5. RISK FACTORS 5. RISK FACTORS Notwithstanding the prospects of our Group as outlined in this Prospectus, our business is subject to a number of risk factors, many of which are outside our control. Prior to making an investment decision, you should carefully consider the risk factors set out below (which may not be eXhaustive) that may have a significant Impact on the future performance of our Group, together with other information contained In this Prospectus. If you are unsure about any of the information contained under this Section on “Risk Factors”, you should consult your stockbroker, bank manager, solicitors, accountant or other professional adviser. 5.1 Risks Relating to the IPO 5.1.1 No prior market for iDimension’s Shares There has been no pUblic market for our Shares prior to the IPO. Hence, there is no assurance that an active market for iDimension Shares will be developed or be sustained upon our Listing. We have received approval from Bursa Securities to have our Shares listed and quoted on the ACE Market of Bursa Securities. The listing of and quotation for our Shares do not, however, guarantee that a trading market for our Shares will develop or, if a market does develop, that the liquidity of that market for our Shares, the ability of holders to sell their Shares or the prices at which holders would be able to sell their Shares. Therefore, we cannot predict whether a trading market for our Shares will develop or how liquid that market might become. There also can be no assurance that the IPO Price which has been determined after taking into consideration of the factors as set out in Section 4.6 of this Prospectus will correspond to the price at which our Shares will be traded on the ACE Market of Bursa Securities upon or subsequent to our Listing.
5.1.2 Volatility of share prices There is no guarantee that the market price of our Shares will not fall below the IPO Price. In fact, the market price of our Shares may be highly volatile and could be SUbject to wide fluctuations. The following factors, inter alia, some of which are beyond our control, should be considered in evaluating our Shares: (a) Our operating results;
(b) Outcome from the implementation of our various business and growth strategies;
(c) Investment analysts’ recommendations on our Shares;
(d) Announcements of developments relating to the operations of our business;
(e) Industry conditions relating to our Group;
(I) General economic conditions or stock markets sentiments; and
(g) Changes in our key management and technical personnel.
In recent years, the stock market has been experiencing extreme fluctuations which are often unrelated to the operating performance of the company. Not only would such fluctuation affect the share price of our Shares, it may dampen confidence among investors. 5. RISK FACTORS (Cont’d)
5.1.3 Possible delay in or abortion of our Listing Amongst others, our listing is exposed to the risk of delay, and thereafter potential failure should the following events occur: (a) our eligible employees and business associates fail to subscribe to the portion of Public Issue Shares allocated to them;
(b) our Company or Underwriter fails to honour its obligation under the Underwriting Agreement;
(c) our Underwriter, in honouring its obligations, becomes a substantial shareholder of our Company;
(d) the identified investors fail to acquire the portion of the Public Issue Shares allotted to them; and
(e) our Group is unable to meet the pUblic spread requirements of Bursa Securities, whereby at least 25% of our issued and paid-up capital for which listing is sought must be held by a minimum number of 200 public shareholders holding not less than 100 Shares each, at the time of Listing.
In the event of such delay resulting in the abortion of our Listing, we will return in fUll, without interest, monies paid in respect of all applications, in compliance with Section 243(2) of the CMSA Nevertheless, we will endeavour to ensure compliance of the listing requirements for our successful listing on Bursa Securities.
5.2 Risks Relating to the Industry that we Operate in 5.2.1 Competition We face constant competition from other IT operators involved in software development and provision of software solutions, which provide the similar solutions as we do. According to MDeC, there are currently approximately 1,150 MSC status companies involved in software development Operators in the IT industry in Malaysia also face competition from operators based overseas who have either set-up their operations or established partners or agents for their products and services locally. In addition, set-up costs generally represent a low barrier to entry for a new entrant that wishes to operate as a developer andlor provider of software solutions for the manUfacturing sector as the tools needed to develop or provide software are computer hardware and software, which are relatively low cost (Source: Independent Assessment of the IT Industry Focusing on the Development and Provision of Manufacturing Software Solutions, particularly for the Semiconductor Industry prepared by Vital Factor Consulting Sdn Bhd) To differentiate ourselves from our competitors, our R&D team works hard to provide fUlly integrated solutions that integrate ERP, MES and APS as well as other manufacturing related software, to provide a one-stop solution centre for our customers. 5. RISK FACTORS (Cont’d)
5.2.2 Technological advances The generally rapid rate of technological advances in the IT industry may lead to obsolescence of our manufacturing software solutions. There Is a risk that demand for our manufacturing software solutions may decline as competitors develop and introduce newer software solutions, or software solutions with better features and functionalities. We are in a strong position to adapt to ongoing advances in technology as we have our own in-house software development capabilities, and have developed a range of proprietary manufacturing software solutions. We have developed both complete solutions, and add-on modules to third party software. We are free to further develop and enhance our manufacturing software solutions, as we own the rights to these products. Our in-house software development capabilities also enable us to develop new manufacturing software solutions to meet changes in the marketplace. Nevertheless, there is no assurance that we will be able to continue to adapt to ongoing advances in technology and market needs.
5.2.3 Availability of freeware Freeware is software that users can legally use without paying any fee to the owner of the software’s intellectual property rights. The ready availability of freeware is a risk to companies, including our Group, who charge a fee to users for the use of their software solutions. In general, the range of freeware that is currently available is limited to more basic applications. Developers of freeware are typically unable to provide users with valueadded services such as consulting services, customisation, or to offer managed services and extensive technical support. Freeware is generally not an attractive proposition for business users who wish to implement some sort of software solutions for the manufacturing sector, as these solutions must be customised to suit the specific needs of an organisation or manufacturing plant As a result, these software solutions require some degree of consultation between the software developer and the user, customisation, installation, user training, and assurance of after-sales technical support, enhancements, modifications and maintenance services. These services are usually not available with freeware. Nevertheless, there is no assurance that freeware will not become a risk to our business in the future.
5.2.4 Software piracy Software can be easily copied, replicated and distributed. Unauthorised copying, replication and distribution denies the owners of the software, such as our Group, revenue that is due, and may have a negative effect on their financial performance. The risk arising from software piracy is less intense for operators who develop software solutions for the manufacturing sector, as these solutions must be customised to suit the specific needs of an organisation or manufacturing plant Successfully deploying software solutions for the manufacturing sector requires some degree of consultation between the software developer and the user, customisation, installation and user training. Users will also require after-sales technical support, enhancements, modifications and maintenance services. These services are usually not available with pirated software. 31 5. RISK FACTORS (Cont’d) Nevertheless, there is no assurance that software piracy will not become a risk to our business in the future 5.3 Risks Relating to our Operations 5.3.1 Dependence on the semiconductor industry Our current software solutions mainly cater for the manufacturing sector, where we have a strong focus on the semiconductor industry. The semiconductor industry accounted for approximately 57.06% of our Group’s revenue for the FYE 31 December 2010 and approximately 56.90% of our Group’s revenue for the 4-month FPE 30 April 2011. The decline in revenue contribution from this industry is evidence of our Group’s efforts to diversify revenue. However, any adverse economic situation in this industry will affect our Group’s financial performance. To mitigate this, our marketing department is constantly exploring new market areas. In 2009 and 2010, we managed to secure new customers in the aviation, oil and gas, and lyre trading industries. We have been developing software solutions to serve a wider range of user industries, including process manufacturing and discrete manufacturing industries, as well as the plantation industry. This will serve to broaden and enlarge our customer base.
5.3.2 Dependence on major customer Our Group’s business may be dependent on the Unisem group of companies, which consists of Unisem (M) Berhad and its subsidiaries, namely Unisem Chengdu Co., Ltd and PT Unisem (collectively known as the “Unisem Group”), by virtue of the Unisem Group’s contribution to our revenue. The Unisem Group has collectively accounted for approximately 55.08% of our Group’s total revenue for the FYE 31 December 2010, and approximately 31.46% of our Group’s total revenue for the 4-month FPE 30 April 2011. There is a risk that losing one or more members of the Unisem Group as customers will have a negative effect on our financial performance. Our dependence on the Unisem Group as a customer is partly mitigated by the fact that the solutions that we provide to them are developed in-house and are proprietary to our Group. As a result, the Unisem Group has to purchase these solutions from us. Further, the solutions provided to them have formed an integral part of their current manufacturing operations and we have been providing them with continuous support to ensure smooth running of their operations. Thus, the Unisem Group may incur switching costs should they decide to adopt other solutions. It should also be noted that the Unisem Group has been our customer since 2004 and we continue to maintain a strong and close relationship with them. There is also a risk that one or more members of the Unisem Group may cease investing in new solutions. In such instance, we will not be able to generate additional revenue from the Unisem Group but will be providing them with our maintenance services. Nevertheless, it should be noted that although revenue contribution from the Unisem Group had increased from RM5.25 million in the FYE 31 December 2008 to RM8.23 million in the FYE 31 December 2010, its contribution in terms of percentage to our revenue had declined from 68.29% to 55.08%. In addition, we are also constantly exploring new market areas and developing software solutions to serve a wider range of user industries, while still maintaining our competitive advantage in the semiconductor industry. 5. RISK FACTORS (Cont’d) Nevertheless, there is no assurance that the Unisem Group will ccntinue to be our customer in the future.
5.3.3 Dependence on major suppliers Our business is somewhat dependent on our three (3) largest suppliers, Siemens Product Lifecycle Management Software (SG) Pte Ltd (“Siemens”), Microsoft Regional Sales Corporation (“Mlcrosoft”) and Datanet Quality Systems (“Datanet”) by virtue of our considerable volume of purchases from them. Siemens accounted for approximately 22.38% of our total purchases for the FYE 31 December 2010, and approximately 7.04% of our total purchases for the 4-month FPE 30 April 2011. In reccgnition of this, iSystems was recognised as a partner by Siemens for Singapore, Malaysia, Indonesia, the Philippines and Vietnam in 2008. Furthermore, Siemens has been a supplier since 2007, which is a relatively long period of time as our Group was founded in 2001. Microsoft acccunted for approximately 33.43% of our total purchases for the FYE 31 December 2010, and approximately 80.74% of our total purchases for the 4-month FPE 30 April 2011. In recognition of this, iSystems was recognised as a Microsoft Certified Partner for Malaysia in 2007, and iSystems joined Microsoft’s President’s Club in 2008. Furthermore, Microsoft has been a supplier since 2006, which is a relatively long period of time. Datanet acccunted for approximately 11.16% of our total purchases for the FYE 31 December 2010, and approximately 3.33% of our total purchases for the 4-month FPE 30 April 2011. Datanet has been a supplier since 2001, which is a relatively long period of time. We have entered into agreements with Siemens and Microsoft for provision of software products. These agreements are referred to in Section 7.12.3 of this Prospectus. Such agreements are subject to renewal. The current agreement with Siemens will be expiring on 30 June 2012, while the current agreement with Microsoft will be expiring on 31 July 2013. It should be highlighted that the agreement with Siemens will automatically be extended for successive one-year periods unless terminated by either party at least 60 days prior to the end of each 12 month period. If there is a termination of our relationship with Datanet due to unforeseen circumstances, and/or a termination or the failure to renew any of our agreements with Siemens and Microsoft, as well as any unfavourable change to the existing terms of the agreements, especially in relation to the fees, may adversely affect the operations and financial performance of our Group. We may lose priVileges in terms of software fee as well as the partnership support provided by these suppliers in the respective sales. We may be able to source for alternative suppliers for the products provided to us by the above-mentioned major suppliers, but this may result in us incurring higher costs. Nevertheless, as an active partner of the suppliers, we believe the risk of termination is low. Further, our Group has our own proprietary products and services which are expected to contribute further to our Group’s sales going forward.
5.3.4 Dependence on our Directors, key management and technical personnel Our success depends to a significant extent upon the continued employment and performance of our key management and technical personnel as well as the networking of our Directors. The loss of any such personnel may affect our operations and performance. 33 5. RISK FACTORS (Cont’d) Our future success also depends to a large extent on our skilled and competent IT knowledge workers, The IT industry is presently experiencing a short supply in experienced knowledge workers such as software developers, software engineers, solutions architects and database administrators. Hence, there can be no assurance that we will be successful in retaining or attracting the personnel we require,
5.3.5 Changes in or loss of MSC status Two (2) of our subsidiaries, namely iMSC and OS Solutions, were granted MSC status by MDeC in 2005 and 2006 respectively, The status accords both companies with certain incentives granted under the MSC Malaysia Bill of Guarantees, which includes five (5)-year income tax exemption. The status is renewable for another five (5) years. MDeC had, vide its letter dated 14 September 2011, approved the pioneer status of iMSC for another five (5)-year period and iMSC is presently pending formal notification of the approval from MIT!. An application has been submitted on 27 June 2011 by OS Solutions for the renewal of its pioneer status to enjoy the tax exemption and is presently pending approval. MDeC is the body that governs and monitors all MSC status designated companies and has the right to revoke any company’s MSC status in the event of non-compliance of any term or condition imposed by MDeC. If the MSC status and/or pioneer status granted are revoked or not renewed in either iMSC or OS Solutions, our Group’s financial performance, particularly the PAT, will be adversely affected, Nevertheless, our Group will continue to adopt prudent management policies to ensure our business activities are in compliance with the conditions imposed by MDeC and to minimise the risk of losing the MSC status in both iMSC and OS Solutions.
5.3.6 Control by substantial shareholders Upon completion of our IPO, our substantial shareholders, namely Daniel Boo and Pang Lee Fung will collectively hold approximately 57,01 % of the enlarged issued and paid-up share capital of our Company, They will be able to control the outcome of most matters requiring the vote of our shareholders unless they are required to abstain from voting by law and/or by the relevant authorities.
5.3.7 Risks of expanding into foreign markets We have plans to utilise part of our listing proceeds to grow and expand our business in foreign markets such as Thailand, Indonesia, China and the Philippines. Presen~y, we pursue customers in foreign markets such as the Philippines and China by collaborating with strategic partners whom, we believe, have the necessary business experience and the understanding of culture in those countries to conduct business there. Our strategic partners are companies appointed on a project basis to follow up on sales leads with potential customers, and local consultants who are able to provide their expertise in implementing projects. Our planned future ventures as set out in Section 7.19 of this Prospectus are subject to business risks in markets which we may not be familiar with. Our business, financial condition and operating results may be affected if we fail to assess these risks accurately, However, our Board will exercise prudence and care to ensure that proper plans are in place when carrying out our business expansion plans. 5. RISK FACTORS (Cont’d) 5.3.8 Exposure to foreign exchange Our Group is exposed to foreign exchange risks through our purchases of software from countries such as Singapore and the United States of America, which are denominated mainly in USD. Further, our Group’s revenue from our overseas markets is also denominated mainly in USD and SGD. Our business is therefore exposed to foreign exchange risks, mainly from the fluctuations of the said currencies. Our gainsllosses on foreign eXchange for the past three (3) financial years up to the FYE 31 December 2010 and the 4·month FPE 30 April 2011 are set out as follows: FYE 31 Decem ber FPE 30 April 2011 2008 2009 2010 IRM’OOOl IRM’OOOl IRM’OOOl IRM’OOOl Gain/(Ioss) on foreign exchange’ 259 (153) (493) (45)
Note: Inc/usNe of realised and unreafised gain or loss. The following is the breakdown of our revenue and purchases transacted in local and foreign currencies during the FYE 31 December 2010 and 4-month FPE 30 April 2011: Currency FYE 31 December 2010 FPE 30 April 2011 Revenue Purchases Revenue Purchases Amount lRM’OOOl Proportion of Group’s revenue (‘/ol Amount IRM’OOOl Proportion of Group’s purchases l’/ol Amount (RM’OOOl Proportion of Group’s revenue l’/ol Amount IRM’OOOl Proportion of Group’s purchases (‘/0) RM USD SGD 3,712 9,693 1545 24.83 64.84 10.33 398 364 1,011 22.20 21.42 56.38 3,799 1,252 503 68.40 22.54 9.06 39 27 474 7.22 5.00 87.78 Total 14950 100.00 1,793 100.00 5,554 100.00 540 100.00
Our foreign currency sales and purchases provide a partial natural hedge against the fluctuations in foreign exchange. In addition, we maintain part of our cash and bank balances, as well as fixed deposits, in foreign currency accounts, mainly in USD, to meet our future obligations in foreign currencies. Nevertheless, there can be no assurance that any future material fluctuations in exchange rates will not have an impact on our financial performance. 5.4 Other Risks 5.4.1 Political, economical and regulatory factors that are beyond our control Any adverse political, economic and regUlatory condition in Malaysia and other countries where we operate in or source our supplies, could materially and adversely affect our financial and business prospects. Among these factors that are beyOnd our control are war, expropriation, nationalisation, changes in government policies, changes in interest rates, methods of taxation and incentives, and currency exchange controls. 5. RISK FACTORS (Cont’d) Although we will continue to take effective measures such as financial management and efficient operating procedures, there can be no assurance that any adverse political, economic and regulatory condition will not materially affect our operations. 5.4.2 Actual results, performance and/or achievements may vary significantly from those expressed or implied in forward.looking statements Other than statements of historical fact, this Prospectus contains forward-looking statements. These include, without limitation, those regarding our financial position, business strategies, plans and objectives of the management for future operations. However, these forward-looking statements are subject to uncertainties and contingencies which may differ from the actual results. It should be noted that all forward-looking statements are based on estimates and assumptions made by our Directors. Whilst believed to be reasonable, they are SUbjected to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from future reSUlts, performance or achievements expressed or implied in such forward-looking statements. Factors such as general economic and business conditions, competition, the impact of new laws and regulations and changes in interest rates could potentially affect us and the industries in which we operate in. Therefore, we wish to caution you that the inclusion of forward-looking statements in this Prospectus should not be regarded as a representation or warranty by our advisers or us on the achievability of our future plans and Objectives. THE REST OF THE PAGE IS INTENTIONALLY LEFT BLANK