Prospectus *** Hofseth BioCare ASA

Transcription

1 Prospectus *** Hofseth BioCare ASA (A public limited liability company organised under the Norwegian Public Limited Liability Companies Act with business registration number ) Listing of 20,000,000 new shares in Hofseth BioCare ASA on Oslo Axess, issued in connection with the Private Placement announced on 11 April 2014 at a subscription price of NOK 4.50 This Prospectus does not constitute an offer to buy, subscribe for or sell the securities described herein. The Prospectus serves as a listing prospectus, and no shares or other securities are being offered or sold in any jurisdiction pursuant to this Prospectus MANAGED BY: 16 May 2014

2 IMPORTANT INFORMATION This Prospectus has been prepared in connection with the listing on Oslo Axess of 20,000,000 new shares in Hofseth BioCare ASA ( HBC ). This Prospectus has been prepared solely in the English language. The Prospectus has been reviewed and approved by Finanstilsynet pursuant to Section 7-7 of the Norwegian Securities Trading Act. Finanstilsynet has neither controlled nor approved the accuracy nor completeness of the information given in this Prospectus. Finanstilsynet s supervision and approval relates solely to the Company having included descriptions according to a pre-defined list of content requirements. Finanstilsynet has neither undertaken any form of control nor approval of matters pursuant to company law described in or otherwise covered by this Prospectus. Any new material information and any material inaccuracy that might have an effect on the assessment of the shares arising after the date of publication of this Prospectus and prior to the listing will be published and announced as a supplement to this Prospectus in accordance with section 7-15 of the Securities Trading Act. Without limiting the manner in which the Company may choose to make public announcements, and subject to the Company s obligations under applicable law, announcements in relation to the matters described in this Prospectus will be considered to have been made once they have been received by Oslo Børs and distributed through its information system. The distribution of this Prospectus may be restricted by law in certain jurisdictions. The Company requires persons in possession of this Prospectus to inform themselves about and to observe any such restrictions. This Prospectus does not constitute an offer to subscribe for shares in the Company. The content of this Prospectus are not to be construed as legal, business, financial or tax advice. Each prospective investor should consult its own legal advisor, business advisor, financial advisor or tax advisor as to legal, business, financial and tax advice. Any dispute regarding the Prospectus shall be governed by Norwegian law and Norwegian courts alone shall have jurisdiction in matters relevant hereto. Investing in shares involve risks. Please refer to section 2 of the Prospectus for a description of certain risk factors. An investment in the Company should only be made by investors able to sustain a total loss of their investment. Investors are strongly recommended to consult an investment advisor who specialises in investments of this nature before making any decision to invest in the Company. 2

3 TABLE OF CONTENTS 1 SUMMARY RISK FACTORS RESPONSIBILITY STATEMENT GENERAL INFORMATION THE PRIVATE PLACEMENT PRESENTATION OF HOFSETH BIOCARE HOFSETH BIOCARE S MARKET OVERVIEW BOARD OF DIRECTORS, MANAGEMENT AND EMPLOYEES OPERATING AND FINANCIAL INFORMATION SHARES, SHAREHOLDER MATTERS AND OWNERSHIP STRUCTURE SECURITIES TRADING IN NORWAY TAXATION IN NORWAY SELLING AND TRANSFER RESTRICTIONS ADDITIONAL INFORMATION DEFINITIONS AND GLOSSARY OF TERMS APPENDIX APPENDIX 1: ARTICLES OF ASSOCIATION HOFSETH BIOCARE ASA 3

4 1 SUMMARY Summaries are made up of disclosure requirements known as "Elements". These Elements are numbered in Sections A E (A.1 E.7). This Summary contains all the Elements required to be included in a Summary for this type of securities and issuer. Because some Elements are not required to be addressed, there may be gaps in the numbering sequence of the Elements. Even though an Element may be required to be inserted in the Summary because of the type of securities and issuer, it is possible that no relevant information can be given regarding the Element. In this case a short description of the Element is included in the Summary with the mention of "not applicable". 1.1 Section A Introduction and Warnings A.1 Warnings This summary should be read as an introduction to the Prospectus, and is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus and in the appendices to this Prospectus. Any decision to invest in Hofseth BioCare should be based on a consideration of the Prospectus as a whole by the investor. Where a claim relating to the information contained in the Prospectus is brought before a court, the plaintiff investor might under the applicable national legislation of a Member State, have to bear the costs of translating the Prospectus before the legal proceedings are initiated. Civil liability attaches only to those persons who have tabled the Summary including any translation thereof, and applied for its notification, but only if the Summary is misleading, inaccurate or inconsistent when read together with the other parts of the Prospectus or it does not provide, when read together with the other parts of the Prospectus, key information in order to aid investors when considering whether to invest in such securities. For the definitions of terms used throughout this Prospectus, see Section 15 Definitions and Glossary of Terms. A.2 Consent to use prospectus by financial intermediaries Not applicable 1.2 Section B Issuer B.1 Legal and Commercial Name B.2 Domicile/ Legal Form/ Legislation/ Country of Incorporation Hofseth BioCare ASA Hofseth BioCare has its registered address at 6140 Syvde, Vanylven municipality, Norway. The Company is a Norwegian public limited liability company incorporated on 5 August 2009 under the laws of Norway and 4

5 is registered with the Norwegian Register of Business Enterprises with registration number The Company s registered office is c/o ØkonimiConsult AS, 6140 Syvde, Norway. The Company s telephone number is: The Company s web site is: B.3 Key factors relating to operations/ Activities/ Products sold/ Services performed/ Principal markets Hofseth BioCare s current key activity is to provide high value added biomarine ingredients for human applications The two most important factors in the hydrolisation process are the input of first class raw materials and a very high degree of control over the different production processes leading to the end product output. The first factor is addressed by quality control together with guarantees from the suppliers, whilst HBC s proprietary technology and advanced production facility management address the second key factor. The core business of HBC is to produce high value ingredients from salmon off-cuts. This means that the Company is neither a refiner nor a distributer, it is a production company. Hofseth BioCare produces the following four primary product fractions from the enzymatic hydrolysis: marine lipids, solvable protein hyrdrolysate, marine calcium and minerals and partially hydrolysed protein. The Company do not perform any services as part of their business. Hofseth BioCare has implemented a network of distributors. The distributors cover different geographical areas. The most important markets in human nutrition are the US and Europe. Asia has experienced an important growth in the last years and HBC has also established distribution in this area. B.4a Known trends The global human nutrition industry is a USD 300 billion market 1, and is projected to grow further, driven by four major factors/megatrends 2 : 1 Globalisation and changing economics (emerging markets); 2 Health and wellness; 3 Food safety and sustainability; and 4 Demographics. B.5 Group Hofseth BioCare is a holding company. Hofseth BioCare owns 51% of the shares in the Norwegian company Hofseth BioCare Rørvik AS. Hofseth BioCare owns 100% of the shares in the Norwegian company HBC Berkåk AS, which is a spray drying facility that 1 Nutrition Business Journal Nutrition Business Journal

6 will handle drying of protein products for the Company. B.6 Persons having an interest in the Issuer's capital or voting rights All Shares in the Company have equal voting rights, with each Share carrying the right to one vote at the general meeting of shareholders. Before the distribution of the Offer Shares, the following registered shareholders have holdings in excess of the statutory thresholds for disclosure requirements: Roger Hofseth (personally and through wholly owned companies) 24.74%, Jan Håkan Ingemar Petteresson (personally and through wholly owned companies) 12.92%, Verdipapirfondet DNB SMB 6.13% and Hofseth AS 5.40%. B.7 Selected historical key financial information The following information has been extracted from the audited consolidated financial statements as at end of the years ended 31 December 2013, 2012 and The selected financial information presented below should be read in conjunction with the financial statements incorporated by reference to the Prospectus. Selected statement of income data (NOK 1,000) (audited) (audited) (audited) Gross operating revenue Operating profit Profit / Loss before tax Profit / Loss for the year Selected balance sheet data (NOK 1,000) Total non-current assets Total current assets TOTAL ASSETS Total equity Total obligations and long-term liabilities Total current liabilities TOTAL EQUITY AND LIABILITIES Selected statement of cash flow data (NOK 1,000) (audited) (audited) (audited) Net cash flow from operating activities Net cash flow from investing activities Net cash flow from financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period

7 Significant subsequent changes B.8 Selected key pro forma financial information B.9 Profit forecast or estimate B.10 Qualifications in audit report In April 2014 the Company completed an equity Private Placement to raise gross proceeds of NOK 90 million Not applicable Not applicable There was a qualification related to the financial statement 2012 based on breach of the financial covenants. The breach was repaired as a result of the completion of a private placement. B.11 Working capital The Board of Directors is of the opinion that the working capital of the Company is sufficient for the Group s present requirements in a twelve months perspective as from the date of this Prospectus. 1.3 Section C Securities C.1 Type of class of securities being offered On 2 May 2014, the EGM of Hofseth BioCare resolved the issuance of a total of 20 million new shares, in a Private Placement, each share having a par value of NOK 1, towards certain Norwegian investors, including certain members of the Company's Board and management and certain of the Company's creditors and towards certain institutional investors outside the United States, in such other jurisdiction as permitted or catered for by exemption rules under applicable securities laws. The subscription price was NOK 4.50 per share, totalling NOK 90 million. The subscription price in the Private Placement has been paid in full and the share capital increase was duly registered in the Norwegian Register of Business Enterprises on 8 May C.2 Currency NOK The Company has one class of Shares and all shares are equal in all respects. The Offer Shares will have the same VPS registrar and the same ISIN number as the Company's other shares (securities identification code ISIN NO ). C.3 Number of shares/ Par value Hofseth BioCare's share capital is NOK 97,536,088, divided into 97,536,088 ordinary shares; each share is fully paid and has a par value of NOK 1. C.4 Rights attached The Offer Shares are ordinary shares in the Company, i.e., the same class as the Shares already issued and listed on Oslo Axess. The Offer Shares will obtain rights to receive dividends from the date of registration of the share capital increase in the Norwegian Business Enterprise Register. The Shares have equal rights to the Company's profits, in the 7

8 event of liquidation and to receive dividends unless all the shareholders approve otherwise. C.5 Restrictions The Shares are freely transferable according to Norwegian law and the Company's Articles of Association. C.6 Listing and admission to trading The Shares are listed on Oslo Axess, under Oslo Børs ticker symbol "HBC". The listing on Oslo Axess of the Offer Shares is subject to the approval of the Prospectus by the Norwegian Financial Supervisory Authority (Norwegian: Finanstilsynet) under the rules of the Norwegian Securities Trading Act. Such approval was granted on 16 May The first day of trading of the Offer Shares on Oslo Axess, will be on or about 19 May The Shares are not listed on any other regulated market and Hofseth BioCare does not intend to seek such listing. C.7 Dividend policy Hofseth BioCare s objective is to provide its shareholders with a competitive return over time based on its earnings. Any dividend will be considered in conjunction with Hofseth BioCare s financial position, debt covenants and capital requirements for existing and new projects. Hofseth BioCare intends to pay out between 50% and 100% of its net profits over time. The Company has not paid any dividends since its incorporation. 1.4 Section D Risks Element Description of Element D.1 Key risks specific to industry or its issuer Disclosure requirements Prospective investors should consider, among other factors, the following risks relating to the market in which Hofseth BioCare operates: Regulatory and environmental regulations Perceived health concerns and food safety issues Retention of key personnel Entering the human health and nutrition market Ability to obtain elevated pricing Sale of products from third parties to the end-users Difficulties in managing expected growth Prospective investors should consider, among other factors, the following risks related to Hofseth BioCare and its business. Foreign exchange risk Covenant compliance 8

9 Sourcing of raw materials is subject to a number of variables D.3 Key risks specific to securities Patents Prospective investors should consider, among other factors, the following risks related to the securities described herein: The market value of Shares may fluctuate There may occur a lack of liquidity in the Shares Investment and trading risks in general Hofseth BioCare s ability to pay dividends is dependent on the availability of distributable reserves Future share issues may have a material adverse effect on the market price of the Shares Shareholders will be diluted if they are unable or unwilling to participate in future share issues Exercise of voting rights for nominee shareholders Certain transfer and selling restrictions may limit shareholders ability to sell or otherwise transfer their Shares Enforceability of civil liabilities Norwegian law may limit the shareholders ability to bring an action against the Company 1.5 Section E Offer Element Description of Element E.1 Net proceeds/ Estimated Expenses Disclosure requirements The subscription price per share was NOK 4.50, amounting to an aggregate subscription price and gross proceeds of NOK 90 million. E.2a Reasons for the offer/ Use of proceeds/ Estimated net amounts The Company will bear the fees and expenses related to the Private Placement, which are estimated to amount to NOK 5,000,000. Total net proceeds from the Private Placement will amount to about NOK 85 million. The proceeds from the Private Placement will be used for the following purposes and with the following estimated, net amounts: NOK 23 million for conversion of debt Repayment of up to approximately NOK 34 million in 9

10 overdue trade payables The remaining net proceeds will be used for general corporate purposes and working capital E.3 Terms and conditions of the offer The application period for the Private Placement expired after close of the Oslo Stock Exchange on 10 April Payment due date: 5 May EGM approving the Private Placement: 2 May Registration of share capital increase: 8 May Delivery date of Offer Shares: 19 May E.4 Material interests in the Offer. The Managers (and/or their affiliates) may have interests in the Private Placement as they have provided from time to time, and may in the future provide, investments and commercial services to the Company and its affiliates in the ordinary course of their respective businesses, for which they have received and may continue to receive customary fees and commissions. The Managers, their employees and any affiliates may currently own existing Shares in the Company. The Managers has received a commission in connection with the Private Placement and, as such, has an interest in the Private Placement. Reference is made to Section 5.11 Proceeds and expenses related to the Private Placement There are no interests of natural and legal persons, other than the Managers, involved in the Private Placement, including conflicting ones that are material to the Issue. E.5 Managers/ Lock-up Carnegie AS and Swedbank Norway, branch of Swedbank AB (publ), (the "Managers") has assisted the Company with the Private Placement. Each investor has agreed to not sell or in any other way dispose of the Offer Shares they are allocated in the Private Placement until the Private Placement has been approved by the EGM and become effective, or to take any other action that would prevent the investor from voting for the shares in the EGM without a prior written consent from the Company and one of the Managers. E.6 Dilution The per share dilution of ownerships as result of the Private Placement resolved by the Company is approximately 20.5%. E.7 Estimated expense Not applicable. The Company will not charge any costs, expenses or taxes directly to any shareholder or to any investor in connection with the Private Placement. 10

11 2 RISK FACTORS Before investing in the Company, investors should carefully consider all of the information contained in this Prospectus, and in particular the following risk factors, which may affect some or all of the Company s activities, the industry in which it operates and the Company s securities. If any of the following risks materialise, the Company s business, financial position and operating results could be materially adversely affected, which may cause a decline in the value and trading price of the Shares that could result in a loss of all or part of any investment in the Shares. Although the Company has taken all reasonable care to ensure that the Company is aware of the specific risk factors currently relevant to the Company, additional risks and uncertainties that the Company currently is not aware of or which it currently deems immaterial based on the facts known to the Company on the date of this Prospectus, may also impair the Company s business, financial position and operation results and adversely affect the price of the Shares. An investment in the Company is suitable only for investors who understand the risk factors associated with this type of investment and who can afford a loss of all or part of their investment; prospective investors should consult their own expert advisors as to the suitability of an investment in the Shares. The order in which the risks are presented below is not intended to provide an indication of the likelihood of their occurrence nor of their severity or significance. 2.1 Risks relating to the Company and the industry in which it operates Regulatory and environmental regulations The Company s operations and products are subject to environmental and health laws, regulations, treaties and conventions ( Regulations ). The sale and marketing of the Company s products will in certain of the Company s markets be subject to approvals as set forth in applicable Regulations. As a producer of aquaculture products for pet or human consumption, Hofseth BioCare may be subject to significant fines and penalties in the event of non-compliance with such Regulations, which in turn could have a material adverse effect on the Company s business, operating results or financial condition. Regulations relating to the aquaculture industry and human consumption have become more stringent in recent years, and in some cases such Regulations may impose strict liability. These Regulations may also expose the Company to liability for the conduct of or conditions caused by others, or for acts that were in compliance with all applicable Regulations at the time such actions were taken. The application of these Regulations or the adoption of new Regulations could have a material adverse effect on Hofseth BioCare s business, operating results or financial condition Health concerns and food safety issues Fish diseases have been a recurring problem for the aquaculture industry. Diseases, perceived health concerns and food safety issues may negatively impact the reputation of the aquaculture industry, and may, consequently, have a negative impact on the demand for Hofseth BioCare s marine ingredient products for the human market. Outbreaks of diseases may cause direct loss of assets, loss of quality, death or culling of the fish, and result in media attention and public concern, which may in turn reduce the demand for Hofseth BioCare s marine ingredient products even if there is no direct risk to human health. Hofseth BioCare sells marine oil, marine calcium and soluble protein hydrolysate used as raw material in products for human consumption. Although the products sold by Hofseth BioCare are approved by regulatory authorities and are considered safe for human consumption, it is an inherent risk in such business that the products may be consumed by persons with special health conditions or that the products may in other ways cause harm to persons and lead to product liability claims, negative media attention and public concern. This could have a material adverse 11

12 effect on the demand for Hofseth BioCare products, which in turn could have a material adverse effect on the Company s business, operating results and financial condition Retention of key personnel Hofseth BioCare s business and prospects depend, to a significant extent, on the continued services of its key personnel. Hofseth BioCare may, due to financial difficulties or other factors, fail to retain or attract skilled personnel to operate and provide services for its business. The loss of any of the members of its senior management or other key personnel or the inability to attract a sufficient number of qualified employees could have a material adverse effect the Company s business, results of operations and financial condition Entering the human health and nutrition market The human health and nutrition market is highly competitive. The Company may not be able to compete successfully for its products in the competitive human health and nutrition market. The competition in the market where the Company operates may lead to reduced profitability and/or expansion opportunities. Further, the Company may not be successful in entering new markets, as there may be participants with greater experience or financial strength than the Company. The Company is exposed to several markets and any changes to any of these markets will have a significant impact on the Company as a whole. If the Company is not competitive, the Company s business, results of operations and financial condition may be materially adversely affected Ability to obtain elevated pricing The Company plans to sell its marine ingredient products at prices that are higher than the prices obtained from traditional products made from fish off-cuts. There is no guarantee that the Company will be able to obtain the expected prices, and if it fails to obtain such expected pricing, such failure will have a material adverse effect on the Company s business, financial condition and operating results. Further, market conditions could lead to changes of what is perceived as obtainable prices in the market. A change in the market conditions could lead to lower sales prices or volumes, which would have a material adverse effect on the Company s business, financial condition and operating results Sale of products from third parties to the end-users Hofseth BioCare s commercialisation strategy involves the granting of licenses and entering into distribution, marketing and sales agreements with third parties, often on an exclusive basis, in each of the Company s principal markets, for the purpose of obtaining regulatory approval for marketing and selling Hofseth BioCare s marine ingredient products. Hofseth BioCare s strategy thus involves several exclusive out-licensing and distribution agreements with third parties. The Company s revenues will depend on its ability to enter into such agreements, as well as the terms of these licensing, distribution, marketing and sales arrangements and the efforts of the third parties thereto, which Hofseth BioCare does not control. Currently, the Company has entered into two distribution agreements and one cooperation agreement and if the Company fails to enter into additional distribution agreements in line with its strategy, this will have a material adverse effect on the Company s business, financial condition and results of operations. The exclusive nature of the agreements, and the various restrictions on Hofseth BioCare s ability to terminate these contracts, also may make it difficult to find replacement partners should the chosen third parties fail to generate market demand and distribute Hofseth BioCare s marine ingredient products. The commercial success of Hofseth BioCare s sales strategy depends on the cooperation of its partners and the level of resources they commit to the marketing and selling of Hofseth BioCare s marine ingredient products in each respective jurisdiction and, in part, on Hofseth BioCare s ability to establish, maintain and productively manage these relationships, both in terms of sales and distribution. Chosen partners may not perform their obligations as expected, and disagreements may arise between Hofseth BioCare and such partners, leading to supply or production delays or 12

13 lower sales revenues. Litigation or arbitration may also result from such disagreements, which could be time consuming and result in expensive settlements or damages payable to Hofseth BioCare s partners. Any of these events could have a material adverse effect on Hofseth BioCare s business, financial condition and results of operations. Furthermore, where Hofseth BioCare does not have exclusivity agreements with existing partners, Hofseth BioCare may seek to develop relationships with new partners. No assurance can be given that Hofseth BioCare will be able to do so successfully, and a failure to do so may limit Hofseth BioCare s ability to further commercialise the Company s current or future marine ingredient products, which could in turn have a material adverse effect on the Company s business, financial condition and results of operations Hofseth BioCare may have difficulties in managing the expected growth Hofseth BioCare expects that the Company s future growth plans, such as the planned growth through its new facility established together with Sinkaberg-Hansen AS on Rørvik through Hofseth BioCare Rørvik AS, will continue to place significant demand on the Company s management and other resources. This will require Hofseth BioCare to improve its operational, financial and internal controls across the organisation, to work to maintain its business culture, and to adopt best practices. The costs involved in expanding the Company s manufacturing operations may be higher than Hofseth BioCare expects, and the Company may not be able to avoid certain duplicative costs and delays. Hofseth BioCare s growth strategy also includes the establishment of new facilities in other places in Norway, and the Company may, in the future, decide to extend this strategy to other markets. The development of new facilities is an expensive and time-consuming venture and could potentially delay the launch and/or distribution of additional products. Hofseth BioCare may also undertake acquisitions in the future, some or all of which may require significant management time and attention in an effort to properly integrate any such business into the Company. Any inability to manage the Company s future growth could have a material adverse effect on Hofseth BioCare s business, operating result and financial condition. 2.2 Financial risks Additional capital needs The Company may require additional capital in the future pursuant to its business plan, due to unforeseen liabilities or in order for it to take advantage of opportunities that may be presented to it. Further, negative developments in sales or production cost may lead to a strained liquidity position and the potential need for additional funding through equity funding, debt financing or other means. Any additional equity financing may be dilutive to existing shareholders. There can be no assurance that the Company will be able to obtain necessary funding in a timely manner and on acceptable terms Foreign exchange risk Fluctuations in currency exchange rates may impact the Company s operational income. The Company expects that a large part of its operating income will be denominated in other currencies than NOK, including USD, EUR and JPY. Currency fluctuations and depreciation of foreign currencies may have a material adverse effect on the Company s business, operating results and financial condition Covenant compliance The Company s borrowing facilities contain certain restrictions and financial covenants. There can be no assurance that Hofseth BioCare will be able to comply with all such restrictions and financial covenants or that the Company s lenders will extend waivers or amend terms to avoid any actual or anticipated breaches of such restrictions or financial covenants. This could lead to acceleration of 13

14 loans, including acceleration based on cross-default provisions in the borrowing facilities, which may in turn cause the Company to become insolvent and/or to file for bankruptcy Hofseth BioCare s second production facility Hofseth BioCare s agreement with Sinkaberg-Hansen AS regarding the establishment of Hofseth BioCare Rørvik AS and the new production facilities on Rørvik is conditional on the parties ability to obtain necessary financing for the plant s production equipment. If such financing is delayed or the parties fail to obtain the necessary financing, the establishment of the production facility can be delayed or cancelled, which may have a material adverse effect on the Company s business, operating results and financial condition Limited historical financial information As the Company was incorporated in 2009 and its first production facility only recently opened, the Company lacks useful financial information for the estimation of its future financial results. 2.3 Risks relating to production and manufacturing Hofseth BioCare s production is currently concentrated in one location, and is not set up for production at full capacity. If it takes longer than projected to reach full capacity or the manufacturing facilities are damaged or closed for any reason, the Company may lose substantial revenues. The production of the Company s products is an industrial process requiring advanced equipment that may be subject to break-downs and other problems. The Company is dependent on materials and products from suppliers that could be prone to faults. The Company currently has one production facility at Midsund, any delays in the time schedule to reach full production capacity at Midsund or critical damage or impairment to this facility could severely reduce or suspend the Company s production capacity for an extended time period. Moreover, the inability to fully and timely utilise the Company s facility could result in increased costs or significant delays and could also result in breaches of the Company s license and distribution agreements and have an impact on the Company s products and reputation. Any disruption in production equipment, capacity, or deliveries from suppliers could have a material adverse effect on the Company s business, financial condition and operating results Sourcing of raw materials is subject to a number of variables The Company produces marine ingredients products and the Company needs sufficient access to raw material of a consistent and high quality. For the time being, such access is partly secured through agreements with two fish processers and the Company believes that the remaining quantity of raw material needed for its production can be obtained from third parties at the expected prices and quality. However, no guarantees can be made regarding the future quality of the raw material or the continued access to raw material from the expected sources, any of which could have a material adverse effect on the Company s business, financial condition and operating results. The supply and quality of this material is dependent on a variety of factors, including: local seasonal variations in temperature; levels of nutrients, impurities and salt content of the fish; environmental conditions such as pollution, both endemic and unforeseen; toxicity or pathenogenicity of the fish in any given period of time; extinction or reduction of the relevant fish stocks; actions of sole suppliers; demand levels from the fish feed industry; and regulatory decisions by the relevant governments or international organisations. 14

15 Hofseth BioCare pays a fixed price per kilo for salmon off-cuts, which will be negotiable on a regular basis based on the various contracts the Company has with its suppliers. Although the Company will seek to pass price increases on to purchasers through increases in the price of its products, any increase in the prices for the raw materials could raise the Company s costs of production. Any change in the availability or quality of salmon off-cuts or other materials the Company requires may impact its ability to produce its products at optimal levels or raise production costs, which could have a material adverse effect on its business, operating result and financial condition Patents and intellectual property rights The use of technology in a competitive business where patents and other intellectual property rights exist involves a general risk of alleged infringement of third party rights. Any of the above mentioned events could have a material adverse effect on Hofseth BioCare s business, financial condition and results of operations. Hofseth BioCare relies upon certain proprietary confidential information, trademarks, unpatented know-how, unpatented trade secrets and improvements and continuing technological innovation to develop and maintain its competitive position. On the date of this Prospectus, the Company has filed five patent applications. There can be no assurance that any of the patents applied for by the Company will be granted. Patent protection will, in any event, not prevent competitors from developing alternative technological solutions. If Hofseth BioCare is unable to adequately protect its intellectual property, technology, trade secrets or proprietary knowhow, or enforce its existing or future patents, this might have a material adverse effect on its business, results of operations and financial condition. The business of Hofseth BioCare may also be dependent on utilisation of patented or otherwise proprietary technology of third parties, to which Hofseth BioCare will have or seek right of use as further regulated in license agreements and arrangements. No assurances can be given that such license rights will be renewed and upheld in the future, or that a renewal can be made on the same terms as for the existing rights. The use of technology in a competitive business where patents and other intellectual property rights exist involves a general risk of alleged infringement of third party rights. Although freedom to operate analysis has been performed by Hofseth BioCare, there can be no assurance that such analysis is complete or has considered relevant future scenarios. Competitors may claim that one or more of Hofseth BioCares products or various processes infringe upon their patents or other intellectual property rights. Resolving a patent or other intellectual property infringement claim can be costly and time consuming and may require Hofseth BioCare to enter into royalty or licence agreements. If this should become necessary, there is no assurance to obtain royalty or licence agreements on commercially acceptable terms. A successful claim of patent or other intellectual property infringement could Hofseth BioCare to significant damages or an injunction preventing manufacture, sale or use of the Company s affected products or otherwise limits its freedom to operate. Any of the above events could result in the value of the intellectual property of the Company being lower than expected, or that the Company may not be able to carry out its business as expected, which could have a material adverse effect on the Company s business, financial condition and operating results Hofseth BioCare is dependent on third parties for certain stages of the production and manufacturing cycle Hofseth BioCare outsources certain aspects of its production, including encapsulation processes pursuant to agreements entered into with third parties. Under the terms of these agreements, the respective production is undertaken according to technical specifications that the Company 15

16 prescribe; however, the related manufacturing procedures are entirely within the control of such third parties. Outsourcing requires inspection and auditing of external suppliers and validation of their technologies and procedures. If these suppliers were unable to perform their services adequately for any period, or at all, the Company may incur substantial loss of revenue and may breach its supply and license agreements with its partners. If Hofseth BioCare is forced to find alternative supply chain service providers for such processes, in addition to loss of revenue, Hofseth BioCare may incur additional costs in establishing such new arrangements. Any of these events could have a material adverse effect on the Company s business, financial condition and results of operations Disruptions of Hofseth BioCare s business operations due to strikes or labour union problems could adversely affect the business Hofseth BioCare s production plant in Midsund, Norway, seeks to be operational 24 hours a day, 6 days a week, with the aim of being operational 24 hours a day, 7 days a week. Failure to reach agreement in future disputes with the employees or their unions could lead to work stoppages or delays in production. Any industrial action is likely to have an immediate adverse effect on the Company s daily operations and production capacity. Industrial actions could obstruct the Company s manufacturing operations for an extended period and could have a materially adverse effect on Hofseth BioCare s business, financial condition and results of operations. 2.4 Risks relating to the Shares The market value of Shares may fluctuate The trading price for the Shares may fluctuate significantly and may not always reflect the underlying asset value of the Company. A number of factors outside Hofseth BioCare s control may impact its performance and the price of the Shares, including, but not limited to, quarterly variations in operating results, adverse business developments, changes in market sentiment regarding the Shares, the operating and share price performance of other companies in the industry and markets in which Hofseth BioCare operates, changes in financial estimates and investment recommendations or ratings. Changes in market sentiment may be due to speculation about Hofseth BioCare s business in the media or investment community, changes to Hofseth BioCare s profit estimates, the publication of research reports by analysts and changes in general market conditions. If any of these factors actually occurs, this may have a material adverse effect on the pricing of the Shares. The market price of the Shares could decline due to sales of a large number of the Shares in the market or the perception that such sales could occur. Such sales could also make it more difficult for the Company to offer equity securities in the future at a time and at a price that are deemed appropriate. In recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in the same industry as the Company. Those changes may occur without regard to the operating performance of these companies. The price of the Shares may therefore fluctuate based upon factors that have little or nothing to do with the Company, and these fluctuations may materially affect the price of the Shares Lack of liquidity in the Shares The Company s Shares are currently listed on Oslo Axess. This, however, does not imply that there will always be a liquid market for the Shares. An investment in the Shares may thus be difficult to realise. Investors should be aware that the value of the Shares may be volatile and may go down as well as up. In the case of low liquidity of the Shares, or limited liquidity among the Company s shareholders, the share price can be negatively affected and may not reflect the underlying asset 16

17 value of the Company. Investors may, on disposing of the Shares, realise less than their original investment or lose their entire investment. The Company will request that the Offer Shares are admitted to listing on Oslo Axess. Except for unanticipated circumstances, the Company believes that the Offer Shares will be admitted to such trading. A delay in the commencement of the listing of the Offer Shares on Oslo Axess would affect the liquidity of the Offer Shares and prevent the sale of these shares until they are allowed for listing Investment and trading risks in general All securities investments involve the risk of loss of capital. Investment in the Company involves significant economic risks. Although the Company s investment and management strategy is expected to provide some protection from the risk of loss inherent in the ownership of assets, there can be no assurance that these strategies will completely protect against this risk or that the Company s investment objectives will be met Hofseth BioCare s ability to pay dividends is dependent on the availability of distributable reserves Norwegian law provides that any declaration of dividends must be adopted by Hofseth BioCare s general meeting of shareholders. Dividends may only be declared to the extent that Hofseth BioCare has distributable funds and Hofseth BioCare s Board of Directors finds such a declaration to be prudent in consideration of the size, nature, scope and risks associated with Hofseth BioCare s operations and the need to strengthen its liquidity and financial position. As a general rule, the Company s general meeting of shareholders may not declare higher dividends than the Board of Directors has proposed or approved. If, for any reason, the general meeting of shareholders does not declare dividends in accordance with the above, a shareholder will, as a general rule, have no claim in respect of such non-payment, and Hofseth BioCare will, as a general rule, have no obligation to pay any dividend in respect of the relevant period Future share issues may have a material adverse effect on the market price of the Shares Hofseth BioCare has no current plans for an offering of new Shares other than the Private Placement. However, it is possible that Hofseth BioCare may decide to offer additional Shares or securities in the future in order to strengthen its capital base or for other reasons. Any additional offering of Shares may be made at a significant discount to the prevailing market price and could have a material adverse effect on the market price of the outstanding Shares Shareholders will be diluted if they are unable or unwilling to participate in future share issues Unless otherwise resolved by the general meeting, shareholders in Norwegian public limited companies, such as Hofseth BioCare, have pre-emptive rights proportionate to the aggregate number of Shares they hold with respect to any new Shares issued against consideration in cash. Due to regulatory requirements under foreign securities laws or other factors, foreign investors may be unable to participate in a new issuance of Shares or other securities. Any investor that is unable or unwilling to participate in Hofseth BioCare s future share issues will have its percentage shareholding diluted Exercise of voting rights for nominee shareholders Beneficial owners of Shares that are registered in a nominee account (e.g. through brokers, dealers or other third parties) may not be able to vote for such shares unless their ownership is reregistered in their names with the Norwegian Central Securities Depository (VPS) prior to the Company s general meetings. There can be no assurance that beneficial owners of the Company s Shares will receive the notice of a general meeting in time to instruct their nominees to either 17

18 effect a re-registration of their Shares, or otherwise vote for their Shares in the manner desired by such beneficial owners Certain transfer and selling restrictions may limit shareholders ability to sell or otherwise transfer their Shares The Shares have been admitted to trading in Norway, but Hofseth BioCare has not registered the Shares under the U.S. Securities Act or securities laws of other jurisdictions, including Canada, Australia and Japan, and it does not expect to do so in the future. The Shares may not be offered or sold in the United States, Canada, Australia, Japan or in any other jurisdiction in which the registration or qualification of the Shares is required but has not taken place, unless an exemption from the applicable registration or qualification requirement is available or the offer or sale of the Shares occurs in connection with a transaction that is not subject to such provisions. In addition, there can be no assurances that shareholders residing or domiciled in the United States or other jurisdictions will be able to participate in future capital increases or subscription rights Enforceability of civil liabilities The Company is a public limited liability company organised under the laws of Norway. The majority of the members of the Company s Board of Directors and the members of the Company s management reside in Norway. As a result, it may not be possible for investors to effect service of process in other jurisdictions upon such persons or the Company, to enforce on such persons or the Company judgments obtained in non-norwegian courts, or to enforce judgments on such persons or the Company in other jurisdictions Norwegian law may limit the shareholders ability to bring an action against the Company The rights of holders of Shares are governed by Norwegian law and by the Articles of Association. These rights may differ from the rights of shareholders in other jurisdictions. In particular, Norwegian law limits the circumstances under which the shareholders of Norwegian companies may bring derivative actions. For instance, under Norwegian law, any action brought by Hofseth BioCare in respect of wrongful acts committed against Hofseth BioCare will be prioritised over actions brought by shareholders claiming compensation in respect of such acts. In addition, it may be difficult to prevail in a claim against the Company under, or to enforce liabilities predicated upon, securities laws in other jurisdictions. 18

19 3 RESPONSIBILITY STATEMENT The Board of Directors of Hofseth BioCare ASA hereby declares that, after having taken all reasonable care to ensure that such is the case, the information contained in this Prospectus is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import. 16 May 2014 The Board of Directors of Hofseth BioCare ASA Kjetil Olsen Chairman Roger Hofseth Board Member Bjørn Tunheim Board Member Henriette Godø Heggdal Board Member Marit Liland Sandvold Board Member 19

20 4 GENERAL INFORMATION 4.1 Third party information In certain Sections of this Prospectus information sourced from third parties has been reproduced. In such cases, the source of the information is identified. Such third party information has been accurately reproduced, and as far as the Company is aware and is able to ascertain from information published by that relevant third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. 4.2 Forward looking statements This Prospectus contains forward-looking statements relating to the Company s business and the sectors in which it operates. Forward-looking statements include all statements that are not historical facts, and can be identified by words such as anticipates, believes, expects, intends, may, projects, should, or the negatives of these terms or similar expressions. These statements appear in a number of places in this Prospectus, in particular in Section 2 Risk Factors, Section 7 Hofseth BioCare s market overview and 9 Operating and Financial Information, and include statements regarding the Company s management s intent, belief or current expectations with respect to, among other things: strategies for the Company s services, segments and business; global and regional economic conditions; sales volumes, price levels, costs and margins; competition and actions by competitors and others affecting the global or regional market of the Company: the Company s planned capacity and utilisation rates; fluctuations in foreign exchange rates, interest rates, earnings, cash flows, dividends and other expected financial results and conditions; cash requirements and use of available cash; financing plans; anticipated capital spending; growth opportunities; development, production, commercialisation and acceptance of new services and technologies; environmental and other regulatory matters; legal proceedings; and intellectual property No forward-looking statements contained in this Prospectus should be relied upon as predictions of future events. No assurance can be given that the expectations expressed in these forward-looking statements will prove to be correct. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions or expectations proves to be inaccurate or is unrealised. Some important factors that could cause actual results to differ materially from those in the forward-looking statements are, in certain instances, included with such forward-looking statements and in Section 2 Risk Factors. 20

21 5 THE PRIVATE PLACEMENT 5.1 Background and use of proceeds The Company deems the outlook for 2014 and onwards very attractive as the Company now is entering the commercialisation phase with a fully functioning production process, although recognizing that the Company is in a development phase before it can take advantage of the full market potential. The Company resolved to carry out the Private Placement in order to strengthen the balance sheet and secure a solid financial platform for commercialisation of the product portfolio the next months. The net proceeds of approximately NOK 85 million from the Private Placement will be used for general corporate purposes, including conversion of shareholder loans and trade payables, repayment of overdue trade payables and working capital. More specifically, the net proceeds will be used for (in prioritised order): 1. NOK 23 million in conversion of debt; 2. repayment of up to approximately NOK 34 million in overdue trade payables; and 3. the remaining net proceeds will be used for general corporate purposes and working capital 5.2 The Private Placement On 11 April 2014, the Company publicly announced that it had raised NOK 90 million in gross proceeds through a private placement of 20 million new shares ( New Shares ), each with a par value of NOK 1.00, at a subscription price of NOK 4.50 per share (the Private Placement ). The application period for the Private Placement expired after close of the Oslo Stock Exchange on 10 April Notification of allotments and payment instructions for New Shares to be issued upon the completion of the Private Placement was sent to the subscribers on 11 April 2014 through a notification issued by the Managers. 10 million of the New Shares were subscribed for by existing shareholders and certain of the Company s key suppliers and the remaining 10 million New Shares were subscribed by Codfarmers AS whose ultimate owner is Jerzy Malek, the founder of Morpol. The Private Placement was documented by an investor presentation, a term sheet and terms of application. The minimum order and allocation of New Shares in the Private Placement was set to the NOK equivalent of EUR 100,000. However, up to 149 of the Company s existing shareholders were allowed to subscribe for an amount corresponding to less than EUR 100,000. Completion of the Private Placement was conditional upon the following conditions, which were all satisfied at the time of the Company s extraordinary general meeting held 2 May 2014 (the EGM ): (i) (ii) (iii) all necessary corporate resolutions being validly made, including without limitation approval by an extraordinary general meeting of the Company expected to be held on 2 May 2014 (the EGM ); payment being received for the new shares to be issued in the Private Placement; all outstanding shareholder loans post completion of the Private Placement being extended until 1 October 2015 with neither amortization nor payment of accrued interest being made prior to the maturity date of the principal amount; 21

22 (iv) (v) the Company being in compliance with its existing loan agreements at the time of the EGM; and audited 2013 annual accounts being available at the time of the EGM The EGM resolved to increase the share capital related to the New Shares. The new share capital was registered in the Norwegian Register of Business Enterprises on 8 May Resolution regarding the Private Placement At the EGM the following resolution regarding the Private Placement was passed: (i) The share capital is increased by NOK 20,000,000 through the issue of 20,000,000 new shares. (ii) The par value for the new shares shall be NOK 1. (iii) (iv) (v) (vi) (vii) (viii) The price to be paid for each new share is NOK The minimum subscription and allocation amount is an amount equal to EUR 100,000, however, up to 149 of the Company s existing shareholders is allowed to subscribe for an amount corresponding to less than EUR 100,000. The shares are allotted to the investors which have applied for shares by entering into a subscription agreement and authorized Carnegie AS or Swedbank Norway, branch of Swedbank AB (publ) to subscribe for shares on their behalf. The names of the Investors and the number of shares allotted to them are specified in Appendix 2 attached to the minutes from this general meeting. Existing shareholders preferential rights to subscribe for new shares are set aside. The subscription of the new shares will take place on a separate subscription form within 3 May The subscription amount for the new shares shall be settled in cash or by offsetting as specified for the individual investor in Appendix 2. Cash payments shall be made to a separate bank account within 5 May 2014 for those investors who shall settle the subscription amount in cash. For the investors who shall settle the subscription amount by offsetting, the amounts specified in Appendix 2 shall be used to settle the subscription amount in its entirety. The outstanding amounts that will be used to offsetting constitutes to a total of NOK 22,646, Such set off shall be deemed to have taken place from the time the new shares are subscribed. The new shares shall rank pari passu with the existing shares and carry full shareholder rights in the Company, including the right to dividends, from the date of registration of the capital increase in the Norwegian Business Enterprise Register. 4 of the Company's Articles of Association is amended accordingly. (ix) The estimated costs related to the Private Placement are NOK 5,000, The New Shares The New Shares were issued as ordinary shares in the accordance with Norwegian law. The New Shares will rank pari passu in all respects with the existing Shares and carry full shareholder rights in the Company from the time of issuance. The New Shares are eligible for any dividends which the Company may declare after said date. For a description of rights attached to the Shares, see Section 10 ( Shares, shareholder matters and Ownership structure ). 22

23 5.5 Share capital following the completion of the Private Placement The Company s share capital following the completion of the Private Placement is NOK 97,536,088 divided into 97,536,088 Shares, each with a par value of NOK Dilution Shareholders who did not participate in the Private Placement were diluted with approximately 20.5% subsequent to the Private Placement. Prior to the Private Placement Subsequent to the Private Placement Number of Shares with a nominal value of NOK 1 77,536,088 97,536,088 % dilution 0.0% 20.5% 5.7 Subscription price The subscription price of NOK 4.50 was determined through a bookbuilding process. The following factors were also taken into account; the Company s historical and expected earnings, and future market prospects, and a comparison of these factors with the market valuation of comparable companies, the expected liquidity of the New Shares as well as a wider assessment of the stock market in general. The subscription price represented a 3.8% discount compared to the closing price for the Company's Shares on Oslo Axess on 10 April The subscription price was announced through Oslo Børs information system on 11 April The table below gives an overview of shares acquired by members of the administrative, management or supervisory bodies or Executive Management the last twelve months, of where there is a material disparity between the subscription price of NOK 4.50 and the effective cash cost paid in the below mentioned transactions. Name Volume Price Date Disparity In % (NOK/share) Øystein Omvik¹ 200, % 38, % Kjetil Olsen² 794, % Roger Hofseth³ 67, % 100, % 30, % Jon Olav Ødegård (closely related 300, % parties) Jon Olav Ødegård 4 2,449, % 15, % Oddvar Myrmo 20, % Bomi Framroze 50, % ¹Acquired through his wholly owned company Prisma Consult AS ²Acquired through his wholly owned company Trols AS ³Acquired through his wholly owned company Roger Hofseth AS 4 Acquired through his wholly owned company Ødegård Prosjekt AS 5.8 Allocation of the New Shares The subscription price was determined by the Board, in its absolute discretion and based on advice from the Managers. The Board allocated the New Shares under the Private Placement towards 23

24 certain Norwegian investors, including certain members of the Company s Board and management and certain of the Company s creditors and towards certain institutional investors outside the United States, in such other jurisdiction as permitted or catered for by exemption rules under applicable securities laws, on its sole discretion. However, an important aspect of the allocation principles is the desire to create an appropriate long-term shareholder structure for the Company. The allocation principles, in accordance with normal practice for institutional placements, included factors such as, but not necessarily limited to, existing shareholding, perceived investor quality, size, timeliness of application and quality of order. The Board of Directors decided to set aside the shareholders preferential right to subscribe for shares. The Board of Directors viewed the proposal in line with market practice, advantageous for the transaction, the share price and the subscription price, an expeditious placement, participation of external investors, and reduced the risk of trading based on assumptions regarding the share price development. Setting aside the shareholders preferential rights benefitted certain investors who were able to subscribe for a higher share of the Private Placement than their shareholding prior to the Private Placement. 5.9 VPS registration and delivery of the New Shares The New Shares were registered in the VPS under a separate temporary ISIN on 8 May 2014, and issued in accordance with the Norwegian Public Limited Liabilities Companies Act. Upon approval of this Prospectus, the New Shares will, together with the existing Shares, be registered in book-entry form with the VPS under ISIN NO The Company s register of shareholders with the VPS is administrated by SEB Merchant Banking, Custody Service, PO Box 1843 Vika, NO-0123 Oslo, Norway, telephone The New Shares will be tradable on Oslo Axess, and issued to the subscribers respective VPS accounts immediately following approval of this Prospectus by the Financial Supervisory Authority of Norway Selling and transfer restrictions For a description of selling restrictions applicable to the Private Placement see Section 13 (Selling and transfer restrictions) Proceeds and expenses related to the Private Placement The gross proceeds to the Company for the New Shares offered in the Private Placement were NOK 90 million. The Company will bear the fees and expenses related to the Private Placement and the Listing, which are estimated to amount to up to approximately NOK 5,000,000. No expenses or taxes have been charged by the Company or the Managers to the subscribers in the Private Placement. The net proceeds from the Private Placement will be approximately NOK 85 million Governing law and jurisdiction This Prospectus, the Application Agreement and the terms and conditions of the Private Placement shall be governed by and construed in accordance with, and the New Shares will be issued pursuant to Norwegian law. Any dispute arising out of, or in connection with, this Prospectus or the Private Placement shall be subject to the exclusive jurisdiction of the courts of Norway, with Oslo as legal venue. 24

25 5.13 Advisors Carnegie AS, Grundingen 2, Aker Brygge, PO Box 684 Sentrum, 0106 Oslo and Swedbank Norway, Filipstad Brygge 1, PO Box 1441 Vika, 0115 Oslo, Norway are acting as Managers in relation to the Private Placement. Advokatfirmet CLP DA is acting as the Company s legal adviser in relation to the Private Placement Interests of natural and legal persons involved in the Private Placement The Managers (and/or their affiliates) may have interests in the Private Placement as they have provided from time to time, and may in the future provide, investments and commercial services to the Company and its affiliates in the ordinary course of their respective businesses, for which they have received and may continue to receive customary fees and commissions. The Managers, their employees and any affiliates may currently own existing Shares in the Company. The Managers have received a commission in connection with the Private Placement and, as such, have an interest in the Private Placement. Reference is made to section 5.11 ( Proceeds and expenses related to the Private Placement ). 25

26 6 PRESENTATION OF HOFSETH BIOCARE 6.1 Overview The Company is a Norwegian public limited liability company organised under the Norwegian Public Limited Liability Companies Act, with business registration number The Company s registered office is c/o ØkonomiConsult AS, 6140 Syvde, Norway, and its telephone number is The legal and commercial name of the Company is Hofseth BioCare ASA. The Company was incorporated under the Norwegian laws on 5 August 2009 and registered in the Norwegian Register of Business Enterprises 29 August 2009; subsequently the Company was listed on Oslo Axess 2 December The Company s shares are registered in the VPS. 6.2 Business concept Hofseth BioCare is a Norwegian biomarine company with the key objective to provide high value added biomarine ingredients for human applications. The Company is founded on the core value of sustainability and optimal use of natural resources. Through innovative production technology and logistics, HBC is able to preserve the quality of protein, calcium and oil extracted from fish off-cuts. Products that previously could only be used as animal feed can now be produced in a manner suitable for human consumption and pharmaceuticals. HBC is thus contributing to efficient use of marine resources and entering the higher profit market of quality ingredients for human applications. 6.3 History and development Hofseth BioCare AS was incorporated 5 August 2009 by Roger Hofseth AS. However, the business has its roots back to year Today, protein products derived from seafood are mainly used to feed animals, because the marine industry has not been able to produce a high quality protein that can be used directly by humans. As far back as the 1990 s, many companies tried to make better quality protein from fish using hydrolization, but none succeeded in achieving the quality needed. The right technology was not available, and the raw material control was insufficient. This was the starting point for heavy investments in research and new technology by Green Earth Industries LLC in early The work done by Green Earth Industries LLC comprises the building blocks of Hofseth BioCare. Paperboy Ventures established Green Earth Industries LLC and had significant investments in technology, development, testing and documentation from 2000 to In 2007, Paperboy Ventures started the initial construction of the Midsund plant, established under the name Real Estate Midsund AS. Paperboy Ventures was hit by the global financial crises in 2009 and Green Earth Industries LLC went bankrupt after Landsbanki had to withdraw its bank facility. Certain assets of Green Earth Industries LLC, like the Midsund plant and immaterial property rights were acquired by Roger Hofseth AS in 2009, and Hofseth BioCare was established. The plant was approximately 60% finished when Hofseth BioCare was incorporated. In 2011, Hofseth BioCare merged with Cromi AS and completed the Midsund plant. The first commercial production commenced primo October Cromi AS was a consultant group operating in the neutraceutical human market and brought important assets to HBC, such as, an international market competence, a network of professionals within product and business development, and a new management with Sjur Jenssen as CEO and Lucas Altepost as VP for Sales and Marketing. On 12 October 2011, Hofseth BioCare entered into an agreement with Sinkaberg-Hansen AS regarding the establishment of a new and larger production plant and on 14 November 2011, Hofseth BioCare Rørvik AS was incorporated by Hofseth BioCare (51%) and Sinkaberg-Hansen AS (49%). 26

27 On 30 March 2012, the Company announced that it had acquired Tine s spray drying facility at Berkåk. On 18 September 2012, HBC Berkåk AS was incorporated by Hofseth BioCare (100%). On 8 January 2013, the contract with Tine was transferred to HBC Berkåk AS and the takeover of the Berkåk plant was completed. On 14 January 2013, the Company participated in a private placement in HBC Berkåk AS, which reduced Hofseth BioCare s stake from 100% to 92%. Hofseth BioCare now has full control over its entire protein value chain from sourcing of raw material through to its final product. On 1 March 2013, HBC s current CEO (Jon Olav Ødegård) and CFO (Øystein Omvik) joined the Company and during the year the production process was optimized and is now fully functioning, producing at stable yields and in accordance with human specifications. In addition, in March 2014 full-scale test production was completed at Midsund verifying positive lab tests of new mixing technology and enzymes indicating more than a doubling of current production capacity. The Company currently focus on commercialization of the business strategy and has recently increased its sales and marketing activity resulting in sales and launch of products in Australia, Sweden, Canada and the USA. 6.4 Legal structure Hofseth BioCare is a holding company. Hofseth BioCare owns 51% of the shares in the Norwegian company Hofseth BioCare Rørvik AS. Hofseth BioCare Rørvik AS is a new production company established together with Sinkaberg-Hansen AS (49%) and will be situated next to Sinkaberg- Hansen AS production facilities on Rørvik in Norway. In 2012 Sinkaberg-Hansen AS began the construction of the production plant for Hofseth BioCare Rørvik AS, and the building site development was completed the same year. However, installation of production equipment is set on hold until stable full scale production with expected output for the human nutrition market is obtained in the Midsund plant. After the production facilities are completed, Hofseth BioCare Rørvik AS will carry out the same business as the Company, but Hofseth BioCare Rørvik AS will require certain services from the Company as set out in Section 8.8 Related party transactions. Hofseth BioCare owns 100% of the shares in the Norwegian company HBC Berkåk AS, which is a spray drying facility that will handle drying of protein products for the Company. Hofseth BioCare acquired the spray drying facility from Tine. In addition, the Company continued the working relationship with the workforce at Berkåk. Hofseth BioCare ASA Hofseth BioCare Rørvik AS (51 %) HBC Berkåk AS (100 %) 6.5 Hofseth BioCare s vision and objective Vision Hofseth BioCare s vision is to be the leading company in the production and development of premium bioactive marine ingredients from the off-cuts to the high-end markets. Sustainability is the core value in all the Company s activities. 27

28 6.5.2 Objective Hofseth BioCare s key objective is to provide high value added biomarine ingredients for human applications. Through innovative production technology and logistics, HBC preserves the quality of protein, calcium and oil extracted from fish. The technology is proprietary to the Company. The Company has submitted patent applications related to the technology, which are in process, although none of these have yet been granted at the date of this Prospectus. Products that previously could only be used for animal feed can now be made suitable for human consumption and pharmaceuticals. HBC is thus contributing to efficient use of marine resources. 6.6 Products The core business of HBC is to produce high value ingredients from salmon off-cuts. This means that the Company is neither a refiner nor a distributer, it is a production company. Hofseth BioCare produces the following four primary product fractions from the enzymatic hydrolysis: marine lipids, solvable protein hyrdrolysate, marine calcium and minerals and partially hydrolysed protein Marine Lipids (Oil) Product characteristics Low in free fatty acid ( FFA ) HBC s salmon oil is transparent with a reddish/pink colour, low in free fatty acid values in the range of % and with very low rancidity values. High in docosapentaenoic acid ( DPA ) HBC s oil is a natural oil containing adequate amounts of eicosapentaenoic acid ( EPA ) and dehydroascorbic acid ( DHA ), and it is higher in DPA than most other omega-3 oils. Low density lipoprotein ( LDL ) Scientific studies 34 indicate that extra virgin salmon oil has the effect of lowering oxidized LDL. Oxidized LDL has been shown in dozens of journal articles to be a very good predictor molecule for identifying cardio-vascular disease ( CVD ). Antioxidant This salmon virgin oil also contains the strong antioxidant asthaxanthine, and retains other bioactive components that are normally removed during the production of refined omega-3 oils. Marine lipids play an important role in both human and animal health and nutrition Applications Human health and nutrition - Dietary supplements Hofseth BioCare s marine oil represents a new approach to how the oil is sourced and purified. HBC s production is dedicated for human consumption from the sourcing of the raw material to its new enzymatic production technology. The enzymatic processing solves many of the issues that the traditional crude fish oil industry is facing, such as sustainability, fishy taste, lack of freshness of the raw material and lack of quality control of the value chain. 3 Sen & Framroze, The Effect of Dietary Oil Capsules on Reducing Serum Concentrations of Oxidized Low Density Lipoprotein- β 2-Glycoprotein-I Complex, Nutrition & Food Sciences 2013, 3:5 4 Framroze & Shah, A study on serum concentrations of oxidized low-density lipoprotein β2-glycoprotein I complex in patients with normal and dyslipidemic lipid profiles, Journal of Indian College of Cardiology 2013,

29 The typically Western diet does not supply enough EPA and DHA, which may contribute to increased risk of chronic diseases and hundreds of thousands of preventable deaths. First and foremost, omega-3 fatty acids must be consumed in the daily diets; they are essential because the body cannot synthesize them from other types of fat in the diet. The marine oil supplements in the market today are omega-3 in natural or concentrated form. Animal and pet food Salmon oil is largely used in feed and pet food. The traceability of HBC s salmon oil, the controlled enzymatic processing, the freshness and good palatability of the product are distinctive quality characteristics that play an important role for the animal and pet nutrition market. A recent study 5 showed that fresh Norwegian salmon oil has equal or better palatability than poultry fat for dry feed to dogs (pet food). These findings open up new possibilities for HBC s fresh salmon oil, both in the feed and the pet food segments Soluble Protein Hydrolysate (SPH) Product characteristics Low on fat The SPH is generated from the water-soluble protein fraction of the enzymatic process. The final free-flowing spray-dried powder is now currently sprayed out at HBC s facilities at Berkåk. The final product contains 90% + protein and less than 1% fat. Specification SPH consists of oligopeptides and smaller peptides with a maximum molecular weight well under 10,000 Daltons, as measured by MALDI-TOF analysis (matrix assisted laser desorbtion/ironization) Applications Human health and nutrition - Healthy and functional food Studies 678 clearly show that fish protein hydrolysate ( FPH ) can be an important part in reducing the development of obesity. Preliminary studies 9 in an animal model indicate that FPH might increase fat oxidation, which can reduce the development of obesity. Compared to composition of proteins frequently utilised in the food industry, such as soy and milk, the FPH are particularly rich in the water soluble B-vitamins. B-vitamins are essential in energy consuming processes such as fat oxidation, both in animals and humans. Furthermore, FPH has a different amino acid ( AA ) composition than both soy and milk, which might be favourable with respect to fat metabolism. The nutritional qualities of Hofseth BioCare s FPH, along with its functional and technical properties make it very suitable for applications in healthy and functional foods. 5 Presented at RUBIN-Conference, Feb. 7 th, Dietary cod protein improves insulin sensitivity in insulin-resistant men and women: a randomized controlled trial. Ouellet V, Marois J, Weisnagel SJ, Jacques H. Diabetes Care Volume Nov;30(11) Page Dietary cod protein reduces plasma C-reactive protein in insulin-resistant men and women. Ouellet V1, Weisnagel SJ, Marois J, Bergeron J, Julien P, Gougeon R, Tchernof A, Holub BJ, Jacques H. Journal of Nutrition Dec; Volume138(12) Page Responses of Plasma Lipoproteins and Sex Hormones to the Consumption of Lean Fish Incorporated in a Prudent-Type Diet in Normolipidemic Men. Brigitte Lacaille et al. Journal of the American College of Nutrition, Vol. 19, No. 6, Page (2000) 9 A Fish protein hydrolysate alters fatty acid composition in liver and adipose tissue and increases plasma carnitine levels in a mouse model of chronic inflammation. Bodil Bjorndal et al. Lipids in Health and Disease 2013, Vol. 12: Page

30 Animal health and nutrition Pet food Feeding studies 1011 carried out using fish hydrolysates on dogs and cats show that SPH may also have an immune-stimulating effect on pets in addition to a nutritional value. This may solve specific gut infections in young animals and compromise immune systems in geriatric pets. Based on the studies done, it is assumed that Hofseth BioCare s SPH bioactive properties will distinguish itself from ordinary protein. HBC do also have strong indication that their SPH has hypoallergenic effects on animals due to the unique AA profile and low Dalton Weight of the product. HBC s results on iron uptake, research and good documentation on palatability and good digestibility are important competitive advantages. Animal health and nutrition Feed Studies 12 on SPH clearly showed that SPH increased iron uptake as compared to other digested protein sources tested. SPH improved iron uptake over casein and was even more than 40%, higher than hydrolysed meat protein. The iron uptake indication has several important applications in animal feed. One important application is the piglet feed, where the ability of the piglet gut to digest and absorb iron is a ratelimiting function for rapid growth and feed efficiency. A positive impact on iron absorption could also lead to the physiological benefits of reducing anaemia and improving the respiratory function. Fermentation In microbiological and fermentation media, HBC s SPH represents a good alternative of peptones of animal sources. Soluble proteins key properties for fermentation media: Highly soluble Molecular size below 3000 Daltons Easily convertible/useable nitrogen Prion free Low ash content Test results 13 show that fish peptones are good alternatives to peptones derived from animal sources. There is no crossover between salmon and human diseases, addressing consumers concerns regarding animal diseases (like mad cow disease / bovine spongiform encephalopathy ( BSE )) Marine Calcium & Minerals Product characteristics Many uses Fish bones are an excellent natural source for calcium and essential minerals. HBC s marine calcium & mineral fraction is a dry powder that can be further formulated into products as desired 10 Fish meals, fish components, and fish protein hydrolysates as potential ingredients in pet foods. Folador, J., Karr-Lilienthal, L., Parsons, C., Bauer, L., Utterback, P., Schasteen, C., Bechtel, P.J., Fahey, G. Journal of Animal Science (2006) Vol. 84(10) Page Fish protein substrates can substitute effectively for poultry by-product meal when incorporated in high quality senior dog diets. Zinn, K., Hernot, D., Fastinger, N., Karr-Lilienthal, L., Bechtel, P.J., Swanson, K., Fahey, G. Journal of Animal Physiology and Animal Nutrition.(2008) Vol. 93(4) Page Internal Report, Results published in part in Patent Application WO Novozyme PP1 is the pilot plant version of the SPH from Midsund today. Caco-2 Cell Iron Uptake measurements using SP Dry Novozyme PP1(SPH) in comparison with Meat, Chicken and Fish and Casein Protein digests. Romano Development Inc. 25th March Internal report, Report on Comparison Studies using SP Dry Novozyme PP1 from the Novozyme pilot trial Jan 2008 as a Component for Microbial Growth Media. Romano Development Inc. 22nd February

31 by HBC s customers. Salmon calcium seems to exhibit excellent absorption and high bioavailability. Natural balance The calcium to phosphorous ratio in the fraction is approximately 2:1. This is similar to the naturally occurring amounts in human skeletons, making the product particularly useful in feed and nutraceutical markets Applications Human health and nutrition - Dietary supplements Calcium is essential for the bone metabolism, but daily calcium requirements are not met in a significant proportion of the population. Fortunately, oral calcium supplementation can help to meet these needs; however, the calcium bioavailability depends on the calcium sources. A recent study 14 shows that salmon bones (equal to the HBC calcium process), because of their high calcium content, can conveniently be utilised as a high quality food ingredient or supplement in human nutrition. In the mentioned study, the calcium in enzymatically rinsed bones from Atlantic salmon was demonstrated to be a well absorbed source of calcium in young, healthy men. A second trial 15 conducted by the Service de Nutrition de I Institut Pateur assessed that enzymatically treated fish bone powder (similar to the HBC calcium process) constitutes an excellent source of calcium. These results indicate that HBC s marine calcium may enhance growth of bone structure in humans. HBC has a detailed R&D plan and first positive results of a Caco-2 in line cell study are currently being followed by an animal trial on ovariectomised ( OVX ) rats that simulate osteoporosis in older women. If the OVX rat trial shows positive results, HBC intends to do a whole body bone scan follow-up study in humans suffering from osteoporosis. The draft protocol is being prepared. Animal health and pet nutrition Feed Studies 1617 show that marine calcium made from enzyme-treated salmon bones (equal to the Hofseth BioCare process) has a better absorption rate in pigs than commercial calcium. In addition the calcium source made from enzyme-treated salmon bone has a higher absorption rate compared to calcium from codfish and white fish. With more and more pets living to a ripe old age, nutritional supplements for pets have become a fast growing business, as pet owners seek out health products for their beloved friends. The Company believes that its marine calcium, with its proven bioavailability, is perfectly suited for the premium pet market and as an additive for animal health nutrition. 14 Calcium from salmon and cod bone is well absorbed in young healthy men: a double-blinded randomised crossover design Marian K Malde1*, Susanne Bügel2, Mette Kristensen2, Ketil Malde3, Ingvild E Graff1, Jan I Pedersen4, 20th Jul ( 15 Effects of two marine dietary supplements with high calcium content on calcium metabolism and biochemical marker of bone resorption Institut Pasteur de Lille, France., European Journal of Clinical Nutrition. Jul Fish Bones - a highly available calcium source in growing pigs. Marian K Malde et al. J. Anim Physiol & Anim Nutr 2010 Vol. 94(5) Page Calcium from salmon and cod bone is well absorbed in young healthy men: a double blind randomised crossover design. Marian K Malde et al. Nutrition and Metabolism 2010 Vol 7 Page 61 31

32 6.6.4 Partially Hydrolysed Protein (PHP) Product characteristics Superior content The PHP fraction, produced as a dry granular powder, has a complementary AA profile when compared to other animal protein sources, with significantly higher levels of phospholipids, good digestibility (92 94%), and a high ratio of essential AA. Many uses Its elevated and well-balanced essential AA profile, combined with high digestibility due to partial hydrolysis, makes it an ideal complement to vegetable proteins such as rice protein, wheat protein, and maize protein. Cost-effective In order to reach the full potential of the PHP fraction, the Company has developed a cost-effective method for concentrating and drying this fraction without a loss of nutritive value Applications Animal health and nutrition Feed Due to low margins within pig production, low price proteins of poor nutritional value are used to lower costs. To reduce the risk of problems and diseases due to the poor quality, the feed is added with antibiotics, high levels of zinc etc. Fishmeal is already recognised in the industry as an excellent source of AAs. Animal health and nutrition Pet food Hofseth BioCare s PHP s well-balanced essential AA profile, combined with high digestibility, makes it an ideal complement to vegetable proteins such as rice protein, wheat protein, and maize protein. Consequently, the PHP is a very good choice as a protein fortifier in pet feed, especially when the feed has high levels of vegetable proteins low in tryptophane and methionine. 6.7 Production technology and process Hofseth BioCare processes its raw material through an enzymatic hydrolysis process that gradually digests the protein in the raw material, breaking down the long chain proteins into shorter peptides chains and peptones. This process requires careful management of the hydrolysing time, supply of enzymes, temperature and moisture. The hydrolysed raw material is separated and concentrated in several steps ending up with the four product fractions; oil, protein concentrate, dried bone/calcium and dried protein. The entire process is controlled and monitored by the PLC-system. The marine calcium and protein are dried internally, while the liquid soluble fraction is dried at the Berkåk facility, performed by a conventional spray dryer. Spray drying is a process where products are pumped at high pressure over injectors on the top of a drying chamber. The products atomize, resulting in a large surface. Later the products fall into the drying chamber, where hot air dries the products. Eventually the dried products are collected in the tank, packed/labelled and placed in stock ready for dispatch to customers. 32

33 Simplified illustration of the production process: Enzymes Marine Oil Raw Material Hydrolysis process Separation Concentration Berkåk Dry soluble protein Dry marine calcium Calcium & partly hydrolysed protein Internal dryer Dry protein The crucial factors The two most important factors in the hydrolisation are the input of first class raw materials and a very high degree of control over the different production processes leading to the end product output. The first factor is addressed by quality control together with guarantees from the suppliers, whilst HBC s proprietary technology and advanced production facility management address the second key factor. A new method The platform technology of the Company is based upon a new method for full production controlled by-product refinement up to high-end protein products intended to substitute animal and soy products currently dominating the marketplace. Enzymes are specific, meaning that one certain type of enzyme under certain conditions can cut (hydrolyse) different types of protein at a certain place in the protein chain. To produce the optimal mix between proteins, peptides and AAs, HBC uses a Bacillus protease complex (enzymes). The mix of enzymes consists of Neutrease and Alcalase (a proteolytic enzyme developed for the hydrolysis of all types of protein). When combining both, endo protease and exo peptidase activity, HBC can control the breakdown of the protein and achieve the desired result. Controlling the main hydrolysis in the reactors in terms of enzyme ratio and enzyme concentration together with optimal conditions such as ph level, time and temperature, is essential to obtain the desired quality. A proprietary mixture of readily available enzymes is combined with water and the raw material. This gradually digests the long chain proteins by breaking them down into shorter peptides and AAs. To produce consistent, high-quality end products, HBC precisely controls key process parameters such as reaction time, temperature, and moisture content. 6.8 Production capacity and facilities Production capacities The existing processing plant in Midsund commenced production in June Until the end of 2012, the factory managed to process 5,800 tons of raw materials. The designed production capacity was estimated to 12,500 tons of raw material for a full year. Based on the actual production in 2012, the capacity proved to be higher. Hofseth BioCare estimates to process close to 19,000 tons of raw material with 7,100 tons of finished products in In March 2014, the Company accomplished full-scale test production with new proprietary enzymes at the Midsund plant confirming lab tests done in Germany in the fall of 2013 showing that the Company will be able to halve the hydrolysis period compared to the current situation and thus be able to process 50,000 tons of raw materials p.a. compared to the current capacity of 20,000 tons. In addition to the significant capacity increase, the new mixing technology will imply considerable cost reductions. The new mixing technology is not yet installed in the Midsund plant, but the management will prioritize this investment in the coming 6 months. 33

34 6.8.2 First production facility - Midsund Hofseth BioCare s first processing plant is situated in Midsund, Norway and is built with state of the art hardware and technology. The plant, the production facilities and the Company s fixed assets are not affected by environmental conditions. Dedicated, skilled and trained staffs with wide experience from the food processing industry secure the customer s full attention during the production process. New products are developed together with the customers and in-house R&D and S&M crew. On demand, customers can be given online access to analysis results and certificates for their own products. It proved more challenging for Hofseth BioCare to obtain the designed yield and product quality for soluble protein (SPH) than previously expected. In addition, it was difficult to separate the mix of PHP/calcium into two distinct products. In general, the challenges were mainly related to the separation of the raw material into fractions in the early stages of production. As a result, the average yields in 2012 were 4% of SPH (finished powder), 18% of oil and 3% of mix PHP/calcium. The Midsund plant underwent substantial new process developments but managed at the same time producing products for sale during During the second and the third quarter of 2012, initiatives including changes in productionprocess and equipment were initiated without delivering desired effects. Consequently, the production team at Midsund realised that more severe actions were required. During the fourth quarter of 2012 and until February 2013, the preparation and installation of totally new equipment in the first phase of the production were made. The production showed a substantial increase in yields of SPH in accordance with earlier lab tests, increasing from 4% to 8%. The Company is continuously working on the separation of raw material as this is key to secure optimal yield and quality. A new production unit will be installed in April/May 2014 for testing purposes. Out of one ton of raw material, the production facility in Midsund has the following budgeted yields for 2014: (i) approximately 20 kg dry PHP/MIX (2%), (ii) approximately 30 kg dry calcium/bones (3%), (iii) approximately 180 kg of oil (18%), and (iv) approximately 56.5 kg of SPH (5.65%) increasing to 73 kg of SPH (7.3%) from May Illustration of yield: 100% 2.0 % 3.0 % 7.3 % 18.0 % PHP Calcium SPH Oil Raw material Output 34

35 Optimal conditions The plant s control system, programmable logic controller ( PLC ) is programmed to operate according to fixed settings, to secure the most optimal and stable production conditions. The PLC system controls every single valve, pump, machinery and production step. Operators have full control over the process, and also over technical systems such as steam boilers and air compressors. Power consumption status is shown on the system. The PLC system operates online and can be connected from outside the plant for engineering service and support. In addition, key staff is given access directly to the system in order to be able to adjustments of parameters, fine tuning, trouble-shooting etc. Unstable processes, approved and not approved operations, and limit values will be recorded in the system for reports and documentation. Quality standards Hofseth BioCare's advanced and modern production facilities in Midsund and Berkåk are built and maintained to fulfil today's high requirements regarding product safety, sustainability and quality from the pharmaceutical, food and feed industry. No production plant is however better than the attitude and work habits of the people involved and therefore Hofseth BioCare have also invested time and energy to establish a culture to promote those values from the personnel involved in the everyday production up to the company s top management and they will continue to do so. Hofseth BioCare s Management System is based on the fundamentals of product safety and quality for this type of manufacturing which includes Management Commitment, Personnel involvement, applicable legal requirements, customer specifications, Good Manufacturing Practices (GMP) or Pre- Requisite Programs (PRP s) as they are more commonly referred to today within the food industry and a HACCP system according to Codex Alimentarius, From an environmental and sustainability point of view Hofseth BioCare is at the very forefront. The basic idea of using parts of the fish that otherwise would go to waste and instead handle and use it as a resource for the benefit of human and animal health is in line with the very core of sustainability. Still consideration to minimise the impact on the local environment has to be made so therefore both plants are of the highest standard constructed to fulfil the very strict Norwegian environmental legislation. Hofseth BioCare is also in regular dialogue with the local community and environmental authorities to minimise any potential impact on the local environment such as odour. In Berkåk Hofseth BioCare has invested in a new system unique for Norway which remarkably reduces any odour to the surrounding environment. This system is also being evaluated for the plant in Midsund, together with other solutions. In order to show commitment to product safety, sustainability and accountability as a trustworthy business partner Hofseth BioCare is constantly monitoring the opinion of current and future clients to identify and act upon their needs and considerations regarding legislative issues, industry standards and best practices. Consistent high quality products are a significant advantage, as competitors focus principally on bulk delivery of products from poorly controlled processes. Hofseth BioCare uses substantial resources in order to meet the different quality standards demanded from the customers in order to enter new markets and segments. Close cooperation with world leading enzymes vendors, offering their own R&D and laboratory facilities for close follow up and troubleshooting with any type of product and production issues, secures the best quality standards. Not only are raw material and products monitored and tracked. The plant s hardware such as tanks, pumps, valves, instruments etc., are tagged, monitored and maintained to prevent production stops and costly equipment breakdown. Instruments are calibrated according to 35

36 international standards and methods, making sure that the values measured are correct at any time. In June 2012, the Midsund factory became certified according to the product safety and quality standard GMP+ (Good Manufacturing Practice for animal feed) and was also evaluated and approved by the organisation Trustfeed at their highest level which is very unusual to achieve at the first time audit. Due to the importance of having high quality into the first level of the food chain, the requirements for reaching the GMP+ standard are very high. More importantly, the standard is an important basis acquiring the GMP standard for Dietary Supplements or other relevant quality standards. In October 2012, Hofseth BioCare completed its first Generally Recognised as Safe (GRAS) selfaffirmation approval for its salmon-based Soluble Protein Hydrolysate (SPH) ProGo designed for human nutrition in the US market. A committee of independent experts critically reviewed efficacy and toxicity data for ProGo, and found the product to match the highest quality standard for a protein isolate and concluded that its use should be generally recognised as safe. In November 2012, Hofseth BioCare became certified according to the sustainability standard by Friends of the Sea. Friend of the Sea is a non-profit non-government organisation (NGO), whose mission is to preserve the marine habitat. Hofseth BioCare follows environmental regulations standard in compliance and under the supervision of local county and national authorities. Hofseth BioCare fulfil environmental requirement for all its waste water for both current production sites in Midsund and Berkåk Second production facility - Rørvik Hofseth BioCare entered into an agreement with Sinkaberg-Hansen on 12 October 2011 to establish Hofseth BioCare Rørvik AS and build a new production facility situated next to Sinkaberg- Hansen AS production facilities in Rørvik in Norway. Hofseth BioCare and Sinkaberg-Hansen decided in late 2012 to postpone the building of the factory, due to high building costs and sourcing of raw material Acquisition of spray dryer facility - Berkåk Hofseth BioCare entered into an agreement to acquire Tine s spray drying facilities at Berkåk on confidential terms. Through the transaction in January 2013, Hofseth BioCare gained full control over the critical phase of the SPH production-process and important human competence. In the future, all drying of SPH will be handled at Berkåk. The Berkåk facility will use approximately 50% of its full capacity for drying SPH from Midsund, and be able to dry SPH from future new factories and potential external clients. The facility at Berkåk has an annual capacity to handle 4,000 tons of soluble protein-concentrate, giving 1,800 tons of finished dried products. Since the take-over in January 2013, the production shows a significant quality improvement of the SPH powder, both in solubility and odour. In relation to the private placement carried out in March 2013, the Company acquired the remaining 8 % of the shares in HBC Berkåk AS. The Company thus holds all shares in HBC Berkåk AS Future production facilities Hofseth BioCare aims to enter into contracts similar to the contract with Sinkaberg-Hansen, with fish farming producer/processor and with the Norwegian pelagic fish industries. Hofseth BioCare is currently in discussions with several important players in the Norwegian fish processing industry. There is an estimated volume of 850,000 metric tons of bi-products available along the Norwegian coast, that today are sold at very low value (sealage), and HBC s technology represents an 36

37 important opportunity for this industry to increase the value of their off-cuts. Options are currently being explored by HBC concerning how to employ the available space at Berkåk. An ambition is to make Berkåk the Company s third production facility in order to expand the Company s production, with an enzymatic line for pelagic processing. Although options are currently being explored, no firm commitments have been made. 6.9 Sourcing of raw material Midsund The plant at Midsund currently processes approximately 19,000 tons of raw materials each year. The Company's previous long term supply agreements for raw materials with SFF and Hofseth AS (wholly owned subsidiaries of Hofseth International AS) were transferred to Hofseth International AS in December As part of the consideration for the right of supply of raw materials, Hofseth International AS shall deliver a quantum of raw materials to the Company corresponding to the remaining right of supply of raw materials to the Company under the previous long term supply agreement at a discounted price. Please refer to section 8.8 Related party transactions for further details regarding the transfer of the long term supply agreements. Simultaneously with transferring the long term supply agreements, the Company entered into a new, long term supply agreement regarding delivery of 30,000 tons of raw material with SFF and Hofseth AS. The delivery period under this agreement commences on 1 January 2015 or from such time as Hofseth International has completed delivery of raw materials as payment of consideration, as described above. The delivery period ends after three years. The Company will nonetheless be entitled to purchase raw materials from other producers if SFF or Hofseth AS fails to meet the conditions set out in the supply agreement. Accessible volume of raw material from such other producers exceeds the capacity at Midsund plant. The Company is regularly in contact with both existing and new potential suppliers of raw material. The work of securing new contracts will continue through Rørvik Sinkaberg-Hansen AS and Hofseth BioCare s new plant at Rørvik is expected to have the same design as the Midsund plant and thus the same production capacity. Hofseth BioCare Rørvik AS has secured an exclusive right to all available raw material from the Sinkaberg-Hansen group that can be used in the production at the Rørvik plant. It is estimated that Sinkaberg-Hansen AS will process approximately 24,000 tons of salmon in their plants in Such production will provide around 7,500 tons of bi-products. Until it is decided to proceed with the building of the Rørvik plant, no new contracts with salmon producers for the supply of the additional raw material needed will be signed Market strategy A new quality standard Bi-products The fishing industry traditionally has been sourcing its raw material bi-products to animal feed. Today, this market is dominated by producers (mainly feed fish) that have a dedicated supply chain and are mainly selling their products as animal feed. In the last 20 years, the technology used in the upstream sector of this industry has seen little innovation. Hofseth BioCare intends to set a new standard of quality for the fish protein and fish oil industry, an industry that has mainly focused on volumes and feed quality standards. 37

38 Opportunities In the opinion of the Company, there are great opportunities to further improve the upstream sector of this industry in the way bio-marine ingredients are handled, sourced and produced with improved technology and more controlled processing. HBC with its enzymatic production and usage of fresh off-cuts from aquaculture represents a concrete step in delivering higher quality in the bio-marine ingredients marketplace. Higher value In the starting phase, HBC sold most of the volume to the animal nutrition market in order to secure full off-take for all its production. The animal nutrition market is characterised by high volumes and low prices. Gradually, as contracts are signed for the higher-end pet and nutrition markets, more volumes will go into these markets where total market volumes are lower, but prices are considerably higher. HBC s key target market is the human nutrition market and the first contract for products to this market has been signed. Market pyramid: Market entry strategy Hofseth BioCare is entering three distinct markets with four products. HBC is working to establish a distributors network that will streamline logistics and maximise coverage in each geographical and market segment. A distributor should be able to handle one or more of HBC s target markets Distribution strategy HBC has previously established several agreements to implement its distribution network: Exclusive Distribution Agreement for its salmon oil in the Human Nutrition Market with TSI Health Science LTD for the following markets: North America, Australia, Japan and New Zealand. Exclusive Distribution Agreement for its Soluble Protein Hydrolisates in the Human Nutrition Market with Roxlor Ltd. for USA and Canada. Exclusive Distribution Agreement for Salmon Oil, Soluble Protein Hydrolisates and Calcium with Novosana for China. 38

39 For the Animal and Pet Food market, Hofseth BioCare has appointed Chr. Olesen as its Agent. Contract was signed on 28 September Chr. Olesen will buy all the remaining volume of protein and oil not sold to the human nutrition market. Distributors are committed to minimum sales objectives to reach for each year during the duration of the agreement. If the minimum sales are not reached, the distribution agreement can be terminated. All distributors play an important role in terms of logistics and marketing in each geographical area. Hofseth BioCare has previously implemented a network of sales agents and distributors for marketing and sales of its products in various jurisdictions. However, the Company did not obtain the desired results and entered into an agreement with Hofseth International regarding market cooperation approved by the extraordinary general assembly dated 27 December Hofseth International had for some time prior to the agreement been involved in marketing work for the Company through marketing and offering of the Company's products through and via its sales network and its customers, including that both HBC's and Hofseth International's products have been marketed together under the "whole fish" concept. In December 2013 the parties agreed upon a formalisation of the marketing cooperation, including that Hofseth International, on certain terms and conditions, shall be entitled to a sales commission for sales of certain specific products in certain specific marketing areas to customers Hofseth International has had the main responsibility for the Company's agreements with. The sales commission varies from 5 10%, depending on the sales revenue from each relevant customer surpassing certain defined milestones. Hofseth International will not be entitled to receive payment of sales provision before the Company has necessary liquidity to effectuate such payment. Hofseth BioCare s employees have extensive experience and knowledge in all market segments, and have already worked together with the above distributors, and currently actively participate in introducing all product fractions directly to marketers Research and development HBC has developed expertise in marine bi-product refinement through many years of process development, production and clinical studies. HBC has optimised the process to make sure that the right parameters are adopted to obtain the right quality and yields. HBC has a highly experienced production staff, which is supported by the R&D department led by Dr. Bomi Framroze. Hofseth BioCare has during the last few years developed a marine waste treatment industry into a nutraceutical and functional food business. This is a result of four distinct R&D areas of focus. The first is the introduction of food grade quality systems and equipment at its new facility at Midsund, Norway. The equipment at this facility, the process control systems and the CIP solutions and the quality system defines a high food grade standard for fish fractionation. Together with its strict tracking and logging of raw material sourcing, the Midsund facility for the first time produces consistent series of high quality fractions from the salmon off-cuts. The second is the continuous process improvement necessary to reduce the cost of production and improve the specifications of each of the four fractions produced. Recent successes include process improvements that have led to the elimination of the use of anti-oxidants during production and substitution of a proprietary blend of non-gmo enzymes that significantly reduces the cost of production. The third is the accurate and more detailed characterisation of the four fractions done through analysis. Hofseth BioCare's salmon protein hydrolysate (SPH) powder is the only protein powder that is certified 'prion free' and 'hypoallergenic' on the basis of the most rigorous testing, such as MALDI-TOF analysis (matrix assisted laser desorption/ionization mass spectrometry). The Company s partially hydrolysed protein is characterized by its peptide size to give feed formulators 39

40 much greater confidence on its performance in finished feeds. Hofseth BioCare s salmon oil is specified below GOED standards for toxic dioxins and POC's (persistent organic chemicals) which is required in Japan and the US. And finally, the Company s marine calcium product is characterized by its presence of not just calcium, like all other products, but also phosphorous and oligosaccharides that have been shown to impact calcium absorption and bone regrowth. The fourth is creating a portfolio of clinical trials and patent protection that exploits the role these highly characterized products can play in improving nutrition and improving chronic health issues in both animals and humans. Of HBC s total R&D investments over the years , approximately 15% has been used for the food grade quality systems, 25% for the continuous process improvement necessary to reduce the cost of production and improve the specifications of each of the four fractions produced, 20% for the detailed characterisation of the four fractions done through analysis and 40% for creating a portfolio of clinical trials and patent protection. HBC s Soluble Protein Hydrolysate has been shown to increase haemoglobin (RBC) in its first dose-ranging human clinical study. A PCT worldwide patent has been filed. A follow up confirmatory study with 36 subjects for 50 days on anaemic human subjects is underway. Iron supplements is a very large nutritional supplement market that is increasingly under pressure due to lack of effectiveness and liver toxicity issues, and a natural supplement that increases RBC without adding extra iron would be a first in dietary supplements. HBC has compared SPH in the industry standard, TIM-1 human digestion model at INAF, University Laval, Canada against the best whey protein hydrolysates for the measuring the rate of nitrogen absorption. This bio property is critical to muscle regeneration and fatigue control in sports medicine which is one of HBC s initial target markets. SPH outperformed all the standards and in some cases with more than 2x the absorption rate and this study has been submitted to the Journal of Functional Food and Health for publication. The Company s Salmon Oil continues to show dramatic results on its patent protected CVD biomarker oxidised low density lipoprotein beta-2-glycoprotein-1(oxldl-gp). New animal trials show that HBC s salmon oil was at least 3 times better at reducing this marker as compared to krill oil while processed fish oils and concentrates did not reduce serum levels at all. In February 2013, the Company completed a baseline study on 188 patients that showed the significant relevance of serum levels of OxLDL-GP in predicting CVD and the study was published in the Journal of the Indian College of Cardiology in July HBC s human study on the unique and significant effect of the salmon oil on cardio-vascular health was also published in the Journal of Nutrition and Food Science in September A new study fractionating the salmon oil along rancidity/pufa levels/anti-oxidant levels in mice has led to a better understanding of the CVD improving effect of this oil and the study is being prepared for publication and the results will also be used for improving HBC s independent patent protection for this bio-efficacy. HBC s Calcium powder was tested in the industry standard ovariectomised rat model that simulates osteoporosis in older women. The results clearly indicate that this calcium powder is superior to other calcium supplements for improving bone density and bone re-growth. Studies to understand this effect so as to ensure excellent patent protection are on-going HBC intends to do a whole body bone scan follow up study in humans suffering from osteoporosis in the near term. The Company will continue with its R&D efforts to improve the production process to lower its cost position against current and future competitors. At the same time, Hofseth BioCare will continue to characterise and fractionate its products to (a) improve the quality of its products such as concentrating the PUFA's in the salmon oil without disrupting the virgin quality of the oil, (b) more closely identify the mechanism of action of the biological activity of the products leading to more independently owned and valuable patent positions, (c) continue to search for and develop the technology required to isolate more high value products from the fish off-cuts such as gelatine and collagen and (d) look for more biological efficacies based on the high quality and reproducible consistent product fractions. 40

41 6.12 Government approvals Hofseth BioCare completed the first Generally Recognized as Safe (GRAS) self-affirmation approval for its salmon-based Soluble Protein Hydrolysate (SPH) ProGo designed for human nutrition in the US market on 8 October A committee of independent experts critically reviewed efficacy and toxicity data for SPH and ProGo. The committee found ProGo to match the highest quality standard for a protein isolate and concluded that its use should be generally recognized as safe. On 2 November 2012, the Company received a written confirmation from the Danish Ministry of Food, Agriculture and Fisheries, giving its SPH non-novel food status in the European Union as food supplement. The Danish Authorities further confirms similar approvals from French and Belgian authorities. The approval implies that Hofseth BioCare is excused from applying for additional novel food certifications for SPH. Such application-processes normally take a minimum of two years, in addition to involving significant financial information for the Company Intellectual property rights License agreements with third parties Hofseth BioCare is a licensee of patents relating to certain enzymes from Novozymes, and has an exclusive license from Recon Oil for use of certain patent applications relating to virgin salmon oil. Other than this, Hofseth BioCare s business is, to the best knowledge of Hofseth BioCare, not dependent on any licences from third parties for the production and marketing of its value-added fish protein hydrolysates, non-soluble fish proteins, marine lipids (oil) and marine calcium. Recon Oil has granted the Company an exclusive worldwide use license to exploit and develop products based on the patent applications exclusively for the human nutraceutical and pharmaceutical market. Furthermore, the Company may grant non-exclusive sublicenses to third parties. The licence granted the Company continues until the expiration of the patent or 10 years from 17 August 2011, whichever is longer. The Company is obligated to pay a royalty fee to Recon Oil calculated as six percent of the Company s gross sales of products sold by the Company into the human nutraceutical and pharmaceutical market, which are based on the patent applications. The Company is committed to achieve a minimum sales volume of USD 100,000 in 2012, USD 350,000 in 2013, USD 1,000,000 in 2014, USD 2,000,000 in 2015 and USD 3,000,000 in The minimum sales volume for 2012 and 2013 was not reached, and will therefore be carried over to 2014, as agreed among the parties. Recon Oil has the right to terminate the agreement with a 90 days prior notice upon non-performance of the projected annual sales volumes. The Company uses the licensed patent applications as part of its sales material, such as in sales presentations for salmon oil, and may continue to produce and market its salmon oil with the same quality but using a different sales pitch than licensed from Recon Oil in the event the license agreement with Recon Oil should be terminated Intellectual property right of HBC HBC has created a new process technology for a semi-continuous process. This is based on enzymatic hydrolysis, and the combined technology knowledge enables HBC to produce large quantities of value-added fish protein hydrolysates, non-soluble fish proteins, marine lipids (oil) and marine calcium. HBC has filed several patent applications that are relevant for its Soluble Protein Hydrolysate powder (SPH), marine protein hydrolysate, virgin salmon oil and PUFA salmon oil, and are in the process of filing further applications. In general, these applications are now processed at a regional level (EPO) or national level in various states in America, Asia and Europe following international PCT-applications. 41

42 The Company is not dependent on a single patent. By being granted a patent, the Company will be able to obtain premium pricing. However, a rejection of a patent application will not put any limits to the production of HBC. In addition, HBC possesses proprietary know how and trade secrets with regard to the production and marketing of its products. See Section 6.11 Research and development with regard to Company s R&D Significant commercial and financial contracts Based on the Company's business model and financial position, commercial contracts and financial contracts are material to its business and profitability. Below is a point by point summary of significant commercial contracts: HBC has entered long term agreements with the seven suppliers of raw material the Company currently employs. The price, the quality and the frequency of delivery are specified in the contracts. The agreements are to be renegotiated on a yearly basis, and will be valid until one of the parties decides to terminate the agreement. Given that an agreement is terminated, there is a mutual term of notification of three months which will give HBC time to find a substitution if that it is necessary. The Company is dependent on entering into this type of agreements to generate and increase revenue. Non-exclusive Distribution Agreement for its salmon oil in the Human Nutrition Market with TSI Health Science LTD for some named customers in the USA. HBC signed a contract with US distributor Roxlor for distribution of Soluble Protein Hydrolisates to the Human Nutrition Market in the US and Canada during the second quarter of Under this contract, Roxlor is committed to purchase a volume of minimum 40 tons per month. The Company is dependent on entering into this type of agreement to generate and increase revenue. 21 March 2013, the Company announced that it had signed an extended contract with Roxlor for sales of HBC s soluble protein product ProGo to the US market. The contract is valued around NOK 40 million, including an exclusivity payment at contract signing of up to NOK 8.5 million. The contract runs to the fourth quarter of On 29 February 2012, the Company announced it had entered into a distribution agreements with Novosana for distribution of HBC s products to the dietary supplement and human nutrition market in China. The Company is dependent on entering into this type of agreement to generate and increase revenue. Hofseth BioCare has appointed Chr. Olesen as its Agent for the Animal and Pet Food market. Contract was signed on 28 September Chr. Olesen will buy all the remaining volume of protein and oil not sold to the human nutrition market. The Company is dependent on entering into this type of agreement to generate and increase revenue. Exclusive license from Recon Oil for use of certain patent applications relating to virgin salmon oil, please see Section License agreements with third parties. The Company is dependent on entering into this type of agreement to generate and increase revenue. The Company has entered into an agreement with one of the major U.S. department stores regarding production and sales of capsuled, fresh salmon oil to the consumer market for human nutrition. Hofseth BioCare has entered into an agreement with Norwegian company Proteinfabrikken AS regarding strategic cooperation for sales, marketing and product development. 42

43 On 12 September 2013, the Company announced that it delivers fresh salmon oil as food supplement to the Canadian consumer market. Below is a point by point summary of significant financial contracts: Please see Section 8.8 Related party transactions for an overview of financial contracts entered between HBC and selected shareholders. The Company is dependent on entering into this type of agreements to obtain the necessary funding for continued operations. 27 February 2013, the Company announced that it had entered into an agreement with CMA Asset Management AS (CMA), giving CMA the mandate to assist HBC in establishing funding and refinancing of the Company s assets through an operational lease. The agreement is based upon a total sales value of the assets above NOK 100 mill. A refinancing will substantially reduce capital need for fixed assets. An operational lease will further contribute to a significant strengthening of HBC s liquidity and improve the Company s financial flexibility with regards to follow defined growth strategies within selected market segments. On 27 December 2013, the Company announced that it had increased the financing limit under an agreement with SG Finans AS from NOK 40 million to NOK 65 million. The increase was done to ensure the financing of a future increase in sales and inventory Dependence on patents, licences and contracts In the opinion of the Company, and except as set forth in Section 6.13 Intellectual property rights and 6.14 Significant commercial and financial contracts HBC s business and profitability is not dependent on any patents or licences, industrial, commercial or financial contracts or new manufacturing processes to conduct its business. The Company is not dependent on a single patent. 43

44 7 HOFSETH BIOCARE S MARKET OVERVIEW HBC produces biomarine ingredients from salmon off-cuts. The Company s products include marine oils, proteins and calcium. Of the Company s three offerings, marine oils represent the most significant product in terms of production volume. HBC sells its products into the following markets: 1. Human health and nutrition; 2. Pet health and nutrition; and 3. Animal health and nutrition Within all product groups, the Company s main focus is the human health and nutrition market. This market segment is subject to stringent quality requirement and products that command relatively higher prices. Within the other two market segments HBC also focuses on the high end of the pet nutrition market where attractive prices can be realized. The global human nutrition industry is a USD 300 billion market 18, and is projected to grow further, driven by four major factors/megatrends 19 : - globalisation and changing economics (emerging markets); - improved health and wellness; - increasing concern over food safety and sustainability; and - changing demographics The North American, EU and Japanese markets have increased steadily over the last decades, and the emerging markets such as China, India and Latin America, among others, hold the potential for further growth with an increasing middle-class. Consumer awareness of the relationship between diet and health has increased considerably in recent years, based on emerging evidence that a healthy diet can contribute to reduce risk of chronic diseases such as coronary heart disease, diabetes and cancer. Demographics such as the increasing share of elderly people in the western world drives the demand for health preventing products. The pet nutrition market is experiencing growth driven by marketing campaigns that continue to convert pet owners to better quality and premium price customers. Premium pet foods cover a wide variety of options including: natural/organic, fortified/functional, weight control, life stage, breed-/size-specific, gourmet, etc. The high end segment of the market is often not just as human style, but as human grade. The market for animal health and nutrition is driven by Asia, Europe and North America. Pork and poultry farmers are the largest consumers of animal feed. The following descriptions of the marine oil, protein and calcium market are mainly based on market reports provided by Frost & Sullivan and UBIC which are not publicly available. All publicly available information is traceable. 7.1 Marine oil Marine oils consist of EPA/DHA omega-3 which is essential in human, pet and animal nutrition. Global consumer spending on EPA/DHA products in 2011 was USD 25.4 billion. Packaged Facts predicts that the market of EPA/DPA products will be USD 34.5 billion by 2016, which equals a compound annual growth rate of 6% 20. The total production of marine oils was 865,000 tons in The largest customer group for the end products is the fish farmers, who are dependent on the marine oil as an omega-3 source for its fish production. 18 Nutrition Business Journal Nutrition Business Journal Defining the Global Market: Omega-3 On-track for Expansion & Diversification 44

45 Marine oils are more frequently used in human nutrition, and the market has developed several end-applications such as omega-3 capsules, cod liver oil, functional food, and pharmaceutical. The common denominator for the products within human nutrition is its alleged preventative effect on cardiovascular disease ( CVD ). CVD is a collection of heart and blood vessel disorders that includes high blood pressure, coronary heart disease (heart attacks), strokes and heart failure. Measured in tons, the human nutrition market is still small and there is a great potential of selling oils to human nutrition, instead of selling oils to animal feed; an ethical stance that is gaining increased momentum 21. There are two segments within pet nutrition. One high-end supplied/served with equal products as the lower end of human nutrition and one segment with products equal to animal nutrition. The global supply of marine oils is concentrated in a few producing countries, including Peru, Chile, China, Thailand, the US, Japan, Denmark, Norway, Iceland and South Africa. These top ten countries account for 80% of the global production. Main producers of marine oil Marine oil end application in 2009 (MT) 8% 2% 90% Aquaculture Human nutrition Pet nutrition Source: IFFO and Frost & Sullivan The production of marine oil has declined over the past few years due to over-fishing, natural disasters and environmental changes, which have weakened the harvest stock. Limited further growth is expected in the next 4-5 years and thereafter, as the resources of the world's oceans are already exploited to the maximum 22. The combination of (i) growing fish farming industry demanding higher volumes of marine oils, (ii) increased demand for omega-3 oils in human nutrition and (iii) limited supply growth are the factors driving industry pricing Industry structure / value chain The largest suppliers of crude oil are the Peruvian based fisheries, such as Tecnologica de Alimentos (TASA), Copeinca ASA and Pesquera Diamante. In the human nutrition market, omega-3 grade crude oil is sold directly to a refiner (or indirectly through traders), which refines the products in line with the requirements demanded for the endapplication, e.g. concentrates for omega-3 capsules. The value-added-resellers ( VAR ) buy the products from the refiner, encapsulate (or indirectly through an encapsulator) and sell the end product to supermarkets, drugstores, health stores, etc. 21 Enaca: Use of fish in animal feeds IFFO, FAO

46 The market for VAR is highly fragmented. The largest VARs in North America include Puritan Pride, Nordic Naturals, Nutrilite and Pharmavite. Other VAR are Axellus (Nordic region) and Ferrosan (Europe). In the animal nutrition market, crude oil is shipped directly to feed producer, which blends the oil with other ingredients in order to produce animal feed. The products within this market are typically of low quality. In the pet nutrition market crude oil is either shipped directly to a pet food producer, or to a refiner, depending on whether it is the low-end or high-end of the pet nutrition market. Marine oil supply chain Crude oil suppliers Traders and brokers Fish and marine oil refiners including captive production of powders and emulsions Algae oil fermentation and refining Encapsulator Animal nutrition Human nutrition Animal nutrition Pet nutrition Dietary supplements Food and beverage Pharmaceuti cals Infant nutrition Clinical nutrition End consumers SELLER or SUPPLIER VALUE-ADDED RESELLERS OTHER KEY INDUSTRY PARTICIPANTS Source: Frost & Sullivan Human nutrition Polyunsaturated fatty acids (PUFAs) are essential fatty acids that are vital to health. The most common PUFA is omega-3 and omega-6. The global revenue for omega-3s at the raw material level was USD 1.93 billion in , equalling 126,433 metric tons. Omega-3 comes from either marine oils or vegetable-sources. Marine oils are far more common accounting for USD 1.81 billion of the total market revenue or 103,284 metric tons. Marine oils are rich in Eicosapentaenoic Acid (EPA) and Docosahexaenoic Acid (DHA), two types of omega-3 fatty acids. 23 Defining the Global Market: Omega-3 On-track for Expansion & Diversification ( Jan

47 Global marine oil market Percentage of global omega-3 revenue in % 5 % 2 % Market value of EPA/DPA omega-3 packed products by region in % 14 % 46 % 26 % 43 % 20 % 26 % Dietary supplements Pharmaceuticals Infant formula Food/beverage Animal Feed Clinical nutrtition North America Europe Asia-Pacific Rest of the World Source: Frost & Sullivan and Packaged Facts EPA/DHA marine omega-3 ingredients for humans can be found in several products and forms, and the market is divided into five segments by end-applications: 1. Dietary supplements: all non-prescription health-ingredient supplements, where omega-3 ingredients are added directly into product formulations, such as omega-3 capsules and cod liver oil. 2. Functional food: omega-3 ingredients for all processed food and beverage applications where omega-3 ingredients are added directly into product formulations, such as milk consisting omega Infant nutrition: omega-3 ingredients for all infant formula products. 4. Pharmaceutical: omega-3 ingredients for all products that need a prescription. 5. Clinical nutrition: omega-3 ingredients applied for therapeutic foods in medical practices. Dietary supplements account for the majority of the market in terms of revenue. Pharmaceuticals however are anticipated to take a greater share of the market as new products are expected to be introduced. Geographically, China and the rest of the Asia-Pacific region is experiencing rapid growth, however, North America remains the largest market. The food and beverage category are augmented by the strong Chinese market. Marine oils come in seven different product types: 18/12 fish oils (now commonly referred to as 30% natural fish oil), concentrates, algae oils, cod liver oils, salmon oils, krill oils and tuna oils. Some of these, such as algae oils, have through patents and marketing successfully entered premium segments within human nutrition, infant nutrition and pharmaceuticals. The source, the extraction and the distillation process all play a role in the pricing of marine oils. 18/12 fish oils have been the primary product category from a historical point of view. It accounts for 70% of the market in terms of unit shipment, but only 34% in terms of revenue. Dietary supplements typically contain 18/12 fish oil which is derived from natural fish and contains 30% EPA/DHA oils. The relatively low concentration levels lead to higher capsule consumption by consumers. Pharmaceuticals are consumed as per medical doctors advice and contain concentrates. Concentrates are available in 3 concentrations: 40 to 55%, 60 to 70% and 85 to 95% concentration. Only the high concentrate (80 to 95%) is used for formulating pharmaceutical omega-3. The highly concentrated marine oil is attributed to have healing properties. The inadequate dosage of Omega-3 in dietary supplements has turned customers towards pharmaceutical omega-3 in turn resulting in the higher growth rate. 47

48 Sources of marine oil Source: Frost & Sullivan Target segments The largest segment, both measured in tons and revenues is the dietary supplements, representing USD million (approximately 46%) in revenues and 62,569 tons (approximately 61%) in The relatively higher portion of global tonnage than global revenue is because the market is dominated by typically low concentrate marine oils, such as the 18/12 category which typically contains 30% natural fish oil. Product sources that fall within this category include sardines, anchovies, menhaden, halibut liver, hoki, seal, squail, etc., all commonly termed low-value fish. In recent years the raw material composition of the fish harvests has challenged the production of 18/12 oils and especially the fatty acid composition of the catch has changed dramatically. Salmon oil is regarded as a high quality source compared to the others within dietary supplements. Pharmaceutical is the second largest segment measured in revenues, and accounted for USD 358 million (approximately 20%), but only 1,922 tons in The segment is dominated by high valued 80%-95% concentrates, which are believed to be optimal for pharmaceutical applications. This view is being challenged, as other substances are excreted in the concentration process. The second largest segment measured in tons (excluding animal feed) is food and beverage (functional food, accounting for 12,950 tons in year 2011). There have been great expectations for this segment within marine oil, but there are only a few success stories, such as marine oil in milk in Spain and in butter in the US. Companies such as Tine, Norway s largest dairy producer, have invested heavily in the possibility to add marine oil in milk, without success. The largest problem has been to stabilise omega-3 and to avoid a fishy taste Geographic split & growth The global market for human EPA/DHA increased in volumes by 10%, and in terms of revenue with 11%, from 2010 to The market is still in the growth stage of its product lifecycle and global revenues are expected to grow at a compound annual growth rate ( CAGR ) of 12% from 2010 until Global unit shipments are also expected to grow at a CAGR of 12% from 2010 to Within the relevant segments for HBC, the largest geographic region is North America, both measured in revenues and metric tons. The expected revenue CAGR is 16% for the region from 2010 until Europe is the second largest, measured in revenue. Expected revenue CAGR is 6% in Europe and 12% in the rest of the world for the period 2010 to Frost & Sullivan, Omega-3 market report - Not available for general public, only for subscribers. 25 Frost & Sullivan, Omega-3 market report - Not available for general public, only for subscribers. 48

49 Global human marine oils consumption Source: Frost & Sullivan In addition to the factors that will affect the overall human nutrition industry, there are four key elements that will drive the continued growth within marine oil human nutrition: 1. Product factors; 2. Price factors; 3. Regulatory factors; and 4. Promotional factors The WHO states that CVD is the number one cause of death globally, accounting for 29% of all deaths worldwide in By 2030, the WHO projects that CVD will continue to be the leading cause of death globally. Scientific studies 2627 concluded that extra virgin salmon oil has the effect of lowering oxidized LDL. Oxidized LDL has been shown in several of journal articles to be a very good predictor molecule for identifying CVD. Scientific research is the backbone of all the growth factors. It increases awareness among consumers, which in turn drives the demand for omega-3. Innovation, and new product attributes have also increased the consumers willingness to pay for omega-3 and have convinced governments around the world that this is important for their populations long-term health and wellness Pet nutrition The market is dominated by low concentrate EPA/DHA marine oils, and is comparable with the lowend human nutrition market. The largest producers of pet food include Hills, Mars, Nestlé-Purina and Procter & Gamble (Eukanuba). Geographically, North America is the largest region within pet nutrition accounting for 52% of global tonnage. Europe and APAC are the second and third largest regions, accounting for 20% and 15%, respectively. Research performed by Marine Harvest Ingredients/Nutreco 28 concluded that fresh Norwegian salmon oil has equal or better palatability than poultry fat for dry feed to dogs. This indicates a 26 Sen & Framroze, The Effect of Dietary Oil Capsules on Reducing Serum Concentrations of Oxidized Low Density Lipoprotein- β 2-Glycoprotein-I Complex, Nutrition & Food Sciences 2013, 3:5 27 Framroze & Shah, A study on serum concentrations of oxidized low-density lipoprotein β2-glycoprotein I complex in patients with normal and dyslipidemic lipid profiles, Journal of Indian College of Cardiology 2013,

50 '000 tons Hofseth BioCare growing demand for salmon oil within pet nutrition, as marketers continue to convert pet owners to better quality customers Animal nutrition The animal nutrition market is the largest end market for marine oils by volume, accounting for 779,000 tons in With an average traded price at the Hamburg commodity exchange of 1.1 USD/kg in 2010, the total market is valued at USD 857 million 29. The main source of marine oils for animal nutrition is pelagic fish. The key value to measure the freshness of the oil in this segment is the level of FFA. The highest qualities that are produced for this market segment have an average level below 5 FFA. The general supply of seafood in the world is turning more to farmed seafood as the supply from wild catch is stagnating in several regions and for many important species. Global farmed seafood is expected to grow over the upcoming years. There are few substitutes for the fish farmers as they are dependent on fish feed consisting of omega-3. Prices and profitability for the crude oil suppliers are therefore expected to grow over the coming years. The production of pork is expected to increase by a CAGR of 2% in the next two years and driving the demand for animal feed 30. Production of animal marine oil and aquaculture landscape Production of animal marine oil Peru Chile Scandinavia USA Japan Other Aquaculture end-application 3% 1% 3% 6% 19% 68% Salmon & trout Marine fish Crustaceans Tilapias Eels Other Source: IFFO & Copeinca The largest producers of animal feed are Provimi, Cargile, Nutreco and ADM. EWOS, Skretting and Biomar are the largest producers of fish feed. 7.2 Protein market Industry structure / value chain The global protein ingredient market is significant. The human nutrition market alone is worth in excess of USD 57 billion and accounted for approximately 20 million metric tons 31. Protein ingredients serve both a functional application and a nutritional market. The functional application (binder), accounts for the majority of the market and is dominated by low concentrate proteins. Proteins are essential for building muscles, and the nutritional market is dominated by high concentrate proteins. 28 Rubin, Rapport nr. 4625/139, 29 Kontali Research - Not available for the general public, only for subscribers. 30 United States Department of Agriculture, Foreign Agriculture service October UBIC Protein Ingredients Market, Not available for the general public, only for subscribers. 50

51 There are several protein sources within animal and pet nutrition, such as vegetable and soy proteins, these are low protein concentrates, compared to products within human nutrition. Fishmeal accounted for 4.3 billion tons in year Marine proteins supply chain Raw material producer Meat Vegetables Milk Fish protein protein protein protein Concentrator / hydrolysator Animal feed Pet feed Human nutrition In the human nutrition market protein is concentrated and sold to VARs. Within pet nutrition, protein is either sold as low concentrates or as concentrates more equal to the protein in the human nutrition. Protein in animal nutrition is low concentrates, produced by Peruvian fisheries. The largest suppliers of proteins include Fonterra, Arla, Starch, National Starch, Gelita and Rousselot, whereas the largest VAR of protein are Abbot, Glanbia, Nestlé nutrition, Unilever and ADM Human nutrition In the nutritional market, proteins are sold as 80-90% concentrates. Main sources applied in concentration are milk (including casein), whey, soy and wheat. The aggregated market for these sources was approximately 385,000 tons (including hydrolysates) in Prices of these sources vary, depending on customer and concentration. The total market is estimated at USD 10 billion 34. Protein concentrates are specifically used in sports nutrition, due to the high nutritive value. Furthermore, high concentrates are used in bakery, infant formula, clinical nutrition, confectionary, functional foods and other dairy products. There is a growing market for hydrolysates 35. Hydrolysates (80-90% concentrates) are a mixture of AAs prepared by splitting a protein with acid, alkali or enzyme. This is a premium protein ingredient compared to other protein concentrates due to its bioavailability, pre-digested and hypoallergenic applications. The global hydrolysates market is small in size, with the main ingredients being whey protein hydrolysates and casein hydrolysates. The total market (accessible and captive) was estimated at 32 IFFO and Copeinca UBIC Protein ingredient market - Not available for the general public, only for subscribers. 34 UBIC Protein ingredient market - Not available for the general public, only for subscribers. 35 RUBIN

52 approximately 45,000 tons in , the accessible market accounted for 15,000 tons, and the captive market for 15,000-30,000 tons. The accessible market was valued at USD 185 million in Suppliers within the captive market are large corporations such as Nestlé, Abbot (whey hydrolysates) with in-house production of hydrolysates. The largest end-applications for hydrolysates are infant formula (hypoallergenic infant formula) and clinical nutrition, each accounting for 35-40% of protein hydrolysate ingredient market. Sports nutrition accounted for 2,600 (approximately 18%) tons in Global protein market Source high concentrate proteins in 2010 (MT) 7% 3% 41% 49% Hydrolysates segment split in 2010 (MT) 1% 11% 18% 35% 35% Hypoallergenic Infant Body building Clinical nutrition Microbiological culture media Whey Milk Soy Wheat Nutraceuticals Source: UBIC Protein ingredient market & UBIC Protein hydrolysate ingredient market Geographic split & growth The US represents the largest geographic region, with approximately 57% of the high concentrate market, measured in tons, in Second largest region is the European Union, accounting for 22% in The nutritional market for whey protein concentrates (excluding hydrolysates) has experienced a CAGR of 8.6% over the last 6 years. In addition to the three megatrends/factors that affect the overall human nutrition industry, the global obesity problem is a key driver for the protein ingredient market. In 2008, 1.5 billion adults were overweight, and the worldwide obesity has more than doubled since million adults die each year as a result of being overweight or obese 38. In the US, 17% of medical expenditures go towards the treatment of obesity. A study by NIFES 39 clearly showed that FPH can be an important part in reducing the development of obesity. Compared to composition of proteins frequently utilised in the food industry, such as soy and milk, the FPH are particularly rich in the water soluble B-vitamins. B-vitamins are essential in energy consuming processes such as fat oxidation, both in animals and humans. Furthermore, FPH have a different AA composition than both soy and milk, which might be favourable with respect to fat metabolism. RUBIN, a Norwegian foundation working for increased and more profitable utilisation of bi-products within fisheries, has also highlighted the potential for high concentrated fish proteins, within the sports nutrition markets. A critical success factor is the taste of the fish protein. In sports nutrition the fish hydrolysates are complementary to whey protein. Whey protein is ideal for building muscles, while fish hydrolysates are ideal for fat metabolism 40. There is still a great potential for hydrolysates in hypoallergenic formulas 41. Protein allergy is a tolerance problem. It means that the infant s immune system has responded in an abnormal way 36 UBIC Protein hydrolysate ingredient market - Not available for the general public, only for subscribers. 37 UBIC Protein ingredient market - Not available for the general public, only for subscribers. 38 WHO National institute of nutrition and seafood research (NIFES) scientific advisor to the Norwegian government 40 RUBIN UBIC Protein hydrolysate market - Not available for the general public, only for subscribers. 52

53 to the protein in human diet. This can happen with both milk-based and soy-based formulas, and it tends to run in families. Hypoallergenic formulas (hydrolysates) are increasing in many countries, and in more and more Western countries regarded as standard formulas 42. High concentrate protein consumption by geography Geographic split high concentrate proteins in 2010 (MT) 18% 25% 57% USA EU Oceania Source: UBIC Protein ingredients market Pet nutrition Hydrolysates are applied in pet food due to the hypoallergenic applications. Feeding studies 4344 have been carried out using fish hydrolysates on dogs and cats. Indications show that products made of SPH may have an immune-stimulating effect in pets in addition to a nutritional value Animal nutrition Fishmeal accounted for 4.3 million tons in The average traded price at the Hamburg commodity exchange was 1.7 USD/kg, valuing the total market at USD 7.3 billion 45. Within this source of proteins, the aquaculture is the largest customer group, accounting for 63% of the market in year Salmon and trout, other marine fish and crustacean farmers accounted for approximately 80% of the aquaculture s consumption, each with an equal share. The second largest customer group is pig farmers, accounting for 25% of the market in Generally there are substitutes within protein, such as soy, and other vegetable sources, because the buyers are not dependent on one specific ingredient that only can be found in marine sources. But fishmeal is also selling to a broader range of customers, where the important factor for the buyers is the protein concentration. Fishmeal is, to some extent, exposed to the same story as marine oil, declining harvest stocks and growing demand, which drive prices. 42 UBIC Protein hydrolysate ingredient market - Not available for the general public, only for subscribers. 43 Fish meals, fish components, and fish protein hydrolysates as potential ingredients in pet foods. Folador, J., Karr-Lilienthal, L., Parsons, C., Bauer, L., Utterback, P., Schasteen, C., Bechtel, P.J., Fahey, G. Journal of Animal Science (2006) Vol. 84(10) Page Fish protein substrates can substitute effectively for poultry by-product meal when incorporated in high quality senior dog diets. Zinn, K., Hernot, D., Fastinger, N., Karr-Lilienthal, L., Bechtel, P.J., Swanson, K., Fahey, G. Journal of Animal Physiology and Animal Nutrition.(2008) Vol. 93(4) Page Kontali Research - Not available for the general public, only for subscribers 53

54 Global fishmeal market Source: IFFO The largest producers of animal feed are Provimi, Cargile, Nutreco and ADM. 7.3 Calcium Industry structure / value chain Calcium is a mineral needed by the body for healthy bones, teeth, and proper function of the heart, muscles, and nerves. The body cannot produce calcium and must therefore be absorbed through food. Calcium is applied in human, pet and animal nutrition. Calcium supply chain Nutritional calcium Calcium phosphate Calcium carbonate Calcium lactate Calcium citrate Calcium gluconate Milk calcium Granulation / Encapsulator Animal feed Pet feed Human nutrition The largest suppliers of calcium are Budenheim, Innophos, Seppic, Omya, CalCitech, Procter & Gamble, DMV, Friesland Foods, Glanbia, Snow brand milk, Morinaga, Fonterra, Danone and Lactalis. The VARs are the same as within marine oil. The largest VARs in North America are Puritan Pride, Nordic Naturals, Nutrilite and Pharmavite. Other VAR are Axellus (Nordic region) and Ferrosan (Europe). 54