4. RISK FACTORS 4. RISK FACTORS Prior to making an investment decision, you should carefully consider the risk factors set out below that may have a significant impact on us or our Shares, together with other information contained in this Prospectus. If you are unsure about any of the information contained under this section on “Risk Factors”, you should consult your stockbroker, bank manager, solicitor, accountant or other professional adviser. 4.1 RISKS RELATING TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE 4.1.1 Our business may be adversely affected by product defects, product liability claims, product recalls, adverse pUblicity or negative public perception regarding our products or our industry in general If any of our products were to be involved in product contamination, tampering, adulteration, damage or mislabelling, we may need to recall some or all of our products. A widespread product recall, or even a recall of similar products sold by other manufacturers, could result in significant losses due to the cost of conducting a product recall, including destruction of inventories and loss of sales resulting from the unavailability of the product for a period of time. In addition, adverse publicity or negative public perception regarding the products that we sell, the safety or quality of our products or our industry in general could result in substantially lower demand for our products. Negative public perception could also arise from regulatory investigations or product liability claims, regardless of whether those investigations involve us or whether any product liability claim is successful against us. We may also be liable if the consumption or use of any of our products causes illness or death. A significant product liability judgment, involving us or our competitors, could also result in a loss of consumer confidence in our products and materially impact consumer demand, which in tum could have a material adverse effect on our financial position, results of operations and prospects. Nevertheless, we are familiar with the need for stringent quality control procedures for product formulation and manufacturing processes given our GMP compliance since 2008. To date, we have not had any of our products recalled from the market, and have not experienced any product liability claim nor reputation risks and lack of consumer confidence due to contaminated products. 4.1.2 We may be subject to infringement of our intellectual property and/or proprietary liquid fermentation technology by other players in the market We use various brand names, i.e. “Bexlim®”, “Nushine”, “Bioapotec®”, “Alphanex”, “Apotec” and “Bioa”, to package, advertise, distribute and sell our products. Protection of these brands and intellectual property rights are important in maintaining our distinctive corporate and market identities. If third parties sell products that use counterfeit versions of our brands or otherwise look like our brands, consumers may confuse our products with products that they consider to be inferior and this could negatively impact our brand image and sales. We have been granted trademark registrations covering some of our brands, and have filed and are expected to continue to file trademark applications for newly developed brands. The registration of our trademarks will confer protection on our brands such that subsequent third party users are prevented from using trademarks which are similar to ours. We also produce some of our raw materials using our proprietary liquid fermentation technology. Knowledge of such proprietary information is restricted to our Managing Director/Chief Executive Officer and certain R&D personnel as well as the research partners whom we engaged to assist us in the development of such technology. In addition, we also seek to protect our proprietary information in part by having confidentiality and non-disclosure clauses in agreements with our employees and research partners as well as filing patent applications for our proprietary liquid fermentation technology. 4. RISK FACTORS (Cont’d) However, there can be no assurance that we will be able to continue to protect our proprietary and intellectual property rights against infringement or unauthorised third party copying, use or exploitation, any of which may have an adverse impact on our business, operating results and financial condition. Our intellectual property rights are registered and/or pending registration for protection in certain jurisdictions Le. Taiwan and Malaysia. There can be no assurance that third parties will not exploit these intellectual property rights in jurisdictions where our rights have not been registered or otherwise protected. 4.1.3 Our R&D activities may not lead to successful technologies or products Our success and earnings growth depend in part on our ability to be efficient in the production of our products and to develop new products to meet prevailing market demand. To this end, we are committed to undertake R&D activities to develop new product formulations and to enhance our production process. Our qualified R&D team is advised by our SAB and in more complex cases which involve the expertise of scientists such as plant geneticists and molecular biologists, we also work with research partners who are experts in these fields. Please refer to Section 6.5 of this Prospectus for the process flow for our R&D activities. Weare not, however, dependent on these research partners as the ownership of the technology developed is vested with our Group and the risk of losing the said technology to competitors is protected by the confidentiality and non-disclosure clauses terms stated in the respective experts’ engagement letters. In the event our arrangements with our research partners were to cease, we can identify and readily work with other institutions and/or experts based in Malaysia or overseas. However, there can be no assurance that our R&D activities will be successful. Unsuccessful R&D activities may have an adverse impact on our financial performance as the R&D expenses incurred may have to be written off or sales of the newly developed products may be insufficient to cover our R&D expenses. 4.1.4 Interruptions in utility supply and/or increase in the cost of these utilities could disrupt and/or affect our business Our liquid fermentation process is reliant on a constant supply of utilities such as electrical power and water. Any significant or prolonged interruption in the supply of electrical power and water or other essential utilities could cause us to lose entire production batches of fermented medicinal mushroom and thus, disrupt our production. Increases in our utility costs may also have an adverse effect on our profit margin and results of operations. Our operations are also subject to other risks such as accidents and fire. To minimise the impact of supply disruptions, we have in place emergency systems such as back-up power supply/power generators to facilitate the continued operations of our production facilities. To date, we have not experienced any significant disruptions in our operations caused by utility supply disruptions. However, there can be assurance that such event will not occur or if occur, would not have a material adverse effect on our operations and financial performance. We have also taken up insurance covering our property, plant and equipment. However, there can be no assurance that this coverage is sufficient to offset the potential liabilities and financial losses relating to our operations. In the event that the amounts of such liabilities and losses exceed the insurance coverage of our policies, we may have to bear such liabilities and losses ourselves. There are also other risks such as natural disasters, riots, general strikes, acts of terrorism and other risks that cannot reasonably be insured against, which may adversely affect our operations and financial performance. 4. RISK FACTORS (Cont’d) 4.1.5 Inherent risks in herb farming may cause disruption of supply of herbs for our manufacturing process We are subject to risks inherent in herb farming. These include, but are not limited to, outbreaks of disease, damage from pests, fire or other natural disasters, adverse climate conditions and increase in labour costs. Disruptions in the supply of herbs from our herb farms could affect our production of herbal products should we be unable to source alternative supplies of quality herbs on a timely basis. Our ability to mitigate these risks depends on various factors, including our ability to keep abreast of the latest technologies related to planting materials, disease prevention and farm operations. As such, we have a business development (agricultural) division, which is responsible for our herb farming activities and overall agricultural development. This division oversees our current herb farm on Desaru Land and will manage our future farm on Pasir Raja Land to ensure a continuous supply of herbs for our manufacturing process. They also regularly engage representatives from MOA for the latest developments relating to planting materials, disease prevention and farm operations. However, there can be no assurance that such events can be contained or eliminated entirely and will not have a material adverse effect on our operations and financial performance. 4.1.6 Our herb farms’ leases are not registered under the NLC We were appointed by ECERDC as an Anchor Company to invest, develop and commercially manage a herbal integrated cluster development in Pasir Raja, Terengganu. Pursuant thereto, we have, on 30 January 2015, entered into a sub-lease agreement with ECERDC for the lease of 123.5 acres ofPasir Raja Land for a period of thirty (30) years. Please refer to Section 6.16.1 of this Prospectus for further details of the said lease. In order to safeguard our legal interests as lessee, we will register the said lease under Section 221 (4) of the NLC as any lease that is above three (3) years is required to be registered under the NLC. Failure to register a lease under the NLC will not result in any penalty being imposed. In addition, there is no timeline prescribed under the NLC to register a lease. We had also entered into a Joint Venture Agreement to jointly develop and undertake biotechnology farming on Desaru Land. Pursuant thereto and as provided under clause 3.1(d) of the Joint Venture Agreement, J-Biotech Herbal has agreed to lease the Desaru Land to BJHSB, being the joint-venture company, for a period ofsixty (60) years as injection ofcapital into BJHSB. As at the LPD, we have yet to enter into a lease agreement with the owner of Desaru Land. Without a formal lease agreement for the leasing of Desaru Land, we may be denied the rights to occupy the said land, which will affect our herb farming activities thereon. The Desaru Land is located within an area measuring approximately 3,642 hectares in Tanjung Balau known as ‘Bio Desaru -Organic Food Valley’ and is part of the Johor State Government’s initiative to develop Bio Desaru into an agricultural development region based on modem biotechnology. Bio Desaru Sdn Bhd, the holding company of J-Biotech Herbal, had clarified that the delay in preparation of the lease agreement for Desaru Land was mainly due to a delay in finalising all the investors for Bio Desaru, whereby preparation of the relevant agreements for these investors, including the Desaru Land lease agreement, and registration of the same with the Johor Land Office would be executed at the same time. Pursuant to the finalisation of all the investors for Bio Desaru, Johor Biotechnology and Biodiversity Corporation, the registered owner of Desaru Land and ultimate holding company of J-Biotech Herbal, is in the midst of drafting the said lease agreement to be submitted to the State Secretary, Johor (Incorporated), whereby the agreement is expected to be executed by the second half of 20 15. 4. RISK FACTORS (Cont’d) Nonetheless, our right to the lease of Desaru Land is provided in clause 3.1(d) of the Joint Venture Agreement and we are working closely with the owner of Desaru Land to formalise the said lease. In the event our right to occupy Desaru Land is denied, we will have legal recourse against J-Biotech Herbal for breach of term of contract. In such a situation, we can continue our herb farming activity on Pasir Raja Land as well as source the required herbal plants from external suppliers/farmers. Currently, the herbal plants harvested from our herb farm on Desaru Land are processed into processed herbs for our manufacturing of finished and semi-finished health supplement products as well as sold to third party customers. In the event the right to occupy Desaru Land is denied, we do not expect our operations to be materially affected as the herbal plants harvested from our herb farm on Desaru Land only constituted approximately 1.25% of our total raw materials purchases for FPE 30 September 2014 and we can alternatively source these herbal plants from external suppliers/farmers. In addition, we do not expect our financial performance to be materially affected as our operations on Desaru Land, vide BJHSB, generated a net loss ofRMO.18 million for FPE 30 September 2014. Please refer to Section 6.16 of this Prospectus for further details on our herb farms.
4.1.7 We are susceptible to regulatory, political, economic and social conditions relating to the health supplement industry in Malaysia as well as other international markets in which we operate We operate under a broad range of laws and governmental regulations, both in Malaysia and in international markets, including Indonesia and Australia. These laws and regulations cover many aspects of our operations, including permits and licenses to manufacture and sell our products, and levels of government incentives and exemptions. In addition, food safety laws and regulations in countries in which we operate may become more stringent in the future and this may require us to incur more cost and time to ensure compliance. Non-compliance to new regulations may result in revocation of our permits and licenses. All our health supplement products that are currently sold in the market have been registered with the relevant authorities of the respective countries, including Indonesia and Australia, either by ourselves or our customers. Whilst we have not experienced any significant difficulty in obtaining these approvals in the past, we cannot provide assurance that the relevant authorities will register our future products in the timeframe we anticipate or at all. We were granted a BioNexus status by MBC in 2008, which allows BRSB to enjoy tax exemption benefits on qualifying activities for a period often (10) years. We have also been awarded with grants by various government agencies including, but not limited to, the CRDF from MTDC for R&D on the extraction of polysaccharide carbohydrate from L. rhinocerus and the BCF grant from MBC for the development of new C. sinensis based products. In addition, we have also been appointed as an Anchor Company under the EPP 1, which entitles us to a grant to fund the R&D expenses required for the attainment of “High-value herbal products” and botanical drug claims for two (2) of our existing herbal supplement products for diabetes and hormone replacement therapy. Please refer to Section 6.5 of this Prospectus for the salient terms of the grants. The agreements in relation to the CRDF and BCF grant contain negative covenants, whereby BRSB shall not undertake certain actions without the prior written consent of MTDC and MBC, such as diversification of business activities and disposal of all or a substantial part of its assets. These negative covenants, other than those specifically relating to the grant projects, are similar to certain requirements under the Listing Requirements and/or the Act, whereby shareholders’ approval are also required for the abovementioned actions. Thus, these negative covenants have accorded MTDC and MBC similar rights as BRSB’s shareholders during the tenure of the grants (“Negative Covenants”), which will be expiring on 13 June 2015 and 15 July 2015 respectively. In the event that we decide to undertake such actions during the tenure of the grants through BRSB and MTDC and/or MBC withhold their consents, we will not be entitled to the respective grants and may be liable to repay monies disbursed under the grants, if any. 4. RISK FACTORS (Cont’d) Nonetheless, it is not our intention for BRSB to undertake any actions which may trigger the consent of MTDC and MBC under the Negative Covenants as BRSB was established for the purpose of undertaking R&D activities in order to widen our product range and enhance our product offerings. Any diversification of activities within our Group or other activities which would trigger the consent of MTDC and MBC under the Negative Covenants will be undertaken by other existing or new companies within our Group. In addition, the assets owned by BRSB, which mainly comprise laboratory fittings and fixtures and laboratory machines such as bioreactors, extraction unit, autoclave machines and incubators, will continue to be used for our activities during the tenure ofthe grants. However, there is no assurance that the Government, through its relevant agencies, will continue to provide such incentives and exemptions, and that we will be able to continue to receive similar grants. Although the loss of any of these grants will not have a material impact on our business, these grants do accelerate our R&D activities and are able to subsidise part ofour R&D expenses. On the other hand, in the event that we lose our BioNexus status or the tax exemption for BioNexus companies do not continue, we will incur income tax charges on our qualifying activities which may adversely affect our financial performance. Other political uncertainties that may unfavourably affect us include changes in government policies on priority sectors, war, economic downturn, fmancial crisis, expropriation, nationalization, re-negotiation or nullification of existing contracts, changes in interest rates, methods of taxation and currency exchange controls. Whilst we practice prudent financial management and efficient operating procedures, there can be no assurance that any adverse economic, political and regulatory developments locally or even globally will not materially affect our operations, financial performance and future prospects.
4.1.8 Our success depends on our key personnel and our ability to attract and retain skilled personnel Our success is largely attributed to our management team, including our Managing Director/Chief Executive Officer, William Hon. Our key management has also played a pivotal role in our day to day operations and expansion. The loss of our key personnel may disrupt our business as we may be unable to fmd a suitable replacement in a timely manner. We strive to minimise this risk by having in place a management succession plan, which includes taking a proactive approach towards addressing talent management. Our middle management are constantly exposed to various aspects of our business activities to ensure that they have a full understanding of the necessary responsibilities and decision making process. Nonetheless, there can be no assurance that our measures will be successful in retaining our key personnel or in ensuring a smooth transition should changes occur.
4.2 RISKS RELATING TO AN INVESTMENT IN OUR SHARES 4.2.1 There has been no prior market for our Shares Prior to our IPO, there has been no public market for our Shares. Hence, there is no assurance that upon our Listing, an active market for our Shares will develop, or if developed, that such a market can be sustained. The market price of our Shares could be affected by many factors, some of which are not within our control and may be unrelated or disproportionate to our financial performance and/or position. These include, amongst others, the depth and liquidity of the market for our Shares, general market and economic conditions, the market for similar securities, investors’ individual perceptions of our Group, our financial performance and/or future prospects.