4. RISK FACTORS 4. RISK FACTORS BEFORE INVESTING IN OUR SHARES, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS THAT MAY HAVE A SIGNIFICANT IMPACT ON OUR FUTURE PERFORMANCE AND THE PROSPECTS OF OUR GROUP, IN ADDITION TO OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THE RISKS SET OUT BELOW ARE NOT AN EXHAUSTIVE LIST OF ALL THE RISKS THAT COULD AFFECT US OR RISKS THAT MAY DEVELOP IN THE FUTURE. ADDITIONAL KNOWN OR UNKNOWN RISKS MAY HAVE A MATERIAL AND ADVERSE EFFECT ON US OR OUR SHARES IN THE FUTURE. If you are in any doubt as to the information contained in this section, you should consult your stockbrokers, bank managers, solicitors, accountants or other professional advisers. 4.1 Risks in Relation to Our Business 4.1.1 Dependency on Our Key Management and Technical Personnel The continuing success, growth and expansion of our Group will depend significantly on the knowledge, experience and continued services of our key management and technical personnel. Therefore, the loss of any of our key management and technical personnel without suitable and timely replacement could have a material adverse impact on our ability to compete and expand our business operations effectively.
4.1.2 Dependency on Major Suppliers For the FPE 31 August 2016, purchases from the Merial Group and the Roquette Group accounted for 43.65% and 22.97% of our total purchases respectively. As such, we are dependent on the Merial Group and the Roquette Group for the supply of animal health products and food ingredients respectively. Any disruptions in supply from these major suppliers may adversely affect our business operations and financial performance. Our Group has entered into distribution agreements with Merial SAS (in respect of the Merial Group) and Roquette Singapore Pte Ltd (in respect ofthe Roquette Group) to ensure continuing supply from these major suppliers during the tenure of the agreements. We are the sole distributor of Merial Group in Malaysia for its non-avian products and in Malaysia, Brunei and Singapore for its avian products and one of the distributors of Roquette Group’s products in Malaysia. The key terms of the distribution agreements, amongst others, are as follows: (i) Merial SAS may terminate the agreement by giving three (3) months’ prior notice if Rhone Ma Malaysia is no longer managed and controlled by Dr. Lim, Foong Kam Weng, Dr. Yip, Dr. Raymond Choo and Chan Chew Yen. These five (5) persons are deemed to have control of Rhone Ma Malaysia if they own, directly and / or indirectly, fifty percent (50%) of Rhone Ma Malaysia’s voting shares. As such, the loss of any and / or all of these persons as our shareholders may result in the termination of the agreement. These persons are expected to have control via their total direct and indirect shareholdings of approximately 57.09% in our Company, which in turn is the holding company of Rhone Ma Malaysia upon completion of our Listing. However, there can be no assurance that they will not sell or transfer their respective shareholdings in our Company subsequent to the Listing. Further, in the event of the demise of any and / or all of these persons, Merial SAS may terminate the agreement as the Company no longer fulfills the condition of the distribution agreement. 4. RISK FACTORS (Collt’d) 4.1.3 4.1.4 (ii) Merial SAS can terminate the agreement without any compensation to Rhone Ma Malaysia by giving ninety (90) days’ prior notice if the parties cannot establish the minimum quantity of the products to be purchased from Merial SAS every year for two (2) years continuously. In the event that there is disagreement with Merial SAS on the establishment of such minimum quantity for two (2) years continuously, the agreement may be terminated and we will no longer be granted exclusive right to market and sell Merial products in Malaysia. (iii) Merial SAS can terminate the agreement by giving a thirty (30) days’ prior notice or delete specific product(s) from the agreement without any compensation to Rhone Ma Malaysia, if Rhone Ma Malaysia cannot meet certain percentage of the minimum quantity of the products to be purchased from Merial SAS every year set for the product(s) on a given period. (iv) Roquette Singapore Pte Ltd may terminate the agreement at any time and without prior notice in the event of serious misconduct by Link Ingredients or a change in Link Ingredients’ legal structure, management or financial situation. Kindly refer to Section 6.14 of the Prospectus for further details on the salient terms of the distribution agreements with Merial SAS and Roquette Singapore Pte Ltd. In the event that the distribution agreements are terminated, our financial performance may be adversely affected as revenue contributed by the sales of products purchased from the Merial Group and the Roquette Group accounted to approximately 48.05% and 19.75% of our total revenue for the FPE 31 August 2016. Dependency on a Major Customer For the FYE 31 December 2013, FYE 31 December 2014, FYE 31 December 2015 and FPE 31 August 2016, our maj or customer had contributed approximately 11.26%, 13.65%, 10.92% and 9.94% of our Group’s total revenue respectively. The loss of this major customer, if not replaced, may adversely affect our financial condition and results of operation. Neve11heless, this major customer only accounts for approximately 5.12%, 3.96%,4.81 % and 3.37% of the total PBT of our Group for the FYE 31 December 2013, FYE 31 December 2014, FYE 31 December 2015 and FPE 31 August 20 16 respectively. Despite the absence of long-term contracts with this major customer, it has been our customer since the commencement of our food ingredients business in 20 II. As at the LPD, we have more than 660 customers of which 414 customers have had dealings with our Group in each of the past three (3) financial years up to the FYE 31 December 20 IS. FUl1her, over 130 of our customers have had dealings with us from as early as 2005. Non-Renewal or Revocation of Permits and! or Regulatory Licences Our Group requires approvals, major licences and permits to carry out our business operations. Details of the approvals, major licences and permits obtained by our Group are set out in Section 6.17 of this Prospectus. In the event that we do not obtain the required approvals, major licences and permits and! or such approvals, major licences and permits are not renewed or are revoked, we will not be able to carryon our business operations and this would adversely impact our business and financial performance. 4. RISK FACTORS (Collt’d) Rhone Ma Malaysia has been in the business of importing and distributing feed additives since 2001 and manufacturing feed additives since 2009 whereas AsiaPacific Special Nutrients commenced business in the trading of feed additives in 2013. Further, Link Ingredients commenced business in the trading ofCGM in 2015. Pursuant to the Feed (Licence to Import Feed or Feed Additive) Regulations 2012 which provides that a person must have a valid licence issued by the Feed Board in order to impOli any feed or feed additives and the Feed (Manufacture and Sale of Feed or Feed Additive) Regulations 2012 which provides that no person shall manufacture or sell feed or feed additive unless registered with the Feed Board, Rhone Ma Malaysia had on 27 March 2013 made its first application to the Feed Board for a licence to import feed additives and to be registered as a manufacturer and seller of feed additives. Asia-Pacific Special Nutrients had on 27 March 2013 and 29 August 2014 made its first applications to the Feed Board to be registered as a seller of feed additives and for a licence to impoli feed additives respectively. Further, Link Ingredients had on 13 July 2015 made its first application to the Feed Board for a licence to impOli CGM. As at the LPD, all applications to the Feed Board which are for new import licences and registrations under the Feed Act 2009 are pending approval save for the impOli licences and seller registration certificates for some of the feed additives imported by Rhone Ma Malaysia and Asia-Pacific Special Nutrients and the import licence for CGM impOlied by Link Ingredients, which have been obtained. There was a delay in the submission by Rhone Ma Malaysia and Asia-Pacific Special Nutrients to the Feed Board as our Group was not able to obtain the necessary approval letters from the Quarantine Services and Import / Expori Section of the Department of Veterinary Services (“Quarantine Section”) (for feed additives which contain animal based protein) required for our onward submission to the Feed Board within the timeframe as stipulated under the regulations due to the delay in receiving the necessary veterinary health celiificates from some suppliers as well as the inability of several suppliers in providing the necessary veterinary health certificates as these documents are not required in the suppliers’ country of origin. Nevertheless, no fines or penalty have been imposed by the Feed Board on our Group for the delay in the submission of the applications. As at the LPD, our Group has complied with all the necessary requirements imposed by the Feed Board for the applications save for the approval letters from the Quarantine Section for some of our applications which have yet to be obtained as our Group has not been able to procure the necessary veterinary health certificates from several suppliers as these documents are not required in the suppliers’ country of origin. We are still in discussions with the officers from the Quarantine Section on the documents to be submitted. The delay in obtaining the required regulatory licences from and registration with the Feed Board is due mainly to the continuous changes in the requirements for the suppOliing documents in relation to the application. Hence, the Feed Board had requested our Group to submit additional supporting documents as a result of the changes in the requirements. Further, pursuant to a meeting held between the representatives of our Group and the Feed Board in April 2015 (“Meeting”), our Group was informed that there were voluminous applications submitted to the Feed Board and pending process which has resulted in the delay in obtaining the licences and registration. As at the LPD, no indicative timeframe was provided by Feed Board for the approval of our applications. 4. RISK FACTORS (Coil/’ll) Nevertheless, the Feed Board has been issuing temporary notifications to our Group which is renewable on a three (3)-monthly basis since 2013 for Rhone Ma Malaysia and Asia-Pacific Special Nutrients and since 2015 for Link Ingredients. Pursuant to the Meeting, we were also informed that although the applications by Rhone Ma Malaysia and Asia-Pacific Special Nutrients were submitted after the time frame provided under the regulations, the temporary notifications allowed our Group to import, manufacture and ! or sell the feed additives until we obtain the licence to import feed additives and being registered as a manufacturer and! or seller of feed additives. Rhone Ma Malaysia has received its latest temporary notification dated 5 August 2016 which is expiring on 31 December 2016 from the Feed Board that allows Rhone Ma Malaysia to continue to import, manufacture and ! or sell the feed additives specified in the notification letter prior to obtaining the licence to import feed additives and being registered as a manufacturer and seller of feed additives. AsiaPacific Special Nutrients has received its latest temporary notification dated 5 August 2016 which is expiring on 31 December 2016 from the Feed Board that allows AsiaPacific Special Nutrients to continue to import and! or sell feed additives specified in the notification letter prior to obtaining the licence to import feed additives and being registered as a seller of feed additives. Link Ingredients has also received its latest temporary notification dated 5 August 2016 which is expiring on 31 December 2016 from the Feed Board that allows Link Ingredients to continue to sell CGM as specified in the notification letter prior to being registered as a seller of CGM. These temporary notifications were first granted to Rhone Ma Malaysia and Asia-Pacific Special Nutrients with effect from 25 March 2013 respectively whereas Link Ingredients was granted its first temporary notification with effect from 13 July 2015. As at the LPD, our Group has a total of 137 animal health products of which we are required to be registered as a manufacturer and! or seller of these products with the Feed Board under the Feed Act 2009. Rhone Ma Malaysia and Asia-Pacific Special Nutrients had on 4 August 2016 and 16 August 2016 received the seller registration certificates from the Feed Board for 22 animal health products. These products accounted for approximately 6.59% of our total revenue for the FYE 31 December 2015. Nevertheless, we have not been registered as the manufacturer and! or seller for the remaining 115 animal health products and these products accounted for approximately 16.18% of our total revenue for the FYE 31 December 2015. In addition, III out of the 137 animal health products also require import licence under the Feed Act 2009. As at the LPD, we have obtained import licence for thirty nine (39) animal health products and such animal health products accounted for approximately 10.93% of our total revenue for the FYE 31 December 2015 whereas the remaining seventy two (72) animal health products which are still pending approval for import licence under the Feed Act 2009 accounted for approximately 7.01% of our total revenue for the FYE 31 December 2015. Save for these III animal health products, the remaining animal health products imported by our Group do not require import licence from the Feed Board under the Feed Act 2009. Please refer to Section 6.17 of this Prospectus for details of the import licences and notification letters. 4. RISK FACTORS (Col1t’d) 4.1.5 4.1.6 In the event that our applications are not approved and the temporary notifications are not renewed by the Feed Board upon their expiry, our business operations and financial performance may be adversely affected as we may not be able to continue with our business activities to impo11, manufacture and / or sell the feed additives. Our Group is committed in complying with the prevailing requirements of the Feed (Licence to Import Feed or Feed Additive) Regulations 2012 and the Feed (Manufacture and Sale of Feed or Feed Additive) Regulations 2012 by regularly engaging with the representatives of Feed Board. We are of the view that we would be able to renew the temporary notifications upon their expiry and / or to obtain the required licences and / or register with the Feed Board if the relevant submissions and required documents are in order. Nevertheless, our Group confirms that we will not import and / or carry out any sale of feed additives in the event that the licence to imp0l1, manufacture and / or sell feed additives is not obtained. Registration of Products We are required to register some of our products which include, amongst others, veterinary biologics, veterinary vaccines and pharmaceutical products with the relevant authorities such as Department of Veterinary Services and Drug Control Authority. Some of the product registrations are subject to periodic renewal and registrations are subject to conditions imposed by the relevant authorities which may vary from time to time. If we fail to register and / or renew the products registration, we will not be able to sell the aforesaid products which may result in a material adverse impact on our business and financial performance. Some of our products are sold to resellers and distributors who may be required to hold ce11ain licences, permits or approvals from the relevant authorities in various jurisdictions in order for them to sell the products to their customers. Failure by such resellers and distributors to obtain or renew the necessary licences, permits or approvals from the relevant authorities may result in the resellers or distributors having to cease distribution of our products, which may in turn have a material adverse impact on our business and financial performance. Gestation Period of the New GMP-Compliant Plant As disclosed in Sections 3.8(a)0) and 6.22.10) of the Prospectus, we intend to construct a new GMP-compliant plant in Nilai, Seremban, Negeri Sembilan Darul Khusus to manufacture powder-based products. In the event that we are unable to obtain or obtain on a timely manner, the manufacturer’s licence and / or register the products to be manufactured in the new manufacturing plant, we may not be able to commence operations on time or at all of the new manufacturing plant upon completion of construction. This may adversely affect the business operations and financial performance of our Group. For illustration purposes only, the potential financial impact that may affect our Group assuming that the construction of the new manufacturing plant had been completed as at 31 December 20 IS and that no additional revenue will be generated from the new manufacturing plant since it has not commence operations are as follows: • additional full year depreciation charge of the new manufacturing plant of approximately RM1.20 million; and
• additional interest expense to be incurred on amount to be funded via borrowings from financial institutions of approximately RMO.10 million to construct the new manufacturing plant.
4. RISK FACTORS (Collt’d) 4.1.7 4.1.8 4.1.9 4.1.10 Breakdown of Machineries and Equipment Our manufacturing plant is susceptible to interruptions caused by defects or breakdowns of machineries and equipment. In such event, this would affect the production of our in-house manufactured products and result in an adverse impact on our business operations. Substandard Raw Material Supplied The raw materials that we use for the manufacturing of our products may deteriorate if kept for a long period of time. To maintain the quality of the raw materials, we order our raw materials in quantities adequate to facilitate our Group’s day-to-day intended manufacturing volume. Therefore, the quality of the products manufactured by us is dependent on the consistent supply of raw materials which meet our quality requirements. The raw materials supplied that do not satisfY our quality requirements may result in the failure of our Group to provide safe and quality products to our customers which may subsequently result in an adverse impact to our reputation and business operations. Product Contamination Contamination of our products, whether actual or alleged, deliberate or accidental, could potentially harm our business operations and / or our reputation. Any incident of contamination may result in amongst others, the suspension of our licences. It may also affect the quality and safety of our products resulting in customers’ complaints, loss of reputation and subsequently loss of income. Infringement of IP Rights Our IP is one of the factors that differentiate us from our competitors. Failure to protect our IP rights against infringement or counterfeiting will threaten the image of our Group and result in an adverse impact on our business and financial performance. Details of our registration and applications for trademarks and patents are set out in Section 6.13 of this Prospectus. There is no assurance that our applications for trademark and patent registrations which are currently pending approval for registration will be successful. The registration of trademarks and patents confer protection to our Group such that third parties are prevented from using trademarks that are similar to ours in respect of the class in which our trademarks have been registered or from exploiting our patents without our consent. As the owner of registered trademarks and patents, we have the right to commence legal proceedings for trademark infringement under the Trade Marks Act 1976 or patent infringement under the Patents Act 1983 in the case of infringement, counterfeiting, unauthorised third party use or exploitation of our trademarks and patents. We will also have recourse under the common law to pursue a tortious action for passing off against third parties who attempt to counterfeit or pass off their products under our trademarks which are pending registration. Nevertheless, the existing laws and regulations in relation to IP provide only limited protection to our trademarks and patents and such protection is required to be renewed periodically and generally does not have extraterritorial coverage. Third paIiies may exploit these IP rights in countries in which our trademarks and patents have not been registered or otherwise protected. Further, the filing for and granting of patents will also result in public disclosure of our product formulations which may lead to exploitation of the product formulations in countries where there is no or limited IP protection. 4. RISK FACTORS (Col1t’d)
4.1.11 Credit Risk and Default in Payment by Our Customers Generally, the credit terms granted to our customers range from thirty (30) days to ninety (90) days. Our customers have varying degrees of credit risk profiles which exposes us to the risk of non-payment by them. In the event that our customers default on their payments, our operating cash flows, financial condition and results of operations could be materially and adversely affected.
4.1.12 Adequacy oflnsurance Coverage Our Group’s assets are insured against unforeseen events such as fire and burglary. We also have in place money, employer’s liability, public liability, product liability and fidelity guarantee and marine cargo insurance policies. In the event that we have inadequate insurance coverage, our business operations may be adversely affected.
4.1.13 Disruption in Shipment For the FPE 31 August 2016, approximately 94.37% of our purchases are from suppliers outside Malaysia. As such, we may experience disruption in shipment due to, amongst others, weather conditions, delays in custom clearance, strikes, political turmoil or lost shipments, which may have an adverse impact on our business operations.
4.1.14 Foreign Currency Fluctuation Risl( A majority of our purchases and some of our sales are transacted in foreign currencies, primarily in USD and EUR. For the FPE 31 August 2016, approximately 1.44% of our sales were transacted in USD whereas approximately 94.26% of our purchases were transacted in USD and EUR. As such, we are exposed to foreign currency fluctuation risk. Any unfavourable fluctuations in foreign exchange rates may have an adverse impact on our financial performance and profitability.
4.1.15 Financial Risks Save as disclosed in Section 12.6.3 of this Prospectus, our Group has no other borrowings as at 31 August 2016. All our bank borrowings are interest bearing borrowings and hence, we are susceptible to fluctuations in interest rates. Further, our Group is bound by certain covenants under facility or loan agreements that we have entered into with financial institutions which may limit our operating and financial flexibility. Any breach of the terms and conditions or covenants in relation to the facility or loan agreements may result in the financial institutions withdrawing such facility or forcing outstanding amounts to become immediately due and payable to the financial institutions which could materially and adversely affect the financial position of our Group. 4.2 Risks in Relation to Our Industry 4.2.1 Outbreak of Disease The animal health product sector is highly dependent on the development of the livestock industry. Disease outbreaks such as the avian influenza outbreaks and the Nipah virus outbreak affected the supply and demand for poultry and swine respectively. Similar outbreaks or other new epidemics could have similar effects on the supply and demand of livestock as well as for animal health products. 4. RISK FACTORS (CoIlI'(/j 4.2.2 4.2.3 4.2.4 Dependency on the Livestock Industry Animal health and nutrition products are a critical part of a livestock farm’s operations in ensuring proper nutrition, health and hygiene of the livestock. Therefore, demand for animal health and nutrition products are mainly attributed to the growth in the livestock industry. (Source: IMR Report) Our Group is primarily involved in the provision of end-to-end animal health solution comprising the provision of veterinary advisory and consultation services, diagnostic laboratory analyses, R&D activities as well as manufacturing and distribution of animal health products. As such, our business operations are significantly reliant on the performance of the livestock industry especially on the demand of poultry and swine. Any significant drop in the demand of these livestock which could, amongst others, caused by a change in the eating habits of consumers or disease outbreaks affecting livestock would have an adverse impact on our operating results and profitability. Com petition The local animal health and nutrition market is highly competitive and the market players of the animal health and nutrition market compete on product quality, branding and supply as well as economies of scale and competitive prices in order to cater to larger commercial-scale farms due to the mature nature of the local livestock industry. (Source: IMR Report) According to the IMR Report, some of the key market players within the Malaysian animal health and nutrition market that registered an annual turnover of over RM30 million are Age D’or Sdn Bhd, Asia Veterinary Sdn Bhd, Agritech Enterprise Sdn Bhd, Danberg (M) Sdn Bhd, Pacific Vet Group (M) Sdn Bhd, Peterlabs Holdings Berhad, Ritma Prestasi Sdn Bhd, SCC Holdings Berhad and Sunzen Biotech Berhad. Nevertheless, it should be noted that the product offerings of each player may not exactly coincide with others. In the event that we are unable to remain competitive in the future, increased competition may adversely affect our business and financial performance. Lack of Qualified Professionals in the Animal Health and Nutrition Market Our Group’s business operations are dependent on the expertise of various qualified professionals such as veterinarians, pharmacists and nutritionists. Any substantial shortage in the supply of qualified professionals may lead to a disruption in our Group’s operations. As at the LPD, our Group employs thirteen (13) veterinarians, three (3) pharmacists, one (1) nutritionist and three (3) registered chemists which are sufficient for our existing operations. In addition, three (3) out of six (6) of our key management are veterinarians registered with the Malaysian Veterinary Council. 4. RISK FACTORS (Conl’d)
4.2.5 Political, Economic and Regnlatory Risl. Adverse developments in political, economic and regulatory conditions in Malaysia and other countries in which our Group operates could unfavourably affect the financial position and business prospects of our Group. These risks include, amongst others, changes in political leadership, risk of war, riots and commotions, changes in economic conditions, changes in interest rates, methods of taxation and unfavourable changes in government policies such as introduction of new regulations, import duties and tariffs. Any slowdown in the global or local economy may also have an adverse impact on the demand for our products and services, which will in turn affect our Group’s business operations and financial performance.
4.2.6 R&D Risk Our Group undertakes R&D activIties related to animal health, food safety and agriculture. As such, failure to develop new products or obtain necessary approvals for the products developed in-house may affect our ability to introduce and commercialise new products. In addition, development of new products may have lead times of several years to reach its commercial status and we may not obtain the necessary approvals from the regulatory authorities that are required to commercialise the new products. In such event, we may not be able to recover the cost incurred for the development of new products in time and our results of operations and financial performance may be adversely affected. 4.3 Risl.s in Relation to Our Shares and Our IPO
4.3.1 Delay or Abortion of Our Listing Our Listing may potentially be delayed or aborted should any of the following events occur: (a) any or all of the identified investors fail for whatever reason to subscribe for our IPO Shares allocated to them; or
(b) the Sole Underwriter exercising its rights pursuant to the Underwriting Agreement to discharge from its obligations under the Underwriting Agreement; or
(c) we are unable to meet the public shareholding spread requirement of at least 25% of our enlarged issued and paid-up share capital to be held by a minimum of 1,000 public shareholders holding not less than 100 Shares each at the time of Listing.
In the event we are unable to meet the above requirement, you will not receive any Shares and monies paid in respect of any application accepted will be returned to you without interest within fourteen (14) days after we become liable to repay it. If any such monies are not repaid within fourteen (14) days after we become liable to repay it, then the provisions under sub-section 243(2) of the CMSA shall apply. If our Listing is aborted and our Shares have been allotted to you, a return of monies to you can only be achieved by way of cancellation of our share capital as provided under the Act. Such cancellation requires the approval of our shareholders by way of a special resolution in a general meeting, consent of our creditors (unless dispensation with such consent has been granted by the High Court of Malaya) and the confirmation of High Court of Malaya. There can be no assurance that such monies can be recovered within a short period of time or at all under such circumstances. -39