2005-2006 flu season.
AnfluTM is safe for children and the elderly. Demand is expected to exceed
Sinovac's production capability as demand in China for flu vaccines largely
exceeds total supply. As such, the Company intends to build another, much larger
AnfluTM vaccine production facility if financing is obtained.
SARS
----
On January 19, 2004, the SFDA authorized the Company's operating subsidiary in
Beijing, Sinovac Biotech Co., Ltd. ("Sinovac Beijing") to conduct a phase I
clinical test of its potential SARS vaccine. Sinovac Beijing is the first
institute approved by the SFDA to conduct human clinical trials of a SARS
vaccine.
Thirty-six healthy volunteers between the ages of 21 and 40 years were selected,
then divided into four groups for clinical testing. Twenty-four subjects (two
groups of 12) received the vaccine in two dosage strengths, while twelve others
(two groups of six) received a placebo. Neither the volunteers nor the
administering doctors were informed of whether the injection was a vaccine or a
placebo. Each subject received two inoculations: the first being administered on
day zero, the second being administered 28 days later.
20
The first volunteers received their injection on May 22, 2004. By September 1,
2004 all 36 subjects participating in the trial had been vaccinated with two
doses of either the SARS vaccine or the placebo. Professor Lin Jiangtao, head of
the Respiratory Medical Department at the China-Japan Friendship Hospital in
Beijing, led the trial.
The independent result of the 56-day observation was submitted to the SFDA upon
completion. China's Ministry of Science and Technology, the Ministry of Health
and the SFDA jointly announced on December 5, 2004 that the phase I human test
of a SARS vaccine, independently developed by Chinese scientists, proved safe
and effective in preliminary tests. This event marked China as the first country
in the world to complete a phase I clinical test of a SARS vaccine. According to
phase I clinical trial protocol, the trial concluded when the 210-day
observation of all subjects from their first inoculation was satisfied. This
occurred in March 2005. The Company is currently conducting testing and analysis
on blood samples collected from each volunteer expect that the results will be
available in mid 2005.
Avian Flu - Pandemic Influenza Vaccine (H5N1)
---------------------------------------------
The National Institute for Biological Standards and Control, arld Health
Organization (WHO) influenza laboratory began providing the reverse generic bird
flu virus strain in early 2004 to vaccine makers around the world for the
purpose of developing a viable vaccine. Sinovac received the virus in March
2004.
Sinovac signed an avian flu vaccine co-development agreement with the China
Centre of Disease Control and Prevention ("China CDC"). Under the terms of the
agreement, the Company will apply for the New Drug Certificate, production
license, and patents. As a result, Sinovac will own all commercial rights.
Pursuant to the agreement, the China CDC is responsible for surveillance of
influenza prevalence, molecular epidemiology study of the virus strain, guidance
and establishment of avian flu vaccine development strategies, participation in
avian flu vaccine research and development, and the design of the technical
process. Furthermore, the China CDC is responsible for conducting several tests,
including genome analysis on the virus strains used in the vaccine research and
development, antigen analysis and immunization protection analysis, among
others. Lastly, the China CDC is responsible for providing guidance on the scope
of use, storage, and the evaluation of the protection of the vaccine. Sinovac is
responsible for avian flu vaccine research and development based on the
established technical platform, as well as vaccine application and production.
The Company, with China CDC, intends to apply for government funding for this
project.
Regulatory Environment
- ----------------------
The SFDA governs the regulation of vaccines in China. Sinovac takes the
following steps to gain approval from the SFDA to sell its vaccines in China:
21
--------------------------------------------
|Pre-clinical trial results submitted to SFDA|
--------------------------------------------
|
|
v
-----------------------
|Clinical Trial Approval|
-----------------------
|
|
v
------------------------------------------
|Conducting three phases of clinical trials|
------------------------------------------
/
|/_
---------------------------------------- ---------------------------
|Clinical trial results submitted to SFDA| |Production of three lots of|
---------------------------------------- |products submitted to SFDA |
| ---------------------------
| |
| |
v v
-------------------- ------------------
|New Drug Certificate| |Production License|
-------------------- ------------------
\ /
\ /
_\| |/_
---------------
|GMP Application|
---------------
|
|
v
-----------------
|GMP Certification|
-----------------
Pre-Clinical Trials: The process involves in-vitro laboratory and in-vivo animal
- --------------------
testing. It also includes a study on the technology process, and establishes
quality control and test evaluation standards for the safety, efficacy, and
stability of the vaccine throughout animal trial testing.
Clinical Trial Approval: After a formal review and evaluation of per-clinical
- -------------------------
results, the SFDA makes a determination to approve or disapprove commencement of
human clinical trials using the product. After three phases of human clinical
trial of a new drug, the independently prepared results and three lots of
product samples are submitted to the SFDA at the same time the Company applies
for a new drug certificate and production license.
22
New Drug Certificate & Production License: The new drug certificate grants
- ---------------------------------------------
approval for the research and development process of a drug that has never been
approved for production or sale in China. The production license is approval for
vaccine production. After completing three phases of clinical trial and passing
the evaluation by a professional delegation, the SFDA will issue a new drug
certificated to the manufacturer. This grants the filing Company intellectual
property rights to this drug. Chinese administrative protection for the new
proprietary drug starts from the date of the issuance of the new drug
certificate.
GMP certificate: The GMP certificate is for the monitoring of drug
- ------------------
manufacturers. After receiving a new drug certificate and production license,
the company submits an application for GMP (Good Manufacturing Protocol)
certification. This provides approval for the equipment and control of the
manufacturing workshop of the particular drug.
A new drug is only officially approved for sale in the Chinese market once these
steps have been completed. The Company believes that the most significant
milestone is the new drug certificate.
Research and Development
- ------------------------
Disease prevention is a lengthy process. The Company will strive to integrate
its research and development, and marketing strategies, to supply more new
products to eliminate human diseases.
The Company, with the cooperation of local and internationally known
universities, colleges and institutes, and in consideration of the need of
disease control in China, researches and develops new vaccines, takes benefits
from the mature technology in the world, reconstructs the existing vaccine
products, participates in world-wide competition in vaccine markets, and makes
an effort to achieve more abundant and perfect products.
In this regard, a number of leading Chinese scientific and medical institutions,
such as Beijing University and the Chinese Academy of Medical Sciences, are
collaborating with the Company in the research and development of new and
improved vaccine biotechnologies. In particular, the Chinese government is
providing a significant amount of its scientific resources to the Company's aid,
in a collaborative effort to develop on an expedited basis a safe and effective
vaccine for SARS.
In the last three years, Company expenditures on research and development were
as follows:
2004 - Gross expenditures of $1,005,000, less government grants recognized of
$719,000 for net expenditures of $286,000. The Company received $1,688,000 in
government research grants in 2004, but the Company did not meet the conditions
necessary for recognition of the full amount.
2003 - Gross expenditures of $927,000 less government grants received of
$664,000 for net expenditures of $263,000.
23
2002 - Expenditures of $25,000, with no government grants received.
Safety and Quality Assurance
- ----------------------------
All of the Company's facilities conform to the World Health Organization's
("WHO") recommended bio-safety standards and Sinovac's primary manufacturing
plant has been certified as meeting the GMP standard of the China SFDA.To comply
with GMP operational requirements, the Company has written and implemented a
quality assurance validation plan, procedures, and a complete documentation
system. The manufacturing facilities for Hepatitis vaccines, Healive(TM) and
Bilive(TM), have both received the Certificate of Good Manufacturing Practices
for Pharmaceutical Products (n. 2515 and 2514) issued by the China SFDA. Company
facilities also meet GMP requirements of Chinese and international regulatory
agencies.
Sinovac maintains strict control management of its staff, plant environment,
support facilities, raw materials, hygiene, validation, documentation,
manufacturing process, quality control, product selling, and sales follow-up
resolution. The Company's personnel are trained on these procedures and
documentations routinely to ensure a proficient comprehensive quality assurance
system and the quality of the finished products.
Sinovac bases its operations on an "excellence in service" concept. To meet high
goals, the Company established a team of well-known nationwide experts,
professors and doctors to provide vaccine customers with support. This team
provides the core of the Company's emergency advisory response center, which
promises to take action within 24 hours in case of emergency, 365 days a year.
Sinovac's facilities are fully compliant with world advanced GMP Quality
Assurance System (QAS), international standards on bio-pharmaceutical
manufacturing. The production plant for Healive(TM) vaccine was designed by a
well-known European company in accordance with the U.S. FDA and EU GMP
requirements, with major equipment and facilities imported from Europe and North
America, and the installation and debugging processes completed on a turnkey
basis by a European pharmaceutical engineering company. Our key equipment has
passed the validation conducted by SVS, which is an FDA-designated GMP
validation consulting company.
Tangshan Yian Biological Engineering Co., Ltd. ("Tangshan Yian") is a wholly
owned subsidiary of Sinovac. Tangshan Yian is a research and development center
providing support to the parent Company in Beijing. Tangshan Yian owns and
operates a Biosafety level III Laboratory (BSL-3) that is located in the
Tangshan Yian facility. The studies of deadly infectious viruses, such as SARS
are required to be conducted in BSL-3 rated laboratories. The BSL-3 Lab in
Tanghsan Tian is constructed and managed according to WHO biosafety manual.
24
The Market
- ----------
Global Market for Vaccines
--------------------------
The global vaccine market in 2001 was valued at $5.4 billion and is forecast to
reach $7.5 billion by 2005 (Datamonitor). This predicted year-on-year growth of
8 to 10% makes vaccines the fastest growing pharmaceutical sector, surpassing
even prescription drugs. A key driver of this growth is the threat of the
emergence of new, more powerful super viruses such as SARS and avian influenza.
The efficacy of vaccines in preventing viral infections is accentuated by the
prevalence of prevention programs worldwide; some 116 countries have initiated
childhood vaccination regimes. World health authorities concur that vaccination
is the most cost effective way to deal with viral threats.
Quality and cost concerns have created a shortage of effective, affordable
vaccines to prevent hepatitis A, hepatitis B, and influenza. No approved
vaccines exist yet for SARS or avian influenza.
Chinese Market for Vaccines
---------------------------
There is a critical and growing need in China for safe, highly effective,
low-cost vaccines to protect the general public and particularly those most
vulnerable to infectious diseases caused by viruses. Between 1992 and 2002,
demand for vaccines rose 21.8% per year and consistently exceeded vaccination
output despite large gains in production. There are many causes for this
phenomenon.
China's population is the world's largest at 1.3 billion. One of the most
challenging health concerns is the vaccination against diseases for its newborns
and elderly citizens. With persistent widespread outbreaks of hepatitis A and B,
the annual shortage of influenza vaccines in China is forecasted at some 15 to
20 million doses.
According to China's Vice-Minister of Health, 19 million babies are born in
China every year, placing a large demand for vaccines supplies. However, the
elderly growth is even larger and their need for vaccines just as vital. In 2001
China had 88 million people age 65 or older. This number reached 94 million in
2004 and by 2025 this age group is expected to exceed 200 million people.
According to the China Elderly Association, senior citizens will account for
11.8 percent of the total population in 2020, up from 7 percent today.
Hepatitis A is endemic in China with 2.4 million cases of acute hepatitis every
year. Up to 80% of the population have been infected with hepatitis at some
point in their lives. According to the Ministry of Public Health, China reports
about half a million new cases of hepatitis B and 280,000 deaths from hepatitis
B-related liver diseases each year. More than 350 million will suffer lifelong
infection.
There are several factors driving China toward developing and dispensing
vaccines to combat viral diseases. They include support for its growing economy,
a growing middle-class population, increased awareness of health management, the
launch of a $145 million nationwide disease prevention program, and the
government's priority in developing the country's pharmaceutical industry.
25
Vaccines must be affordable however. China is still a developing country, with
limited government funds for an Expanded Program for Immunization (EPI) program.
The best growth potential will be to companies that can produce high quality
vaccines at affordable prices.
Customer Types
- --------------
Government
----------
Governments across the globe are pledging their support, financially and
organizationally to vaccine initiatives. Where rubella (measles) and smallpox
were the traditional child vaccinations, hepatitis and influenza are now being
added to increase the scope of preventative medicine. Government sponsored
programs tend to be aimed at "most at risk" groups and are often directed at
children more than the elderly.
International Nongovernmental Organizations
-------------------------------------------
Since 1991, international health authorities have urged all countries to add
hepatitis B vaccines into their national immunization programs. As of March
2000, 116 countries had included hepatitis B vaccine in their national programs,
including most countries in Eastern and South- East Asia, the Pacific Islands,
Australia, North and South America, Western Europe and the Middle East.
An organization committed to the vaccination of children against diseases is The
Global Alliance for Vaccines and Immunization (GAVI), which was created in 1999.
GAVI introduced a new approach to international health funding - the Global Fund
for Children's vaccines (GFCV). This fund helps 74 low-income countries
reinforce their national vaccine programs and introduce hepatitis B, yellow
fever and hemophilia influenza type B (HIB) vaccines into their national
immunization programs.
Sinovac is planning to develop vaccines that are on the nongovernmental
organizations and the WHO Expanded Program on Immunization (EPI) order lists in
order to capture the low-price, but big-demand vaccine market.
Private Citizens
----------------
Rising incomes have contributed to the increased demand for commercial vaccines.
Many of those in the higher income bracket choose to pay for higher quality
vaccines. Cost conscious physicians in private health centers supply this
growing market.
Marketing Strategy
- ------------------
First, Sinovac intends to target progressive geographic expansion with its
family of vaccines that target historically devastating viruses. The Company is
building and training a sales organization for the Chinese domestic market.
Concurrently with its domestic marketing plan, the Company is establishing a
marketing and sales presence in Southeast Asia and other developing countries
through local distributors. These distributors have over 10 years experience in
26
commercialization and registration of vaccines and other pharmaceuticals through
established governmental relationships and local sales networks.
The marketing strategy contains a contingency plan that goes into effect once
the Company creates a blockbuster vaccine for defeating emerging viruses such as
SARS or the avian flu. The Company believes a "first to market" advantage opens
doors to international markets. In such a scenario, Sinovac intends to enter the
international market with a worldwide network of professional sales teams and
sales networks, a reliable customer-credit management system, and an efficient
logistics system.
Domestic Market Strategy
------------------------
Sinovac's domestic marketing is greatly enhanced by Chinese government programs
for inactivated hepatitis A vaccines, an inactivated SARS vaccine, and a new
human influenza vaccine. As China's premier domestic developer and manufacturer
of these vaccines, Sinovac has an overwhelming advantage over its competitors.
The Company plans to continue pursuing a strategy of first launching its vaccine
products in market segments in China that present the highest concentrations of
people with higher earnings bases. Subsequently, it will expand its sales
program into less affluent urban areas and rural provinces. Accordingly, the
Company plans to enter these regional markets in descending order with Segment A
representing the most affluent, high density areas and Segment D representing
lesser populated areas with the lowest per capita average incomes. These market
demographics are outlined below:
Segment A: Beijing, Guangdong, Jiangsu, ZhejiangTianjin
Segment B: Liaoning, Hebei, Shandong, Fujian, Shanghai, Hainan, Shaanxi,
Chongqing, Guangxi
Segment C: Helongliang, Jilin/Shanxi, Sichuan, Yunnan, Anhui
Segment D: Henan, Hunan, Jiangxi, Guizhou/
International Market Strategy
-----------------------------
Sinovac's international market focus is on countries with significant vaccine
demand, but without the means to afford expensive Western products. The Company
has started with Southeast Asian countries through a joint venture
licensing/marketing agreement with a successful South Korean pharmaceutical
company. In early 2005, the Company adapted its method of target penetration
from utilizing an intermediary marketing company to a tailored direct approach.
As such, the Company terminated its contract with Innopath International and is
seeking well-established local companies within each targeted country.
Also in 2004, Sinovac entered a vaccine export agreement with MEHECO to develop
the Brazilian market. However, due do a Brazilian Government vaccine
distribution policy change, the Company terminated its contract with MEHECO.
27
The Company intends to accelerate international market growth by placing a
priority on sales agreements with companies that can take advantage of Sinovac's
premier research and development capabilities.
The Company has set a goal to sell its products (Healive(TM), Bilive(TM) and
Anflu(TM)) in the majority of developing Southeast Asian markets within the next
five years.
Seasonality of Sales
- --------------------
The Chinese traditional New Year is usually in January or February and, as a
result, demand is low during that period. Sales generally increase rapidly at
the end of March and then slow again in May and June.
One of the main end user groups for Sinovac vaccines are students. Sales are
relatively low in July and August when students are on break for summer
holidays. Sales increase dramatically in September when new students are
required to receive vaccination during school registration. Most schools
organize vaccination programs for their students.
Strong vaccine sales continue through October as Chinese companies usually start
planning their budgets for the coming year. The China CDC, which places
government orders for vaccines, also follows this schedule. In December, as
Chinese New Year approaches, the China CDC usually purchases an inventory of
vaccines for the coming year. As a result, there are usually many larger orders
at the end of each calendar year.
Other Developments
- ------------------
International Workshop on Development of SARS and New Human Influenza
---------------------------------------------------------------------------
Vaccines
- --------
In March 2004, the Ministry of Science and Technology of China and the World
Health Organization held a joint workshop in Beijing, China entitled
"International Workshop on Development of Vaccines for SARS and New Human
Influenza Vaccines." Over 60 experts (scientists, physicians and ethicists) from
China and around the world attended the workshop. The workshop included parallel
meetings and visits to several institutions, related to various aspects of
vaccine programs on SARS, Influenza, HIV/AIDS, Japanese Encephalitis and
Malaria.
Sinovac's President and CEO, Dr. Yin was China's representative for inactivated
SARS and human influenza vaccine development programs. Dr. Yin and Sinovac
deputy general manager, Mr. Jiansan Zhang, presented the Company's research and
development and reported on the protocol of the phase I clinical trial on the
inactivated SARS vaccine. Workshop participants reviewed data from animal trials
and discussed additional measures towards refining methodology and data
requirements prior to initiating Phase I trial in humans.
Immediately following the summit, Dr. Yin hosted a 12-member delegation from WHO
to tour the Company's facilities. Sinovac was the delegation's first stop during
its tour of Beijing and Shanghai corporations.
28
Former Malaysian Prime Minister Visited Sinovac
-----------------------------------------------
On April 21, 2004, former Malaysian Prime Minister Datuk Seri Mahathir Bin
Mohamad visited Sinovac with officials from the Chinese People's Institute of
Foreign Affairs. President and CEO, Dr. Weidong Yin gave a brief introduction
about the inactivated hepatitis A and SARS vaccine projects to the visitors. The
former prime minister expressed keen interest in the inactivated SARS vaccine
project by asking many questions about its research and development. This visit
supports Sinovac's growing network with world leaders and establishment of an
international presence in the biotechnology sector.
Competition
- -----------
With the advent of a market economy in China, the regulatory system began a
modernization program that will continue for the next several years.
Concurrently, the pharmaceuticals and healthcare industry are also
restructuring. These dynamic conditions present tremendous investment
opportunities for well-positioned visionary Chinese companies, as well as
multinational companies.
Sinovac is emerging as a leader in this new era, but operates in an increasingly
competitive environment. China's biotech industry consists of roughly 600
companies (not including extremely small companies), of which 200 produce
pharmaceuticals, 200 produce amino acids, and the rest are in traditional fields
like brewery, food and chemicals. Historically, imported medicines make up 40%
of the Chinese pharmaceutical market, while domestic producers (most of which
are state owned) have 60% of the market.
Most Chinese citizens have to pay for their own vaccines, even with the advent
of private medical and healthcare insurance programs in China. These insurance
programs do not cover payment for vaccines; requiring the patient to purchase
the vaccines. Sinovac believes this health conscious, yet price-sensitive
consumer market favors the Company's products over cheaper less safe domestic
vaccines and more expensive Western competitors.
Simply stated, the Company's competition in China is between old, inefficient
Chinese companies on one hand, and expensive, huge, state-of-the-art
international companies on the other. Sinovac believes it has strategic leverage
against these competitors by utilizing its innate advantages as a Chinese
company with strong connections to government agencies and incorporating
state-of-the-art technologies and business practices. Sinovac's unique strategic
advantages are its investment in world-class R&D facilities; it's experienced
visionary leadership; and its growing sales force.
There are many companies producing vaccines that compete with Sinovac's products
and we have the Company has identified the following companies in particular:
Hepatitis A vaccine:
- --------------------
Live Attenuated - Zhejiang PuKang, Changchun Changsheng, Changchun Institute of
Biological Products, Kunming Institute of Biological Products
29
Inactivated Domestic - Kunming Institute of Biological Products
Inactivated International - GlaxoSmithKline Inc., Merk
Hepatitis A and B vaccine:
- --------------------------
Domestic - no competitors identified
International - GlaxoSmithKline Inc.
Influenza vaccine:
- ------------------
Domestic - Zhejiang Tianyuan, Changchun Changsheng, Shanghai Institute of
Biological Products, Changchun Institute of Biological Products, Changzhou
Yanshen
International - GlaxoSmithKline Inc., Pasteur, Chiron
Chinese Competition
-------------------
Most Chinese pharmaceutical companies use outdated production facilities,
producing raw products with low-tech added value. Some old and state-owned
manufactures do not have enough capital for developing new products and
improving the facilities. Only a small fraction of annual sales, about 2%, are
re-invested into R&D of new drugs. Consequently, the majority of products
available in China are less safe and immunogenetic than western products.
An example of this are cheap live attenuated hepatitis A vaccines that compete
with Sinovac's Healive(TM). These cheap vaccines are so unstable they require
strict storage and delivery conditions, and still expire in six months. When the
ambient temperature is above 8 degrees Celsius (46.4 degrees Fahrenheit), the
hepatitis A vaccine may lose its efficacy, and becomes unsuitable for use. This
makes delivery to many undeveloped areas impracticable.
Sinovac enjoys a number of advantages over its domestic competitors. For
example, it is not required, as are most Chinese vaccine manufacturers, to
allocate up to 70% of their vaccine production capacity for federal government
immunology programs. The profit margins for these programs are usually quite
low. Another, more significant example, is the difficulty of domestic
competitors access to major financing for expansion purposes. This is one of the
greatest limitations Chinese vaccine manufacturers deal with, particularly when
these companies are marketing inferior biotechnologies.
The venture capital market in China is still in its infancy and accessing funds
is problematic. This forces Chinese vaccine manufacturers to look for funding
from outside China. Sinovac however has already made steps in overcoming
growth-funding challenges. A vital step occurred when Sinovac entered into a
Financial Advisory Agreement with Credit Suisse Advisory Partners AG, a
100%-owned subsidiary of Credit Suisse Group headquartered in Zurich,
Switzerland, whereby Credit Suisse Advisory Partners will act as the Company's
exclusive financial advisor. Credit Suisse Group is a leading global financial
services company.
30
International Competition
-------------------------
International competitors include large international pharmaceutical and
biotechnology companies with great resources. This competition tends to come
from well-established biopharmaceuticals with deep pockets and a proven track
record for successful product development and commercialization. However,
according to international research, these mega-biopharmaceutical companies
invest relatively little in R&D and manufacturing capacity for vaccines that
would benefit developing countries for five related reasons: competition with
more profitable vaccine ventures; the perception that demand for new products is
low; costs of production are relatively high; market pressures are intense and
rapidly changing; and products for the industrialized world are diverging from
those for poorer countries.
C. Organizational Structure
------------------------
Sinovac now owns 71.56% of Sinovac Biotech Co., Ltd., (Sinovac Beijing) (51% at
December 31, 2004) a company organized under the laws of the People's Republic
of China. The Company also owns 100% of Tangshan Yian Biological Engineering
Co., Ltd., a company also organized under the laws of the People's Republic of
China. Therefore, the Company has two subsidiaries - one that is wholly owned
and one that is majority owned.
Acquisition of Additional 20.56% of Sinovac Beijing
- ---------------------------------------------------
On November 30, 2004, Sinovac, entered into a share purchase agreement (the
"Share Purchase Agreement") with China Bioway Biotech Group Co., Ltd.
("Bioway"), Beijing Keding Co., Ltd. ("Keding") and Shenzhen Bio-Port Co., Ltd.
("Shenzhen") to purchase an aggregate 20.56% of Sinovac Beijing, its main
operating subsidiary.
In accordance with the Share Purchase Agreement, Sinovac paid $3,310,000 cash
for the additional 20.56% of Sinovac Beijing, to the following companies:
acquired 9.73% from Bioway US$1,570,000; acquired 7.92% from Shenzhen for
US$1,270,000; and acquired 2.91% from Keding for US$470,000. The transaction
closed on February 4, 2005.
D. Property, Plants and Equipment
------------------------------
Office Space
- ------------
Sinovac's corporate headquarters and primary research and development facilities
are located in the Beijing University Biological Industry Park in a 4,113 square
meter, state-of-the-art facility, of which more than 1,000 square meters is used
as an office building and more than 2,000 square meters is used for the
production plant for hepatitis A vaccine.
Plants
- ------
The Company's new influenza vaccine production line is situated next to its
existing Beijing headquarters, at a new manufacturing facility now being built.
31
This 2,600 square meter facility, built to Chinese Good Manufacturing Practice
(the "GMP") standards, is expected to have a production capacity of 2 million
doses of flu vaccine per year.
The Company's Tangshan Yian facility conducts research and pilot production for
other, in-development vaccines. This facility is 4,300 square meters, and
includes a world class Biosafety level III Laboratory ("BSL-3"), Cell Culturing
Workshop, Pilot Trial Production Workshop, Reagents Manufacture Workshop, and
Research Lab for R&D of the split flu vaccine (AnfluTM). The facility is located
in the New Hi-tech Development Zone of Tangshan City, 160 kilometers east of
Beijing. The plant is situated on 20,000 square meters of land and has reserved
an additional 10,000 square meters in anticipation of future expansion.
Tangshan Yian provides the Company with low-cost research and development and
manufacturing. The advantages of Tangshan Yian's state-of-the-art facilities
expanded manufacturing capabilities should enhance the competitive ability of
the Company regarding research and production.
Equipment
- ---------
Steel furring is used for the main portion of the Company's manufacturing
facility, and the architecture is concise. The manufacturing facility is
designed based on Chinese GMP requirements and is divided into clean and
non-clean zones. Sinovac's manufacturing facility grade classifications include:
grades A and B correspond with class 100, M3.5, ISO 5; grade C with class
10,000, M5.5, ISO 7 and grade D with class 100,000, M6.5, ISO 8'. Superior
facilities are selected for the establishment of the Company's manufacturing
facility. The Company's subsidiary facilities are mainly constructed in China.
Temperature control is designed to be automatic. The production control is a
centralized design. The Company's manufacturing facility includes necessary
features such as dressing rooms and air brakes. The design, preparation, fire
control, environment protection, labor protection, and energy saving of heating,
ventilation, and air conditioning are based on GMP standards and relative
domestic requirements.
ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS
- -----------------------------------------------------
A. The Company
-----------
Management has determined that, in 2003 and 2002, the Company should have
treated the acquisition of certain licenses as purchases of in-process research
and development. Management has also determined that in 2003, the Company
incorrectly capitalized certain research and development costs that should have
been expensed. Management has further determined that, in 2001, the Company
should have commenced amortization of its hepatitis A vaccine license at the
date of purchase, when previously amortization did not begin until July 2002.
Accordingly, the Company has restated its financial statements for the year
ended December 31, 2004. The following discussion relates to the restated
amounts.
The Company has made certain accounting estimates that have a material bearing
on the financial statements. The principal such estimates are:
32
Stock-based compensation
- ------------------------
Stock-based compensation is a very significant expense for the Company, but is
based on estimates that have a subjective element. The Company employs the
Black-Scholes option pricing model which in turn is based on (among other
things) assumptions regarding rates of return and stock volatility. To estimate
the risk-free rate of return, the Company uses the US Treasury bill rate for
instruments with a similar term to the life of the option being granted. Since
the Company has a relatively short trading history, it has looked at the
volatility of the stock of other publicly traded companies and used these as a
guide.
The Company has estimated the expected volatility of its stock at 74%. The
following table shows the effect of a change in the expected volatility of 10%:
Hypothetical As Reported Hypothetical
10% Decrease 10% Increase
in Expected in Volatility
Volatility
Expected volatility 66.6% 74.0% 81.4%
Stock-based compensation expense $ 4,091,418 $ 4,428,032 $ 4,705,447
Loss for the year $ (4,330,097) $ (4,666,711) $ (4,944,126)
Loss per share $ (0.13) $ (0.14) $ (0.15)
Given the nature of the estimated volatility of a stock, it is not practical to
provide a meaningful assessment of historical accuracy of the estimated
volatility used. It is very likely that the expected volatility will change in
future periods and the changes could be material.
Amortization of Intangible Assets
- ---------------------------------
The Company has amortized the value of intangible assets, being licenses and
permits, over an estimated 10-year useful life. The estimated life of
intangible assets is inevitably subjective, however at least once per year, the
Company reevaluates the market opportunities for its products and determines
whether the remaining useful life estimate is still reasonable.
The following table shows the effect of a change in the estimated useful life of
licenses and permits of 10%:
33
Hypothetical As Reported Hypothetical
10% Decrease 10% Increase
in Useful Life in Useful Life
Useful life 9 years 10 years 11 years
Amortization expense $ 215,918 $ 194,326 $ 176,660
Loss for the year $(4,688,303) $ (4,666,711) $ (4,649,045)
Loss per share $ (0.14) $ (0.14) $ (0.14)
Given the nature of estimating the useful life of long-term assets, it is not
yet possible to provide a meaningful assessment of historical accuracy of the
useful life estimates employed. It is very likely that the useful life of the
licenses and permits will be different from the estimate employed, and the
changes could be material. Changes in the estimated life of the licenses and
permits will not have a bearing on the total amount charged to operations
over the life of the assets, but could change the results of operations and
financial position in any given period.
Allocation of Intangible Assets
- -------------------------------
When the Company acquired its interest in Sinovac China, it had to allocate the
excess of its purchase price over net tangible assets to various classes of
intangible assets. The Company based its estimates on the projected cash flows
to be earned from each product.
Given the nature of estimating the relative value of long-term assets, it is not
possible to provide a meaningful assessment of historical accuracy of the
valuation allocation estimates employed. It is very likely that the actual
values of the licenses and permits will be different from the estimates
employed and the changes could be material. Changes in the relative value of
each of the licenses and permits will not have a bearing on the total amount
charged to operations over the life of the assets, but could change the results
of operations and financial position in any given period.
The following table summarizes the amortization expense for each component of
licenses and permits, allowing the reader to draw inferences regarding the
sensitivity of earnings to different allocation models.
Asset Purchase Price Amortization Expense
Allocation in the Year Ended
December 31, 2004
Inactive hepatitis A $ 1,941,879 $ 194,188
Recombinant hepatitis A&B 506,460 -
Influenza virus HA vaccine 381,058 -
------------- -----------
$ 2,829,397 $ 194,188
------------- -----------
The cost of the recombinant hepatitis A&B and influenza virus HA vaccines was
written off as in-process research and development expenses in the years of
acquisition.
34
Income Tax Valuation Allowance
- ------------------------------
The Company has recorded a $860,300 deferred income tax asset based on the
difference in timing of certain deductions for income tax and accounting
purposes. The ability of the Company to ultimately derive a benefit from the
deferred tax asset depends on the existence of sufficient taxable income of the
appropriate character within the carryforward period available under the tax
law. The Company has reviewed available information, both positive and negative,
and has concluded that realization is probable. If the Company's evaluation of
the circumstances is not correct, the Company will have to record a charge to
operations in respect of any over-accrual of the benefit.
Year ended December 31, 2004 compared with the year ended December 31, 2003
- ---------------------------------------------------------------------------
Results of Operation
--------------------
In the following discussion of the Company's operating results and financial
condition, all financial amounts have been rounded to the nearest thousand
dollars.
Sales
-----
Sinovac's sales reflect the value of vaccines sold less any returns and
discounts. Company sales in 2004 and 2003 were entirely comprised of
Healive(TM). The Company generated revenue of $6,454,000 and $2,839,000 in sales
of Healive(TM) for the years ended December 31, 2004 and December 31, 2003,
respectively. Revenue growth in 2004 was due to an expanded sales network and
improved corporate profile. The number of doses sold increased from 433,000 in
2003 to 1,002,106 in 2004.
Gross Profit
------------
The Company's gross profit reflects the contribution from sales after direct
costs, such as production labor and production facilities costs. Gross profit
margin was 70.0% and 61.8% for the years ended December 31, 2004 and December
31, 2003, respectively. These gross profit amounts are exclusive of depreciation
and amortization amounts of $202,000 for 2004 and $202,000 for 2003. If these
depreciation and amortization amounts had been included in the determination of
gross profit, the gross profit margin would have been 66.8% and 54.6% for the
years ended December 31, 2004 and December 31, 2003, respectively. The increase
in gross profit margin was due to economies of scale; increased production of
Healive(TM) decreased the average cost per unit.
Government Research Grant
-------------------------
The Chinese government provided grants to the Company which are brought into
income in the period in which the research and development expenses are recorded
and the conditions opposed by the government authorities are fulfilled. In the
year ended December 31, 2004, the Company received a Chinese government SARS and
Avian flu research grants of $1,640,000 and $48,000, respectively. In the year
ended December 31, 2004, the Company recognized government research grant income
of $719,000, compared to $664,000 in the previous year.
35
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses ("SG&A expenses") include
non-production related wages and salaries, consulting fees, freight, travel,
occupancy, advertising, public company costs and professional fees. SG&A
expenses were $4,415,000 and $1,629,000 for the years ended December 31, 2004
and December 31, 2003, respectively. Company sales expenses increased in 2004
due to exploration of new markets and efforts to improve sales networks and
sales strategy. Administrative expenses of $140,966 relating to Tangshan Yian
were included in the consolidated financial statements as the result of the
acquisition of that company. Sinovac expects to see additional increases in SG&A
to support continuing market penetration and brand awareness.
Stock-Based Compensation
------------------------
The Company incurred stock-based compensation of $4,428,000 and $120,000 for the
years ended December 31, 2004 and December 31, 2003, respectively. In the
current fiscal year, 2 million stock options were granted to the directors,
employees and consultants at an exercise price of $4.55 per share. The stock
options granted in 2004 have an estimated fair value of $2.85 per share and have
different vesting schedules and, as a result, the Company has unrecognized
compensation costs of about $3.4 million. This unearned component will be
recognized over the remaining vesting period. This item does not reduce the cash
balance of the Company but reflects the fair value of the above-mentioned stock
options.
Research and Development Expenses
---------------------------------
Research and development expenses reflect amounts spent on the split flu and
SARS vaccines. Research and development expenses totaling $1,005,000 and
$927,000 for the years ended December 31, 2004 and December 31, 2003,
respectively, represent activities on the split flu (AnfluTM) vaccine.
The Company commenced the study and research of a SARS vaccine after the SARS
outbreak of 2003. In 2004, Sinovac became the first company in the world
approved to commence a human clinical trial of a SARS vaccine. On May 22, 2004,
the commencement of the phase I clinical trial was announced when the first
clinical trial volunteer received his first inoculation. A research grant from
the Ministry of Science and Technology and other central government agencies on
behalf of the Chinese government as a whole, has provided sufficient funding for
the phase I clinical trial and demonstrates the support for the Company's SARS
vaccine research.
Provision for Income Taxes
--------------------------
The Company generated an income tax recovery of $767,000 in 2004. It accrued a
$93,000 liability for income taxes on profits in Sinovac Beijing and recorded a
$860,000 deferred tax recovery that offset this expense. The Company's taxable
income in China is subject to Chinese income tax regulations for its reported
statutory income declaration at a tax rate in accordance with the relevant
income tax laws and regulations applicable to Sino-foreign joint ventures.
Sinovac Beijing is subject to a 7.5% corporation income tax rate until 2006 and
15% tax rate after that. Tangshan Yian is eligible for a full exemption from
36
income taxes for two years and a 50% reduction in income taxes for the three
years following its first profit-making year. Currently, Tangshan Yian is in a
loss position.
Interest and Financing Expenses
-------------------------------
Interest and financing expenses were $369,000 and $269,000 for the years ended
December 31, 2004 and December 31, 2003, respectively. The 2004 increase
reflected higher levels of debt, largely due to the purchase of Tangshan Yian.
Net Loss
--------
The Company's net loss was $4,667,000 and $872,000 for the years ended December
31, 2004 and December 31, 2003, respectively. The increase in net loss in the
current year over the previous period was primarily due to increased stock-based
compensation since the increase in SG&A was largely funded by an increased
contribution from product sales.
Liquidity and Capital Resources
-------------------------------
Sinovac's capital requirements have generally been funded by cash flow from
sales revenue and issuances of common stock. Cash and cash equivalents totaled
$2,605,000 at December 31, 2004, which is not sufficient to fund the Company's
business and expansion plans over the next 12 months. Sinovac's plans for 2005
include:
o Spending $4 million constructing an influenza vaccine production line;
o Acquiring an additional 20.56% of Sinovac Beijing, giving the Company
a 71.56% interest in that company, for cash consideration of $3.31
million;
o Product promotion campaigns.
Sinovac plans to raise necessary capital from the sale of equity securities.
There can be no assurance that any that such financing will be available, if at
all, on terms acceptable to the Company. If additional funds are raised by the
issuance of equity securities, stockholders may experience dilution of their
ownership interest.
The Company generated net cash of $1,185,000 and $1,107,000 for the years ended
December 31, 2004 and December 31, 2003, respectively. Net loss for the period
of $4,667,000 incorporated certain non-cash charges including stock-based
compensation ($4,428,000), a provision for doubtful debts ($374,000) and
depreciation ($784,000). Changes in operating working capital consumed
$1,626,000 of cash, resulting in net cash used in operations of $1,130,000.
Accounts receivable increased as a result of increased sales. The proportionate
decrease in cash used, compared to earlier years, was primarily attributable to
lower working capital requirements in the third year.
The Company's financing activities generated $6,545,000, which included
$5,288,000 of newly raised share capital and $1,281,000 from government funding
(net of qualified research and development expenditures). In the year ended
December 31, 2004, the Company paid $399,000 to reduce amounts owing to a
non-controlling shareholder of Sinovac Beijing. Other financing activities
included loan proceeds of $3,268,000, loan payments of $3,099,000 and proceeds
from shares subscribed of $207,000.
37
In the year ended December 31, 2004 the Company used $4,227,000 in investing
activities, which included $1,650,000 to acquire property, plant and equipment
offset by cash of $42,000 acquired with the purchase of Tangshan Yian. During
the current period, Sinovac negotiated agreements that govern the purchase of a
further 20.56% interest in Sinovac Beijing. In connection with these
negotiations, the Company advanced $2,227,000 to two non-controlling
shareholders of Sinovac Beijing as deposits on account of the Share Purchase
Agreement. The deposits bear interest at 5.31%, and the principal and interest
will be repaid to us the Company when we it makes full payment of the share
purchase consideration. The Share Purchase Agreement for the acquisition of the
additional 20.56% of Sinovac Beijing closed on January 31, 2005.
Trend Information
-----------------
In 2005 the Company expects to increase production and sales of HealiveTM, and
initiate production and sales of two new products, BiliveTM (a combined
inactivated Hepatitis A and B vaccine) and AnfluTM (an influenza flu vaccine).
Sales of both products are expected to follow HealiveTM's sales pattern,
beginning slowly the first year and growing dramatically (100% or more) the
following years.
BiliveTM will be the first new product to launch in 2005 and may take some of
HealiveTM's market. As a result, the sales growth rate of HealiveTM may
stabilize.
Ideally, AnfluTM marketing will begin in late summer of 2005, with sales
beginning in the fall. This market timing will enable the Company to take
advantage of their HealiveTM and BiliveTM promotions, thereby leveraging
Sinovac's growing name recognition and confidence in domestic market.
The Company is not certain however that the SFDA will approve the vaccine
production license for AnfluTM in time to produce sufficient quantities of
vaccines for sale in the 2005 - 2006 flu season. If approval is not received
this year, the Company is assured it will happen in time to produce vaccines for
the flu season in 2006 - 2007.
Production costs for HealiveTM should continue to decrease, however, first year
production costs for BiliveTM and AnfluTM will offset HealiveTM's lower costs.
Combining the above two driving factors, the Company expects the gross margin to
remain at the same level in 2005.
The last known uncertain factor that could have a material effect on the Company
is a change in government policy on vaccine distribution. If the regulatory body
changes China's vaccine distribution channel, which is currently through the
China CDC system, the Company will need to make changes in its general marketing
and sales strategy for the domestic market.
38
Year ended December 31, 2003 compared with the year ended December 31, 2002
- ---------------------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
Our primary liquidity requirements are for working capital, capital
expenditures, research and development. Our primary sources of liquidity have
been cash provided by operations, borrowings and stock plan. The availability
and attractiveness of any outside source of financing will depend on a number of
factors, some of which relate to our financial condition and performance, and
some of which are beyond our control, such as prevailing interest rates and
general economic conditions. There can be no assurance that additional financing
will be available, of if available, that it will be on terms we find acceptable.
Cash and cash equivalents increased by $1,107,453 to $1,420,047 in 2003, from
$312,594 in 2002.
Net cash provided by financing activities increased by $1,443,134 to $2,895,793
in 2003, from $1,452,659 in 2002. This increase is primarily related to the
subscription received of $1,031,959.
In 2003, cash used by investing activities decreased by $1,348,103 to $729,248.
This cash was used to purchase plant equipment, totalling $348,190, and payment
for Licenses and permits, $381,058.
Cash used in operating activities was substantially unchanged, increasing by
$5,913 to $1,058,854 in 2003, from $1,052,941 in 2002. While the loss from
operations decreased, cash applied to working capital balances increased.
Results of Operation
--------------------
Vaccine manufacturing is a special industry, which requires high open-end
investment in order to establish the proper production line to meet high
requirements. From building the manufacturing workshop to selling the product
into the market, Good Manufacturing Practice certification is required, as well
as application for New Drug Approval for commercialization. Therefore, it is
expected that there will be a significant period of time from the beginning of
investment until we realize return. For Sinovac, the construction of the
manufacturing workshop was completed in 2002. The hepatitis A vaccine was
initially launched into the market in Q4 of 2002. Profits for the sales of this
vaccine were not realized by the end of 2003. However, we expect to gain profit
by the end of 2004, since market share and sales numbers for HealiveTM continue
to increase. Concurrently, we are going to launch the combined hepatitis A&B
vaccine in the market. Part of the production of combined vaccine is going to be
completed in our manufacturing workshop for hepatitis A vaccine, which helps to
lower production costs.
In 2003, total sales were $2,838,933, a fourfold increase from $649,319 in 2002,
and net cash inflow in 2003 was $1,107,453.
Cost of sales was $1,085,881 in 2003, and gross margin was 61.75%, compared to
the $251,711, 61.23% in 2002 respectively. These cost of sales amounts are
exclusive of depreciation and amortization amounts of $201,802 for 2003 and
39
$201,648 for 2002. If these depreciation and amortization amounts had been
included in the determination of gross profit, the gross profit margin would
have been 54.6% and 45.1% for the years ended December 31, 2003 and December 31,
2002, respectively.
The Company recognized $664,251 in government research grants in 2003 for
research on a SARS vaccine.
Expenditures on sales and general administration were $1,629,118 compared to
$792,078 in 2002. Expenditures were $354,173 for salaries and benefits compared
to $218,613 in 2002, $357,503 on marketing compared to $181,935 in 2002,
$399,317 on office expenses compared to $226,961 in 2002, $211,819 on travel
compared to $138,147 in 2002, $40,765 on rentals compared to $24,005 in 2002 and
$265,538 on professional and consulting fees compared to nil in 2002.
Research and Development, Patents and Licenses, etc.
----------------------------------------------------
Research and Development expenditures totalled $926,746 in 2003, compared to
$24,535 in 2002. The increase in spending from last year primarily reflects
work on the SARS vaccine, although other factors include split flu clinical
development activity and work to obtain obtained new drug license for the
hepatitis A&B vaccine.
The Company's most important research and development achievement is the
inactivate SARS vaccine. The SARS research and development expenditures was
supported by a grant from the China government for $664,251 (RMB 5,500,000).
Trend Information
-----------------
The Company's corporate strategy is aggressively directed towards increasing
sales during 2004. There are, however, some external factors that can materially
affect the final sales figures for 2004. These external factors include the
government approval process, possible reoccurrence of diseases such as SARS and
new competition.
Understandably, government delays in the sales approval for the Company's
combined hepatitis A&B vaccine will correspondingly reduce sales figures for the
2004 period. In addition, the reoccurrence of SARS or similar viruses cannot be
guaranteed and as such neither can sales of any respondent vaccine. Finally, the
market sector available to the Company may be reduced if a new competitor
obtains approval to sell an equivalent product into the Company's market and the
Company does not increase promotional investment to compensate.
40
F. Tabular Disclosure of Contractual Obligations
---------------------------------------------
Payments due by period ($US)
Contractual Obligations ----------------------------
Less than 1 - 3 3 - 5 more than 5
Total 1 year years years years
Short Term Debt
Obligations:
- ------------
- - Bank Loan for 5,000,000 $603,865 $603,685 $ - $ - $ -
RMB at 5.58% per annum
repayable on Oct. 28, 2005
- - Bank Loan for 5,000,000 $603,865 $603,865 - - -
RMB at 5.49% per annum
repayable on Dec. 19, 2005
- - Loan from China High
Tech Investment Co., Ltd.
for 9,000,000 RMB at 5%
per annum (5.4 million
RMB of the principal and
interest due on Sept. 30,
2005 and remaining balance
plus interest due on Dec.
31, 2005 1,250,000 1,250,000 - - -
- - Employees loan of
1,222,000 RMB at 15% per
annum due on demand 147,554 - 147,554 - -
Long Term Debt
- --------------
Obligations:
- ------------
- - Mortgage of 1,676,167
RMB at 5.04% per annum
having a monthly payment
of $2,284 and due on May
25, 2014. 202,436 21,498 42,995 42,995 94,948
Purchase Committments
- ---------------------
Rent of influenza
manufacturing workshop
with quarterly payment of
RMB 236,520 and due on
Aug. 12, 2024 2,256,652 114,261 228,522 228,522 1,685,348
- - Rent of R&D center from
China Bioway with
quarterly payment of RMB
113,150 and due on Aug.
12, 2024 1,079,571 54,662 109,324 109,324 806,262
---------- ---------- -------- -------- ----------
Total: $6,143,943 $2,648,151 $528,395 $380,841 $2,586,558
41
ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
- ---------------------------------------------------
A. Directors and Senior Management
-------------------------------
The names, municipality of residence and principal occupations in which each of
the Directors, Executive Officers and other members of management of the Company
have been engaged during the immediately preceding five years are as follows:
Name, Municipality Number of Shares of
of Residence and Principal Occupation Director/ the Company
Positions, if any, or Employment Officer of the Beneficially Owned,
held with the during the Past Five Company Controlled or
Company Years Since Directed(1)
------- ----- ----- -----------
Weidong Yin Businessman President, CEO, 6,544,830
Beijing, P.R.C. Secretary and a
President, CEO, Secretary Director since
and a Director of the Company September 2003
Heping Wang Businessman Director since 3,500,000
Beijing, P.R.C. September 2003
Director of the Company
Lily Wang Retired CFO and a 9,549,821
Beijing, P.R.C. Businesswoman Director since
CFO and a Director of the September 2003
Company
Dr. Kim Kiat Ong Businessman Director since Nil
Singapore November 2003
Director of the Company
42
Simon Anderson Businessman Director since Nil
Vancouver, B.C., July 2004
Canada
Director of the Company
Hao You Businessman Director since 10,000
Atlanta, Georgia, July 2004
U.S.A.
Director of the Company
Zou Bin Businesswoman Treasurer since Nil
Vancouver, B.C. Dec. 2004
Canada
Treasurer of the Company
Notes:
- ------
(1) These figures are as of April 30, 2005.
The following are brief profiles of the directors and executive officers of the
Company:
> Mr. Weidong Yin (age 40) has been the President, CEO, Secretary and a
Director of the Company since September 24, 2003. Mr. Yin is also the General
Manager of the Company's subsidiary, Sinovac Biotech Co., Ltd. Mr. Weidong Yin,
has been dedicated to hepatitis research for over 20 years. He is credited with
developing the intellectual property that led to the development of the
Company's hepatitis A vaccine. In addition, Mr. Yin has been appointed to be the
principal investigator by the Chinese Ministry of Science and Technology for
many key governmental R&D programs such as "Inactivated Hepatitis A vaccine
R&D", "Inactivated SARS vaccine R&D" and "New Human Influenza Vaccine (H5N1)
R&D". He obtained his Masters degree in Business Administration from the
Singapore State University.
> Mr. Heping Wang (age 53) has been a Director of the Company since September
24, 2003. Mr. Wang graduated from Beijing University of Apparatus Technology. He
has been working in real estate industry for over ten years. Mr. Wang developed
the Beijing Fuhua Mansion, which is the first European style architecture in
Beijing with over 200,000 square meters. Recently, Mr. Wang has started to
invest in the biotech industry and the information technology industry.
> Ms. Lily Wang (age 46) has been the CFO and a Director of the Company since
September 24, 2003. Ms. Wang graduated from Chamnide University of Honolulu in
43
1992 with a Masters degree in Business Administration. Ms. Wang has been working
in accounting and finance area for over 10 years since she graduated. She was an
accounting manager from 1992 - 1995 with AJAX United, a US company and a
Vice-President and Secretary for over nine years with Xinyu Enterprise
Development Inc. Ms. Wang is also a general partner of Tiancheng International
Investment Company.
> Dr. Kim Kiat Ong (age 52) has been a Director of the Company since November
12, 2003. Dr. Ong has been in the medical field for over 30 years and has
specialized as a Cardiothoracic and Vascular Surgeon for 18 years. He has been a
member of several national committees and is currently a Member of the Advisory
Committee, for the Singapore Ministry of Health (2003-2005). As a seasoned
lecturer, teacher and writer in the medical profession, Dr. Ong offers a high
level of quality experience to the management team at Sinovac.
> Mr. Simon Anderson (age 44) has been a Director of the Company since July
23, 2004. Mr. Anderson has been a partner and Vice President of MCSI Consulting
Services Inc. from 1996 to present. Mr. Anderson is a Chartered Accountant and
from 1994 to 1996 was a partner with BDO Dunwoody, an international accounting
and consulting firm, where he specialized in mergers, acquisitions and
valuations. Mr. Anderson was admitted as a member of the Institute of Chartered
Accountants in British Columbia in 1986. In addition, Mr. Anderson is a director
and/or Chief Financial Officer of four other public companies.
> Mr. Hao You (age 45) has been a Director of the Company since July 23,
2004. Mr. You is the Vice President of SIMCOM international Holdings, Inc.
("SIMCOM"). He has extensive knowledge of and is responsible for SIMCOM's
marketing and sales efforts in the Asia Pacific region, which includes
establishing and maintaining successful business relations with relevant trade
organizations, government agencies, technical societies and various other
organizations.
> Ms. Zou Bin (age 35) has been the Treasurer of the Company since December
31, 2004. Ms. Bin has also been the accounting manager of the Company's
subsidiary, Sinovac Biotech Co., Ltd. from September 2003 to present. As the
accounting manager, Ms. Bin oversees the accounting department of seven staff
members, conducts in-depth cost analysis, develops master and operational
budgets and prepares financial statements for reporting and tax purposes. From
June 2001 to August 2003, Ms. Bin worked as an accountant for Huading Medical
Company in Beijing, China. Ms. Bin obtained her B.A. (Education) from Beijing
Normal University, Beijing, China in 1992.
Aggregate Ownership of Securities
- ---------------------------------
There are presently an aggregate of 19,604,651 shares of the Company's common
stock owned by all of the directors, officers and senior management of the
Company representing 52.18% of the total issued and outstanding shares of the
Company's common stock.
44
Other Reporting Issuers
- -----------------------
The following Directors, Officers, promoters or other members of management of
the Company have held a position as a director, officer, promoter or other
member of management of other reporting issuers within five years prior to the
date of this Annual Report:
Member Position with Other Reporting Issuer
- ------ ------------------------------------
Weidong Yin N/A
Heping Wang N/A
Lily Wang N/A
Dr. Kim Kiat Ong N/A
Simon Anderson Director of Ikona Gear International, Inc. (OTCBB)
from November 2003 to present; CFO of Minco Mining &
Metals Corporation (TSX) from February 2005 to
present; CFO of Doublestar Resources Ltd. (TSX-V)
from April 2005 to present; CFO of Buffalo Gold Ltd.
(NEX) from May 2004 to present; CFO of SHEP
Technologies Inc. (OTCBB) from February 2004 to
November 2004; Director from August 1999 to June
2004 and CFO from August 1999 to March 2004 of XML
Global Technologies, Inc.
Hao You N/A
Zou Bin N/A
Individual Bankruptcies
- -----------------------
None of the Directors, Officers, promoters or members of management of the
Company have, within the five years prior to the date of this Annual Report,
been declared bankrupt or made a voluntary assignment in bankruptcy, made a
proposal under any legislation relating to bankruptcy or insolvency, or been
subject to or instituted any proceedings, arrangement or compromise with
creditors, or had a receiver, receiver manager or trustee appointed to hold the
assets of that individual.
Conflicts of Interest
- ---------------------
Some of the Directors and Officers of the Company also serve as directors and/or
officers of other companies and may be presented from time to time with
situations or opportunities which give rise to apparent conflicts of interest
which cannot be resolved by arm's length negotiations but only through exercise
by the Directors and Officers of such judgement as is consistent with their
fiduciary duties to the Company which arise under Antigua and Barbuda corporate
law, especially insofar as taking advantage, directly or indirectly, of
information or opportunities acquired in their capacities as Directors or
Officers of the Company. All conflicts of interest will be resolved in
accordance with the appropriate business corporation statute. Any transactions
with Directors and Officers will be on terms consistent with industry standards
and sound business practices in accordance with the fiduciary duties of those
45
persons to the Company and, depending upon the magnitude of the transactions and
the absence of any disinterested board members, may be submitted to the
shareholders for their approval.
Other Information
- -----------------
There are no family relationships between any of the Directors or Officers of
the Company except for Ms. Lily Wang and Mr. Heping Wang, who are brother and
sister. The approximate percentage of business time that each Director and
Officer will devote to the Company's business is as follows:
Name Percentage of Time
---- ------------------
Weidong Yin 100%
Heping Wang 30%
Lily Wang 50%
Kim Kiat Ong 10%
Simon Anderson 5%
Hao You 5%
Zou Bin 30%
B. Compensation
------------
The Company's Executive Compensation
- ------------------------------------
The Company's fiscal year end is the 31st day of December.
The Company has created four Executive Offices, namely that of President,
Secretary, CEO and CFO. In this regard the Company's named Executive Officers
(collectively, the "Named Executive Officers") are as follows:
Weidong Yin - Mr. Yin was appointed the President, CEO and Secretary of the
- -----------
Company on September 24, 2003 and served as a Director since the same date.
Lily Wang - Ms. Wang was appointed the CFO of the Company on September 24, 2003.
- ---------
Zou Bin - Ms. Zou Bin was appointed the Treasurer of the Company on December 31,
- -------
2004.
For the purpose of this Annual Report, except as otherwise expressly provided or
unless the context otherwise requires, the following words and phrases shall
have the following meanings:
"Equity security" means securities of a company that carry a residual right
to participate in earnings of that company and, upon liquidation or winding
up of that company, its assets;
"Option" means all options, share purchase warrants and rights granted by a
company or any of its subsidiaries (if any) as compensation for services
46
rendered or otherwise in connection with office or employment;
"LTIP" means a long-term incentive plan, which is any plan providing
compensation intended to serve as incentive for performance to occur over a
period longer than one financial year, whether the performance is measured
by reference to financial performance of the company or an affiliate of the
company, the price for the company's securities, or any other measure, but
does not include Option or SAR plans or plans for compensation through
restricted shares or restricted share units; and
"SAR" means stock appreciation right, which is a right granted by a company
or any of its subsidiaries (if any) as condensation for services rendered
or otherwise in connection with office or employment to receive a payment
of cash or an issue or transfer of securities based wholly or in part on
changes in the trading price of publicly traded securities.
The following table details the compensation paid to the Company's Named
Executive Officers during the fiscal year ended December 31, 2004:
Summary Compensation Table
--------------------------
Annual Compensation Long-Term Compensation
------------------- ----------------------
All other Securities
and annual under Restricted
Fiscal Compensation Options/ Shares or
Name and Principal Year and LTIP SARS Restricted
Position(1) End Salary Bonus Payouts Granted Share Units
----------- --- ------ ----- ------- ------- -----------
($) ($) ($) (#) (#)
Weidong Yin (2) 2004 $40,396 48,780 Nil 500,000 Nil
President, CEO, Secretary 2003 $21,420 Nil Nil 575,000 Nil
and a Director
Lily Wang (3) 2004 $72,000 Nil Nil Nil Nil
CFO and a Director 2003 $48,265 Nil Nil 200,000 Nil
Zou Bin (4) 2004 $36,000 Nil Nil Nil Nil
Treasurer
<FN>
Notes:
(1) Refer to the disclosure found above the Summary Compensation Table
hereinabove for a detailed description of the Company's Named Executive
Officers.
(2) Mr. Weidong Yin was appointed as the President, CEO and Secretary on
September 24, 2003.
(3) Ms. Lily Wang was appointed as the CFO on September 24, 2003.
(4) Ms. Zou Bin was appointed as Treasurer on December 31, 2004.
</FN>
47
The Company anticipates that compensation will be provided by the Company during
the Company's next financial year to certain of the Named Executive Officers of
the Company and in conjunction with certain management and administrative
services to be provided to the Company by such Named Executive Officers.
Long-term Incentive Plans - Awards in most recently completed Financial Year
- ----------------------------------------------------------------------------
During its most recently completed financial year, and for the two previously
completed financial years, the Company has not awarded or instituted any LTIPs
in favour of its Named Executive Officers.
Options/SAR Grants during the most recently completed Financial Year
- --------------------------------------------------------------------
As of December 31, 2004, the Company had granted the following options to
purchase common stock of the Company as follows:
Name of Optionee Position Number Exercise Date Expiration
- ---------------- -------- Of Price Granted Date
Optioned ----- ------- ----
Shares
------
Jianguo Wei Employee 20,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Yi Bao Employee 20,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Xuguang Han Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Xudong Lu Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Shuguang Huang Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Zijing Zhang Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Qian Zhang Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Zhibin Gao Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Chunyan Hu Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Fanzhuo Kong Employee 10,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Heqing Gao Employee 10,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Xiulan Zheng Employee 10,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Chen Wei Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Huiwen Wang Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Zhengyou Lu Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Yan Liu Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Lili Song Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Ran Wu Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Yi Wu Employee 500 $1.31 Nov. 13, 2003 Nov. 13, 2008
Tingting Zhang Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Yulong Qu Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Linging Xu Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Li Xu Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Hongmei Sun Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Yanmei Yin Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
48
Lin Wang Employee 5,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Weidong Yin Director 300,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Lily Wang Director 200,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Heping Wang Director 200,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
K.K. Ong Director 200,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Aihua Pan Employee 300,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Jiansan Zhang Employee 90,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Nan Wang Employee 80,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Yingqun Wang Employee 70,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Xuejie Gong Employee 80,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Changjun Fu Employee 80,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Jingling Qin Employee 60,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Jiangting Chen Employee 60,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Jingning Wang Employee 60,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Xiaomei Zhang Employee 60,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Wei Zhao Employee 60,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Zhenshan Zhang Employee 60,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Liangxiang Hu Employee 40,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Jinfeng Huang Employee 40,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Zhiguo Niu Employee 40,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Xuebin Li Employee 40,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Ming Xia Employee 40,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Yuxuan Liu Employee 30,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Yingjun Wei Employee 30,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Lan Wei Employee 30,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Qiang Gao Employee 30,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Yanru Pei Employee 20,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Baoxiang Gong Employee 30,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Yanwei Zhao Employee 20,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Xu Wang Employee 20,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Ziqiang Zhang Employee 20,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Zhongshan Han Employee 20,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Jian Li Employee 20,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Jing Li Employee 20,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Yufen Liu Employee 20,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Jinshui Yin Employee 30,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Guoxing Liang Employee 30,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Xiaojun Zhou Employee 30,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Chuan Qing Employee 20,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Xiaopin Dong Employee 10,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Weidong Yin Director 275,000 $1.31 Nov. 13, 2003 Nov. 13, 2008
Weidong Yin Director 500,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Xianping Wang Employee 400,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
49
Heping Wang Director 400,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Sinoglobe Worldwide Consultant 100,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Michael Tan Consultant 100,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Technique Capital Consultant 100,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Viking Investment Consultant 100,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Jiansan Zhang Employee 13,500 $4.55 Apr. 14, 2004 Apr. 14, 2009
Nan Wang Employee 12,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Yingqun Wang Employee 12,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Xuejie Gong Employee 12,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Changjun Fu Employee 12,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Jingling Qin Employee 9,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Jianting Chen Employee 9,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Jingning Wang Employee 9,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Xiaomei Zhang Employee 9,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Wei Zhao Employee 9,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Zhenshan Zhang Employee 9,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Liangxiang Hu Employee 6,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Jinfeng Huang Employee 6,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Zhiguo Niu Employee 6,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Xuebin Li Employee 6,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Ming Xia Employee 6,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Yuxuan Liu Employee 4,500 $4.55 Apr. 14, 2004 Apr. 14, 2009
Yingjun Wei Employee 4,500 $4.55 Apr. 14, 2004 Apr. 14, 2009
Lan Wei Employee 4,500 $4.55 Apr. 14, 2004 Apr. 14, 2009
Qiang Gao Employee 4,500 $4.55 Apr. 14, 2004 Apr. 14, 2009
Yanwei Zhao Employee 4,500 $4.55 Apr. 14, 2004 Apr. 14, 2009
Jianguo Wei Employee 3,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Yi Bao Employee 3,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Shujuan Zhang Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Changjiu Zhang Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Hanbo Chen Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Zheng Chen Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Lin Gao Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Xiangjun Li Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Maolin Peng Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Xiaobing Wang Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Laichun Zhang Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Li Sun Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Yujing Zhu Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Wei Hu Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Guang Yang Employee 10,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Hong Gao Employee 10,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Ye Ning Employee 10,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
50
Xiaoping Dong Employee 5,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Wei Xu Employee 3,500 $4.55 Apr. 14, 2004 Apr. 14, 2009
Jing Li Employee 4,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Xiaojuan Lian Employee 4,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Luqiu Li Employee 4,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Xuyang Feng Employee 3,500 $4.55 Apr. 14, 2004 Apr. 14, 2009
Peng Wang Employee 4,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Shaoqian Liu Employee 4,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Jia Luo Employee 4,000 $4.55 Apr. 14, 2004 Apr. 14, 2009
Guang Yang Employee 4,500 $3.36 June 9, 2004 June 9, 2009
A total of 5,000,000 shares are issuable pursuant to stock options.
Defined Benefit Plans
- ---------------------
The Company does not have, and at no time during its most recently completed
financial year had, any defined benefit or actuarial plans in respect of which
any of its Named Executive Officers were eligible to participate.
Compensation of the Company's Directors
- ---------------------------------------
For the Company's most recently completed fiscal year:
(a) no compensation of any kind was accrued, owing or paid to any of the
Company's current Directors for acting in their capacity as such;
(b) no arrangements of any kind existed with respect to the payment of
compensation of any kind to any of the Company's current Directors for
acting in their capacity as such;
(c) no compensation of any kind was accrued, owing or paid to any of the
Company's current Directors for services rendered to the Company as
consultants or experts;
(d) no arrangements of any kind existed with respect to the payment of
compensation of any kind to any of the Company's current Directors for
services rendered, or proposed to be rendered, to the Company as
consultants or experts;
(e) no SARs or LTIPs were outstanding or in effect in favour of any of the
Company's Directors; and
(f) there were Options which were outstanding and in favour of certain
Directors of the Company who are not also Named Executive Officers of
the Company as set out in the options table above.
51
No directors have received any compensation other than option grants and
travelling expenses.
C. Board Practices
---------------
The Board of Directors meets quarterly to set policy and review the progress as
well as review and approve budgets and expenditures.
The Directors of the Company are elected by the shareholders at each annual
general meeting of the Company, or, in the event of a vacancy, they are
appointed by the Board of Directors then in office, to serve until the next
annual general meeting of the Company or until their successors are elected and
ratified.
The Company's executive officers are appointed by the Board of Directors and
serve at the discretion of the Board of Directors.
D. Employees
---------
The Company has 169 full time employees as at December 31, 2004. The Company has
incurred employee compensation expenses of $788,000 (salaries, wages and
benefits but excluding stock-based compensation) in the year ended December 31,
2004.
In addition to these employees, the Company also retains the services of certain
consultants on an "as needed" basis.
E. Share Ownership
---------------
Directors and Officers
- ----------------------
The share ownership in the Company held directly or indirectly by the Directors
and Executive Officers of the Company are as indicated in the table below:
Number of
Name Office Shares (1)
---- ------ ------
Weidong Yin President, CEO, Secretary and a 6,544,830
Director
Lily Wang CFO and a Director 9,549,821
Heping Wang Director 3,500,000
Dr. Kim Kiat Ong Director Nil
52
Simon Anderson Director Nil
Hao You Director 10,000
Zou Bin Treasurer Nil
Note:
(1) These figures are as of April 30, 2005.
As a group, the directors and Executive Officers of the Company hold 19,604,654
shares of common stock, which is 52.18% of the total amount of issued and
outstanding such shares (see the section entitled "Options" in this memorandum
for detailed information regarding any and all Options held by the directors and
Named Executive Officers.)
Public and Insider Ownership
- ----------------------------
The directors, officers and insiders of the Company hold an aggregate of
19,604,654 shares of common stock of the Company on a non-fully diluted basis,
which is 52.18% of the then issued and outstanding such shares, as opposed to
the public owning an aggregate of 17,968,557 such shares, or 47.82% of the
issued and outstanding shares of the Company's capital stock, assuming that no
warrants to acquire common shares of the Company are exercised.
ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
- ----------------------------------------------------------
A. Major Shareholders
------------------
To the knowledge of management of the Company, as at April 30, 2005 the
following beneficially own directly or indirectly, or exercise control or
direction, over common shares carrying 5% or more of the voting rights attached
to any class of voting securities of the Company:
Number of Common Percentage of Common
Member Shares Shares
------ ------ ------
Lily Wang 9,549,821 25.42%
Weidong Yin 6,544,830 17.42%
All the shareholders of the Company have the same voting rights.
To the best of the Company's knowledge, the Company is not owned or controlled,
directly or indirectly, by another corporation or by any foreign government.
53
To the best of the Company's knowledge, there are no arrangements, the operation
of which at a subsequent date will result in a change in control of the Company
other than as stated in this Annual Report.
B. Related Party Transactions
--------------------------
None of the current directors or officers of the Company nor any associate or
affiliate of the foregoing persons, has any material interest, direct or
indirect, in any transactions of the Company or in any proposed transaction
which, in either event, has or will materially affect the Company, except for
Lily Wang and Heping Wang.
On September 24, 2003, Lily Wang and the Company entered into an agreement,
whereby the Company purchased Ms. Wang's ownership interest in Sinovac Biotech
Co., Ltd., a company organized pursuant to the laws of the People's Republic of
China, for 10,000,000 shares of the Company's common stock issued to Ms. Wang at
a deemed price of $0.60 per share constituting approximately 37% of the
Company's outstanding common stock after such issuance.
On January 26, 2004, Heping Wang and the Company entered into an agreement,
whereby the Company acquired Mr. Wang's ownership interest in Tangshan Yian
Biological Engineering Co., Ltd., a company organized pursuant to the laws of
the People's Republic of China, for 3,500,000 shares of the Company's common
stock issued to Mr. Wang plus $2,200,000 in cash.
On October 12, 2004, Sinovac Biotech Ltd. (the "Company") and Lily Wang, a
current director and officer of the Company, entered into a Pledge, Escrow and
Promissory Note Agreement (the "Agreement"), whereby Ms. Wang owes Tangshan Yian
Biological Engineering Co., Ltd. ("Tangshan Yian"), which is now a wholly-owned
subsidiary of the Company, an unsecured sum of US$1,849,000 (the "Loan") and Ms.
Wang has offered to grant the Company security on 3,000,000 common shares (the
"Shares") in the capital of the Company owned by Ms. Wang as security for the
Loan and to make payments in accordance with this Agreement. Ms. Wang has agreed
to place into escrow and pledge the Shares and to grant a pledge of all her
rights and interest in such Shares to secure with the Shares the Loan and
recovery of any part thereof on default of payment and which Loan is to be
repaid on or before November 15, 2006 in accordance with the terms of this
Agreement. According to the Agreement, Ms. Wang promises to pay to the Company
the Loan on the following terms:
(a) the Loan shall be paid in installments of US$200,000 commencing with
the first payment November 15, 2004 and the like amount each three
months thereafter (each payment an "Installment") with any remaining
sum due November 15, 2006;
(b) subject to the approval of the Company, Ms. Wang may make payment of
any Installment by assignment of an appropriate number of the Shares,
or other acceptable assets or securities, with such fair market
valuations as the Company may require and as are acceptable under
relevant generally accepted accounting principles;
54
(c) subject to payment of a 10% extension fee (10% of an Installment) Ms.
Wang may defer an Installment for 90 days twice during the term of
this Agreement; and
(d) the Loan shall bear interest on the declining balance of the Loan at
the rate of five percent (5%) per annum payable with each Installment
for the preceding three months.
On October 12, 2004, the Company and Heping Wang, a current director of the
Company entered into a Pledge, Escrow and Indemnity Agreement (the "Agreement"),
whereby the Company, through its wholly-owned subsidiary, Tangshan Yian, owes
China High Tech Investment Co., Ltd. the sum of 9,000,000 RMB (the "Loan"), plus
accrued interest, which is due and owing on demand. The Company acquired the
Loan plus accrued interest in the course of acquiring Tangshan Yian from Mr.
Wang and for which Mr. Wang agreed to indemnify and pay the Company for all
payments and costs (the "Indemnity") of the Loan, as and when incurred by the
Company and within thirty (30) days of demand for any Indemnity, whether in
whole or part, and Mr. Wang has agreed to provide security for such Indemnity.
Mr. Wang has offered to grant to the Company security on 1,500,000 common shares
(the "Shares") in the capital of the Company owned by Mr. Wang as security for
the Indemnity and Loan (hereafter collectively also referred to as the "Loan")
and to make payments in accordance with this Agreement. Mr. Wang has agreed to
place into escrow and pledge the Shares and to grant a pledge of all his rights
and interest in such Shares to secure with the Shares the Loan and recovery of
any part thereof on default of payment and which Loan is to be repaid in
accordance with the terms of this Agreement. According to the Agreement, Mr.
Wang acknowledges his liability to indemnify the Company for the Loan and
promises to pay to or for the Company such of the Loan as the Company may suffer
to pay from time-to-time on the following terms:
(a) the Company shall submit to Mr. Wang notice of all demands ("Demand")
for payment of all or any part of the Loan and the Company shall pay,
subject to lawful defenses, the Demand at and when the Demand
requires; and
(b) in the event that the Company shall pay any of the Loan the Company
shall deliver on Mr. Wang notice of such payment (and evidence
thereof) and Mr. Wang shall repay the Company within 30 days of such
notice.
On October 14, 2004, the Company and Heping Wang entered into a letter agreement
(the "Letter Agreement") whereby the Company and Heping Wang agreed that the
Company will not be required to pay the $2,200,000 that it owes to Heping Wang,
which was part of the consideration to be paid by the Company to Heping Wang for
the purchase of 100% of the issued and outstanding shares of Tangshan Yian, and
which is due and payable on January 30, 2005, until Heping Wang first pays the
$2,600,000 that he owes to Tangshan Yian, which is now a wholly owned subsidiary
of the Company.
C. Interests of Experts and Counsel
--------------------------------
This section is not applicable to the Company.
55
ITEM 8 - FINANCIAL INFORMATION
- ------------------------------
A. Financial Statements and other Financial Information
----------------------------------------------------
The audited financial statements for the Company for the fiscal years ending
December 31, 2004, and 2003 form a material part of this Annual Report. See Item
"19" hereinbelow.
B. Significant Changes
-------------------
There have not been any significant changes in the Company since the date of the
most recent audited financial statements other than those disclosed in this
Annual Report.
ITEM 9 - THE OFFERING AND LISTING
- ---------------------------------
A. Offer and Listing Details
-------------------------
This Annual Report does not relate to any offering of the Company's shares.
The following table indicates the annual high and low market prices over the
last two fiscal years since the Company's common stock was not listed until
February 21, 2003 on the OTCBB and then on the American Stock Exchange under the
symbol "SVA" on December 8, 2004:
Year Annual High Annual Low
---- ----------- ----------
2004 $6.95 $1.71
2003 (1) $1.80 $0.75
Notes:
(1) The Company commenced trading on the OTCBB on February 21, 2003.
The following table indicates the high and low market prices for each full
financial quarter since February 21, 2003:
Quarter Ended High Low
------------- ---- ---
Mar. 31, 2005 $3.60 $2.70
Dec. 31, 2004 $4.45 $3.30
Sept. 30, 2004 $3.85 $2.64
June 30, 2004 $6.01 $2.93
March 31, 2004 $6.95 $1.71
Dec. 31, 2003 $1.80 $0.75
Sept. 30, 2003 $0.78 $0.75
June 30, 2003 No trading No trading
B. Plan of Distribution
--------------------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
56
C. Markets
-------
The Company's securities traded on the OTC Bulletin Board from February 21, 2003
to December 7, 2004. From December 8, 2004, the Company's securities have been
trading on the American Stock Exchange under the symbol "SVA".
D. Selling Shareholders
--------------------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
E. Dilution
--------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
F. Expenses of the Issue
---------------------
This Annual Report does not relate to any offering of the Company's shares.
Therefore, this section is not applicable to the Company.
ITEM 10 - ADDITIONAL INFORMATION
- --------------------------------
A. Share Capital
-------------
This section is not applicable to the Company as this is an Annual Report.
B. Memorandum and Articles of Association
--------------------------------------
Objects and Purpose
- -------------------
The Company is registered at the companies registry in Antigua, and has been
assigned company number 011949, having its registered office situated at No. 6
Temple Street, P.O. Box 2372, Septimus A Rhudd Law Office, St. John's, Antigua
and Barbuda. The objects for which the Company is established allow at Article
IV:
a. To conduct any and all business activities permitted by the Laws of
Antigua/Barbuda as an International Business Corporation;
b. To acquire and deal with any property, real or personal, to erect
buildings, and generally to do all acts and things which, in the opinion of the
Corporation or the Directors, may be conveniently or profitably, or usefully,
acquired and dealt with, carried on, erected or done by the Corporation in
connection with said property.
c. To generally have and exercise all powers, rights and privileges necessary
and incident to carrying out properly the objects herein mentioned.
57
The Company shall not engage in International banking, Trust, Insurance,
Betting, and Bookmaking or any other activity which requires a Licence under the
International Business Corporation Act.
The Company shall be primarily engaged in research, development and
commercialization of human vaccines for infectious diseases.
Directors and Powers
- --------------------
Bylaw 8.3 of the Corporation states a director may hold any other office or
place of profit under the Corporation and he or any firm of which he is a member
may act in a professional capacity for the Corporation in conjunction with his
office of director of the Corporation for such period and in such terms as to
remuneration and otherwise as the Board may determine. No director or intending
director shall be disqualified by his office from contracting with the
Corporation, either with regard thereto, as a vendor, purchaser or otherwise,
nor shall any such contract, or any contract or arrangement entered into by or
on behalf of the Corporation in which any director so contracting or being so
interested be liable to account to the Corporation for any profit realized by
any such contract or arrangement by reason of such director holding such office,
or of the fiduciary relationship thereby established so long as the director
notifies the Corporation in accordance with the requirements of the Act. To the
extent permitted by the Act, any director may vote as a director or shareholder
in respect of any such contract or arrangement; provided that such director must
disclose his interest in the contract or arrangement, the contract or
arrangement must be entered into by the Corporation in an Annual or Special
Shareholders' Meeting, and before the contract or arrangement is so entered
into, the directors must disclose their interests to the meeting.
Directors of the company do not have to retire under an age limit requirement
and are not required to own shares of the company in order to serve as
directors.
Bylaw 8.2 states each of the Directors shall be paid out of the funds of the
Corporation such remuneration for his services as a director as the Corporation
in an Annual Shareholders' Meeting may from time to time determine. The
directors may also be paid all traveling, hotel and other expenses properly
incurred by them in attending and returning from meetings of the directors or
any committee of the directors or meetings of the Corporation or in connection
with the business of the Corporation.
Bylaw 8.9 states the business of the Corporation shall be managed by the Board,
who may exercise all such powers of the Corporation as are not by the Act or by
these By-Laws required to be exercised by the Corporation in an Annual
Shareholders' Meeting, subject nevertheless to any regulation of these By-Laws,
to the provisions of the Act as may be prescribed by special resolution of the
Corporation, but no regulation so made by the Corporation shall invalidate any
prior act of the Board which would have been valid if such regulation had not
been made. The general powers given by this by-law shall not be limited or
restricted by any special authority or power given to the Board by any other
By-Law.
Rights and Privileges of Common Shares
- --------------------------------------
Bylaw 5 states the Board may from time to time declare, and the Corporation may
pay, dividends on its outstanding shares in the manner and upon the terms and
58
conditions provided by law. Bylaw 7.8 states every shareholder shall have one
vote for each share of which he is the holder. All elections for directors shall
be decided by majority vote; all other questions shall be decided by majority
vote except as otherwise required by the Act. Bylaw 12 states if the Corporation
shall be wound up (whether the liquidation be voluntary, under the supervision
of or by the Court) the Liquidator may, with the required authority, divide
among the shareholders in specie or kind the whole or any part of the assets of
the Corporation, and whether or not the assets shall consist of property of one
kind or properties of different kinds, and may for such purpose set such value
as he deems fair upon one or more or classes of property, and may determine how
such different classes of shareholders. The Liquidator may, with the like
authority, vest any part of the assets in trustees upon such trusts for the
benefit of shareholders as the Liquidator with the like authority shall think
fit, and the liquidation of the Corporation may be closed and the Corporation
dissolved. Article III states no share shall have a pre-emptive right. Article
VII states the liability of a shareholder is limited to the amount, if any,
unpaid on the shares held or subscribed to by said shareholder. The Articles and
Bylaws are silent regarding redemption provisions, sinking fund provisions or
any provision regarding discrimination against any existing or prospective
holder of such securities as a result of such shareholder owning a substantial
number of shares.
A special resolution (requiring a 2/3 majority or signature of all shareholders
entitled to vote) is required to amend the Company's articles in such
circumstances as to change any maximum number of shares that the Company is
authorized to issue, to create new classes of shares, to change the designation
of all or any of its shares and add, change or remove any rights privileges,
restrictions and conditions including rights to accrued dividends, in respect of
all or any of its shares, whether issued or unissued pursuant to section 161 and
163 of the International Business Corporations Act of Antigua and Barbuda.
The conditions governing the manner in which annual general meetings and special
general meetings of shareholders are convoked are contained in Bylaw 7.2 to
7.12:
7.2 Annual Shareholders' Meeting
--------------------------------
An Annual Shareholders' Meeting of the Corporation shall be held every year
after the incorporation of the Corporation at such time and place within
Antigua and Barbuda as shall from time to time be prescribed by the Board.
7.3 Special Shareholders' Meeting
---------------------------------
The Board may, whenever it thinks fit, convene a Special Shareholders'
Meeting. The Board shall also on the requisition of the holders of not less
than one-twentieth (1/20) of the issued share capital of the Corporation
proceed to convene a special Shareholders' Meeting of the Corporation.
7.4 Proceedings
---------------
All business shall be deemed special that is transacted at a Special
Shareholders' Meeting, and also that is transacted at any Annual
Shareholders' Meeting, with the exception of the consideration of the
accounts and auditor's report, if any, the election of directors and the
reappointment of any incumbent auditor.
59
7.5 Quorum
----------
No business shall be transacted at any shareholders' meeting unless a
quorum of shareholders is present at the time when the meeting proceeds to
business. Save as is herein otherwise provided, shareholders present in
person or by proxy representing a majority of the Corporation's shares
shall constitute a quorum.
7.6 Chairman
------------
All meetings shall be chaired by a Director appointed by the Board to act
as Chairman.
7.7 Minutes
-----------
Minutes of the proceedings of every Annual Shareholders' Meeting shall be
kept, and shall be signed by the Chairman of the same meeting, or by the
Chairman of the next succeeding meeting, and the same, when so signed,
shall be conclusive evidence of all such proceedings and of the proper
election of the Chairman.
7.8 Votes of Shareholders
-------------------------
Subject to any rights or restrictions for the time being attached to any
class or classes of shares, every shareholder shall have one vote for each
share of which he is the holder. All elections for directors shall be
decided by majority vote; all other questions shall be decided by majority
vote except as otherwise required by the Act.
7.9 Informal Action by Shareholder
----------------------------------
Unless otherwise provided by law, any action required to be taken at a
meeting of the shareholders, or any other action which may be taken at a
meeting of the shareholders, may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all of the
shareholders entitled to vote with respect to the subject matter thereof.
7.10 Proxies
------------
Votes may be given either personally or by proxy. The instrument appointing
a proxy shall be in writing under the hand of the appointer or his attorney
duly authorized in writing, or if the appointer is a corporation, either
under seal or under the hand of an officer or attorney duly authorized. A
proxy need not be a shareholder of the Corporation. The instrument
appointing a proxy and the power of attorney or other authority, if any,
under which it is signed or a certified copy of that power of attorney
shall be deposited at the office or at such other place within Antigua as
is specified for that purpose in the notice convening the meeting.
7.11 Notice of Meeting
----------------------
Written or printed notice stating the place, day and hour of the meeting
and, in case of a special meeting, the purpose or purposes for which the
60
meeting is called, shall be delivered not less that Twenty-One (21) days
before the date of the meeting, either personally by mail or facsimile, to
each shareholder on record entitled to vote at such meeting. If mailed,
such notice shall be deemed to be delivered when deposited in the mail,
addressed to the shareholder at his address as it appears on the stock
transfer books of the Corporation, with postage thereon prepaid.
7.12 Waiver of Notice
---------------------
Unless otherwise provided by law, whenever any notice is required to be
given to any shareholder, a waiver thereof in writing, signed by the person
or persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
Article X states no securities of the Corporation will be distributed to the
public in Antigua and Barbuda in contravention of Section 365 of the
International Business Corporations Act, 1982.
There is not Article or Bylaw that directly deals with would delay, defer or
prevent a change in control of the Corporation and that would operate only with
respect to a merger, acquisition or corporate restructuring involving the
Corporation.
There is no Bylaw provisions governing the ownership threshold above which
shareholder ownership must be disclosed.
Article IV paragraph 4 describes the conditions imposed by the Articles of
Incorporation governing changes in the capital. Paragraph specifically states:
4. The Corporation shall have the power to increase or reduce said capital,
and to issue any part of its capital, original or increased, with or
without any preference, priority, or special privilege, or subject to any
postponement of rights, or to any conditions or restrictions, and so that,
unless the conditions of issue shall otherwise expressly declare, every
issue of shares, whether declared to be preference or otherwise shall be
subject to the power herein contained.
C. Material Contracts
------------------
During the preceding two years, the Company entered into the following material
contracts:
1. Share Purchase Agreement entered into between Net Force Systems Inc.
and Lily Wang, dated September 24, 2003.
2. Consulting Agreement entered into between the Company and Sinoglobe
Worldwide Limited, dated November 1, 2003.
3. Consulting Agreement entered into between the Company and Michael Tan,
dated November 1, 2003.
61
4. Consulting Agreement entered into between the Company and Technique
Capital Corp., dated November 1, 2003.
5. Share Purchase Agreement entered into between the Company, Tangshan
Yian Biological Engineering Co., Ltd. and Mr. Heping Wang, dated
January 26, 2004.
6. Consulting Services and Finder's Fee Agreement entered into between
the Company and Roberto Ebrahimi, dated April 23, 2004.
7. Pledge, Escrow and Promissory Note Agreement entered into between the
Company and Lily Wang, dated October 12, 2004, a copy of which is
attached hereto as Exhibit 10.7.
8. Pledge, Escrow and Indemnity Agreement entered into between the
Company and Heping Wang, dated October 12, 2004, a copy of which is
attached hereto as Exhibit 10.8.
9. Share Purchase Agreement entered into between the Company, China
Bioway Biotech Group Co., Ltd., Beijing Keding Co., Ltd. and Shenzhen
Bio-Port Co., Ltd., dated November 30, 2004, a copy of which is
attached hereto as Exhibit 10.9.
10. Financial Advisory Agreement entered into between the Company and
Credit Suisse Advisory Partners AG, effective December 14, 2004, the
details of which are discussed below.
11. Cooperation Agreement on the Research and Development of Avian Flu
Vaccine for Human Use entered into between the Company and the Center
for Disease Control & Prevention of China, effective December 15,
2004, a copy of which is attached hereto as Exhibit 10.10.
12. Corporate Services Agreement entered into between the Company and
Segue Ventures LLC, dated for reference effective May 1, 2005, a copy
of which is attached hereto as Exhibit 10.11.
Effective December 14, 2004, the Company's Board of Directors approved a
Financial Advisory Agreement, which was executed on November 9, 2004, between
the Company and Credit Suisse Advisory Partners AG ("CSAP"), a subsidiary of
Credit Suisse Group, under which CSAP was appointed to act as the Company's
exclusive financial advisor in accordance with the terms of the agreement. The
scope of work to be performed by CSAP for the Company under the Financial
Advisory Agreement includes assisting the Company prepare for potential capital
raising via private placements (including assisting the Company develop key
positioning themes and investment highlights), assisting the Company identify
and negotiate with potential financial and/or strategic investors and providing
other financial advisory services to help the Company prepare for a potential
future public offering and listing on a major stock exchange. The term of the
mandate under the Financial Advisory Agreement is 12 months commencing the date
of signing of the agreement, though exclusivity of the agreement may be
terminated by the Company at an earlier time to the extent certain financing
62
benchmarks are not reached. Remuneration to be paid to CSAP under the Financial
Advisory Agreement includes a cash retainer fee and a contingent success fee
(made up of cash and warrants) to be paid in relation to potential fund raising
exercises carried out by the Company. Either party to the Financial Advisory
Agreement can terminate such agreement at any time by giving a two-weeks notice
in writing. However, the Company shall be obliged to compensate CSAP in full in
accordance with the terms of the Remuneration and Expenses provisions set out in
the Financial Advisory Agreement in the event that within twelve months of the
agreement's termination the Company successfully concludes any fund raising
exercise or mergers and acquisitions transaction with investors and/or strategic
partners introduced by or through CSAP.
D. Exchange Controls
-----------------
Not applicable.
E. Taxation
--------
United States security holders of the registrant company are not subject to
taxes or withholding provisions. Sections 271- 274 of the International Business
Corporations Act, 1982, Antigua and Barbuda, Division G: Special Taxation
Provisions detail the relevant tax provisions under the Act.
Section 271, "Exempt corporations" states the following:
"For the purposes of this Division, an exempt corporation shall mean any
corporation formed or continued under this Act."
Section 272, "Exemption from tax" states the following:
(1) No income tax, capital gains tax, or other direct tax or impost may be
levied in Antigua and Barbuda upon the profits or gains of an exempt
corporation, in respect of the international trade and business it carries on
from within Antigua and Barbuda.
(2) No income tax, capital gains tax, or other direct tax or impost may be
levied in Antigua and Barbuda in respect of any securities or assets of an
exempt corporation that are beneficially owned by an exempt corporation or by a
person who is not a resident.
(3) No estate, inheritance, succession or similar tax or impost may be levied
in Antigua and Barbuda in respect of any securities or assets of an exempt
corporation that are beneficially owned by an exempt corporation or by a person
who is not a resident.
(4) No tax, duty or other impost may be levied upon the increment in value of
the property, or other assets in Antigua and Barbuda or elsewhere of an exempt
corporation other than upon such of them as are distributed to residents.
63
Section 273, "No assets transfer tax".
(1) No tax, duty or other impost may be levied upon an exempt corporation, its
security holders or transferees in respect of the transfer of all or any part of
it's securities or other assets to another exempt corporation or to a person who
is not a resident.
(2) When an exempt corporation or a person who is not a resident transfers
securities or assets of an exempt corporation that are held by that exempt
corporation, or person to another exempt corporation, or to another person who
is not a resident, the transfer is exempt from the payment of any tax, duty, or
other impost thereon.
(3) No income tax or capital gains tax, and no other direct tax or impost, may
be levied or collected in Antigua and Barbuda, in respect of any dividends
interests or other returns from any securities, deposits or borrowings of an
exempt corporations or any assets managed by the exempt corporation if the
dividends, interest or other returns are in respect of securities, deposits,
borrowings or assets beneficially owned by another exempt corporation, or a
person who is not a resident; but the onus of establishing ownership, lies upon
the exempt corporation holding or managing the deposits, borrowings or assets.
Section 274, "Withholding tax and report"
(1) Notwithstanding, any provision of the Income Tax Ordinance, but subject to
subsection (2), no exempt corporation need withhold any portion of any dividend,
interest or other returns, payable of any person in respect of any borrowings of
the exempt corporation from that person or in respect of securities of the
exempt corporation held by that person.
(2) All dividends interest or other returns attributable to the securities of,
or the management of, assets by an exempt corporation that are payable to a
resident who is known to be a resident, by the exempt corporation or who, with
the exercise of reasonable care by the exempt corporation, could be known by him
to be a resident, must be reported to the Commissioner of Inland Revenue by the
exempt corporation.
Section 276 of the Act, "Duration of tax exemption" states the following:
"Any tax exemption provided under this Act, shall continue in effect for a
period of fifty years from the date of incorporation of the exempt corporation."
There is no reciprocal tax treaty in existence between the United States and
Antigua and Barbuda regarding withholding taxes.
F. Dividends and Paying Agents
---------------------------
This section is not applicable to the Company as this is an Annual Report.
64
G. Statement by Experts
--------------------
This section is not applicable to the Company as this is an Annual Report.
H. Documents on Display
--------------------
The above contracts respecting the Company may be inspected at the Company's
Canadian counsel's office in the Province of British Columbia, located at Suite
2550, 555 West Hastings Street, Vancouver, British Columbia, V6B 4N5 for a
period of 30 days following the filing of this Annual Report.
I. Subsidiary Information
----------------------
The Company is a 71.56% majority owner of Sinovac Biotech Co., Ltd., a company
organized under the laws of the People's Republic of China, and a 100% owner of
Tangshan Yian Biotechnology Engineering Co., Ltd., a company organized under the
laws of the People's Republic of China. Therefore, the Company has two
subsidiaries - one which is wholly owned and one which is majority owned.
ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------
The carrying value of cash and cash equivalents, accounts receivable, short-term
loans payable, accounts payable and accrued liabilities approximate their fair
value because of the short-term nature of these instruments. The fair value of
long-term debt is based on the discounted value of contractual cash flows and as
at December 31, 2004, approximates its carrying value. The discount rate is
estimated using the rates currently offered for debt with similar remaining
maturities.
While the Company's financial statements are denominated in United States
dollars, most of its operations are located in China, where transactions are
denominated in the Chinese currency RMB. During the year ended December 31,
2004, the exchange rate between the United States dollar and the RMB was
essentially fixed at US$1.00 = 8.28 RMB.
Subsequent to December 31, 2004, the fixed exchange rate with the United States
dollar was abandoned in favour of a link to a basked of world currencies. The
following table shows the relative holdings of monetary assets and liabilities
allocated between United States dollars and RMB, for those monetary assets which
are held in a combination of United States dollars and RMB. The table also shows
the relative effect on these balances of a 10% change in the exchange rate.
65
Denominated in Effect of
-------------- Total a 10%
Value Change in
US$ RMB in US$ Exchange
Rate
------ ----- ------- ---------
Cash and cash equivalents 775,167 15,151,436 2,605,051 7.0%
Due from related parties - net 1,671,048 10,860,363 2,982,686 4.4%
Accounts payable and accrued
liabilities 192,573 19,263,656 2,519,102 9.2%
All other monetary assets and liabilities are substantially or entirely
denominated in RMB. For these assets and liabilities, a 10% change in the
exchange rate would result in a 10% change in the United States dollar
equivalent. We believe that the selected rate change of 10% is reasonably
possible in the near term.
Sinovac has not entered into derivative contracts either to hedge existing risks
or for speculative purposes.
ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
- ----------------------------------------------------------------
A. Debt Securities
---------------
This section is not applicable to the Company as this is an Annual Report.
B. Warrants and Rights
-------------------
This section is not applicable to the Company as this is an Annual Report.
C. Other Securities
----------------
This section is not applicable to the Company as this is an Annual Report.
D. American Depositary Shares
--------------------------
This section is not applicable to the Company as this is an Annual Report.
PART II
-------
ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
- ---------------------------------------------------------
Not applicable.
66
ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
- --------------------------------------------------------------------------------
PROCEEDS
- --------
This Annual Report does not relate to any offering of the Company's securities.
Therefore, this section is not applicable to the Company.
ITEM 15 - CONTROLS AND PROCEDURES
- ---------------------------------
As of the end of the period covered by this Annual Report, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer (the "CEO") and the Chief
Financial Officer (the "CFO"), of the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based on that evaluation,
the Company's management, including the CEO and CFO, concluded that the
Company's disclosure controls and procedures were effective. There have been no
changes in the Company's internal controls over financial reporting that
occurred during the fourth quarter ended December 31, 2004, that have materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
ITEM 16A - AUDIT COMMITTEE FINANCIAL EXPERT
- -------------------------------------------
The Company's board of directors has determined that it has at least one audit
committee financial expert serving on its audit committee, and that person is
Simon Anderson.
ITEM 16B - CODE OF ETHICS
- -------------------------
As of the date of this Annual Report, the Company has not yet adopted a code of
ethics that applies to the Company's principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions. However, the Company intends to adopt such a code
of ethics in the near future.
ITEM 16C - PRINCIPAL ACCOUNTANT FEES AND SERVICES
- -------------------------------------------------
(1) Audit Fees
- --------------
The aggregate fees billed for the last two fiscal years for professional
services rendered by the principal accountant for the audit of the Company's
annual financial statements and review of financial statements included in the
Company's Form 20-Fs or services that are normally provided by the accountant in
connection with statutory and regulatory engagements for those fiscal years was:
2004 - $77,800 - Moore Stephens Ellis Foster Ltd.
2003 - $68,850 - Moore Stephens Ellis Foster Ltd.
67
(2) Audit - Related Fees
- ------------------------
The aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountants that are reasonably related to the
performance of the audit or review of the Company's financial statements and are
not reported in the preceding paragraph:
2004 - $25,950 - Moore Stephens Ellis Foster Ltd.
2003 - $22,295 - Moore Stephens Ellis Foster Ltd.
(3) Tax Fees
- ------------
The aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountant for tax compliance, tax advice,
and tax planning was:
2004 - Nil - Moore Stephens Ellis Foster Ltd.
2003 - Nil - Moore Stephens Ellis Foster Ltd.
(4) All Other Fees
- ------------------
The aggregate fees billed in each of the last two fiscal years for the products
and services provided by the principal accountant, other than the services
reported in paragraphs (1), (2), and (3) was:
2004 - Nil - Moore Stephens Ellis Foster Ltd.
2003 - Nil - Moore Stephens Ellis Foster Ltd.
ITEM 17 - FINANCIAL STATEMENTS
- ------------------------------
The restated audited balance sheet of the Company as at December 31, 2004 and
2003, the restated statements of shareholders' equity, operations and cash flows
for the three years ended December 31, 2004, 2003 and 2002 are attached hereto
and form a material part of this Annual Report.
ITEM 18 - FINANCIAL STATEMENTS
- ------------------------------
Not applicable.
68
ITEM 19 - EXHIBITS
- ------------------
A. Restated Financial Statements
-----------------------------
This Annual Report contains the following restated financial statements and
information respecting the Company:
1. Auditors' Reports for the Company's financial statements for the period
ended December 31, 2004 dated March 11, 2005 and November 15, 2005.
2. Restated Balance Sheets for the Company dated December 31, 2004and 2003.
3. Restated Consolidated Statement of Shareholders' Equity for the Company
for the years ended December 31, 2004, 2003 and 2002.
4. Restated Consolidated Statement of Operations for the Company for the
years ended December 31, 2004, 2003 and 2002.
5. Restated Consolidated Statement of Cash Flows for the Company for the
years ended December 31, 2004, 2003, and 2002.
6. Notes to the Restated Financial Statements
69
B. Exhibits
--------
This Annual Report contains the following Exhibits respecting the Company:
Additional Exhibits:
10.1* Share Purchase Agreement entered into between Net Force Systems
Inc. and Lily Wang, dated September 24, 2003.
10.2* Consulting Agreement entered into between the Company and
Sinoglobe Worldwide Limited, dated November 1, 2003.
10.3* Consulting Agreement entered into between the Company and Michael
Tan, dated November 1, 2003.
10.4* Consulting Agreement entered into between the Company and
Technique Capital Corp., dated November 1, 2003.
10.5* Share Purchase Agreement entered into between the Company,
Tangshan Yian Biological Engineering Co., Ltd. and Mr. Heping
Wang, dated January 26, 2004.
10.6* Consulting Services and Finder's Fee Agreement entered into
between the Company and Roberto Ebrahimi, dated April 23, 2004.
10.7+ Pledge, Escrow and Promissory Note Agreement entered into between
the Company and Lily Wang, dated October 12, 2004.
10.8+ Pledge, Escrow and Indemnity Agreement entered into between the
Company and Heping Wang, dated October 12, 2004.
10.9+ Share Purchase Agreement entered into between the Company, China
Bioway Biotech Group Co., Ltd., Beijing Keding Co., Ltd. and
Shenzhen Bio-Port Co., Ltd., dated November 30, 2004.
10.10+ Cooperation Agreement on the Research and Development of Avian Flu
Vaccine for Human Use entered into between the Company and the
Center for Disease Control & Prevention of China, effective
December 15, 2004.
10.11+ Corporate Services Agreement entered into between the Company and
Segue Ventures LLC, dated for reference effective May 1, 2005.
31.1 Certification of Disclosure in Sinovac Biotech Ltd.'s Annual
Report by Weidong Yin.
31.2 Certification of Disclosure in Sinovac Biotech Ltd.'s Annual
Report by Lily Wang.
70
32.1 Certification of Weidong Yin pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Lily Wang pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- -------------
Note:
* Previously filed as an exhibit to the Form 20-F filed on June 30, 2004, and
incorporated herein by reference.
+ Previously filed as an exhibit to the Form 20-F filed on May 27, 2005, and
incorporated herein by reference.
71
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Restated Consolidated Financial Statements
(Expressed in U.S. Dollars)
December 31, 2004 and 2003
Index
- -----
Reports of Independent Registered Public Accounting Firm
Restated Consolidated Balance Sheets
Restated Consolidated Statements of Stockholders' Equity
Restated Consolidated Statements of Operations
Restated Consolidated Statements of Cash Flows
Notes to Restated Consolidated Financial Statements
72
ERNST 7 YOUNG
- -------------
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Sinovac Biotech Ltd.
(formerly Net-Force Systems Inc.)
The consolidated balance sheets of Sinovac Biotech Ltd. (formerly Net-Force
Systems Inc., the "Company") as at December 31, 2004 and 2003, and the related
consolidated statements of stockholders' equity, operations and cash flows for
each of the years in the three year period ended December 31, 2004 were audited
by other auditors who have ceased operations and whose report dated March 11,
2005 expressed an unqualified opinion on those statements before the restatement
adjustments described in Note 2.
As discussed above, the consolidated balance sheets of the Company as at
December 31, 2004 and 2003, and the related consolidated statements of
stockholders' equity, operations and cash flows for each of the years in the
three year period ended December 31, 2004 were audited by other auditors who
have ceased operations. As described in Note 2, in 2005, the Company's Board of
Directors, upon recommendations from the Securities and Exchange Commission,
revised the accounting for purchased in-process research and development costs
and the commencement date for amortization of a drug license. As a result of
this revision, the net loss and the comprehensive loss for the 2004 fiscal year
was decreased by $85,000, while the net loss and the comprehensive loss for the
fiscal years of 2003 and 2002 were increased by $410,768 and $573,844,
respectively. Loss per share for the 2004 fiscal year was decreased by $0.01
and increased by $0.01 for the 2003 fiscal year. The loss per share information
for the 2002 fiscal year was unchanged. The total assets as at December 31,
2004 and 2003 were decreased by $946,612 and $1,113,612, respectively. The total
accumulated deficit as at December 31, 2004 and 2003 was increased by $496,248
and $581,248, respectively. Various components of investing and operating cash
flows were also reclassified without any net impact on cash flows. We audited
the adjustments described in Note 2 that were applied to restate the financial
statements of 2004, 2003 and 2002. Our procedures included i) assessing the
appropriateness of the accounting for the purchased in-process research and
development costs and the commencement date of amortization of the drug license
and associated impacts on the related accounts, and ii) testing the mathematical
accuracy of the adjustments to license and permit, deferred income tax assets,
minority interest, accumulated deficit, purchased in-process research and
development costs, amortization of license and permit and the resulting
mathematical impact on net loss, comprehensive loss, basic and diluted loss per
share, total assets and shareholders' deficit accounts. In our opinion, such
adjustments are appropriate and have been properly applied. However, we were not
engaged to audit, review, or apply any procedures to the 2004, 2003 and 2002
financial statements of the Company other than with respect to such adjustments
and, accordingly, we do not express an opinion or any other form of assurance on
the Company's financial position as at December 31, 2004 and 2003, and the
results of its operations and cash flows for each of the years in the three year
period ended December 31, 2004 taken as a whole.
Vancouver, Canada /s/ Ernst & Young LLP
November 15, 2005 Chartered Accountants
A Member of Ernst & Young Global
73
M O O R E S T E P H E N S
E L L I S F O S T E R L T D .
- ---------------------------------
CHARTERED ACCOUNTANTS
1650 West 1st Avenue
Vancouver, BC Canada V6J 1G1
Telephone: (604) 734-1112 Facsimile: (604) 714-5916
E-Mail: generaldelivery@ellisfoster.com
Website: www.ellisfoster.com
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------
To the Board of Directors and Stockholders of
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
We have audited the consolidated balance sheets of Sinovac Biotech Ltd.
(formerly Net-Force Systems Inc.) ("the Company") as at December 31, 2004 and
2003, and the related consolidated statements of stockholders' equity,
operations and cash flows for each of the three years in the period ended
December 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2004, and 2003 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2004 in conformity with
generally accepted accounting principles in the United States of America.
Vancouver, Canada "MOORE STEPHENS ELLIS FOSTER LTD."
March 11, 2005 Chartered Accountants
- --------------------------------------------------------------------------------
MSEFA partnership of incorporated professionals
An independently owned and operated member of Moore Stephens North America
Inc., a member of Moore Stephens International Limited
- members in principal cities throughout the world
74
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Consolidated Balance Sheets
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
=================================================================================================
2004 2003
- -------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 2,605,051 $ 1,420,047
Restricted cash 391,481 -
Accounts receivable - net (note 4) 3,353,287 1,470,761
Inventories (note 5) 487,243 1,047,920
Prepaid expenses and deposits (note 11d) 438,614 13,723
Due from related parties (note 11a) 1,194,878 -
- -------------------------------------------------------------------------------------------------
Total current assets 8,470,554 3,952,451
Property, plant and equipment (note 6) 10,042,063 7,459,883
Due from related parties (note 11a) 1,816,998 947,267
Deferred tax asset (Note 10) 860,300 -
License and permit (notes 2 and 8) 1,230,315 1,424,503
- -------------------------------------------------------------------------------------------------
Total assets $ 22,420,230 $ 13,784,104
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loans payable (note 9) $ 2,605,314 $ 752,415
Accounts payable and accrued liabilities 2,519,102 1,483,690
Due to related parties (Note 11b) 29,190 1,170,474
Dividends payable 470,301 -
Deferred research grants 1,032,036 -
- -------------------------------------------------------------------------------------------------
Total current liabilities 6,655,943 3,406,579
Long-term debts (note 9) 202,436 603,865
- -------------------------------------------------------------------------------------------------
Total liabilities 6,858,379 4,010,444
- -------------------------------------------------------------------------------------------------
Minority interest 3,124,640 4,205,292
- -------------------------------------------------------------------------------------------------
Commitments (notes 11d and 17a)
STOCKHOLDERS' EQUITY
Preferred stock - -
Authorized 50,000,000 shares at par value of $0.001 each
Issued and outstanding: nil
Common stock 35,815 27,091
Authorized: 100,000,000 shares at par value of $0.001 each
Issued and outstanding: 35,815,015 (2003 - 27,091,033)
Subscriptions received 206,950 1,031,959
Additional paid in capital 18,151,878 5,798,220
Accumulated other comprehensive income (1,613) 206
Dedicated reserves 199,606 -
Accumulated deficit (6,155,425) (1,289,108)
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 12,437,211 5,568,368
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 22,420,230 $ 13,784,104
=================================================================================================
The accompanying notes are an integral part of these financial statements.
75
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
=================================================================================================================================
Restated - Note 2
Compre-
Common stock Additional hensive Accumulated
-------------------------- paid in income Dedicated earnings
Shares Amount capital (loss) reserves (deficit)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 14,709,804 $ 14,710 $ 7,993,161 $ - $ - $ (206,408)
Contribution of drug licenses for shares at
transferor's cost 1,760,784 1,761 456,873 - - -
Subscriptions receivable received - - - - - -
Component of comprehensive income (loss)
- - Net loss for the year - - - (1,166,052) - (1,166,052)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss $ (1,166,052)
=============
Balance, December 31, 2002 16,470,588 8,400 8,458,105 - - (669,616)
Debt exchange for shares (note 11g) 3,137,255 1,600 2,607,096 - - -
Recapitalization adjustment (note 1) - - (5,426,848) - - 423,295
Spin-off of minority interest on
recapitalization (9,607,843) (9,608) (9,608) - - -
Recapitalization to effect the acquisition
of Net-Force (note 1) 17,091,033 17,091 (16,991) - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance after recapitalization adjustment 27,091,033 27,091 5,621,362 - - (416,801)
Imputed interest on advances from related
parties - - 57,277 - - -
Stock-based compensation - - 119,581 - - -
Subscriptions received - - - - - -
Component of comprehensive income (loss)
- - Foreign currency translation - - - 206 - -
- - Net loss for the year - - - (872,307) - (872,307)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss $ (872,101)
============
Balance, December 31, 2003 27,091,033 $ 27,091 $ 5,798,220 $ - $(1,289,108)
======================================================================================= ===========================
The accompanying notes are an integral part of these financial statements.
.....continued
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
========================================================================================
Restated - Note 2
Accumulated
other Subscript-
compre- ions Total
hensive (receivable) stockholders'
income and received equity
- ----------------------------------------------------------------------------------------
Balance, December 31, 2001 $ - $ (1,020,139) $ 6,781,324
Contribution of drug licenses for shares at
transferor's cost - - 458,634
Subscriptions receivable received - 1,020,139 1,020,139
Component of comprehensive income (loss)
- - Net loss for the year - - (1,166,052)
- ----------------------------------------------------------------------------------------
Comprehensive loss
Balance, December 31, 2002 - - 7,094,045
Debt exchange for shares (note 11g) - - 2,608,696
Recapitalization adjustment (note 1) $ - $(1,020,139) $ 4,471,189
Spin-off of minority interest on
recapitalization - - -
Recapitalization to effect the acquisition
of Net-Force (note 1) - - 100
- ---------------------------------------------------------------------------------------
Balance after recapitalization adjustment - - 5,231,652
Imputed interest on advances from related
parties - - 57,277
Stock-based compensation - - 119,581
Subscriptions received - 1,031,959 1,031,959
Component of comprehensive income (loss)
- - Foreign currency translation 206 - 206
- - Net loss for the year - - (872,307)
- ---------------------------------------------------------------------------------------
Comprehensive loss
Balance, December 31, 2003 $ 206 $ 1,031,959 $ 5,568,368
=======================================================================================
The accompanying notes are an integral part of these financial statements.
76
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
=================================================================================================================================
Restated - Note 2
Compre-
Common stock Additional hensive Accumulated
-------------------------- paid in income Dedicated earnings
Shares Amount capital (loss) reserves (deficit)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 27,091,033 $ 27,091 $ 5,798,220 $ $ - $(1,289,108)
Imputed interest on advances from related
parties - - 1,329 - - -
Stock-based compensation - - 4,428,032 - - -
Common stock issued in connection with
acquisition of Tangshan Yian 3,500,000 3,500 1,569,543 - - -
Private placement 4,179,200 4,179 4,745,821 - - -
Exercise of stock options 40,500 41 53,014 - - -
Exercise of warrants 991,782 991 1,515,432 - - -
Stock issued for services 12,500 13 40,487 - - -
Subscriptions received - - - - - -
Component of comprehensive income (loss)
- - Foreign currency translation - - - (1,819) -
- - Net loss for the year - - - (4,666,711) (4,666,711)
Transfer to dedicated reserves (note 14) - - - - 199,606 (199,606)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss $(4,666,530)
============
Balance, December 31, 2004 35,815,015 $ 35,815 $18,151,878 $ 199,606 $(6,155,425)
======================================================================================== ==========================
The accompanying notes are an integral part of these financial statements.
....continued
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
========================================================================================
Restated - Note 2
Accumulated
other Subscript-
compre- ions Total
hensive (receivable) stockholders'
income and received equity
- ----------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 206 $ 1,031,959 $ 5,568,368
Imputed interest on advances from related
parties - - 1,329
Stock-based compensation - - 4,428,032
Common stock issued in connection with
acquisition of Tangshan Yian - - 1,573,043
Private placement - (1,031,959) 3,718,041
Exercise of stock options - - 53,055
Exercise of warrants - - 1,516,423
Stock issued for services - - 40,500
Subscriptions received - 206,950 206,950
Component of comprehensive income (loss)
- - Foreign currency translation (1,819) - (1,819)
- - Net loss for the year - - (4,666,711)
Transfer to dedicated reserves (note 14) - - -
- ----------------------------------------------------------------------------------------
Comprehensive loss
Balance, December 31, 2004 $ (1,613) $ 206,950 $ 12,437,211
========================================================================================
The accompanying notes are an integral part of these financial statements.
77
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Consolidated Statements of Operations
Years ended December 31, 2004, 2003 and 2002
(Expressed in U.S. Dollars)
=============================================================================================================
Restated - Note 2
2004 2003 2002
- -------------------------------------------------------------------------------------------------------------
Sales $ 6,454,043 $ 2,838,933 $ 649,319
Cost of sales - exclusive of depreciation of land
use rights and amortization of licenses and permits
of $201,785 (2003 - $201,802; 2002 - $201,648 (Note
11) 1,937,983 1,085,881 251,711
- -------------------------------------------------------------------------------------------------------------
Gross profit 4,516,060 1,753,052 397,608
Government research grant (Note 3(l)) 719,220 664,251 -
- -------------------------------------------------------------------------------------------------------------
5,235,280 2,417,303 397,608
- -------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses
(Notes 11 and 13(c)) 4,414,564 1,629,118 792,078
Stock-based compensation 4,428,032 119,581 -
Research and development expenses (Note 3(l)) 1,005,046 926,746 24,535
Purchased in process research and development
(Note 2) - 381,058 476,750
Depreciation of property, plant and equipment
and amortization of licenses and permits 333,881 271,115 240,431
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 10,181,523 3,327,618 1,533,794
- -------------------------------------------------------------------------------------------------------------
Operating loss (4,946,243) (910,315) (1,136,186)
Interest and financing expenses (Note 11) (369,491) (268,758) (81,009)
Interest and other income (Note 11) 321,460 40,869 51,143
- -------------------------------------------------------------------------------------------------------------
Loss before income taxes and
minority interest (4,994,274) (1,138,204) (1,166,052)
Income taxes (Note 10) 767,467 - -
- -------------------------------------------------------------------------------------------------------------
Loss before minority interest (4,226,807) (1,138,204) (1,166,052)
Minority interest share of (earnings) loss (439,904) 265,897 -
- -------------------------------------------------------------------------------------------------------------
Net loss for the year $ (4,666,711) $ (872,307) $ (1,166,052)
=============================================================================================================
Loss per share - basic and diluted $ (0.14) $ (0.04) $ (0.07)
==============================================================================================================
Weighted average number of shares of
common stock outstanding
- Basic and diluted 32,742,837 20,081,796 15,891,700
==============================================================================================================
The accompanying notes are an integral part of these financial statements.
78
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003 and 2002
(Expressed in U.S. Dollars)
=======================================================================================================================
Restated - Note 2
2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) operating activities
Net loss for the year $ (4,666,711) $ (872,307) $ (1,166,052)
Adjustments to reconcile net loss to net cash
used by operating activities:
- deferred income taxes (860,300) - -
- stock-based compensation 4,428,032 119,581
- common stock issued for services 40,500 - -
- In-process research and development acqired with
stock - 381,058 476,750
- provision for doubtful debts 373,519 148,551 -
- interest accrued on promissory notes, related parties (164,770) - -
- imputed interest on advances received from
related parties 1,329 57,277 -
- written-off equipment 4,775 - -
- depreciation of property, plant and equipment
and amortization of licenses and permits 784,324 683,795 434,193
- amortization of deferred charge 114,861 - -
- minority interest 439,904 (265,897) -
Change in other assets and liabilities, net of effect of
acquisition of Tangshan Yian
- accounts receivable (2,214,266) (1,150,133) (461,600)
- inventories 629,591 307,129 (1,229,140)
- prepaid expenses and deposits (425,194) (7,002) (1,185)
- accounts payable and accrued liabilities 384,169 (460,906) 894,093
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,130,237) (1,058,854) (1,052,941)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) financing activities
Loans proceeds 3,268,029 1,207,730 1,409,819
Loans repayment (3,098,806) (1,261,269) (966,183)
Proceeds from issuance of common stock 5,287,519 - 1,020,139
Proceeds from shares subscribed 206,950 1,031,959 -
Government grant received, net of qualified research
and development expenditures 1,280,893 - -
Advances from (to) related parties (399,235) 1,917,373 (11,116)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 6,545,350 2,895,793 1,452,659
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) investing activities
Restricted cash (391,481) - 128,790
Cash acquired in connection with acquisition of
Tangshan Yian 42,216 - -
Deposits on purchase of interest in Sinovac China from
minority interest (2,227,167) - -
Acquisition of property, plant and equipment (1,650,248) (348,190) (2,188,025)
Acquisition of drug licenses and related costs - (381,058) (18,116)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,226,680) (729,248) (2,077,351)
- -----------------------------------------------------------------------------------------------------------------------
Exchange loss on cash and equivalents (3,429) (238) -
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,185,004 1,107,453 (1,677,633)
Cash and cash equivalents,
beginning of year 1,420,047 312,594 1,990,227
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of year $ 2,605,051 $ 1,420,047 $ 312,594
=======================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for interest, net of interest capitalized $ 131,379 $ 180,180 $ 1,490
=======================================================================================================================
Cash paid for income taxes $ 8,896 $ - $ -
=======================================================================================================================
The accompanying notes are an integral part of these financial statements.
79
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
1. Nature of Business and Basis of Presentation
--------------------------------------------
These consolidated financial statements are those of Sinovac Biotech Ltd.,
formerly Net-Force Systems Inc., ("parent company"), its 51% owned
subsidiary Sinovac Biotech Co., Ltd. ("Sinovac China") and its 100% owned
subsidiary Tangshan Yian Bioengineering Co., Ltd. ("Tangshan Yian") and
Sinovac Biotech (Canada) Ltd. ("Sinovac Canada"). Collectively, they are
referred to as "the Company".
The Company, through its subsidiaries, Sinovac China and Tangshan Yian,
primarily operates in China and it is in the business of research and
development, production and sales of pharmaceutical products. Sinovac China
was incorporated under the laws of China on April 28, 2001. In January
2004, the Company acquired a 100% interest in Tangshan Yian (see note 7).
Tangshan Yian was incorporated under the laws of China on February 9, 1993.
On September 24, 2003, Net-Force Systems Inc. ("Net-Force"), a company
incorporated on March 1, 1999 under the International Business Corporations
Act No. 28 of 1982 of the laws of Antigua and Barbuda, entered into a share
exchange agreement ("Agreement") with Sinovac China, whereby Net-Force
issued 10,000,000 shares of its common stock in exchange for a 51% interest
in Sinovac China. As part of the agreement, Net-Force disposed of its
wholly owned subsidiary, Net Force Entertainment, Inc. and all of its
assets and liabilities to a company controlled by its president and Chief
Executive Officer for $100 and then become a non-operating shell company.
Immediately prior to the Agreement, Net-Force had 17,091,033 shares of
common stock issued and outstanding. The acquisition was accounted for as
recapitalization of Sinovac China because the shareholders of Sinovac China
controlled Net-Force after the acquisition. Sinovac China was treated as
the acquiring entity for accounting purposes and Net-Force was the
surviving entity for legal purposes. The combined company is considered to
be a continuation of the operations of Sinovac China. Outside the
Agreement, a member of Sinovac management purchased 6,544,830 shares of the
17,091,032 Net-Force shares of common stock outstanding before the
acquisition, resulting in shareholders and management of Sinovac having
control of the combined entity. The issued and outstanding common stock
of Sinovac China prior to the completion of acquisition was restated
to reflect the 10,000,000 common stock issued by Net-Force. Effective on
October 21, 2003, Net-Force changed its name to Sinovac Biotech Ltd.
The Company has an office in Vancouver, Canada. Net-Force had no
operations between May 1, 2003 and September 23, 2003.
The Company incorporated a 100% owned subsidiary called Sinovac Biotech
(Canada) Ltd., under the Canadian Business Corporations Act, on May 12,
2004. Sinovac Canada had no operations in 2004.
80
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
2. Restatements
------------
Management has determined that, in 2003 and 2002, the Company should have
treated the acquisition of certain licenses as purchases of in-process
research and development. Management has also determined that in 2003, the
Company capitalized certain research and development costs that should have
been expensed. Management has further determined that, in 2001, the Company
should have commenced amortization of its hepatitis A vaccine license at
the date of purchase, in April 2001, instead of in July 2002. The Company
has restated its financial statements as at December 31, 2004 and 2003 and
for the years ended December 31, 2004, 2003 and 2002 to correct these
errors.
The effect of these adjustments on the Company's consolidated financial
condition is as follows:
December 31, 2004 December 31, 2003
----------------- -----------------
Restated Originally Restated Originally
Reported Reported
Licenses and permits $1,230,315 $2,343,927 $1,424,503 $2,538,115
Deferred tax asset 860,300 693,300 - -
Total assets 22,420,230 23,366,842 13,784,104 14,897,716
Minority interest 3,124,640 3,575,004 4,205,292 4,737,656
Accumulated deficit (6,155,425) (5,659,177) (1,289,108) (707,860)
The effect of these adjustments on the Company's consolidated results of
operations is as follows:
Period ended December 31, 2004 December 31, 2003 December 31, 2002
- ------------ ----------------- ----------------- -----------------
Restated Originally Restated Originally Restated Originally
Reported Reported Reported
Government
grant $ 719,220 $ - $ 664,251 $ - $ - $ -
Research and
development
expenses 1,005,046 285,826 926,746 232,785 24,535 24,535
Purchased in-
process research
and development - - 381,058 - 476,750 -
Depreciation of
property, plant
and equipment
and amortization
of licenses and
permits 333,881 333,881 271,115 271,115 240,431 143,337
Income taxes (767,467) (600,467) - - - -
Net loss for
the period (4,666,711) (4,751,711) (872,307) (461,539) (1,166,052)(592,208)
Loss per share $ (0.14) $ (0.15) $ (0.04) $ (0.03) $ (0.07)$ (0.07)
81
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
3. Significant Accounting Policies
-------------------------------
(a) Basis of Presentation
These consolidated financial statements include the accounts of the
parent company, its 51% owned subsidiary, Sinovac China and its 100%
owned subsidiaries, Tangshan Yian and Sinovac Canada. All significant
inter-company transactions have been eliminated.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(c) Cash and Cash Equivalents
Cash equivalents usually consist of highly liquid investments that are
readily convertible to cash with maturities of three months or less
when purchased.
(d) Restricted Cash
Restricted cash is cash held as collateral for letters of credit
issued and is classified based on the expected expiration of such
facilities.
(e) Inventories
Inventories are stated at the lower of cost or replacement cost with
respect to raw materials and lower of cost and net realizable value
with respect to finished goods. Cost generally determined on a
first-in, first-out basis and includes direct material, direct labour
and overheads. Net realizable value represents the anticipated selling
price less estimated costs of completion and distribution.
(f) Property, Plant and Equipment
Property, plant and equipment are recorded at cost, including
capitalized interest and internal engineering costs. 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. Depreciation of property, plant and equipment
generally is computed using the straight-line method based on the
estimated useful lives of the assets as follows:
Land-use rights 49 years
Machinery and equipment 8 - 10 years
Motor vehicles 5 years
Office equipment and furniture 5 years
Plant and building 30 years
82
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
3. Significant Accounting Policies (continued)
-------------------------------
(g) Licenses and Permits
The Company capitalizes the purchase cost of vaccines if the vaccine
has received a new drug certificate from the Chinese Food and Drug
Administration ("SFDA"). If the vaccine has not received a new drug
certificate, the purchase cost is expensed as in-process research and
development.
Licenses and permits, in relation to the production and sales of
pharmaceutical products in China, are amortized on a straight-line
basis over their useful lives of 10 years. Carrying values of such
assets are reviewed at least annually and whenever events or changes
in circumstances indicate that the carrying value may not be
recoverable from future undiscounted net cash flows expected to be
generated by the asset. If the asset is not fully recoverable, an
impairment loss would be recognized for the difference between the
carrying value of the asset and its estimated fair value based on
discounted net future cash flows or quoted market prices. There were
no impairment adjustments to the carrying value of the licenses and
permits for the years ended 2004, 2003 and 2002.
(h) Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". Long-lived assets and intangible assets subject to
amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable from the future, undiscounted net cash flows expected to
be generated by the asset. If the asset is not fully recoverable, an
impairment loss would be recognized for the difference between the
carrying value of the asset and its estimated fair value based on
discounted net future cash flows or quoted market prices. There have
been no impairment losses recognized to date.
(i) Income Taxes
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", which requires the
Company to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns using the
liability method. Under this method, deferred tax liabilities and
assets are determined based on the temporary differences between the
financial statements and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse.
83
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
3. Significant Accounting Policies (continued)
-------------------------------
(j) Revenue Recognition
Sales revenue is recognized when persuasive evidence of an arrangement
exists, the price is fixed and final, delivery has occurred and there
is reasonable assurance of collection of the sales proceeds. The
Company generally obtains purchase authorizations from its customers
for a specified amount of products at a specified price and considers
delivery to have occurred when the customer takes possession of the
products. The Company provides its customers with a limited right of
return. Revenue is recognized upon delivery and a reserve for sales
returns is recorded. The Company has demonstrated the ability to make
reasonable and reliable estimates of products returns in accordance
with SFAS No. 48, Revenue Recognition When Right of Return Exists.
Shipping and handling fees billed to customers are included in sales.
Costs related to shipping and handling are part of selling, general
and administrative expenses in the consolidated statements operations.
EITF No. 00-10, Accounting for Shipping and Handling Fees and Costs
allows for the presentation of shipping and handling expenses in line
items other than cost of sales. In 2004, $39,633 (2003 - $16,347 and
2002 - $7,573) related to shipping and handling costs was included in
selling, general and administrative expenses in the accompanying
consolidated statements of operations.
(k) Advertising Expenses
Advertising costs are expensed as incurred and included in selling
expenses. Advertising costs were $71,399 (2003 - $14,875 and 2002 -
$77,790) for the year ended December 31, 2004.
(l) Research and Development
Research and development costs are charged to operations as incurred.
Research and development costs are listed as a separate line item on
the Company's statements of operations.
Government research grants to reimburse expenses issued are taken into
income in the period in which the development expenses are recorded
and the conditions imposed by the government authorities are
fulfilled.
84
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
3. Significant Accounting Policies (continued)
-------------------------------
(m) Foreign Currency Transactions
The parent company and its subsidiaries maintain their accounting
records in their functional currencies, i.e. U.S. dollars and Renminbi
Yuan ("RMB") respectively. The Company translates foreign currency
transactions into its functional currency in the following manner:
At the transaction date, each asset, liability, revenue and expense is
translated into the functional currency by the use of the exchange
rate in effect at that date. At the period end, foreign currency
monetary assets, and liabilities are re-evaluated into the functional
currency by using the exchange rate in effect at the balance sheet
date. The resulting foreign exchange gains and losses are included in
operations.
The assets and liabilities of the foreign subsidiaries, Sinovac China
and Tangshan Yian, are translated into U.S. dollars at exchange rates
in effect at the balance sheet date. Revenue and expenses are
translated at average exchange rate. Gain and losses from such
translations are included in stockholders' equity as a component of
other comprehensive income.
(n) Stock-based Compensation
The Company has adopted the fair value method of accounting for
stock-based compensation recommended by of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-based
Compensation". The Company has a stock option plan that is described
more fully in note 12.
(o) Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. The
Company discloses this information on its Statement of Stockholders'
Equity. The Company's comprehensive income consists of net earnings
(loss) and foreign currency translation adjustments.
(p) Earnings (Loss) Per Share
Basic earning (loss) per share is computed using the weighted average
number of shares outstanding during the period. The Company adopted
SFAS No. 128, "Earnings per Share". 1,500,000 shares held in escrow
and contingently cancelable are excluded in the computation of loss
per share until the conditions for their release are satisfied (note
7). Diluted loss per share is equal to the basic loss per share for
the periods presented because common stock equivalents that are
outstanding are anti-dilutive. However, they may be dilutive in
future.
85
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
3. Significant Accounting Policies (continued)
-------------------------------
(q) Financial Instruments and Concentration of Credit Risks
The fair values of financial instruments are estimated at a specific
point in time, based on relevant information about financial markets
and specific financial instruments. As these estimates are subjective
in nature, involving uncertainties and matters of significant
judgement, they cannot be determined with precision. Changes in
assumptions can significantly affect estimated fair values.
The carrying value of cash and cash equivalents, accounts receivable,
short-term loans payable, accounts payable and accrued liabilities,
and due from and to related parties approximate their fair value. The
fair value of long-term debt is based on the discounted value of
contractual cash flows and at December 31, 2004, approximates its
carrying value. The discount rate is estimated using the rates
currently offered for debt with similar remaining maturities.
The Company operates in China, which may give rise to significant
foreign currency risks from fluctuations and the degree of volatility
of foreign exchange rates between US dollars and the Chinese currency
RMB. Financial instruments that potentially subject the Company to
concentration of credit risks consist principally of cash and trade
receivables, the balances of which are stated on the consolidated
balance sheets. The Company places its cash in high credit quality
financial institutions. The Company's customers are primarily
government agencies. One customer accounted for 21% (2003
- 16%) of total sales for year ended December 31, 2004. Two
customers accounted for 41% of total sales for the year ended December
31, 2002. Concentration of credit risks with respect to trade
receivables is limited since the Company has a large number of
customers in different locations in China. Ongoing credit evaluations
of customers' financial condition are performed and the Company
maintains provision for potential credit losses if necessary. The
Company does not require collateral or other security to support
financial instruments subject to credit risks. The Company is not
subject to significant interest risk.
(r) Accounting for Derivative Instruments and Hedging Activities
The Company has adopted the Statement of Financial Accounting
Standards No. 133 (SFAS 133), Accounting for Derivative Instruments
and Hedging Activities, which requires companies to recognize all
derivatives contracts as either assets or liabilities in the balance
sheet and to measure them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in
the fair value of the hedged asset or liability that are attributable
to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of
change.
The Company has not entered into derivative contracts either to hedge
existing risks or for speculative purposes. The adoption of this
pronouncement does not have an impact on its consolidated financial
statements.
86
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
3. Significant Accounting Policies (continued)
-------------------------------
(s) New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs--an
amendment of ARB No. 43, Chapter 4", which is the result of the FASB's
project to reduce differences between U.S. and international
accounting standards. SFAS No. 151 requires idle facility costs,
abnormal freight, handling costs, and amounts of wasted materials
(spoilage) be treated as current-period costs. Under this concept, if
the costs associated with the actual level of spoilage or production
defects are greater than the costs associated with the range of normal
spoilage or defects, the difference would be charged to current-period
expense, not included in inventory costs. SFAS No. 151 will be
effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The adoption of SFAS No. 151 does not have an
impact on the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for
Stock-Based Compensation". SFAS 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity
instruments for goods or services. This Statement focuses primarily on
accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS 123(R) requires
that the fair value of such equity instruments be recognized as
expense in the historical financial statements as services are
performed. Prior to SFAS 123(R), only certain pro-forma disclosures of
fair value were required. SFAS 123(R) shall be effective for the
Company as of the beginning of the first interim or annual reporting
period that begins after December 15, 2005. The adoption of this new
accounting pronouncement does not have an impact on the Company's
consolidated financial statements.
In December 2004, FASB issued Statement No. 153, "Exchange of
Nonmonetary Assets". This statement addresses the measurement of
exchanges of nonmonetary assets and eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive
assets and replaces it with an exception for exchanges that do not
have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is
effective for periods beginning after June 15, 2005. The adoption of
this new accounting pronouncement does not have an impact on the
Company's consolidated financial statements.
87
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
4. Accounts Receivable
-------------------
---------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------
Trade receivables $ 3,839,249 $ 1,609,209
Allowance for doubtful accounts (521,804) (148,551)
---------------------------------------------------------------------------
3,317,445 1,460,658
Other receivables 35,842 10,103
---------------------------------------------------------------------------
Total $ 3,353,287 $ 1,470,761
===========================================================================
5. Inventories
-----------
---------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------
Raw materials $ 149,493 $ 237,974
Finished goods 230,847 692,673
Work in progress 106,903 117,273
---------------------------------------------------------------------------
Total $ 487,243 $ 1,047,920
===========================================================================
88
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
6. Property, Plant and Equipment
-----------------------------
2004
--------------------------------------------------
Cost Accumulated Net book
Amortization Value
---------------------------------------------------------------------------------------------
Construction in progress $ 1,196,094 $ - $ 1,196,094
Plant and building 5,797,311 439,011 5,358,300
Land-use rights 592,087 57,022 535,065
Machinery and equipment 3,572,657 908,110 2,664,547
Motor vehicles 242,406 90,367 152,039
Office equipment and furniture 243,905 107,887 136,018
---------------------------------------------------------------------------------------------
Total $ 11,644,460 $ 1,602,397 $ 10,042,063
=============================================================================================
2003
--------------------------------------------------
Cost Accumulated Net book
Amortization Value
---------------------------------------------------------------------------------------------
Land-use rights $ 365,510 $ 19,892 $ 345,618
Plant and building 4,191,009 189,342 4,001,667
Machinery and equipment 3,134,007 412,862 2,721,145
Motor vehicles 166,219 48,834 117,385
Office equipment and furniture 174,847 51,326 123,521
Leasehold improvements 167,274 16,727 150,547
---------------------------------------------------------------------------------------------
Total
$ 8,198,866 $ 738,983 $ 7,459,883
=============================================================================================
As at December 31, 2004, the three apartments used as dormitories included
in plant and building with a net book value of $337,440 are pledged as
collateral for a $202,436 outstanding mortgage and a $603,865 short-term
bank loan (note 9). Depreciation expense for the year ended December 31,
2004 was $589,998 (2003 - $489,452 and 2002 - $240,005).
89
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
7. Acquisition of Tangshan Yian
----------------------------
On January 26, 2004, Sinovac acquired 100% of the shares of Tangshan Yian
from a director (the "Vendor") of the Company by issuing 3,500,000 common
shares and paying $2,200,000 cash in the form of a promissory note. The
$2,200,000 promissory note is non-interest bearing and payable on or before
January 26, 2005 (note 11e). In connection with the acquisition, the Vendor
agreed to assume and pay off $1 million of debt owed by Tangshan Yian on or
before January 31, 2006. 1,500,000 of 3,500,000 shares are placed in escrow
and contingently cancellable if the debt is not paid within the given time
frame. Accordingly, these escrow shares are excluded from the calculation
of the weighted average number of shares for purposes of earnings (loss)
per share. The total consideration, not including the 1.5 million escrow
shares, is valued at $3.6 million. The share price used to determine the
purchase price for accounting purposes was based on the average closing
market prices of the Company's common stock for the seven trading days,
which includes the three trading days before and after the acquisition
announcement on October 20, 2003.
The acquisition has been accounted for by the purchase method with the fair
value of the consideration paid being allocated to the fair value of the
identifiable assets and liabilities acquired as follows:
Cash and cash equivalents $ 42,216
Tangible assets 6,445,222
Liabilities (2,877,395)
--------------------------------------------------------
Net assets acquired $ 3,610,043
========================================================
Tangshan Yian is in the business of research and development, production
and sales of certain pharmaceutical products in China. The operating
results of Tangshan Yian from January 26, 2004 to December 31, 2004 are
included in the consolidated statements of operations. Tangshan Yian did
not have material operations in 2003, accordingly, pro forma supplemental
information on the results of operations of 2003 as though the acquisition
had been completed at the beginning of 2003 is not presented.
90
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
8. Licenses and Permits
--------------------
---------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------
Inactive hepatitis A $ 1,941,879 $ 1,941,879
Less: accumulated amortization (711,564) (517,376)
---------------------------------------------------------------------------
Total $ 1,230,315 $ 1,424,503
===========================================================================
(a) The inactive hepatitis A drug license was contributed by Tangshan Yian
in 2001 as its capital contribution to Sinovac Beijing. The purchase
price represented Tangshan Yian's book value and also the estimated
fair value at that time. The hepatitis A vaccine received its new
drug certificate from the SFDA in December 1999 and production
commenced in July 2002.
(b) In March 2003, Sinovac China acquired the influenza virus HA vaccine
drug license from Tangshan Yian at the vendor's cost. In January
2004, Sinovac China completed the acquisition of 100% of the shares of
Tangshan Yian (note 7). Sinovac China received the final drug
registration approval from the SFDA in February 2005. The cost of the
license was expensed as purchased in-process research and development.
(c) In April 2002, Sinovac China acquired the recombinant hepatitis A&B
drug license from a company called Beijing Keding Investment Co., Ltd.
("Beijing Keding") by issuing shares equal to a 10.71% interest in
Sinovac China and paying $18,116 (RMB150,000) in cash. Beijing Keding
is owned by a director, president and three other senior officers of
Sinovac China. As at December 31, 2004, $10,481 (December 31, 2003 -
$10,487) remained unpaid and was recorded in due to related parties
(see note 11b). Sinovac China received a final drug registration
approval from China SFDA in January 2005. The cost of the license was
expensed as purchased in-process research and development. The drug
license was acquired at the vendor's cost.
(d) Amortization expense for the licenses and permits was $194,326 for the
year ended December 31, 2004 (2003 - $194,343 and 2002 - $194,188.
The estimated amortization expenses for each of the five succeeding
fiscal years ended December 31 are as follows:
2005 $194,000
2006 $194,000
2007 $194,000
2008 $194,000
2009 $194,000
91
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
8. Licenses and Permits (continued)
--------------------
The above amortization expense forecast is an estimate. Actual amounts
of amortization expense may differ from estimated amounts due to
additional intangible asset acquisitions, changes in foreign currency
exchange rates, impairment of intangible assets, accelerated
amortization of licenses and permits, and other events.
9. Loans Payable
-------------
---------------------------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------------------------
Bank loan: RMB 5,000,000, bearing interest at 5.84% per
year and due on June 26, 2004. The loan was secured by
certain machinery and equipment (Note 6) $ - $ 603,865
Bank loan: RMB 5,000,000, bearing interest at 5.58% per
annum, interest is payable quarterly and the principal
is repayable on October 28, 2005. The loan is secured
by three apartments included in property, plant and
equipment (Note 6) 603,865 -
Bank loan: RMB 5,000,000, bearing interest at 5.49% per
year, interest is payable quarterly and the principal
is repayable on December 19, 2005 603,865 -
Loan from China High Tech Investment Co., Ltd.:
RMB9,000,000, unsecured and bearing interest at 5% per
year, RMB5.4 million (including principal and interest) of
RMB9 million loan is due on September 30, 2005, the
remaining balance plus interest is due on December 31,
2005 1,250,000 -
Unsecured employees loan: RMB 1,222,000 (2003 - RMB
1,230,000) bearing interest at 15% per annum and due on
demand 147,584 148,550
---------------------------------------------------------------------------------------------
Total loans payable - current $ 2,605,314 $ 752,415
=============================================================================================
Bank loan: RMB 5,000,000, bearing interest at 5.49% per
year, interest is payable quarterly and due on
December 19, 2005 $ - $ 603,865
Mortgage payable: RMB 1,676,167, bearing interest at
5.04% per year with the monthly blended payments of
$2,284 and due on May 25, 2014. The mortgage is secured
by three apartments included in property, plant and
equipment (Note 6) 202,436 -
---------------------------------------------------------------------------------------------
Total loans payable - long-term $ 202,436 $ 603,865
=============================================================================================
The weighted average effective interest rate was 6.75% and 8.52% for the
years ended December 31, 2004 and 2003, respectively.
92
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
10. Income Taxes
------------
Sinovac China and Tangshan Yian are subject to income taxes in China on
their taxable income as reported in their statutory accounts at a tax rate
in accordance with the relevant income tax laws applicable to foreign
investment enterprises. Tangshan Yian is eligible for a full exemption from
income taxes for two years and a 50% reduction in income taxes for the
three years following its first profit making year. The tax holiday has no
impact on Tangshan Yian's operating results as Tangshan Yian was in a tax
loss position. Sinovac China is granted a "New Technology Enterprise"
certificate by Chinese government, under which Sinovac China is entitled to
a tax holiday. It was exempt from income taxes for three years until 2003,
is subject to a 7.5% corporation income tax rate until 2006 and 15%
thereafter until it no longer qualifies as a "New Technology Enterprise".
The parent company is not subject to income taxes.
If the tax holiday of Sinovac China described above had not existed, the
income tax expenses (net of minority interest) would have been increased by
approximately $108,220 (RMB895,400) for the year ended December 31, 2004.
Basic and diluted loss per common share would have been approximately $0.15
for the year ended December 31, 2004. The tax holiday had no impact on
operating results before taxes generated in 2003 and 2002 as Sinovac China
was in a tax loss position.
Income taxes are attributed to the operations in China and consist of:
---------------------------------------------------------------------------
2004 2003 2002
---------------------------------------------------------------------------
Current $ 92,833 $ - $ -
Deferred (860,300) - -
---------------------------------------------------------------------------
Total income taxes $ (767,467) $ - $ -
===========================================================================
The reconciliation of the Chinese income tax rate to the effective income
tax rate based on income before income taxes stated in the consolidated
statements of operations is as follows:
2004 2003 2002
---------------------------------------------------------------------------------------------
% % %
China statutory income tax rate (33.00) (33.00) (33.00)
Loss of the Company not subject to tax 33.65 11.00 0.00
Deferred income taxe recognized (17.23) 0.00 0.00
Benefit of loss carry forward 0.67 0.00 0.00
Effect of tax holiday (2.17) 0.00 0.00
Non-deductible expenses 2.63 0.00 0.00
Tax asset value greater than net book value 0.00 14.00 20.00
Loss to be carried forward not realized 0.18 8.00 13.00
Others (0.10) 0.00 0.00
---------------------------------------------------------------------------------------------
Effective income tax rate (15.37) 0.00 0.00
=============================================================================================
93
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
10. Income Taxes (continued)
------------
The tax effects of temporary differences that give rise to the Company's
deferred tax assets (liabilities) are as follow:
---------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------
Tax losses carried forward $ 422,000 $ 139,000
Excess of tax cost over the net book
value of the certain long-lived assets 860,300 878,000
Less: valuation allowance (422,000) (1,017,000)
---------------------------------------------------------------------------
Total deferred tax asset $ 860,300 $ -
===========================================================================
The Company determines deferred taxes for each tax-paying entity in each
tax jurisdiction. The potential tax benefits arising from the losses
incurred by Tangshan Yian have not been recorded in the financial
statements, however, the potential benefits arising from tax losses
incurred by Sinovac Beijing have been recognized.
The Company evaluates its valuation allowance requirements on an annual
basis by reviewing reviews all available evidence, both positive and
negative, and considers whether, based on the weight of that evidence, a
valuation allowance is needed. When circumstances change and this causes a
change in management's judgement about the realizability of deferred tax
assets, the impact of the change on the valuation allowance is generally
reflected in current income. The future realization of the tax benefit of
an existing deductible temporary difference ultimately depends on the
existence of sufficient taxable income of the appropriate character within
the carryforward period available under the tax law.
With the history of two years taxable income in Sinovac Beijing, the
expectation of future earnings and the availability of certain tax planning
strategies, the Company concluded that the valuation allowance relating to
timing differences in respect of long lived assets should be reversed.
Management expects that taxable income from operations in the future will
be sufficient to utilize the deductions resulting from the reversal of
timing differences. If taxable income from operations is not sufficient,
the Company will employ tax planning strategies that relate the realization
of gains on land use rights at the time that those assets are no longer
required.
Based on these factors, the Company concluded that a valuation allowance in
respect of temporary timing differences was not required at December 31,
2004. The valuation allowance relating to losses carried forward of
Tangshan Yian is still required as realization of this element of the
potential tax benefit is still uncertain.
94
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
11. Related Party Transactions
--------------------------
Related party transactions not disclosed elsewhere in the consolidated
financial statements are as follows:
(a) Due from related parties consist of the following (also see notes 7 &
8):
---------------------------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------------------------
o Advances to Tangshan Yian, a company related
by a common director, bearing interest at 5%
per annum (secured by the floating charge on
the property, plant and equipment of Tangshan
Yian), also see note 7 $ - $ 786,300
o Due from Shenzhen Bio-Port Co., Ltd.
("Shenzhen Co."), a non-controlling
shareholder of Sinovac China, bearing
interest at the prevailing lending rates in
China, which ranged from 5% - 6% in 2004. The
amount was received subsequent to the year
end 421,327 32,178
o Due from Beijing Xinfu, a corporation
controlled by a director Sinovac China,
bearing interest at 5% per annum - 128,789
o Due from Beijing Weiming, a non-controlling
shareholder of Sinovac China, bearing
interest at the prevailing lending rates in
China, which ranged from 5% - 6% in 2004. The
amount was received subsequent to the year
end 773,551 -
o Due from a director (see (e) below) 145,950 -
o Promissory note from a director, including
accrued interest of $22,048 (see below) 1,671,048 -
---------------------------------------------------------------------------------------------
Total $ 3,011,876 $ 947,267
=============================================================================================
The promissory note from a director of the Company with the principal
amount of $1,849,000 was due on September 24, 2004. On October 12, 2004,
the Company entered into a pledge, escrow and promissory note agreement
("Escrow Agreement") with this director to extend the repayment date.
Pursuant to the Escrow Agreement, the promissory note shall be paid in
installments of $200,000 commencing November 15, 2004 and the like amount
each three months thereafter with any remaining sum due on November 15,
2006. The note bears interest at 5% per annum. The Company received
$200,000 in 2004 and $200,000 in February 2005 in accordance with the
payment schedule. This director placed 3,000,000 shares of the Company in
escrow as security for the amounts owing under the Escrow Agreement.
95
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
11. Related Party Transactions (continued)
--------------------------
(b) Amounts due to related parties are unsecured, do not bear interest,
are due on demand, and consist of the following:
------------------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------------------
o Due to Beijing Weiming, a non-controlling
shareholder of Sinovac China $ - $ 1,135,045
o Due to Beijing Keding, a non-controlling
shareholder of Sinovac China (note 8b) 10,481 10,487
o Due to Beijing Xinfu, a corporation
controlled by a director of Sinovac China 5,611 -
o Due to a director 13,098 24,942
------------------------------------------------------------------------------------
Total $ 29,190 $ 1,170,474
====================================================================================
(c) The Company entered into the following transactions in the normal
course of operations at the exchange amount with related parties:
------------------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------------------------------------------
Purchased raw materials from Tangshan Yian $ - $ - $ 403,698
Interest income earned on the advances to related
parties $ 285,850 $ 38,764 $ 44,063
Rent paid to Beijing Weiming, a non-controlling
shareholder of Sinovac China (see (d) below) $ 42,261 $ - $ 4,019
Interest expenses incurred on the advances from
related parties (including interest imputed at the
rate of 5% per annum on the interest- free
advances received): $ 186,845 $ 155,334 $ 30,059
------------------------------------------------------------------------------------------------------------
(d) In 2004, the Company entered into two operating lease agreements with
Beijing Weiming, a non-controlling shareholder of Sinovac China, with
respect to Sinovac China's production plant and laboratory in Beijing,
China for an annual lease of totalling of $169,000 (RMB 1,398,680).The
leases commenced on August 12, 2004 and have a term of 20 years.
Included in prepaid expenses and deposits as at December 31, 2004, is
$375,276 (RMB 3,107,289) representing the lease deposit made to this
related party.
(e) In 2004, a promissory note owed by a director of the Company to
Tangshan Yian approximately $2.6 million was settled by $400,000 cash
and offsetting $2.2 million promissory note owed to him. As of
December 31, 2004, $145,950 representing the interest owing on the
$2.6 million promissory note remained unpaid and was included in due
from related parties.
96
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
11. Related Party Transactions (continued)
--------------------------------------
(f) In 2004, the Company paid $72,000 and $36,000 to a director of the
Company and an individual related to a director of Sinovac China,
respectively, relating to management consulting services.
(g) In June 2003, Sinovac China completed two debt settlements, totaling
$2,608,696 with corporations controlled by one of its directors by
issuing shares equal to approximately 16% interest in Sinovac China.
12. Stock Option Plan
-----------------
The board of directors has approved a stock option plan (the "Plan")
effective on November 1, 2003, pursuant to which directors, officers,
employees and consultants of the Company are eligible to receive grants of
options for the Company's common stock. The Plan expires on November 1,
2023. A maximum of 5,000,000 common stocks have been reserved under the
plan. Each stock option entitles its holder to purchase one common share
of the Company. Options may be granted for a term not exceeding 10 years
from the date of grant. The Plan is administered by the board of
directors.
In November 2003, 3,000,000 stock options under the Plan were granted to
its directors, officers and employees with an exercise price of $1.31 per
share, being the market price at the time of the grant. These options vest
from April 1, 2004 to July 1, 2006 and expire on November 12, 2008.
In April 2004, 2,000,000 stock options under the Plan were granted to its
directors, officers and employees with an exercise price of $4.55 per
share, being the market price at the time of the grant. These options vest
from April 14, 2004 to July 14, 2006 and expire on April 13, 2009.
In June 2004, 4,500 stock options were granted to an employee to replace
the 4,500 stock options forfeited in 2004. These options have an exercise
price of $3.36 per share, being the market price at the time of the grant,
and expire on June 8, 2009. The options vest from June 9, 2004 to September
9, 2006.
97
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
12. Stock Option Plan (continued)
-----------------------------
A summary of the Company's stock options activities is presented below:
---------------------------------------------------------------------------
Weighted
Number of Average
Common Shares Exercise Price
---------------------------------------------------------------------------
Options outstanding at December 31, 2002 - -
Granted 3,000,000 $ 1.31
---------------------------------------------------------------------------
Options outstanding at December 31, 2003 3,000,000 1.31
Granted 2,004,500 4.55
Forfeited (4,500) (1.31)
Cancelled (500) (1.31)
Exercised (40,500) (1.31)
---------------------------------------------------------------------------
Options outstanding at December 31, 2004 4,959,000 $ 2.62
===========================================================================
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------------------------
$1.01 - $2.00 2,954,500 3.88 $ 1.31 1,566,750 $ 1.31
$3.01 - $4.00 4,500 4.44 $ 3.36 1,350 $ 3.36
$4.01 - $5.00 2,000,000 4.29 $ 4.55 1,177,500 $ 4.55
--------------------------------------------------------------------------------
4,959,000 4.04 $ 2.62 2,745,600 $ 2.70
================================================================================
The Company charged $4,428,032 and $119,581 stock-based compensation in
relating to selling, general and administrative expenses to operations in
2004 and 2003, respectively, by applying the fair value method in
accordance with SFAS No.123.
98
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
12. Stock Option Plan (continued)
-----------------------------
The following table shows the assumptions used in determining stock-based
compensation costs under the Black-Scholes option pricing model:
---------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------
Expected volatility 74.0% 74.0%
Risk-free interest rate 3.44% 3.42%
Expected life (years) 5.0 4.0
Dividend yield Nil Nil
Weighted average fair value of options
granted $2.85 $0.74
---------------------------------------------------------------------------
As at December 31, 2004, there was $3.4 million of total unrecognized
compensation cost related to non-vested share-based compensation
arrangements granted under the Plan. That cost is expected to be recognized
over a period of 11 months.
99
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
13. Common Stock
------------
(a) Share Capital
In 2004, the Company completed a private placement by issuing
3,800,000 units at a price of $1.25 per unit for gross proceeds of
$4,750,000, of which $1,031,959 was received by December 31, 2003.
Each unit consists of one share of common stock of the Company and one
share purchase warrant. The terms of the warrants are described below.
The Company also issued 379,200 units as a finder's fee.
(b) Share Purchase Warrants
As at December 31, 2004, there are warrants outstanding to purchase up
to 7,366,618 shares of common stock of the Company. In particular
there are 3,187,418 share purchase warrants outstanding; each warrant
entitles the holder to purchase one share of common stock of the
Company at $1.65 per share until January 15, 2005 with an exercise
price increasing by $0.05 every month thereafter until April 15, 2005,
and a "piggyback" right to purchase one additional share of common
stock at $3.00 per share until November 14, 2005 only if the holder
exercises the share purchase warrant. In 2004, 991,782 share purchase
warrants were exercised and as at December 31, 2004, there are 991,782
piggyback warrants exercisable at $3.00 per share until November 14,
2005. There were no share purchase warrants outstanding at December
31, 2003. (Also see note 17c)
(c) Stock Issued for Services
In 2004, the Company issued 12,500 shares of common stock to a
consulting firm for financial consulting services rendered at a value
of $40,500.
100
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
14. Distribution of Profit
----------------------
Pursuant to Chinese company law applicable to foreign investment companies,
the Company's subsidiaries, Sinovac China and Tangshan Yian, are required
to maintain dedicated reserves, which include a general reserve and an
enterprise expansion reserve. The dedicated reserves are to be appropriated
from net income after taxes, determined under the relevant Chinese
accounting regulations at a rate determined by the board of directors of
the respective subsidiaries, and recorded as a component of shareholders'
equity. The dedicated reserves are not distributable other than upon
liquidation.
For the year ended December 31, 2004, Sinovac China appropriated 10% of its
after-tax profit, determined under the relevant Chinese accounting
regulations, to each of the general reserve and the enterprise expansion
reserve. As Sinovac China recorded a loss for the year ended December 31,
2003 and 2002, no appropriation to the dedicated reserves was made.
Pursuant to the same Chinese company law, the Company's subsidiaries are
required to transfer, at the discretion of its board of directors, a
certain amount of its annual net income after taxes as determined under the
relevant Chinese accounting regulations to a staff welfare and bonus fund.
For the year ended December 31, 2004, the board of directors of Sinovac
China approved $49,901 (RMB 413,183) for contribution to such fund which
shall be utilized for collective staff benefits such as building of staff
quarters or housing. As Sinovac China recorded a net loss for the years end
December 31, 2003 and 2002, no appropriation to the staff welfare and bonus
fund was made. The amounts appropriated to staff welfare and bonus fund
were charged against income and the related provisions were reflected as
accrued liabilities in the consolidated balance sheets.
Tangshan Yian recorded a net loss for each of the three years in the period
ended December 31, 2004, so no appropriation to the dedicated reserves and
staff welfare and bonus fund was made.
Dividends declared by the Company's subsidiaries are based on the
distributable profits as reported in their statutory financial statements.
As of December 31, 2004, dividends payable of $470,301 represent a minority
interest in the share of dividends declared by Sinovac China.
101
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
15. Segmented Information
---------------------
The Company operates exclusively in the biotech sector. The Company's
business is considered as operating in one segment based upon the Company's
organizational structure, the way in which the operation is managed and
evaluated, the availability of separate financial results and materiality
considerations. All the revenues are generated in China. The Company's
assets by geographical location are as follows:
---------------------------------------------------------------------------
2004 2003
---------------------------------------------------------------------------
Assets
North America $ 780,000 $ 342,268
China 21,640,230 13,441,836
---------------------------------------------------------------------------
Total $ 22,420,230 $ 13,784,104
===========================================================================
16. Non Cash Transactions
---------------------
(a) In January 2004, the Company issued 3,500,000 shares of common stock
and $2,200,000 promissory note for the acquisition of Tangshan Yian
(note 7). The $2.2 million promissory note was settled in 2004 by
offsetting the amount owed by this related party.
(b) In 2004, the Company issued 12,500 shares of common stock to a
consulting firm for financial consulting services provided to the
Company (note 13c).
(c) In 2003, Sinovac China issued its shares for debt settlement in the
amount of $2,608,696 (Note 11(g)).
102
SINOVAC BIOTECH LTD.
- --------------------
(formerly Net-Force Systems Inc.)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003
(Expressed in U.S. Dollars)
Restated - Note 2
- --------------------------------------------------------------------------------
17. Subsequent Events
-----------------
(a) On November 30, 2004, the Company entered into share purchase
agreements with non-controlling shareholders to acquire aggregated
additional 20.56% interest in Sinovac China for cash consideration of
$3.31 million increasing the Company's interest in Sinovac China to
71.56%. As of December 31, 2004, the Company made prepayments of $2.2
million to the minority interest of Sinovac China. The transaction was
completed in February 2005 and the Company is in process of valuation
of certain intangible assets, thus the allocation of the purchase
price has not been finalized as at the report date.
(b) Subsequent to the year end, the Company completed two private
placements by issuing 491,667 and 70,000 units, respectively, at $3.00
per unit for total gross proceeds of $1,685,000, of which $206,950 was
received by December 31, 2004. Each unit consists of one share of
common stock of the Company and one share purchase warrant. The
Company issued 39,333 warrants and 1,970 warrants as finders' fees for
the two private placements, respectively. The Company also paid
finders' fees in cash totaling $168,200. Each warrant entitles its
holder to purchase one additional share of common stock of the Company
at $3.35 per share until the one year anniversary date from the date
of issuance, and:
o for the first private placement warrants, at a price of $4.00
thereafter until the two year anniversary date after the
issuance. The warrants are subject to call provisions in favor of
the Company, which may reduce the expiry date
o for the second private placement warrants, at a price of $4.00
thereafter until October 15, 2006. The warrants are subject to
call provisions in favor of the Company, which may reduce the
expiry date.
Warrants issued as the finders' fee have the same terms as described
above.
(c) Subsequent to the year end, 1,166,529 share purchase warrants were
exercised with total gross proceeds of $1,916,266 and 1,166,529
piggyback warrants were granted to the holders upon the exercise of
the original share purchase warrants.
103
SIGNATURES
----------
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this Annual Report on its behalf.
ON BEHALF OF THE COMPANY, SINOVAC BIOTECH LTD.
----------------------------------------------
Per:
/s/ Weidong Yin
---------------------------------
Weidong Yin
President, CEO and a Director
Date: November 21, 2005
-----------------------
104
EXHIBIT INDEX
-------------
Exhibit # Description of Exhibit Page No.
- --------- ---------------------- --------
31.1 Certification of Disclosure in Sinovac Biotech 105
Ltd.'s Annual Report by Weidong Yin.
31.2 Certification of Disclosure in Sinovac Biotech 108
Ltd.'s Annual Report by Lily Wang.
32.1 Certification of Weidong Yin pursuant to Section 111
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Lily Wang pursuant to Section 906 113
of the Sarbanes-Oxley Act of 2002.