1. Risk Management Policy and Procedure
Risk Management Policy and Procedure |
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2. Risk Evaluate
(1) Operational risks - Supply chain risks:
A. Evaluate:
a.Mandatory suspension of the PRC supplier operations for environmental protection reasons.
b.Impacts of COVID-19 lockdowns on supply.
B. Impact: In 2022, the factory's production capacity was limited due to the aftermath of the fire accident,therefore the raw materials are not yet in short supply.
C. Response:
a.To disperse the supply chain.
b.To overstock, as possible, raw materials with questionable supply conditions.
c.To design multi-functional/multi-purpose production lines so they can be converted to other uses during the affected period.
(2) Operational risks - EHS risks:
A. Evaluate:
a.Being in the chemical manufacturing industry carries high potential for fire and toxicity.
b.Equipment damage or employee death or injuries due to negligent operations that might lead to suspension of operations.
c.Environmental pollution due to negligent operations that might lead to suspension of operations.
d.Net zero carbon impact.
B. Impact: :
a. In 2022, the company recognized insurance claim income of NT$160 million. After assessing the compensation details submitted by the neighboring factory that suffered damage, the reversal of
compensation losses amounted to approximately NT 101.2 million.
b. The company's fire insurance premium has increased fourfold.
C. Response:
a.To execute standard operational procedures faithfully, ensuring adherence to ISO45000 and ISO14000.
b.To conduct educational training and fire drills and include environmental pollution and work safety incidents as factors for performance awards and punishments.
c.To have fire insurance, the current combined insurance amount of which is about NT$2.1 billion (including insurance for interruption of operations).
d.To have Insurances for public accident liability and employer liability.
e.To hire external institutions to calculate the carbon footprint of the company’s products.
(3) Operational risks - Quality risks:
A. Evaluate: Failing a client audit or health authority inspection or receiving warning letters,which create issues in product quality that necessitate remake or scrapping.
B. Impact: In 2022, the loss of inventory scrapping was about NT 2.77 million, and the amount of returns and allowances was about NT 5.68 million.
C. Response:
a.To implement quality assurance policies and good manufacturing practice, ensuring adherence to ISO9000.
b.To have introduced the SAP ERP and Master Control softwares for data integrity and launch the Laboratory Information Management System (LIMS) in 2021.
c. To have a product liability insurance for US$2 million.
(4) Financial risks - Exchange rates risks:
A. Evaluate: 90% of the company’s revenue is derived from exports. The quoted price is mainly in US dollars, and the appreciation or depreciation of the currency impacts the company’s revenue
significantly.
B. Impact: The appreciation and depreciation of NT$1 in the foreign exchange between US dollars and New Taiwan dollars approximately impact 2% of the gross margin. The position of US dollars
generates non-operating exchange gains and losses, NT$27.55 million of non-operating exchange gains in 2022, affecting NT$0.23 in EPS after tax.
C. Response:
a.To increase the product price to maintain the gross margin.
b.To undertake Forward Foreign Exchange to reduce exchange gains and losses.
(5) Financial risks - FVPL:
A. Evaluate: The current amount of financial assets at fair value through profit or loss is NT $97.54 million, mainly consisting of preferred stocks of financial institutions.
B. Impact:
a.The preferred shares of financial institutions are paying stable dividends with a dividend income of approximately NT$5.5 million in 2022.
b.The valuation gains or losses from the investment positions, generate the valuation losses of NT$14 million in 2022.
C. Response: It is expected to dispose of it in 2023.
(6) Financial risks PVOCI:
A. Evaluate: Currently, the financial assets at fair value through other comprehensive income is NT$66 million with NT$34 million from Sunny Pharmtech Inc. and NT$32 million from Energenesis
Biomedical Co., Ltd.
B. Impact: Other comprehensive losses in 2022 are approximately NT$5.79 million, mainly the losses on the valuation of Energenesis Biomedical Co., Ltd. and Sunny Pharmtech Inc.
C. Response:
a.As the investments in those companies are part of a long-term strategy, there is currently no disposal plan.
b. Sunny Pharmtech Inc has been listed on the over-the-counter market in 2022, and the company's operation has improved.
c.The delays in the OTC listing and the progress of the product licensing of Energenesis Biomedical Co., Ltd. are behind schedule, however, the company is still optimistic about the future development.
(7) Financial risks - Credit risks:
A. Evaluate:
a.For the default risk of account receivables, the current account balance is NT$173 million.
b.For the default risk of cash and cash equivalent, the current balance is NT$166 million.
B. Impact: There was no bad debt loss in 2022, but there were accounts receivable overdue for more than 360 days, with an amount of approximately NT$4.7 billion, which has been estimated for refund
liability for sales returns and allowances. The interest income of cash and cash equivalent generated is approximately NT$ 1 million.
C. Response:
a.The company shall implement proper client credit investigation, prepayment transactions shall be requested to the clients with concerning status, and factoring of accounts receivables and insurance
shall be implemented when necessary.
b. The company’s cash deposits are in financial institutions with high credit ratings, which are mainly Mega Bank and JihSun Bank, for USD fixed deposits.
(8) Financial risks Others:
A. Evaluate:
a. Interest rates risks.
b. Liquidity risks.
c. Inflation risks.
B. Impact:
a.The amount of interest on the five-year loan from Mega International Commercial Bank that was capitalized in 2022 was approximately NT$2.36 million, and it will be amortized after the operation of
the Guanyin factory.
b.Interest expense for 2022 was approximately NT$1.07 million.
c. Liquidity and inflation would not result in significant impacts on the Company in 2022.
C. Response:
a. Inflation : Expected cost increases, and raises products prices.
b. Liquidity : The credit line for the five-year loan from Mega International Commercial Bank is NT$1 billion, while the credit line for the three-year loan from Bank of Shanghai is NT$150 million. The
company may also conduct capital increases if necessary.
(9) Strategy risks:
A. Evaluate:
a.The company joint venture with Veolia to establish the Framosa Co., Ltd in the hope to reduce the consumption and the outsourced processing of chemical solvent, enhancing the competitiveness in
operation and meeting the global trend of ESG, thus the company support Framosa to construct its plant and operate within the schedule.
b. Construction of a second plant: The plant in Guanyin is to decentralize the production locations and stabilize the relationships with clients.
B. Impact:
a. The company is holding 25% of the shares of Framosa Co., Ltd., allowing it to become one of the company’s affiliated companies. The shareholding ratio will be utilized to recognize the loss on
investment (NT$12.1 million of losses recognized in 2022). The decrease in consumption and the outsourced processing of chemical solvent will reduce the operating costs and increase the gross profit margin of products.
b. The total investment for the Guanyin Plant is expected to be NT$20.2 billion, if the utilization rate of the production capacity is not high enough after the operation started, it will affect the profitability
of the company’s main business.
C. Response:
a.To support the construction and operation of the Framosa Co., Ltd. under the schedule to secure the solvent processing service agreements within the industry and establish economic scale.
b.To strengthen the business team, especially the market development capability in Northern America, and to ensure the increase in production capacity utilization..
(10) Hazard risks Natural disaster risks:
A. Evaluate:
a. Taiwan is easily impacted by natural disasters such as typhoons, earthquakes, etc.
b. Risks of emerging infectious diseases.
B. Impact: No losses related to natural disasters occurred in 2022.
C. Response:
a.To enact the continuous operation plan of the company.
b.To enact the reporting and protection measures of infectious diseases, and implement them accordingly.
c.To purchase property insurance, currently the total coverage amounts of insurance is approximately NT$2.1 billion (the scope of insurance includes the stock, machinery equipment, buildings, and the
interruption in operation.)
(11) Law risks:
A. Evaluate:
a.Compliance with government laws and orders.
b.Investment agreement signed by the President’s Office.
c.Non-disclosure agreement and supply agreement signed by the Business and Purchase Department.
d.Service agreement and equipment agreement from other departments.
B. Impact: None in 2022.
C. Response:
a.Each department shall assign personnel to review the amendment of laws and regulations and review its impact and the corresponding measures that shall be taken by the company.
b.Each department shall review all agreements carefully, and strictly enforce
the internal control procedures requiring signatures and seals.
c.To commission services from legal firms for special and significant events.
d.To consult the opinions of General Counsel from the parent company for special and significant events.
(12) Others risks Market risks:
A. Evaluate:
a.The market for pharmaceuticals grows steadily each year under population growth, aging, and economic growth.
b.The risk of losing clients.
c.The risk of having excessive ratios of a single product and a single client in the company’s revenues.
B. Impact:The disruption of supply due to the fire accident may result in future risks of losing clients.
C. Response:
a.To continuously enhance the relationship with the clients, speed up the processes of reconstruction, returning to production, and the construction of Guanyin Plant to restore the confidence of our
clients.
b.To continuously develop new products with the goal of reducing the ratio of a single product to the company’s revenue to below 15%.
c.To continuously develop new clients with the goal of reducing the ratio of a single client to the company’s revenue to below 10%.