In evaluating an investment in the IPO Shares, prospective applicants should carefully consider all information contained in this Prospectus including but not limited to the general and specific risks of the following investment considerations:
a) Business Risk
We are subject to general business risks inherent in the semiconductor equipment industry which include, but are not limited to, cost ineffectiveness, technology obsolescence, unexpected industry downturn and seasonal effects of sales. Our operations are relatively new and we have a limited track record in term of operations.
In order to mitigate such risks, we have implemented and will continue to implement various strategies such as, diversifying our product range, expansion of our market base as well as undertaking robust R&D and technology innovations to strengthen and increase our business activities. Apart from the above, we undertake to provide good after sales services to ensure customer satisfaction. Priority will be given to ensure smooth running of our customers’ operations. Good after-sales service is also a way to maintain and build good reputation and relationship with the customers. However, even with the said practices, no assurance can be given that we will not be adversely affected should there be any change in market forces.
b) Political and Economic Risk
As we participate in the global semiconductor equipment market, it will inevitably depend on the development in political, economic and regulatory conditions not only in Malaysia, but also other countries. Therefore, uncertainty in global economic, business and credit conditions, governmental legislation and policies, inflation, future fluctuation in foreign exchange rates, interest rates, political or social development, risk of expropriation, nationalisation, renegotiation or nullification of existing contracts and methods of taxation risk may adversely affect us.
c) New Product and Technology Risk
We are continuously involved in new product development whereby a substantial amount of pre-delivery testing is conducted before a new product is officially marketed. However, the performance of our products will only be truly tested when they are being used in the actual manufacturing environment. The products might face various unforeseeable technical and non-technical problems, which may result in negative product reputation and loss of business opportunities in the industry. Despite the development of new products by us which represents an opportunity to enhance our profitability, there is no assurance that the new products introduced will be successfully commercialised.
We are also subjected to the risk of rapid technological development. Our products and technologies are characterised by rapid technologies development, evolving industry standards, swift changes in customer requirements, and new product introductions and enhancements. With our experienced engineering team in the semiconductor and semiconductor equipment industry, we can reasonably predict the technological and market trend that we are subjected to. By nurturing and maintaining close ties with our customers, we can keep abreast with not only the latest developrnents in the semiconductor industry but also the short term and long term outlook of the industry. We also obtain consistent and regular updates on the latest development in the industry from industry pUblications and participation in the local and international trade and technology exhibitions. However, our future performance depends on our capability to address the increasingly sophisticated needs of our customers by keeping in pace with the technology evolvement and coming out with timely development and roll-out of enhanced products.
The timely development of new or enhanced products and services is a complex and uncertain process. Although we believe that we will have the funding to implement our business plan, there can be no assurance that we will continue to have sufficient resources to successfully and accurately anticipate technological and market trends, or to successfully manage long development cycles.
We may also experience design, marketing and other difficulties that could delay or prevent the development, introduction or marketing of our products, as well as new products and enhancements. We may also be required to collaborate with third parties to develop products and services and may not be able to do so on a timely and cost-effective basis.
If we are not able to develop new products or enhancements to our existing products and services on a timely and cost-effective basis, or if our new products and services or enhancements fail to achieve market acceptance, or if one or more of our competitors introduce products and services that better address customer needs or for any reason gain market share, our business, operating results and financial condition would be adversely affected.
d) Competitive Risk
We believe we have the edge over our competitors due to our ownership of core technologies under the same roof, our R&D capabilities and our technological skills. Furthermore, we have taken and will continue to take pro-active measures to mitigate the competitive risks which include constantly reviewing our development and marketing strategies in response to ever-changing economic conditions and market demands and to adopt different development concepts and marketing strategies that will correctly position our products and services to serve the needs of the target market.
However, no assurance can be given that we will be able to maintain our competitive edge over our competitors and maintain our customer base. Many of our customers are MNCs in Malaysia and overseas where the selection of equipment for their manufacturing process are based on stringent criteria such as high quality standard equipment. good after sales service support, competitive pricing and also reliability of the products.
e) Dependence on the Semiconductor Industry
Our main customers are from the semiconductor industry. We sell our products to customers from various sub-sectors of the industry. Therefore. our performance and industry risk will depend on the semiconductor industry which is cyclical in nature. In fact, any slow down in the semiconductor industry worldwide will have an impact on the demand for our products. No assurance can be given that any adverse development in the semiconductor industry will not affect our business and adversely affect our operations and financials (please refer to Section 4.4 on the current condition of the semiconductor industry). However. we believe that by being attuned to our customers’ requirements. we will be able to adapt our strategies to mitigate lower demand during industry slowdown. We will also explore the growth opportunities outside the semiconductor industry, such as the printed circuit board assembly and pharmaceutical industries to mitigate this risk.
f) Dependence on Protection of Intellectual Property
Our success is dependent on our ability to protect our proprietary technology. In this regard, we have put in place several security measures to protect our proprietary technology, e.g. protection of the source codes of our in-house developed software. The nature and functionality of our products also acts as barrier against illegal usage as specialised knowledge and familiarisation with the software as well as mechanical engineering are required to make it work.
As a further mitigation to this, we have submitted applications to register our trademark, “VisDynamics” and patents on two of our core technologies on our vision inspection system. We will continue to apply for patent protections for future developments where applicable.
However, existing copyright, trademark and patent laws afford only limited protection. Accordingly, there can be no assurance that we will be able to protect our proprietary rights against unauthorised third party copying, use or exploitation which could cause a material adverse effect on our business, operating results and financial condition.
We believe that the risk is relatively low due to the nature of our products as the products developed by us involves numerous aspects and technologies, which are considered complex and lime consuming to develop and integrate. Third parties may challenge or dispute our intellectual property rights in terms of, amongst others, title and third party intellectual property rights infringement. We could incur substantial costs in defending or prosecuting any claims relating to our intellectual property rights. Issues relating to intellectual property rights can be complicated and there can be no assurance that disputes will not arise or that any disputes in relation to our intellectual property will be resolved in our favour. Moreover, any such disputes could be time consuming, cause delays in introducing new or improved products and services or require that we discontinue using the challenged technology, and could have an adverse effect on our reputation, business, operating results and financial condition.
g) Foreign Currency Risk
We are subject to foreign currency risk due to the following:
• Some of our products are exported overseas where our revenue is mostly in USD. For FYE 2005, 44,6% of Our total revenue is from exports;
• A few of our main raw materials such as camera components are sourced from international suppliers in Singapore where payments are denominated in Euro, SGD and USD. For FYE 2005, this constitutes 9.0% of our total purchases; and
• Certain components such as vision components, motion control components, pneumatic parts, computer peripherals and control and electrical parts are purchased through local distributors but originate from Europe, Japan, Singapore and Taiwan. For FYE 2005, this constitutes 41.3% of our total purchases.
Any unfavourable movement in the relevant currencies against the RM will adversely affect our financial performance and position indirectly. As a mitigation, we have a foreign exchange facility to hedge ourselves from the risk of fluctuations in foreign currency.
h) Dependence on Key Personnel
Our success will depend on the continuous efforts of our existing Directors and key management. We are headed by an experienced, dedicated and dynamic management team. Please refer to their profiles in Sections 5.1.2, 5.3.2 and 5.5.2 for their management experience. We will strive to continue attracting and retaining skilled personnel to support our business operation as well as training of our staff. In this regard, we offer suitable and competitive remuneration packages as well as clear career progression plans to our current and future employees.
Based on the long-term plan to nurture our key management, we plan to recruit and train younger employees to participate in management to further support the senior management and/or to take on additional responsibilities should the need arise. We groom junior employees by ensuring their participation in management meetings, R&D projects as well as discussions with customers/end users. Furthermore, we also implement a policy whereby we are not dependent on one person to perform important job functions such as machine design, software coding and electrical circuit design, among others.
We emphasise teamwork and integration between team members and every important assignment will have backup personnel. However, there can be no assurance that the above steps will always be successful in retaining the key personnel or ensuring a smooth transition should Change occur.
i) Material Litigation / Legal Uncertainty
Mr Choy Ngee Hoe, our director and substantial shareholder was previously the president of STISB, a wholly-owned subsidiary of ASTI. His terms of employment included certain provisions for restraint of activities in the event Mr Choy left STISB. These include a restraint of trade clause which states that for a period of two years after termination of employment, Mr Choy cannot be directly or indirectly involved in any similar business. As Mr Choy left STISB in December 2002 and co-founded VRSB in the same period, there is a risk that ASTI may take legal action against Mr Choy to enforce the terms referred to above. To assess the risk, we have appointed Infinitus Law Corporation, which is based in Singapore, to act as our legal counsel to provide an opinion on the matter.
According to the legal counsel, ASTI is unlikely to succeed in enforcing the restraint of trade clause or any other restraint of activities clauses. Furthermore, the clauses, if at all enforceable, are only applicable to Mr Choy and not our other founding members. In addition, our other founding members, who were also previously with ASTI/STISB do not have any restraint of trade clauses in their terms of employment. Premised on the above, we believe that it is unlikely that our business will be materially adversely affected by the enforcement of the restraint of activities clauses against Mr Choy.
j) Adequacy of Insurance Coverage of Our Assets
We are aware of the adverse consequences arising from inadequate insurance coverage that could affect the business operation. In ensuring such risks are minimised, we review and ensure adequate coverage for our assets on a continuous basis.
We have taken necessary measures to ensure that our raw materials, work in progress, finished goods and property, plant and equipment are adequately covered by insurance for common peril such as fire and burglary.
k) Control by Promoters and Substantial Shareholders
Upon completion of the IPO, the Promoters and Substantial Shareholders, as set out in Sections 5.1 and 5.2 of this Prospectus respectively, will collectively own and control approximately 69.2% of our enlarged Issued and paid-up share capital. As a result, they would be able to exercise some extent of influence on the outcome of certain matters requiring the vote of our shareholders unless they are required to abstain from voting by law, covenants and I or the relevant authorities.
We believe the appointment of two (2) non-executive independent directors to our Board of Directors and the establishment of the Audit Committee will help to ensure that there are effective controls as well as check and balances in the management of our Group. Our non-executive independent directors are long-standing corporate figures who bring with them sound business acumen and professional objectivity.
i) Data Corruption and System Failure
Most of our in-house mechanical designs, automation software codes and important databases and documents are kept in computerised data form which is subjected to corruption arising from unexpected computer virus infection, operating system failure, fire etc. Furthermore, we depend on the computerised system to carry out our mechanical design, software coding, inventory and assembly planning and operations, accounting and administrative works of which the total failure of the respective computerised system will inevitably affect the proper functioning of our operation, which in turn have an adverse impact on us operationally and financially.
We have undertaken contingency plan where important databases, documents, inhouse mechanical design and automation software code are backed-up in a secured server at regular intervals. Adequate and prompt system recovery plan is also in place to handle any contingency situation that may appear. However, there is no assurance that the data corruption and system failure will not happen and if happen, will not have any material impact on our business.
m) Absence of Long Term Contractual Agreement with Customer and/or Contractor/Supplier
There is no long-term contractual agreement between us and our customers and/or contractors/suppliers in accordance with the general practice of the industry. We seek to limit this risk by employing various strategies to expand our clientele base. This includes setting up our own regional marketing/sales and service centres to serve our existing customers in Southeast Asia, North Asia and North America.
Contractual agreements between us and our customers concerning our products may also be revoked if the performance of our products does not meet their expectations or even when the semiconductor Industry is experiencing a downturn, which is a common practice of the players in the semiconductor ATE industry. The revocation of the orders may have a material adverse effect on our future financial performance.
However, we have recurring orders for our products from existing customers who are satisfied with the performance of our products. This enables us to build and maintain long-standing business relationships with our customers since we have proven that we are able to satisfy their stringent demands.
Notwithstanding the absence of any long-term contracts, we have maintained and will continue to build good relationship with our existing customers by providing product enhancement, product upgrading and related sales services.
The major raw materials we utilise can be easily sourced and it is not necessary for us to enter into long-term contract(s) with our contractors/suppliers.
n) Dependence on Contractor / Supplier
As mentioned in Section 4.6 of this Prospectus, we are not solely dependent on any major contractors Or suppliers, as we have established a wide network of contractors and suppliers. Such network is established through relationships with most of our contractors and suppliers over the past one (1) to three (3) year.
However, there can be events outside our control which may interrupt the supply of the standard parts/components and fabricated parts to us, including, inter-alia. war and riot which may affect the smooth running of our business and hence the performance of our business.
o) Dependence on Major Customer
We are not solely dependent on any major customer as we have a diversified customer base in China. Malaysia, Philippines. Singapore and the USA. However, as set out in Section 4.5. we have four (4) customers that contributed more than 10% to our sales for FYE 2005. Please refer to Section 4.5 for our ten (10) major customers in FYE 2005.
While we have developed good business relationship with these customers, there can be no assurance that they will continue to be our customer or that the failure to maintain our business relationship or reduction in orders from these customers would not affect our operating results.
We will continue to enhance our value added services proposition, improve our service level, maintain our competitiveness including broadening our product range and develop a more diversified portfolio of customers and markets in the future, both locally and overseas, to lessen our dependency on any major customer even further.
p) Financial Risk
Pursuant to credit facility agreements entered into by us with banks or financiers, we are bound by certain positive and negative covenants, which may limit our operating and financial flexibility. The covenants are of a nature, which is commonly contained in credit facility agreements in Malaysia. Any act by us falling within the ambit or scope of such covenants will require the consent of the relevant bank! financier. Breach of such covenants may give rise to a right by the bank! financier to terminate the relevant credit facility and/ or enforce any security granted in relation to that credit facility. We are aware of such covenants and shall take all precautions necessary to prevent any such breach.
As disclosed in Section 8.4 (iii) of this Prospectus, our borrowing is approximately RM635,406, which is within the manageable level and would not have an adverse financial impact on us.
As at 20 February 2006, we entered into a sale and purchase agreement to acquire two (2) pieces of land in Mukim Bukit Baru, Melaka for a total consideration of RM963,488 of which we have paid a deposit of RM96,349, which represents t 0% of the total purchase consideration.
Details of the sale and purchase agreement are included in Section 12.4 of this Prospectus.
Save for the above, we have not incurred or known to have incurred any material commitments tor capital expenditure. which may have a substantial impact on our financial position.
q) Change in or Loss of Pioneer Status/LMW Licence
VRSB was granted Pioneer Status by MITI pursuant to the Promotion of Investments Act 1986 on 25 June 2004, with income tax exemption of 100% on statutory pioneer income for a period of five (5) years with effect from 1 June 2003 with the extension for five (5) years on expiry upon application by VRSB.
VRSB was also granted the LMW licence by Kastam Diraia Malaysia in accordance to Section 65 and 65A of Customs Act 1967 (Act 235). Under the LMW licence. raw materials/components directly used in the manufacturing process of approved process are exempted from payment of import duties and sales tax.
There can be no assurance that we will be able to continuously comply with the conditions laid down by the respective government bodies and hence, retain our Pioneer Status and LMW licence or that we will continue to enjoy Or not experience delays in enjoying the incentives outlined above, all of which could materially and adversely affect our business, operating results and financial condition.
In addition, there can be no assurance that the government will not introduce additional conditions or change the nature of incentives granted to us.
r) Reliance on Sales/Service Representative/Agent
We depend on the sales/service representatives/agents to conduct sales and marketing activities and technical/after sales supports on our behalf in Southeast Asia, North Asia, and the USA. These sales/service representatives/agents normally carry many other products and consequently may not concentrate on promoting our products and/or may not carry out the necessary technical/after sales supports promptly and effectively. In addition, we cannot ensure continuance of services offered by the sales/service representatives/agents on a long term basis.
In the industry that involves complex and sophisticated technology, we recognise the importance of maintaining direct and close relationship with all customers, both house accounts and end users, to ensure all technical issues are resolved satisfactorily within the shortest time possible. Furthermore, we are planning on a brand building exercise which will strengthen our image in the market and therefore reduce our level of dependence on our sales/service representatives/agents.
Nevertheless, no assurance can be given that our sales and operations will not be affected arising from the discontinuance of sales/service representatives/agents’ services.
s) Warranty Risk
Our delivery notes and pro-forma/commercial invoices to customers usually incorporate warranty provisions for damaged Or faulty equipment/part. To date, there has been no warranty claims from our customers for the machines sold.
There can be no assurance that a suit alleging a defect or a breach of an express or implied warranty in future will not have an adverse effect on our reputation and financial performance.
t) Breakout of Fire, Energy Crisis and Other Emergency
Every business faces the risk of losses arising from emergencies such as breakout of fire and energy crisis. We have taken note of such risks and have taken various steps to reduce such risks by having proper fire-fighting systems and carrying out periodic review on our security and maintenance. We have also taken insurance coverage to mitigate the financial losses from such happenings where possible. In the event of temporary energy crisis, the shortfall in production volume can be made up by increasing the scheduled production volume.
u) Uncertainty of Proposed Business Development Plan
The success of our business plan will largely depend on market acceptance of our products as well as our ability to further develop and commercialise future products. In addition, our proposed future plan and prospects will depend on, among other things, our ability to enter into strategic marketing on a timely basis, and on favourable terms, hire and retain skilled personnel in all areas of financial, marketing and technical. We also have the challenge of successfully managing growth (including monitoring operations and controlling costs) and obtaining adequate financing as and when needed.
v) Risk on Impairment of Goodwill
The carrying amounts of assets, other than those to which the Financial Reporting Standards (“FRS”) t 36 on Impairment of Assets does not apply, are reviewed at each balance sheet date for impairment when there is an indication that the assets might be impaired. The impairment is measured by comparing the carrying value of the assets with their recoverable amounts.
The Acquisition of VRSB had resulted in a goodwill amounting to approximately RM1,576,446. Goodwill represents the excess of the fair value of the purchase consideration over our share of the fair values of the separable net assets of the subsidiary at the date of acquisition. The said goodwill will be recorded in our consolidated balance sheet.
The carrying value of the goodwill will be reviewed annually and may be written down for impairment where it is considered necessary. Any impairment in the value of the goodwill will then be taken to our consolidated income statement as impairment cost.
Based on this, there is no assurance that our financial position will not be affected by any write-down of goodwill for impairment which may occur in the future.
w) Disclosure Regarding Forward-Looking Statements
Certain statements in this Prospectus are based on historical data, which may not be reflective of the future results, and any forward-looking statements in nature are subject to uncertainties and contingencies.
All forward-looking statements are based on forecasts and assumptions made by us, and although believed to be reasonable, are subject to unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to differ materially from the future results, performance of achievements express or implied in such forward-looking statements.
Such factors include, inter-alia, general economic and business conditions, competitions and the impact of new laws and regulations affecting us. In light of these and other uncertainties, the inclusion of any forward-looking statements in this Prospectus should not be regarded as a representation by us or our adviser that our plans and objectives will be achieved.
x) Dependence on Capital Market Risk
As our investors, you must note that we will be listed on the MESDAQ Market. Therefore, the performance of our share price is dependent on external factors such as the performance of the regional and global bourses and the cycle of inflow or outflow of foreign investment. The capital market is also influenced by internal factors such as economics and political conditions in Malaysia as well as the growth potential of various sectors of the country. These factors contribute to the volatility of trading volumes witnessed on Bursa Securities.
Nevertheless, it shall be noted that our profitability is not dependent on the performance of the Bursa Securities.