4. RISK FACTORS 4. RISK FACTORS NOTWITHSTANDING THE PROSPECTS OF OUR GROUP AS OUTLINED IN THIS PROSPECTUS, YOU SHOULD CAREFULL Y CONSIDER THE FOLLOWING RISK FACTORS (WHICH MA Y NOT BE EXHAUSTIVE) THAT MAY HAVE A SIGNIFICANT IMPACT ON THE FUTURE PERFORMANCE OF OUR GROUP. YOU SHOULD CAREFULL Y CONSIDER THE RISKS AND INVESTMENT CONSIDERA TlONS SET OUT BELOW ALONG WITH OTHER INFORMATION CONTAINED HEREIN IN THIS PROSPECTUS BEFORE YOU MAKE YOUR INVESTMENT DECISION. IF YOU ARE IN ANY DOUBT AS TO THE INFORMATION CONTAINED IN THIS SECTION, YOU SHOULD CONSULT YOUR STOCKBROKER, BANK MANAGER, SOLICITOR, ACCOUNTANT OR OTHER PROFESSIONAL ADVISER. THE RISKS AND INVESTMENT CONSIDERATlONS SET OUT BELOW ARE NOT AN EXHAUSTIVE LIST OF THE CHALLENGES THAT WE CURRENTL Y FACE OR THAT MA Y DEVELOP IN THE FUTURE. ADDITIONAL RISKS, WHETHER KNOWN OR UNKNOWN, MA Y HAVE A MATERIAL ADVERSE EFFECT ON THE FINANCIAL PERFORMANCE OF OUR GROUP. 4.1 RISKS RELATING TO THE BUSINESSES AND OPERATIONS OF OUR GROUP 4.1.1 We face competition from other EDM solutions providers The EDI\I1 industry is dominated by a handful of large multinational companies, with local operating companies in the SEA market. The major brands in the industry include EMC, IBM, HP, Symantec, Quantum (as offered by our Group) and Oracle. With the presence of these international com panies, industry players face com petitive pressures to differentiate and remain sustainable so as to appeal to end-users’ demands and meet business requirements. In addition, industry players must also continuously keep up with the latest technological developments to remain competitive. As for ,the EDM managed services industry in SEA, it consists mainly of local operating companies or local companies which have formed alliances with the global EDM industry players. These local representatives are able to leverage on the established branding of the global industry players as well as receive product and technology support. The EDM managed services industry remains a niche, specialised industry and thus, is considered to be an emerging industry with growth potential. (Source: IMR report by Smith Zander) Notwithstanding the above, we believe that we will be able to .remain competitive in the industry with our competitive strengths (as detailed in Section 5.1.3 of this Prospectus), which include our resilient market presence through direct relationships with End-User Customers, our well-established value network of distributors, resellers/channel partners and End-User Customers in the SEA region and our strong technical expertise with our internally developed technology framework, FABRiK. In addition, our growth strategy of expanding into EDM managed services has been carefully selected to leverage on our core strengths, as it enables us to enhance our revenue stream and minimise our risk exposure. Our selected target market is Midmarket Companies as we believe that this is an underserved market for EDM solutions. We believe there are opportunities to tap into the Mid-market Companies as they are more budget-conscious compared to multinational corporations, enterprises and governments. Further, we believe the need for EDM managed services will become more compelling to Mid-market Companies due to the need to safeguard business continuity, competition and increasing awareness on its importance. 4. RISK FACTORS (Cont’d) 4.1.2 We are susceptible to the evolution of technological trends resulting in the need for us to constantly innovate to stay competitive As with the IT industry in general, the EDM industry undergoes rapid technological evolvement. Since the 1950s, technology for EDM has evolved both in terms of storage technology as well as the network servers connecting this technology. Beginning with the introduction of punch cards as storage devices for data backup, the EDM industry then developed to introduce faster and more efficient devices such as magnetic backup tapes and later, optical storage devices. In terms of network servers connecting IT devices, the EDM industry has seen development from local area networks (LANs) which enables transferring of files between devices while being connected to the same server; to file transfer protocol (FTP) networks which permits remote transferring of files over the Internet to another machine; to network attached storage (NAS) networks that connects computer devices to a remote computer network; and finally to storage area networks (SANs) which allows high speed connectivity of storage devices and servers. (Source: IMR report by Smith Zander) As a result, our ability to adapt to these changes and to remain technologically relevant will determine the sustainability of our business earnings. There can be no assurance that we would have sufficient resources to successfully and accurately anticipate technological changes and market trends as well as developing them on a timely and cost-effective manner. We may also experience difficulties that could delay or prevent the development of new services and solutions which may have a negative impact on our business and financial condition.
4.1.3 We are dependent on our Promoters for continued success Our success will depend on the continuing contribution of our Promoters, Mr. Pramotedham and Mr. Teo for the leadership, strategic business planning, development and management of our Group. Our Promoters have played a pivotal role in our day to day operations as well as charting, formulating and implementing strategies to drive the future growth of our Group. We have currently put in place a management succession plan which includes taking a proactive approach towards addressing talent management in order to ensure the organisation has a capability to undertake leadership positions. Our key management personnel are constantly exposed to various aspects of our business activities to ensure that they have full understanding on the necessary responsibilities and decision-making process. In the event that we lose our Promoters and we are unable to find a suitable replacement in a timely manner, our ability to realise our strategic objectives could be impaired and this could have an adverse effect on our business and results of our operations. Our Group has had low employee turnover so far. We believe that the Listing will enhance our profile, and will facilitate talent retention and recruitment. 4.1.4 We may be affected by adverse change of relationship with our strategic marketing partner In the past three (3) FYE 31 December 2011 to 2013 and six (6)-month FPE 30 June 2014, the contribution of revenue from Quantum-related products and services amounted to 100.0%, 97.5%, 92.9% and 80.9% respectively. Our main subsidiary, QSA, is the strategic marketing partner for Quantum Corporation since 2007 via a strategic marketing agreement for SEA, covering Singapore, Malaysia, Indonesia, Thailand, Philippines, Vietnam and Cambodia. The strategic marketing agreement is extended for a term of five (5) years commencing on 29 April 2014 and shall automatically renew annually thereafter unless either party provides notice of non-renewal not less than 30 days prior to the end of anyone-year term. 4. RISK FACTORS (Cont’d) QSA markets and distributes a substantial volume of EDIVI hardware of our strategic marketing partner, and as such QSA’s revenue and performance may be affected by an adverse change in our relationship with our strategic marketing partner. Given that our strategic marketing agreement has been in place for more than seven (7) years, we have established a strong, trusted and mutually beneficial relationship with them. As such, we do not anticipate adverse changes to this relationship. However, in the event that any adverse change occurs, we anticipate a potential loss of revenue to our Group. 4.1.5 Our business growth may be affected if the level of awareness and adoption of EDM managed services develops more slowly than we expect The growth of our EDM managed services business with respect to industry growth is based on estimates and assumptions made by our key management team, and while we may believe these estimates and assumptions to be reasonable, they are subject to known and unknown risks, uncertainties and other factors which may adversely affect the future growth of this industry. In order for us to grow our revenue from our EDM managed services business, the services offered should be widely accepted as an alternative to procuring EDM solutions. In the event the adoption rate of our EDM managed services develops more slowly than we expect, our Group’s performance, potential earnings and future growth from the EDM managed services could be impacted. As set out in the IMR report, the SEA market is already receptive to managed IT services industry, as can be seen by its CAGR of 9.4% over the period between 2011 and 2013, from USD16.7 billion (RM51.1 billion) in 2011 to USD20.0 billion (RM63.4 billion) in 2013. Smith Zander forecasts the managed IT services industry in SEA to continue to grow to USD26.6 billion (RM84.3 billion) in 2016 at a CAGR of 10.2%, and part of this growth is expected to be attributable to the growth in the EDM managed services industry. (Source: IMR report by Smith Zander) 4.1.6 Our business expansion activities require capital investments and we may need to seek capital injections or additional external financing which may not be available or is available on terms not favourable to us Our Board is of the opinion that after taking into account our cash flow position and the total gross proceeds to be raised from the Public Issue, we would have adequate working capital for our business operations for a period of 12 months from the date of our Prospectus. However, there is no assurance that there will not be any future development or event which will cause us to require additional capital. We may be required to seek additional financing sooner to fund working capital or capital expenditure to support the expansion of our business especially if we seek financing in countries outside Singapore. Our ability to arrange for external financing and the cost of such financing are dependent on a number of factors, including general economic and capital market conditions, interest rates, credit availability from banks or other lenders, investors’ confidence in us, the success of our businesses, provisions of tax and securities laws that may be applicable to our efforts to raise capital, restrictions imposed by the Government, if any, and the prevailing political, social and economic conditions in the country. In spite of our best efforts, there can be no assurance that the necessary financing will be available in amounts or on terms acceptable to us, if at all. As a result, the progress of our projects could be hampered, which in turn could have a material negative impact on our business, financial condition and operating results. The sale of additional equity or convertible securities in our Company to non-shareholders in the future, if any, may result in dilution to the percentage equity holding of our shareholders upon our Listing. To address this risk, we undertake prudent financial management and conduct rigorous forward planning in order to ascertain our funding requirements and secure external financing where and when necessary, ahead of project execution. 34
4. RISK FACTORS (Cont’d) 4.1.7 We depend on data centres operated by our hosting partners and any disruption in the operation of these facilities could adversely affect our EDM managed services business For our EDM managed services, we are dependent on external third party hosting partners that provide us data centre facilities and connectivity. Although we do not anticipate any interruptions or shortfall in delivery of our hosting partners, in the case that these external third party hosting partners are not able to deliver their services, there might be potential negative financial impact on our Group and a detrimental effect on our Group’s business reputation. Furthermore, any power outages, fire outbreaks or other calamities occurring at the premises of our hosting partners may result in the disruption of our operations which may consequentially affect our client’s business operations and/or adversely affect our business reputation and financial performance. Nevertheless, it should be noted that as we partner and only intend to partner with credible, established and reputable hosting partners, these hosting partners would have taken precautions and actions to mitigate this risk and ensure business continuity. In addition, we also maintain our own disaster recovery facility. 4.1.8 We face risk on security breaches and failure to protect our proprietary information as well as our customers’ information could adversely affect our business As with any business with integrated IT solutions in critical business operations, we are susceptible to external security threats such as direct attacks from external elements such as malware attack, hacking, espionage and cyber intrusion, as well as internal security breaches which includes unauthorised access to restricted information by employees, or attacks which originate from malware-infected mobile deVices which are brought into the network system by employees. Failure to protect our proprietary and our customers’ information from security breaches could adversely damage our business reputation and brand name, and subsequently the long term repercussions on our business operations. 4.1.9 We may not be successful in expanding our business into other foreign markets Our Group has physical presence in Singapore and Malaysia through our subsidiaries in these countries, and in Philippines, Thailand and Indonesia through the presence of our business development representatives. We intend to utilise part of our listing proceeds to further expand our operations in these countries as well as strengthen our presence in other countries such as Vietnam, Sri Lanka and Myanmar, where we have secured some sales in the past. In this regard, we intend to devote adequate financial and management resources to grow our operations in these targeted markets. However, there can be no assurance that our Group will be able to successfully penetrate the aforementioned new markets. Furthermore, such future expansion could expose our Group to foreign economic, political, legislative and other risks. Any failure to accurately assess these issues could affect our Group’s business, financial and condition and operating results.
4.1.10 We are subject to risks relating to the economic, political, legal or social environment in the markets in which we operate We operate regionally in SEA and expect to continue to expand our regional presence, making us increasingly susceptible to legal, regulatory, political and economic conditions as well as operational risks in the countries in which we operate in. We derive a portion of our revenues from businesses outside Malaysia and Singapore. For the six (6)-month FPE 30 June 2014, our businesses in Thailand and Indonesia generated RM1.656 million and RMO.882 million in sales revenue, which accounted for 5.51 % and 2.93% respectively of our total proforma sales revenue. As we continue to expand our business in SEA, our financial condition and results of operations are expected to be increasingly 4. RISK FACTORS (Cont’d) affected by political, economic and operating conditions in countries where we operate, transact business or have interests. Operating regionally also requires us to comply with foreign laws and regulations covering many aspects of our operations, including trade laws and investment laws, and many of the above laws may change, or may be updated and amended, from time to time. Much of the above changes are beyond our control. Whilst we practise prudent financial management and efficient operating procedures, there can be no assurance that any adverse economic, political and regulatory developments will not materially affect the performance of our Group. 4.1.11 We are exposed to foreign exchange transaction risks and any adverse movements in the foreign exchange currency market may negatively impact our business, financial position and operating results Our purchases are denominated in the USD whilst our sales are denominated in USD and SGD. As a result, we have natural hedge in our operations and transactions from foreign currency fluctuations. Our management constantly monitors our Group’s foreign currency exposure and reviews our Group’s need to hedge. Nonetheless, should the exposure become substantial, we will consider hedging our position. In addition, financial statements of our subsidiaries in Singapore are denominated in USD (for QSA) and SGD (for KS). As such, any future significant depreciation in USD and/or SGD against RM may have a material negative impact on our Group’s reported operating profits based in Malaysia. 4.1.12 We may not continue to be profitable in the future or achieve increasing or consistent levels of profitability We have, over the years, practised sound financial management via efficient credit control measures, prudent cash flow management and careful consideration of operating expenditure as well as any proposed capital expenditure and its effect on our Group. Whilst we would exercise our best endeavour to maintain and increase our record of profitability in the EDM solutions part of our business offering, there is no assurance that our Group’s performance will not be adversely impacted by changing market conditions and, in particular, the resources and expenses required in the development of our EDM managed services and our expansion into new markets. 4.1.13 The lack of long term contracts may result in the fluctuation of our Group’s performance Our Group’s sales are mainly on PO basis. We have not entered into any long-term contracts with our customers, save for maintenance contracts in the provision of our EDM infrastructure technology and subscription agreement for our EDM managed services, comprising 17.59% and 5.68% respectively of our revenue for the six (6)-month FPE 30 June 2014. The lack of long-term contracts is mainly due to the present industry practice where End-User Customers would purchase products by PO on project-toproject or as-needed basis. As such, this may result in the fluctuation of our Group’s performance. However, our Group has established long standing and strong relationships with our distributors, resellers/channel partners and End-User Customers which would provide us with business continuity and growth. 4. RISK FACTORS (Cont’d)
4.1.14 Change in or loss of MSC-Malaysia status may impact ourfinancial performance We were granted MSC-Malaysia status in May 2014. Presently, all MSC-Malaysia status companies are granted financial and non-financial incentives. MDeC is the body responsible for monitoring all MSC-Malaysia status designated companies. MDeC has the right to revoke any company’s MSC-Malaysia status at any time in the event there is non-compliance to continuing MSC-Malaysia status obligations. We cannot ensure that we will continue to retain our IVISC-Malaysia status or that we will continue to enjoy the MSC-Malaysia status incentives granted to all MSC-Malaysia status companies or if the incentives will not be changed or modified in any way in the future, all of which could have an adverse effect on our Group’s financial results. Amongst the incentives that we enjoy is pioneer status which entitles us to a five (5) year exemption from Malaysian income tax on income derived from approved MSC activities, which is renewable for a further period of five (5) years upon expiry of the first five (5) years. Please refer to Section 8.2 of this Prospectus for the salient conditions imposed by MDeC on our MSC-Malaysia status. 4.1.15 Loss of Productivity and Innovation Credit (“PIC”) scheme may impact our financial performance We enjoy enhanced deduction on our income taxes due to the PIC scheme that is available to all businesses in Singapore under the Inland Revenue Authority of Singapore. The PIC scheme is a scheme by the Government of Singapore to encourage business to invest in productivity and innovation and allows businesses to enjoy 400% tax deductionsl allowances and/or 60% cash payout for investment in innovation and productivity improvements. It is an expense based scheme that benefits all businesses, especially SMEs. Individual companies need not apply to be part of the scheme as the scheme is made available to all businesses as long as they meet the eligibility criteria. Currently, the PIC scheme is valid for years of assessment 2011 to 2018. The Government of Singapore has been extending the PIC scheme annually in its annual budget since its introduction in 2011, the latest extension being up to year of assessment 2018. In the event the PIC scheme is no longer available, we do not expect that to have an impact on our operational profits. Nonetheless, the absence of the PIC scheme would have an impact on our PAT. We believe that this risk factor would only be relevant after year of assessment 2018 and specifically confined to our business in Singapore. THE REST OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK