6. BUSINESS OVERVIEW 6. BUSINESS OVERVIEW
6.1 Our business activities, products and services 6.1.1 Our business activities We are a vertically integrated manufacturer based in Ipoh, Perak. Our business activities are set out below:(i) design, development and manufacture of Bluetooth devices for external brands;
(ii) product conceptualisation, design, development, manufacture and marketing and sales of Bluetooth devices for our in-house brand, FOBO; and
(iii) manufacture of other electronics and precision parts and components for external brands. Our in-house R&D team supports our business activities where our engineers collaborate with our customers to conceptualise, refine and complete the product design; which includes mechanical, hardware and firmware designs. As a vertically integrated manufacturer, we are able to provide a full range of manufacturing services to our customers, and are able to perform a typical product development lifecycle as shown below:Product conceptualisation I idea generation t FOBO products Product design
External brands and FOBO products Product testing I prototyping Product commissioning Manufacturing and assembly Marketing and sales t FOBO products 6. BUSINESS OVERVIEW (Cont’d) (i) Product conceptualisationlidea generation Product conceptualisation/idea generation involves defining and understanding the product’s purpose and function. When developing concepts for a new product, this product must meet various requirements in terms of potential market demand and the availability of raw materials and technology. The product blueprint developed at this stage may be subject to further design changes during the function/technical development stage based on materials to be used and/or processes to be applied. (ii) Product design The architecture of a product is dependent on its mechanical design, form factor build-up and functional requirements. Our R&D team utilises various 3D software for mechanical, hardware and form factor design. The form factor design refers to the physical design of a product. The design of a product varies in accordance to its intended function and purpose, the suitability and availability of materials, the corresponding technology and cost. The design of the product is planned based on these factors and specific requirements of our customers. (iii) Functional/technical development The functional/technical development of a product is a critical stage as it involves the execution of a product design. The necessary functionalities are developed to fit into the planned design, and the parts and components required to carry out these functionalities are determined. There is a strong focus on the type of materials and processes to be used during this stage, as these may result in changes to the product design. (iv) Product testing/prototyping Development of a prototype of the product for testing will help prepare the product for market entry. The attributes and functions of the product are tested repeatedly to ensure proper usability and functionality. Based on the product testing, further changes and improvements to the product may be made. (v) Product commissioning Upon passing the product testing, authorisation is given by the respective customers (for external brands’ products) and by our Chief Executive Officer after clearance from our relevant departments are completed (for FOBO products) for the manufacturing and assembly of the products at the product commissioning stage. (vi) Manufacturing and assembly The products are manufactured for mass production while fulfilling all required quality criteria. We carry out continuous in-process QC tests to ensure conformance and consistency to the product’s design specification and optimal functionality throughout the product’s Iifecycle. The products are then assembled to form the final finished product. 6. BUSINESS OVERVIEW (Cont’d) (vii) Marketing and sales We undertake marketing and sales activities for our FOBO products. It is an essential and critical stage to strengthen the FOBO brand and to increase the visibility and market presence of our FOBO products in the global marketplace. The marketing process entails the development and implementation of sale and promotional strategies as well as undertaking sales efforts by securing contracts with distributors and global retailers to expand our distribution channels. Our level of involvement in the product development lifecycle varies in accordance to our customer’s request and the product’s design specifications. For our in-house brand, FOBO, we are involved in the full product development lifecycle, from product conceptualisation to product marketing and sales.
6.1.2 Our products and services (a) Bluetooth devices for external brands We provide design, development and manufacturing services for Bluetooth devices such as Bluetooth audio headsets, Bluetooth smartwatches and Bluetooth car kits. Our customers are primarily multinational electronic and mobile communication device corporations which include international brand names such as, Plantronics, Jaybird and Sony. We must qualify as an authorised/qualified supplier before any of our major customers place orders with us. Such qualification is generally based on whether a supplier meets the technical, performance and QC standards set by such customers as well as international standards and other specific requirements mandated by such customers. We provide design and engineering services which include mechanical, hardware and firmware designs. We work closely with our customers to conceptualise, refine and complete product designs. As at the LPD, we are the only authorised supplier for specific models of our major customers’ products, where we manufacture and assemble the complete product in our plant. Our manufacturing services comprise raw material procurement, manufacturing and assembly, and product testing, as follows:• Raw material procurement
Raw material procurement involves planning, purchasing and expediting delivery of components and materials used in our manufacturing process. We employ various inventory management techniques such as just-in-time and ship-to-stock programmes. We have developed direct relationships with our suppliers to ensure our supplies are received regularly, on time and are of the required quality. Further, we carry out audits on the components and materials purchased from our suppliers to ensure conformance to quality standards.
• Manufacturing and assembly services
Our manufacturing and assembly services include plastic precIsion injection moulding, PCBA, electromechanical assembly and final product assembly. We have invested in advanced manufacturing equipment such as nano-coating machines, laser de-paneling, double shot moulding machines, 3D solder paste inspection system and SIVIT equipment, to ensure that we meet the quality standards required by our customers. Please refer to Section 6.5 of this Prospectus for further details of our manufacturing processes. 6. BUSINESS OVERVIEW (Cont’d) • Testing services We provide testing services for assembled PCBs and finished products, which enable us to deliver high-quality products on a consistent basis. We also work with our customers to develop product-specific test strategies. Our test capabilities include manufacturing defect analysis, in-circuit tests, functional tests, accelerated stress and life tests, environmental stress tests of board or system assemblies, and radio frequency testing. The list of selected Bluetooth devices that we were involved in the design, development and manufacture for external brands in the last three (3) FYE 30 June 2013, 2014 and 2015 up to the LPD are as follows:
Consumer electronics Plantronics Backbeat Go, Backbeat Go 2, and Backbeat Fit Bluetooth stereo headset Jaybird Bluebuds X and Bluebuds X2 Bluetooth stereo headset Novero The First One and Lexington Bluetooth mono headset Novero The Talky One Bluetooth speaker Novero Rockaway Bluetooth stereo headset Sony SBH80 and MW600 Bluetooth stereo headset Sony Smartwatch 2 Bluetooth smartwatch Automotive Novero The Trusty One and The Truly One Bluetooth handsfree car kit
(b) Bluetooth devices under our in-house brand, FOBO We are involved in the product conceptualisation, design, development, manufacture and marketing and sales of Bluetooth-enabled automotive accessories and consumer electronics devices under our in-house brand, FOBO, comprising Bluetooth-enabled TPMS and Bluetooth-enabled electronic sensors, tracking devices and beacon transmitters. Our portfolio of products include security tags, namely FOBO Tag and FOBO MAX as well as a broad range of TPMS devices for motorcycles, cars, light trucks and vans. Our first FOBO product, the FOBO Tag was launched in April 2013 and a series of Bluetooth TPMS devices were SUbsequently launched commencing from October 2014. We market and sell our FOBO products across multiple regions globally, namely Europe, North America, Asia and Africa, including major countries such as US, Canada, UK, Germany, France, Singapore, Taiwan, Australia, Russia, Japan and Malaysia. Our sales for FOBO contributed approximately 0.4%, 0.1 %, 1.8% and 1.1 % to our total revenue for FYE 30 June 2013, 2014 and 2015 as well as the seven (7) months FPE 31 January 2016, respectively. Our FOBO products are targeted primarily at retail consumers. Our primary modes of marketing and sales are directly through e-commerce sales on our website, via third party e-commerce platforms (either directly via Amazon, Brookstone, TouchOfModern and Massdrop, or indirectly through IPMart, Lazada, Mudah.com, Superbuy and Torque Tuning) and through local and overseas retail outlets via our appointed local and overseas distributors as further set out in Section 6.12 of this Prospectus. Our in-house R&D team plays a key role in the development of our FOBO products. This team is involved in idea generation, idea development and testing, product conceptualisation, product prototyping and product testing. Our R&D team is also involved in the mechanical, hardware, firmware, and mobile app designs (i.e. FOBO Tire app, FOBO Bike app and FOBO Tag 2 app, which are currently applicable for iOS and Android only) for our FOBO products. 6. BUSINESS OVERVIEW (Cont’d) The manufacture of FOBO products is carried out entirely at our manufacturing plant, and comprises the same scope of work, processes and stringent quality controls as the manufacturing services we provide to our external customers; including raw material procurement, manufacturing and assembly, and product testing. Please refer to Section 6.5 of this Prospectus for further details of our manufacturing processes. As at the LPD, our FOBO products are certified compliant with the FCC certification mark in the US and the CE marking for the European Economic Area. We further conform to and are compliant with SAE J2657, an international automotive standard for TPMS for light duty highway vehicles. The SAE J2657 standard establishes overall performance guidelines, test methods and minimum performance levels for TPMS. The list of Bluetooth devices under our in-house brand, FOBO up to the LPD are as follows:
(i) Automotive (Bluetooth-enabled TPMS) FOBO Tire and FOBO Tire Plus
Bluetooth-enabled TPMS products utilising the Bluetooth 4.0 technology. The FOBO Tire and FOBO Tire Plus include four (4) tyre sensors and one (1) in-car monitoring unit. Users can access real-time information on the pressure and temperature of their tyres through the in-car monitoring unit and!or the paired Android and!or iOS smartphone. The FOBO Tire is capable of monitoring tyre pressure of up to 350 kiloPascal or 50 pounds per square inch, suitable for light vehicles such as cars, vans and sport utility vehicles. The FOBO Tire Plus is capable of monitoring tyre pressure of up to 600 kiloPascal or 87 pounds per square inch, suitable for motor homes and pick-up trucks. Retail end users! consumers FOBOXtra
Additional sensor which can be added to the default four (4)-sensors system of both the FOBO Tire and FOBO Tire Plus. A maximum of 12 FOBO Xtra sensors can be added per vehicle profile. FOB0 Bike Bluetooth-enabled TPMS product utilising the Bluetooth 4.0 technology. The FOBO Bike includes two (2) tyre sensors. The FOBO Xtra sensor is capable of monitoring tyre pressure of up to 600 kiloPascal or 87 pounds per square inch. This sensor is generally used for spare tyres or trailers which have more than four tyres. Users can access real-time information on the pressure and temperature of their tyres through the paired Android and!or iOS smartphone. The FOBO Bike is capable of monitoring tyre pressure of up to 600 kiloPascal or 87 pounds per square inch, suitable for motorcycles, bicycles, trikes and quadbikes. Retail end users! consumers Retail end users! consumers
6. BUSINESS OVERVIEW (Cont’d)
(ii) Consumer electronics (Bluetooth electronic sensors, tracking devices and beacon transmitters) FOBO Tag and FOBO MAX Bluetooth low energy wireless tags or trackers utilising the Bluetooth 4.0 technology. FOBO Tag and FOBO MAX enables the user to keep track of a user’s belonging when it is attached to a particular item. The features enable users to access real-time information on the proximity of their FOBO Tag and FOBO MAX devices and alert users immediately when the tag is moved. The FOBO Tag and FOBO MAX can also be used as emergency triggers to seek help. Additionally, the FOBO IVIAX has a crowd-sourced tracking function, which when activated, will allow signal detection through other users of FOBO MAX to ascertain its last location. Retail end users! consumers
A beacon transmitter utilising the Bluetooth 4.0 technology to broadcast signals which can be received by compatible smart devices. The FOBO Beacon can be used as a digital media advertising platform. Users can send promotional offers and messages as well as advertisements to smart devices within the proximity of the FOBO Beacon. Business users
(c) Other electronics and precision parts and components for external brands We provide manufacturing services of other electronics and precision parts and components for external brands. Our customers are primarily multinational electronic products, IT products and mobile communication device corporations. The manufacturing services that we offer to customers in this segment are similar to the scope of services provided to our customers of Bluetooth devices for external brands. Further, we have capabilities in tooling design, which is critical for the manufacturing of electronics and precision parts and components. Please refer to Section 6.5 of this Prospectus for further details of our manufacturing processes. The list of other electronics and precision parts and components that we have manufactured for external brands in the last three (3) financial years under review up to the LPD are, amongst others, as foliows:
6. BUSINESS OVERVIEW (Cont’d) 6.2 Principal markets for our products and services The design, development and manufacture of Bluetooth devices for external brands is our main business activity, which accounted for approximately 68.0%, 92.4%, 90.4% and 90.9% of our total revenue in FYE 30 June 2013,2014 and 2015 as well as the seven (7) months FPE 31 January 2016, respectively. The breakdown of our revenue by business activities during the financial period under review are as follows:Business activities Salutica Allied Sal utica Group FYE 30 June 2013 2014 (RM’OOO) (%) (RM’OOO) (%) FYE 30 June 2014(1) 2015 (RM’OOO) (%) (RM’OOO) (%) Seven (7) months FPE 31 January 2015 2016 (RM’OOO) (%) (RM’OOO) (%) -- — Bluetooth devices for external brands 53,398 68.0 216,371 92.4 188,556 92.4 174,051 90.4 113,630 91.5 132,405 90.9 Bluetooth devices under FOBO 332 0.4 233 0.1 197 0.1 3,530 1.8 1,419 1.1 1,647 1.1 Other electronics and precision parts and components for external brands Total revenue 24,829 31.6 17,608 7.5 --78,559 100.0 234,212 100.0 -- 15,379 7.5 14,937 7.8 –204,132 100.0 192,518 100.0 = = 9,217 7.4 11,602 8.0 124,266 100.0 145,654 100.0
Note:(1) For reference purposes only as our Group’s results only captures the ten (10) months financial performance of Salutica Allied following the completion of the management buyout of Salutica Allied on 4 September 2013. During the financial period under review, our sales were principally derived from export markets, as most of our customers are multinational corporations based overseas. Our export sales accounted for approximately 81.4%, 98.5%, 98.2% and 99.4% of our total revenue in FYE 30 June 2013,2014 and 2015 as well as the seven (7) months FPE 31 January 2016, respectively. 57 Company No. 10247 6. BUSINESS OVERVIEW (Cont’d) The breakdown of our revenue by our principal markets during the financial period under review is as follows:External brands Overseas North America(2) Europe(3) Australasia Asia(4) African region and the Middle East Subtotal Malaysia Total external brands FOBO Overseas North America(2) Europe(3) Australasia Asia(4) African region and the Middle East Subtotal Malaysia Total FOBO Total revenue 2013 (RM’OOO)# 33,598 16,400 46 13,746 – 63,790 14,437 78,227 –3 162 – 165 167
332 78,559 Salutica Allied FYE 30 June
2014 (%)- (RM’OOO)# 42.7 110,399 20.9 105,752 0.1 125 17.5 14,322 – –
81.2 230,598 18.4 3,381 99.6 233,979 = -5 -69 /I 0.2 7 -14 0.2 95 0.2 138 0.4 233 100.0 234,212 % 47.1 45.2 0.1 6.1 -98.5 1.4 99.9 = /I /I -/I /I A 0.1 0.1 -100.0-
2014(1) (RM’OOO)# 87,194 99,745 46 14,215 – 201,200 2,735 203,935 6 69 -3
14 92 105 197 204,132 FYE 30 June
(%)- 2015 (RM’OOO)# 42.7 48.9 /I 7.0 – 136,631 30,643 942 18,731 /I
98.6 186,947 1.3 2,041 99.9 188,988 /I 797 /I 735 -144 /I 329 /I 224 A 2,229 0.1 1,301 0.1 3,530 100.0 192,518 Salutica Group Seven (7) months FPE 31 January 2015 2016 (%)- (RM’OOO)# (%)- (RM’OOO)# (%)- 71.0 82,006 66.0 131,349 90.2 15.9 29,146 23.5 3,375 2.3 0.5 942 0.8 5 /I 9.7 9,482 7.6 8,599 5.9 /I – – – – - - - 97.1 121,576 97.9 143,328 98.4 1.1 1,271 1.0 679 0.5 - - - 98.2 122,847 98.9 144,007 98.9 - - - 0.4 345 0.3 974 0.7 0.4 143 0.1 346 0.2 /I 97 0.1 63 /I 0.2 126 0.1 171 0.1 0.1 85 /I 22 /I - - - 1.1 796 0.6 1,576 1.0 0.7 623 0.5 71 0.1 - - - 1.8 - 1,419 1.1 - 1,647 1.1 - - - - 100.0- 124,266 100.0 - 145,654 100.0-
58 6. BUSINESS OVERVIEW (Cont’d) Notes:# Revenue is tracked by the geographical markets where the goods are delivered rather than the origin of the customer. 1\ Negligible. (1) For reference purposes only as our Group’s results only captures the ten (10) month financial performance of Salutica Allied from 4 September 2013 to 30 June 2014.
(2) Mainly US and Canada.
(3) Mainly Sweden, Netherlands, Poland, Cyprus, Spain, France, Russia and Germany.
(4) Mainly Japan, Republic of Korea, Singapore, Hong Kong and Saudi Arabia.
6.3 Our competitive strengths (i) We are a vertically integrated manufacturer with the ability to provide a full range of manufacturing services We commenced operations in 1990 as an original equipment manufacturer principally involved in the manufacture of precision plastic parts and components for the electronics industry. We have since evolved to become a vertically integrated manufacturer primarily focused on Bluetooth devices, with capabilities and expertise ranging from product conceptualisation, design, development, testing/prototyping, commissioning to manufacturing and assembly as well as marketing and sales. Please refer to Section 6.1.1 for our involvement in a typical product development lifecycle. For our external customers, our Group has the capabilities to provide product design, functional/technical development and product testing/prototyping, subject to our customers’ requests on the level of involvement required. For our in-house brand, FOBO, we are involved in the full product development lifecycle, from product conceptualisation to product marketing and sales. During our design process, the engineers from our in-house R&D team work closely with our customers to conceptualise, refine and complete the product designs. Our design capabilities include mechanical, hardware and firmware design. Our vertically integrated services have enabled us to be more responsive to the needs of our customers, allowing them to streamline their supply chain by reducing the number of suppliers/service providers that they have to engage. This strategy provides our customers with comprehensive value-added solutions, which enhances our customers’ effectiveness in product delivery, marketing and branding. At the same time, by providing these integrated services, we are able to benefit from multiple revenue-generating phases in the manufacturing value chain guided by our Six Sigma manufacturing methodology. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 6. BUSINESS OVERVIEW (Cont’d) (ii) Our R&D has provided the foundation and platform for our growth and expansion Our in-house R&D division was set up in 2004, whereby the focus of our R&D activities was on Bluetooth and other wireless technologies. As a result of our R&D initiatives, we have managed to improve our capabilities as a one-stop solution provider over the years which have enabled us to continuously secured contracts for new products as well as subsequent product updates from multinational corporations for the design and manufacture of products such as audio headsets, car kits, smartwatches and light-guides. In addition, through our R&D efforts, we have succeeded in improving our manufacturing processes, thus reducing manufacturing costs and time. Our success in retaining existing multinational corporations as customers as well as securing new customers is largely driven by the capabilities and expertise of our R&D team. Our Group’s R&D activities have been critical to the development of our own products resulting in the birth of our in-house brand, FOBO. With two (2) years of intensive and continuous R&D efforts, we launched our first FOBO product, the FOBO Tag in April 2013 followed by the FOBO Tire in October 2014. The successful launch of our inhouse brand, FOBO, shows our capabilities in developing and producing products with our in-house expertise. As at the LPD, we have 32 personnel in our R&D division who focus on, amongst others, developing improved products for our customers as well as new FOBO products. Please refer Section 6.13 of this Prospectus for our expenditure on R&D for the financial period under review. Our Group’s strong emphasis on R&D has been the cornerstone of our growth and expansion to-date, and will continue to drive our product development initiatives in the future. Our R&D efforts will help us to continuously introduce new Bluetooth-enabled products to meet global market needs and improve process design as we seek to expand our market presence. (iii) We specialise in Bluetooth technology, and are well-positioned to benefit from the growing global demand for Bluetooth devices We specialise in Bluetooth technology and we design, develop and manufacture various consumer electronics products such as Bluetooth audio headsets and Bluetooth smartwatches, as well as automotive accessories such as Bluetooth car kits and Bluetooth TPMS. In addition, we are also a licensed member of the Bluetooth Special Interest Group, where we are able to keep abreast with the latest development in Bluetooth technology, thereby incorporating the latest Bluetooth technology into the Bluetooth related products that we design, develop and manufacture. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK
6. BUSINESS OVERVIEW (Cont’d) According to the IIVIR report, Bluetooth has become one of the most prevalent and pervasive wireless technologies available today. The role of Bluetooth in the connected environment has evolved with the advancement of technology and the expansion in the consumer electronics product lines to accommodate relatively new functions such as the connected home and wearable technology (i.e. smartwatches). The continuous evolving and expanding role of Bluetooth technology in consumer electronics has resulted in an increase in global Bluetooth device shipments from approximately 1.8 billion units in 2011 to approximately 3.0 billion units in 2014 representing a CAGR of approximately 18.6%, with projected growth to approximately 4.9 billion units in 2018. The future growth in Bluetooth technology and subsequently, shipments in Bluetooth devices, will be largely driven by the use of Bluetooth as a key connectivity technology in the Internet of Things. The evolving Internet of Things environment will result in more Bluetooth-enabled devices and sensors entering the market with the aim of creating a smart environment leveraging on technology which offers greater convenience to the end user. Please refer to Section 7 “Industry Overview” of this Prospectus for further details. The growing use of Bluetooth technology in consumer electronics products will present growth opportunities for our Group, as we have the expertise in Bluetooth technology. We believe our Group will be well-positioned to capture these opportunities, which will provide us with long term and sustainable growth. (iv) We have leveraged on our expertise in Bluetooth technology to develop our inhouse brand of Bluetooth devices Since the setting up of our in-house R&D division in 2004, we have been involved in the design and manufacturing of Bluetooth devices for external brands for over ten (10) years. Recognising the opportunities for Bluetooth technology in the automotive and consumer electronics industry, we have leveraged on our years of expertise in Bluetooth technology and have developed our own in-house brand, FOBO. Our FOBO products comprise of automotive accessories such as Bluetooth-enabled TPMS and other consumer electronic products such as Bluetooth-enabled electronic sensors, tracking devices and beacon transmitters. Our FOBO products also utilise multiple sensor technologies, namely pressure sensors, temperature sensors, motion sensors and proximity sensors to deliver tracking, monitoring and crowd searching functions. The development of our own in-house Bluetooth devices stems from our Group’s ambition to diversify the source of revenue for our Group, as well as to build and develop brand identity and brand equity for our Group. During FYE 30 June 2013, we launched our maiden FOBO product, FOBO Tag, and recorded revenue of approximately RMO.3 million. During FYE 30 June 2015, we launched a series of Bluetooth TPMS products commencing from October 2014 and recorded revenue of approximately RM3.5 million, a ten (10)-fold increase in two (2) years. For the seven (7) months FPE 31 January 2016, we recorded revenue of approximately RM 1.6 million from our FOBO products. Given that FOBO, particularly our range of TPMS products, has received good feedback and product reviews thus far, this has fuelled our confidence to further invest time and resources towards expanding and enhancing our current suite of FOBO products and potentially developing and introducing new in-house brands in the future. Based on the IIVIR report, TPMS as an aftermarket solution is a segment of the automotive accessories market that has significant growth potential as there is a large number of vehicles in use that do not have TPMS installed as a factory specification. Please refer to Section 7 of this Prospectus for further details of the global automotive industry. 6. BUSINESS OVERVIEW (Cont’d) (v) We have a strong portfolio of multinational corporation customers, comprising some of the world’s major Bluetooth and mobile communications companies Most of our customers are large multinational corporations in their respective industries, such as Plantronics and Jaybird, both major global players in Bluetooth audio headsets and other electronic devices; and Sony, a major global player in mobile telecommunications and electronics. These companies have been our major customers for the financial period under review. Our success in securing and retaining these globally renowned multinational corporations is a testament to the quality of our design and manufacturing services, customer service and proven industry track record. It is also a demonstration of our Group’s capabilities and expertise in complying with the strict design and manufacturing standards set by these companies. Please refer to Section 6.7 of this Prospectus for further details of our ability to comply with the standards required by our multinational corporation customers. Having a track record and an existing portfolio of multinational corporation customers has given us the credentials to secure even more customers over the years, and moving forward, will help us expand our customer base and contribute to the ongoing growth and expansion of our business. (vi) We have an experienced key management team We were incorporated in 1990 and our history spans over twenty five (25) years, with more than ten (10) years of experience in the design and manufacturing of Bluetooth related products. Our Managing Director / Chief Executive Officer, James Lim, has played a pivotal role in steering our strategic direction and growth. His experience, drive and passion for our business have been instrumental to our Group’s success todate. During his tenure with us, James Lim has always placed critical importance on R&D as the foundation of our Group’s long-term sustainability. Under his leadership, we secured numerous design and manufacturing orders with several multinational corporations, which has been central to our growth and expansion. Our Managing Director / Chief Executive Officer is supported by a dedicated and experienced management team as set out below:Years Years of Year with working Key management Designation joined us experience Chan Shook Ling Chief Financial Officer 1999 17 > 20 Chin Seen Choon Chief Operating Officer 2005 11 > 20 Ho Keat Soong Chief Supply Chain Officer 2003 13 > 23 Goh Bee Chin @ Ooi Chief Administrative Officer 1992 24 > 25 Bee Chin Ho Chang Tih Director, Business Development 2005 11 > 20 Kaveh Mohammedpour Head of Product Development 2013 3 > 15 Please refer to Section 8.4.2 of this Prospectus for the profile of our key management team. Most of our key management team have been with us during the challenging transition period between 2009 and 2013, when smartphones gradually replaced feature phones, and more importantly when our management team successfully responded by shifting Salutica Allied’s business focus from manufacturing precision plastic parts and components to the provision of design, development and manufacture of Bluetooth related products. 6. BUSINESS OVERVIEW (Cont’d) (vii) We have demonstrated our ability to comply with strict design and manufacturing requirements set by our customers Our multinational corporation customers have stringent design and manufacturing requirements as well as stringent supplier selection processes. They conduct detailed audits on their suppliers prior to selection to ensure that their product quality and operating standards are met, with many of these evaluation processes taking up to six (6) months to complete. Many customers also carry out regular follow-up assessments to ensure compliance has been maintained. Our success in securing and retaining these multinational corporation customers, demonstrates our ability to comply with the strict design and manufacturing requirements set by these customers, which is evidence of our standing as a proven industry player. Our Group also complies with the IS014001 :2004 standard as we place importance on the preservation of the environment. The IS014001 :2004 standard specifies requirements for an environmental management system, which includes prevention of pollution, continual improvement, and compliance with legal and other requirements. Further, we adopt the Six Sigma methodology in our manufacturing processes. Please refer to Section 6.7 and 6.10 of this Prospectus for further details of our QA initiatives and technology used, respectively. Our ability to comply with these stringent design and manufacturing requirements is evidence of our high manufacturing standards in creating high quality precision products. This coupled with our emphasis on the importance of human rights and environment, positions our Group as a one-stop solution provider for socially responsible multinational corporations. 6.4 Seasonality Our business is subject to the cyclicality of the global electronics and electrical industry, which is caused by variations in supply and demand for electronic products and economic cycles. The demand for our products is also subject to launches of new electronic products as well as seasonal variations due to the increase in sales of electronic products during the year-end holiday period in many countries globally. Demand for our products and services usually increases during the second half of a calendar year to fulfil these holiday season orders. 6.5 Our manufacturing processes Our manufacturing process is vertically integrated and utilises high precision equipment since 2004, thus lowering costs and making operations more efficient, which allows us to have better control over the design, production and quality of the components. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 6. BUSINESS OVERVIEW (Cont’d) Our manufacturing process primarily involves (i) plastic injection moulding of the plastic parts and components used in our devices, and (ii) the manufacture of electronic components, which is described below:Plastic parts Electronic components Tooling SMT process I Mechanical check Automatic optical inspection ,——1′——–_ FlashingMoulding De-panelingPainting Functional testing ,Printing , , .. Secondary processing Physical property testing Assembly Product J. Plastic parts (i) Tooling The tooling process involves the design and manufacture of a mould. Moulds are built through either, milling, electrical discharge machining or wire cutting. The mould is then polished for high gloss. 6. BUSINESS OVERVIEW (Cont’d) (ii) Mechanical check Checks are performed on the moulding machines’ key parameters, including temperature, speed and pressure. As different items may require a different set of parameters, a mechanical check is required to ensure that the correct parameters have been set. (iii) Moulding The moulding process comprises single shot and double shot moulding with multiple cavities, over-moulding, thin-wall moulding and metal insert moulding. For precision moulding, pneumatic and full servo robot pickers are used during our moulding process. In addition, during the moulding process, all parts undergo in-process QC using 2D or 3D smart scope measuring systems. (iv) Painting
Upon moulding, painting is carried out in a class 10k clean room painting facility, which is equipped with a multi-axial robot arm with rotary turning spraying jigs. We use four (4) types of paint systems, namely one (1) component (1 k) painting, two (2) component (2k) painting, rubber painting and ultraviolet painting.
Upon painting, printing is carried out with a multi-colour printing machine and hot foil stamping machine. The multi-colour printing machine is able to achieve up to six (6) colours per run on the same part, and has a printing accuracy of within 0.2 mm for positioning. It is also capable of producing four (4) colours, which are cyan, yellow, magenta and key (black). The hot foil stamping machine is used to produce chrome and metal-looking effects. (vi) Physical property testing Physical property testing of the manufactured parts is carried out to ensure that these parts meet the proper requirements and specifications. Physical properties of the manufactured parts which are tested include tensile properties, moisture content, melt flow, colour properties and environmental stress cracking. II. Electronic components (i) SMT process Our PCBA involves the placement of components such as integrated circuits and transistors on a PCB using SMT, in which the components are mounted or soldered on the surface of a PCB using solder paste. A bare PCB which has the pads for surface mount components is placed into a screen printer and solder paste is applied through a screen and onto the pads on the PCB. Solder paste inspection is then carried out to measure the applied solder paste, thus reducing the incidence of solder-related defects. The components are then placed onto the solder paste on the PCB. Upon component placement, the PCB is heated in a reflow oven that is flushed with nitrogen to reduce oxidisation of solder paste. A reflow oven causes the solder paste to soften, thereby enabling a mechanical and electrical bond between the components and the PCB as the solder paste cools upon exiting the reflow oven. 6. BUSINESS OVERVIEW (Cont’d) (ii) Automatic optical inspection An inspection is then carried out to ensure that the components have been placed correctly on the PCB using an optical inspection machine. If there has been any incorrect placement of components on the PCBA, the PCBA will undergo rework to correct the component placement. Upon rework, it will once again be visually inspected. (iii) Flashing Flashing is the installation of firmware onto the PCBA. Flashing can also be used for the purpose of upgrading firmware by overwriting the existing firmware with a new firmware. (iv) De-paneling In order to increase the throughput of PCB assembly and SMT lines, PCBs are designed to consist of many smaller individual PCBAs which will be used in the final product. For the de-paneling process, router/laser cutting machines as well as milling machines are used. (v) Functional testing Electrical testing is then performed to ensure that our products meet our customers’ requirements. In-circuit testing is performed to detect any process defects, and functional testing ensures that the functionality of the PCBA meets specifications. Further, X-ray tests are carried out on specific sample sizes of PCBAs for solder joint inspection. (vi) Secondary processing Secondary processing may be carried out depending on customer requirements and the specifications of the final end product. Our secondary processes comprise nano-coating and potting. Nano-coating is a process whereby the application of nano structures enables the water-proofing of a product by repelling liquids on the product’s surface. Potting is a process of partially or completely filling or encasing a product to provide resistance to shock and vibration, as well as creating a seal against moisture. III. Assembly Our non-Bluetooth related products are sub-assembled to reduce production times and improve operations. We then undertake box-build assembly to form the final finished product. Box-build assembly is the assembly of complete products which involves the assembly of completed PCBAs, plastic parts and components, electronic and electrical components, and electro mechanical and mechanical parts into the final product. The final products are then subject to functional testing before they are packaged for shipment to our customers. 6.6 Operating capacities and output Our production capacity is measured based on the output of our SMT lines which is dependent on product mix. This results in varied production output depending on the type, specifications, and size of the PCBAs used in the manufacturing of Bluetooth headsets, Bluetooth smartwatches, Bluetooth car kits, FOBO products, 3D glasses and electronic locks.
6. BUSINESS OVERVIEW (Cont’d) Our maximum capacity, actual production volumes and utilisation rates based on our SMT annual capacity in FYE 30 June 2013, 2014 and 2015 as well as the SMT capacity for the seven (7) months FPE 31 January 2015 and 2016 are depicted below:
Actual prpclUGtipn (unit) Assumptions:(a) SMT annual capacity is weighted capacity calculated based on product mix in the respective financial years, and SMT production runs six (6) days a week in two (2) 12-hour shifts daily each year.
(b) SMT seven (7) months capacity is weighted capacity calculated based on product mix in the respective financial period, and SMT production runs six (6) days a week in two (2) 12-hour shifts daily for the seven
(7) months period.
(c) For illustration purposes, the estimated maximum annual capacity for FYE 30 June 2016 is approximately
13.9 million units, calculated based on the annualised seven (7) months capacity for the FPE 31 January 2016. The increase in annual capacity compared to FYE 30 June 2015 was due to the installation of a new modular placement in one of our existing SMT lines in August 2015 and changes in product mix. The increase in production from approximately 3.4 million units in FYE 30 June 2013 to approximately 7.5 million units in FYE 30 June 2015 has resulted in an increase in utilisation rate from approximately 27.8% to 69.1 %. The highest increase in production was recorded between the FYE 30 June 2013 and FYE 30 June 2014, where production more than doubled from approximately 3.4 million units to approximately 7.8 million units, thereby causing a rise in utilisation rate from approximately 27.8% to 65.5%. The increase in production is due to an increase in orders from our customers, including Plantronics, Jaybird and Sony. We recorded revenues of approximately RM50.0 million or 63.6% of our total revenue, RM214.7 million or 91.7% of our total revenue and RM172.8 million or 89.8% of our total revenue from these three (3) customers in FYE 30 June 2013, 2014 and 2015, respectively. Additionally, the launch of our in-house brand, FOBO, on 30 April 2013 and subsequent product launches in 2014 and 2015 have contributed to the increase in production. We produced approximately 5.7 million units in the seven (7) months FPE 31 January 2016 representing a utilisation rate of approximately 70.5%. 6.7 Quality assurance As part of our efforts to achieve total customer satisfaction, we place strong focus on QA throughout the process of our project lifecycle. As at the LPD, we have 33 employees in our Quality department. Our Quality team is responsible for:(i) QC of supply and incoming raw materials;
(ii) QC of in-process production;
(iii) QC of outgoing products; and (iv) Documentation and implementation in compliance with the applicable ISO standards. Seven (7) months FPE 31 January 2015 Seven (7) months FPE 31 January 2016 12,304,899(a) 11,962,660(a) 10,921,052(a) 6,576,613(b) 8,115,739(b)(C) 3,415,750 7,840,768 7,541,272 4,584,460 5,721,596 27.8 65.5 69.1 69.7 70.5 6. BUSINESS OVERVIEW (Cont’d) Our Group maintains a QA and QC system to ensure the quality of our products and services meet or exceed customer expectations. We have established stringent QC procedures to perform quality checks at each critical stage of our manufacturing process to ensure all our products and services satisfy our customers’ requirements. QC checks are carried out, recorded and monitored by our in-house QA team. Our QA and QC activities include the following:
In-coming raw material control Design In-process production control Finished products testing We source and procure components and other materials from our customers’ approved suppliers. In cases where there are no preferred suppliers, we will recommend suitable suppliers based on, amongst other factors, our customers’ specifications and the reliability and quality of the suppliers’ products and services. All incoming components and materials are subject to inspection at the point of receipt. Any defects or non-compliance with our quality standards are immediately highlighted to our suppliers for replacement or rectification. We document QA checks on in-coming components and materials, and conduct periodic reviews on the quality of our suppliers. During the prototyping stage, we use a 3D optical scanning scope to verify that the physical parts are in accordance with the 3D designs rendered. We employ a wide range of QA mechanisms and systems at different stages of our production processes to administer preventive and corrective measures to ensure that the final product meets quality requirements. We use smart scopes and functional tests to measure the critical parameters at important process control points. Our production QA activities include the following:• During the solder paste printing process, sufficient application of solder paste is inspected on all PCBs by the solder paste inspection checker. • Upon soldering, all PCBs are subject to an automated optical inspection machine to ensure accurate placement of the components. • Electrical testing is performed on all PCBAs to ensure that these products meet our customers’ requirements. In-circuit testing is performed to detect any process defects, whereas functional testing ensures that the functionality of the products meets specifications. Thereafter conformal coating is carried out to prevent moisture from damaging the solder joints. • X-ray inspections may also be employed to ensure proper bonding of components on the PCBAs. • Visual inspection is carried out to detect any visual defects on the PCBAs including cosmetic defects and product labels. Thus at each stage, any defects are detected and corrected. This ensures consistency in the process and also reduces reworking costs to minimum levels. Our production team carries out functional testing and cosmetic inspections on all completed products. Further, sample finished products are selected by our Quality department for a subsequent phase of visual inspection and functional testing.
6. BUSINESS OVERVIEW (Cont’d)
QMS Six Sigma methodology All design and manufacturing activities are well documented by our Quality department in a timely manner and implemented in compliance with the applicable ISO standards. We adopt the Six Sigma methodology in our manufacturing processes. Six Sigma is a methodology used for process improvement through the enhancement of the quality of manufacturing outputs by identifying and removing the causes of defects and minimising variability in manufacturing and business processes, thus ensuring a minimum amount of errors. The Six Sigma methodology utilises either the DMAIC (define, measure, analyse, improve and control) approach or DMADV (define, measure, analyse, design and verify) approach for process improvement. A trained and certified Six Sigma Master Black Belt holder is required for the implementation of a Six Sigma process. There are various levels of Six Sigma certification, namely White Belt, Yellow Belt, Green Belt, Black Belt and Master Black Belt. As at the LPD, we have several certified Six Sigma personnel, including one (1) Master Black Belt. We presently comply with the following local and international quality standards and were awarded the following certificates of compliance:
6. BUSINESS OVERVIEW (Cont’d)
UL Certificate of Compliance: QMMY2.E3015 04 (Fabricated Parts Component) Underwriters Laboratories Inc, issued by UL International Ltd, Hong Kong 2006 Not applicable Covers material traceability of fabricated plastic parts. Material traceability is a traceability program which provides quick verification of material identity through markings on a fabricated part such as molded, encapsulated, potted and other fabricated plastic parts. Under this program, the molder or fabricator is required to keep adequate records which will trace the correctly identified material from receipt through storage, inventory withdrawal, molding, finishing, packaging and shipping.
Notes:(1) This FCC marking is a certification mark employed on electronic products manufactured or sold in the US which certifies that the electromagnetic interference from the device is under the limits approved by the FCC.
(2) This CE marking is a registration for products which certifies the products to be in compliance with the safety, health and environmental requirements in accordance with the Directives 2006/951EC, 1999/5IEC and 2014/53/EU.
In addition to the FCC marking in the US and CE marking for the European Economic Area, as at the LPD, our FOBO products also conform to the relevant countries certifications/registrations where our products are exported to, such as Canada, Japan, Republic of Korea, PRC, Russia, Singapore and Taiwan. We further conform to and have been certified compliant with SAE J2657, an international automotive standard for TPMS for light duty highway vehicles. The SAE J2657 establishes overall performance guidelines, test methods and minimum performance levels for a TPMS. 6.8 Occupational safety, health and environment Our Group places strong emphasis on the health and safety of our employees, and the protection of the environment. In line with this, we are committed to comply with the relevant occupational safety, health and environmental requirements. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 6. BUSINESS OVERVIEW (Cont’d) We presently comply with the following local and international occupational safety, health and environment standards:
ISO SIRIM QAS 2015 26 May 2015 Design, development and manufacture 14001 :2004(i) International Sdn Bhd and IQNet 25 May 2018 of radio frequency based products (Bluetooth); customised test system development and testing for wireless consumer products (Bluetooth); design and fabrication of moulds and dies for injection moulding; manufacture of plastic moulded parts by injection moulding and secondary processes (spray painting, tempo printing and silk screen printing); and assembly and testing of electromechanical parts and products OHSAS SIRIM QAS 2015 26 May 2015 Design, development and manufacture 18001 :2007(ii) International Sdn Bhd and IQNet 25 May 2018 of radio frequency based products (Bluetooth); customised test system development and testing for wireless consumer products (Bluetooth); design and fabrication of moulds and dies for injection moulding; manufacture of plastic moulded parts by injection moulding and secondary processes (spray painting, tempo printing and silk screen printing); and assembly and testing of electromechanical parts and products
Notes:(i) 15014001:2004 specifies requirements for an organisation to develop and implement an environmental management system.
(ii) OHSAS18001:2007 specifies requirements for an organisation to develop and implement health and safety management systems.
Our Directors are not aware of the existence of any breach of the relevant occupational safety, health and environment requirement that would have a material adverse effect on us. Additionally, our Group has also been awarded with the following Green Partner Certification from Sony Corporation:
6.9 Types, sources and availability of materials, components and parts Our purchases comprise expenditure on materials, components and parts used for the design and manufacture of products for external customers and our in-house brand, FOBO. Our principal purchases are electronic and electro-mechanical components which comprise approximately 38.1 % and 39.7%, respectively of our total purchases of materials, components and parts in the seven (7) months FPE 31 January 2016. 6. BUSINESS OVERVIEW (Cont’d) The materials, components and parts we use are generally widely available and sourced from local and international suppliers, including suppliers specified by our customers. The prices of our materials are sUbject to price fluctuations as a result of demand and supply conditions. However, the prices of our materials purchased have been relatively stable during the financial years under review. For the purchase of materials, components and parts, we generally take into account supplier lead times to prevent potential major disruptions to our production. We have developed stringent policies and procedures that guide our selection of suppliers. All selected suppliers are evaluated in terms of financial performance, production capacities, ability to deliver products that meet our quality requirements, and ability to deliver in a timely manner. We appoint experienced suppliers that are reliable and financially secure to ensure the quality of our products meet the required standard. The breakdown of the cost of materials, components and parts purchased by us during FYE 30 June 2013, 2014 and 2015 as well as the seven (7) months FPE 31 January 2016 is as follows:
Electronic components(3) Electro-mechanical components(4) Mechanical parts(5) Resin Chemicals(6) Packing material Total 20,513 18,834 9,180 1,250 3,077 542 38.4 35.3 17.2 2.3 5.8 1.0 70,266 74,101 33,517 1,992 2,508 743 38.4 40.4 18.3 1.1 1.4 0.4 51,330 53,004 24,876 2,750 2,876 1,305 37.7 38.9 18.3 2.0 2.1 1.0 39,614 41,218 19,019 1,319 2,127 549 38.1 39.7 18.3 1.3 2.0 0.6 –100.0 = 53,396 100.0 183,127 100.0 136,141 100.0 103,846
Notes:(1) Based on Salutica Allied’s figures for FYE 30 June 2013 and 2014, respectively.
(2) Based on Salutica Group’s figures for FYE 30 June 2015 and seven (7) months FPE 31 January 2016, respectively.
(3) Electronic components comprise, amongst others, capacitors, resistors, integrated chips and microcontrollers.
(4) Electro-mechanical components comprise, amongst others, PCBs, speakers and batteries.
(5) Mechanical parts comprise, amongst others, cables, gaskets and metal stamping parts.
(6) Chemicals comprise, amongst others, paint, thinner, ink and glue.
THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 6. BUSINESS OVERVIEW (Cont’d) 6.10 Technology used Our Group has the necessary equipment and expertise to perform and apply the following technology in our products and operations:-
Bluetooth technology Nano-coating technology SMT Solder paste inspection Bluetooth is a wireless technology standard for exchanging data over short distances using short-wavelength UHF radio waves in the ISM band from 2.4 to 2.485 GHz from fixed and mobile devices, and building personal area networks. The Bluetooth technology enables a wide range of devices to connect and communicate with each other, overcoming problems of synchronisation. A fundamental strength of Bluetooth wireless technology is the ability to simultaneously handle data and voice transmissions, which provides users with a variety of innovative solutions such as hands-free headsets for voice calls, printing and fax capabilities, and synchronisation for personal computers and mobile phones. Our Group is a licensed member of the Bluetooth Special Interest Group, a body which owns the Bluetooth trademarks and oversees the development of Bluetooth standards. As a member of the Bluetooth Special Interest Group, we are able to keep abreast of the latest developments in Bluetooth technology. Nano-coating or nano-sealing is the result of an application where nano structures create a consistent network of molecules on a surface to enable water proofing without adding thickness to the product. This is a chemical process where the surface can be designed as hydrophob/superhydrophob or hydrophil/superhydrophil, where:• hydrophob/superhydrophob is when liquids that strike the surface are repelled and flow away immediately; and • hydrophil/superhydrophil is when liquids that strike the surface build a plain film on the surface and mostly flow away. SMT involves mounting components such as integrated circuits and transistors by surface mount equipment onto the surface of PCBs. Due to the size of the components, SIVIT is used for more compact PCBs with finer circuitry, higher component density and components with higher lead counts. It also enables components to be mounted on both sides of the PCB. Our SMT line has the capability of mounting up to 01005 components, which presently, are the smallest sized components in the industry, measuring 0.4 mm xO.2 mm. Solder paste inspection is carried out by using 3D scanning technology to measure the volume and thickness of the solder paste to ensure sufficient solder paste is applied. A solder paste inspection reduces incidences of solder-related defects.
6. BUSINESS OVERVIEW (Cont’d)
Nitrogen gas flushing Laser de-paneling 3D scanning Thin-wall injection moulding Radio-frequency chamber Nitrogen gas is used to flush the SMT line to remove oxygen, preventing the oxidation of the solder, thus ensuring stronger joints. As nitrogen is an inert gas, it does not react with the hot metal surfaces of circuits and their packages during the SMT production which could form unwanted films. In addition to improving solder joint quality, the usage of nitrogen gas also reduces the sensitivity of the circuits to the SMT process variations. Nitrogen gas flushing results in an increase in manufacturing yield. Laser de-paneling uses an ultraviolet wavelength to cut PCBs and has a high cut quality and quick turn capability. Laser de-paneling enables high precision and accurate cuts as well as clean cuts, which reduces circuit failures and extra cleaning processes, thus resulting in greater reliability and lesser material wastage. In addition, the high precision and accuracy of laser de-paneling allows for a denser PCB panel as components can be placed closer to the edges of the PCB panel, thus increasing efficiency and capacity. We carry out 3D scanning to ensure that physical parts of our products are in accordance with the designs rendered as it determines the accuracy and compatibility of all parts. Further, 3D scanning can be used in the metrology process, a measurement process to determine allowable tolerance of components and parts. Thin-wall injection moulding is a high precision moulding technique which is able to create thinner and lighter plastic parts. Thin wall parts have a wall thickness of less than 1 mm. Thin wall parts require higher injection pressure as the distance that the material can flow is dependent on the thickness of the part. In addition, a thinner wall section allows shorter cooling time and cycle time. The manufacture of thinner and lighter parts due to thin-wall injection moulding has resulted in lower material costs, lower electricity cost per part due to fast cycle time with hydraulic machines and higher production output due to fast cycle times. Our thin-wall injection moulding machines have the capability to manufacture thin and light parts with a wall thickness as low as 0.3 mm. A radiofrequency chamber is a shielded room with radiofrequency absorber materials installed on the walls, ceiling, and for some, the floor. The chamber is used to perform electromagnetic compatibility measurements and can be used within various industries including consumer electronics, automotive, aerospace, medical and telecommunications. The chamber is primarily used for testing radiated emissions and radiated immunity within specific frequency ranges. We have a 5.4 GHz radiofrequency chamber in our testing laboratory which is accredited by Bureau Veritas Consumer Products Services (Hong Kong) Limited.
@ompany No. 1024781-T ~ 6. BUSINESS OVERVIEW (Cont’d) 6.11 Property, plant and equipment 6.11.1 Summary of properties used As at the LPD, the details of the property owned by our Group are as follows:- Salutica Lot 202124, PN 94442 99 years, Allocated parking N/A N/A Land area: 630.2 Charged as Allied Mukim Hulu Kinta expiring on 11 space for employees 4,551 security for a Daerah Kinta February 2092 loan facility Negeri Perak 3 Jalan Zarib 6 Built-up area: N/A with OCBC Bank (Malaysia) Kawasan Perindustrian Berhad Zarib, 31500 Lahat Ipoh, Perak Salutica Lot 202125, PN94443 99 years, Allocated parking N/A N/A Land area: 664.2 Charged as Allied Mukim Hulu Kinta expiring on 11 space for employees 4,314 security for a Daerah Kinta February 2092 loan facility Negeri Perak 3 Jalan Zarib 6 Kawasan Perindustrian Built-up area: N/A with OCBC Bank (Malaysia) Berhad Zarib, 31500 Lahat, Ipoh, Perak
75 ~ Company No. 1024781-T II 6. BUSINESS OVERVIEW (Cont’d) Salutica Lot 381631, PN314266 99 years, Our manufacturing Phase One: Phase One: Land area: 23,597.9 Charged as Allied Mukim Hulu Kinta expiring on 11 plant comprising a 17 December 1999 16 years 30,130 security for a Daerah Kinta February 2092 two (2)-storey office loan facility Negeri Perak 3 Jalan Zarib 6 Kawasan Perindustrian Zarib, 31500 Lahat Ipoh, Perak annexed to a two (2) storey warehouse (“Phase Three”) and factory (“Phase One and Two”) (“Buildings”) Phase Two: 1 November 2000 Phase Three: 21 March 2008 Phase Two: 16 years Phase Three: seven (7) Built-up area: Approximately 30,318 with OCBC Bank (Malaysia) Berhad years
The above three (3) plots of land are located contiguously. Save for the above Buildings, there is a shelter area with total built-up area of 102.22 square meter erected on our Group’s factory compound (“Shelter”). The Shelter was built in 2010 as a general rubbish and waste disposal area. An independent engineer/consultant whom we regularly engage, has confirmed vide its letter dated 4 February 2016 that the Shelter does not necessarily warrant a certificate of fitness to be issued. We have also subsequently made our own verbal enquiries with the local authority, Majlis Bandaraya Ipoh and the local authority has confirmed the same understanding. Save as disclosed under Section 3.8 of this Prospectus, as at the LPD, our Group does not have any material plans to construct, expand, or improve our facilities. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 76
any No. 1024781-T 6. BUSINESS OVERVIEW (Cont’d) As at the LPD, the details of properties rented by our Group are as follows:-
Salutica Sim Kian Ngee No.54, Tingkat Zarib 5C Tenancy commenced on 1 July Double storey terrace house for Land area: 4,800 Allied Taman Pinji Mewah 31650 Lahat, Perak 2013 and may be renewed yearly for a further period of one residential purposes for Salutica Allied’s employees Approximately 1,400* (1) year. The tenancy has been extended and will expire on 30 June 2016 Built-up area: Approximately 2,400* Salutica Chong Poh Nam No. 27, Persiaran Zarib 5 Tenancy commenced on 1 July Double storey terrace house for Land area: 4,800 Allied Taman Pinji Mewah 31650 Lahat, Perak 2013 and may be renewed yearly for a further period of one residential purposes for Salutica Allied’s employees Approximately 1,400* (1) year. The tenancy has been extended and will expire on 30 June 2016 Built-up area: Approximately 2,400* Salutica Abdul Malik bin No. 36, Jalan SCI 6/3 Tenancy commenced on 1 Double storey townhouse for Land area: 24,000 Allied Mohamad Ali Jinnah Sunway City Ipoh February 2016 until 31 January residential purposes for Approximately 1,780* 31150 Ulu Kinta 2018 Salutica Allied’s employees Perak Built-up area: Approximately 2,000*
Note:Based on respective registered owners’ estimated total built up area and land area. As at the LPD, our Group is not in breach of any law, rules and building regulations in relation to the use of the properties. Our Directors wish to highlight that with respect to the properties owned and rented by our Group, there are no environmental issues that may materially affect our Group’s operations and utilisation of the above properties. Our IPO does not involve any valuation of land and buildings. 77
6. BUSINESS OVERVIEW (Cont’d) 6.11.2 Key Machinery and Equipment A summary of the material machinery and equipment owned and used by us are set out below:
Plastic injection moulding machine Paintline SMT lines comprising printers, solder paste inspection systems, mounters and ovens X-ray inspection system Robotic glue dispensing system Radiofrequency chamber system 3D printing system Universal radio communication tester Wireless connectivity test set Nano-coating machine Laser machines comprising laser marking machines and laser welding machines Printing machine Hot stamping machine Electrical discharge machine Milling machine Precision surface grinding machine Automated laser system >5 >5 3 >5 >5 >5 >5 2 2 >5 2 >10 >10 >10 >10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 44 1 3 1 1 1 1 1 1 1 6 13 4 4 4 2 1 1,415 1,385 2,242 128 55 411 108 71 71 895 317 154 61 332 13 65 945 Total 89 8,668
Note:With scheduled maintenance, the average lifespan of the above equipment and machinery may be prolonged notwithstanding any technology obsolescence. The above machinery and equipment, in particular the SMT lines are used to derive our production capacity and output measurement as set out in Section 6.6 of this Prospectus. As disclosed under Section 3.8 of this Prospectus, the purchase of new machinery and equipment from the IPa proceeds serves to gradually replace some of our machinery that are older than their average lifespan (such as the milling machines, electrical discharge machine and precision surface grinding machine) which incorporates the latest technology and enhanced functionalities. When we purchase new machinery, management takes into consideration amongst other factors, whether the machine suits the customer order or product specification and whether or not the machinery can be used across multiple products and multiple customers. This ensures that the machine can be optimally utilised and we are able to generate sufficient returns to cover the cost of our machinery investment. In any event, the Company does not foresee a significant investment to be made in the near future to replace the machinery that have exceeded their average lifespan as the lifespan of the equipment and machinery can be prolonged with scheduled maintenance. 78 6. BUSINESS OVERVIEW (Cont’d) 6.12 Marketing and distribution channels As at the LPD, our Group’s business development, marketing and sales department consists of nine (9) personnel. They are responsible for business development, conducting market activities to promote our FOBO products and services as well as to keep abreast with the most recent market trends and customer preferences. Our business development, marketing and sales activities inciude:(i) Trade exhibitions and events We participate regularly in trade exhibitions as it helps us to enhance our brand visibility and enables us to showcase our products and services. Such participation provides us with significant opportunities to meet interested buyers, and keep abreast with current market demand and trends. The major trade exhibitions and events that we participated in over the last three (3) financial years and seven (7) months FPE 31 January 2016 up to the LPD are as follows:
2013 Consumer Electronics Show Consumer Electronics Association Las Vegas, US 2014 Consumer Electronics Show Consumer Electronics Association Las Vegas, US 2014 Hong Kong Trade Development Council Hong Kong Electronics Fair Hong Kong Trade Development Council Hong Kong 2014 China Sourcing Fair Global Sources Jakarta, Indonesia 2014 New Straits Times Auto Show New Straits Times Kuala Lumpur, Malaysia 2015 Consumer Electronics Show Consumer Electronics Association Las Vegas, US 2015 Kuala Lumpur Converge 2015 Malaysian Communications and Multimedia Commission Kuala Lumpur, Malaysia
(ii) Corporate website and product website We have established a corporate website at http://www.salutica.com which provides immediate searchable information on our Group, including our products and services. We have also established a product website for our in-house brand, FOBO, at http://www.my-fobo.com which provides information, including features and specifications of our FOBO products. In addition, our product website is an ecommerce platform, and serves as a global retail platform for our FOBO products. The current widespread use of the Internet as a source of information enables us to cross geographical borders, and facilitate access from any part of the world, enhancing our market reach and exposure. 6. BUSINESS OVERVIEW (Cont’d) (iii) Referrals from business associates As we maintain the quality of our services at all times, we have been able to attract new customers through referrals from our business associates. Our sales team is also dedicated in bUilding and maintaining long-term relationships with our customers. Further, we regularly obtain feedback from our customers on our products to better understand market trends and customer preferences. Referrals received from our business associates are testament that our business relationships with these parties have been favourable. (iv) Multiple distribution channels for products under our in-house brand, FOBO As at the LPD, our FOBO products are marketed locally and internationally through various distribution channels comprising:E-commerce platforms Due to the ease and accessibility of e-commerce platforms, our FOBO products are available online via our own product website at http://www.my-fobo.com. as well as on other recognised e-commerce platforms, either directly via Amazon, Brookstone, TouchOfModern and Massdrop or indirectly through IPl’v1art, Lazada, Mudah.com, Superbuy and Torque Tuning. Retail stores/distributors We engage our distributors on ad-hoc basis or by way of an agreement, depending on the market potential. We source our distributors from sales enquiries, referrals and during trade exhibitions and events. All distributors are required to provide us with the respective sales organisation structure and sales channels, while the exclusive distributors are required to maintain a certain purchase volume. Generally, we sell our FOBO products outright to our distributors. Distributors are normally required to provide a secure method of payment which is usually by way of full payment before delivery or through an irrevocable and confirmed letter of credit. As at the LPD, we have also engaged one (1) distributor in the US to sell our FOBO products on consignment. As at the LPD, our FOBO products are available in 47 retail point of sales in Malaysia through our authorised distributor, Sunweu Sdn Bhd, who is principally involved in the distribution of mobile phone accessories in Malaysia. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 6. BUSINESS OVERVIEW (Cont’d) The summary of the main locations and number of the retail point of sales in Malaysia as at the LPD are as follows:-
Johor Kedah Kelantan Kuala Lumpur Labuan Malacca Negeri Sembilan Pahang Penang Perak Perlis Sabah Sarawak Selangor Terengganu Total 6 1 1 11 1 7 1 1 3 12 2 47 Our FOBO products are also marketed overseas. As at the LPD, we have 29 overseas distributors spanning across Australia, Belgium, Canada, France, Hong Kong, India, Indonesia, Japan, Kenya, Lithuania, Luxembourg, Mexico, Myanmar, Netherlands, Norway, Philippines, Poland, Russia, Singapore, South Africa, Sweden, Taiwan, Thailand, Trinidad and Tobago, Turkey, UK and LIS. Further, our FOBO products are available for sales in retail stores such as Brookstone, Maplin, Halfords and Virgin Megastore directly or through our overseas distributors. For the seven (7) months FPE 31 January 2016, the sales of our FOBO products derived from local and overseas distributors are approximately RMO.1 million and RM1.1 million, respectively. Save for our FOBO products, our Group’s other products are not sold through any distributors. (v) Advertising To promote our “FOBO” brand and products, we market and advertise through our product website and sponsored magazine reviews. In addition, we appointed Oh Kah Beng, a former Malaysian motorbike Grand Prix racer and currently a racing instructor, as our brand ambassador. 6.13 R&D We recognise the importance of R&D in ensuring we remain competitive to sustain the continuous growth of our business. Our R&D initiatives have been focused on (i) participation in our customers’ product design phase, particularly in value engineering, “design for manufacturability”, and/or manufacturing process design and development/improvement; and (ii) innovation of new and improved products for our in-house brand, FOBO. 6. BUSINESS OVERVIEW (Cont’d) Our R&D activities are focused on, but not limited to, Bluetooth-enabled products. R&D activities on Bluetooth-enabled products commenced in 2004 when we started our R&D division to provide R&D activities to our customers’ products which led us to secure our first hardware and mechanical design and manufacture contract for Bluetooth car kits for Sony in 2006. Our R&D efforts involve mechanical design, electronic design with PCBA layout, firmware development for Bluetooth-related products, tester development experiences for Bluetooth audio headset/car kit, smartphone/smartwatch/smartpad, TPMS and radio frequency modules, 3D printer for fast prototyping, radio frequency chamber for precompliance testing on radio frequency products, mobile app design and acoustic chamber for audio testing. As at the LPD, we have 32 personnel in our R&D division. We undertake these efforts to improve the quality of our products and services as well as to widen our manufacturing capabilities to allow us to offer a wider range of products and services to our customers. We are also enhancing our R&D capabilities in product and process design and development. Resulting from our R&D efforts, we have successfully designed and developed several Bluetooth-enabled prototypes for our in-house products as follows:-
FOBOTire FOBO Bike FOBO Tire Plus FOBOXtra FOBO Tag/MAX FOBO Beacon Bluetooth-enabled TPMS for light vehicles such as cars, vans and sport utility vehicles Bluetooth-enabled TPMS for two (2)-wheel vehicles Enhanced Bluetooth-enabled TPMS for motor homes and pick-up trucks Additional TPMS sensors Bluetooth electronic sensor and tracking device Bluetooth electronic beacon transmitter 2014 2015 2015 2015 2012 2013 2014 2015 2015 2015 2013 2014
Our in-house FOBO products in particular the TPMS products have different development timeframes. For example, the FOBO Tire took approximately nine (9) months to develop, commencing in early 2014 and completed in late 2014. However, SUbsequent TPMS products were able to share the architecture of FOBO Tire, which shortened the development period to approximately three (3) months. There is no typical timeframe to develop a product as it depends on, amongst others, the type of product, the product feature and complexity as well as the technology available. Our R&D costs include (i) expenses incurred for the R&D activities for our external brands’ products (amongst others, mechanical design, electronics design, hardware design and firmware design) which are normally charged to our customers, where applicable, and (ii) general R&D expenses (amongst others, product industrial design, mechanical design, electronics design, hardware design, firmware design and app design) for both external brand products and FOBO products, which are borne by us. 6. BUSINESS OVERVIEW (Cont’d) The breakdown of our R&D expenses is as follows:
l\Jon-recurring engineering R&D expenses incurred for external· customers General R&D expenses(3) Total R&D expenses Total R&D expenses over our total revenue (%) 5,817 3,428 9,245 11.8 7,611 2,967 10,578 4.5 1,991 4,106 6,097 3.2 1,251 1,972 2,545 3,796 2,111 4,083 3.1 2.8
Notes:(1) Based on Salutica Allied’s figures for FYE 30 June 2013 and 2014, respectively.
(2) Based on Salutica Group’s figures for FYE 30 June 2015, seven (7) months FPE 31 January 2015 and seven (7) months FPE 31 January 2016, respectively.
(3) Including R&D expenses incurred for the development of our FOBO products.
In FYE 30 June 2015, the non-recurring engineering R&D expenses (UNRE”) incurred for external customers had reduced from approximately RM7.6 million in FYE 30 June 2014 to RM2.0 million as more R&D activities were conducted in FYE30 June 2013 and 2014 for new product launches (i.e. the smartwatch and light-guide) while the R&D activities during FYE 30 June 2015 were mostly on product upgrades and improvements. In addition, we absorbed design and development costs for some of our major customers, thus reSUlting in the drop in NRE. Our competitors are mainly established international original equipment manufacturers that may offer cheaper rates for manufacturing or services provided to our major customers. Therefore, as part of our business strategy, we absorb some of the R&D costs to maintain our competitiveness. The increase in general R&D expenses was mainly due to R&D expenses incurred for FOBO products, which amounted to approximately RM1.3 million. We recorded R&D expenses of approximately RM4.1 million in the seven (7) months FPE 31 January 2016, of which approximately RM2.0 million and RM2.1 million were incurred for nonrecurring engineering R&D expenses charged to external customers and general R&D expenses, respectively. In the seven (7) months FPE 31 January 2016, the NRE incurred for external customers increased from approximately RM1.3 million in the seven (7) months FPE 31 January 2015 to approximately RM2.0 million due to an increase in R&D activities for new product launches. The slight decrease in general R&D expenses was mainly due to near-completion of R&D activities for some of our FOBO products. The R&D expenses for the seven (7) months FPE 31 January 2016 comprise of, amongst others, purchase of raw materials for engineering/prototype builds and R&D staff costs. 6.14 Interruptions to business and operations During the twelve (12)-month period prior to the date of this Prospectus, our Group did not experience any business interruption that significantly affected our operations. Company No. 1024781-T 6. BUSINESS OVERVIEW (Cont’d) 6.15 Approvals, major licences and permits As at the LPD, details of our approvals, major licences and permits for our operations are as follows:Permit / Licence / Date of grant or Description of approval/ Approving Registration renewal/ Expiry licence / permit authority no. date Sa/utica Allied MITI A012965 Issue date: (serial no. 14 November 2013 Manufacturing Licence for 032796) design, development and Valid until and production of Bluetooth and unless otherwise Broadband devices and mobile revoked under the phones Industrial Co ordination Act, 1975 (“ICA”) Sa/utica Allied MITI A012965 Issue date: (serial no. 6 December 2013 Manufacturing Licence for 032850) production of Bluetooth lifestyle Valid until and devices and smart auto meter unless otherwise readers revoked under the ICA
Status of Salient conditions compliance No terms and conditions attached Complied • Salutica Allied must commence the relevant manufacturing Complied activities within 12 months from the effective date (i.e. 16.10.2013) or any other period as may be stipulated by the licensing officer
• Notification must be given to MITI for any change in the board of directors
• Notification must be given to MITI and MIDA for any disposal of shares in Salutica Allied
84 II Company No. 1024781-T ~ 6. BUSINESS OVERVIEW (Cont’d) Description of approval/ licence / permit Sa/utica Allied Warehouse Licence and Manufacturing Warehouse Licence issued pursuant to Section 65 and 65A of the Customs Act 1967, respectively Sa/utica Allied Licence under Class C: activities relating to purchase, own, possess, handle or store irradiating apparatus, pursuant to pursuant to the Atomic Energy Licensing Act 1984 and the Radiation Protection (Licensing) Regulations 1986 Sa/utica Allied Approval to be a GST-registered person under the GST Act 2014 Sa/utica Allied Approval to be a participant of the Approved Trader Scheme (“ATS”) under the GST Act 2014 Approving authority
Royal Malaysia Customs Department
Atomic Energy Licensing Board (“AELB”)
Royal Malaysian Customs Department
Royal Malaysian Customs Department
Permit / Licence / Registration no. A10 G6 2008 00000017 and A10 G6 2008 00000017A LPTAlAl842 (serial no. 84212464) 000177209344 SPL00864747 52 Date of grant or renewal/ Expiry date Issue date: 26 November 2015 Expiry date: 30 November 2016 Issue date: 9 July 2014 Expiry date: 23 August 2016 Issue date: 23 June 2014 Expiry date: Nil Issue date: 17 February 2015 Expiry date: 30 June 2016 85 Salient conditions • No taxable goods (other than goods approved by the Director General of the State) may be stored in the licensed manufacturing warehouse
• Prior approval of the Director General of the State is required for any change to the building structure and equipment in the licensed manufacturing warehouse(1)
• At least 80% of the finished products must be exported, and not more than 20% of the finished product can be sold in the domestic market. Goods sold in the domestic market are subject to the prevailing duties and/or taxes
• Notification to the proper officer of customs in writing within 14 days if there is a change in the board of director of Salutica Allied
• Salutica Allied must establish and implement a radiation protection programme as approved by AELB
• Salutica Allied can only purchase radioactive equipment from suppliers licensed by AELB, and must ensure that any radiation equipment purchased from overseas fulfils the standards adopted by AELB
GST must be imposed on every taxable supply in Malaysia for the purposes of business as required under Section 9 of the GST Act 2014. The Director General of Customs may at any time revoke or suspend any ATS approval that has been issued without giving prior notice or reasons to the affected ATS participant on cogent reasons. Status of compliance Complied Complied Complied Noted [ Company No. 1024781-T II 6. BUSINESS OVERVIEW (Cont’d) Permit 1 Licence 1 Date of grant or Description of approval 1 Approving Registration renewal 1Expiry Status of licence 1permit authority no. date Salient conditions compliance
Sa/utica Allied Ipoh City G1/D/2/66/6/04 Issue date: No terms and conditions attached Complied Council 29 December 2015 Composite licence to carry on (Majlis engineering, electricitylmachinery Bandaraya Expiry date: works under the Local Ipoh) 31 December 2016 Government Act, 1976 Sa/utica Allied Ipoh City G110/3/188/04 Issue date: No terms and conditions attached Complied Council 29 December 2015 Composite licence for (Majlis advertisement/signboard under Bandaraya Expiry date: the Local Government Act, 1976 Ipoh) 31 December 2016 Note:(1) The necessary approval will be obtained for the acquisition of new machinery and/or equipment as disclosed under Section 3.8 of this Prospectus as and when such acquisition is made in the future. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 86
II Company No. 1024781-T II 6. BUSINESS OVERVIEW (Cont’d) 6.16 Patents, trademarks and registration 6.16.1 Patents As at the LPD, we have filed a total of twenty four (24) patent applications locally and internationally to safeguard five (5) different inventions relating to our FOBO products, as set out below:No. Proprietor 1. Salutica Allied
2. Salutica Allied
Title of Invention 1 Descriptions
Safezone: a wireless alerting system for personal area asset supervision
CrossPair: a system and method for transmitting, storing receiving and/or retrieving identification information or data and/or pairing information or data between accessories or associated products and smart electronic devices into and/or from any distinct server or storage media
Country(ies) where patent protection is sought International application through Patent Cooperation Treaty 1970 (“PCT”) (1) US Malaysia International application through PCT (1) PRC European Union Indonesia Japan Republic of Korea Malaysia Philippines Russia Singapore South Africa Thailand US Vietnam 87 Company No. 1024781-T II Application Status of reference no. Date of application registration PCTIMY2013/000016 31 January 2013 Completed 14/410,138 9 January 2015 Pending PI 2012700414 22 June 2012 Pending PCT/MY2012/000288 28 November 2012 Completed 2012800773827 28 May 2015 Pending 12889076.1 11 June 2015 Pending P00201503889 25 June 2015 Pending 2015-544024 25 May 2015 Pending 10-2015-7015145 8 June 2015 Pending PI 2015701711 27 May 2015 Pending 1-2015-501151 22 May 2015 Pending 2015124314 23 June 2015 Pending 11201504174W 27 May 2015 Pending 2015/04371 17 June 2015 Pending 1501003210 9 June 2015 Pending 14/647,789 27 May 2015 Pending 1-2015-02104 12 June 2015 Pending
6. BUSINESS OVERVIEW (Cont’d) Title of Invention 1 Country(ies) where patent protection Application Status of No. Proprietor Descriptions is sought reference no. Date of application registration 3. Salutica Allied Websearchme: a wireless International application through PCT (1) PCT/MY2013/000017 31 January 2013 Completed pairing and/or tracking Malaysia PI 2012004064 13 September 2012 Pending system for locating lost items US 14/418,120 29 January 2015 Pending European Union 13837949.0 19 February 2015 Pending 4. Salutica Allied FOBO Tire: a wireless tire International application through PCT (1) PCTIMY2014/000186 19 June 2014 Pending monitoring system
International application through PCT (1) PCTIMY2015/000048 16 June 2015 Pending
5. Salutica Allied FOBO Antenna Malaysia PI 2014703332 7 November 2014 Pending
Note:(1) An international patent application under the PCT enables applicant to seek patent protection for an invention simultaneously in each of the PCT contracting country. An application under the PCT procedure includes:(i) international phase: international patent application is filed with the World Intellectual Property Organisation (WIPO) International Bureau; and
(ii) national phase: national patent application is filed with the relevant patent offices of the designated PCT contracting countries.
Save for Myanmar and Taiwan, the countries that we sell our FOBO products to are PCT contracting countries. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK 88 Company No. 10247 6. BUSINESS OVERVIEW (Cont’d) 6.16.2 Trademark The following trademarks have been registered for:Registration No. Proprietor Trademark No. Class(es) Date registered Expiry date Country of recognition
011138633 9,10 and 12 18 January 2013 23 August 2022 European Community 1. Salutica Allied 2. Salutica Allied 5568610 9 22 March 2013 23 March 2023 Japan 3. Salutica Allied 40-1018203 9 16 January 2014 16 January 2024 Republic of Korea0 ..0 …6 .0 4. Salutica Allied 2012056453 9 17 August 2012 17 August 2022 Malaysia GOBCI 5. Salutica Allied T1213800G 9 19 September 2012 19 September 2022 Singapore GOBO 6. Salutica Allied 01596349 9 1 September 2013 31 August 2023 Taiwan
Company No. 1024781-T II 6. BUSINESS OVERVIEW (Cont’d) Registration No. Proprietor Trademark No. Class(es) Date registered Expiry date Country of recognition 7. Salutica Allied 4516970 9 22 April 2014 22 April 2024 us
8. Salutica Allied
11525570 9 14 July 2014 13 July 2024 PRC
9. Salutica Allied TMA889278 9 4 November 2014 4 November 2029 Canada 6.16.3 Industrial designs The following industrial designs we have been registered for:No. Proprietor Title Registration No. Date registered Expiry date Country of recognition 1. Salutica Allied SECURITY TAG MY 12-01483-0101 25 October 2012 25 October 2037 Malaysia 6.17 Dependency on contracts/arrangementsllicenses/patents As at the LPD, save as disclosed below, our Group is not highly dependent on any other contracts/arrangements/licences/patents:(a) Approvals, major licenses and permits as set out in Section 6.15 of this Prospectus; and
(b) Patents, trademarks and industrial designs as set out in Section 6.16 of this Prospectus.
90 6. BUSINESS OVERVIEW (Cont’d) 6.18 Major customers Major customers of Salutica Allied which have contributed more than 10% of our total revenue for the past three (3) FYE 30 June 2013, FYE 30 June 2014 and FYE 30 June 2015 as well as the seven (7) months FPE 31 January 2016 are as follows:-
Plantronics Jaybird Sony Canon Opto Sdn Bhd 26,593 9,910 13,464 14,086 33.9 12.6 17.1 17.9 65,491 34,664 114,497 3,162 28.0 14.8 48.9 1.4 84,788 46,918 41,124 1,976 44.0 24.4 21.4 1.0 61,726 63,479 5,149 640 42.4 43.6 3.5 0.4 5 4 10* 18
Notes: (1) Based on Salutica Allied’s figures for FYE 30 June 2013 and 2014, respectively. (2) Based on Salutica Group’s figures for FYE 30 June 2015 and the seven (7) months FPE 31 January 2016, respectively. * The length ofbusiness relationship with Sony is based from the date of our first Sony Ericsson engagement.
We are engaged by the above customers for the design, development and manufacture of Bluetooth devices and the manufacture of other electronics and precision parts and components. We are dependent on Plantronics, Jaybird and Sony, as they collectively contributed to approximately 90.0% of our total revenue in the seven (7) months FPE 31 January 2016. However, due to our close collaboration, technical elements and design expertise required for the provision of goods and services to these customers, we believe that we are not easily replaced or substituted by other manufacturing companies. We believe we can maintain the existing relationship and service track record with the aforementioned customers and aspire to support their growth ambitions globally. 91 6. BUSINESS OVERVIEW (Cont’d) 6.19 Major suppliers Major suppliers of Salutica Allied which have contributed to more than 10% of our purchases, for the past three (3) FYE 30 June 2013, 2014 and 2015 as well as the seven (7) months FPE 31 January 2016 are as follows:-
Cotron Corporation WPG South Asia Pte Ltd TPK Universal Solutions Limited SDKM Technologies Sdn Bhd Taiwan Singapore Taiwan Malaysia 5,749 2,475 222 782 10.8 4.6 0.4 1.5 16,226 20,120 36,951 6,831 8.9 11.0 20.2 3.7 20,872 17,998 9,758 13,024 15.3 13.2 7.2 9.6 20,613 14,287 12,213 19.9 13.8 11.8 5 14 4 9 Notes:(1) Based on Salutica Allied’s figures for FYE 30 June 2013 and 2014, respectively.
(2) Based on Salutica Group’s figures for FYE 30 June 2015 and the seven (7) months FPE 31 January 2016, respectively.
Our purchases from major suppliers comprises, amongst others, speakers, general components and touchscreens. Our suppliers can be categorised into suppliers specified by our customers and our own approved suppliers. TPK Universal Solutions Limited, Cotron Corporation and SDKM Technologies Sdn Bhd are suppliers specified by our customers for the purchase of certain materials, while WPG South Asia Pte Ltd is our own approved supplier. As our major suppliers are located overseas, the delivery of certain materials may take up to four (4) months. Therefore, we practice prudent material and production planning to ensure our orders for materials are made and delivered to us on a timely basis. During the financial period under review, we have not faced any material supply disruptions or delays by our major suppliers. With the exception of our suppliers specified by our customers, we are able to source most of our material supplies from our own approved list of suppliers, which reduce our dependency on our major suppliers. Thus, we are not wholly dependent on anyone of our major suppliers. We deal directly with our major suppliers’ manufacturers or their authorised distributors and the selection criteria are as follows:(a) Suppliers’ capabilities to supply as per our products specifications; (b) Costs; (c) Commercial terms such as credit terms, delivery terms and lead time; and (d) Suppliers’ assessment evaluation which includes review of company profile such as number of years established, financial information such as historical revenue, their major customers, number of employees and their quality control system. 92
6. BUSINESS OVERVIEW (Cont’d) 6.20 Future plans, strategies and prospects 6.20.1 Future plans and strategies (i) Continued focus on R&D and expansion of the FOBO product range We will continue to focus on our R&D capabilities to expand and enhance our current FOBO products with new features and functionalities. We believe that the expansion of our FOBO brand and improvement in product features will drive our business and broaden our customer base, as we anticipate increasing demand for Bluetooth related devices in the automotive and consumer electronics applications. Premised on the above, as at the LPD, our R&D team is in the midst of the following product development:
Bluetooth-enabled TPMS FOBO Ultra Bluetooth-enabled TPMS for multi-axle heavy vehicles FOBO Ultra Pro Enhanced Bluetooth-enabled TPMS for multi-axle heavy vehicles Bluetooth-enabled electronic sensors and tracking devices FOBO Tag 2 Enhanced Bluetooth electronic sensor and tracking device 2016 2017 2017
As set out in Section 3.8 of this Prospectus, we have allocated RM8.2 million from our IPO proceeds for R&D expenditure, as follows:(a) RM5.0 million will be allocated to upgrade our R&D facilities with the purchase of R&D machinery and equipment;
(b) RM2.2 million will be allocated to hire additional experienced and skilled R&D personnel, as well as engage our current R&D staff in key development and training programmes; and
(c) RM1.0 million will be allocated to undertake vigorous testing (inclUdes providing free field testing samples), verification and certification for our new FOBO products.
This expenditure will enable us to develop the above FOBO products as well as the creation of potential new in-house brands as disclosed in Section 6.20.1 (v)(b) of this Prospectus. (ii) Increase sales, marketing and branding initiatives for FOBO We launched our first Bluetooth device under our in-house brand, FOBO, in 2013. Over the last three (3) financial years, the revenue derived from our FOBO products have grown from approximately RMO.3 million in FYE 30 June 2013 to approximately RM3.5 million in the in FYE 30 June 2015, registering a three (3) year CAGR of approximately 226.1 %. The sales of our FOBO products have been generated globally, primarily from North America, Europe, Asia and Africa, which contributed approximately 0.4%, 0.1%, 1.8% and 1.1% to our revenue for FYE 30 June 2013, 2014 and 2015 as well as the seven (7) months FPE 31 January 2016, respectively. 6. BUSINESS OVERVIEW (Cont’d) We intend to increase our marketing and sales activities for our FOBO products through the following:(i) Expand our sales and distribution channels Our Group aims to increase our direct sales and distribution channels for our FOBO products. As highlighted under Section 6.12 of this Prospectus, our primary modes of sales and distribution are directly through our website; third party e-commerce platforms; and through local and overseas distributors and retail outlets. The revenue breakdown from our primary mode of sales and distribution for our FOBO products for FYE 30 June 2015 are as follows:
e-Commerce platforms Own website Third party Distributors Local Overseas Retail outlets I customers I staff purchases Total 27.9 0.1 19.3 35.1 17.6 100.0 For the next twelve (12) months from the LPD, we intend to increase our sales and distribution channels as follows:
Direct third party e-commerce platforms 4 3 Distributors 29 8 Direct retail chain outlets 2 3
All of our planned additional distribution channels are overseas distributors, which will comprise exclusive and non-exclusive distributors, direct third party e-commerce platforms and direct retail chain outlets. (ii) To participate in more trade exhibitions and events Our Group plans to participate in more trade exhibitions and events related to automotive accessories and consumer electronics. This will enable our Group to showcase our FOBO products to consumers, wholesalers, distributors and vehicle fleet owners, who are our key target customers, and to gain greater visibility and exposure for our products in the global market. 6. BUSINESS OVERVIEW (Cont’d) The major trade exhibitions and events that we intend to participate in are as follows:
2016 The SEMA Show Speciality Equipment Market Association Las Vegas, US 2016 Hong Kong Trade Development Council Hong Kong Electronics Fair Hong Kong Trade Development Council Hong Kong 2017 The Consumer Electronics Show Consumer Electronics Association Las Vegas, US 2017 Hong Kong Trade Development Council Hong Kong Electronics Fair Hong Kong Trade Development Council Hong Kong 2017 The SEMA Show Speciality Equipment Market Association Las Vegas, US
(iii) To increase branding, advertising and promotional activities To strengthen our FOBO brand, we plan to increase our branding, advertising and promotional activities via physical billboards, television and radio advertisements, and sponsorship for motorsports events. The marketing and sales activities for our FOBO products thus far have been mainly funded through internally generated funds. We intend to utilise approximately RM3.0 million of the proceeds from our Group’s Public Issue to fund the abovementioned marketing and sales initiatives. This will provide us with greater resources to aggressively expand our market reach and customer base for our existing FOBO products and more importantly for our new FOBO Ultra in mid-2016 and FOBO Ultra Pro and FOBO Tag 2 in 2017. (iii) Expansion of our business in the design, development and manufacture of Bluetooth devices for external brands Our success to-date has been built on our design, development and manufacturing capabilities where we serve major multinational electronic devices and mobile communication product corporations such as Plantronics, Jaybird and Sony. Our Group designs, develops and manufactures some of the prominent Bluetooth devices in the market including Bluetooth audio headsets and Bluetooth smartwatches. Moving forward, we intend to continue positioning our Group as a one-stop solutions provider for our multinational corporation customers and continue to leverage on our proven track record, experience and technical capabilities to secure more business. Having developed a good working relationship with our existing customers and being an authorised/qualified supplier that has gone through stringent selection processes, we are well placed to grow and expand in tandem with our customers as they seek to expand their global customer reach and market presence. As the global consumer electronics market for Bluetooth devices advances with new technologies, our Group will have further opportunities as new models and enhancements of Bluetooth devices are regularly introduced. 6. BUSINESS OVERVIEW (Cont’d) According to the IMR report, global Bluetooth device shipments grew from approximately 1.8 billion units in 2011 to approximately 3.0 billion units in 2014 representing a CAGR of approximately 18.6%, with projected growth to approximately 4.9 billion units in 2018. This will present significant growth opportunities for our Group, and with our proven track record in the design and manufacturing of Bluetooth devices, we are poised to benefit from these opportunities. Please refer to Section 7 “Industry Overview” of this Prospectus for further details. (iv) Expansion and upgrade of manufacturing facilities In our manufacturing operations, we utilise machinery and equipment which includes, amongst others, engineering moulds, surface mount equipment, plastic injection moulding machines, and nano-coating equipment. Most of our machinery and equipment are of European and Japanese brands. All of our machinery and equipment undergoes regular maintenance and timely upgrades, in order to keep up with new and up-to-date technologies whilst ensuring high level of manufacturing quality. In line with our Group’s expansion plans, we intend to acquire new machinery and equipment which will incorporate recent up-to-date and new technologies, as this will allow our Group to keep abreast with the latest manufacturing technologies and enable us to increase our efficiency, productivity and competitiveness. We also intend to upgrade our manufacturing facilities which will entail upgraded infrastructure and equipment as well as new test machines and expansion in our testing laboratories. The purchase of new machinery and equipment, as well as the upgrade of our manufacturing facilities will enable us to increase our capacity, expand our product range, replace old machinery and improve our testing capabilities. The cost of these new machinery and equipment and upgrades is estimated to be RM13.6 million as set out in Section 3.8 of this Prospectus. We also intend to invest in new software and hardware to upgrade our Group’s IT infrastructure in order to keep abreast with the rapid changes and development in the information and communications technology and electronics industries. In addition, the investment in our IT infrastructure will also facilitate the expansion of our FOBO products. The cost of the upgrades to our IT infrastructure is estimated at RM1.4 million as further set out in Section 3.8 of this Prospectus. The total estimated cost of our planned equipment purchase and facility upgrade as well as the upgrade to our IT infrastructure is RM15.0 million, which we intend to fund via proceeds from our Public Issue. (v) New product expansion As at the LPD, we have identified the following areas in which to expand our range of consumer electronic products:(a) Devices for touchscreen functionality Leveraging on our capabilities and experience in precIsion part and components manufacturing involving light-guide technology, we are currently in the advanced stages of securing a contract for the manufacture of a USB powered device that adds touchscreen functionality to non-touch laptop screens. The new device uses infrared together with proprietary software to detect the touch position on the display monitor of laptops by users. The device is placed at the bottom of the laptop screen and is connected via USB to the laptop. With this device, new and/or existing non-touchscreen laptops will have touch and gesture sensing functionality. At this juncture, the device is only applicable for non-touch laptop screens and has not been developed for use with standalone monitors. 6. BUSINESS OVERVIEW (Cont’d) This device is a new product developed by our customer and we will mainly be involved in the functional design of the test samples as well as the manufacturing process of the device. Due to the complexities of manufacturing this device, investments in a new automated production line is required. This new production line is an automated wafer chip and electronic component encapsulation production system with additional capability to mount wafer chips and perform wire bonding, which is different from our SMT production line. This new production line will allow our Group to diversify our current and future product mix as well as increase our revenue stream. The demand for this touchscreen device/gadget will be driven by the pervasive use of laptops globally arising from the growth in global income levels that have brought consumer electronics such as laptops within economic reach of larger portions of the global population. Please refer to Section 7 “Industry Overview” of this Prospectus for the key demand drivers. In this regard, our Group intends to utilise approximately RM10.0 million from the IPO proceeds to finance the purchase of one (1) automated production line with an estimated production capacity of approximately 3.0 million devices per annum. We plan to purchase and fully install the production line at our factory by the fourth quarter of calendar year 2016, with mass production estimated to commence at the end of 2016/early 2017. (b) Bluetooth devices for use in other industries We have identified the healthcare industry as a new area of focus, where we are evaluating the potential of developing electronic devices for personal health monitoring (i.e. blood pressure monitor and glucose monitor for home usage). Although still at the product feasibility stage, we plan to commence R&D by 2017 and if viable, to rollout such healthcare related products within two (2) to three (3) years from commencement of R&D. If our venture into the healthcare industry is successful, such new products will contribute to additional revenue and earning streams for our Group, thereby providing long-term sustainability to our Group’s financial performance. 6.20.2 Prospects Premised on our future plans and strategies as highlighted above, our competitive strengths as highlighted in Section 6.3 of this Prospectus, and the prospects and outlook of the consumer electronics industry and automotive industry as set out in Section 7 of this Prospectus, our Board is of the view that our Group will enjoy positive growth and favourable prospects in the long-term. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK